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37–598 PDF 2007

CLIMATE CHANGE: LESSONS LEARNED FROM

EXISTING CAP-AND-TRADE PROGRAMS

HEARING

BEFORE THE

SUBCOMMITTEE ON ENERGY AND AIR QUALITY

OF THE

COMMITTEE ON ENERGY AND

COMMERCE

HOUSE OF REPRESENTATIVES

ONE HUNDRED TENTH CONGRESS

FIRST SESSION

MARCH 29, 2007

Serial No. 110–28

(

Printed for the use of the Committee on Energy and Commerce

energycommerce.house.gov
COMMITTEE ON ENERGY AND COMMERCE

JOHN D. DINGELL, Michigan, Chairman

HENRY A. WAXMAN, California

EDWARD J. MARKEY, Massachusetts

RICK BOUCHER, Virginia

EDOLPHUS TOWNS, New York

FRANK PALLONE, JR., New Jersey

BART GORDON, Tennessee

BOBBY L. RUSH, Illinois

ANNA G. ESHOO, California

BART STUPAK, Michigan

ELIOT L. ENGEL, New York

ALBERT R. WYNN, Maryland

GENE GREEN, Texas

DIANA DEGETTE, Colorado

Vice Chairman

LOIS CAPPS, California

MIKE DOYLE, Pennsylvania

JANE HARMAN, California

TOM ALLEN, Maine

JAN SCHAKOWSKY, Illinois

HILDA L. SOLIS, California

CHARLES A. GONZALEZ, Texas

JAY INSLEE, Washington

TAMMY BALDWIN, Wisconsin

MIKE ROSS, Arkansas

DARLENE HOOLEY, Oregon

ANTHONY D. WEINER, New York

JIM MATHESON, Utah

G.K. BUTTERFIELD, North Carolina

CHARLIE MELANCON, Louisiana

JOHN BARROW, Georgia

BARON P. HILL, Indiana

JOE BARTON, Texas

Ranking Member

RALPH M. HALL, Texas

J. DENNIS HASTERT, Illinois

FRED UPTON, Michigan

CLIFF STEARNS, Florida

NATHAN DEAL, Georgia

ED WHITFIELD, Kentucky

BARBARA CUBIN, Wyoming

JOHN SHIMKUS, Illinois

HEATHER WILSON, New Mexico

JOHN B. SHADEGG, Arizona

CHARLES W. ‘‘CHIP’’ PICKERING,

Mississippi

VITO FOSSELLA, New York

STEVE BUYER, Indiana

GEORGE RADANOVICH, California

JOSEPH R. PITTS, Pennsylvania

MARY BONO, California

GREG WALDEN, Oregon

LEE TERRY, Nebraska

MIKE FERGUSON, New Jersey

MIKE ROGERS, Michigan

SUE WILKINS MYRICK, North Carolina

JOHN SULLIVAN, Oklahoma

TIM MURPHY, Pennsylvania

MICHAEL C. BURGESS, Texas

MARSHA BLACKBURN, Tennessee

PROFESSIONAL STAFF

DENNIS B. FITZGIBBONS, Chief of Staff

GREGG A. ROTHSCHILD, Chief Counsel

SHARON E. DAVIS, Chief Clerk

BUD ALBRIGHT, Minority Staff Director

(II)
(III)

SUBCOMMITTEE ON ENERGY AND AIR QUALITY

RICK BOUCHER, Virginia, Chairman

G.K. BUTTERFIELD, North Carolina

Vice Chairman

CHARLIE MELANCON, Louisiana

JOHN BARROW, Georgia

HENRY A. WAXMAN, California

EDWARD J. MARKEY, Massachusetts

ALBERT R. WYNN, Maryland

MIKE DOYLE, Pennsylvania

JANE HARMAN, California

TOM ALLEN, Maine

CHARLES A. GONZALEZ, Texas

JAY INSLEE, Washington

TAMMY BALDWIN, Wisconsin

MIKE ROSS, Arkansas

DARLENE HOOLEY, Oregon

ANTHONY D. WEINER, New York

JIM MATHESON, Utah

JOHN D. DINGELL, Michigan (ex officio)

J. DENNIS HASTERT, Illinois,

Ranking Member

RALPH M. HALL, Texas

FRED UPTON, Michigan

ED WHITFIELD, Kentucky

JOHN SHIMKUS, Illinois

JOHN B. SHADEGG, Arizona

CHARLES W. ‘‘CHIP’’ PICKERING,

Mississippi

STEVE BUYER, Indiana

MARY BONO, California

GREG WALDEN, Oregon

MIKE ROGERS, Michigan

SUE WILKINS MYRICK, North Carolina

JOHN SULLIVAN, Oklahoma

MICHAEL C. BURGESS, Texas

JOE BARTON, Texas (ex officio)

PROFESSIONAL STAFF

SUE D. SHERIDAN, Chief Counsel

LORIE SCHMIDT, Counsel

DAVID J. MCCARTHY, Minority Counsel

MARGARET HORN, Legislative Clerk

(V)

C O N T E N T S

Page

Hon. Rick Boucher, a Representative in Congress from the Commonwealth

of Virginia, opening statement ............................................................................ 1

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

Illinois, opening statement .................................................................................. 2

Hon. Mike Doyle, a Representative in Congress from the Commonwealth

of Pennsylvania, opening statement ................................................................... 3

Hon. Joe Barton, a Representative in Congress from the State of Texas,

opening statement ................................................................................................ 4

Prepared statement .......................................................................................... 5

Hon. Jane Harman, a Representative in Congress from the State of California, opening statement ........................................................................................ 7

Hon. John D. Dingell, a Representative in Congress from the State of Michigan, prepared statement ...................................................................................... 8

Hon. Michael C. Burgess, a Representative in Congress from the State of

Texas, prepared statement .................................................................................. 9

WITNESSES

Brian McLean, Director, Office of Atmospheric Programs and the Office of

Air and Radiation, U.S. Environmental Protection Agency, Washington,

DC .......................................................................................................................... 10

Prepared statement .......................................................................................... 88

Ralph Izzo, chairman and chief executive officer-elect, the Public Service

Enterprise Group Incorporated, Newark, NJ .................................................... 11

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

Jill Duggan, head of International Emissions Trading, U.K. Department for

Environment, Food, and Rural Affairs, London, England ................................ 13

Prepared statement .......................................................................................... 67

Richard Sandor, founder, chairman, and chief executive officer, Chicago Climate Exchange, Chicago, IL ................................................................................ 15

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

Dallas Burtraw, senior fellow, Resources for the Future, Washington, DC ....... 16

Prepared statement .......................................................................................... 50

Anne Smith, vice president, CRA International, Washington, DC ...................... 18

Prepared statement .......................................................................................... 111
(1)

CLIMATE CHANGE: LESSONS LEARNED FROM

EXISTING CAP-AND-TRADE PROGRAMS

THURSDAY, MARCH 29, 2007

HOUSE OF REPRESENTATIVES, SUBCOMMITTEE ON ENERGY AND AIR QUALITY, COMMITTEE ON ENERGY AND COMMERCE, Washington, DC.

The subcommittee met, pursuant to call, at 10:05 a.m., in room

2123 of the Rayburn House Office Building, Hon. Rick Boucher

(chairman) presiding.

Members present: Representatives Butterfield, Barrow, Markey,

Wynn, Doyle, Harman, Gonzalez, Inslee, Ross, Hooley, Weiner,

Matheson, Dingell, Hastert, Upton, Shimkus, Shadegg, Walden,

Sullivan, and Barton.

Also present: Representative Gilchrest.

Staff present: Bruce Harris, Lorie Schmidt, Chris Treanor, Margaret Horn, Kurt Bilas, Peter Spencer, David McCarthy, and Peter

Kielty.

OPENING STATEMENT OF HON. RICK BOUCHER, A REPRESENTATIVE IN CONGRESS FROM THE COMMONWEALTH

OF VIRGINIA

Mr. BOUCHER. The subcommittee will come to order.

In 1990, the Energy and Commerce Committee under Chairman

Dingell’s leadership pioneered the cap-and-trade concept as a regulatory means of achieving air quality control. We applied, in 1990,

cap-and-trade for the first time to the control of sulfur dioxide

emissions from stationary sources. And that was done with highly

positive results.

Based largely on that successful experience, the Environmental

Protection Agency and the States have established other cap-andtrade programs for fine particulate matter, for mercury emissions,

and for emissions leading to ground-level ozone formation.

Today the subcommittee will begin its consideration of whether

cap-and-trade should be chosen as the preferred method for a nationwide, economy-wide, program of greenhouse gas controls. It is

noteworthy that in order to comply with the Kyoto Protocol, the

European Union adopted cap-and-trade to control greenhouse gas

emissions from a wide range of emission sources.

We intend to gain the full benefit of the European experience

with cap-and-trade in this context as we design a mandatory control program for the United States. In today’s hearing and during

an upcoming European visit, we will ask those who have had this

firsthand experience to advise us on what the European Union did
2

properly and perhaps what could have been done better, were that

program to be designed from the outset today.

We will ask similar questions about the experience to date of the

voluntary greenhouse gas cap-and-trade program that is coordinated by the Chicago Climate Exchange, and we are pleased to

have the chief executive officer of that exchange with us this morning.

We also note the decision of the Northeastern and mid-Atlantic

States comprising the regional greenhouse gas initiative to use capand-trade to reduce CO2 emissions from power plants and the announcement by five western States that cap-and-trade will also be

employed in a regional greenhouse gas controlled initiative on the

Pacific Coast.

I would stress that in this subcommittee, we have to date, made

no decisions about the method that we will adopt for a U.S. greenhouse gas controlled program, but obviously cap-and-trade is a

major candidate for consideration for that program. During today’s

hearing and through further inquiries, we will be examining closely

cap-and-trade as a possible choice for the U.S. program.

I want to welcome today’s witnesses and thank them for preparing and submitting their testimony and being here in person in

order to offer oral summaries and give us advice. And I would announce that pursuant to the rules of the committee, any member

who chooses to waive an opening statement will have the time for

opening statements added to that person’s period for asking questions.

With that said, I am pleased now to call on the ranking Republican member of our subcommittee, the gentleman from Illinois,

Mr. Hastert, for an opening statement.

OPENING STATEMENT OF HON. J. DENNIS HASTERT, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF ILLINOIS

Mr. HASTERT. Well, thank you, Mr. Chairman, for calling this important hearing. I look forward to hearing from today’s witnesses

about the lessons learned from the European experience from the

carbon cap-and-trade program and the U.S. expertise and experience with acid rain program, which was enacted prior to the 1990

Clean Air Act, a bill that I was pleased to support.

The key lesson, I think, that we can draw from the acid rain program is that the state of commercially available technology is critical. In 1990, technology to control sulfur dioxide emissions from

coal-fired power plants was readily and commercially available.

Congress determined that the most economic way to encourage the

deployment of this technology was to put a cap on this emission of

this pollutant in law, provide time to comply, and allow utilities to

acquire, bank, and trade allowances.

Unfortunately, no commercially available technology exists at

this time to remove CO2, which I would like to point out is not a

pollutant from electricity generation, vehicles, and industry that

rely upon carbon-based fuels. Because no technology exists to remove CO2 emitted when we turn on the lights, start our cars, or

manufacture goods, a cap-and-trade system, such as the one in

place in Europe, is not an effective mechanism to control the greenhouse gas emissions. I have described such a system in the past as
3

cap-and-pray, since a cap without technology requires one of several bad choices. We could turn off the power. We could switch

fuels, which threatens our energy security and future economic

well-being, or we simply tax a generation and use electricity. In

fact, that latter is what the European system has done. It is no

surprise to me that the price of carbon credit is closely correlated

with the price of electricity.

And finally I would note while Europeans are paying these costs,

almost none of these countries are on pace to meet their Kyoto obligations. I have always believed good energy policy is good environmental policy, and the reverse is also true. Good environmental

policy should be good energy policy. I believe the key to our future

energy security is technology. We need to drive technology to reduce our carbon profile when we burn coal to generate electricity.

We need to get more out of our motor fuels from clean, renewable

fuels like ethanol and soy diesel, and we need to increase our reliance on nuclear power.

I would like to take a second to talk about a phone call I had

yesterday with a fellow by the name of Dean Kamen, which I think

illustrates the point that technology and innovation are the key to

the world’s energy and economic future. Everybody knows Dean

Kamen. He is famous for inventing the Segue, but I was surprised

to learn that he has invented several devices that can help those

underdeveloped countries provide electricity and clean water. Imagine a device that continuously outputs a kilowatt of electricity,

enough to light 70 energy-efficient light bulbs, all on an abundant

local fuel, cow dung. In a village that has never had electricity, this

is life-altering technology.

In short, Mr. Chairman, I think we can all learn from such examples by encouraging the development and deployment of technologies that we can overcome in a relatively short period of time.

Our energy issues, whether it is dependence upon the unstable foreign sources of energy or the emissions of greenhouse gases. Once

these innovations are in place, then it is time to discuss measures

such as cap-and-trade to make sure that these technologies are deployed in the most economic and expeditious fashion.

Mr. Chairman, I thank you for having this hearing, and I thank

you for the opportunity to speak.

Mr. BOUCHER. Thank you very much, Mr. Hastert. The gentleman from Pennsylvania, Mr. Doyle, is recognized for 3 minutes.

OPENING STATEMENT OF HON. MIKE DOYLE, A REPRESENTATIVE IN CONGRESS FROM THE COMMONWEALTH OF PENNSYLVANIA

Mr. DOYLE. Thank you, Mr. Chairman. I would like to welcome

each of you to our committee as we discuss the risks and benefits

associated with cap-and-trade programs, both here and in Europe.

I think it is an extremely important hearing as it will provide us

with valuable insight as we consider whether we will or will not

include cap-and-trade program as part of our global warming legislation.

As I have stated in the past, I stand ready to work closely with

Chairman Boucher and others on this committee to legislate the

best possible solution as America moves forward in addressing
4

global warming. I think it is critical that we work to ensure that

we have all the facts so that we can be sure that the policies we

pass do not put our country at a competitive disadvantage with our

trading partners or lead to the exportation of jobs from this country

as businesses move overseas to avoid restrictions or requirements

we pass. From the Clean Air Act Amendments of 1990 and Care

Act, which we authored in this committee, the European Union’s

Emission Trading scheme, there is no lack of empirical evidence

about cap-and-trade regimes.

I think it is critical that members of this committee understand

the pros and cons of these systems before we move forward, both

to address global warming and protect American jobs. This hearing

will be very valuable in that regard. While this hearing is on capand-trade programs themselves, I think our committee needs to

also look at what other options we have for achieving similar reductions in the emission of greenhouse gases.

Although most of our panels would express a strong support of

a cap-and-trade system, I believe it is critical that all options and

all combination of options are considered as we move forward.

Again, Mr. Chairman, I welcome each of the panelists to the discussion. I will consider all sides of this debate, and I look forward

to rolling up my sleeves and working with you to craft the most realistic, transparent and cost-effective solution to the question posed

by global warming, and with that, I yield back.

Mr. BOUCHER. Thank you very much, Mr. Doyle. The gentleman

from Texas, Mr. Barton, ranking member of the full committee, is

recognized for 5 minutes.

OPENING STATEMENT OF HON. JOE BARTON, A

REPRESENTATIVE IN CONGRESS FROM THE STATE OF TEXAS

Mr. BARTON. Thank you, Mr. Chairman. I listened to your opening statement with great interest as I always do, and I sense that

you have begun to move somewhat slightly towards the position

that I have been espousing. So I am going to begin to move somewhat slightly towards the position that you are espousing. So we

are here, but we are now kind of starting the process. So I want

you to know that I do listen. Our former Speaker, also in his opening statement, I think moved.

I want to submit my written opening statement for the record.

I am going to speak extemporaneously for a few minutes because

today we are here to talk about cap-and-trade systems. Now, I am

very skeptical that a cap-and-trade system would be of any benefit

to the true environmental situation, and I am fairly certain that it

would be of no benefit, in fact, it would probably be a harm to our

economy.

One of the reasons that many people have talked about using a

cap-and-trade system for CO2 emissions is because of the success

that we had in the mid–90s and continue to have to this day with

a cap-and-trade system with SO2, sulfur dioxide. There are major

differences between those two compounds. SO2 is a harm to health.

There are known quantities at which it affects human health. Prior

Clean Air Acts had regulated the amount of SO2 emissions, and we

had a health standard that was set by the EPA. We put the capand-trade program on for SO2 in the Clean Air Act Amendments
5

of 1991, I believe, because President Bush made an executive decision that he wanted to cut SO2 emissions in half by a certain date.

And the most cost beneficial way to meet that target was to go to

a cap-and-trade.

Well, SO2 is a known pollutant. It is a criteria pollutant. It is a

harm to health. We already had regulations on it. CO2 is not. CO2

is a naturally occurring compound. There is no quantity that is

known to impact health in a negative way. There is a theory that

in high concentrations in the upper atmosphere, it somehow impacts the infrared scale and makes energy less likely to escape the

upper atmosphere. Hence, it leads to global warming. That is a theory. It is not a fact.

We also know from historical records that CO2 concentrations in

the past have been much higher. So I dispute that cap-and-trade

for CO2 is somehow a good thing because cap-and-trade for SO2

worked. Those are two entirely different situations.

Having said that, today we are going to look at cap-and-trade,

and that is a good thing. We are also going to begin to look at solutions that make sense if we agree, for whatever reason, that we

need to lessen the carbon intensity of our economy. We have several zero-emissions electricity generation options available right

now, one being nuclear power. I am not aware of any group that

says a nuclear plant is not a zero-emitter in terms of carbon. Well,

there is a lot that we could do to accelerate the permitting process

and the construction process for new nuclear plants, which is being

done everywhere but in the United States.

We could also expand our solar energy issues. We could expand

our wind energy. We could accelerate R and D on our hydrogen initiative the President started several years ago. So there are many,

many things that we can do in a positive way to work together to

begin to move to a less carbon intense economy in the United

States.

And so today is the step to look at the cap-and-trade systems. I

hope nobody tries to say that what has been tried in Europe is a

positive. I am going to be very skeptical if we go down that trail

since it has raised wholesale electricity rates in Germany 30 to 40

percent.

Having said that, Mr. Chairman, this is another substantive

hearing, and I am extremely pleased that you and Chairman Dingell are trying to really develop a positive record about what the

true facts are. With that, I yield back.

[The prepared statement of Mr. Barton follows:]

PREPARED STATEMENT OF HON. JOE BARTON, A REPRESENTATIVE IN CONGRESS FROM

THE STATE OF TEXAS

Thank you, Mr. Chairman, for continuing this series of hearings on global warming.

Today we will focus on the question of a ‘‘cap-and-trade’’ program to control our

CO2 emissions. If you recall, at the outset of these hearings I voiced my opposition

to a unilateral cap-and-trade program. I said then that I see it harming the U.S.

economy without helping the environment.

We haven’t seen evidence to the contrary in the 10 hearings we have subsequently

held. First, with respect to economic harm, we heard testimony that electric rates

in Germany went up 30 to 40 percent when the cap-and-trade program was implemented. No witnesses contradicted that, not even the utility CEOs from our own

country at a later hearing.
6

We shouldn’t be surprised because the whole point of rationing CO2 emissions is

to change behavior. Sure many rent-seeking companies—including ones represented

at our hearings—will be enriched if the program is written their way, but consumers and workers will pay in their energy bills and with their jobs.

Our economic analysis has hardly begun. I look forward to future hearings on the

impact of a carbon cap on coal prices, on rising gas prices due to fuel switching,

on cancellation of new power plants fueled with clean coal, and most importation

people’s jobs.

The migration of so many manufacturing jobs offshore over the past 5 years of

rising natural gas prices should give us all pause. Exporting those jobs may make

shrewd financial sense to many CEOs, but not to the workers I represent.

Losing American jobs to poor competitors doesn’t help the global environment either. Developing countries always swap clean air for economic growth and as we

heard this week, China is no different. China’s economic growth is explosive, and

so is China’s coal combustion. We heard that decisions in China about where and

what kind of power plants to build are decentralized, effectively uncontrolled.

We learned that less than 5 percent of China’s coal-fired electricity plants are

even fitted with ordinary sulfur dioxide control equipment, and that those with the

equipment may or may not actually use it.

But, Mr. Chairman, I cannot believe that the answer is to tell American consumers that they can’t buy foreign-made goods anymore because some countries won’t

knuckle under to our demands that they ration CO2. As one of our witnesses said,

‘‘the greatest threat to the environment is poverty.’’ Using our economic might to

hold hundreds of millions of foreigners in poverty and deny U.S. consumers the freedom to buy what they choose is not a solution worthy of America.

What are the solutions? We have many.

These are some proposals that make economic sense and provide environmental

benefit, without harming our economy:

• We should expand ZERO emissions electricity generation, including nuclear

power. We must solve the problem of waste storage. We know what to do, it is time

to act. We need to expand wind and solar energy. We heard testimony about what

it takes to facilitate wind projects. It turns out it wasn’t capping carbon, it is siting

transmission so that remote wind and solar projects can serve loads miles away.

• We need to protect the hydroelectricity that we have now and look for ways

to increase hydro output with efficiency improvements and new projects, including

ones in the ocean.

• In partnership with industry, we need to fund research, development, and

demonstration of carbon capture and sequestration. This includes Future Gen and

coal-to-liquid projects, as well as fully funding technology to retrofit existing plants

Mr. Chairman, we need to step up efforts on energy efficiency.

• We should accelerate efficiency improvements for commercial and residential

energy users. Better building codes and smart metering are just two examples.

Mr. Chairman, we also need efficiency improvement in transportation. Mobile

sources must contribute to any effort to lessen carbon intensity.

• We reported a strong bill last year to reform automobile fuel efficiency standards and the President wants to work with us on it this year.

• We can also do more to fund and encourage advanced alternative fuels and advanced vehicles such as plug-in hybrids.

All these steps are good for our energy security, and at the same time reduce

greenhouse gas emissions. CO2 is not a pollutant, and we should not allow ourselves

to be stampeded into pretending that something we exhale is now our sworn enemy.

CO2 is also in the breath of the American economy. It makes good sense to reduce

it where we can, but no sense to overreach and kill jobs in the process. These are

significant steps that we can take now to diminish carbon intensity and protect our

economy and consumers from increased electric costs.

Thank you, Mr. Chairman.

Mr. BOUCHER. Thank you very much, Mr. Barton. The Chair recognizes the gentlewoman from California, Ms. Harman, for 3 minutes.
7

OPENING STATEMENT OF HON. JANE HARMAN, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF CALIFORNIA

Ms. HARMAN. Thank you, Mr. Chairman. Listening to Ranking

Member Barton, I am starting to believe that maybe the political

polar ice cap on this committee is starting to melt. At least the beginning of his statement implied that. But I just wanted to know,

and I was chatting with my colleague, Mr. Doyle, that some of us

all the way over here also think we need to do what we can with

hydrogen and build the infrastructure. And we need to explore safe

uses of nuclear power in our future. So just maybe we will move

along smartly here.

I do however want to endorse the cap-and-trade idea strongly for

CO2. We heard from former Vice President Gore last week that

cap-and-trade program is a time-tested means of harnessing the

market to reduce emissions, and reduce emissions we must. I think

there is growing bipartisan support on this committee about that,

but I agree too that how we design a cap-and-trade program for

CO2 is crucial.

I can envision a carbon market that is rigid, unpredictable, and

inefficient. That would be bad. But I can also envision a market

that is liquid, flexible, and allows our economy to cope with emissions reductions in a way that makes us the example to the rest

of the world. The decisions made in this room in the coming

months will make the difference, and the stakes are huge.

On Tuesday I said we should use the power of the American

economy as the engine for our cap-and-trade system. Opening our

carbon market could be the carrot that brings the developing nations to the cap-and-trade table. The upside is obvious. Last year,

much to the chagrin of many Republican and Blue Dog colleagues

in this body, the U.S. had a trade deficit of over $800 billion. A carbon market could mean that our Nation could fill that gap by exporting carbon credits. If developing nations want to sell us credits

and American businesses want to sell their own credits overseas,

American ingenuity can win and so can our fragile environment.

I just want to close by saying that I am bullish on American ingenuity and bullish on the potential of this committee to get it

right if we work together, have open minds, and learn from the experience on cap-and-trade. I yield back the balance of my time.

Mr. BOUCHER. Thank you very much, Ms. Harman. The gentleman from Utah, Mr. Matheson, is recognized for 3 minutes.

Mr. MATHESON. I will waive.

Mr. BOUCHER. The gentleman from Utah waives his opening

statement. The gentleman from North Carolina, Mr. Butterfield, is

recognized for 3 minutes.

Mr. BUTTERFIELD. Thank you very much, Mr. Chairman. I too

want to thank you for convening this important hearing today. I do

not have a formal opening statement to give or to place into the

record. I simply want to thank the six witnesses for coming forward

today to give us the benefit of your testimony, as I see that all six

of you are ready to go. And so I am not going to unduly interfere

with that.

I will say to you, however, that in so many of our hearings, we

have witnesses who come forward, and the Members really have already made up their mind about the issue. But this is not the case
8

today. What you say today will make a difference. It certainly will

make a difference with me because I don’t have any fixed views on

cap-and-trade, and I am sure many of the other Members feel the

same way. And so what you say will be critically important. I

thank you very much for coming. I yield back.

Mr. BOUCHER. Thank you very much, Mr. Butterfield. The gentleman from Massachusetts, Mr. Markey, is recognized for 3 minutes. Gentleman from Massachusetts waives.

The gentleman from New York, Mr. Weiner, is recognized for 3

minutes.

Mr. Weiner waives his opening statement. All Members having

now been recognized for opening statements; any other statements

for the record will be accepted at this time.

[The prepared statements of Messrs. Dingell and Burgess follow:]

PREPARED STATEMENT OF HON. JOHN D. DINGELL, A REPRESENTATIVE IN CONGRESS

FROM THE STATE OF MICHIGAN

From the outset of our climate change hearings, witnesses have been recommending a cap-and-trade program as an important element of a climate change program.

Today we will hear from experts about existing cap-and-trade programs and how

those experiences should inform our response to climate change.

In the 1990 Clean Air Amendments, Congress took a bold step when it adopted

the Acid Rain Trading Program to reduce sulfur dioxide emissions from power

plants. At that time, the cap-and-trade approach was largely untested and very controversial. We sit here almost two decades later having frequently heard witnesses

praise this extremely successful program. Power plants have reduced emissions faster than required by law and at far less cost than projected. Based in large part on

the success of the Acid Rain Trading Program, a number of other cap-and-trade programs have been established to address environmental problems.

Many of these programs have been quite successful, but some have had rocky

times. Witnesses and members have noted some problems experienced during the

first phase of the European Union’s Emissions Trading System. This first phase was

designed to be a learning period for the EU, and I hope to hear what lessons they

have learned and whether those lessons are applicable here. If the United States

decides to adopt a cap-and-trade program to address climate change, many decisions

will need to be made to ensure that we tailor the solution to address our policy

goals. In addition to questions about the timing and level of reductions that would

be required, there are structural questions that must be answered, such as:

• Which greenhouse gases should be covered? Just carbon dioxide?

• Who should be covered by the program? Should it be economy-wide or cover

just certain sectors?

• How should the allowances be distributed? Should the Government auction

them? Should Congress allocate them by statute, as with the acid rain program? If

not, what Government entity should be given that responsibility? Should they be

given away for free as we did with most of the Acid Rain allowances? If we give

them away, to whom should we give them?

• Should we allow covered entities to use offsets to meet their requirements? If

so, what offsets?

• Should we have a safety valve that fixes a maximum price on allowances?

• What must be done to ensure that the program operates openly, fairly and

honestly?

• What should we do with any revenues generated by safety valves or auctions?

• Are there ways to design the program to encourage technological development?

• How many of these decisions should Congress make and which should we delegate to another entity?

These are all very important questions. The answers will have critical environmental and economic consequences. It is crucial that we understand these consequences so that we can avoid those that are unintended.

I look forward to hearing from today’s experts so that we can better understand

the choices before us.
9

PREPARED STATEMENT OF HON. MICHAEL C. BURGESS, A REPRESENTATIVE IN

CONGRESS FROM THE STATE OF TEXAS

Thank you, Mr. Chairman.

I’d also like to thank our expert witnesses for appearing before us today. Your experience and perspective is especially valuable to us as we debate a potential carbon

cap-and-trade system.

Mr. Chairman, I found it troubling that the first hearing that we held in this subcommittee began with a discussion of private sector cap-and-trade proposals—it appeared that we were pre-supposing the solution before we even examined the problem.

Since that time, we have held a hearing on the science behind climate change,

and still others to gather perspectives from various constituencies. But we have still

yet to discuss approaches other than cap-and-trade.

While I absolutely believe that we should take into account lessons learned about

the cap-and-trade mechanism, I believe that this discussion should wait until we

have completed gathering information and have turned to evaluating legislative options.

I also want to make a couple of points before yielding back. First, I am concerned

about the possible size and complexity of a cap-and-trade to regulate carbon dioxide.

The Sulfur Dioxide Program involved only about 120 emitters, whereas a CO2 regime could involve thousands of different entities.

And second, I continue to be concerned about the increased costs in the United

States, relative to the rest of the world, should we implement this program. As

we’ve heard over and over again, it does not matter where the CO2 is emitted—just

that it is emitted at all. If we implement a cap-and-trade regime, and the result is

that American manufacturing—and American manufacturing jobs—could move

somewhere else that does not cap carbon emissions and as a result, overall emissions will not decrease.

Again, I’d like to thank the witnesses for appearing before us today. We greatly

appreciate your thoughts on this important subject.

With that Mr. Chairman, I yield back.

Mr. BOUCHER. I am pleased to welcome our panel of witnesses,

and I will say a brief word of introduction about each.

Mr. Brian McLean is the Director of the Office of Atmospheric

Programs and the Office of Air and Radiation at the Environmental

Protection Agency. He has been a career EPA employee for more

than 30 years and has been involved in the development, implementation, and oversight of all of EPA’s cap-and-trade programs for

stationary sources, starting with the acid rain trading program. He

is here as a technical expert on cap-and-trade programs and is not

here today to discuss administration policy. And we are very

pleased to have you, Mr. McLean. Welcome.

Dr. Ralph Izzo is the chairman and chief executive officer-elect

of PSEG, the Public Service Enterprise Group Incorporated, a large

public utility for the State of New Jersey and other areas.

Ms. Jill Duggan is the head of International Emissions Trading

in the United Kingdom’s Department for Environment, Food, and

Rural Affairs. We are particularly honored that you have traveled

to the United States to share your experience with us this morning,

and we welcome you, Ms. Duggan.

Dr. Richard Sandor is the founder, chairman, and chief executive

officer of the Chicago Climate Exchange, and we very much look

forward to hearing about the Exchange’s experience.

Dr. Dallas Burtraw is the senior fellow at Resources for the Future, and Dr. Anne Smith is vice president of CRA International.

We welcome all of our witnesses. Without objection, your prepared

written statement will be made a part of the record. We would very

much welcome your oral summary and would hope that you could
10

keep that within the range of about 5 minutes. And, Mr. McLean,

we will be happy to begin with you.

STATEMENT OF BRIAN MCLEAN, DIRECTOR, OFFICE OF ATMOSPHERIC PROGRAMS AND THE OFFICE OF AIR AND RADIATION AT THE ENVIRONMENTAL PROTECTION AGENCY,

WASHINGTON, DC

Mr. MCLEAN. Mr. Chairman and members of the committee,

thank you very much for inviting me to testify today on EPA’s experience, designing and implementing cap-and-trade programs.

While at EPA, I have worked on both traditional regulation and

emissions trading, and in my remarks this morning, I will focus on

what cap-and-trade is, what it has achieved, and why it works, the

basic principles that we have followed.

Cap-and-trade is a market-based mechanism for addressing environmental problems and contains several key elements that distinguish it from other regulatory approaches. First, it seeks to reduce

emissions by setting a mandatory cap or limit on the aggregate

emissions of an entire category of sources. The cap both establishes

the emission reduction goal and provides predictability for the allowance market. All significant sources, existing and new, of a particular industry or sector should be included in to minimize the

shifting of production and emissions to uncovered sources.

Once the size, the timing, and scope of the cap are defined, allowances equal to the cap are then distributed. How the Government

distributes allowances is an important policy and economic design

decision. Emission allowances are valuable assets. Keep in mind

though that whether they are distributed for free or by auction, it

does not affect the total quantity of allowances under the cap, nor

the environmental outcome of the program, nor the total cost of the

program. It does, however, affect how the costs are distributed

across the economy and who ultimately pays for the program.

Allowances can be traded, bought or sold, and banked and saved.

Unrestricted trading and banking allows companies to choose, and

importantly, change compliance options and minimize compliance

costs. Banking also encourages early reductions and provides liquidity, which can be a cushion against price volatility and unforeseen market events.

The fourth element of these programs is monitoring. It is important that all sources accurately measure and report all their emissions. Along with complete transparency of data, this provides the

foundation for ensuring both the emission reduction goal and the

credibility of the allowance market. At the end of each control period, sources must surrender allowances equal to their emissions.

And finally, there must be clean consequences for non-compliance

known up front to the participants. This provides certainty for both

the environment and for the sources. Unlike other trading programs, cap-and-trade has a cap which ensures achievement of the

emission reduction goal. Unlike traditional command and control

regulation, individual source control requirements are not specified.

So sources have the flexibility to experiment and the opportunity

to choose and change control strategies without needing Government approval.
11

The allowance system also rewards companies for achieving

greater control through, for instance, technology innovation. As a

utility vice president once said to me, the beauty of cap-and-trade

is that I can explain it to my CEO in 15 minutes.

The results from our acid rain and NOx budget programs have

been impressive. SO2 emissions from power plants are down 40

percent. Acid rain is down 30 percent across the eastern United

States with costs that turned out to be less than one-third of what

we had predicted. Summertime NOx emissions under our NOx

budget program are down 70 percent, as are the number of areas

exceeding the ozone standard. And compliance in both these programs is over 99 percent.

Cap-and-trade is also efficient to run. We work with more than

7,000 sources and have completed over 70,000 allowance transactions involving over 230,000,000 allowances. Yet the acid rain

program takes only 50 EPA employees, and the NOx program 20.

Given this success, in 2005, we chose this mechanism for the Clean

Air Interstate Rule to reduce SO2 and NOx emissions further.

So why have these programs worked? For the acid rain program,

the answer is simple. We had good legislation, and I want to thank

you for that. But second, in developing that law and its implementing regulations and in designing other programs, and then in the

day-to-day program operations, we have tried to adhere to the following principles.

First, keep your eye on the prize. Above all, Government needs

to focus on achieving the emission reduction goal and letting the

market work to keep costs down. Second, keep it simple so it is understood by all, particularly those who must comply with it. Third,

be transparent. Transparency builds public support and market

confidence.

Fourth, provide certainty both in what is required and what the

consequences will be for non-compliance. And fifth, be accountable.

Measure and report results, including the impact on the economy

and the environment.

In closing, let me reiterate that cap-and-trade can be a cost-effective, flexible and efficient instrument for achieving and sustaining

environmental benefits. And its success depends greatly both on

the sound design as well as effective implementation. Thank you.

[The prepared statement of Mr. McLean appears at the conclusion of the hearing.]

Mr. BOUCHER. Thank you very much, Mr. McLean. Dr. Izzo.

STATEMENT OF RALPH IZZO, CHAIRMAN AND CHIEF EXECUTIVE OFFICER-ELECT, THE PUBLIC SERVICE ENTERPRISE

GROUP INCORPORATED, NEWARK, NJ

Mr. IZZO. Mr. Chairman and members of the subcommittee, I am

pleased and honored to appear before you today on behalf of Public

Service Enterprise Group, or PSEG. PSEG distributes electricity

and natural gas to more than 2 million customers in New Jersey

and owns and operates approximately 16,000 megawatts of electric

generating capacity into eight States. Our generating fleet includes

about 2,400 megawatts of coal-fired capacity and almost 3,500

megawatts of nuclear capacity. We believe that global climate
12

change represents a real environmental threat and a significant

business challenge, but we also view it as an opportunity.

We support mandatory greenhouse gas reductions on a national

level and a cap-and-trade mechanism to achieve the necessary reductions. I have confidence that our Nation has the intellectual

capital and innovative spirit with which to meet the climate change

challenge.

Numerous options already exist for reducing our emissions.

These options include end-use efficiency, supply-side efficiency, renewable energy technologies, nuclear energy, and a wide range of

greenhouse gas offsets. Many technologies within these categories

can be implemented now, and the pace of technology development

and deployment will pick up dramatically when the United States

reduces regulatory uncertainty, adequately incents innovation, and

establishes a market price for carbon.

As noted, we believe that national climate change policy should

be structured around a cap-and-trade mechanism that will deliver

meaningful reductions at a reasonable cost. Our view is based on

considerable experience with other cap-and-trade programs that

have been successful in reducing emissions of sulfur dioxide and nitrogen oxide.

A key question is how to best structure a national cap-and-trade

program and establish a CO2 market that will efficiently spur investment in new low and zero-carbon technologies. This will require that we improve upon the existing models. Under the Acid

Rain Program, for example, virtually all SO2 allowances were distributed at no cost to power plant operators on the basis of historic

emissions.

Some would advocate that we continue this approach in a CO2

cap-and-trade program. We disagree. This grandfathering approach, as it is commonly known, rewards technologies with lower

efficiency and higher emission rates while providing no incentives

for investment in new, clean technologies. We support a performance-based approach also known as an updating, output-based allocation.

Under this system, allowances would be distributed based on a

facility’s recent electricity output measured in kilowatt hours. New

facilities, like IGCC and Ultra Super Critical Coal-Fired Plants,

would be entitled to compete for allowances with existing plants.

Companies would have an incentive to improve the efficiency of

their existing plants and the economics of investing in clean coal

and new nuclear would be improved.

Another alternative could entail the auctioning of allowances instead of distributing them. Proceeds from an auction could be used

for a variety of public benefits, including consumer rebates, research and development, and energy efficiency credits will reduce

taxes. And many economists agree that an auction is the most efficient and transparent method for distributing allowances.

We believe that existing coal-fired power plants continue to be an

important energy resource in the United States. Therefore we think

it makes sense to limit the auction of allowances in the early years

of the program. We support auctioning 25 percent of the allowances

at the outset of a national cap-and-trade program and transitioning
13

to a full 100 percent allowance auction system over a 10-year period.

It also will be critical to include emissions offsets both as a cost

control measure and a source of innovative compliance solutions.

These measures can include methane capture from coal mines and

landfills and other options as well. A robust offset program can reduce the cost of a cap-and-trade program.

Mr. Chairman and members of the subcommittee, on behalf of

PSEG, I thank you for the opportunity to offer these comments,

and I will be pleased to respond to your questions later.

[The prepared statement of Mr. Izzo appears at the conclusion of

the hearing.]

Mr. BOUCHER. Thank you very much, Dr. Izzo. Ms. Duggan, we

will be happy to hear from you.

STATEMENT OF JILL DUGGAN, HEAD OF INTERNATIONAL

EMISSIONS TRADING, UNITED KINGDOM’S DEPARTMENT

FOR ENVIRONMENT, FOOD, AND RURAL AFFAIRS, LONDON,

ENGLAND

Ms. DUGGAN. Thank you, Mr. Chairman and members of the

committee, for inviting me to describe the UK’s experience of capand-trade programs. I head the International Emissions Trading

branch at the UK Department of Environment, and I have worked

with emissions trading programs since 2003, both on the UK’s voluntary program and as policy lead developing the UK’s allocation

plan for the second phase of the EU program.

My current responsibility is to help extend cap-and-trade programs beyond the EU whilst allowing others to learn lessons for

the EU experience. To give some context, in the UK, all major political parties accept the science of climate, and climate change

mitigation is therefore not a contentious issue, only insofar as how

we go about it and how far we go how quickly.

Emissions trading is the central plan but not the only measure

to mitigate climate change in the UK Government’s portfolio of

measures. It is favored because it guarantees an environmental

outcome through the cap, and it maximizes the incentives to reduce

emissions at least cost through the flexibility to buy and sell allowances.

Turning to the first phase of the EU program, that runs from

2005 to 2007, designed as a learning phase to ensure that when we

got to the first Kyoto period, we had a successful, fully implemented scheme up and running. It was necessary to have this

learning in order to collect and verify emissions data, and many of

the facilities covered by the program did not collect emissions data

up until that point; to put in place the institutional framework that

is required for a cap-and-trade program so the electronic registries

that monitor the holdings, track the holdings of emissions allowances and allow electronic surrender of those allowances the monitoring reporting protocols, the verification; and not least, to gain

experience trading.

Our experience in the UK voluntary program is that sometimes

it takes a couple of years for trading to really get going, and I think

that was the experience in the SO2 program in the U.S. And so it

was important to have the 3-year period to get trading underway
14

and for participants to understand how they could benefit from this

program.

What phase 1 has done is provide a very good basis for member

states into the European Commission to develop and assess their

plans for phase 2, and that is the process that is currently underway, with the commission assessing, to date, 17 of the 27 plans for

the second phase of the EU program. And I have included in my

written testimony the summary of those allocation plans and the

allowances that will be issued for those member states. And I think

that they demonstrate both the commission’s determination to ensure real scarcity in phase 2 of the program, and also member

states’ determination to learn from their 2005 mission state that

they now have.

As an example, Germany initially proposed an annual cap in

phase 2 of 482,000,000 allowances, and that has not been cut back

to 453,000,000 allowances whilst increase in the emissions that it

covers. And Spain has set its phase 2 cap at 161⁄2 percent below

its 2005 verified emissions. The UK indeed has set its phase 2 cap

at 13 percent below 2005 verified emissions.

And in doing so, we had a number of considerations. First, the

environmental impact of the scheme, but also the impact on electricity prices and the competitiveness of UK industry. And I know

there has been some discussion of electricity prices, but our assessment for phase 2 for setting the cap for UK industry at that level

was that in a central case, electricity prices would rise by 1 percent

by industrial users and by half a percent for domestic users.

We have learned some real lessons from phase 1 of the EU program. First, the most important lesson is that markets need real

scarcity, but also that in order to ensure that scarcity, you need

very good data. And what phase 1 has done is provide us with verified emissions data from many of those facilities for the first time.

We have also learned that you need more harmonization of rules

and allocation processes to mitigate against competitive distortions

that may happen intrastate and to make sure that we are undertaking as fairly as possible the effort that we do. Industry, we also

know, needs certainty on targets and framework to make sure that

it makes the low-carbon investments that we want it to do. And the

European Union has recently announced its 20/20 target to cut

emissions by 20 percent below 1990 levels.

But we have also have done some really good things in phase 1.

We have put the institutions in place, and it was often quite a

painful process in which to do so, but those registries, those allocation methodologies, were among the most important protocols.

And trading is happening. Point Carbon, the market analysis

news service to the carbon market, estimates that a billion tons

were traded in the EU program in 2006, and that a billion tons

was worth around 18 billions euros. There is still a positive carbon

price. The phase 1 price is very low. The phase 2 price is currently

around 17 euros a ton, and that has been reasonably steady over

the past few months.

Lastly the UK Government retains its commitment to cap-andtrade as the most cost effective way of achieving the emissions reductions we need to avoid catastrophic climate change, and I would

be very happy to answer your specific questions later.
15

[The prepared statement of Ms. Duggan appears at the conclusion of the hearing.]

Mr. BOUCHER. Thank you very much, Ms. Duggan. Dr. Sandor.

STATEMENT OF RICHARD SANDOR, FOUNDER, CHAIRMAN,

AND CHIEF EXECUTIVE OFFICER, CHICAGO CLIMATE EXCHANGE, CHICAGO, IL

Mr. SANDOR. Thank you very much, Mr. Chairman. I am delighted to be here to share our experiences with you, and also noting in looking around the room that there are four of our members,

Smithfield Foods, Meadwest Bako, Roanoke, and Rolls Royce all in

your district. And Illinois, I am proud to say we have 32 members,

not including hundreds of traders and 75 members of the board

who trade in the Chicago Mercantile Exchange. We have 4 from

Pennsylvania, 14 from New York, 9 from Texas, 6 from Massachusetts, 2 from Georgia. Every single member here has member firms

in our district.

We bring to bear our experience of 40 years in academia off and

on and 35 years as a professional investor. We have been involved

in the development of financial futures, interest rate derivatives at

the Chicago Board of Trade. I had the privilege of working with

Brian in the design of the SO2 program. We did the first register

trade in the EPA, and we have traded carbon throughout the decade of the 1990s, giving us an experience set.

The Chicago Climate Exchange is a cap-and-trade allowance

from project-based systems. It is very important to indicate it has

300 members. They range from IBM, DuPont, Motorola, American

Electric Power, Tamper Electric, four of the companies in the Dow

Jones, Intel included, many, many companies that are America’s

leaders. In sum total, the emissions baseline of the Chicago Climate Exchange is 330 million tons, representing 10 percent of the

United States stationary source emissions. So it is not a small sample.

And what have we learned? What is our architecture? Number

1, we start with the baseline of year 2000, and our members are

required to cut emissions by 6 percent by 2010. This is as stringent

as any bill that you have pending before you. The system allows,

as I indicated, emissions reductions and most importantly projectbased offsets. The Illinois Farm Bureau, the Iowa Farm Bureau,

North Dakota Farmers Union, National Farmers Union. And one

of the major things we have learned is the role of agriculture could

be very, very significant in reducing greenhouse gases at the most

efficient levels.

We, for example, have seen farmers, dairy people, rangeland

management all included in our protocols. The 6 percent reduction

is independently verified by the NASD and monitored. Even though

we were granted a letter of regulatory exemption, we chose to be

regulated in order to ensure the integrity of our data.

How has our volume proceeded? A year and 2 years ago, we traded 1.5 million tons of carbon. Last year, we traded 10.3 million

tons, and in the first 90 days, we have traded 6.5 million tons

roughly. That is a sign of companies being able to enter and exit

without disturbing prices.
16

The price history is phenomenal in that we started at 80 cents

a ton, got up to $5 a ton, and ultimately went down to about 3.75,

where we are.

One thing I think is a common theme among all of us is price.

And that volume history is important because of entry and exit, but

the price is the driver.

Let me give you a few small examples. A professor from MIT

called up when the price was $2, ultimately with a biodiesel invention. He was able to raise $10 million, and now that system is in

practice, licensed to MIT, used by Arizona Public Service.

Intrepid, which is in the animal waste digestive program, taking

methane in, raised $17 million based on a $2 or $3 price. Once you

put price out there, invention is automatically spurred, and we

have seen in just this little pilot with very, very low prices, professors from MIT, people in the northwestern part of the United

States, doing biodigestors in Iowa, raising tens of millions of dollars

all to bring the low-cost solution.

So this is very, very important as far as where we are concerned.

Craig Vennor, who matched the genome project, raised $100 million to look for genetically altered microbes that eat pollutants. So

even with this tiny price, we are beginning to see some things.

The Chicago Climate Exchange, in the last 2 minutes that I

have, basically has a family of exchanges. We are very, very privileged. There are seven exchanges in Europe, and the European Climate Exchange has an 85 percent market share. We trade the

mandated system there and do about $60 to $70 million of trading

a day. We run the SO2 futures market, which is also mandated,

centrally located.

One of the lessons that we have learned. It is not daunting.

There are no showstoppers. The bad news is there are data gaps

and inefficiencies. We think, in summary, to distribute the allowances free is important. To credit early action is critical to have the

maximum number of offsets, domestic and international. Thank

you.

[The prepared statement of Mr. Sandor appears at the conclusion

of the hearing.]

Mr. BOUCHER. Thank you very much, Dr. Sandor. Dr. Burtraw,

we will be happy to hear from you.

STATEMENT OF DALLAS BURTRAW, SENIOR FELLOW,

RESOURCES FOR THE FUTURE, WASHINGTON, DC

Mr. BURTRAW. Thank you, Mr. Chairman and members of the

committee. My name is Dallas Burtraw. I am a senior fellow at Resources for the Future, a 54-year old research institution here in

Washington, DC. RFF takes no institutional positions. All my comments represent my own views.

I have studied cap-and-trade programs in existence today from a

scholarly and practical perspective for several years. An early lesson of these programs is that they can almost always be counted

on to deliver their expected environmental results. That is whenever an emissions cap is articulated, that cap will be attained as

long as there is credible monitoring, strong data systems, and credible enforcement.
17

The exceptions when the environmental cap has not been

achieved are anachronisms, and they can be easily avoided. The

more important issue from an environmental perspective is what

should be the level of the cap, and the responsibility for that is a

social decision that falls your way. However, given a well-articulated environmental goal, a cap-and-trade approach is a reliable

tool to achieve that goal. A primary motivation for choosing this

tool is to achieve cost savings relative to traditional prescriptive

regulatory approaches.

In general, we can identify substantial accomplishments and cost

savings here as well, but we might say the glass is only half full.

Substantial cost savings fall short of the economically feasible because the programs, as they sometimes are adopted, depart from

transparent market design in an attempt to accommodate a variety

of special considerations that are important to one party or another.

This leads to a first lesson that rises above others that we could

offer. The key to a successful program is simple rules and transparent design. This is the best assurance of efficiency and that fairness is achieved. The SO2 trading program that was established by

the 1990 Clean Air Act amendments perhaps comes closest in

many ways to achieving this ideal.

The second observation that rises above the others is the importance of allocation. That is the initial distribution of emission allowances. In the case of even a modest policy affecting just the electricity sector in this country, there will be created an outset worth

$30 to $40 billion per year, and that wealth will be distributed into

the economy. Complicated rules for allocation can provide a clock

for unfair wealth transfers of huge portions.

Where does this wealth come from? Emissions allowances are an

intangible property right that is created by the program where no

property rights existed previously, just as the legal systems in the

19th century created a property right in the Great American West.

And it is of comparable magnitude.

For the most part, it is consumers who fund this wealth creation.

It is important to note that emitters do not bear all, or necessarily

even most, of the cost of the program. Those costs are borne by consumers and by other businesses. So the free distribution of allowances to emitters, especially in the electricity sector, can lead to

gross overcompensation, that is extra-normal profits at the expense

of consumers because the value of allowances greatly exceeds the

compliance costs of investments that emitters would be expected to

put in place in order to comply with the program.

By way of guidance, there are not many things you can get a

group of economists to agree on, but one is the virtue of an auction

for the initial distribution of emission allowances. Virtually all public finance economists support an auction of allowances because it

can, for technical reasons, result in dramatic efficiency gains. Also

an auction yields a source of revenue that can be used to achieve

a variety of complementary policies, including research and development or direct compensation for consumers or severely affected

industries.

In summary, I am a strong advocate for efficiency and climate

policy because it is possible that so much will be asked of the
18

American people in this century that it is essential that we adopt

policies that are efficient. cap-and-trade is a tool to achieve that

outcome. I ask you to keep two principles in mind. One is a determined focus on simplicity and transparency in the design of the

program. That means a presumptive no to many bells and whistles

that may be suggested. Second, remember the crucial role of allocation. An auction should play the most important role at the beginning of the program and a growing role over time.

Despite these lessons from experience, you will be deluged with

suggestions for fixes to potential or imagined problems. Those fixes

are then likely to incur a whole new set of problems. In order that

we learn our lessons from history and not from the school of unintended consequences, I emphasize the importance of principled

market design.

There could be obtained a point where it is just not worth it to

use cap-and-trade. We have other policies such as prescriptive regulation to help us get started. In moving to cap-and-trade, it is essential that we adopt a strong architecture because this is an institution that may be with us for the better part of a century. A badly

designed cap-and-trade system can erode political will until there

is a cloak for huge transfers of wealth. However, done right, capand-trade is the preemptive choice for broad-based climate policy.

Thank you.

[The prepared statement of Mr. Burtraw appears at the conclusion of the hearing.]

Mr. BOUCHER. Thank you, Dr. Burtraw, and my apologies for

mispronouncing your name. Dr. Smith, we will be pleased to hear

from you.

STATEMENT OF ANNE SMITH, VICE PRESIDENT, CRA

INTERNATIONAL, WASHINGTON, DC

Ms. SMITH. Thank you, Mr. Chairman and members of the committee. Thank you for inviting me to participate in today’s hearing.

I am Anne Smith, a vice president of CRA International. My testimony today represents my own research and opinions. It does not

represent any positions of CRA.

Cap-and-trade is one possible form of a market-based approach

to regulation. These approaches can be very effective for reducing

emissions at the lowest possible cost, but to be effective, cap-andtrade must be tailored, not worn off the rank. I will explain why

a good greenhouse gas cap-and-trade program should not look just

like an SO2 program on steroids.

If we design it that way, we will run into at least three serious

problems. First, emissions allowance prices are notoriously volatile.

Emissions traders love that volatility, but consumers do not. For

SO2, the volatility had little effect on final costs passed through to

consumers. Prices on CO2 emissions, however, will more readily appear in consumers’ costs of living.

For example, the carbon price swings that have occurred in the

EU ETS so far have caused the cost of coal-fired electricity generation to rise and fall by almost 200 percent. It is not entirely coincidental that the average EU business’s electricity rates, across the

whole EU, rose by 16 percent in 2005. So clearly a well-designed

cap-and-trade program must eliminate such price spikes. This can
19

be done by letting the Government sell extra permits at a pre-established affordable price to anybody who wants to buy them. It

can be done even more easily and simply using other market-based

approaches such as emission fees.

The second problem of copying the SO2 model relates to the

international dimension of greenhouse gases, which is not a concern for SO2. The fact that a price on CO2 directly increases costs

of productions means that domestic businesses will see their costs

increasing as the price of carbon is added. And it will make them

less able to compete with their competitors in uncapped countries.

If we reduce our greenhouse gas emissions domestically but they

are offset by increases elsewhere in the world, large sums of money

could be spent by us on controls with no actual environmental benefit. The bottom line, any domestic cap-and-trade program that is

implemented in advance of internationally coordinated efforts

should be designed with permit price caps, and low ones at that.

Third, in contrast to SO2 and NOx, greenhouse gas sources come

from a wide vast array of sources. Covering all of these sources is

not possible with a cap that is imposed at the point where emissions occur, as we do with SO2. Imagine imposing a cap on all automobile tailpipes. Fortunately, there is actually a very simple way

to achieve nearly universal coverage of greenhouse gases: cap them

upstream before they are ever even emitted.

How? By capping carbon in the fossil fuels rather than capping

the emissions as those fuels are burned. The EU ETS program followed the SO2 model by capping CO2 at the point of emission or

downstream, rather than upstream. As a result, that cap covers

less than half of EU’s greenhouse gas emissions. The other half

continues to grow, making it very likely that the EU may not meet

its emissions targets.

An upstream approach could have covered those other emissions

too. The upstream approach is neither radical nor novel. It was

used successfully in two of our earliest cap-and-trade programs for

the phase-down of lead in gasoline and the phase-out of

chlorofluorocarbons.

Some are concerned about an upstream approach because they

think that it will affect their permit allocations. You can completely

separate the decision about the point of regulation from any decisions about who should receive the permit allocations. And I think

that you should make this separation very clearly.

In summary, there are reasonable approaches that will work for

a greenhouse gas cap, but they look very different from the widely

touted SO2 and NOx cap-and-trade programs. Unfortunately, many

policymakers want to run away from the market-based approaches

and go back to prescriptive regulations.

This would be very costly. For example, I have estimated that a

renewable portfolio standard, as an alternative to a cap, would cost

four times as much as any simple pure cap-and-trade program to

produce the same amount of emissions reductions.

I close on the need for more and better R and D. Market-based

policies stimulate innovation that is incremental in nature and deployment of emerging new technologies. But sadly and contrary to

widespread belief, cap-and-trade programs cannot stimulate the

kinds of technological progress that are necessary to enable the
20

much, much deeper emissions cuts that are required to achieve climate stabilization. And the current preoccupation with how to impose near-term greenhouse gas controls is crowding out attention

to this much more important bottleneck for reducing climate

change risks. Thank you very much for your time. There are more

details in my written comments, which will be in the record, I

hope.

[The prepared statement of Ms. Smith appears at the conclusion

of the hearing.]

Mr. BOUCHER. Thank you, Dr. Smith, and I want to say thank

you to each of our witnesses for their well prepared and presented

testimony this morning. This is one of the more interesting hearings that we are having in our series on climate change, and I truly

appreciate the information that you provided to us.

We just received a notice for a recorded vote on the floor of the

House, and we have approximately 10 minutes before we have to

leave for that. What I am going to attempt to do is keep this hearing going throughout the entire recorded vote. Mr. Hastert and I

are going to ask our questions and then depart, while other members propound theirs.

Let me begin, Ms. Duggan, with you. And again thank you for

traveling here from a long distance to share your experience with

us. The testimony we have received about the European Union’s

experience with cap-and-trade has not been uniform. Some have

suggested that it has been a good experience. Others have said that

it could have been a better designed system, that there have been

significant flaws in that first phase. Would you care to respond to

that? How would you characterize the overall experience? Specifically, I understand your first phase was designed to be somewhat

experimental. How would you say the experience has been with

that first phase? What have you learned from it? What do you intend to do differently in the second phase?

Ms. DUGGAN. The first phase, as you rightly point out, was designed as an experimental phase. And I mentioned in my opening

statement, there are good reasons to actually have that experimental phase prior to the 2008–12 Kyoto period where member

states do have obligations under Kyoto. And therefore it was very

rushed. Implementation was rushed. Trading was due to start on

the first of January 2005. The UK, although it worked hard and

put a lot of resources into this, did not have its final approval and

its registered life until May of that year, and we were one of the

earliest States to achieve that milestone.

And so one of the things that happened in 2005 and early 2006

was that final decisions were made on allocations. Registries came

live, and allocations were made. So volatility in the market in the

first phase was essentially due to the decisions of allocation and

the availability of allowances. And I think if we had more time,

then clearly all of us would have preferred to have had that happen

in more harmony prior to the start of the scheme. So I think that

one thing is that trading schemes do take quite a long time to design, and getting that institutional framework in place is time consuming and often difficult.

We have had, in the first phase, 95 percent free allocation. That

does not mean that facilities get 95 percent of need. It means that
21

as a minimum, States, once they made their allocation decision,

should give 95 percent of that allocation for free. But different

States made different allocation decisions, and I think that one of

the things that came apparent last May, when the first results

were announced, was that some States had either cut their emissions or they had set those allowances. Other States didn’t. UK,

having had experience of its own voluntary trading program and

more emissions data, I would suggest than many, actually our cap

was 35 million below what the electricity power sector needed, and

27 million below need altogether. So we were one of the ones that

was buying in from elsewhere.

Mr. BOUCHER. Let me ask this other question if I might because

I only have 2 minutes left.

Could you describe the effect from the vantage point of industry

in the United Kingdom of the implementation of cap-and-trade

there? Has there been disadvantage to industry? And if so, to what

extent? And have particular industrial sectors suffered unusual disadvantage in comparison with others? And describe, if you would

also, the effect of the implementation of cap-and-trade to the average consumer of energy in the United Kingdom. So from the vantage point of both industry and consumers, what has been the experience?

Ms. DUGGAN. The experience—the UK industry, we made a decision to put the burden on large electricity producers for phase 1

and for phase 2 of the program because they are insulated from

international competition, and they have an ability to pass through

costs so that they would be less impacted, if you like.

Other sectors of industries that were covered by the program

were allocated at predicted need, and in fact, in that very first

year, as I said, the electricity producers with, I think, 37 million

short of allowances and the rest of the UK industry was in aggregate 10 million long in allowances. So that although they faced

some increase in electricity prices, they also had allowances that

they could sell in the market. They could mitigate against that by

reducing their energy use and selling the allowances back to the

electricity producers.

Clearly, some sectors are more subject to international competition than others, and the analysis that we have done to date shows

that of all the sectors that potentially could be covered by the

scheme, the aluminum sector is the most vulnerable to international competition. In the UK, they have only been included insofar as they have combustion installations that meet the definition

of the program. And they therefore have had a free allocation to

cover that. There is clearly a need for a more analysis, but they are

the most vulnerable sector that we have seen. Other sectors are

relatively insulated from international competition. Some are regionally traded. It is one of the things that we are looking at, but

we only have one year’s data to date. The second year’s data will

come through soon.

Mr. BOUCHER. And finally, the price of electricity at the retail

market, how has that been affected?

Ms. DUGGAN. The price of electricity did go up during 2005.

Mr. BOUCHER. By how much?
22

Ms. DUGGAN. I don’t have the exact figures. I will get back to

you. The largest part of that increase was due to the rise in natural

gas prices, and I think the U.S. also saw increases in electricity

prices over the——

Mr. BOUCHER. For unrelated reasons, yes.

Ms. DUGGAN. Yes.

Mr. BOUCHER. OK. Well, my time has expired. Thank you. And

let me recognize now the gentleman from Illinois, Mr. Hastert, for

5 minutes.

Mr. HASTERT. Thank you very much. A couple questions I want

to ask and very quick answers if I could. Ms. Duggan, in European

Union, and is it intra- or inter-trading? Do you trade within a

country, all the trading with UK, or will you trade with Germany

for instance?

Ms. DUGGAN. Both. We trade with any facility or any trader, and

Europe can trade with any other facility anywhere in Europe.

Mr. HASTERT. All right. So to me, I am just trying to look

through this thing. So the environmental benefits goes to those

people who are low emitters under the cap. So their customers

aren’t necessarily benefited from the low emissions if they sell the

credit. If they sell the credit then to somebody who emits more CO2

over the cap, then that cost is passed on to that company. They buy

those credits so there is a cost, and then that money is passed

through to the consumer, right? So electricity prices go up?

Ms. DUGGAN. Electricity prices go up.

Mr. HASTERT. And emissions basically stay the same, right?

Ms. DUGGAN. It depends on the overall cap.

Mr. HASTERT. Well, let us say in your country itself. Say the new

plant that you brought in on T-side, the big plant that burns natural gas off the North Seal. It is huge, and so it has very low emissions. And you take and sell those credits then to somebody down

in Wales that has a coal plant that is not very modern. So you have

somebody trading caps or trading credits here, and so people with

coal costs go up to those people who buy that energy at the same

time the price is set, plus the emissions are set at T-side. Is that

correct?

Ms. DUGGAN. Yes.

Mr. HASTERT. Very good.

Mr. HASTERT. Then let me ask the gentleman, Mr. McLean.

When we put in the SOx and NOx emissions and we did when the

EPA and others did this clean air thing, was the commercial ability

to clean up SOx and NOx available?

Mr. MCLEAN. There were several options available.

Mr. HASTERT. So the commercial ability to do that was available.

How about the commercial availability today across this Nation to

take CO2 and sequester it?

Mr. MCLEAN. Those options are becoming available. It depends

on where you set the cap. If you don’t make it a stringent cap,

there are plenty of options to reduce 5 percent. If you set a cap at

a 50 percent reduction, yes, you would have difficulty.

Mr. HASTERT. All right. And then, Ms. Smith, basically you said

prices on CO2 cause a cost of coal-fired increase of almost 200 percent. So is that the cost of putting this on the facility itself? Or is
23

it the cost of buying the credits and passing them onto the consumer?

Ms. SMITH. That is the price of buying the credits when they

were at the highest level that occurred in the EU ETS system,

which was about $35 a ton of CO2. Mr. HASTERT. Have you done any projections on let us say the

coal-fired plants in the south central part of the United States, Virginia and West Virginia and Ohio and Indiana and southern Illinois, the coal coming from those plants? What kind of increase in

cost might there be? Any idea at all?

Ms. SMITH. It depends, as Mr. McLean was saying, on the stringency of the cap, but if you set a cap at about a 50 percent reduction, such as we did do under the SO2 market, you would probably

see prices very much in the range of, well, tens to hundreds of dollars a ton of CO2 to get a 50 percent reduction, if we were trying

to do it with current technology in today’s world.

Mr. HASTERT. So what, for instance, would that cost be when you

pass that onto a customer per kilowatt hour?

Ms. SMITH. Well, the price increase in coal-fired generation

doesn’t translate—say it is a 200 percent increase. That does not

translate into a 200 percent increase in the cost of electricity.

Mr. HASTERT. I didn’t say that.

Ms. SMITH. Right, but when you say try to say what would happen across the whole electricity system at the same price, it would

be perhaps a 20 percent, 30 percent increase in the price of electricity?

Ms. SMITH. Yes.

Mr. HASTERT. Thank you. My time is up. Thank you, Mr. Chairman.

Mr. BOUCHER. OK, thank you very much, Mr. Hastert. There

being no majority members in the room, other than the chairman,

and the chairman having to go vote, I am going to exercise the option of recessing the committee momentarily. I think our vice chairman of this committee, Mr. Butterfield, will be returning shortly.

So stay where you are. We are going to recess until he returns, and

when he returns, he will be in the Chair and will propound his

questions, as will other members in order. With that said, the committee stands in recess.

[Recess.]

Mr. BUTTERFIELD [presiding]. The committee will come back to

order. Let me thank the witnesses for your extreme patience this

morning. We had a roll-call vote, and most of the members are now

on the floor. The chairman had asked that I leave early and cast

my vote and get back to the committee to resume these deliberations.

It is now time for the questions from the various committee

members, and I am going to start. And I think I am going to address this question to you, Mr. McLean, if you would. Sir, I feel

very strongly that climate change is a global issue, which must be

addressed by our country as a whole and in cooperation with the

world. If the Federal Government fails to make the responsible

choice in crafting a solution to this problem, is it possible that our

States could develop mandatory greenhouse gas reduction programs that would be effective enough? And could there be some
24

major problems with this type of patchwork approach to regulation?

Mr. MCLEAN. Sir, I understand your question, and it raises sort

of an overall policy question about how to proceed, the timing to

proceed, the relationship between the Federal Government and the

States. And it sort of getting beyond my area of expertise to sort

of call that judgment, but I understand what your concern is. And

I think it is a legitimate concern that ought to be weighed in your

deliberations as to when to act and how to——

Mr. BUTTERFIELD. Dr. Burtraw, you want to take a stab at that

one?

Mr. BURTRAW. Sir, I think that for a meaningful policy that addresses climate issues, it really is fundamentally a Federal and

international issue. But I think there is an important role for leadership in the States, and if ever there was a case where the States

are a laboratory of new ideas, this is where we are seeing it today.

And there are some important architecture design issues that—

they merged in RGGI and California, I think they can be very useful for you to consider for a national model.

Mr. BUTTERFIELD. Dr. Izzo?

Mr. IZZO. We would agree with you that it is critically important

that it be a national cap-and-trade program. While we have been

very supportive of what has gone on in the RGGI states, I would

be less than accurate if I didn’t admit that we have been challenged with many of our coal investments to recognize how to proceed given that several of the RGGI states have different points of

view of what the future will hold, yet many of those States have

a common clearing price for wholesale electricity. So you have uncommon cost structures, common clearing price, and some huge

competitive dislocations with those disparities.

Mr. BUTTERFIELD. There are some people who argue that a capand-trade system to reduce greenhouse gases will lead to much

higher energy cost and job loss. We heard testimony earlier this

week that in India, for example, there is a strong resistance to employ any environmental protections which might slow economic

growth. Is it possible that a cap-and-trade system could actually

spur technological innovation as businesses seek to reduce their

greenhouse gas output, thereby creating new jobs in industry? Dr.

Sandor?

Mr. SANDOR. I do think a cap-and-trade system will spur new

technology. Every experience that we have had with regard to inventors, we probably see, I would say, 50 to 150 proposals from inventors, be they small firms or large firms. And I do believe ultimately there will be a green tech revolution from the date that we

see, and the processes will come from the small inventors, as they

did in the Web. This price discovery allows individuals and people

that finance in private equity firms to raise capital and to do

things out of the box that might not be done otherwise.

Mr. BUTTERFIELD. Thank you. Finally, Dr. Burtraw, let me ask

you my final question. Sir, in the past, efforts to curb emissions

and pollution have often left poor communities and minority communities far behind. One concern with a cap-and-trade system is

that it may be easier to reduce emissions in the newer factories located in affluent areas rather than undertake the more costly effort
25

to deal with the older factories that are often in low-income communities and tend to have high emissions of greenhouse gases. Do

you have any suggestion on how we can help to ensure environmental justice, as we call it, in our low-income communities?

Mr. BURTRAW. Sir, I take that question very seriously. I am serving on the market advisory committee in the State of California as

they look at designing and implementing AB 32 in that State. And

this issue is very sharp and keen in that context.

The CO2 is not a local pollutant, but the reason that it becomes

such a key issue with the subject of environmental justice is that

its emissions of CO2 are correlated with the emission of other toxic

pollutants that can have a local effect. And so advocates who want

to see a reduction on these other types of hazardous air pollutants

use any tool that they can grab a hold of to try to achieve the benefits for their local community.

I think the more appropriate thing to think about is designing

the CO2 policy, rather than trying to constrain the way that you

would achieve CO2 reductions, and a cost-effective way, is to recognize what can be done to achieve economic justice as a superset for

what includes environmental justice.

And one of the most interesting models in this regard is, again

I will point to the RGGI example, the Regional Greenhouse Gas

Initiative, which is mandating a significant portion of emission allowances, at least 25 percent, should be set aside for strategic energy investments. And modeling what we have done for the State

of Maryland, we showed that by putting that allowance revenue

into end-use efficiency investments, electricity prices could restabilize even as Maryland joined the Regional Greenhouse Gas Initiative.

Mr. BUTTERFIELD. Thank you very much. At this time, the Chair

recognizes the ranking member of the full committee, the gentleman from Texas.

Mr. BARTON. Thank you, Mr. Chairman. Thank you for coming

back early so we could keep going. I want to ask Ms. Duggan my

understanding—I don’t know that this is a fact. That is why I am

asking it—that Great Britain primarily made a decision to meet its

targets under Kyoto by really eliminating domestically produced

coal or reducing the amount of coal and going to a Norse Sea gas

and maybe even LNG from Norway. Is that true or not true?

Ms. DUGGAN. I think there was certainly a move to use gas in

the 1990s, though one of the things I wanted to say in 2005, even

under the EU emissions trading program, there is a switch that

year from gas to coal in the UK. There has been a number of measures, and the UK is constantly looking at ways in which to reduce

its carbon emissions. And that work continues, and so there has

been a variety of means to do so.

Mr. BARTON. Is it fair to say that the use of coal has declined?

Ms. DUGGAN. I cannot categorically answer that. I will get back

to you and put something in the text.

Mr. BARTON. Fine. I just asked because you are from Great Britain. Ms. Smith, our EPA witness in his prepared testimony, and I

am told in his verbal testimony, talks about leakage. If you don’t

design the system well, people move to where it is not regulated.

Do you have any evidence that would indicate that if we really put
26

a significant cap-and-trade system on in the United States that we

wouldn’t just have a lot of industry migrate to places like China,

where they have shown no inclination at all to limit their carbon

emissions? And no. 2, do you think China would ever join an international group that would actually be effective at reducing air

emissions?

Ms. SMITH. Regarding leakage, we can’t say we have hard evidence because we haven’t tried the experiment. But there has been

a lot of modeling exercises that we had done and others in our

modeling community have done, which do indicate that there is a

great potential for leakage. It is not 100 percent leakage, meaning

every ton reduced in a capped country does not reappear as a extra

ton in another country that is uncapped. But leakage does seem to

have a potential to occur at the level of maybe 5 to 15 percent of

the emissions, and that is pretty significant when it is occurring at

the cost of industry within one’s own country.

We also see that even in State programs where a unilateral state

might impose a cap unilaterally on self without the States surrounding it doing that within the U.S. And we see that kind of

leakage number occurring across State numbers.

Mr. BARTON. OK.

Ms. SMITH. The second question was whether China would ever

follow us in a cap-and-trade program. I am not an international

lawyer. I really don’t have an answer to that, but I will say that

I don’t believe, by putting a cap on our own Nation, that we will

get the countries such as India and China to follow us. I don’t see

any incentive for them to do that.

Mr. BARTON. OK.

Ms. SMITH. Though I do think we need to coordinate the policies

before applying the caps.

Mr. BARTON. OK, Mr. McLean, I am told that you are the director at the EPA of the office that has actually implemented the SO2

cap-and-trade. Correct me if I am wrong. SO2, we primarily regulated and capped at smokestacks at the stationary sources. I don’t

think we did anything for mobile sources. Is that true?

Mr. MCLEAN. That is correct. Utilities were about 70 percent of

the SO2 in this country, and so that is the sector we focused on.

Transportation for SO2 is a very small portion of it.

Mr. BARTON. Now, if we are going to cap-and-trade CO2, my information is that it is about a third generated by stationary

sources, about a third by mobile sources, and then about a third

by so-called natural sources. How do you cap-and-trade mobile

sources and natural sources?

Mr. MCLEAN. Well, first of all, yes, utilities are about a third and

then other industrial sources are another 20 percent or so. So

about 50 percent are utilities and industrial sources, and about a

third are mobile sources. The rest tend to be commercial, residential, sort of making up that 100 percent.

We have not used this technique to deal with the mobile source

sector and what I can say is when we dealt with NOx, we focused

on utilities and industrial sources which were about 30 percent of

the total NOx emissions in the eastern United States. And that

was the focus of the cap-and-trade.
27

So 70 percent wasn’t even covered under cap-and-trade. We used

other tools to——

Mr. BARTON. My time is expired, but Mr. Chairman, if we are

going to seriously review cap-and-trade, I would stipulate that the

entire totality of the emissions has to be capped and trade, and

that is something we need to pursue.

Thank you for your time, and I thank the witnesses for being

here.

Mr. BUTTERFIELD. Thank you very much, Mr. Barton.

The gentleman from Pennsylvania, Mr. Doyle, is recognized for

5 minutes.

Mr. DOYLE. Thank you, Mr. Chairman.

Mr. Sandor, I am very concerned that we ensure that any legislation we enact includes provisions that encourage our trading partners, especially in rapidly developing countries like China and

India, to also make significant reductions in their greenhouse gas

emissions.

Now, in your testimony you stated that you have engaged the

leaders of both of these countries on the issue of market-based initiatives that address environmental concerns. I am interested to

hear more about that, specifically, what have you talked to them

about and how would you gauge their level of interest, and more

importantly, their desire to actually start pursuing these strategies?

Mr. SANDOR. Let me share with you my experience. I have been

to China three times in the last 5 months, and I have been to India

two times. We have started forming something similar to CCX

called the Indian Climate Exchange, and it involves the same caliber of companies that the Chicago Climate Exchange, some of the

leading industrialists, et cetera.

We found that at least in the private sector—now, I can’t speak

for their leaders, OK, and the policy people. I can tell you that

there are the counterparts to my members like DuPonts, IBMs,

Safeway stores, Duquesne Power and Light, that there is many of

those that are over there that say we want to learn what you are

doing and we would like you to help us establish an exchange.

Our experience is that in the industrial sector—now, make no

mistake, even in China, there is a lot of wealth being created by

the private sector, and those folks, not their leaders—again, I can’t

speak to the leadership, but I can tell you we sense the same latent

demand for action among the industrialists there that we sense

here. Everybody said without the absence of a law, you would

never get anybody to join a legally binding private sector agreement to reduce greenhouse gases. And we have engaged 10 percent

of the United States in that debate with no law. And it is my business view that we can duplicate our efforts in Asia and then track

them in. We have five Chinese companies. We have two Indian. We

have seven Brazilian companies that have taken on reduction targets. So our experience, again one small piece of data.

And then third, I had the pleasure of being invited to speak at

Beijing University. I happen to be a professor at Northwestern

University. At that talk at Beijing University, I would say the students were every bit as literate, if not more, about cap-and-trade

and emissions trading. They actually asked me, the 21-year old,
28

why the price in Chicago was this, and how come it differed from

the price in Europe. So the universities there are teaching cap-andtrade to the students in China as we speak.

Mr. DOYLE. I will bet you not many students in American universities know what cap-and-trade is.

Mr. SANDOR. Well, the other thing, which I think is just incidental to this, I came with Mandarin slides and threw them out after

one presentation because everybody was bilingual.

Mr. DOYLE. Thank you, sir. I want to ask Mr. McLean probably

my last question. Mr. McLean, as Congressman Barton said, carbon poses different challenges than does SO2. And given your experience administering the acid rain program, how would you structure this program to meet these challenges? And do you think that

we should take an economy-wide approach, as others have testified? Or do you believe the committee should just focus on specific

industries to meet the reduction goals?

Mr. MCLEAN. OK, I will try to give you an answer based on experience that we have had. As I said, there are many policy instruments out there. cap-and-trade is one of the market-based instruments. There are traditional regulation, and my office also runs

voluntary programs.

We have not applied cap-and-trade to the entire problem, either

for SO2 or for NOx. We have applied it to those sectors where we

thought it would work well, where it could be run effectively, and

we could get reduction.

Mr. DOYLE. So let me ask you this because my time is almost up.

What do you believe is the real world achievable reduction that a

perfect cap-and-trade program could bring about in the next 5

years?

Mr. MCLEAN. I can’t really give you an answer to that question.

Mr. DOYLE. You don’t want to wing that one?

Mr. MCLEAN. No, thank you.

Mr. DOYLE. Thank you, Mr. Chairman. I see my time is up.

Mr. BOUCHER. Thank you very much, Mr. Doyle. The gentleman

from Michigan, Mr. Upton, is recognized for 3 minutes.

Mr. UPTON. Three minutes or 5 minutes?

Mr. BOUCHER. I am sorry. Five minutes. You are worth every

second of 5 minutes.

Mr. UPTON. I know I wasn’t here to get the additional three, and

I do want to apologize for being late. We had a meeting downtown,

and it was very difficult to get back. So I missed your testimony

and some of the questions here, but I appreciate your willingness

obviously to be here this morning.

Mr. SHIMKUS. Same meeting I was at.

Mr. UPTON. I was at the same meeting as you were, Mr.

Shimkus. We tried to get an early bus to leave, and we couldn’t do

it. We commandeered it, but it didn’t work. They had guns. It was

the President.

Ms. Duggan, I think you answered about the UK meeting its

Kyoto targets, and I just wonder what percentage of their electricity production comes from natural gas, nuclear, and coal. Do

you know?

Ms. DUGGAN. I believe that nuclear counts for about 20 percent.

I don’t have the figures on coal and gas.
29

Mr. UPTON. So about the same nuclear as it is here. And do you

know if the UK is expanding its nuclear capability to provide electricity?

Ms. DUGGAN. We published an energy-wide paper last year, looking at the future of energy for the UK, and a bill will be published

shortly. I am not sure exactly when. And that will set out the UK

strategy for energy policy going to the future.

Mr. UPTON. OK, Dr. Izzo, your company currently produces about

45 percent of its electricity from nuclear, as I understand it. Do you

have any plans to increase your nuclear energy production as a

way to reduce CO2?

Mr. IZZO. Yes, we do. In fact, this autumn coming up, we will

complete a 120-megawatt upgrade at one of our nuclear facilities,

and we are actively considering——

Mr. UPTON. And where is that facility?

Mr. IZZO. That is in Salem County, New Jersey, and we are actively considering the submission of a license for a new facility in

New Jersey.

Mr. UPTON. And how long did it take, as you looked at this facility in Salem Country, how long did it take you, from the point that

you decided that is where you wanted to go, how long did it take

to get through the regulatory process to actually get to where you

are today? How long ago did you start?

Mr. IZZO. The upgrading process took about 2 years. A new nuclear plant, from decision point to production of a kilowatt hour,

will probably take 10 years.

Mr. UPTON. Dr. Sandor, we appreciated your testimony, and

there are a number of us from the Midwest that are not too far

from Chicago. So you may get a call from us in the next couple

weeks wondering if a couple of us might come by and visit your exchange.

Mr. SANDOR. We would be very pleased. As you know, some of

our significant members are in Michigan. Dow Corning, Michigan

State University.

Mr. UPTON. I am a Wolverine, I want you to know.

Mr. SANDOR. OK. Well, we are talking to the university here in

Michigan, plus I have a home on Lake Michigan so——

Mr. UPTON. Which town?

Mr. SANDOR. Halfway between St. Joe and Southaven.

Mr. UPTON. So you are in my district. So you are in one of the

fire lanes?

Mr. SANDOR. Yes.

Mr. UPTON. Which fire lane?

Mr. SANDOR. Fire lane nine.

Mr. UPTON. Nine, OK.

Mr. SANDOR. Wilderness Dunes.

Mr. UPTON. I know exactly where it is. Look forward to seeing

you, and I think Mr. Shimkus and Mr. Hastert intend to come to

try and visit. I live in St. Joe, Dr. Sandor. I live just north of the

river. Dr. McLean, as we talk about monitoring greenhouse gases

accurately, we heard earlier in the week about both China and

India. China, of course, putting on line literally two new coal-fired

plants literally every week. India, we heard some very disappointing information as it relates to the Indian part, I guess you could
30

say, in terms of where they are and what they might likely do.

How difficult is it to monitor the emissions in either one of these

two countries? And what type of cooperation do you might see coming ahead as we look at some possible legislation moving?

Mr. MCLEAN. Well, there are several parts to that. First of all,

in the U.S., we monitor CO2 from power plants. We have, since the

1990 amendments, put that in. So that is a third of the emissions

in the United States. For the last several years, we have been

working with China on several projects, one of which is to introduce and help them implement a cap-and-trade program for SO2

and hopefully NOx-modeled on the U.S. program.

Part of that is monitoring, and we have been working specifically

with them on the monitoring areas because they recognize that

that is going to be critical. So they are starting to put in place

pieces that will build a solid regulatory base to——

Mr. UPTON. And in my last 5 seconds, what are we doing with

India?

Mr. MCLEAN. We are also working with India. India is a more

difficult country to engage with structurally, but we do have work

that we are doing there in different areas, different pollutants. We

are working with them on methane and other issues.

Mr. UPTON. And India is getting the hydroelectricity, right, from

Bhutan?

Mr. MCLEAN. I am not familiar with their electrical structure.

Mr. UPTON. OK, thank you. I yield back. Thank you, Mr. Chairman.

Mr. BOUCHER. Thank you, Mr. Upton. The gentleman from

Michigan, Mr. Dingell, the chairman of the full committee, is recognized for 5 minutes.

Mr. DINGELL. Mr. Chairman, thank you for your courtesy. Welcome to our panel. Ladies and gentlemen, I have three statements

which I would like to make here, and if anyone disagrees, please

indicate so by the sign of no.

One, there was not a comprehensive emissions baseline to begin

with, so as a result, the market was overallocated with emissions

allowances. I am referring to the European Union’s adoption of a

cap-and-trade program. Is that true? All right, the second question

again refers to the European Union’s adoption of a cap-and-trade

program. Ladies and gentlemen, the 3-year emission reduction period in phase 1 and even phase 2 of the program from 2008 to 2012

is too short to allow for long-term capital planning and emissions

reduction strategies. Do you agree, ladies and gentlemen, or do you

disagree?

Ms. DUGGAN. In terms of target, I agree that business certainly

needs long-terms targets, but if we had the allocation plans for

phase 1 for 10 or 15 years, we would have been in real trouble.

Mr. DINGELL. Thank you. Now, I am referring again to the same

situation. EU members propose caps that varied widely in stringency. Is that correct or not?

Ms. DUGGAN. I think that is probably true for phase 1 because

there wasn’t good emissions data. I don’t think it is true for phase

2; although, they have different targets for Kyoto.

Mr. DINGELL. All right. Now, we are getting down to the point

that I am concerned with. And, ladies and gentlemen, again re-
31

member I have only 5 minutes to do this business. In your opinion,

ladies and gentlemen, do any of the concerns which I have raised

represent insurmountable problems that could not be addressed in

a U.S. cap-and-trade system? Can these be dealt with?

Mr. SANDOR. I think they can all be dealt with and with a great

deal of ease.

Mr. DINGELL. Very well. Now, Ms. Duggan, it is my understanding that one of the reasons the EU adopted a test period from 2005

to 2007 was to allow the EU to develop the kind of hindsight that

has just been exhibited. Is that a correct statement?

Ms. DUGGAN. That is correct, yes.

Mr. DINGELL. Now, I think we can say then that the benefit of

hindsight is that you will enter the Kyoto compliance period of

2008–12 with these problems resolved. Is that correct?

Ms. DUGGAN. Many of them resolved as far as possible, yes.

Mr. DINGELL. Now, would any of the members of our panel want

to make further comment? Dr. Burtraw?

Mr. BURTRAW. Thank you. One of the problems in the EU going

forward, I think, is a legacy of in the EU, you have 25, now 27,

participating sovereign nations at a level of sovereignty that

doesn’t exist among States in the United States, and a lot of accommodation had to be made due to that sovereignty. You have less

harmonization in the policies in the different member states, and

one of those kinds of rules has to do with the treatment of new

sources and treatment of sources that retire. This introduces a lot

of unexpected and perverse incentives in terms of investment behavior within the EU. That is a kind of policy that could not be

fixed going into phase 2. I know that it is on the agenda to be

looked at going forward beyond 2012.

Mr. DINGELL. Ms. Duggan, you had a comment.

Ms. DUGGAN. I would like to respond to that. One of the differences that Dr. Burtraw refers to is that the Germans had intended to guarantee new entrants 100 percent allocation for 14

years. The commission have not allowed that, so there is indeed

more harmonization on new entrant rules of phase 2.

Mr. SANDOR. I would just like to add one thing. In our experience

in financial inventions, whether it is mortgage-backed securities,

interest rate derivatives, the initial start of the invention rarely

looks like the sophisticated product 10 years at a time. Our belief

is you can’t let the perfect be the enemy of the good. Many of the

things that we have, we chuck the things that don’t work. We try

to enhance the things that do work, and in invention, it is very

dangerous to have the perfect. It is often the enemy of the good,

so our experience, whether it is the Web or anything like that, final

looks at inventions don’t look like the initial ones.

Mr. DINGELL. Thank you. Now, would it be fair for me to observe

then that we could use a cap-and-trade system similar to the EU

system or similar to some of the programs we have in this country,

but it would require some very careful attention in terms of trying

to learn from the inadequacies of those programs and then try and

come up with proper mechanisms to address them so that we

would have a good workable program. Do you agree with that, ladies and gentlemen? Thank you. Ma’am, you have been very patient, yes.
32

Ms. SMITH. I would just like to say that the design of that program does not provide coverage that is really needed. So within

that cap in the EU, it may function well going forward once some

of the kinks have been worked out of the system. But it will not

be providing sufficient coverage of all emissions of greenhouse

gases across the EU because it doesn’t deal with 50 percent or

more of the sources at this point in time. So a different architecture

in the U.S. would allow us, with a very simple system, to get that

coverage and therefore not have the runaway emissions outside of

the cap that are dogging and will continue to dog the EU, I believe.

Mr. DINGELL. Thank you. Ladies and gentlemen, I appreciate

your patience. Mr. Chairman, I thank you for your courtesy.

Mr. BOUCHER. Thank you very much, Chairman Dingell. The

gentleman from Illinois, Mr. Shimkus, is recognized for 5 minutes.

Mr. SHIMKUS. Thank you, Chairman. Appreciate the panel. I

think Mr. Hastert, Mr. Upton, and I will probably make it up to

the Chicago Climate Exchange. We are trying to do that soon. I did

read the article in Newsweek. I think it was in Newsweek. There

was a soybean grower in Wisconsin, who was part of the exchange,

which I find interesting. I do have a large agricultural district.

There are questions that you don’t need to address right now, but

I think when we come up there, it would be basically issues such

as how can producers sell credits so that they might have—I know

no-till farming is an issue. How do they measure how much they

sequester? So I will look at some of those things when we come up.

A cap-and-trade system will undoubtedly mean for electricity

generation in this country, fuel switching. And we saw it before in

the SO2 debate, and I am from southern Illinois, and I had numerous mines closed down. There is a place called Kincaid, Illinois.

Commonwealth had a coal-fired generating plant and a mine across

the street. For this power plant to meet its new clean air guidelines, they shipped in western coal, and they closed down the coal

mine. Not real efficient, and that happened in all of southern Illinois. And so that is why a lot of us are skeptical, especially if there

is not an international agreement that would ensure that the world

community addresses climate and a carbon standard.

And I also find it curious that my colleagues on the other side

are now such great believers in exchanges when, let the buyer beware. The first time financiers use the market, based upon the fluctuation and the risk, why do we have people with capital going to

these markets? They want the big fluctuation of prices because the

financiers want to make the profits through this market. That is

what they like, and my friends on the other side will say they are

reaping excessive profits by using NYMEX. Or they are using the

energy exchanges or the Mercantile Exchange. It is the real rich

people of the world, and they are extorting these markets. So be

careful. You may be safer having a market based on private sector

people wanting to do good things, versus having us help dictate, direct, and determine a carbon exchange.

And it will happen. We have seen it on this committee ever since

I have been here. When the energy prices go whacko—I mean we

did it on the gas issue. Blame the marketer. Blame the guys who

are in these exchanges. So I just find it curious. Now it is going

to be the salvation to the global warming debate.
33

Dr. Smith, great point. I would like to elaborate just briefly because we are also going to address RPS stuff here. And did I hear

you say that if we are going to go in this direction, which I am not

sure we need to do, there are four times more benefits trying to do

a legitimate cap-and-trade system versus mandating the RPS?

Ms. SMITH. I did say something close to that.

Mr. SHIMKUS. Not bad for a layman. I paid attention.

Ms. SMITH. Achieving the exact same emissions reductions that

an RPS could provide will cost four times more if it is done only

within RPS and not with the cap-and-trade program. And the reason is because a cap-and-trade program needs to be a comprehensive, economy-wide cap-and-trade program. It allows incentives to

take on far more types of reductions that are cheaper than some

of the renewables that we force by the——

Mr. SHIMKUS. Thank you. And I want to get Dr. Izzo real quick

because the same people who want cap-and-trade and decreased

carbon are not supporters of nuclear power, and we have to have

nuclear power. So you are expanding, and I applaud that. Would

addressing your onsite storage of nuclear waste help you? And

would moving to interim storage in the desert be helpful? And is

it safe to say that Yucca Mountain, which would be a long-term repository that is under a mountain in a desert, is a better location

to store high-level nuclear waste than onsite in New Jersey?

Mr. IZZO. The answer to all three of those questions are yes.

Mr. SHIMKUS. Thank you very much. I yield back my time.

Mr. BOUCHER. Thank you very much, Mr. Shimkus. The gentleman from Utah, Mr. Matheson, is recognized for 8 minutes.

Mr. MATHESON. Thank you, Mr. Chairman. I appreciate the panel’s testimony. Dr. Smith, in your written testimony, you talked

about how to achieve real reduction, there needs to be a lot of technological advances beyond what is going to be easy to do. If we are

going to move down the path of creating a cap-and-trade system,

how should we incorporate consideration of the rate and pace and

time of technological innovation in terms of how that cap-and-trade

system is designed?

Ms. SMITH. Well, the simple answer is that if you tighten the cap

to a point where you are starting to push beyond what you can do

at low cost with current technologies, then you perhaps have a cap

that is getting ahead of the game on the technologies. So it argues

for far less reduction in the near term and making much more

rapid and deeper cuts later in time to get a lower cost outcome out

of the same kind of overall approach. This takes into account that

to get stabilization of atmospheric emissions and to stabilize climate risks, we need to look at the cumulative amount of emissions

over a very, very long period of time, out through the next century.

We don’t need to worry about exactly what the emissions are this

year or in 2015 or even through 2020 per se if we can make up

those reductions later when the technologies come in.

But the problem is nothing is sitting out there in the way of incentives to make those technologies appear, and the cap-and-trade

program doesn’t provide sufficient incentives for those kinds of

massive revolutionary types of technological change to occur. The

cap-and-trade program only incentivizes incremental innovation
34

with nearly marketable technologies, and it will do that well. But

that is not enough to get us to climate stabilization.

Mr. MATHESON. And is it fair to say that the concept that over

the long run technology has got to take us to a different place to

achieve significant reductions, and so you are suggesting that a

cap-and-trade system should have caps that are not so onerous in

the short term and maybe ramped up to more stringent caps in the

long term? Is there any rational way for us to figure out how to

design that structure over time for how caps are implemented over

time?

Ms. SMITH. My personal view is the rational way to go about that

is to think about what price we should be willing to pay now and

in the future and to link and integrate that thinking with what we

believe we can do technologically on the cost of technologies in the

future. How can we bring their costs down to an affordable price?

What is that price target? What is the timing of that? And that allows us to back out to what we ought to be spending today, simply

by applying simple present value type rules that economists use all

the time. So it is not about where you set the cap in any year. It

is about what is the right price to be paying over time now and into

the future.

Mr. MATHESON. And would you suggest that, in terms of we are

in the public policy setting position and we are considering capand-trade as an option, that if that option is considered the part

and parcel of that, we also need to take a look at if there are incentives that we can create in the public policy arena to generate this

greater emphasis on development and technology? Because you

said in the current marketplace and even with the cap-and-trade,

we are not setting up necessarily the best incentives for this development of new technology?

Ms. SMITH. We need specific policies aimed specifically at the

challenge of figuring out how to design R and D incentives correctly

and to target them so that they will be productive at what we need,

which is new energy systems that are zero or low carbon. That is

different than the cap-and-trade program.

Mr. MATHESON. Right, I understand.

Ms. SMITH. It is a separate policy.

Mr. MATHESON. And would you say that for all the R and D programs that Congress has voted for in the last few years, and we

are all looking to develop new technologies, you would suggest that

the current set of public policies in place to incentivize research to

develop new technologies are inadequate for the type of reductions

that you think probably need to be achieved?

Ms. SMITH. I believe that they are inadequate. I think the issue

is perhaps less about funding and more about getting the incentives right and the targeting of the program so that the money is

going to the right kinds of activities, the ones that will be successful and produce the right kinds of solutions too.

Mr. MATHESON. OK, Ms. Duggan, Dr. Smith’s testimony talks

about the notion of an upstream application of cap compared to a

downstream. In the EU system, it is a downstream cap. Have you

considered any ramifications? Or has it been considered where the

EU system should transfer to more of an upstream cap than capture it broader economy-wide focus?
35

Ms. DUGGAN. I think certainly the UK voluntary program looked

at that, and there is constant consideration particularly when looking at new sectors, such as surface transport and others, that perhaps the current approach may not be the one that is most appropriate for other sectors. I think there is always a balance between

simplicity and complexity in capturing the behavior changes that

you want. But it certainly is something that is under consideration

for other sections.

Mr. MATHESON. I would think that when you are looking at those

different balances, one of the other factors is one-half of your

emitters are not subject to the system. That would be another factor in looking at balancing simplicity and complexity.

Ms. DUGGAN. Indeed, but just because they are not covered by

the EU program doesn’t mean to say that they are not covered by

other measures. And the UK recently announced another domestic

program with a full auctioning, mandatory program that will cover

commercial concerns, such as retail and some others. So we are

constantly looking at where the emissions are and how we should

deal with them. But whilst we favor cap-and-trade, it is looking at

how best to incorporate those into cap-and-trade systems.

Mr. MATHESON. OK. Dr. Sandor, do you see any implications

from the exchange perspective between upstream and downstream?

Do you think your exchange could accommodate either type of

focus?

Mr. SANDOR. Yes, we would operationalize any policy. Our experience though suggests that, including Wasuch in your district, that

the further downstream you go, the more you are going to affect

behavior change. And that is the tradeoff. You want to get to the

individual who won’t be responsive to behavior change, and that is

a hard balance. As you say, some aren’t covered, some are. But our

belief is we can cover and will cover. No matter what you provide,

we will operationize the law that you, the leaders, make.

Mr. MATHESON. OK, and you actually anticipated the last question I wanted to give to Dr. Smith. I understand where the upstream is preferable in terms of capturing all the carbon emitters.

But, as Dr. Sandor pointed out, the downstream tends to give price

signals to individual users to most accurately affect behavior. How

do you balance those two competing approaches?

Ms. SMITH. Both approaches give the same price signal. It is just

a question of where the price signal appears in the system. So if

you set the price signal at the time when you sell the gasoline, it

will move its way right on down to the consumer just as easily as

if you tell him he has to pay for every ounce of CO2 that comes

out of his tailpipe and make him find the permits for it. One is

more complex and difficult to implement, but both of them give the

same price signal as long as the market price of carbon is the

same. And that is more dependent on the stringency of the cap

than it is on how you have implemented it.

Mr. MATHESON. So you are not too concerned about this issue of

individual users seeing price signals if we do an upstream approach?

Ms. SMITH. They should see price signals.

Mr. MATHESON. Yes, OK. That is great. Mr. McLean, I just wanted to finish with you. I have 10 seconds. I will make this quick.
36

You have been involved with the other programs the EPA has implemented. Do you foresee, if there was an upstream approach,

that that creates unique challenges for EPA in terms of—compare

the experience you have had so far.

Mr. MCLEAN. No, it would be different. As people have said, we

would look at each sector and think about what would be the best

way to address that particular sector and take into account the

things that Dr. Smith said as well as Dr. Sandor, that we don’t

have a firm view at this point.

Mr. MATHESON. OK. Thank you, Mr. Chairman.

Mr. BOUCHER. Thank you, Mr. Matheson. The gentleman from

Oregon, Mr. Walden, is recognized for 5 minutes.

Mr. WALDEN. Thank you very much, Mr. Chairman. I apologize

to the panel for not being able to be here to hear your testimony;

although, I have been trying to work my way through it and will

take and read it later today.

I represent a district out on the west coast. Our State of Oregon

has 7 percent of its energy, I believe was the figure, derived from

coal production. Most of ours comes from hydroelectric with a pretty good and growing amount of wind energy. And I think one of the

questions my constituents would have in any cap-and-trade program is who gets capped? And at what level do you start? And certainly based on how many megawatts your output is versus your

CO2 emissions makes a big difference. And so I would be curious

to hear from the panel, as we look at a cap-and-trade system, how

do you deal with a region of the country that starts with very, very

low emissions? And do we end up getting placed here along with

the coal emitters here and then everybody is told to go down and

we can’t?

I mean these are things that my constituents want to know. We

hear about price signals. To them, that means how much is my bill

going to go up because somebody is going to get paid in this deal.

We have had folks from Wall Street here who can’t wait to have

a new trading system in place. Well, somebody is going to make

money on that, and I am all for a private sector guy. But I also

pay a lot of electric bills in my business and personally, and so do

my constituents. So perhaps somebody could enlighten me. Dr.

Izzo?

Mr. IZZO. We would agree with you. Our proposal is that the allocation method be tied to the number of kilowatt hours that an electric generator produce, so as to constantly incent people to produce

more kilowatt hours and fewer tons of CO2 for the very reasons you

outlined. If you simply grandfathered all the emissions credits, you

are rewarding people who have produced the greatest amount of

CO2 and not creating an incentive for them to then lower their

CO2, should they choose not to.

Mr. WALDEN. Other panelists, do you want to talk to me about

how you deal with hydro or what you recommend?

Mr. SANDOR. From a balance point of view, I do think that this

has got to be all six gases. I might say Portland, Oregon is a member of the Chicago Climate Exchange.

Mr. WALDEN. Right, and has actually reduced their carbon footprint.

Mr. SANDOR. Yes, fantastically.
37

Mr. WALDEN. We are trying to do our part. In this business of

government, no good deed ever goes unpunished. We are trying to

avoid getting punished.

Mr. SANDOR. I have two points of view, and I know some of my

fellow panelists don’t agree. There are those who would not be in

favor of Portland getting credit for what has been done. Members

of this panel state that they shouldn’t because there are bad people

as well. I would say you have got to have credit for early action.

That is No. 1.

Number 2, you have got to have six greenhouse gases so the lowhanging fruit that can be accomplished by changes that reduce

other greenhouse gases like methane or NOx, any of those, the

hydrofluorocarbons, et cetera, can help get rid of it. And I do think

if you take the other questions where you have modest targets to

begin with, you can achieve them with a great deal of project-based

credits. And then if you tighten it later on, you are going to induce

the technology. And our experience is even low prices, as I said

with the MIT professor, they go that way.

Mr. WALDEN. I only have a minute left. Let me ask you a different question, and that is this. In the West, we have—like my

State is—more than 55 percent Federal land. And I have disputed

with others about how those forests get managed. One forest fire

in my district in 2003 emitted double the amount of carbon into the

atmosphere, in the matter of weeks that it burned, as the entire

State of Oregon in a year. We are always going to have fire, but

they don’t have to be catastrophic. Trees can be carbon sinks if forests are managed properly. And I am curious if there is any discussion in a cap-and-trade, carbon reduction discussion for how Federal policy over management of Federal lands should come into

play.

Mr. SANDOR. We have dealt with the forest service on that, and

we have also talked about water markets as well because these are

not separable. And I think that there can and will be more interaction with the Federal agencies. I would hope so. We have an open

door and would like to educate them, and we face this project with

parks management in Costa Rica and in other areas. So it is not

a unique problem.

Mr. WALDEN. Any other comments from panelists just on that

question? I realize my time has expired.

Mr. IZZO. I would encourage that to be part of any offset program

consideration.

Mr. WALDEN. All right. Mr. McLean?

Mr. MCLEAN. Just one comment on how we deal with forests because when they burn, then they grow back. And then they absorb.

So that sector you have to think of in sort of over time how it operates.

Mr. WALDEN. I do. I clearly do, and in fact, I would like them

to grow back faster. And the House approved a bill to do that after

a fire, but the Senate, well you know, didn’t quite get around to

it.

Mr. IZZO. I won’t comment on that.

Mr. WALDEN. I wish you would. Mr. Chairman, my time is expired. If other panelists have quick comment, if not, thank you Mr.

Chairman.
38

Mr. BOUCHER. Thank you very much, Mr. Walden. The gentleman from Massachusetts, Mr. Markey, is recognized for 8 minutes.

Mr. MARKEY. Thank you, Mr. Chairman. See, the Republicans

are the opponents. The Senate is the enemy. That is the point

that——

Mr. WALDEN. On that, we agree.

Mr. MARKEY [continuing]. Oregon was making, yes. And I apologize to everybody, but I am in this national competition, the Luca

Brasi sound-alike contest, so I apologize for my voice today. Ms.

Duggan, last week the subcommittee heard testimony from several

electric utility CEOs who recommended that we create a cap-andtrade program in which virtually all of the emission credits were

allocated flaw-free to the generations of greenhouse gas emissions

based on their historic emissions with as little as 5 percent of the

credits actually being auctioned. Such a structure was sharply criticized in a recent report by the National Commission on Energy Policy that is stating that the allocation of most of these allocations

for free to energy producers creates the potential for large windfall

profits. What was the experience in Europe?

Ms. DUGGAN. The experience in phase 1 was not dissimilar, except there wasn’t 95 percent of 100 percent of need.

Mr. MARKEY. Not dissimilar meaning windfall profits——

Ms. DUGGAN. There were indeed windfall profits in phase 1, and

one of the things that is happening in phase 2 is that, although,

there is a maximum of 10 percent auctioning in phase 2, that still

means that we can set the cap below need for electricity producers.

And indeed in the UK, we have set the cap at about 30 percent

below need for electricity producers, and they will face some auctioning. But there have been windfall profits.

Mr. MARKEY. Windfall profits. Mr. Burtraw, could you comment

on that?

Mr. BURTRAW. Well, yes, I agree directly that there is evidence

there were windfall profits. House of Commons report found that

in the UK and similarly in Germany. That is extranormal profits,

the change in revenues is greater than the change in their costs.

Mr. MARKEY. How big were the windfall profits?

Mr. BURTRAW. These reports are suggesting they are in order of

2 to 3 billion Euro per year in each of those cases.

Mr. MARKEY. In each country?

Mr. BURTRAW. Yes.

Mr. MARKEY. In each country for the utilities?

Mr. BURTRAW. The power sector, yes.

Mr. MARKEY. The power sector. Yes, Ms. Duggan.

Ms. DUGGAN. I just wanted to come back on that. It depends on

the assumptions you make and the assumption of the price of allowances at the time, and UK Government assessment of the size

of windfall profits recognizes that indeed they were windfall profits.

That those full costs pass through to industrial users but not to domestic users during 2005. And they were in the region of 800 million. Nevertheless, they were there, and it is one of the things that

we are considering allocation methodology for the review for future

phases.
39

Mr. MARKEY. Yes. Well, a recent study on how the German Government allocated credits, reports that the German utilities were

set to make windfall profits, and between 31 and 64 billion Euros

up until the end of 2012. Does that experience suggest that regulators may have a hard time ensuring that all of the financial

windfall associated with the allocations of free credits to the utility

industry are actually passed along to the ratepayers? And you were

mentioning this point about consumers, Dr. Burtraw. Could you get

into that please?

Mr. BURTRAW. Well, yes, the source of those so-called windfall

profits are changes in product prices that consumers are the ones

that are paying, and so these costs rise, the opportunity costs, the

emissions allowances are passed through in product prices. The

question is who is going to be the recipient of this wealth transfer.

And that is one of the reasons that people point to an auction as

equitable as well as efficient mechanism to implement the program.

Mr. MARKEY. OK, Ms. Duggan, based on the European experience, do you think that we should be auctioning off most of these

credits and use the resulting revenue for public benefits, such as

accelerated R and D on new technologies, energy efficiency, or even

reducing taxes on businesses or individual consumers that might

be faced with higher energy prices?

Ms. DUGGAN. I think the use of auctioning for future phases is

under discussion this year as the commission and member states

review the directive for emissions trading. I know Sweden has stated publicly that it believes that there should be full auctioning for

large electricity producers. The UK Government’s position is there

should be more use of auctioning, but I wouldn’t want to preempt

the outcome of any cross government discussions on that. We have

looked with interest at the RGGI proposals.

Mr. MARKEY. The RGGI proposals meaning the proposals in eastern United States with the nine States that are now moving towards an auctioning system as opposed to this allocation to the

utilities giving them 95 to 100 percent of the credits. Do you agree

with that, Dr. Burtraw? Let me go to you, Dr. Sandor. What do you

think makes the most sense?

Mr. SANDOR. We would propose less auctioning and more insurance and reliance through pass through provisions and windfall

gains going to the electricity users.

Mr. MARKEY. Going to the consumers?

Mr. SANDOR. To the consumer, right, to make sure it is passed

on. The auction limits the price discovery process.

Mr. MARKEY. How would we ensure that it goes to the consumer

or to the businesses that consume electricity?

Mr. SANDOR. I will get back to you after the hearings with some

thoughts on that without getting too laborious here, but that is

what we would favor because we think it is continuous price discovery and efficiency that is important and do recognize the need to

pass on benefits to consumers, but market efficiencies are better

served by—well, 100 percent auction would be perfect price discovery, as you know. But you have these other equities. I appreciate

that.
40

And we have to factor that in, but moving on the system that led

to this German mess and other countries’ messes is something we

won’t replicate.

Mr. MARKEY. Thank you. Let me go quickly to Mr. McLean.

When this committee drafted the Clean Air Act Amendments of

1990, it set up the cap-and-trade program for sulfur dioxide emissions. I was able to add a provision to the bill that allowed utilities

to obtain allowances for qualified energy conservation measures

that were determined by the EPA to increase the efficiency of the

use of electricity provided by an electric utility to its users. Under

the provision, for each ton of sulfur dioxide emissions avoided by

an electric utility during the applicable period through use of these

qualified energy conservation measures, the EPA would allocate a

single allowance on a first-come-first-serve basis up to a cap of

300,000 allowances.

How has that provision of the law worked out over the years, Mr.

McLean? And what lessons would you say that the experience with

that provision of the 1990 bill would have for us in the subcommittee today, were we to try to add a similar provision to the cap-andtrade bill for carbon?

Mr. MCLEAN. Yes, a couple points about that. First of all, that

was the first time that we had ever done that, that you had done

that, and we had implemented it. So there is something to be

learned. I think when we spent the incentive in that you get one

allowance for roughly an equivalent ton reduced from conventional

power. Our experience was that we expected that reserve to be

overwhelmed, and it was not. And I think the reason was that we

probably had set it too much in balance. That we probably should

have, and to encourage more, would have set a higher ratio.

Mr. MARKEY. So we set it too low. We should have set it higher

if we wanted to——

Mr. MCLEAN. If you wanted to incentivize the transfer, but I

think the idea of setting a specific reserve is a way to deal with

that particular issue.

Mr. MARKEY. And are you nodding your head in agreement, Dr.

Sandor?

Mr. SANDOR. Yes.

Mr. MARKEY. And how high should it have been? Could you give

us quickly?

Mr. SANDOR. I would have to relook at that, but clearly setting

it at that level was not enough.

Mr. MARKEY. If you, Mr. McLean and Dr. Sandor, could tell us

how high you thought we—looking back at that sector, that would

help us. I thank the chairman.

Mr. BOUCHER. Thank you very much, Mr. Markey. Gentleman

from Arizona, Mr. Shadegg is recognized for 5 minutes.

Mr. SHADEGG. Thank you, Mr. Chairman. Let me start by asking

you, Dr. Sandor or Dr. Burtraw. Mr. Markey has just asked a series of questions having to do with the market and a series of questions focusing on the windfalls that occurred. I am concerned that

this isn’t really a valid market, and I am concerned that whenever

we decide to try to create a market, which is what we are trying

to do, somehow we have to figure out how to create it correctly, or
41

we do create windfalls. Obviously Mr. Markey is deeply concerned

about those windfalls.

And I guess I am concerned that it is the Government price setting at the outset which results in the creation of such windfalls.

And I don’t know how I can explain to my constituents something

like occurred in England where, as I understand it, two things happened at once. One, the price of electricity goes up by 16 percent.

I can assure you that my constituents are going to be extremely

unhappy if their electricity goes up by 16 percent. If the cost of

their electricity goes up by 16 percent and they don’t know why,

or they believe it is greenhouse gases, and then they read that

somebody is saying this is a windfall profit.

But I have some pretty smart consumers, and they are going to

say well, wait a minute. Why were there windfall profits? And

somebody is going to say well, Congressman, it is because you created this cap-and-trade program, and I believe that there is going

to be, pardon my expression, heck to pay for me creating, and I

guess some argument is made that, Dr. Sandor, you say well, just

do it. It may be a mistake. You may cause a problem. We heard

that same testimony 2 days ago. Well, just do it. I think that just

do it doesn’t work very well for an elected official who has to go

home and say the cost of electricity just went up by 16 percent, and

somebody is making a windfall profit, neither of which would have

occurred had you figured out a better way to achieve this in. Go

ahead, Doctor.

Mr. SANDOR. Number 1, if we take a look at the SO2 program

with bonus allowances——

Mr. SHADEGG. Look, the SO2, I think, is simply not applicable.

SO2 came from a limited number of sources. This comes from a

vastly greater numbers of sources. This SO2 is a discrete pollutant

as compared to carbon dioxide.

Mr. SANDOR. No, I am not suggesting—the analogy I am making

is there were windfalls in SO2. Mr. SHADEGG. No, I am making the analogy that there were

windfalls in Europe.

Mr. SANDOR. Both of those. But let me just say from my point

of view, as a professional economist, OK, and putting on that hat,

the allocation of what you do doesn’t matter. A man by the name

of Ronald Cose won a Nobel Prize for that and says for the efficiency of the market, it doesn’t matter. OK, that is leading to the

right price. It is not my particular role, as from in the equity point

of view, from an exchange thing, to really bring the expertise. I can

tell you I would look to find a way that that windfall, through the

regulatory process, is going to the consumer. But that is more the

expertise that you have as politicians than I have as a trader and

an economist.

Mr. SHADEGG. I can tell you from a standpoint of economics, it

may not matter initially, and I understand the witness from England is saying look, in phase 1, here is what we suffered through.

But in phase 2, we went to an auction process, and in the auction

process, we resolved that. You are shaking your head. Expand on

your point, ma’am.

Ms. DUGGAN. I think there are two things. One, the 16 percent

increase in electricity price—and I am not sure if that was the
42

right figure—was due to an increase, largely, two-thirds of it at

least, was due to an increase in gas, not because there was an increased demand because of the carbon price in gas. In fact, there

was switching from gas to coal in the UK during that time, but because of supplies of gas for other reasons. And, as I pointed out

earlier, I believe that for other reasons, you had increases in electricity prices in the U.S. in the year as well.

But I think the point that you can actually deal with windfall

profit through allocation methodology—I am shaking my head because we are not going to full auctioning in phase 2.

Mr. SHADEGG. I think the 16 percent price increase was, in fact,

linked to the imposition of the cap-and-trade system in Europe. Dr.

Smith, they occurred at the same time, so it is going to be hard

to explain to voters or to constituents that they are not a result of

one of the other. Dr. Smith, you talked about increased impacts as

a result of price uncertainty and price volatility. Would you expand

on that?

Ms. SMITH. Well, price volatility, because the prices will be

passed through into electricity and other energy prices, if the system is actually economy-wide as it ought to be, then that will

translate into volatility in the prices of goods and services throughout the economy. It will be a little bit dampened. It will be a little

bit, with time lags, et cetera. But nevertheless, as long as you have

a system that gives you a huge amount of uncertainty about where

prices will be for carbon, you have got a huge amount of uncertainty about what the cost of living is going to be very soon thereafter.

Mr. SHADEGG. Let me just ask one last question. If we were to

implement this, would you suggest that it have a lead time during

which it was advisory and not obligatory? That is it was, in some

way, to allow it to fluctuate before it actually damaged the market,

before it actually did that, a period of years to let it function before

it was implemented, or is that not a possibility?

Mr. BOUCHER. Very quickly, Dr. Smith. Very quickly please.

Ms. SMITH. That is impossible to do. The only way to manage

that volatility is to put a price cap on the market directly.

Mr. BOUCHER. Thank you very much. The gentleman’s time has

expired. The gentleman from New York, Mr. Weiner, is recognized

for 8 minutes.

Mr. WEINER. Thank you. I appreciate it. I won’t use all my time.

Lest we be lest with, I believe, what people who know Latin would

call an ad hoc ergo propter hoc facility, could you just clarify again

what you think in your experience—this is hearing about what experiences we have and how we can learn from them—from your experience and from the data you have collected as a professional

who looks at this, not as someone who occasionally steps in and

looks at it, accounted for that rise in cost?

Ms. DUGGAN. The main reason for the rise in electricity prices in

Europe and in particular in the UK during 2005 was an increase

in the price of gas. The price of gas increased so much that actually, rather than having fuel switching as we had hoped from fuel

to gas, there was fuel switching from gas to coal. And that was

even when the price of carbon was at 30 Euros, and it was estimated at that time that the price of carbon would need to have
43

been about 70 Euros a ton to actually begin to have price switching

from coal to gas.

That is not to say that is an example of success of the scheme.

It is saying let us get the facts right on that. That was not the reason for the rise in electricity prices. It has been estimated that of

the increase in electricity prices, perhaps up to one-third might

have been caused by the carbon price at its highest.

Certainly the carbon price for phase 1 is now significantly lower.

It is around one Euro to one and a half Euros, and therefore it

would be surprising if that was causing an increase in electricity

prices at the moment. I accept that there were windfall profits due

to the design of the allocation methodology, which was designed in

that way to recognize the costs of industry and therefore to give

them free allocation when they hadn’t known a carbon price was

about to be imposed on them.

Mr. WEINER. Right. Well, we have a vote. I just have one brief

question. It seems that the greatest threat to any system working

would be anything that impinges on the transparency of the marketplace here. Is technology, as it advances, making it harder to

cheat? Is it making it easier to cheat in terms of how much emissions are being recorded or being reported? Do we need to create

a giant regulatory scheme in order to make sure we know what

emissions are being put out there? Or is the system pretty much

been tried and true to where we have the transparency the market

demands? Dr. Sandor?

Mr. SANDOR. We do have 14 members in New York including

IBM and Kodak, so we appreciate your support. Let me say we

have a more comprehensive system in the U.S. than the EU with

six gases in the pilot program versus one initially. And so we have

been measuring all six gases, and I would say that technology has

been very, very easy.

Mr. WEINER. And the marketplace has voted with its feet in that

if there were a sense that they were trading on things that weren’t

fully accountable, then the marketplace wouldn’t succeed. You

wouldn’t have traders who were willing to step in there and do this

transaction if they weren’t confident that it was being done in a

fair way?

Mr. SANDOR. Number 1, I think that is unambiguously correct,

and No. 2, we have market evidence of that. The credits that are

traded on the exchange in Chicago are priced four times higher

than those that are not verified and traded in the over-the-counter

markets. So the markets are already distinguishing where there is

better verification, there is a higher price.

Mr. WEINER. Thank you. Thank you, Mr. Chairman. I yield back.

Mr. DOYLE [presiding]. I thank the gentleman. The Chair recognizes the gentleman from Oklahoma, Mr. Sullivan, for 5 minutes.

Mr. SULLIVAN. Thank you, Mr. Chairman, and I want to thank

the panelists for being here today. And I was out for a little while,

and I am sure maybe you have been asked the questions I may

ask, but I would like to ask them myself if I can.

And this is for everyone on the panel. Based on the models provided by the acid rain program and the European experience, what

will a cap-and-trade program cost the United States in dollars per

year do you estimate?
44

Mr. IZZO. We have run several models, and the answer is it depends on where that cap is set. There are probably seven gigatons

of CO2 reduction that can take place that are economically wise to

do even if the emissions were priced at zero dollars. However, to

get to some of the 400 to 500 PPM levels that people have talked

about, prices could get as high as $40 to $50. So the answer is it

really depends. There are some that are prudent to do today. Others that will need price signals upwards of $40 a ton.

Mr. SULLIVAN. Anyone else?

Ms. SMITH. Yes.

Mr. SULLIVAN. Yes, Ms. Smith.

Ms. SMITH. We have done some modeling work as well, and to

answer it in terms of dollars per year, the SO2 market costs a couple billion. And what we are finding, it is true. It depends on what

your cap is, but what we are finding is even with the very loose

types of caps that are sort of the high end of what is being proposed, you are looking at tens to maybe $100 billion a year. And,

of course, with the much tighter caps such as the high end of what

is being proposed, we are looking at hundreds to thousands of billions a year in costs.

Mr. SULLIVAN. Anyone? Mr. McLean?

Mr. MCLEAN. Yes, the comment was that the stringency of the

cap determines everything. We analyzed Senator Carper’s bill last

year, and it had a modest cap with offsets.

Mr. SULLIVAN. Yes.

Mr. MCLEAN. And the cost was less than half a billion dollars a

year. It was relatively small, had virtually no price impact. We are

currently looking at the McCain/Lieberman bill, which is a much

more significant reduction, and we will be analyzing that bill. So

I think it very much depends on the shape and size of the bill.

Mr. SULLIVAN. Anyone else?

Ms. DUGGAN. I clearly can’t comment on the cost to the U.S.

What I can say is the UK Government believes and is committed

to cap-and-trade as the cheapest way, the least costly way, to

achieve the emissions reductions we need. I would point to the

Stone Review commissioned by the UK Government that says that

action is cheaper than inaction.

Mr. SANDOR. Just as a matter of information, as in the exchange,

we are forbidden from commenting on prices and costs. It is not

within the law. I might say that [former Senator] David Boren was

a member of the advisory committee for the Chicago Climate Exchange, and OU was the first public sector university in America

to join the exchange.

Mr. SULLIVAN. That is good.

Ms. SMITH. I would just like to respond to the statement by Mr.

McLean about the cost of the Carper bill being extremely low. We

have done some analyses and studied, in fact, that analysis that

EPA did. And I just want to point out that the costs were very low

based on some assumptions that we would disagree with, but most

importantly, it was driven low by a presumption that there would

be a lot of purchasing of what is called Russian hot air by the Europeans et cetera in that marketplace for international permits,

and that that was a very significant part of the reason they came
45

up with a very low-cost estimate. But that is not viewed as politically acceptable at this point in time.

Mr. SULLIVAN. OK, and I have one more question. On Tuesday,

we heard testimony that we cannot expect China and India to reduce their greenhouse gas emissions at any point in the near term

or the near future. Do you support including developing countries

in any type of cap-and-trade program adopted by United States?

Dr. Burtraw?

Mr. BURTRAW. I believe there is an architecture in the proposal

by Representatives Udall and Petrie that is very innovative. I want

to encourage you to look further at, and there is a slice of allowance value that is set aside for some programs for the developing

world, including technology transfer. But the allocation of those resources to the developing world is contingent on a finding that they

are taking steps towards joining an international carbon regime,

same kind of funding the State Department does with respect to

making progress on human rights.

Seems like a mechanism such as that could be an onramp for expanding participation from the developing world.

Mr. SULLIVAN. Ms. Duggan?

Ms. DUGGAN. I would point out that China does, in effect, participate in the EU trading program because credits from the clean development mechanism, of which there is a significant investment in

China, are allowed with certain limits in the EU program.

Mr. DOYLE. Gentleman’s time has expired. And last but not least,

the gentleman from Washington, Mr. Inslee.

Mr. INSLEE. Thank you. If I do my math right, Ms. Duggan, if

one-third of the price increase of 16 percent may be attributable,

worst case scenario, for about a 6 percent increase in cost. I just

want to ask you each individually are there any of you that would

not pay 6 percent more on your residential electrical bill to prevent

the loss of the Arctic, the substantial desertification of a substantial part of the globe, and the loss of the Baltimore oriole? Are

there any of you who would not pay 6 percent to prevent that from

happening to the planet? Dr. Izzo?

Mr. IZZO. Not only would I be willing to pay for it, but I would

suggest that it is an important price signal to send to consumers

to encourage conservation.

Mr. INSLEE. I appreciate that. I don’t see anybody saying they

would not be willing to pay that. Dr. Izzo, I think you have suggested moving to essentially a complete auction in about 10 years,

as I understand your testimony. Could you describe why you think

that is about the appropriate period of transition?

Mr. IZZO. For a couple of reasons. Number 1, as I talked about

before, there are quite a bit of reductions that need to take place

which are not economically viable today. Even though seven

gigatons should be done right now, there is a substantial amount

in the renewables area and in the nuclear area that requires some

additional technology and advancement.

We believe nuclear is a part of that solution. If we made a decision to build a nuclear plant today, it would probably take 10 years

before a kilowatt hour could come from that plant, so that was how

we picked the 10-year period.
46

Mr. INSLEE. And I am intrigued, Dr. Izzo, about your discussion

of the output-based system because, as I understand your testimony, it would create the best incentive for efficiencies as opposed

to just a grandfathering permanently. Could you again describe

why you think that is pivotal to give the right incentive for efficiencies?

Mr. IZZO. Sure, what consumers are looking for from us as producers are kilowatt hours. They are not looking for CO2. So what

we think makes sense is to then reward companies that produce

more kilowatt hours with less CO2. And by updating that every

year and determining how to allocate those resources, you are encouraging new entrance to provide new technologies that are lowcarbon or zero-carbon emitters.

Mr. INSLEE. Anybody else like to comment on that on the panel?

Ms. SMITH. Yes, I would like to comment on that. The problem

with that sort of updating approach is that it actually incentivizes

businesses to stay in business and to continue to produce even

when they may be high emitters. And so you end up with an extremely high inefficiency. The cost of a cap with that kind of updating can be much higher than the cost of a cap without that kind

of updating, so it does create inefficiencies in the system.

Mr. INSLEE. I am not sure I understand that. I am going to have

to call you at some point and talk about that. Dr. Burtraw, did you

want to——

Mr. BURTRAW. Well, I would just like to add to this that there

are a variety of ways that you can give emission allowances away

for free, and some of those ways have incentives embedded in

them. And some of the ways can suppress the change in electricity

prices that would otherwise occur. And the proposal by Dr. Izzo

would accomplish a lower electricity price in the first years of the

program and create some incentives for switching to lower emitting

technologies.

But doing all of that, I would also subsidize electricity consumption and lead to more electricity consumption in the early years of

the program. The part of Dr. Izzo’s proposal that I particularly enjoyed hearing him say was that he is suggesting this is a transition

to a full auction, and so the decision of what path to take to a full

auction is one where you are making tradeoffs over equity and

compensation goals in the program.

Mr. INSLEE. Dr. Izzo, you had proposed, as well, that there be allocations to non-emitting technologies. As I understand, it would

include hydroelectric. And I have a parochial interest coming from

Washington State in that regard. I will disclose that. But on the

other hand, if you don’t do that—isn’t there a counter argument?

People argue that that is sort of a gift or giveaway or some type

of snow on your hat as my economist professor used to call it? But

if you don’t do that, essentially I would argue the reverse. I mean

this is a national asset which is a carrying capacity of the atmosphere. Why should one user who happens to have clean electricity

not be given some portion of that national asset just because they

happen to use a clean energy source?

Mr. IZZO. I agree completely. I mean we have to make sure that

we distinguish two factors. The environment benefit is achieved by

setting the cap. How you allocate them is determined through pace.
47

I agree with Dr. Burtraw that over time we want to go to an auction system that gives complete transparency. We could talk about

the use of those proceeds.

But in the interim, we want to reward and further incent people

who have made decisions to go with non-emitting technologies and

update that so that new entrants can enjoy those benefits as well.

Mr. INSLEE. I appreciate that both because it is economically

sound and quite popular out in the State of Washington as well.

Thank you very much.

Mr. DOYLE. I thank the gentleman. I see we have a minute and

38 seconds to get to the floor to vote. I understand there are some

members coming back. We are going to recess shortly, and then reconvene the hearing as soon as a member comes back in the chair.

[Recess.]

Mr. WYNN [presiding]. We have the requisite two members for a

quorum. I believe it is a Democrat’s turn for questioning, and I believe that means the questioning turns to me. I would like to thank

all the witnesses for their testimony today. I want to inquire about

this question of cost because I seem to be in somewhat of a conflict.

Ms. Duggan seems to indicate that the EU experience was based

on increases in natural gas, but Dr. Smith said that we have to be

very cautious about price spikes. And Dr. Burtraw cautioned at the

end of his testimony what we have to do is be careful that this

doesn’t become a cloak for a transfer of wealth. So all of that puts

me in a little bit of a quandary. Maybe I will start with you, Dr.

Smith. You were concerned about price spikes. Can you tell me

why? Or do you disagree with Ms. Duggan?

Ms. SMITH. I don’t fully disagree with her. I will explain that

point, but the first thing I want to say is no matter what you do

in the way of grandfathering or auctions, there is going to be a

price passed through to consumers. Whatever the price of carbon

is, the system will allow that price to pass through. And changing

the way you move the wealth around isn’t going to alter that.

Now, on the point about price volatility. Price volatility creates

some difficult planning costs for businesses. In a sense, you are

really just asking people to plan against a tax but not telling them

what the tax rate is. And so that creates actually costs inside businesses to manage that. Traders love it, but it is really not beneficial to the economy as a whole to have that volatility if you don’t

need it. And we don’t need it because this is a regulated system.

So you can put on a safety valve or a price cap on the system, or

you can just directly impose a price with an emissions fee and get

away from all of that volatility and still have the price signal that

you want coming through to incentivize the emissions reductions.

Mr. WYNN. So it is safe to say we don’t have to have these price

spikes. They are not inevitable in a cap-and-trade system.

Ms. SMITH. They are just waste.

Mr. WYNN. Is that your conclusion? Does anyone disagree with

that? Dr. Sandor?

Mr. SANDOR. I just want to say one thing for the record, and that

is traders don’t unambiguously like volatility. It is very dangerous

to traders who trade options. The most successful futures markets

in the world are Euro dollars and bonds, and they have a very significant lower volatility than the energy complex, No. 1. Number 2,
48

I do very much agree with Ms. Duggan that whether an irrelative

price of fuels are drivers of that volatility more than anything else.

If we ask any energy trader, they will tell you that is the first

thing that they look at. And volatility per se is caused by those,

and those are the drivers.

Mr. WYNN. OK. Well, thank you. Now, in light of that comment,

Dr. Burtraw, what about this transfer of wealth that you seem to

be concerned about?

Mr. BURTRAW. The creation of a cap-and-trade program creates

this new property right, and the question is to whom is that property right going to be distributed. Giving away the emission allowances is one form of compensation that companies could receive or

that consumers could receive or could be kept in the public sector

through an auction.

There is another form of compensation where it is just changes

in the electricity prices or product prices generally. If you give

away all of these emission allowances, this new property right, to

emitters, the possibility exists for dramatic overcompensation to

those companies.

Mr. WYNN. Is that what happened in Europe?

Mr. BURTRAW. That is what has happened in Europe.

Mr. WYNN. Was that a miscalculation that can be avoided, or is

that an uncertainty that we will have to deal with, should we adopt

that in this country?

Mr. BURTRAW. Sir, I have great respect for what happened in Europe, and they put together a program at a breakneck pace that is

of historic magnitude. But they had to make some decisions in

doing so that I think we would not want to replicate here.

Mr. WYNN. OK. Well, hopefully we can avoid it. Is there any

sense that there would have to be a Federal subsidy to offset consumer costs? We tend to treat this rather cavalierly. We describe

it as volatility and other things. To the consumer, it is great heartache. Yes, Dr. Burtraw?

Mr. BURTRAW. The changes in energy prices would be a heartache to consumers. In the long run, economists firmly believe that

changes in prices are what is needed to officially implement carbon

policy in the United States. In the short run, there could be measures, such as suggested by Dr. Izzo, that could help mitigate that.

But in the long run, I think we want to see the transition to a time

when people recognize the social cost of carbon emissions and the

decisions that they make on a daily basis.

Mr. WYNN. My last question. Off ramps and safety valves, are

they conducive to stability, or do they interject further instability?

Dr. Burtraw?

Mr. BURTRAW. Yes, this is like Jeopardy. Thank you. Dr. Smith

mentioned that the SO2 program had departed in one way, and

that there is more dramatic price volatility in the CO2 market. In

fact, if you look at all the markets, there has been a lot of price

volatility. And the most important consequence previously has been

the dramatic price fall in the SO2 market, which meant that Congress did not get everything it paid for, and a lot of investments

maybe weren’t as worthwhile as people had hoped they would be.

But the point is that you could have cost management on the low

side and on the high side that could dramatically improve the per-
49

formance of the program in terms of achieving goals without unnecessarily surprising investors and making them look stupid either

on the low side or on the high side.

Mr. WYNN. Right. Well, my time is up, and although there is no

one else that hasn’t asked questions, I will not abuse the time. I

want to thank all the witnesses.

Mr. SHIMKUS. Mr. Chairman.

Mr. WYNN. I am sorry.

Mr. SHIMKUS. No, just for a point of clarification just because my

5 minutes was pretty quick. I believe in the markets, and I believe

in exchanges. My point was that not everyone does, and they do

think there is manipulation. And they do think there is price gauging. I believe in raising capital, assuming risk, rewarding that, and

I just put that on the record.

The other thing is that there is an assumption here that, because

of all our numerous hearings, that if we go down this route, there

is going to be increased cost, whether we can manage that effectively through our U.S. Government cap-and-trade program. First

of all, we can’t assume we are going to affect China and India.

The other thing is if we dramatically change our economy and we

impose great cost increases—the concern is in 100 years, does the

global temperature’s climate change 5 degrees or 3 degrees. Now,

you do the math and effect cost benefit analysis of this. I think

many of us are going to say that this is not the way to put our dollars, $180 billion, in a program that is of questionable scientific

benefit to us. And I yield back.

Mr. WYNN. All right. I thank the gentleman. Again, I thank the

witnesses for their testimony, and we appreciate your presence

here today. There are no further requests for time for questioning,

the hearing is adjourned.

[Whereupon, at 1:05 p.m., the subcommittee was adjourned.]

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