S. HRG. 110–1233 

AMERICA’S CLIMATE SECURITY ACT OF 2007, 

S. 2191 

HEARINGS 

BEFORE THE

COMMITTEE ON 

ENVIRONMENT AND PUBLIC WORKS 

UNITED STATES SENATE 

ONE HUNDRED TENTH CONGRESS 

FIRST SESSION 

NOVEMBER 8, 13, AND 15, 2007 

Printed for the use of the Committee on Environment and Public Works 

( 
AMERICA’S CLIMATE SECURITY ACT OF 2007, S. 2191 
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73–583PDF 2013

S. HRG. 110–1233 

AMERICA’S CLIMATE SECURITY ACT OF 2007, 

S. 2191 

HEARINGS 

BEFORE THE

COMMITTEE ON 

ENVIRONMENT AND PUBLIC WORKS 

UNITED STATES SENATE 

ONE HUNDRED TENTH CONGRESS 

FIRST SESSION 

NOVEMBER 8, 13, AND 15, 2007 

Printed for the use of the Committee on Environment and Public Works 

( 

Available via the World Wide Web: http://www.fdsys.gpo.gov 
(II) 

COMMITTEE ON ENVIRONMENT AND PUBLIC WORKS 

ONE HUNDRED TENTH CONGRESS 

FIRST SESSION 

BARBARA BOXER, California, Chairman 

MAX BAUCUS, Montana 

JOSEPH I. LIEBERMAN, Connecticut 

THOMAS R. CARPER, Delaware 

HILLARY RODHAM CLINTON, New York 

FRANK R. LAUTENBERG, New Jersey 

BENJAMIN L. CARDIN, Maryland 

BERNARD SANDERS, Vermont 

AMY KLOBUCHAR, Minnesota 

SHELDON WHITEHOUSE, Rhode Island 

JAMES M. INHOFE, Oklahoma 

JOHN W. WARNER, Virginia 

GEORGE V. VOINOVICH, Ohio 

JOHNNY ISAKSON, Georgia 

DAVID VITTER, Louisiana 

JOHN BARRASSO, Wyoming1

LARRY E. CRAIG, Idaho 

LAMAR ALEXANDER, Tennessee 

CHRISTOPHER S. BOND, Missouri 

BETTINA POIRIER, Majority Staff Director and Chief Counsel 

ANDREW WHEELER, Minority Staff Director 

1Note: During the 110th Congress, Senator Craig Thomas, of Wyoming, 

passed away on June 4, 2007. Senator John Barrasso, of Wyoming, joined 

the committee on July 10, 2007. 
(III) 

C O N T E N T S 

Page 

NOVEMBER 8, 2007 

OPENING STATEMENTS 

Warner, Hon. John W., U.S. Senator from the Commonwealth of Virginia ...... 1 

Boxer, Hon. Barbara, U.S. Senator from the State of California ....................... 2 

Inhofe, Hon. James M., U.S. Senator from the State of Oklahoma ................... 5 

Lieberman, Hon. Joseph I., U.S. Senator from the State of Connecticut .......... 7 

Voinovich, Hon. George V., U.S. Senator from the State of Ohio ...................... 10 

Klobuchar, Hon. Amy, U.S. Senator from the State of Minnesota .................... 13 

Bond, Hon. Christopher S., U.S. Senator from the State of Missouri ............... 14 

Carper, Hon. Thomas R., U.S. Senator from the State of Delaware .................. 15 

Vitter, Hon. David, U.S. Senator from the State of Louisiana ........................... 17 

Lautenberg, Hon. Frank R., U.S. Senator from the State of New Jersey ......... 18 

Barrasso, Hon. John, U.S. Senator from the State of Wyoming ........................ 20 

Cardin, Hon. Benjamin L., U.S. Senator from the State of Maryland .............. 21 

Craig, Hon. Larry E., U.S. Senator from the State of Idaho .............................. 23 

Sanders, Hon. Bernard, U.S. Senator from the State of Vermont ..................... 25 

Isakson, Hon. Johnny, U.S. Senator from the State of Georgia, prepared 

statement .............................................................................................................. 27 

Alexander, Hon. Lamar, U.S. Senator from the State of Tennessee, prepared 

statement .............................................................................................................. 28 

Whitehouse, Hon. Sheldon, U.S. Senator from the State of Rhode Island ........ 29 

WITNESSES 

Darbee, Peter A., chairman, CEO and president, Pacific Gas and Electric 

Corporation ........................................................................................................... 30 

Prepared statement .......................................................................................... 32 

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

Resources Institute .............................................................................................. 38 

Prepared statement .......................................................................................... 40 

Smith, Anne E., Ph.D., vice president, CRA International .................................. 49 

Prepared statement .......................................................................................... 51 

Responses to additional questions from Senator Inhofe ............................... 67 

Thorning, Margo, Ph.D., senior vice president and chief economist, American 

Counsel for Capital Formation ............................................................................ 75 

Prepared statement .......................................................................................... 76 

Responses to additional questions from Senator Inhofe ............................... 88 

Barbour, Wiley, executive director, Environmental Resources Trust, Inc. ......... 88 

Prepared statement .......................................................................................... 90 

ADDITIONAL MATERIAL 

Study, International Comparison of Depreciation Rules and Tax Rates for 

Selected Energy Investments, May 2, 2007.................................................... 115–154 

Letters from: 

James E. Ford, Vice President, Government Affairs, API ............................ 155 

Joseph M. Stanton, Chief Lobbyist, Government Affairs, National Association of Home Builders (NAHB), October 31, 2007 ................................. 159 

Cecil R. Roberts, International President, United Mine Workers of America ................................................................................................................... 162 
Page

IV 

NOVEMBER 13, 2007 

OPENING STATEMENTS 

Boxer, Hon. Barbara, U.S. Senator from the State of California ....................... 165 

Warner, Hon. John W., U.S. Senator from the Commonwealth of Virginia ...... 166 

Baucus, Hon. Max, U.S. Senator from the State of Montana ............................ 167 

Isakson, Hon. Johnny, U.S. Senator from the State of Georgia, prepared 

statement .............................................................................................................. 168 

Lieberman, Hon. Joseph I., U.S. Senator from the State of Connecticut .......... 169 

Barrasso, Hon. John, U.S. Senator from the State of Wyoming ........................ 171 

Carper, Hon. Thomas R., U.S. Senator from the State of Delaware .................. 172 

Voinovich, Hon. George V., U.S. Senator from the State of Ohio ...................... 173 

Klobuchar, Hon. Amy, U.S. Senator from the State of Minnesota .................... 175 

Craig, Hon. Larry E., U.S. Senator from the State of Idaho .............................. 176 

Whitehouse, Hon. Sheldon, U.S. Senator from the State of Rhode Island ........ 178 

Alexander, Hon. Lamar, U.S. Senator from the State of Tennessee, prepared 

statement .............................................................................................................. 179 

Cardin, Hon. Benjamin L., U.S. Senator from the State of Maryland .............. 180 

Bond, Hon. Christopher S., U.S. Senator from the State of Missouri ............... 182 

WITNESSES 

Hawkins, David, director, climate center, National Resources Defense Council ........................................................................................................................... 184 

Prepared statement .......................................................................................... 185 

Responses to additional questions from Senator Lautenberg ....................... 216 

Greene, David L., corporate fellow, Engineering Science and Technology Division, Oak Ridge National Laboratory ................................................................. 217 

Prepared statement .......................................................................................... 218 

Responses to additional questions from Senator Inhofe ............................... 226 

Baugh, Robert C., executive director, AFL–CIO Industrial Union Council 

and Chair, AFL–CIO Energy Task Force ........................................................... 228 

Prepared statement .......................................................................................... 229 

Responses to additional questions from Senator Inhofe ............................... 235 

Sharkey III, Andrew G., president and CEO, American Iron and Steel Institute ........................................................................................................................ 236 

Prepared statement .......................................................................................... 238 

Response to an additional question from Senator Inhofe ............................. 240 

Rowlett, Donald R., director of Regulatory Policy and Compliance, OG&E 

Energy Corporation .............................................................................................. 241 

Prepared statement .......................................................................................... 243 

Responses to additional questions from Senator Cardin ............................... 251 

ADDITIONAL MATERIAL 

Report, U.S. Government Accountabilitgy Office (GAO), Climate Change, Financial Risks to Federal and Private Insurers in Coming Decades Are 

Potentially Significant, March 2007 ................................................................... 272 

NOVEMBER 15, 2007 

OPENING STATEMENTS 

Boxer, Hon. Barbara, U.S. Senator from the State of California ....................... 347 

Barrasso, Hon. John, U.S. Senator from the State of Wyoming ........................ 348 

Carper, Hon. Thomas R., U.S. Senator from the State of Delaware .................. 350 

Voinovich, Hon. George V., U.S. Senator from the State of Ohio ...................... 350 

Inhofe, Hon. James M., U.S. Senator from the State of Oklahoma ................... 353 

Vitter, Hon. David, U.S. Senator from the State of Louisiana ........................... 355 

Cardin, Hon. Benjamin L., U.S. Senator from the State of Maryland .............. 357 

Bond, Hon. Christopher S., U.S. Senator from the State of Missouri ............... 360 

Lieberman, Hon. Joseph I., U.S. Senator from the State of Connecticut ........... 405 

Warner, Hon. John W., U.S. Senator from the Commonwealth of Virginia ....... 426 
Page

V 

WITNESSES 

Krupp, Fred, president, Environmental Defense .................................................. 363 

Prepared statement .......................................................................................... 365 

Responses to additional questions from: 

Senator Inhofe ........................................................................................... 378 

Senator Vitter ............................................................................................ 379 

Claussen, Eileen, president, Pew Center on Global Climate Change ................. 379 

Prepared statement .......................................................................................... 381 

Responses to additional questions from: 

Senator Inhofe ........................................................................................... 384 

Senator Vitter ............................................................................................ 384 

Sims, Ron, county executive of King County, Washington .................................. 385 

Prepared statement .......................................................................................... 387 

Responses to additional questions from Senator Vitter ................................ 391 

Book, Kevin, senior analyst and vice president, Friedman Billings Ramsey 

and Company, Inc. ............................................................................................... 392 

Prepared statement .......................................................................................... 394 

Responses to additional questions from: 

Senator Inhofe ........................................................................................... 400 

Senator Vitter ............................................................................................ 401 

Berendt, Christopher, director of Environmental Markets and Policy, PACE ... 402 

Prepared statement .......................................................................................... 403 

ADDITIONAL MATERIAL 

Letters: 

American Chemistry Council, November 9, 2007 .......................................... 427 

The Fertilizer Institute .................................................................................... 434 

International Brotherhood of Boilermakers, Iron Ship Builders, Blacksmiths, Forgers and Helpers, November 12, 2007 ..................................... 437 

International Emissions Trading Association, November 15, 2007 ............. 439 

Statements: 

Porcari, John D., secretary, Maryland Department of Transportation ........ 442 

Wilkinson, Paul, vice president, Policy Analysis American Gas Association ................................................................................................................. 444 

Banks, Jonathan, Clean Air Task Force ......................................................... 450 

Report, IPCC Fourth Assessment, Draft Copy-Subject to final copy edit, 

November 16, 2007 ....................................................................................... 481 

(1) 

AMERICA’S CLIMATE SECURITY ACT OF 2007, 

S. 2191 

THURSDAY, NOVEMBER 8, 2007 

U.S. SENATE, COMMITTEE ON ENVIRONMENT AND PUBLIC WORKS, Washington, DC. 

The full committee met, pursuant to notice, at 9:30 a.m. in room 

406, Dirksen Senate Office Building, Hon. Barbara Boxer (chairman of the full committee) presiding. 

Present: Senators Boxer, Inhofe, Lieberman, Carper, Lautenberg, 

Cardin, Sanders, Klobuchar, Whitehouse, Warner, Voinovich, 

Isakson, Vitter, Alexander, Bond, Barrasso, and Craig. 

Senator BOXER. Good morning, everybody. The hearing will come 

to order. 

We are here today to consider a landmark global warming bill, 

thanks to the bipartisan leadership of Senators Lieberman and 

Warner. For me as Chair, I couldn’t be more proud of the work that 

they have done. I want to thank all members of the Committee for 

really helping us get to this point. 

Senator Warner has a need to go back to his office, because he 

is nursing a serious wound that he encountered. As a result of that, 

I have decided, and Senator Inhofe agrees, that we will ask Senator 

Warner if he will make his statement first. 

Senator, welcome. 

STATEMENT OF HON. JOHN W. WARNER, U.S. SENATOR FROM 

THE COMMONWEALTH OF VIRGINIA 

Senator WARNER. Thank you, Madam Chairman. I thank my old 

friend and the distinguished Ranking Member. 

I hit a small pothole, but I am on the mend, but under doctor’s 

orders I can’t sit. That is a unique experience, after 80 years of 

healthy life, nor bend. But that soon will pass. In the meantime, 

I just wanted to come up and say two words to everybody present: 

thank you. First and foremost to the leadership of this Committee 

and to my good colleague, Senator Lieberman, for enabling this 

Committee to fulfill what I believe is his responsibility to the U.S. 

Senate. I believe the Executive Branch has its position and I think 

it is important that the Legislative Branch fulfill its constitutional 

responsibilities. This Committee, under the Senate rules, is the one 

entrusted to do just that. 

I became interested in this issue, because I do believe there are 

ramifications that relate to national security, although they are potential. I have, together with other Senators, participated in efforts, 

which I think are going to be successful, to produce a national in-
2 

telligence assessment. I carefully use the word assessment rather 

than estimate. But I believe the document will have a standing 

equivalent to an estimate. That is forthcoming. 

I am also working on the National Security Annual Authorization bill. As a matter of fact, we hope to meet again today to conclude that. Hopefully there will be a reference in there to the need 

for the various military departments to make their own assessments, as well as the Department as a whole. 

So with those things in mind, I just urge the Committee to continue its work on this. I readily acknowledge that there are many 

members of this Committee and indeed, members of the Senate, 

that have done a great deal of work on this, and that I joined the 

effort somewhat later in time, but with no less energy and commitment to do what I can to see that the Senate performs its duties. 

I do believe that in the coming year, the American public will 

look to both the Democratic Party and the Republican Party as to 

their stance on these various issues. I think the forthcoming issues 

will have it as an active issue of debate. All the more reason for 

this Committee to assemble as best we can a record, so that people 

can draw from that record. 

With that, I will wind up and go back down where I occupy my 

prone position and watch this on television. With the concurrence 

of the Chair and Ranking Member, I have questions. When my 

time comes, I believe Senator Lieberman will ask those questions 

on my behalf. 

I thank my colleague from Wyoming from sitting in to the subcommittee staff to enable the subcommittee to fulfill its work and 

to go to the full Committee. So I wish you luck. A lot is known; 

a lot is unknown. We have a heavy obligation to the extent we can 

achieve the highest degree of bipartisanship, to make those assessments, to prepare this record and to fulfill what I believe is the 

duty of this Committee to report to the Senate Floor a bill. 

I thank the Chair, the Ranking Member. 

[Applause.] 

STATEMENT OF HON. BARBARA BOXER, U.S. SENATOR FROM 

THE STATE OF CALIFORNIA 

Senator BOXER. Senator Warner, go in better health. We know 

you are going to be just fine. We miss you and we feel that the 

work you have done has really been extraordinary for this Committee. This is a special day for the Committee as we look at this 

landmark legislation, a very good bill indeed. 

We also, Senator Inhofe and I, on another matter where we fully 

agree, are going to have a great day for our Committee, and I just 

wanted to take a moment out to say thank you for everyone’s work 

on WRDA. This was one where we really worked together so hard. 

Senator Inhofe and I, joined by Senators Baucus and Isakson, and 

each and every one of you, all of your contributions to the WRDA 

bill were just really strong. I wanted to say to Senator Vitter, I 

know how much this means to you and to Senator Landrieu. I 

think that the members of this Committee, across party lines, 

showed its desire to help with Louisiana. We went down to see 

with our own eyes and you and Senator Landrieu were most helpful to this Committee. 
3 

So it is a good day, from my perspective, on all fronts. 

I am going to put my full statement in the record on this matter, 

but I will quote from it. Senator Warner and Senator Lieberman, 

by coming together to write a bill on global warming, I think is 

leading this Committee in the right direction and leading the Senate in the right direction. 

The way I look at it, each of us has several choices here in what 

we decide to do on global warming. One is to do nothing. I believe 

that is very, very dangerous. Two is to embrace a dangerously 

weak bill. I think that is dangerous. Because if we pass a weak bill, 

if we pass a bill that doesn’t have the proper framework, we could 

get caught into the aspects of the bill that we could never change 

later, or it would be very difficult. So I think doing nothing and 

passing a dangerously weak bill would be something I would oppose. 

Now, that leaves two other options. One is to pass the perfect 

bill. I would say that every member on this Committee could write 

a perfect bill from his or her perspective. I would suggest that 100 

Senators each could write a perfect bill, 100 perfect bills. That is 

not going to get us anywhere. We are in the Legislative Branch. 

We are not executives. We have to work together. 

That leaves the final choice, which is a very good bill. I believe 

the bill before us is a very good bill. Can we make it better? Absolutely. Can we make it better in Committee? Absolutely. Can we 

make it even better on the Floor? Yes. I think the most important 

thing we can do for the American people is to move this process 

forward. I would say not to do that, in my view, is completely irresponsible, given the status of what we already know from the scientists on global warming. 

So Senators Lieberman and Warner have given us a pathway. 

Now, I sat through the entire Subcommittee markup, and I want 

to praise certain Senators. Senator Lautenberg, you are one of 

them, but you have to listen. 

[Laughter.] 

Senator BOXER. Because in the Subcommittee, we moved this bill 

forward. We adopted amendments of Senator Lautenberg, Senator 

Sanders, and Senator Barrasso. We did it in, I think, a very strong 

way. Everybody’s voice was heard. Some amendments were rejected. The reason I believe they were rejected is they would have 

upset the balance so we could move this bill forward. Right now, 

what I hope we can do as we listen to our panel and we go through 

the briefings that we will have is to be able to keep that delicate 

balance that we have across party lines to get this bill out. 

This bill will create a great climate for strong economic growth, 

new green jobs, vigorous environmental protection. If it is passed 

as it is, and we look at the modeling, it is changing, but it is moving in the right direction. It will be the strongest global warming 

bill, the most far-reaching ever passed in the world. The fact that 

this Committee could do it is very exciting. It sets the Nation on 

a clear path to reducing greenhouse gas emissions. The goals are 

strong and we hope to make them stronger. 

We set up a cap and trade program, by the way, cap and trade 

was invented in America, as we looked at the issue of acid rain. 

So we know that it works. It preserves the rights of States to go 
4 

and do even more. It includes provisions to help consumers, especially low and middle income consumers. It includes measures that 

will make the substantial auction revenues available to help ease 

the cost of transition, pay for weatherization, mitigate potential impacts of energy price increases. 

We look at the international scene. I think that Senator Warner’s 

interest was indeed sparked by national security. All we have to 

do, folks, is listen to our Pentagon and our intelligence people who 

are there telling us unequivocally that unfettered global warming 

will in fact be the cause of wars. We already see some evidence of 

that occurring. 

So I approach this issue with hope, not fear. I think the bipartisan breakthrough on this Committee gives me even stronger 

hope. I don’t think we can turn our back on the scientists. There 

is a consensus out there. I don’t think we can turn our back on the 

economic analysis or Nicholas Stern telling us that every dollar 

now saves $5 later. So this is in many ways a great day for this 

Committee. I know there will be some negative voices, and that is 

fine. That is part of what we do here. 

But I still believe we have the momentum, we have the wind at 

our back, and I want to thank everyone on the Committee for their 

help. I just want to say one word about Senators Inhofe and 

Barrasso for a moment. They have not to this point been for the 

Lieberman-Warner bill. I understand that. They could have thrown 

a monkey wrench into the process and all the rest of it. They didn’t 

do that. 

When Senator Inhofe could not be here because he had obligations on the Defense Committee, there came Senator Barrasso as 

a, I think, just taking the high road and helping Senator Warner. 

I want to tell you, Senator, publicly, because I have told you privately, how much it really meant to me as the Chairman of this 

Committee, and I want to thank you so much. 

So to all members, thank you. It is now time to yield to Senator 

Inhofe. 

[The prepared statement of Senator Boxer follows:] 

STATEMENT OF HON. BARBARA BOXER, U.S. SENATOR FROM THE

STATE OF CALIFORNIA

We are here today to consider a landmark global warming bill, thanks to the bipartisan leadership of Senators Lieberman and Warner. 

They have worked so hard to come together and craft this thoughtful, comprehensive piece of legislation, and we could not have done it without their tireless dedication to this issue. 

This legislation brings to us a strong framework and solid foundation to build 

upon, and I am so happy that they were able to successfully pass the bill out of 

their subcommittee. 

Today we will hear that the cap and trade approach is not new, and has been 

applied in the United States for many years. This market-based system has been 

proven to successfully reduce air pollution. 

This bill’s approach provides an effective system for emissions reduction, and opportunities for businesses to thrive. 

This bill will create a great climate for strong economic growth, new green jobs, 

and vigorous environmental protection. 

There are several important provisions of the bill that make it such a breakthrough proposal: 

• It sets the nation on a clear path to reducing greenhouse gas emissions to avoid 

the worst effects of global warming. 
5 

• The goals in the bill are strong and will continue to be reviewed by scientists 

to ensure we are on the right path. 

• It sets up a cap-and-trade program that will establish a price signal to drive 

the development of technologies and encourage energy efficiency while keeping costs 

low. 

• It preserves the right of states, including my home state of California, to implement their own solutions to global warming, building on the significant progress 

they have already made. 

• It includes provisions to help ensure that consumers—especially low and middle 

income consumers—will be protected. 

• This includes measures that will make substantial auction revenues available 

to help ease the cost of transition, pay for weatherization of homes, and mitigate 

any potential impacts of energy price increases on low and middle-income consumers. 

• It includes important steps to ensure that action is taken internationally to address this problem, and that our national security is protected. 

• It creates American jobs, supports American workers in the transition to a 

green economy, and it provides support for wildlife and natural resources. 

I will continue to work to strengthen this bill at each step of the process. 

I believe that it is a moral imperative to do what we can to ease the impacts of 

global warming—not only on the American consumer, but on world populations suffering from droughts, floods and famine. I look forward to working with communities of faith and others as we work to address theses issues. 

It is our obligation to act now. The Intergovernmental Panel on Climate Change, 

or IPCC, has warned of the dangers that global warming poses for us all, such as 

droughts, extreme weather events, threats to water resources, more frequent and intense wildfires, threats to public health, and the extinction of up to 40% of the species on the planet. 

Sir Nicholas Stern, former chief economist of the World Bank, has told us that 

a dollar invested in combating global warming can save $5 later. 

We cannot afford to do nothing. We cannot afford to pass a weak bill. We must 

pass the strongest bill we can, but we must remember that the perfect cannot be 

the enemy of the very good. 

STATEMENT OF HON. JAMES M. INHOFE, U.S. SENATOR FROM 

THE STATE OF OKLAHOMA 

Senator INHOFE. Thank you, Madam Chairman. I want to make 

sure everyone is aware that you and I will be working together at 

10:45 this morning, and I am a little concerned now as I look 

around and see the participation that we have. Because I definitely 

want to hear from our witnesses, and I have some questions to ask. 

But also, we need to be down there in an hour or two, so we will 

try to make that happen. 

Let me just say that I appreciate the fact that you have commented on my feeling about the process. If anything, I want the 

process to be more than it is right now. I think we need to have 

the administrative analysis of the costs and the benefits of this bill. 

While we don’t have a lot of the things I think we should have at 

this point, I think we have some excellent witnesses today that will 

allow us to start talking about what we are really addressing here. 

First of all, the Kyoto process, the cap and trade concept, is 

something that has been a total failure. I don’t think there is anyone in this room, in this Committee, or even in Europe, who believes that it has worked. Even the European environmentalists 

say it has not been a success, it has been a failure. Only two countries out of 15 western European countries have been able to meet 

their targets. 

So I think if we want to address this thing, there are other ways 

of doing it. I know that several members of this Committee are 

looking to other options. While the supporters of putting the brakes 
6 

on our economy say that our leadership will encourage these other 

countries to follow us down this path of self-destruction, I don’t 

hear that. I certainly don’t hear that from the developing nations. 

I don’t hear it from China. China right now has become the number one emitter. It used to be just a few months ago the United 

States. I understand right now that India will be passing us up as 

the greatest emitter of greenhouse gases. 

Now, as far as I know, what we always say is, the science is settled, the science is settled, the science is settled. I want to extend 

my thanks to my colleague, Senator Craig, who yesterday confessed 

to me that he actually read my whole 21⁄2-hour statement on the 

Floor of the Senate that was a week ago Friday. I wish everyone 

would do that, because what I did was, just to show what the 

science has said, just since 2007, this year. So that is something 

we are not going to discuss today, we are not going to debate it. 

But certainly if you look at it, it is not settled. 

But one thing that is for sure is that we are embarking on something here that if it became a reality would be a huge economic disaster for our country. We have some excellent witnesses here today 

to talk about this. The impacts would be terrible, climbing steadily 

until the costs reach up to about a trillion dollars a year. We used 

to look at the Kyoto, and that was going to be $300 billion and this 

is probably three times that. 

So we need to study these things and look and see what the cost 

is going to be, what the benefits are going to be. I look forward to 

this hearing and look forward to joining with you on something 

with which we agree on the Floor at 10:45. 

[The prepared statement of Senator Inhofe follows:] 

STATEMENT OF HON. JAMES M. INHOFE, U.S. SENATOR FROM THE

STATE OF OKLAHOMA

Madame Chairman, 

Thank you for agreeing to hold this and next Tuesday’s legislative hearings on 

S. 2191 after we sent you a letter complaining about the lack of process in the rush 

to pass this bill out of Committee. But it is not enough. We have yet to see any 

analysis from the Administration on the costs or benefits of this bill. We have yet 

to have your staff and those of the sponsors sit down with the staff of all the other 

offices on the Committee to walk through our concerns. The ability of stakeholders 

to comment has been limited. But it does allow us to engage in the beginnings of 

what I hope will be a deliberative process going forward. 

On the substance of this bill, I am very concerned. As this chart shows and we 

will hear today, the Kyoto Protocol cap and trade scheme has been a complete failure, with only two countries expected to meet their targets. Of course, some people 

try to defend the accord, but nobody believes them anymore—not even European environmentalists. Why would we want to adopt what is one of the biggest economic 

and policy failures of modern times? Is it credible for supporters to say ‘‘Sure, it’s 

failed to reduce emissions or protect Europe’s economy, but we think we can tweak 

it to work?’’ Is it really wise to bet our children’s future on a policy we know will 

achieve nothing? 

EPA’s October 1st analysis shows that emissions reductions in the range contemplated in this bill will only reduce global greenhouse gas concentrations by about 

four percent—that’s right, four percent! In the meantime, the world’s leading producer of coal—China—has turned from a net exporter to net importer of coal and 

is building three new coal plants a week. India’s economy is also exploding. Officials 

in both countries have been extremely clear they have no intention of slowing their 

growth out of concern over global warming. 

Yet supporters of putting the brakes on our own economy say that our leadership 

will encourage these other countries to follow us down this self-destructive path. 

I am gratified that, even though we have yet to receive an Administration analysis of this bill, we do have some credible analysts with us here today to discuss 
7 

the impacts of this bill. And the impacts will be terrible—climbing steadily until 

costs reach up to $1 trillion per year and 2 million jobs lost within the 8 years. 

The fact is that this bill ignores we are a growing economy with a growing population. It would be extremely costly to the economy to flatten emission growth, let 

alone cut emissions 70 percent. 

This bill does nothing to protect Americans from spiking natural gas prices and 

lost jobs that will go to the emerging nations which will emit more greenhouse 

gases. 

Madame Chairman, it is unfortunate that for a bill this important, this costly, 

and I would add, this disastrous to our way of life would be pushed through the 

Committee process without any real examination simply to score political points at 

a UN conference. I think the American deserves more from Congress. 

STATEMENT OF HON. JOSEPH I. LIEBERMAN, U.S. SENATOR 

FROM THE STATE OF CONNECTICUT 

Senator LIEBERMAN. Thanks very much, Chairwoman Boxer, for 

your leadership on this very important subject. I appreciate all the 

support that you have given us as we brought this both into fruition and then through the Senate, through the Subcommittee on 

Climate Change with a bipartisan vote. 

We have a problem. Yes, I believe very strongly that the scientists are right. It is a broad, international consensus. In fact, I 

think most members of this committee and most members of the 

Congress agree that there is a problem. The President of the 

United States agrees that there is a problem of global warming. 

The disagreement now, and this is different than it used to be, 

the disagreement now is what to do about the problem. I think that 

the bill we brought forward, America’s Climate Security Act, gets 

the job done and does it in a way that will not hurt our economy, 

in fact, I think will ultimately help our economy. Are there costs? 

There are costs. But forgive the homely analogy, but if there was 

a fire in the kitchen of your house, would you pay the cost of the 

fire department to have them come to put out the fire before your 

whole house burned down? I think the answer is yes. That is where 

we are with global warming now. 

I want to take the time that I have to focus in on the cost question. In July of this year, the Environmental Protection Agency, 

this is not some environmental group, this is the Environmental 

Protection Agency of the Bush Administration, completed an analysis of the climate change bill that Senator McCain and I previously put in. The emission reductions required in that bill were 

actually somewhat less than this bill that is before us now. So they 

were comparable. 

EPA’s analysis found that the reductions in U.S. greenhouse gas 

emissions mandated by the McCain-Lieberman bill would, making 

conservative assumptions about the pace of emissions reductions in 

the rest of the world, keep the concentrations of greenhouse gases 

in the atmosphere below 500 parts per million at the end of this 

century. When I say conservative assumptions about what the rest 

of the world does, interestingly, that means that there is an assumption that the rest of the world will do nothing for 5 years, and 

that China and India, for instance, will get on board 5 years after 

we do, but not really do as much as we are doing until 2025 or 

2030. 

But still, we are such a critical factor that if we adopt the 

McCain-Lieberman bill or this bill that Senator Warner and I have 
8 

put together now, this bipartisan bill, we would keep greenhouse 

gases below 500 parts per million at the end of this century. Why 

is that important? Because according to the consensus of more than 

2,000 scientists from around the world, the IPCC, keeping the atmospheric concentration of greenhouse gases below 500 parts per 

million will avoid a high risk of global warming that will cause severe impacts. So this reaches the goal. 

Now, what about the cost? The Clean Air Task Force has now 

completed an economic analysis of the America’s Climate Security 

Act, as reported out last Thursday. This analysis uses the Energy 

Information Administration’s economic model for climate change as 

applied to earlier legislation. Again, the EIA is part of the Administration. Incidentally, EIA reaffirmed its confidence in that model in 

a report that it submitted to Senators Inhofe, Voinovich and 

Barrasso on October 29. 

So the analysis of the Subcommittee-reported bill projects that 

the price of an emission allowance would not exceed $50 until after 

2030. According to EIA’s report to the three Senators I have mentioned, fuel switching from coal to natural gas would not make any 

economic sense until the price of an allowance exceeded $50. So one 

should not expect fuel switching to occur under the America’s Climate Security Act before 2030. By 2030, even the pessimists say 

that we will have commercial deployment of carbon capture and sequestration technology for coal. 

The analysis goes on to project that U.S. gross domestic product 

would more than double by 2030. The projected increase is only 1 

percentage point lower than the increase projected by the absence 

of America’s Climate Security Act and I don’t believe accounts for 

the costs of not doing something about global warming. Electricity 

prices, and I want to be really specific about this, because there are 

costs. But as I said at the beginning, they are worth it. Electricity 

rates would over 25 years rise from 8.1 cents per kilowatt hour to 

about 9.8 cents per kilowatt hour. 

Now, are the American people willing to pay that extra penny 

per kilowatt hour over 25 years to do something to stop the warming of the planet? I am sure they are. Thus, this most recent modeling report on the Subcommittee-reported bill confirms the modeling results that I entered into the record of the October 24th Subcommittee hearing. In short, the costs are manageable. Of course, 

none of these analyses take into account the staggering economic 

costs that we will face in this country, not to mention the impact 

on our way of life and our economy if we fail to curb global warming. 

Thank you, Chairman Boxer. 

[The prepared statement of Senator Lieberman follows:] 

STATEMENT OF SENATOR JOSEPH LIEBERMAN, U.S. SENATOR FROM THE

STATE OF CONNECTICUT

Thank you, Chairman Boxer. I thought I would describe the core of America’s Climate Security Act and summarize some of the projections of the bill’s environmental 

and economic impacts. 

The bill identifies the large greenhouse gas emitting sources that will be covered 

by the bill’s emissions cap. Those sources include power plants and large manufacturing facilities that burn coal, importers and refiners of gasoline and other fossil 

fuel-based liquid fuels, and importers and processors of natural gas. The sources 
9 

covered by the bill’s cap are responsible for over 80 percent of U.S. greenhouse gas 

emissions. 

The bill requires each covered source, at the end of each year beginning in 2012, 

to hand over to EPA one emission allowance for every carbon dioxide equivalent 

that the source has emitted in that year. A carbon dioxide equivalent is, for each 

greenhouse gas—and there are six of them covered by the bill—the amount of the 

greenhouse gas that makes the same contribution to global warming as 1 metric ton 

of carbon dioxide. 

For each year from 2012 through 2050, the bill identifies the specific number of 

emission allowances that will be made available to the entire pool of covered sources 

for that year. The way the bill reduces greenhouse gas emissions is by decreasing, 

from year to year, the number of emission allowances available to the entire pool 

of covered sources. 

The number of emission allowances goes down each year by 1.8 percent of the 

2012 cap level. By 2020, the cap is down to 15 percent below the number of carbon 

dioxide equivalents that the covered sources emitted in 1990. By 2050, it is down 

to 70 percent below the amount that the covered sources emitted in 2005. 

The bill directs EPA, at the beginning of each year, to allocate all of that year’s 

emission allowances to various government entities, public-private partnerships, and 

covered sources. The largest share always goes to the Climate Change Credit Corporation, which is directed to auction off all of the allowances it receives. 

Once the initial allocating and auctioning has happened at the start of a year, 

the bill allows for unlimited trading of emission allowances. Because the allowances 

can be bought and sold freely, a market develops, and the price of an emission allowance becomes uniform across the market. 

A covered source that can reduce its own emissions at a cost lower than the market price will do so. If those reductions leave the source with more allowances than 

it needs to cover its own emissions at the end of the year, the source will sell the 

surplus on the market. A covered source that cannot reduce its own emissions without incurring a cost that exceeds the market price will purchase credits on the market in lieu of reducing its emissions. The market thus enables facilities to comply 

with the law at a cost lower than the one they would bear in the absence of trading. 

There is a lot more to the bill, particularly when it comes to controlling compliance costs for covered sources and using allowance allocations and auction proceeds 

to commercialize advanced technologies and protect low-income Americans from economic harm. But what I have described represents the core. 

I would like to conclude by mentioning some of the environmental and economic 

impacts that the EPA and Energy Information Administration computer models 

project for the bill. 

In July, EPA completed an analysis of the McCain-Lieberman climate bill, whose 

emissions reductions were somewhat less than what this new bill is projected to 

achieve. EPA’s analysis found that the reductions in U.S. greenhouse gas emissions 

mandated by the McCain-Lieberman bill would—making conservative assumptions 

about the pace of emissions reductions in the rest of the world—keep the concentration of greenhouse gases in the atmosphere below 500 parts per million at the end 

of this century. According to the IPCC, keeping the atmospheric concentration of 

greenhouse gases below 500 ppm will avoid a high-risk of global warming that 

would cause severe impacts. 

Now the Clean Air Task Force has completed an economic analysis of the introduced version of America’s Climate Security Act. The Clean Air Task Force uses a 

modeling firm called OnLocation, which in turn uses the Energy Information Administration’s economic model. Incidentally, EIA reaffirmed its confidence in that 

model in a letter that it sent to Senators Inhofe, Voinovich, and Barrasso on October 

29. 

The analysis of the introduced Climate Security Act using the EIA model finds 

the following: 

First, the price of an emission allowance would not exceed $50 until after 2030. 

According to EIA’s October 29 report to Senators Inhofe, Voinovich, and Barrasso, 

fuel switching from coal to natural gas would not make any economic sense until 

the price of an allowance exceeds $50. So one should not expect fuel switching to 

occur under America’s Climate Security Act before 2030. By 2030, even the pessimists say we will have commercial deployment of carbon capture and sequestration technology for coal. 

The analysis goes on to project that U.S. gross domestic product would more than 

double by 2030. The projected increase is only 1 percentage point lower than the 

increase projected in the absence of America’s Climate Security Act. 

Electricity rates would, over 25 years, rise from about 8.1 cents per kilowatt-hour 

to about 9.8 cents per kilowatt-hour. 
10 

Thus, this most recent modeling report on the subcommittee-reported bill confirms 

the modeling results that I entered into the record of the October 24 subcommittee 

hearing. In short, the costs are manageable. And, of course, none of these analyses 

take into account the staggering economic costs that we will face in this country if 

we fail to curb global warming. 

Thank you, Chairman Boxer. 

Senator BOXER. Thank you. You just note that instead of doing 

the usual first come, I went to Senator Lieberman first. If there is 

no objection, I will go down the seniority list, but in the case of 

Senator Klobuchar, who was here first, she has to leave at 10:00. 

So after the next speaker on the Republican side, if there is no objection, may I call on her next? OK. 

Then we will go to Senator Voinovich. Welcome, Senator. 

STATEMENT OF HON. GEORGE V. VOINOVICH, U.S. SENATOR 

FROM THE STATE OF OHIO 

Senator VOINOVICH. Thank you very much, Madam Chairman. 

Climate change is a serious and complex issue that deserves our 

full attention. Madam Chairman, I acknowledge your commitment 

to timely legislation. But the abbreviated process by which this legislation is moving I don’t believe is conducive to good public policy. 

Moreover, it is not in keeping with Senate precedent for acting 

on complex legislation or with the standards of courtesy by which 

this body traditionally operates. Consideration of legislation of this 

magnitude, which will touch on every aspect of our lives, requires 

a thorough vetting by the Committee of jurisdiction before moving 

forward. Senate 2199 was introduced only a few days ago on October 18, 2007. It is a lengthy, complex bill that has major implications for our economy, our energy security, our environment and 

our citizens. 

Senator Lieberman’s subcommittee held a single hearing less 

than a week after introduction with only one minority opposing 

witness. Then on October 31, the subcommittee was presented with 

substantive revisions to the bill, prior to a hurried-up markup. 

Now, just 7 days later, I am told that we will just have one more 

hearing next Tuesday before proceeding to a markup and a final 

vote on or before December 5. The pace of Committee action is unprecedented, and belies the significant impact the bill will have on 

the United States and international economies, the environment 

and our quality of life. Climate policy development necessitates 

more than political will. Members must be accorded the time to ensure the policy response is appropriately calibrated. 

At this point, it is not possible to assess the costs and benefits 

of this bill. We do not understand how this legislation impact on 

our GDP or the price, supply or reliability of electricity, gasoline 

and other commodities that millions of Americans depend upon 

every day. I am talking bottom line jobs. I am not aware of a credible analysis regarding the regressive impacts the legislation may 

have on the elderly, those on fixed incomes and those living in poverty, the most vulnerable in our society. 

We have no assurance that the bill’s international provisions are 

adequate to ensure the effective participation of China, India and 

other developing nations. The very mechanism the bill advances to 

contain costs seems to be more the stuff of academic theorizing 

than scientific analysis. We have heard from no witnesses on the 
11 

efficacy of the Carbon Board and its ability to protect the economy. 

Veiled allusions to the Federal Reserve Board only remind us of 

the decades of trial and error endured before that institution regularized its procedures. 

In fact, until being provided with today’s testimony, we have 

been presented with no analysis of how these very important issues 

will be affected by the bill. While these analyses are helpful, as one 

might expect, the assumptions built into the analysis and their predict impacts are colored by their source. So the differences of opinion underscore my point: sufficient time has not been provided for 

members to thoroughly analyze the bill. 

At the very least, members should be provided with an economic 

analysis undertaken by an independent agency like the Energy Information Administration or the Environmental Protection Agency 

before moving forward. In the past, this was considered routine. Indeed, multiple analyses were run at the request of Senators Baucus, Carper, Chafee and Obama during the 2003 to 2005 period 

when I chaired the Committee and we dealt with Clear Skies. 

I am asking that a letter that was sent to Senator Inhofe by 

those Senators be inserted into the record, because they said, we 

want analysis of all the bills before we do Clear Skies. We took the 

time. We had boxes of information, and that piece of legislation 

was like a pimple on the back-end of an elephant compared to this 

legislation that we are talking about, which is going to be the biggest elephant in terms of our economy, our future and dealing with 

the environment. 

So Madam Chairman, I think it is important that we understand 

the implications of the votes we take on our economy and environment and our respective States and Nation. This is serious business. Major organizations have major problems with this legislation. The American public deserves to know what implication it has 

for jobs on the vulnerable people that live in our society, on our 

ability to deal constructively with the issue of climate change and 

the speed with which we can move to get the technology to capture 

carbon and to sequester carbon, to make a difference. 

So I am asking that you slow it down. I know that Bali is coming 

up in December, and I know that some people would like to go with 

maybe a scalp in their hand for doing something. But Madam 

Chairman, this is too important. This is too important to rush it 

down the road. Thank you. 

Senator INHOFE. Madam Chairman, I would ask for a unanimous 

consent request to have four letters entered into the record expressing major concerns. 

Senator BOXER. Certainly. 

[The referenced material follow on pages 148–164.] 

Senator BOXER. Also, I understand that your side would like to 

have Senator Bond be the next Republican after Senator 

Klobuchar. 

Senator Voinovich, I don’t think Clear Skies ever became law. I 

think some people come here and they want to get things done. For 

the record, I will say that you don’t have to tell me that this is important and that voices have to be heard, because I agree with you. 

That is why we have held 20 hearings on global warming. As a 

matter of fact—— 
12 

Senator VOINOVICH. But not on this legislation. 

Senator BOXER. If I might continue. We have held 20 hearings 

on the various aspects of global warming and the various ways to 

move to address it. The fact of the matter is, we had leaders from 

State, local government, county government, mayors, who are already acting and we heard them. We heard from the biggest industries who put forward the very concepts that are embedded in this 

bill. 

So I would take issue to the fact that this is being rushed. We 

may never go to Bali because we may have it scheduled here in the 

Senate, that has nothing to do with it. The fact of the matter is, 

we already have a subcommittee bill to go with to Bali and show 

how we are moving in a bipartisan way. That has nothing to do 

with it. The fact is, this is an urgent problem. 

Now, not only have we had 20 hearings on global warming, but 

we have had, as you pointed out, a subcommittee hearing on the 

legislation, a markup on the legislation where over 20 amendments 

were filed, and many of them discussed and voted on. We have 

planned two legislative hearings in the full Committee on this legislation; two members briefings, one of them I hope you will be at 

this afternoon on this legislation—good. In addition, we have daily 

briefings for individual staff members of our colleagues, where my 

staff is available. I personally am meeting with every single U.S. 

Senator on this Committee who wants to meet with me, so we can 

discuss the matter as deep as you want to go. If you are interested 

in amendments, we welcome that. We want this to be a very transparent process. 

So I would only say to you that I disagree with what you are saying. We are not rushing this through. We are doing this in the 

right way. I think if you disagree with the bill and you don’t want 

to have a bill, I respect that. But I don’t think that you should 

criticize the fact of the way we are getting this done. Because I 

think we are listening to members. We received a letter from you 

and other Senators demanding more hearings. We put those hearings on as a show of respect. If you want to have more briefings, 

we will have more briefings. We will brief every single day. 

I know Senators Lieberman and Warner’s staff are ready to discuss this. We have invited—so many of your staffs have been doing 

such a great job on that. 

Senator INHOFE. I have to correct you on one thing, Madam 

Chair. 

Senator BOXER. I will yield to you when I complete. 

Senator INHOFE. All right, that is good. 

Senator BOXER. So my point is, you want to debate whether or 

not we should have legislation, but don’t bring up Clear Skies. That 

is a failure. That never got done. I am a Committee chairman that 

wants to work with each and every one of you to get something 

done. The American people are tired of the partisan bickering. 

They are tired of us not getting anything done. They see this issue 

coming at them. They are very concerned about it. I think the fact 

that Senators Warner and Lieberman reached out across the aisle 

to bring us a bill that is very carefully thought out and didn’t just 

come out of the blue, I mean, these provisions in here have been 
13 

discussed for years. Cap and trade system is already in progress 

in America on acid rain. 

So I just wanted to take the strongest objection to your points 

of view. I respect you, I really do. But I don’t agree with what you 

are saying. 

Senator Inhofe, I will be happy to give you equal time. 

Senator INHOFE. No, I don’t want equal time, because I want to 

get down to the Floor and get this thing done. But it has to get 

in the record that our staff has been requesting meetings with your 

staff for as long as this bill has been discussed, and that has been 

denied. So hopefully today will change that. 

Senator BOXER. OK, I sure would like to see evidence of that, but 

that is—but we are ready to go. 

Senator Klobuchar. 

STATEMENT OF HON. AMY KLOBUCHAR, U.S. SENATOR FROM 

THE STATE OF MINNESOTA 

Senator KLOBUCHAR. Thank you, Madam Chair, and thank you 

for holding this historic hearing and for the work you have done. 

I also wanted to thank Senator Lieberman and Senator Warner 

for the difficult work they have done. 

What brings me to this issue is just what I have seen in our 

State, where we have hunters in Hibbing, Minnesota, who have 

seen the changes to the wetlands. We have seen ski resort owners 

who have seen a 30 percent reduction in profits because there is 

not enough snow. I went to Greenland and saw first-hand the melting of these humongous icebergs where the water is coming off like 

spigots and we have lost the size of Texas and Arizona combined 

in ice into the sea. 

With all due respect to my friend, Senator Voinovich and my fellow Slovenian, from my perspective of being someone new here, we 

have waited too long. We have waited while States have moved 

ahead and ahead and ahead and developed their own standards, 

where 31 States have had to develop their own climate registry because we haven’t done it on the Federal level. We have waited 

while wildfires are raging in California, and we have seen bills that 

are similar to this that Senator Lieberman and Senator McCain 

put out there. 

So I think we have studied this enough to know that there is a 

problem. You know, when Justice Brandeis used to talk about how 

States could be courageous and be the laboratories of democracy, 

we have let them do that. Now it is our time. We stood in that 

chamber yesterday while the French President stood up and talked 

about the history of this country and how we have been on the 

front line, taking up bold challenges. When he brought up climate 

change, I would say the vast majority of the Senators and the Congressmen stood up and cheered and yelled that we were going to 

do something. 

Well, the rhetoric is over and it is time for action. I know that 

this bill isn’t perfect. I am sure there are things—I would love it 

to be exactly like our State’s law and I would love it to have all 

kinds of things that would promote more cellulosic ethanol and 

wind and specifically mention them. But it is not going to be perfect for every State. 
14 

What this bill is is a strong, steady bill that brings in this idea 

of cap and trade that worked so well with reducing acid rain. It is 

going to at least give some direction to business to invest with certainty to make the investments that we need to get us to where 

we are so we can lead the world instead of just following the rest 

of the world with investment in alternative technology and to be 

a leader in this new green revolution and energy independence. I 

know there are issues we should address, to look at how the climate change evolves and if there are going to be some changes in 

the future and we should look back at it to have the proper incentives for clean energy. 

But basically, we need to start somewhere, and we need to get 

a bill going. I am not one that believes that we should wait until 

after the Presidential election to act on this. I have seen that water 

coming off those icebergs. I have seen what the people in my State 

see. I have seen the courageous acts of leaders across this country, 

governors, Republicans and Democrats, who have been willing to 

take on this issue. So I just don’t believe we can wait any longer, 

and we need to move now and I thank Senator Lieberman and Senator Warner for taking the lead on this. 

Senator BOXER. Thank you, Senator. 

Senator Bond. 

STATEMENT OF HON. CHRISTOPHER S. BOND, U.S. SENATOR 

FROM THE STATE OF MISSOURI 

Senator BOND. Madam Chair, my sincere thanks to you, the 

Ranking Member and my colleagues for allowing me to go forward. 

It is strange being this far down on the table, but I came early and 

appreciate the chance to comment. 

Make no mistake, I support cutting carbon emissions. But there 

are many ways we can cut carbon emissions without cutting family 

budgets, and devastating sectors of America. We have the solutions 

available now, aggressive but achievable CAFE standards, a clean 

portfolio standard, wind, solar, hydro, tidal and zero carbon nuclear 

power, low-carbon biofuels and zero carbon nuclear plus capturing 

carbon emissions, cleaning up coal and getting sequestration of 

that carbon. 

But when I look at the bill proposed by my very good friends for 

whom I have high respect, the Senator from Connecticut, the Senator from Virginia, I say this is a very problematic bill, among others, for farmers. It is a long and complicated bill with many detailed provisions. Staff is still struggling to understand it. Every 

time we peel back the onion, we find another layer. Whether the 

consequences of the provisions are intentional or not, vulnerable 

families, workers and farmers caught in its cross-hairs will feel 

very real pain. 

We are talking about a farm bill on the Floor today. I hope nobody makes the mistake of thinking that this cap and trade carbon 

emissions limitation bill won’t have a heavy impact on farmers. 

Now, the bill has tried to provide some relief to the stakeholders, 

as we often do around here, in this case with free carbon allowances. But no farmer should fail to understand that the farm costs 

of Lieberman-Warner far outweigh the benefits. They will suffer 

record high fertilizer prices. I have already pointed out they will go 
15 

even higher under this bill. For years, ammonia fertilizer that puts 

the nitrogen, the N factor, it used to cost farmers $250 a ton. No 

one thought it would break $400. Now it is seeing $500. 

I buy a little bit of fertilizer for my operations. I have seen the 

Triple 13 price go way up because of the cost of the nitrogen fertilizer. Not even corn at $6 a bushel can support where fertilizer 

prices are heading. The bill before us will make more expensive fertilizer’s main ingredient, natural gas. But electric utilities competing for natural gas can pay higher natural gas prices, passing 

that along to their consumers. I am one of the elderly Midwesterners who has to pay those bills. But there are a lot of people who 

have a lot of problems meeting those costs. 

But they buy up natural gas, we drive natural gas-using industries offshore and the jobs they create. Foreign fertilizer imports 

are coming in from cheap natural gas countries like China, Russia 

and the Persian Gulf. But they have already risen to more than 

half our supplies. 

Now our farmers are being dependent on Persian Gulf imports. 

Farmers will face much higher fuel costs to run their trucks, higher 

drying costs and higher transportation costs to get to the market. 

The bill attempts to buy off family farmers by allocating them Ag 

and forestry sequestration allowances, but the effort falls far short. 

The total number allocated will fall 70 percent by 2050. The 

amount actually reaching farmers is unknown since they must 

share with forestry. Also it is unknown whether active farmers can 

even continue qualifying projects that have to show long-term mitigation benefits. 

How are we going to get our food supplies? Farmers receiving allowances will still be deluged with higher fertilizer costs, transportation costs and higher heating. The Warner-Lieberman Ag Offset 

program could decimate small communities. Desperate electric utilities, lacking technologies to cut emissions, would take full advantage of the bill’s offset. They have billions of dollars to spend retiring crop land. Hey, we need that crop land for food. 

But the existing Conservation Reserve Program authorized by 

the Farm Bill took more than 30 million acres out of production. 

I support it, but that program has limits to prevent harm to the 

area because we have already seen harm. Because in the West and 

some parts of the Midwest, communities suffered when the economic viability of those serving the farm community were destroyed because of excessive CRP enrollments. 

This Committee has not considered these. I think that this is just 

one of the many problems that this bill causes. I appreciate the 

chance to share my concerns and we will be hearing more about 

them. 

I thank you, Madam Chair. 

Senator BOXER. Thank you so much, Senator. 

Senator Carper. 

STATEMENT OF HON. THOMAS R. CARPER, U.S. SENATOR 

FROM THE STATE OF DELAWARE 

Senator CARPER. Thank you, Madam Chairman. 

Anyone in this country or the world who might be wondering 

why we haven’t made more progress on addressing issues like cli-
16 

mate change need only listen to the first 30 minutes of discussion 

in this hearing. We are divided on these issues. These are difficult 

issues, there is a lot of disagreement. It is not entirely partisan, 

but it certainly is strong and it is just difficult to overcome. 

I just want to start my comments by thanking my friends, Joe 

Lieberman and John Warner and our Chair for having the courage, 

temerity and the will to try to forge a compromise in the face of 

all these different opinions, conflicting opinions. It is not an easy 

thing to do, and I say this as one who sought to address this issue, 

at least with one sector, and that is the power plant sector in our 

country. 

Having said that, I want to be able to support this legislation. 

In order for me to be able to support this legislation, I need assurances that the concerns that many of you heard me state for years, 

that we also use this as an opportunity to address the emissions 

of sulfur dioxide, nitrogen oxide and mercury, we don’t let this opportunity pass us by. I am also concerned, deeply concerned, with 

the way that we allocate credits under this proposal, because I believe we should allocate credits to those who produce clean energy. 

We ought to incentivize those who are producing the most electricity with the least amount of pollution. I have said to many of 

you, I just don’t believe we are true to that principle here. If we, 

in my view, for me to be able to support this legislation, I need assurances that that will be addressed, too. 

I come from a little State on the East Coast, about 100 miles 

long and about 50 miles wide at our widest point. Delaware and 

other States along the mid-Atlantic, along the East Coast, we find 

ourselves at the end of the tailpipe, if you will, of emissions that 

are put up in other parts of our country. As Governor of Delaware, 

when we were fighting and trying to come into compliance with nitrogen oxide emissions and so forth, we literally, we are not in attainment in any of our three counties. We could almost close down 

our State, close down our industries in our State, not drive at all, 

and we would still have parts of my State that would not be in attainment for ozone. 

It is not our fault. The fault is the people who live in West Virginia, where I was born, the people who live in Virginia, where I 

grew up, the people who live in Ohio where I went to Ohio State, 

along with my colleague, George Voinovich, the people who live in 

Kentucky where my sister and her family live. They and other 

States are putting all kinds of stuff up into the air, nitrogen oxide, 

sulfur dioxide and mercury, that harms my State, not just my 

State, the health of people in my State, but other States along the 

East Coast, north and south. 

Delaware has the highest rate of asthma among children of any 

State. One out of every eight kids in my State suffers from asthma. 

I was principal for a day in a school in our State a couple of weeks 

ago, it is a wonderful program that we have. I stopped by a lot of 

classes. I also stopped off to visit the school nurse. I said, what 

kinds of problems are you hearing from kids, these are sixth, seventh, eighth grade kids. I thought it might be attention deficit disorder, I thought it might be flu, I thought it might be this or that. 

She said, it is asthma. We have so many kids here who have asthmatic attacks, who have to take medicine every day, who go to the 
17 

hospital. In my State, it is not just by dozens or scores or hundreds, it is thousands of kids who are going to be hospitalized some 

time during the course of this year. 

With respect to sulfur dioxide emissions in this country, 24,000 

Americans will die, 24,000 Americans in this country will die from 

sulfur dioxide emissions this year just because of those emissions 

from power plants. Not the other sources. Two-thirds of the sulfur 

dioxide emissions come from power plants. Twenty-four thousand, 

24,000 this year, over 400 this week, today before we go to bed tonight, some 60 more will die because of sulfur dioxide emissions. 

We have another chart that shows mercury. I eat a lot of fish, 

maybe you do, too. We encourage people to eat fish because it is 

good for their health. But if you happen to be a woman who is 

going to become pregnant, that child that you are going to give 

birth to may not be so fortunate. Because we know in this country 

there are going to be 600,000 plus kids that are going to be born 

this year to moms who have very high levels, carry high levels of 

mercury, in many cases because of the fish that they ingest. 

A large part of that mercury, about 40 percent, I think the largest source of mercury pollution in our country comes from power 

plants. For us to ignore the threat to our health caused by sulfur 

dioxide emissions, nitrogen oxide emissions and mercury emissions, 

for us to fail to take this opportunity to address them I think we 

would make a big, big mistake. 

Again, I want to support this legislation. I hope to be able to support this legislation. Madam Chair, I have indicated, and I appreciate your willingness to meet with all of us. 

I will close with this. I appreciate the fact that we have tried to 

address the transportation sector here, and its contributions to our 

problem and to our solution. I would hope, and as I said to Chairman Boxer yesterday, I would have us focus on three things with 

respect to transportation. One, clean fuels. Two, clean cars. Three, 

other options to travel around our communities, around our States, 

around our country, other than our cars, trucks and vans. 

The last thing I would say, there is going to be an amendment 

on nuclear. I am an advocate of nuclear power. I think nuclear energy is part of the solution. We can have a nuclear amendment 

that is offered in Committee or on the Floor that actually addresses 

clean energy and moves us closer to clean energy in reducing these 

emissions, or we can just have a nuclear amendment that frankly 

doesn’t move us in the direction that we need to go. I think it is 

important that those of us who think that nuclear is part of the 

solution that we come up with a compromise that actually makes 

sense and gets the job done. 

Thank you, Madam Chair. 

Senator BOXER. Senator Carper, thank you for your thoughtful 

presentation today. 

Senator Vitter. 

STATEMENT OF HON. DAVID VITTER, U.S. SENATOR FROM THE 

STATE OF LOUISIANA 

Senator VITTER. Thank you very much, Madam Chair. I will be 

brief and submit the rest of my statement for the record. 
18 

I certainly agree with you and others that this is an extremely 

important issue. I also agree with you and others that the stakes 

are very, very high. That is exactly why we need to make sure we 

get this right. I also agree with Senator Voinovich and others on 

this side of the Committee who have expressed grave concern about 

this accelerated process with regard to this particular bill. Because 

I don’t think it allows us the opportunity to get it right. 

Yes, there has been discussion of global warming for years in 

Committee hearings. That is not the same at all as hearings specifically on the provisions of this very voluminous and complex bill. 

So I would again urge the Committee to have more hearings specifically on this bill, so we can try to get it right. 

I don’t think there is any State represented here that has more 

at stake, quite frankly, than my State of Louisiana. Climate 

change, global warming, particularly to the extent it can affect sea 

levels, could have an enormous impact on coastal Louisiana, the 

most coastal State, in many ways, of any of our States. At the same 

time, if we act rashly or unwisely and do things with regard to our 

present fuels that aren’t justified and that don’t produce results, 

Louisiana will be among the first States to feel that hit to the economy. 

So we do have to get it right. We do have to figure out what will 

have an impact, what the science supports, how we intelligently 

deal with this issue. I am just very, very concerned that we are 

taking as big and complex and important a bill as I have ever seen 

in the Senate and rushing through with regard to it, acting on 

sound bites, in my opinion, not science. Perhaps good politics, but 

not sound policy. 

I am eager to hear from the witnesses. I am eager to hear from 

more witnesses, so that we can look carefully at a very long, complex bill and try to get it right. But I do again underscore that I 

believe we need more time and hearings specifically about this bill 

in order to do that. 

Thank you. 

Senator BOXER. Thank you, Senator. 

Senator Lautenberg. 

STATEMENT OF HON. FRANK R. LAUTENBERG, U.S. SENATOR 

FROM THE STATE OF NEW JERSEY 

Senator LAUTENBERG. Thank you, Madam Chairman. I begin by 

thanking you for holding this hearing. Your leadership has spurred 

action on so many issues of great concern, and we are grateful to 

you for your activity. 

I also want to thank Senators Lieberman and Warner for their 

determination and diligence on this legislation and for making 

changes and improvements as the bill moved through our subcommittee. We have to face it: one can’t find a more critical environmental issue facing this Committee or our country or our world 

than fighting global warming. We need legislation that faces this 

problem head-on. 

Otherwise, I believe that our descendants, as nearby as our children and certainly our grandchildren will never understand our unwillingness to deal with this situation. We worked very hard in this 

Subcommittee to improve the good start that Senator Lieberman 
19 

and Senator Warner put forward. Together, we enlarged the reductions and emissions from 10 to 15 percent by 2020. By expanding 

the bill to include natural gas, it protected States’ rights to go beyond Federal benchmarks and created a process for independent 

scientists to continually evaluate whether we need stronger laws to 

fight the effects of climate change over the long term. 

But if we want our actions on global warming to match the goals 

of science, there is still more work that has to be done on this bill. 

The Union of Concerned Scientists has made it clear that true leadership against global warming means the United States should reduce emissions by at least 80 percent by 2050. I hear our friends 

who say they are concerned about jobs and the economy and so 

forth. But my friends, there is an endangered species out there. It 

is called human beings. Unless we get onto doing something about 

it, we will be looking back, yes, there will be plenty of jobs available, there just won’t be enough people to do them. 

Despite these ominous warnings, the bill before us would achieve 

only a 60 percent reduction by 2050, less than what is needed to 

fully protect the world we are accustomed to. We need to reach further to meet the long-term standard. The bill also gives away costfree permits for industry to emit greenhouse gases until 2035, a 

full 28 years from now. We need to move to a polluter pay system 

much earlier, and our Committee should act aggressively to move 

this date forward. Moving to a polluter pay system will make it a 

smart business decision for companies to reduce their greenhouse 

gas emissions and develop new, cleaner technologies. 

Finally, we should think twice before giving out the majority of 

free permits to companies with the highest level emissions, such as 

coal power plants, to encourage companies to go green. Some of 

these permits should be given to clean companies, such as those 

that promote solar power and other energy sources that have fewer 

or no emissions. 

Again, I think we are off to a good start with this legislation. I 

am hopeful that this bill can be improved as the process moves forward. Before closing, Madam Chairman, I want to respond to our 

friend Senator Inhofe, who said cap and trade don’t work. Well, I 

will tell you, it had a heck of a good effect, positive effect on acid 

rain. So the system works, and we have to be able to use it carefully, but not to ignore it. Thank you very much. 

Senator INHOFE. Well, since he referenced me, let me just respond to that. Cap and trade in acid rain is not the same animal 

that we are talking about, the cap and trade today. The example 

that we have, the model that we have is in Western Europe, of 15 

countries, only 2 are able to meet their expectations or their goals. 

Senator LAUTENBERG. I said what I said, thank you. 

Senator BOXER. Thank you, Senator. 

Senator INHOFE. Yes, and I said what I said, thank you. 

Senator BOXER. Yes, you did. 

Senator LAUTENBERG. Are we going to have a tit for tat? 

Senator CARPER. This reminds me of Popeye the Sailor Man. I 

am what I am. 

[Laughter.] 

Senator BOXER. Well, at the next briefing, I will hand out spinach to everyone. 
20 

Senator Barrasso. 

STATEMENT OF HON. JOHN BARRASSO, U.S. SENATOR FROM 

THE STATE OF WYOMING 

Senator BARRASSO. Thank you very much, Madam Chairman, 

and thank you for your kind words at the beginning of this hearing. As I have stated before, the debate on global warming can’t be 

ignored, can’t be rejected. We must adapt, we must make changes, 

we must be ready and we must be ready to put our money where 

our best hopes are. A number of us had a chance to sit down this 

morning, Madam Chairman, with Thomas Friedman, the author of 

the book, The World Is Flat. He is working on his new book, and 

it is on energy and a greener planet. 

I will tell you I believe we cannot simply though shut off our current traditional energy sources by setting unrealistic goals for the 

industry in my home State, which for the most part is carbon-based 

but also we are committed to renewables in our State of Wyoming, 

where we have been blessed with incredible resources and can do 

a lot to help our Nation become energy independent. 

There is a story in today’s Wall Street Journal, page A4, and it 

is called, Why Coal Is To Get Additional Attention. The International Energy Agency says that with tightening energy supplies 

and a surge in global warming emissions, as China and India burn 

more coal to power their booming economies, it talks about China 

and India, and I am going to go through this because of why I believe it is important that we in America today invest in the technology. Because no matter what we do in America, if we don’t have 

the technology to apply worldwide, we are not really going to solve 

the problem that we are aiming at solving, which is a world that 

by the year 2030 will be consuming 55 percent more energy than 

it is now, with almost half of that growth because of soaring demand in China and India. 

Coal share is expected to jump to 28 percent of global consumption from 25 percent in the next 25 years. There are tables that 

talk about as China’s and India’s demand for coal continues to increase, that will drive up global CO2 emissions. There are some 

charts. China and India will account for 80 percent of the growth 

in coal consumption over the next two decades. Then it goes on to 

talk about renewable sources, and it says, they will grow, but all 

renewable energy sources will remain a fraction of total energy use 

globally in 2030 at about 10 percent, unchanged from the percentages of today. 

So I look at the current language of the bill, I have concerns 

about the ability of coal-fired power plants to be able to capture 85 

percent of the carbon emissions. That is not scientifically feasible 

today and I was pleased at the subcommittee to hear Senator 

Lieberman say that he is interested in working with me and stairstepping to that point over a number of years going into the future. 

Because we need to innovate, we need to prepare for changes, but 

we need to retain our ability to use the power we need today, so 

that the companies have the resources that they need to develop 

the clean energy technologies that we will need for tomorrow. We 

need to continue to invest in improving existing energy industries 
21 

today, and that is going to create the new jobs and strengthen the 

economy. 

I do worry about unintended consequences that they will have, 

that energy limitations will have on our economy. There was a 

Washington Post article yesterday that speaks to the high energy 

costs that the average taxpayer will have to pay under certain legislation. But I want to reiterate that I do want to address the problem of global warming. We can get there, but only if we show 

China and India that we can pass a bill that strengthens our economy, creates jobs, and develops the needed technology that can be 

used worldwide to continue in our fight for a cleaner environment. 

So I would like to continue to work with the members of the 

Committee on achieving these objectives. Thank you, Madam 

Chairman. 

Senator BOXER. Thank you, Senator, very much. 

Senator Cardin. 

STATEMENT OF HON. BENJAMIN L. CARDIN, U.S. SENATOR 

FROM THE STATE OF MARYLAND 

Senator CARDIN. Thank you, Madam Chair, and let me thank 

you for your leadership on this issue and getting us to where we 

are today. I want to thank Senator Lieberman and Senator Warner 

for their extraordinary leadership and patience as we try to put together a bill that will really speak to the priorities of our Nation 

and have an excellent chance of being passed. The American Climate Security Act gives us our best hope to pass meaningful climate legislation and once again put America back into the leadership role on the world stage. 

I am proud to be an original co-sponsor of this legislation. The 

cap and trade program at the heart of the bill is an effective method to drive down emissions permanently and cost-effectively. By 

harnessing the power of the marketplace, the system puts America’s greatest strength, our economy, to work on the Nation’s most 

important long-term environmental issue. 

I must tell you, Madam Chair, I think this issue represents more 

than just an issue of climate change. It is a matter of national security for us to use less fossil fuels, so that we can have control 

of our own destiny on energy, we don’t have to finance countries 

that disagree with our way of life. I think it is in our economic interests to deal with this issue. 

So I think it is a win-win-win situation, it allows us to pay proper attention to our environmental concerns as well as dealing with 

our energy independence and the security issues. 

The American Climate Security Act is based on two important 

pillars. By setting a firm and declining cap on emissions, we begin 

to address the underlying problem of global warming and the emission of greenhouse gases into the atmosphere. The bill keeps getting better in this regard. It started with the announcement of an 

outline, we then saw the text of the bill, which I think was an improvement. We then had the Committee markup, which was an improvement. It keeps getting better, Senator Lieberman. I applaud 

you for these efforts. 

We are not quite done yet. I think we can still improve this bill 

and I hope that we will improve this bill. I hope that in two re-
22 

spects that we will be able to improve the bill. First, it is clear to 

me from the scientific information that is available that we should 

strive for an 80 percent reduction by the year 2050. I hope that will 

be our goal. 

Second, it seems to me that from the inception of the caps, we 

would be better off auctioning the credits to the utilities and the 

companies, which would give us not only revenue coming in earlier, 

putting market forces to work earlier, but it would also give us the 

financial wherewithal to deal with the problems of low and moderate income consumers and the cost of energy, as well as developing the types of technologies and, I hope, good jobs that Senator 

Sanders talks about frequently, that will be available as a result 

of new technology. 

So I think for all those reasons, I would hope that we would get 

to an earlier start, a more ambitious goal, and to be able to really 

put our market forces together earlier. I think this bill is a great 

bill, a great start. It restores America’s international leadership on 

this issue and I am proud of the work of our Committee. 

Thank you, Madam Chair. 

[The prepared statement of Senator Cardin follows:] 

STATEMENT OF HON. BENJAMIN L. CARDIN, U.S. SENATOR FROM THE

STATE OF MARYLAND

Madame Chairman, thank you. 

First of all, let me reiterate my congratulations to Senator Lieberman and Senator 

Warner for the great work they have done in crafting the bill we have before us 

today. 

America’s Climate Security Act of 2007 gives us our best hope to pass meaningful 

climate change legislation and once again put America back into a leadership role 

on the world stage. I am proud to serve as an original cosponsor of the bill. 

The cap and trade program at the heart of the bill is an effective method to drive 

down emissions permanently and cost-effectively. By harnessing the power of the 

market place, this system puts America’s greatest strength—our economy—to work 

on the nation’s most important long-term environmental issue. 

And climate change represents more than just an environmental issue. Our energy independence and our national security are at stake as well. 

We need to rid ourselves of a dangerous reliance on imported oil. Oil prices now 

hover around $100 a barrel. 

The amount of our national fortune that is going to regimes that stand in opposition to American values is vast and continues to grow. This bill can help us break 

that dependence. 

Reducing our dependence on foreign oil will strengthen American security. Reducing the threats posed by climate change will also improve American security. 

As defense analysts have pointed out, social disruptions related to sea level rise, 

storm severity, and other climate changes increase the risk for instability across the 

globe. The world is already perilous enough. 

This bill presents a way forward. 

America’s Climate Security Act is based on two important pillars. By setting a 

firm and declining cap on emissions, we begin to address the underlying problem 

with global warming: the emissions of greenhouse gases into the atmosphere. 

The bill keeps getting better in this regard. The outline announced in August 

pointed us in the right direction. The text of the bill when it was introduced was 

further strengthened in this regard, with somewhat tighter caps. The bill reported 

out of the subcommittee moves us even further in the right direction. 

We aren’t there yet. The best scientific minds in the world tell us that we need 

to reduce emissions by 80 percent by 2050. We should not shy away from that 

benchmark. In fact, we should embrace it. The stakes are simply too high for us 

to come so far, but still fall short of what science demands. 

Similarly, the cap-and-trade program in the bill also keeps getting better. But I 

am a firm believer in the power of the American economy and in American ingenuity. Rather than giving away allowances to certain sectors of the economy for dec-
23 

ades, we should adopt a full auction of all pollution credits beginning immediately, 

and put those proceeds to the public uses outlined in the bill: 

• to cushion cost increases to low- and moderate-income consumers; 

• to invest in the new ’green’ jobs that will transform our workforce; and 

• to manage our adaptation to changes in the natural and world landscapes. 

The legislation also provides some key incentives for energy efficiency. Today’s 

witnesses will describe energy efficiency as the low-hanging fruit’ that can help us 

get off to a fast start in reaching the objectives of this legislation. I want to focus 

on a specific energy efficiency technology that is available today and already reaping 

the kinds of rewards that the larger bill promises. 

The CO2-reducing potential of America’s Climate Security Act will be enhanced 

by the deployment of a smart electric grid or ‘‘Smart Grid,’’ which can lower electricity consumption by 10% and grid-related emissions by 25%. (DOE, EPRI Study). 

Since grid-related emissions are 40% of total CO2 emissions in the United States, 

the reductions that a Smart Grid will allow are significant. 

Smart Grid is a 2-way, interactive, data-producing communications network that 

overlays the existing electric grid to transform every electrical outlet into a ‘‘smart 

socket.’’ This allows utilities in real-time to turn down millions of air conditioners, 

pool pumps and other appliances during times of peak demand to make. This control 

allows Smart Grid to make additional megawatts equivalent to those produced by 

new power plants, but at less cost to consumers and the environment. 

Smart Grid is being deployed today by a Maryland company to two million homes 

and businesses in Dallas, Texas. 

As we look ahead to a markup session, I hope that we will take a closer look at 

this successful example and focus on how we can provide the right economic signals 

to deploy these cutting-edge technologies sooner. 

This legislation is a major step forward for all of us who want to act now to curb 

the explosive growth in greenhouse gas emissions. It is comprehensive and bi-partisan and everyone agrees that this bill represents our best hope of enacting meaningful global warming legislation during this Congress. 

I will work to further strengthen this strong bill as it moves through this Committee and the Senate floor. 

I look forward to hearing from today’s witnesses, and moving this landmark legislation quickly through the full Committee and on to the floor of the Senate. 

Congress and America need to once again establish our rightful place as world 

leaders. Thanks to Chairman Boxer, Senators Lieberman and Warner and their 

America’s Climate Security Act, that time is now. 

Senator BOXER. Thank you, Senator Cardin. 

Senator Craig. 

STATEMENT OF HON. LARRY E. CRAIG, U.S. SENATOR FROM 

THE STATE OF IDAHO 

Senator CRAIG. Madam Chairman, thank you very much. 

I don’t fear at all the process you have set forward, as long as 

it is open, clearly transparent and allows a fair and responsible 

vetting of alternatives. My position has been consistent over the 

years, Madam Chairman, cap and trade is obsolete in its approach 

toward greenhouse gas reduction. It hasn’t worked. I don’t think it 

will work. This bill clearly distorts. If you are a coal State, you 

have the allocation. If you are not a coal State, you don’t. 

My State of Idaho is the cleanest State in the Nation today, and 

we are proud of that. We get nothing but higher energy prices. 

There is no benefit for Idaho unless you design a system that is 

output-based. Therefore, entering this concept, the concept is 

flawed. 

What we are doing in an economy-wide way is simply transferring wealth. That does not stimulate the kinds of things that we 

need. When we were crafting EPAC05, I jokingly said, Madam 

Chairman, we ought to call that the Clean Energy Act of 2005. 

Why? Because what it did is now showing up in the marketplace. 

It stimulated nuclear, it stimulated cellulosic in the area of 
24 

biofuels, and it has stimulated greatly efficiencies. That is where 

we ought to be headed, because in every one of EPAC05’s issues 

and results, we are producing clean energy. We haven’t penalized 

the consumer. We are not distorting the marketplace. We are driving ourselves, as we should, by allowing our Government to 

incentivize the marketplace toward cleaner energy. 

Now, I am sorry Senator Clinton isn’t here today, because last 

week out in Iowa she did something that somewhat surprised me, 

and I was frankly—let me put it this way, Madam Chair, and I 

would wish your attention, Senator Clinton did something that surprised me and deserves to be complimented by it. I am going to 

hand around a chart that shows what Senator Clinton has proposed as it relates to climate change legislation from CAFE to portfolio standards to RFS, incentives, much paralleling what the current Administration is doing in some respects, and much paralleling what many of us on this side are doing in relation to driving 

the marketplace toward efficiencies and new and clean energy. 

So I applaud the Senator, I wish she were here today. I don’t 

often compliment her. But she deserves to complimented when she 

gets it right. I find that it is most interesting that it is in many 

ways in conflict with the great piece of legislation that some are 

bestowing compliments on today that are driving us in the direction that this Committee thinks it is being driven. 

I would request of you, Madam Chair, a thorough analysis, a 

thorough analysis by EIA and by EPA of this legislation. We are 

going to request that. There should be a time of adequacy, so that 

we can thoroughly understand. None of us dispute the magnitude 

of the effort. None of us therefore dispute the magnitude of the impact of the effort if we get it wrong. The rest of the world is frustrated. They have tried and they are failing. It is only through new 

technologies and efficiencies, and incentivizing the marketplace to 

drive us in that direction, that we get there. 

This is not a time to rush to get it wrong. This is a time to think 

about and work at getting it right. Therefore, Madam Chair, I 

would respectfully request that the markup of Lieberman-Warner 

be postponed until we have the effective and responsible analyses 

by those, shall we say, impartial groups and impartial observers, 

so that we can look at this through the eyes of somebody other 

than those of us who by our character tend to be a little bit more 

political than we tend to be policy. In this instance, I would hope 

that we could back off, take a deep breath and allow ourselves to 

analyze what we are doing as we do it. 

Thank you, Madam Chair. 

Senator BOXER. Thanks, Senator. 

Since you asked something of me, I will respond to you. We 

haven’t even announced when the markup is. So postponing a 

markup that hasn’t even been announced doesn’t even really make 

much sense. 

The other thing is, we are going to have so many briefings here, 

we are going to make it so easy for members and staff that I hope 

you will feel very comfortable with that. I also—— 

Senator CRAIG. Well, Madam Chair, let me say this—— 

Senator BOXER. Let me finish first, and then I’m happy to—— 
25 

Senator CRAIG [continuing].——asking you to postpone a briefing 

for me does make sense. I am sorry you misinterpreted me. 

Senator BOXER. Sir, sir, I didn’t interrupt you and I am going to 

finish my comments—— 

Senator CRAIG. Of course you will. 

Senator BOXER [continuing].——and then I will be glad to call on 

you. Thank you very much. 

Senator Clinton is also on Sanders-Boxer. So let’s not distort 

Senator Clinton’s strong views that we need global warming legislation. Yes, she is for all the other things we are all for. But she 

is also for global warming legislation. I just wanted to set the 

record straight on that. 

In any case, Senator, I went back and looked at the record, the 

time before long ago when we passed the great landmark environmental legislation. We heard the same thing then: don’t do it, it is 

not time, we need more information. We all know what a slow 

dance is around here. We weren’t born yesterday. 

So there seems to be a very interesting chorus over there, let’s 

slow it down, let’s slow walk it. On this side of the aisle, and I 

think Senator Warner believes this, and I am going to have a statement e-mailed up and the staff is putting it into writing. We think 

the time is now to act. But we certainly will give your side of the 

aisle on this particular request more consideration. We have added 

hearings, briefings, we are happy to do that. 

We think this legislation, this Lieberman-Warner bill, as it is 

being improved, really as it goes through, deserves to be examined 

and looked at. We are very proud of it. So we will be happy to do 

that. 

Senator Craig, did you want to respond to my comment? 

Senator CRAIG. Thank you, Madam Chair. Your courtesies are always appreciated. 

Senator BOXER. Senator Sanders. 

STATEMENT OF HON. BERNARD SANDERS, U.S. SENATOR 

FROM THE STATE OF VERMONT 

Senator SANDERS. Thank you very much, Senator Boxer, and 

thank you very much for your leadership. 

We have come a long way in a year, and I think you, Senator 

Boxer, are one of the people responsible for turning this debate 

around. Because all over the world, as people grapple with the 

cross of global warming, they are wondering what is happening in 

the United States. Thankfully, we are beginning to at least in a serious way begin to address the problem. As I think most members 

of the Committee know, I have serious problems with this legislation, because I believe it does not go far enough. 

I don’t think it is asking too much from the American people to 

ask why it is that we are not listening to the scientific community 

and doing what they say needs to be done to avert the enormous 

tragedy that faces us if we do not get our act together. What the 

scientific community has said over and over again is, we made a 

mistake. We under-estimated the problem of global warming and 

the severity in which this problem is surfacing. Anyone who looks 

at the front pages of the paper any given day knows that they are 
26 

right. They are saying, we have to be more aggressive, not less aggressive. 

Colleagues, what I beg of you, we cannot continue to do politics 

as usual. We need to work this issue without old-fashioned deal 

making. The time is too late, the planet depends upon bold action. 

When the scientists are telling us that at the least, if we are going 

to avert a tragedy, with a 50–50 chance, we need to reduce greenhouse gas emissions by 80 percent by the year 2050, to my mind, 

the 63 percent at most that Lieberman-Warner does just doesn’t go 

far enough. We have to do better than that. 

There are a number of other issues within this bill dealing with 

the auction that I think Senator Carper and Senator Lautenberg 

touched on. I would echo their concerns about the need to say to 

polluters, I am sorry, you can’t have 20 or 25 years to continue to 

destroy the environment. You must start paying if you are going 

to pollute. 

I also have concerns about the new entrants provisions, which 

gives support to existing fossil fuels, but do not encourage the new 

sustainable energies. 

Mostly I want to spend these few minutes by saying that while 

there is a lot of bad news out there, there is some extraordinarily 

good news. My view, in fact, is we know how to reverse global 

warming. It is out there. Right now, in the southwestern part of 

this country, and I know Mr. Darbee, who is head of Pacific Gas 

and Electric, he will speak to this, we are making great strides in 

energy efficiency. The potential out there is enormous. Cities, my 

city of Burlington, VT, States like California, making great strides. 

One of the major concerns I have about this piece of legislation is 

that when you look at the auction beneficiaries, while there is a big 

pot of money for zero and low-carbon energy technology, there is 

not one nickel specific to energy efficiency, which everybody knows 

is the low-hanging fruit. We can make huge gains. Let’s do that. 

Second of all, in terms of solar energy, Pacific Gas and Electric 

has signed a contract with an Israeli solar plant company which 

will produce 535 megawatts of electricity. That is a small nuclear 

power plant, zero greenhouse gas emission. They are estimating 

that the cost of that will be 10 cents a kilowatt hour, competitive 

day. The cost is going to go up minimally over the next 25 years. 

Let me quote from the Federal Government’s own National Renewable Energy Lab. They are saying ‘‘The cost for concentrated solar 

power technologies are declining from approximately 16 cents per 

kilowatt hour to approximately 8 cents in the year 2050,’’ 8 cents 

per kilowatt hour for non-polluting solar energy. It is sitting there. 

These plants cost about $2 billion apiece. If we put $20 billion into 

it, we can produce gigawatts of electricity, huge amounts of electricity. Why aren’t we doing that? 

Wind is sitting out there. We have recently learned that there is 

a small wind turbine manufacturer who for $10,000 can produce a 

small wind turbine that can produce 40 percent of the electricity 

in a given home, $10,000. You subsidize that, as California is already doing, by $5,000, we could have millions of these turbines 

out there. 

So my main concern about this piece of legislation is we are not 

taking advantage of the technologies that are existing now. I don’t 
27 

know, Senator Barrasso, what the future of clean coal is. I don’t 

know that. I am willing to explore it. But what I am telling you 

now is you don’t have to spend hundreds of billions of dollars on 

wind and solar to determine whether it is going to work. It is working today. We make a grave mistake by not working with those 

utilities like Pacific Gas and Electric who are already doing the 

right thing. 

So let me just conclude by saying, we know the answers. They 

are sitting out there, cities, towns, States are already doing it. Utilities are beginning to do it. Let us work with those, we can make 

giant steps forward in saving the planet. Thank you, Madam Chair. 

Senator BOXER. Thank you, Senator. 

Just a couple of items, I would ask unanimous consent to place 

Senator Isakson’s full statement into the record. 

[The prepared statement of Senator Isakson follows:] 

STATEMENT OF JOHNNY ISAKSON, U.S. SENATOR FROM THE STATE OF GEORGIA

Thank you Madam Chairman. 

In July 2007, I took a two-day trip to Greenland with members of the Senate Environment and Public Works Committee to view the effects of climate change and 

to learn more about its impacts on the ice and glaciers of the world’s largest island. 

My visit to Greenland was informative to see firsthand what we all hear so much 

about. What is occurring in Greenland today began 14,700 years ago at the peak 

of the last ice age. 

Two brilliant scientists who accompanied us, Dr. Richard Alley of Penn State and 

Dr. Minik Rosing of Denmark, both confirmed that the climate has changed naturally in the past, including warming about 14,700 years ago as the last ice age 

ended. They told me that most scientists believe that at least some of the recent 

warming has been accelerated by carbon. However, they could not say for sure by 

how much. 

With those facts as a backdrop, and given the uncertainty in the science behind 

the causes of climate change, I believe that we should take proactive steps, both personally and as a nation, to reduce our emissions footprints. One of those steps is 

addressing the carbon issue in the context of promoting all sources of renewable energy. You cannot reduce carbon levels without reducing the burning of fossil fuels, 

and you cannot do that without building nuclear power plants and furthering the 

development of cellulose-based energy. 

My state of Georgia already enjoys the benefits of nuclear power from Plant 

Vogtle, which is applying for one of the first Nuclear Regulatory Commission licenses for reactor expansion. Our state has the greatest supply of cellulose in our 

forest products industry. 

Our country has responded in the past to challenges with innovation and incentives. The issue of carbon reduction in our nation should be approached in the same 

way and through the same processes. Reducing the burning of fossil fuels without 

developing all our renewable resources would be a mistake. 

I commend Senators Warner and Lieberman and their staff for the bipartisan way 

in which they came together, and for the work they have done in attempting to tackle a tough issue. They are to be commended for their efforts. I do have concerns, 

however, that this legislation puts mandates on our economy without providing tools 

to meet those mandates. 

For example I would have preferred to see a bill that is comprehensive in not only 

the requirements for reductions in carbon, but also in offering incentives and methods on how to get there. I see no specific mention of nuclear power in here. I see 

no specific incentives for retrofitting coal fired power plants so that power generators can keep existing baseline capacity. I see no mention of programs to help America’s manufacturers retool their equipment and processes to meet these mandates. 

In fact, Senator Lieberman in the Subcommittee markup said: ‘‘It’s hard to imagine 

that [Lieberman-Warner] will not cost-over time—these two sectors (electric power 

and industrial), hundreds of billions of dollars to comply with the demands of this 

bill,’’ 

To Senator Warner and Senator Lieberman’s credit, they have pledged that they 

will work with me and others on the Committee who share these concerns. I appreciate their willingness to work with us, and look forward to doing so through this 
28 

process. However, I am extremely concerned that the additional energy costs in this 

bill will put a significant burden on Georgia’s hard working families. 

In closing, I am concerned that, in a rush to judgment, this Committee and the 

Senate will enact measures that will have dramatic negative effects on our manufacturing sector while also causing significant increases in the cost of power generation. As members of the Environment and Public Works Committee we have a very 

important responsibility. We should work to ensure that we enact common-sense 

measures designed to address climate change that have been thoroughly debated, 

while ensuring that the economic impact of these measures on our economy is not 

adverse. 

I yield back. 

We have a message from Senator Warner, he wanted to prove to 

us he has been watching this debate. Here is what he said: ‘‘This 

Committee had a chance to hold legislative hearings on the Climate Stewardship Act, that was the McCain-Lieberman bill, and 

did not. We are making up for lost time in this Congress. Senator 

Warner.’’ 

Senator Alexander, I understand you have laryngitis. Do you 

have enough left to say anything at all? No. Well, we will put your 

statement into the record. We need you back, so take care of your 

throat. 

[The prepared statement of Senator Alexander follows:] 

STATEMENT OF LAMAR ALEXANDER, U.S. SENATOR FROM THE STATE OF TENNESSEE

I believe that there is a scientific consensus that human activity is having a significant influence on global temperature increases. Most of the warming since 1965 

is very likely to have been caused by human activity. In other words, global warming is real. 

Since my first year in the Senate—2003—I have introduced legislation to put a 

cap on carbon emissions from the first of these large sectors, electricity power 

plants. These plants produce 40% of the carbon dioxide and 33% of the greenhouse 

gases in the United States. 

I will now broaden my legislation to include two other major sectors of the economy: 

1. A low carbon fuel standard for the fuels used in transportation. Transportation 

produces another one-third of America’s greenhouse gases. 

2. An aggressive approach to building energy efficiency. I am still working on 

these pieces. 

Tailoring our approach to just these three sectors—power plants, transportation, 

and buildings—would cover about two-thirds of U.S. greenhouse gas emissions. 

This compares very favorably with the Lieberman-Warner bill’s coverage of the 

economy which at introduction was described as capping 75% of the economy (As 

reported by the subcommittee, the bill’s coverage is broader because it now caps natural gas producers). 

As we implement laws reducing emissions from these three sectors, we can learn 

more and move on to the other sectors in the future. 

A sector-by-sector approach minimizes guesswork. For example, the United States 

has 16 years experience with a cap-and-trade program designed to reduce acid rain 

pollution from power plants. The program cost less than expected. Utilities have experience with how it works. And we have in place right now the mechanisms we 

need to measure and regulate carbon from utility smokestacks. 

A sector-by-sector approach allows us to build on steps already taken. For example, in the transportation sector, Congress has already begun to mandate renewable 

fuels to reduce greenhouses gases. This year, the Senate enlarged that mandate and 

adopted fuel efficiency standards for cars and trucks. 

I believe we should add to those steps a low carbon fuel standard—that is, requiring transportation fuels to decrease gradually the amount of carbon in the gasoline 

or diesel that they contain—which is a logical and manageable next step. 

Finally, both in the energy bill of 2005 and the energy bill that the Senate passed 

earlier this year, Congress began to encourage more efficient buildings. Making 

those steps more aggressive holds the promise for enormous carbon savings at the 

least cost. Japan, for example, has found that its major obstacle to reducing carbon 

emissions has been the lack of building energy efficiency. 
29 

Finally, I believe a sector-by-sector approach will do the least harm. It avoids imposing new regulations directly on the manufacturing sector (who nevertheless may 

have higher costs for fuel and electricity) and therefore avoids adding to the pressures to ship those jobs overseas. 

A sector-by-sector approach will allow us to leave manufacturing and small business alone for the moment. 

I also believe that a sector-by-sector approach is the easiest approach for Members 

of Congress to understand and explain to our constituents. As the recent debate on 

comprehensive immigration should have taught us, this is not an insignificant concern. The Lieberman-Warner economy-wide climate change legislation is an important 

contribution. It is a good faith beginning and a complex bill which raises lots of unanswered questions. 

Some of the questions raised are: 

1. Why cap and trade rather than a carbon tax? 

2. Why is the cap in the transportation sector a so-called ‘‘upstream cap’’—in other 

words, a cap on the importer, blender, and refiner of transportation fuels? 

3. Does the allocation scheme selected in the Lieberman-Warner bill for utilities 

make sense? The Lieberman-Warner bill will award approximately one-third of the 

allowances to power plants pursuant to output allocation. Output allocation rewards 

fuel-switching to natural gas. Output allocation gives natural gas power plants two 

carbon allowances for every one carbon allowance received by coal plants. 

4. Why does the bill employ such a large auction and why does it increase so 

quickly and steeply? Will an auction of this size unnecessarily drive up the price 

of complying with the bill? 

5. This auction is expected to raise extremely large sums of money. Where should 

the money go? Into the Treasury? Should Congress be able to appropriate it? 

6. What should the money be spent on? 

7. What should be included in this legislation to keep natural gas prices from 

spiking upwards? 

I know this Committee has had a lot of hearings. But this bill, S. 2191, was introduced in its current form on October 18, and I think members of the Committee 

should be given more time to review it. 

I see no advantage to sending this bill rapidly to the Senate floor. 

The Committee is the place to make any corrections to the bill that may be justified. 

Senator BOXER. Senator Whitehouse, you will have the last word, 

I think, from Senators, and then we will finally get to our panel. 

STATEMENT OF HON. SHELDON WHITEHOUSE, U.S. SENATOR 

FROM THE STATE OF RHODE ISLAND 

Senator WHITEHOUSE. Thank you, Madam Chair. 

One of the things that is said fairly often around Government is 

that we are able to see farther because we stand on the shoulders 

of giants. As we go forward with this legislation, we will be focusing, of course, on the areas where we still disagree and where work 

still remains to be done and where issues are still not settled. But 

nothing in that focus going forward should take away from the remarkable achievement that you have made, Madam Chair, and 

that Senator Lieberman and Senator Warner have made in getting 

us to where we are today. 

As we go forward, what we will do will indeed be standing on the 

shoulders of, I don’t want to say giants, because that is not going 

to be a very good phrase—— 

Senator BOXER. Are you saying something about my physical—— 

[Laughter.] 

Senator WHITEHOUSE [continuing].——but we will certainly 

stand on the shoulders of your giant work. 

I do want to indicate some of the areas that I have concern and 

intend to work with the Chair and with the other members. The 

first is that our greenhouse gas targets need to be adequate and 
30 

they need to be enforceable. They need to have teeth behind them. 

I think those are important, basic points and that we need to make 

sure we are getting to where we need to be on that point. 

The second is that the auction needs to be adequate, but it also 

needs to have integrity. This is going to be an important process, 

in which many billions of dollars are going to wash around in it. 

Right now, the entity isn’t even subject to the Administrative Procedures Act, or even subject to the open meetings or open records 

laws. Only one of the members is subject even to advice and consent. 

When you look at how long it took to develop the stock markets, 

the Federal Reserve, when you look at some of the market efforts 

that have been made with California energy pricing, I think there 

is reason to work to improve and help guarantee the integrity of 

this auction process. 

Finally, when it comes to divvying up all the revenues that this 

will produce, I think it is vitally important that we focus on the 

low-income folks who will bear the costs as these signals flow 

through in varieties of products into their families’ pocketbooks. I 

am not convinced that we are there yet. 

So those are the key issues that I will be working on. I am very 

pleased that the wildlife and conservation issue that I have raised 

appears to be getting a very good response. I look forward to that 

being in the manager’s package, if that can be arranged. I hope to 

work with Mr. Darbee and the others in the utility community, 

going back to my days many years ago as a utility litigator, to try 

to further define the role of our public utilities, particularly the distribution companies who are well regarded by their clients who 

have consumer relationship already and who are in a position to 

be extremely helpful as we implement the conservation piece. 

So I will conclude by saying thank you for where we are so far. 

I look forward to working with this Committee in very good faith 

to get to where we need to be. I salute you for what has been accomplished. Thank you. 

Senator BOXER. Senator, thank you so very much. 

As I understand it, we are now ready to turn to our panel, which 

has been very patient. As you can see, this is not an easy issue for 

members on both sides. It is fraught with a lot of concern, emotion 

and we appreciate your patience. 

When I have to leave with Senator Inhofe, it is to make the closing arguments on the override of the WRDA bill. At that time, I 

am going to hand the gavel over to Senator Lieberman. 

Why don’t we get started now. Mr. Darbee, we are very pleased 

to have you back here. The Committee has already heard more 

than 140 witnesses on global warming. This is your second time 

back, so we welcome you, sir. You are from Pacific Gas and Electric, you are the chief executive officer and president. 

STATEMENT OF PETER A. DARBEE, CHAIRMAN, CEO AND 

PRESIDENT, PACIFIC GAS AND ELECTRIC CORPORATION 

Mr. DARBEE. Thank you, Chairman Boxer, Ranking Member 

Inhofe and members of the Committee. Thank you for inviting me 

to speak here today. 
31 

I am here because I am convinced with climate change we face 

an unprecedented challenge. A long-term crisis, but one that urgently needs near-term action. A global problem, but one that is 

unsolvable without this Nation’s commitment. A threat with consequences that defy the imaginable, but one that is going to require 

incredible imagination and ingenuity to defuse. 

This is truly going to be a thousand mile journey, and right now 

I believe the world is watching and waiting for us to take that proverbial first step. In our analysis, America’s Climate Security Act 

provides an appropriate starting point for continued debate and 

progress toward a responsible national policy on and in response to 

climate change. It presents a real opportunity to advance the discussion at the Federal level where frankly, it must occur. It presents a real opportunity to signal that we are serious about coming 

to grips with our greenhouse gas emissions. While it would benefit 

from modifications in some key areas, it presents a real opportunity to roll up our sleeves and get to work on this issue. 

We believe the bill’s cap and trade approach, together with a 

package of complementary measures, provides an effective way to 

begin ratcheting down America’s greenhouse gas emissions, while 

preserving the economy. We especially appreciate the focus on energy efficiency. Improving energy efficiency is one of the lowest cost 

options for managing growing energy demand while eliminating 

greenhouse gas emissions. In fact, the cost of energy efficiency is 

about half that for a new gas-fired power plant. Thus, energy efficiency helps make the U.S. economy more competitive in the worldwide marketplace. 

Policies and incentives should encourage and maximize improvements in energy efficiency throughout our economy. This bill wisely 

gives priority to these strategies. One important example is its support for decoupling, breaking the link between electric sales volume 

and electric company earnings. This is a proven strategy. It effectively removes the financial incentives for utilities to simply sell 

more power. We believe it is absolutely fundamental as a country, 

we want to unleash the full potential of our utilities to help consumers use less energy and use it more efficiently. 

The bill also deals wisely with the fact that costs for the Nation’s 

electric customers will be significant and need to be mitigated. A 

study by the U.S. Energy Information Administration suggests that 

households and businesses at the end of the supply chain will bear 

87 percent of the carbon dioxide compliance costs. Very importantly, this bill allocates emission allowances to electric distribution companies on behalf of their customers, based on the electric 

power load they serve. This is the right approach. It puts the value 

of the allowances in the hands of electricity customers who will ultimately bear the costs of shifting to new, cleaner technologies 

through their electric rates. 

Speaking more broadly about costs, the bill takes positive steps 

toward recognizing that a national program must balance the many 

economic, technology, environmental and societal challenges. As I 

alluded to earlier, we also do see the need for modifications. For 

example, we recommend adding clarity and transparency around 

the workings of the Carbon Market Efficiency Board. Also similar 

to the provisions that are in Senator Carper’s Clean Air Planning 
32 

Act, we see opportunities to expand the role of offsets to add measures that account for the link between power sector emissions and 

the natural variability in weather and precipitation, as well as 

strong incentives for clean generating technologies and recognition 

for early action. 

For example, the bill could also be modified to give more credit 

for early actions to reduce emissions and to speed up advances in 

renewables and other low-carbon technologies by distributing allowances based on the generator’s efficiency rather than on their 

historic emissions. We believe it is important for a share of allowances to be used to encourage investments in energy efficiency and 

new, clean generating technologies. 

In closing, I want to underscore again how important it is for our 

Nation to act meaningfully on climate change. In fact, the sooner 

we take concrete action, the smaller will be the impact on our economy. The optimist in me is certain that we are going to meet this 

challenge. But the realist in me knows that we can’t keep putting 

off our first step. This bill is a worthy point of departure for the 

long journey ahead, the result of which must be enactment of an 

environmentally effective and economically sustainable national 

policy. 

On behalf of PG&E, thank you for the opportunity provided 

today. I appreciate your commitment and I pledge my cooperation 

as you move forward. 

[The prepared statement of Mr. Darbee follows:] 

STATEMENT OF PETER A. DARBEE, CHAIRMAN, CEO AND PRESIDENT, 

PG&E CORPORATION

Chairman Boxer, Ranking Member Inhofe, and Members of the Committee, I am 

honored to appear before you this morning to offer my views on the America’s Climate Security Act of 2007. I believe climate change is one of the most pressing 

issues of our time. It is clear that the link between greenhouse gas emissions and 

the Earth’s warming climate is sufficient to warrant an aggressive response, the potential consequences serious and the need for action urgent. I am pleased that this 

Committee is showing leadership on this very important issue by having a hearing 

that will advance the legislative process. 

PG&E Corporation is an energy holding company headquartered in San Francisco, 

California and the parent company of Pacific Gas and Electric Company. Pacific Gas 

and Electric Company is California’s largest utility, providing electric and natural 

gas service to more than 15 million people throughout northern and central California. PG&E is a recognized leader in energy efficiency and has among the cleanest 

mix of electric power of any utility in the country. 

Our work on energy efficiency and support of clean generating technologies are 

part of a broad portfolio designed to provide advanced energy solutions to our customers. Through technology and innovation we allow our customers to meet their 

energy needs, while providing unique opportunities for them to manage their energy 

use, reduce costs, promote new technologies and address climate change. 

PG&E’S POSITION ON AMERICA’S CLIMATE SECURITY ACT

PG&E believes America’s Climate Security Act provides a solid starting point for 

constructively advancing a comprehensive, national response to and policy on climate change. The framework established in the bill—a cap-and-trade system with 

key complementary policies and measures—provides the foundation for a program 

that will achieve significant and sustained emission reductions from all sectors of 

the economy. Specifically, the bill includes provisions that prioritize energy efficiency and technology development and deployment, as well as innovative ideas to 

protect electricity consumers, manage overall program costs, and provide states with 

the resources to help address the unique needs of their communities and citizens 

as we transition to a low-carbon economy and adapt to a changing environment. 

America’s Climate Security Act takes positive steps toward recognizing that a na-
33 

tional program must balance the economic, technology, environmental and societal 

challenges of combating climate change. 

While we think that the bill provides a solid starting point, we recognize and anticipate that modifications will be made and issues debated as the legislative process 

continues, with a focus on winning passage this Congress. We plan to be a constructive voice throughout that process. For example, it is our recommendation that the 

cost containment measures in the bill become more robust by providing additional 

clarity and transparency regarding the role and workings of the Carbon Market Efficiency Board, and expanding the use and range of offsets available to meet compliance obligations. Additional measures should also be included that recognize and account for some unique characteristics of emissions from the electric power sector 

that are influenced by year-to-year variability in weather and precipitation. We also 

believe that aspects of the bill could be modified to more fully recognize early actions taken to reduce greenhouse gas emissions and to facilitate and encourage the 

rapid development and deployment of renewable generation and other low-emitting 

technologies. 

PG&E bases its assessment of the bill and our recommendations on a set of principles which guide our thinking on climate policy. These include: 

• Mandatory greenhouse gas reductions are necessary.—Voluntary programs alone 

are insufficient and will not send the appropriate price signal to U.S. industry to 

make a measurable impact on global climate change. Only a mandatory, national 

reduction program is capable of stimulating sustained action and investment on the 

scale required to meaningfully reduce emissions and establish the U.S. as a leader 

in the response to global climate change. 

• Market-based programs minimize costs and maximize innovation.—Marketbased strategies—such as cap-and-trade—provide the economic incentive and the 

flexibility to cut emissions in the most innovative, cost-effective ways. This approach 

is key to driving development of the next generation of clean, highly energy-efficient 

technologies and practices. 

• Long-term greenhouse gas targets provide a rational basis for action.—Addressing climate change will ultimately require stabilizing greenhouse gas concentrations 

in the atmosphere at a level that will avoid dangerous climate change. Setting ambitious, but achievable, targets now is important because it establishes a clear objective and sends the appropriate price signals from which incremental objectives and 

action plans can be created, as technologies emerge and scientific understanding 

progresses. 

• Broad-based participation leads to better, more cost-effective results.—Multi-sector participation creates efficiencies that will be essential to keeping costs low. A 

national program should eventually encompass all major sectors that emit greenhouse gases, with each sector responsible for its fair share of reductions. Sector-specific programs can, however, serve as a starting point for creating the infrastructure 

on which to base a broader economy-wide program and strategy. 

• Energy efficiency must be a top priority.—Improving energy efficiency is one of 

the lowest cost options for managing growing energy demand, while eliminating 

greenhouse gas emissions. Policies and incentives should encourage and maximize 

improvements in energy efficiency throughout the economy. For example, utilities 

are empowered to aggressively pursue energy efficiency and demand response programs when regulators ‘‘decouple’’ the link between revenues from the sale of electric power and utility earnings by setting fixed revenue levels and thus eliminating 

the financial incentive to sell more energy. 

• Investment in low- and zero-emission electric generation and other technologies 

is critical.—Policies should lower barriers and create incentives for investment in 

renewable power, nuclear power, advanced coal technologies with carbon capture 

and storage, distributed generation, advanced transportation options, such as plugin electric hybrid vehicles, and other low- and non-emitting technologies. Driving investment in these technologies, along with aggressive support for energy efficiency 

and demand response, will reduce greenhouse gas emissions, enhance and improve 

the efficiency and reliability of the nations’ energy infrastructure, create economic 

opportunities for American business, reduce reliance on imported fossil fuels, and 

support overall U.S. energy independence and security. 

• Early action deserves to be rewarded—not penalized.—Policies must recognize 

and provide credit to responsible parties that have proactively cut emissions before 

being required to do so. Ignoring prior efforts sends a signal that stepping up, taking risks, and taking responsibility is not something valued by policymakers. Importantly, failing to recognize early action puts these parties at a competitive disadvantage, forces them and their customers to ‘‘pay twice’’ for emissions reductions, and 

discourages similarly responsible initiatives in the future. 
34 

• Any climate program must be economically sustainable, achieve the ultimate environmental objectives of the program, and begin to address physical impact and adaptation issues.—Some economic sectors, geographic regions and income groups may 

be disproportionately impacted by both climate change impacts and mandatory 

greenhouse gas reductions. Any climate protection program needs to take account 

of these impacts and provide appropriate assistance to those impacted constituencies. At the same time, policies need to recognize that, ultimately, the majority 

of program costs will be born by energy consumers, and policies must therefore be 

structured to address this issue. 

• Near-term opportunities for cost-effective, verifiable greenhouse gas reductions 

should be pursued.—Policies should encourage actual greenhouse gas reductions, regardless of their geographic location or sector of the economy from which the greenhouse gas reduction opportunities originate. At the same time, a rigorous system 

must be developed to ensure the environmental credibility and integrity of these reductions. Taking this approach can help to encourage actions by other countries, 

spur technological innovation, reduce overall compliance costs, and offer ancillary 

benefits. 

• Standardized emissions reporting is an essential first step and must form the 

basis of any mandatory program.—Developing consistent and coordinated greenhouse gas emission inventories, protocols for standard reporting, and accounting 

methods for greenhouse gas emissions is fundamental to establishing a credible reduction program that is capable of tracking and verifying progress toward emissions 

goals and facilitating a tradable emissions credit system. PG&E was a Charter 

Member of the California Climate Action Registry, which is now working with 38 

other states to develop a consistent set of reporting standards and protocols. We believe that this effort can serve as a model for a national registry system and that 

any national system should leverage the work that the states have already done. 

These principles guided our analysis of the America’s Climate Security Act and 

serve as the basis for some of the specific comments raised above. The remainder 

of my testimony will provide additional detail on these and some other aspects of 

the legislation. We provide them in the spirit of our pledge to work cooperatively 

and constructively as the issue moves through the legislative process. 

Electric power consumers will bear the substantial share of the costs of a mandatory 

climate protection program, so including provisions to mitigate costs to electricity 

consumers is critical. 

We support the approach taken in the America’s Climate Security Act to mitigate 

costs to electricity consumers by allocating emissions allowances to load serving entities (e.g., regulated local electric distribution companies) on behalf of their electricity customers. 

This approach is consistent with those outlined in separate reports from the National Commission on Energy Policy, the California Market Advisory Committee, 

and the Natural Resources Defense Council; each have outlined an approach that 

avoids the inequities and the inefficiencies that stem from solely employing an Acid 

Rain-style, or input based, allocation approach, while benefiting electricity consumers. 

This allocation approach can help to mitigate some of the issues surrounding allowance allocation that arose during the first phase of the European cap-and-trade 

experience, and that we expect to manifest itself in electric markets throughout the 

U.S. For example, in Europe, power companies reflected the cost of allowances in 

their wholesale power prices regardless of whether they initially received the allowances for free. Electricity customers pay more for electricity and power companies 

receive a valuable asset in the form of allowances. We expect this phenomenon to 

occur in competitive wholesale and retail markets throughout the U.S. 

In regulated power markets, a different set of issues emerges when a large share 

of the allowances are allocated at no cost to generating facilities and energy regulators claim the allowances for the benefit of the energy consumers within their jurisdiction. First, some states import a significant share of their power and would 

never see the benefit of the allowances allocated to power plants outside of their 

borders. California, for example, imports 22 to 32 percent of its electricity supply 

and most power distribution companies, whether they are investor-owned or municipally-owned utilities, purchase power from the wholesale markets on behalf of their 

customers. So while customers in states that import a large share of their power 

supplies will face higher wholesale power prices, they see no benefit from the free 

distribution of allowances to out-of-state power plants, whether they operate under 

cost-of-service regulation or are merchant facilities. Again, this raises important equity concerns that should be factored into the allocation methodology. 
35 

Therefore, we believe that the allocation to electricity consumers is an important 

provision that must be preserved in the legislation as the debate moves forward. 

Taking this approach will distribute the allowance value where it should go—in this 

case, the electricity customer—who will ultimately bear the costs associated with 

making the transition to lower-emitting power generation technologies through the 

electric rates they pay each month. A study by the U.S. Energy Information Administration suggests that households and businesses at the end of the supply chain 

will bear 87 percent of CO2 compliance costs. In addition, according to the Congressional Budget Office, firms subject to a CO2 cap would pass along most such costs 

to their customers in the form of higher prices, with regressive impacts on U.S. 

households. The distribution of allowances for consumer benefit can help offset the 

price increases experienced by consumers. 

So, no matter if a consumer is from a competitive or regulated state, a coal-intensive or non-coal-intensive state, electricity consumers will experience higher costs; 

allocating allowances to local distribution companies will allow the revenues generated from the sale of allowances to be directed most effectively to end use consumers. We welcome the opportunity to offer further refinements to the language 

included in the America’s Climate Security Act to ensure that it both achieves its 

intended purpose—mitigating costs to customers without impacting competitive 

markets or masking the price of carbon—and does so in a way that provides state 

regulatory bodies with the oversight they need to ensure that they have the ability 

to best direct the proceeds to serve the unique needs of the consumers and communities whose welfare they are charged with protecting. 

Energy efficiency must be a frontline response. 

We are very pleased that the bill recognizes the important role that energy efficiency will need to play in meeting our nation’s climate change objectives. Existing 

energy efficiency technologies can help the U.S. to slow and stop current emissions 

trends and do so in a way that will increase the overall productivity and efficiency 

of the economy. The bill includes numerous provisions that provide significant incentives for states, utilities, manufacturers and consumers to aggressively pursue 

energy efficiency, such as: Providing incentives for States to pursue policies that 

‘‘decouple’’ electric utility revenues from sales and implement aggressive building 

codes and standards; targeting of auction revenues to ‘‘buy-down’’ costs of new energy efficient end-use technologies; and providing allowances to load serving entities 

for the amount of electricity their customers save. 

We believe that the energy efficiency provisions included in the bill have the potential to make significant contributions to achieving the emission reduction targets 

established. For example, the American Council for an Energy Efficient Economy estimated that the energy efficiency measures included in the House Energy Bill, 

many of which are incorporated in America’s Climate Security Act, could result in 

emissions reductions on the order of 550 million metric tons per year by 2030, while 

Environmental Defense suggested in their analysis that the savings could be higher. 

A recent McKinsey study said that, through energy-efficiency, we could reduce the 

growth rate of worldwide energy consumption by more than 50 percent over the 

next 15 years. And McKinsey said we can do this using the technology we have 

available today. Finally, PG&E is an underwriter of a study on the potential for energy efficiency savings in the U.S. While the results are not final, indications are 

that the potential for savings in the U.S. are on par with or even exceed the potentials McKinsey found in the worldwide study. These savings would not only result 

in positive greenhouse gas benefits for the country, but would also help to reduce 

energy costs in the process. What is needed is a shift in current policy to overcome 

market barriers to realizing the significant potential of energy efficiency and to accelerate its deployment. We believe that this bill provides a significant step in the 

right direction. 

Economic sustainability must be a key program objective. 

We are encouraged that the legislation recognizes that a holistic approach to cost 

containment must be taken and that measures need to be put in place that are designed to protect the overall economy—we believe the provisions included in the bill 

are a step in the right direction that will not only protect our environment, but also 

our economy and energy consumers. These provisions include allocation of allowances to local electric distribution companies on behalf of their customers, unlimited 

trading, offsets, banking, borrowing, as well as the recognition that there will need 

to be some other mechanism to ensure that unsustainably high CO2 prices do not 

jeopardize both the existence of the program and the expansion of our economy. 

In this regard, and as the legislative process progresses, we suggest that additional provisions be included to provide added transparency and clarity on the Car-
36 

bon Market Efficiency Board (CMEB) to ensure that the actions of the CMEB provide the necessary cost and environmental certainty for the program. For example, 

we think the 180-day period currently specified in the legislation—i.e., the period 

after the CMEB has carried out cost relief measures to expand borrowing, but before 

it may increase allowances for the applicable year—is too long to prevent potentially 

disastrous outcomes for companies and significant segments of the economy. During 

the California Energy Crisis, for example, the financial health of the state’s two biggest utilities was significantly impaired in less than 180 days, requiring the state 

to enter into high-price contracts and take on the electric purchasing obligation for 

electricity consumers. California’s electric consumers are still paying for these high 

price contracts today and the state was required to take on additional debt obligations. We suggest shortening the period to 30 days in order to avoid such outcomes; 

this will be particularly important in the first 10 to 15 years of the program. 

In addition, we suggest that additional criteria be included in the legislation to 

better define what the ‘‘trigger prices’’ would be to activate the CMEB powers. Currently the bill is virtually silent on what criteria will be used to determine the price, 

making it impossible for business to predict the future costs of the program, even 

within a reasonable range. Providing this clarity and transparency will remove the 

subjectivity from the workings of the CMEB and provide the certainty needed for 

investment planning by business going forward. 

We also think that it should be made explicit that the CMEB can purchase credits 

out of the market in order to maintain the lower limit of the price range established 

by the Congressional Budget Office. This type of ‘‘price collar’’ approach can help 

manage overall volatility and macro-economic costs, while at the same time provide 

a clear path for technology investors and ensure that there is a ‘‘price for carbon’’ 

that is recognized by the broader economy. We are continuing to think through 

these very complex and important issues surrounding the overall functioning and 

transparency of the CMEB and will share them with the Committee and publicly 

when we finalize our initial work. 

We also recommend including an additional provision that will help entities, particularly in the power sector, manage overall program costs and mitigate price volatility. Cap-and-trade programs for conventional pollutants are typically based on annual compliance periods. At the end of each year, affected sources retire allowances 

for each ton of emissions they generated. However, because of the long-term nature 

of the climate change problem, multi-year compliance periods, like those proposed 

by Regional Greenhouse Gas Initiative and the Clean Air Planning Act, are perfectly appropriate. This flexibility is particularly important for the electric power 

sector because emissions within this sector can vary significantly depending on 

weather and precipitation. For example, a dry year reduces hydroelectric capacity 

in California and the Pacific Northwest and increases PG&E’s reliance on fossilfired power plants, increasing carbon dioxide emissions in that year. Multi-year 

compliance periods, particularly in the early years of the program before companies 

have the opportunity to bank allowances, can allow them to manage variability such 

as this, while also containing costs and reducing price volatility within the sector. 

Finally, with regard to offsets, we are pleased that offsets are considered as a part 

of the bill and believe that they are an important piece of creating an effective approach to managing the overall costs of the program. Offsets can both help provide 

cost-effective compliance options and do so in a way that both reduces the emissions 

of uncovered sectors and sources and that provides added environmental benefits, 

both in the U.S. and abroad. We are particularly pleased that the bill recognizes 

the need for independent, third-party verification of the offsets, as that is a key 

piece of ensuring their overall credibility. 

We do have some suggestions for modifications to both the offset pool and the 

process. First, we suggest increasing the percentage of offsets allowed to be used as 

a compliance option. Again, we believe that offsets are an important cost control 

mechanism and one that can provide additional environmental and other ancillary 

benefits. Second, we suggest expanding the sources of offsets to include the preservation and restoration of wetlands and preservation of forests because research has 

shown that these activities represent one of the largest opportunities to sequester 

carbon dioxide and mitigate adverse consequences of climate change. Third, we recommend taking a performance-based approach to measuring the offsets consistent 

with the approach of the California Climate Action Registry. Fourth, all efforts 

should be made to ensure that the offsets are ‘‘real’’ (help reduce the overall emissions under the cap) and ′′permanent′′ (ensuring that the reductions are maintained 

over time). And, finally, while we appreciate that the Administrator is provided the 

authority to expand the offset pool beyond agriculture and forestry, we believe it is 

important to make explicit that these other actions are of equal weight and importance. 
37 

Encouraging the development and deployment of the most efficient, lowest-emitting 

power generation technologies is key. 

We appreciate that the bill recognizes that new sources of power generation will 

also need access to emission allowances. We are encouraged that the approach taken 

with regard to allocating allowances to new power generating sources is based on 

the performance or efficiency of a facility as opposed to the amount of pollution it 

emits. Basing allowance allocations solely on historic emissions only serves to reward and encourage the highest emitting resources and discourages rapid development and deployment of cleaner, lower-emitting technologies. 

We are actively pursuing renewable generation resources on behalf of our customers, and have made recent announcements on contracts we have signed with 

wind, geothermal, biogas and solar developers. Earlier this week we announced 

plans to contract for power from a solar facility being developed by Ausra Inc., in 

San Louis Obispo County, CA. Earlier this year, we announced a contract with 

Solel-MSP to purchase energy from the Mojave Solar Park. This project will deliver 

553 megawatts of solar power, enough power to serve 400,000 homes. We believe 

the potential for solar thermal technology, as well as other concentrating solar 

power (CSP) technologies, is significant. 

For example, a study by the National Renewable Energy Laboratory (NREL) on 

CSP potential in California and the rest of the Southwest indicated that CSP in 

California could produce upwards of 7 times the energy needed to serve the state. 

NREL also suggests that costs for CSP technologies are declining, from approximately 16 cents per kWh on average today, to approximately 8 cents per kWh in 

2015, assuming at least 4,000 MW of CSP were built by then to achieve ‘‘learning 

curve’’ benefits. (This compares to estimates for advanced coal with carbon capture 

and storage on the order of 11 cents per kWh or a new supercritical pulverized coal 

plant on the order of 6 to 6.5 cents, plus the cost of carbon, which could add upwards of 1.5 cents per kWh depending on carbon prices). 

This is just one example of the potential for renewable technologies. That is why 

we believe it is critical for a climate bill to not only support the transition to advanced coal technologies that release little or no greenhouse gases to the atmosphere, but to also provide significant support to accelerating the development and 

deployment of renewable technologies, as well. 

While we recognize that the bill attempts to balance the interests of incumbent 

utilities with the need to encourage the deployment of low carbon technologies, we 

would encourage you to consider (1) making clear that the percent of allowances allocated to new entrants increases over time, (2) expanding the definition of new entrants to include all forms of renewable energy (the bill limits allocations to fossil 

fuel-fired facilities only), and (3) modifying the definition of new entrants to include 

facilities that commence operation in 2000 or later. 

First, by gradually increasing the percent of allowances allocated to new entrants, 

investment in new, lower emitting generating technologies will be encouraged. The 

current bill directs EPA to establish a reserve of allowances for new entrants, leaving discretion for the Agency to establish a ‘‘fixed’’ reserve of allowances. We do not 

believe that this was the intent of the legislation. Rather, the size of the new source 

set aside should vary consistent with the methodology outlined in Sec. 3903(a)(2) of 

the bill (i.e., the average emission rate multiplied by the output of the facility). 

Second, by including all forms of renewable generation in the new entrant reserve, investment in low carbon technologies and more rapid development and deployment of these technologies will be encouraged (helping to achieve the price 

points projected by NREL for CSP technologies, for example). As currently drafted, 

the bill may have the unintended effect of encouraging investment in fossil fuel-fired 

generating technologies only. Finally, by defining new entrants to include facilities 

that commence operation in 2000 or later, the legislation will recognize the early 

investments that companies have made in modern, high efficiency power plants, potentially helping to alleviate some of the claims that will be made under the early 

action provisions and helping to free up more allowances for other early actions. 

Another alternative to adjusting the generator allocation to accommodate renewable generation would be to establish a set aside, similar to the bonus allowances 

established for carbon capture and storage. It is our understanding that this bonus 

allowance system is intended to accelerate the development and deployment of advanced coal technologies with carbon capture and storage; we suggest a parallel system be established for renewable technologies. Accelerating the deployment of all of 

these technologies will help to smooth the transition to a low carbon economy and 

provide additional economic opportunities. 
38 

Encouraging and recognizing early action is important to successfully achieving climate goals. 

Overall, we are pleased to see that the legislation includes provisions to recognize 

actions taken by companies, consumers and states, both as a result of voluntary actions and state greenhouse gas reduction programs. We think it is important for 

U.S. policy to send the signal that taking risks and taking early action will be recognized under this program. To that point, in Section 3302(b), we suggest changing 

the timeframe for receiving credit for early action from ‘‘date of enactment of this 

Act’’ to ‘‘the first allocation period.’’ There will clearly be a lag between the date of 

enactment and the first allocation period, and in those intervening years, this program should encourage companies to continue to take action. In the alternative, 

companies may refrain from continuing to take actions prior to this date. At the 

same time, since this section is giving credit to companies that need to comply with 

existing state-only or regional programs, many of these programs will come into 

force in the 2010 to 2012 time period. Therefore, reductions made in these years 

should be credited as well. We also believe it is appropriate to raise the overall limit 

in terms of allowances available to credit early actions. The 5 percent set-aside 

would equate to approximately 260 million metric tons of CO2-e in 2012. Given the 

spate of activity that has occurred in the economy and the plethora of state programs slated to come on line in the 2010 timeframe, this number of allowances may 

be inadequate to reward credible early action. 

THE TIME IS NOW

Our country has an historic opportunity to change the way we produce and use 

energy in ways that will lower the threat of climate change and improve our environment. The optimist in me is certain that we’re going to achieve this goal over 

the course of the next generation. But the realist in me knows that we can’t take 

this outcome for granted. Achieving it will be a very substantial challenge. And that 

is why we are committed to being a pragmatic, responsible participant in this effort. 

On behalf of PG&E, I want to thank you for the opportunity provided today. I 

appreciate the commitment of this Committee to addressing climate change and 

hope that as deliberations move forward, the focus remains on establishing a pathway to pass an environmentally effective and economically sustainable bill this Congress. I pledge my cooperation and support as the process moves forward on debating the America’s Climate Security Act of 2007 both in Committee and the full Senate. 

Thank you. 

Senator BOXER. Thank you so much for that encouraging testimony. 

Jonathan Pershing, Director, Climate, Energy and Pollution Program, Climate and Energy, World Resources Institute. 

STATEMENT OF JONATHAN PERSHING, DIRECTOR, CLIMATE, 

ENERGY AND POLLUTION PROGRAM, WORLD RESOURCES 

INSTITUTE 

Mr. PERSHING. Thank you very much, Madam Chair. 

My name is Jonathan Pershing. I am the Director of the Climate, 

Energy and Pollution Program at the World Resources Institute, 

which is a non-profit environmental think tank based here in 

Washington. I am very pleased to be here to speak to what I consider the most pressing environmental problem that faces the 

world, and to what I consider a very strong legislative proposal 

that places the United States firmly on the path to addressing that 

problem. 

My written testimony goes through a number of critical points, 

but I will emphasize only four here. First, the problem is one of 

enormous urgency. It requires very aggressive action if we are to 

hope to limit damages. The science is clear. The IPCC says that it 

is unequivocal that the earth’s climate is warming, and there is 

greater than a 90 percent probability that it is human activities 

that have caused it. It suggests we have to reduce emissions glob-
39 

ally 50 to 85 percent below 2000 levels by 2050 if we would like 

to see temperatures remain below 2 °F. If the United States doesn’t 

act quickly and aggressively, the rest of the world will lag, and we 

can’t afford to wait. 

My second point, the damages from climate will be enormously 

costly. A report authored last year by Sir Nicholas Stern, former 

lead economist at the World Bank, found that the costs of climate 

change could range from 5 to 20 percent of global GDP, a staggering $7 trillion. A few recent examples demonstrate the cost. 

California wildfires, which will increase, already estimated to run 

between $900 million and $1.6 billion for this series of events 

alone. The drought in the Southeast, the Atlanta Journal Constitution says it has already cost the Georgia landscape industry $1.2 

billion and the Ag industry $782 million, just this one event. Hurricanes, projected to increase, well, look at Katrina alone, the damages $70 billion to up to $130 billion. 

My third point, the cap and trade system and the complementary 

policies in this act provide strong environmental benefits and send 

a price signal to invest in new technology. A price signal is required in order to ensure that polluters recognizes their impact, 

begin to control what has been unfettered access to our atmosphere 

and pay for their pollution. The approach has two main attractions: 

One, cap and trade, which is clear and specific limit on emissions, 

creating a price that achieves a target lower than what would otherwise be possible. WRI has conducted a preliminary analysis to 

quantify the reductions that might be expected. The Act would subject 82 percent of all U.S. emissions to mandatory reduction obligations, nearly full economy-wide. 

The bill also includes complementary measures designed to 

achieve reductions in emissions from sectors outside the cap. Our 

estimate is that the bill would reduce covered emissions from 2005 

levels by 17 percent in 2020 and by 71 percent in 2050. Total U.S. 

emissions are estimated to be 16 percent below 2005 levels by 2020 

and 27 percent below 2005 by 2030, if we assume, based on EIA 

numbers, a growth of 0.8 percent in the uncovered sectors. Complementary policies in the current bill do partly offset some of this 

growth. 

The cap and trade regime sends a price signal to the market and 

pushes investments to reduce emissions. There is a huge range of 

technology options at low to modest cost. McKinsey, the consulting 

company, suggests that more than 4 billion tons of abatement could 

be provided with current technology at prices below $50 a ton. 

Other estimates support the low price. Duke University’s Nicholas 

Institute suggests that GDP would increase with no policy about 

112 percent between 2005 and 2030—112 percent with no policies. 

With the policies, 111 percent, less than 1 percent difference in the 

total inclusion of all the policies here. 

The bill also provides a number of mechanisms to help control 

compliance costs: Rewards for early action, capture and storage; a 

free and very substantial allocation of 40 percent of the total allowance pool; allocation borrowing and banking; offset provisions; the 

Carbon Marketing Efficiency Board. These are likely to succeed in 

smoothing the price, although they are somewhat controversial. 
40 

Finally, my last point. The bill sends a strong international signal. The global community is assembling in one month in Indonesia 

to continue discussions about global action. There will be three 

issues on the table: Mitigation efforts by major emitters, forestry; 

and approaches to help countries adapt to climate change. This bill 

signals to the United States that the United States is acting and 

will be taking steps. It also acknowledges the problem of forestry 

and seeks to move forward on that front. However, the bill does not 

address the issue of adaptation, and this could well be an area 

where you, Madam Chair, and the Committee, may choose to focus 

further. 

Thank you very much for providing me the opportunity to speak. 

I appreciate the opportunity and the importance of this session. 

[The prepared statement of Mr. Pershing follows:] 

STATEMENT OF JONATHAN PERSHING, WORLD RESOURCES INSTITUTE

My name is Jonathan Pershing, and I am the Director of the Climate, Energy and 

Pollution Program at the World Resources Institute. The World Resources Institute 

is a non-profit, non-partisan environmental think tank that goes beyond research 

to provide practical solutions to the world’s most urgent environment and development challenges. We work in partnership with scientists, businesses, governments, 

and non-governmental organizations in more than seventy countries to provide information, tools and analysis to address problems like climate change, the degradation of ecosystems and their capacity to provide for human well-being. 

I am very pleased to be here to speak to what I consider the most pressing environmental issues faced by the world—and to what I consider a very strong legislative proposal to place the United States firmly on the path to addressing the problem. 

URGENCY AND SCALE

The Earth is warming, primarily due to human activities. The fossil fuels that 

have led to huge increases in human productivity and great improvements in 

human well-being, together with significant deforestation, have been the most important causes of global warming. The buildup of carbon dioxide and other greenhouse gases (GHGs) is accelerating, and unless we act very soon to control emissions 

warming, will rise to very dangerous levels during our children’s lifetimes. 

In February 2007, the Intergovernmental Panel on Climate Change (IPCC)—the 

official science process endorsed and supported by the world’s governments and in 

which the United States was an active participant) released its most recent report. 

The report states that it is ‘‘unequivocal’’ that Earth’s climate is warming, and confirms that the current atmospheric concentration of carbon dioxide and methane, 

two important GHGs, ‘‘exceeds by far the natural range over the last 650,000 years.’’ 

Further, the IPCC concludes that it is now ‘‘very likely’’ (greater than 90% probability) that GHG emissions from human activities have caused ‘‘most of the observed increase in globally averaged temperatures since the mid-20th century.’’ 

Indeed, the impacts of warming have become increasingly evident. Sea ice in the 

Arctic is shrinking, and Greenland’s massive ice sheet is receding—far faster even 

than predicted in the IPCC report released prior to this summer’s unprecedented 

melting. Glaciers are rapidly shrinking from the Rockies to the Alps. There have 

been fatal heat waves in Northern Europe and a three year drought in the Amazon. 

Farmers and hunters across the United States report changing growing seasons and 

changing bird migration. If we already see these kinds of damages with only about 

0.6 °C (1 °F) of warming, the nature of future damages, with temperatures ranging 

to 2°C and higher, are likely to be catastrophic. 

The IPCC also gave us a clear sense of the emissions reductions required to limit 

the damages—and a timeframe in which to achieve them. The IPCC suggests that 

we must reduce emissions globally by as much as 50–85% below 2000 levels by 2050 

if we wish to see global average temperatures remain below 2 °C of warming. We 

must stabilize global emissions by 2035. 

The warming occurring today is the result of greenhouse gases emitted over the 

past half century. The United States, with 4.6 percent of the world’s population, has 

contributed 28 percent of the emissions currently in the atmosphere.i Our strong 

economic growth in the 20th century was fueled by fossil fuel technologies we in-
41 

vented. And it is clear that today the U.S., with the most advanced economic and 

technological resources and capacity, must take the lead in transforming the global 

economy to a low-carbon future. We cannot expect the rest of the world to act if we 

do not—or expect that countries with per capita incomes 1⁄10 of our own to act until 

we do. 

The emissions limits we set for the U.S. matter. Action by the U.S. will be seen 

as the benchmark against which other countries will measure their commitments. 

The U.S., with its historical responsibility for the current build up of greenhouse 

gases in the atmosphere, will continue to be a key contributor to temperature rise— 

even as other countries may pass us in annual emissions levels. With our European 

allies committing to a 20–30 percent reduction in greenhouse gas emissions by 2020 

to align with the science, U.S. and European action and leadership could help advance the efforts of other countries to take action. 

U.S. action alone will not be enough to reduce global emissions to the extent required. It is widely understood that without timely and aggressive U.S. action, a 

successful international agreement on climate change will be impossible to achieve. 

The policies you are developing here will have the potential to demonstrate the 

American commitment to global action on climate change, and consequently, to 

move the world. 

THE COST OF CLIMATE DAMAGES

The U.S. emitted 7,260 billion tons in 2006,ii and because greenhouse gas pollution is not regulated, these harmful emissions had no financial consequence to those 

who produced them—but significant consequences to future generations. A price signal is required in order to ensure that polluters recognize their impact, begin to control what has been unfettered access to our atmosphere, and pay for their pollution. 

Economists consistently point out that there is no free lunch; climate change is no 

exception. A report authored last year by Sir Nicolas Stern, former lead economist 

at the World Bank and advisor to then UK Chancellor of the Exchequer (and now 

Prime Minister, Gordon Brown), found that the costs of climate change could range 

from 5 to 20 percent of global GDP. iii In dollar terms, this is equal to about $6.98 

trillion—a staggering cost against which our current mitigation price expectations 

pale.iv

A few recent examples demonstrate the point: The California wildfires (a phenomenon expected to increase considerably in a warmer world), are estimated by 

Risk Management Solutions, a leading provider of products and services for catastrophe risk management, to already run between $900 million and $1.6 billion.v The 

drought in the Southeast, a potential harbinger of future events, has led the governors of Florida, Georgia and Alabama to request aid from the President, and has 

been reported by the Atlanta Journal-Constitution to have already cost the Georgia landscape industry $1.2 billion in losses and the agricultural industry $782 million 

in losses.vi Among the most devastating impacts likely to arise from climate change 

is increased frequency of high intensity storms and hurricanes. According to the 

Congressional Budget Office, damages estimated from Hurricane Katrina alone are 

expected to run between $70 and $130 billion. 

CAP AND TRADE: A SIGNAL FOR INNOVATION

It is in the context of the clear understanding of the science and impacts of climate change that strong and prompt action is required. The Climate Security Act 

provides this. As with all cap-and-trade regulatory systems, the approach in S. 2191 

has two main attractions: it puts a clear and specific limit on aggregate emissions 

and it achieves the emissions-reduction target at lower cost than would otherwise 

be possible. The cap establishes certainty as to the total amount of emissions that 

will occur under the program. Meanwhile, the ability to trade emissions allowances 

yields cost-savings by promoting emissions reductions at those sources that are able 

to achieve the reductions most cheaply. Trading emissions allowances lowers costs 

to the facilities covered under the program. In doing so it reduces economic impacts 

on workers, consumers, and taxpayers. 

THE ENVIRONMENTAL BENEFITS

While several organizations are preparing full economic models of S. 2191, WRI 

has conducted a preliminary analysis to quantify the emission reductions that might 

be expected under this bill. Our analysis has included three elements of the legislation: 

1. Coverage of the cap 

2. Emission targets 

3. Complementary policies 
42 

1 Uncovered emissions growth in WRI’s analysis is based on EIA projections of these sectors 

under business as usual reference case, and does not capture the potential interactions across 

sectors. Our assessment of emissions trends uncovered sectors may thus be conservative. 

COVERAGE

It is highly unlikely that all U.S. emissions would ever be directly covered in any 

cap and trade regime. The coverage of the EU–ETS during phase one was approximately 46 percent of total EU emissions. The Northeast states’ Regional Greenhouse 

Gas Initiative applied its initial caps to the power sector alone, accounting for approximately 22 percent of total regional emissions. The limited coverage of these 

programs reflects the fact that some sources of emissions are easier to monitor and 

track, while others are more onerous to regulate. Nevertheless, maximizing the ability of a carbon market to find low-cost abatement options generally depends upon 

the inclusion of diverse sources of emissions. More comprehensive coverage will be 

necessary to achieve economy-wide targets while keeping compliance costs to a minimum. 

S. 2191 (as amended in subcommittee to include emissions from the use of natural 

gas in the residential and commercial sectors) subjects 82 percent of all U.S. emissions to mandatory reduction obligations. The bill covers emissions from significant 

facilities in the power, industrial and transportation sectors as well as a majority 

of emissions in the residential and commercial sectors. The bill includes both reduction obligations, and complementary measures designed to achieve reductions in 

emissions from sectors outside the cap, from sectors where a price signal alone is 

unlikely to spur a technological transformation, and includes recognition of state circumstances and cost mitigation requirements. 

EMISSION TARGETS

S. 2191 sets straightforward annual budgets for covered facilities, and does so 

with absolute rather than relative numbers. WRI estimates that the bill would reduce covered emissions from 2005 levels by 17 percent in 2020 and by 71 percent 

in 2050. Over the life of the program covered emissions are reduced at an average 

annual rate of just over 3 percent. However, as noted above, nearly 20 percent of 

U.S. emissions are not covered by mandatory reduction targets under the cap. If we 

assume a rate of growth of emissions of approximately 0.8 percent for these uncovered sectors, total U.S. emissions are estimated to be 16 percent below 2005 levels 

by 2020 and 27 percent below 2005 levels by 2030. Interactions between covered and 

uncovered sectors of the economy, particularly in the out years of 2030 to 2050, are 

difficult to assess.1 Complementary policies in the current bill will only partly offset 

the growth in the uncovered sectors, and Congress will need to further review and 

adopt additional policies (see chart 1). 

COMPLEMENTARY POLICIES

Although specific mandates are not set for all sectors, S. 2191 does establish a 

wide variety of complementary policies to address emissions in these uncovered sectors. While many of the policies act also as cost-containment mechanisms (reducing 

overall compliance costs from ‘‘covered sectors’’), there are several that explicitly reduce emissions outside the cap. In particular, S. 2191 incentivizes reductions 

through allowance allocations. The most significant of these allocates allowances to 

the USDA to promote biological sequestration through domestic agriculture and forestry programs. While estimating these additional emissions reductions is subject to 

considerable uncertainty, figure 2 below shows a potential range that may result 

from the combined policies. 

While the intent of the bill is excellent, there may still need to be some strengthening of the rules for biological sequestration, in particular to ensure that reductions incentivized through this program would be additional and permanent, and 

that appropriate rules be developed to guarantee environmental benefits from this 

aspect of the program. 

UNDERSTANDING COSTS

S. 2191 sends a price signal to the market. By capping GHG emissions, it implicitly establishes a value on such emissions, and pushes investors to design and implement policies to reduce them. Economic and technology analysis suggests that 

the range of options to reduce emissions at modest costs is large. 

A study being undertaken by McKinsey vii suggests that a wide variety of technologies, with more than 4 billion tons of abatement potential, would penetrate the 

market at costs below $50/ton of carbon (see figure 1 below). However, even such 
43 

a figure is misleading: a carbon price of $50/ton does not imply a loss to the economy 

of this amount. Rather, it implies a shift—from systems and operations that are 

GHG intensive to those that are not. In turn, this suggests we are likely to see 

major investment in new energy and transport technologies that could continue to 

power the U.S. economy. 

The subject of overall economic cost of emissions limits has been much studied. 

Modeling of S. 2191 as introduced into subcommittee (with only modest differences 

to the current draft proposal) and other similar scenarios have estimated that the 

cost of allowances would rise to $26.27 (2005 dollars) by 2020 (see table 1) and to 

$56.71 by 2030.viii Since the economy must now internalize the cost of carbon where 

it was otherwise free, there is the potential for these costs to influence economic 

growth. 

However, the economic impact of those prices is extremely small. Duke University’s Nicholas Institute conducted an analysis of the earlier bill draft submitted by 

Senators Lieberman and Warner to the subcommittee. This analysis showed that in 

a business as usual scenario, GDP would increase 112% from 2005 levels by 2030. 

Under S. 2191 GDP is projected to rise by about 111% from 2005 levels by 2030. 

The decline in economic activity is less than 1% of GDP over the course of the next 

two decades. 

In the Nicholas Institute analysis, by 2050, the projected increase in GDP from 

2005 levels is 238%—and under the bill, this would still increase by 236.4%. This 

means that in 2050, the same overall economic growth would be observed in the 

economy, but it would occur about 8 months later in the calendar year. The scale 

of the U.S. economy is huge, and even small percentages in growth are thus large 

absolute numbers. The context must be taken into account, however, and here it is 

clear: action on climate can be achieved at quite modest costs. 

Table 1 provides the results of several economic modeling studies that reviewed 

cap and trade programs similar to S. 2191. The comparison looks both at the price 

per ton of carbon, and the impact of that price level on GDP. 
44 

None of the economic analysis developed to date has included a complete accounting of the complementary policies or the explicit uses of the emissions trading revenues accruing to the government from an auction of allowances in minimizing economic impacts. These can be substantial. For example, WRI recently facilitated a 

multi-stakeholder process in Illinois to develop recommendations for a state climate 

mitigation program. The diverse stakeholder group was charged with submitting 

policy recommendations to reduce total state-wide emissions to 1990 levels by 

2020—comparable to near term targets under consideration in S. 2191. Illinois is 

representative of many U.S. states as it relies on coal for about half of its electricity 

generation, is home to both large metropolitan areas and rural agriculture, and is 

currently witnessing significant growth in its GHG emissions. The policies under 

consideration included a cap and trade program for large emitters in the industrial 

and electric generation sectors as well as several complementary policies addressing 

energy efficiency, renewable energy, CCS equipped coal generation and reducing 

GHG emissions from passenger vehicles. In short, the process reviewed many of the 

approaches proposed in America’s Climate Security Act. 

ICF Consulting was contracted by the Illinois to analyze the economic costs of the 

policy package. Economic modeling of the entire package of recommendations found 

that the price of allowances in the cap and trade program rose to over $18/tonne 

in 2020, but that even at this price, state GDP increased by nearly 1 percent as 

compared to business as usual. Personal disposable income and net employment saw 

similar gains.x These results are in line with those of a similar study led by David 

Roland-Holst at the University of California—Berkley which looked at the economic 

effects of California’s GHG reduction policies.xi The policy package in that study, 

which also sought to reduce GHG emissions to 1990 levels by 2020, found that a 

cap on emissions in combination with complementary policies achieved up to a 3.4 

percent increase in state GDP as well as an increase in net employment. These state 

examples show that robust and comprehensive climate policy can meet environmental goals while enhancing the nation’s economy. 

The positive economic impacts of the implementation of a climate change regime 

are obvious. The U.S. economy has grown while becoming more efficient and reducing pollution for decades. A price on carbon in conjunction with appropriate complementary energy policies can accelerate this positive trend. Indeed, as existing 

and new American technologies are likely to thrive in a carbon constrained world, 

new business opportunities will plausibly lead to a more robust economy that can 

generate new jobs while increasing national energy security. 

EASING THE TRANSITION: STRATEGIES TO CONTAIN COSTS

Although new opportunities will be significant, the cap-and-trade program will 

create uneven costs across the economy. In designing an effective cost containment 

strategy, five economic burdens must be balanced: 

• cost to any particular company 

• cost to an industry 

• cost to a region 

• cost to a class of consumers 

• cost to the economy 

Designing cost mitigation programs will therefore require different approaches depending on whose costs one mitigates. There are four ways in which the bill seeks 

to provide economic mitigation assistance: (i) free allocation of pollution allowances 
45 

to regulated entities, (ii) a public auction to generate revenue for investment in new 

technologies and provide low income assistance, (iii) inclusion of energy efficiency 

and consumer and state programs as recipients of free allowances for public purposes, and (iv) specific cost mitigation programs such as offsets and borrowing. 

In addition to rewards for early action and carbon capture and sequestration, the 

bill provides regulated entities a free allocation of 40 percent of the total allowance 

pool, phased out over time, disappearing entirely after 24 years. If we assume a 

price of $20/ton of CO2 equivalent, this implies a value of $45 billion in transition 

assistance to regulated entities in the first year of the program. For comparison, a 

recent Congressional Budget Office report estimated that as few as 15 percent of 

freely allocated allowances could allow for regulated entities to remain ‘‘whole’’ as 

they transition into the new low-carbon economy.xii

Auctioning allowances and using the revenues to cut distortionary taxes may be 

the most efficient and least expensive approach to implementing a market-based 

system according to economic models.xiii Auctions may also allow the government to 

raise revenue for any number of other purposes, including technology investments 

or deficit reduction. Furthermore, evidence exists that auctions tend to stimulate 

greater innovation than free allocations and may lead to more efficient investments 

in technology.xiv Real-world complexities, however, such as multiple distortionary 

policies, monopoly power, and differences among regulated firms, complicate the 

issue, making the optimal choice between full auctioning and full free allocations 

of allowances less clear.xv However, S. 2191 makes a clear statement regarding the 

importance of auctioning, starting at a level that is far higher than proposed in 

other legislation, and currently surpassed only by individual state proposals in the 

Regional Greenhouse Gas Initiative program in Northeast (where most states plan 

to auction 100 percent of their allowances). 

While an auction tempers the politics of allowance distribution, there are still important political decisions that must be made regarding the distribution of auction 

revenues. Such revenue will be key to mitigating the costs of the program on lowincome households, for worker transition programs, as well as for funding new low 

carbon technology programs that will ultimately lower overall compliance costs. By 

making specific provisions for such allocations, S. 2191 seeks to address the potential regressivity of the policy while providing dedicated funding to develop the technologies required to reduce emissions and ensure the U.S. remains economically 

competitive. 

Since markets do the best job of controlling costs over time, the most effective cost 

mitigation policy will be based upon the robustness of the cap and trade program. 

There have been concerns raised that large price fluctuations may arise in a new 

GHG market. Such large price changes create risks both to firms in terms of technology investment, and potential cost to consumers. S. 2191 attempts to limit price 

distortions and fluctuations through two mechanisms: (1) allowance borrowing and 

banking and (2) the establishment of a Carbon Market Efficiency Board which can 

adjust the amount and terms of borrowing to limit negative economic impacts. Additional consideration will be needed to assure that the Board has a clear, transparent 

and effective governance structure. 

Offsets are another design element that can contain costs. Offsets provide regulated entities with additional options to reduce GHG emissions that occur outside 

of the cap. This is desirable as many offset opportunities are estimated to be of 

lower cost than abatement options at regulated facilities. A well designed offset program that contains a framework to insure that reductions are real, additional, permanent and verifiable can lower overall compliances costs while maintaining the environmental integrity of the program. S. 2191, contains a design framework that 

should achieve these dual outcomes, including offsets from both within the U.S. and 

internationally. 

INTERACTION WITH STATES

To date, states have been leading the policy response to climate change; California’s AB32 and the Regional Greenhouse Gas Initiative serve as two notable examples. Recent WRI work on the influence of states in federal policy finds that a common development is for the federal government to (at least partially) preempt state 

authority, and set a regulatory floor to which all states must adhere (but which 

states may choose to exceed. xvi

S. 2191 follows this tradition by applying a uniform national policy floor, but by 

allowing states to exceed this floor based on their particular circumstances. This approach achieves a more robust environmental outcome than one that stifles the innovation that will almost certainly emerge from continued state experimentation. 
46 

However, it also serves to set a national standard that will reduce compliance costs 

for industry, which legitimately fears a patchwork of state regulation. 

S. 2191 follows state precedent in another, equally important fashion: it explicitly 

instructs the EPA to cooperate and harmonize federal emissions reporting and 

tracking requirements with the Climate Registry, a common emissions reporting 

and tracking platform in which 40 states currently take part. The Climate Registry 

uses generally accepted accounting protocols that are common in the private sector 

and in other GHG programs around the world. By adopting this standard, the bill 

provides for a common infrastructure for both state and federal programs, and one 

that already has national buy-in. 

INTERNATIONAL INTERACTIONS

The global community is assembling in a month in Indonesia to continue discussions about the global action required to protect the climate. There are three major 

issues on the table: mitigation efforts by major industrial emissions sources and 

emitting countries, reducing emissions from deforestation and encouraging sustainable forest carbon management, and programs and approaches to help countries, 

ecosystems and vulnerable populations adapt to climate impacts. 

America’s Climate Security Act focuses on U.S. mitigation efforts, but also clearly 

acknowledges forestry through both the inclusion of an offsets program, and through 

an innovative set aside for forestry both in the U.S. and globally. In the U.S. and 

around the world, impacts and costs of climate change are already mounting and 

hurting the world’s poor populations and harming fragile ecosystems and water resources. S. 2191 provides only one lens for this issue—the national security implications for the United States of a fragile natural resource base and vulnerable populations. The broader adaptation agenda is both a responsibility and an opportunity 

for the U.S. to rebuild its international leadership in the climate arena and support 

robust private and public engagement to help protect people and the planet. 

Just as S. 2191 provides a clear roadmap for industry in the U.S. on the emissions 

reductions required through its targets and timetables, the bill also signals to the 

international community that the U.S. will take the steps required to reign in its 

emissions and its impact on people and ecosystems around the world. With the U.S. 

and Australia currently reviewing climate policies, and Europe’s cap and trade program underway, China releasing its National Climate Change Plan, and the Meeting of the Parties next month, we can chart a course for a new international agreement by 2012. 

Thank you Madame Chair. I appreciate the opportunity to present this testimony. 

I welcome any questions you or the committee might have. 
Chart 1 

Emissions cap and total economy-wide emissions under S. 2191 

12000 

(J) 10000 

N 

0 

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0 

C ----

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U 6000 1- -- ........ ';:: 

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E 4000 

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2000 

2000 2005 2010 2015 2020 2025 2030 2035 2040 2045 
Chart 2 

12000 

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0 

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c 

0 

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4000 

2000 

o 

Potential emission reductions under S. 2191 

Potential range 

of reductions with 

._ ... J'91!'Q!"fTlenlalYPolicies 

1990 levels 

---

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2000 2005 2010 2015 2020 2025 2030 2035 2040 2045 2
49 

NOTES 

i Environmental Protection Agency, October 1, 2007. ‘‘EPA Analysis of BingamanSpecter Request on Global COP2 Concentrations’’. iiSee EPA GHG Inventory; http://www.epa.gov/climatechange/emissions/ 

downloads06/07ES.pdf iiiStern, Nicholas. 2006. Stern Review on the Economics of Climate Change. (Cambridge University Press: Cambridge, United Kingdom). iv In the Stern report, the upper bound of projected costs of climate change were 

estimated at λ3.68 trillion. At the time of the report’s release, this was equal to 

$6.98 trillion. vSee http://www.rms.com/ viSee http://www.ajc.com/news/content/news/stories/2007/10/20/ 

waterecon1020.html?cxntlid=inform viiThis figure, from new analysis underway byu McKinsey, is posted by the Wisconsin DNR as part of their work to design a state climate change program: http:// 

dnr.wi.gov/environmentprotect/gtfgw/documents/Ma3TF20071019.pdf viiiShowalter, Sharon. October 23, 2007 memo to Joe Chaisson, Clean Air Task 

Force. Re: Warner-Lieberman Bill NEMS Modeling Analysis. ix Nicholas: Murray, Brian; Ross, Martin. 2007. ‘‘The Lieberman-Warner America’s 

Climate Security Act: A Preliminary Assessment of Potential Economic Impacts.’’ 

(Duke University: Durham, North Carolina). Data from ‘‘Warner-Lieberman Tighter 

Cap Scenario’’ is used to represent the tighter cap of S. 2191 in comparison to the 

caps of the annotated table of contents modeled in the core scenario. 

MIT—Paltsev, et al. 2007. Assessment of U.S. Cap-and-trade Proposals. MIT Joint 

Program on the Science and Policy of Global Change Report 146. Data from ‘‘203 

bmt limited sectoral coverage’’ scenario is used to represent less than full-economy 

coverage of S. 2191. 

CATF: Showalter, Sharon. October 23, 2007 memo to Joe Chaisson, Clean Air 

Task Force. Re: Warner-Lieberman Bill NEMS Modeling Analysis. x Illinois Climate Change Advisory Group, forthcoming. Report of the Illinois Climate Change Advisory Group to Governor Rod R. Blagojevich. For an overview presentation of modeling results please see http://www.epa.state.il.us/air/ 

climatechange/documents/07–09–06/modeling-of-policy-proposals.ppt xi Roland-Holst, Robert, 2006. Economic Growth and Greenhouse Gas Mitigation 

in California. University of California—Berkley. xii Congressional Budget Office, 2007. Trade-offs in Allocating Allowances for COP2

Emissions. Economic and Budget Issue Brief. xiiiFullerton, D., and G. E. Metcalf. 2001. Environmental Controls, Scarcity Rents, 

and Pre-existing Distortions. Journal of Public Economics 80(2): 249–67. Goulder, 

L. H., et al. 1999. The Cost-Effectiveness of Alternative Instruments for Environmental Protection in a Second-Best Setting. Journal of Public Economics 72(3): 329– 

60. xiv Adoption: Evidence from the U.S. Lead Phasedown. Journal of Industrial Economics 51(3): 317–43. Milliman, S. R., and R. Prince. 1989. Firm Incentives to Promote Technological-Change in Pollution-Control. Journal of Environmental Economics and Management 17(3): 247–65. Popp, D. 2003. Pollution Control Innovations 

and the Clean Air Act of 1990. Journal of Policy Analysis and Management 22(4): 

641–60. xv Babiker, M. H., et al. 2003. Tax Distortions and Global Climate Policy. Journal 

of Environmental Economics and Management 46(2): 269–87. Fischer, C., I. W. H. 

Parry, and W. Pizer. 2003. Instrument Choice for Environmental Protection When 

Technological Innovation Is Endogenous. Journal of Environmental Economics and 

Management 45(3): 523–45. xvi Aulisi, et al. 2007. Climate Policy in the State Laboratory: How States Influence Federal Regulation and the Implications for Climate Change Policy in the 

United States. World Resources Institute. 

Senator BOXER. Thank you, sir. 

Anne Smith, vice president, CRA International. 

STATEMENT OF ANNE E. SMITH, PH.D., VICE PRESIDENT, CRA 

INTERNATIONAL 

Ms. SMITH. Madam Chairman, members of the Committee, thank 

you for inviting me. I am Anne Smith, a vice president of CRA 
50 

International, an economics consulting firm. My testimony is my 

own and does not represent CRA or any of its clients. 

The economic impacts of any new policy should be carefully examined when that policy will be expected to dramatically alter patterns in consumer behavior and in markets. This is certainly the 

case for S. 2191. Using CRA’s MRN–NEEM model for assessing climate policy costs and considering many different sets of assumptions, I estimate that the present value of S. 2191’s net costs to 

U.S. consumers will be between $4 trillion and $6 trillion through 

2050. 

In terms of GDP, in 2015 alone, GDP would be lower by about $160 billion to $250 billion. Eventually, the annual loss in U.S. 

GDP would increase to the range of $800 billion to $1 trillion, stated in today’s dollars. For context, these losses exceed our current 

annual outlays for Social Security. 

In terms of jobs, by 2015 alone, S. 2191 would result in net job 

losses of 1.2 million to 2.3 million jobs. These are net losses, despite a substantial increase in so-called green jobs. But the most 

troubling aspect to me of the impact estimates is their speed of 

change. Just to meet the 2015 cap, U.S. electricity generators could 

have to cut their use of coal by as much as half, and increase their 

use of natural gas by as much as 70 percent. These shifts are found 

to be necessary, despite large reductions in electricity use and very 

large increases in renewables. 

To deliver that much more gas in a space of just a few years 

would likely cause gas prices to spike far higher than the 15 to 20 

percent price increases that our and other equilibrium models indicate. The problem is that the caps in S. 2191 are far ahead of the 

technologies needed to produce deep emissions cuts. Everyone likes 

to say technology is the solution, and it will be. But the technologies they are talking about will take a lot more time than S. 

2191 is allowing. Meeting the S. 2191 caps would require large additions of coal-based generation that captures and stores carbon 

emissions underground. 

My estimates including building as many new power plants with 

this technology as the entire current U.S. fleet of coal-fired power 

plants by 2050. My estimates also project enough vehicles using 

enough new zero emitting fuels to displace all of the vehicle emissions from the current U.S. vehicle fleet, but by 2050. These 

changes plus much more nuclear power at the key technological solutions that are on the horizon. They can contribute to very large 

reductions by 2050. 

However, even by 2025, only about one-tenth of this technological 

potential can be in place, and effectively none of it can help meet 

the caps before 2015. Renewables and energy efficiency can start 

earlier, and they do in my analyses. But their potential is just not 

sufficient to meet the stringent, near-term targets of S. 2191 cost 

effectively. Consequently, initial compliance involves a disruptive 

large switch toward natural gas, a fossil fuel that emits a lot of 

CO2 in its own right. This is a switch that hardly moves us toward 

greater energy security during that time period prior to about 

2025. 

But then by about 2025, all of that new natural gas infrastructure and generation will lose market share to the new low-carbon 
51 

1http://www.crai.com/pubs/publ7748.pdf 2Placing sectors that are not covered by the proposed cap into the offsets category still limits 

the program’s efficiency. 

technologies as they start to come online, the ones that were needed all along. The rapidly built-up infrastructure supply chains for 

natural gas will become under-utilized within about 15 years of 

being created. We will need to restart the coal mines and the transportation network that were shuttered so rapidly only 15 years before. 

S. 2191 sets ambitious caps, but its near-term ambitions are far 

ahead of the necessary technologies. Despite the economic risks 

that this poses in the near-term, the bill does not provide any protection from leakage when manufactured goods from unregulated 

countries out-compete our own. 

[The prepared statement of Ms. Smith follows:] 

STATEMENT OF ANNE E. SMITH, PH.D., VICE PRESIDENT, CRA INTERNATONAL

Madame Chairman and Members of the Committee: 

Thank you for your invitation to participate in today’s hearing. I am Anne Smith, 

and I am a Vice President of CRA International. Starting with my Ph.D. thesis in 

economics at Stanford University, I have spent the past twenty-five years assessing 

the most cost-effective ways to design policies for managing environmental risks, including cap-and-trade systems. For the past fifteen years I have focused my attention on the design of policies to address climate change risks, and have prepared 

many analyses of the economic impact of climate polices. I thank you for the opportunity to share my estimates of the impacts of America’s Climate Security Act of 

2007 (S. 2191) with you. My written and oral testimonies reflect my own research 

and opinions, and do not represent any positions of my company, CRA International, 

or its clients. 

Net societal costs are an inescapable aspect of an emissions limit via a cap-andtrade program that cannot be eliminated through any allocation formula that may 

be devised. The potential economic impacts of any new policy should be carefully 

explored, but particularly so when one expects that the new policy would cause dramatically altered patterns of economic activities and consumer behavior. This is certainly the case for a greenhouse gas policy such as S. 2191. 

I have estimated the costs and economic impacts of S. 2191 using a model called 

MRN–NEEM that I and my colleagues at CRA International have developed over 

the past two decades specifically to provide a credible and state-of-the-art ability to 

assess greenhouse gas emissions control policies. I will summarize the results of 

these analyses in my testimony, and also discuss some other issues with how S. 

2191 would affect the economy that are not directly addressed in the model analyses. 

OVERVIEW OF ECONOMIC IMPACT MODEL

Detailed documentation of the MRN–NEEM model is available on CRA’s website.1

In brief, this model is a ‘‘general equilibrium’’ model of the U.S. economy. This 

means that it tracks every dollar that is spent in order to reduce emissions through 

the economy, accounting for economic gains in those sectors that provide the goods 

and services that result in emissions reductions, as well as economic costs to those 

who must incur these added expenditures, and to those sectors that lose demand 

as a result of the policy. The model also accounts for any changes in the distribution 

of wealth that result from the combined impact of emissions control spending and 

the disposition of the wealth associated with newly created allowances. The results 

of a model run thus reflect the net impact to the U.S. economy after all of the winners and losers under a proposed policy have been accounted for. It is these net 

costs that should be compared to the changes in climate-related risks expected of 

the policy. 

The model assumes that implementation of an emissions cap will occur in a leastcost fashion with fully-functional, competitive product and allowance markets. The 

only limits imposed on the efficiency of a cap-and-trade market are those that are 

directly specified in a Bill, such as when some sectors are not covered by the proposed cap scheme.2 Leakage of some economic activities outside of the U.S. is also 
52 

estimated for sectors that face competitors in other countries that do not have their 

own emissions caps. 

Additionally, MRN–NEEM assumes all businesses and consumers have ‘‘perfect 

foresight’’ of future allowance prices and policy requirements. This means that the 

model does not include any costs due to uncertainty and ‘‘surprises’’ that will probably also be associated with compliance with a new policy. It captures only a longrun equilibrium in all of the markets, and thus does not include any of the costs 

of an overly rapid shift in markets due to imposition of a new policy. The potential 

disruptiveness of the transition to the new equilibrium, however, can be assessed 

by considering the rate of change in key markets observable in the model results. 

MRN–NEEM represents the U.S. economy in 9 geographic regions and 10 business sectors from 2010 through 2050. Table 1 lists the 10 sectors. The model also 

includes household emissions (including from personal automobile use) and government spending. The electric sector—a very central playing in the emissions control 

effort—is represented in exceptional detail. Electricity markets are divided into 29 

regions interconnected by limited transmission capabilities. Every generating unit 

in the U.S. is represented in the model, with its current emissions control equipment, and retrofit opportunities. Generating emissions of SO2, NOx and Hg (and 

their associated caps) are also included. Use of existing power plants is determined 

by their ability to serve electricity load cost-effectively, and the model retires plants 

that can no longer do this as emissions caps come into effect. The model contains 

substantial detail on new generating technologies that can be built, including all of 

the major forms of renewables generation, new nuclear power, and an ability in the 

future to add (or retrofit) carbon capture and storage onto advanced coal-based generating units. 

TABLE 1:—Business Sector Disaggregation Used in MRN–NEEM Model for Analysis S. 2191 

Energy Sectors Non-Energy Sectors 

Coal extraction .......................................................................... Agriculture 

Oil and gas extraction .............................................................. Energy-intensive sectors 

Oil refining/distribution ............................................................ Manufacturing 

Gas distribution ........................................................................ Transportation services 

Electricity generation ................................................................ Services 

SUMMARY OF ESTIMATES OF THE ECONOMIC IMPACTS OF S. 2191

Key Assumptions 

Using the MRN–NEEM model, I and my colleagues have prepared a number of 

different simulations of the economic impact of the emissions cap-and-trade program 

of S. 2191. These simulations (or ‘‘scenarios’’) differ in their input assumptions, thus 

providing a range of estimates of the impact of the Bill that I summarize in my testimony below. The range reflects a variety of assumptions about the following key 

inputs: 

• The precise numerical level of the cap.—This is the most important cause of the 

ranges that I will report. Characterizations of S. 2191 imply that the cap in 2012 

would be set at 2005 emissions levels. However, the Bill itself states a numerical 

cap of million metric tons of CO2 in 2012 that is about 10% lower than the official 

U.S. Greenhouse Gas Inventory’s 2005 emissions reported for the sources that S. 

2191’s cap would cover. Lacking any information to resolve this discrepancy, I 

present results that have applied a cap at the numerical limits stated in Section 

1201(D) of S. 2191, and also at the higher level that we find reported in the U.S. 

Inventory. As in any cap-and-trade program, the stringency of the cap determines 

the cost of the policy. The scenarios that were run using the more stringent caps 

stated in S. 2191 are generally those that define the more severe economic impacts 

shown in the ranges that I report below. Similarly, the scenarios that were run 

using the less stringent cap levels (based on the data published in the inventory for 

the covered sectors) generally define the less severe economic impacts in the ranges 

that I report below. 

• Timing for availability of advanced, low-carbon technologies.—All scenarios 

showed exceptional reliance on advanced, low-carbon technologies that are not presently commercially available, particularly coal-based generation that uses carbon 

capture and sequestration (CCS) and zero-carbon liquid fuels, such as could be provided by commercialization of cellulosic ethanol. Scenarios reported here reflect a 

wide range of different assumptions about the date of availability and rate of potential construction of CCS technology, although even the most ‘‘pessimistic’’ of the as-
53 

3That is, allowance prices in the initial periods when we turn off banking rise at about 1% 

to 4% in real terms into the next 5 years. (In later years prices escalate by over 10% per year, 

implying a great desire to have built up a bank before that time period arises.) With a real discount rate of 5%, one might wish to borrow slightly from the next time period. However, a 

strong incentive to borrow would only occur if we were to see allowance prices falling in real 

terms, and we have not observed that outcome. The decision to tighten the cap in 2020 between 

the draft and final version of S. 2191 weakened the potential incentives to borrow at the outset. 

sumptions used did allow a very large amount of the technology to be introduced, 

as I will explain below. 

• Cost and effectiveness of advanced, low-carbon technologies, and rate of cost improvement.—Although cost estimates are available for technologies that will one day 

come into the market place, these estimates are viewed as quite uncertain. They 

will also change over time, even if a current estimate is a sound one for a given 

point in time. Our scenarios reflect a variety of the current estimates of technology 

costs and different rates of improvement over time in those costs. 

• Rate of growth in electricity demand.—The rate of increase in energy demand 

as the economy grows (i.e., the energy-intensity of the economy) also contributes to 

the degree of effort that it will take to meet a future cap of any particular level. 

Our scenarios contain a range of base case electricity load growth assumptions, generally defined by projections of the National Electricity Reliability Council (NERC) 

which monitors the sufficiency of U.S. electricity supplies and by the projections of 

the Energy Information Administration (EIA) in its Annual Energy Outlook 2007. 

• Natural gas prices.—Long-term natural gas prices forecasts are very uncertain, 

but can have a significant effect on the cost of achieving different CO2 levels. Our 

scenarios rely on the reference cases of the EIA’s Annual Energy Outlooks (both 

2006 and 2007) through 2030, where that forecast ends. After that, our scenarios 

vary in whether they assume gas prices would continue to increase over time, or 

would remain flat (in real dollars) after 2030. 

• Quantity of offsets allowed.— S. 2191 would allow a limited number of offsets 

to be used in meeting its caps. There is some uncertainty in interpreting its provisions regarding how much flexibility these provisions would provide to use a variety 

of sources and types of offsets. Our scenarios use offsets limits that range from 15% 

to 30%, reflecting different views on how much could be obtained through international channels under Title II.E. 

• Quantity of new nuclear capacity that may be built.—All of our scenarios allow 

new nuclear generation to be built after 2015, and allow the existing fleet of capacity to remain through 2050. The scenarios allow a maximum of 85 to 130 GW of 

new nuclear capacity to be added by 2050 (depending on the scenario), and they all 

impose limits on how fast these can be built. These quantities are approximately 

equal to the amount of nuclear capacity already in place in the U.S., and so our 

analyses essentially double U.S. nuclear capacity between now and 2050. 

• Degree of emissions banking that will be adopted.—S. 2191 allows unlimited 

banking. However, our analyses reveal that the incentives to bank in the period 

2012–2020 are driven by expectations of very rapid allowance price escalation in 

much later years (e.g., in 2035–2050). It is debatable whether companies will engage 

in large amounts of banking to optimize costs over such a long period when they 

imply such substantial added near-term cost. Allowing the model to simulate such 

banking reduces total present value of costs, but it increases the impacts in the first 

years of the policy while it reduces the later year impacts by even more. Our scenarios include cases with and without banking behavior. 

All of our scenarios have substantial quantities of new renewables, available immediately. The maximal quantity of different types of renewables varies by region, 

based on publicly available information on these resources. Our scenarios do not 

vary the assumptions about these technologies. 

S. 2191 allows some constrained amounts of borrowing. We reviewed our scenario 

results for whether borrowing would occur. We find that if long-term incentives are 

fully considered, there is actually an incentive even in the first years of the policy 

to bank rather than borrow. If a more myopic view is assumed, there would be a 

very slight incentive to borrow in the first few years of the period, if there were no 

penalty for doing so.3 Given the financial penalties that S. 2191 would impose, and 

the limits to borrowing, we do not believe borrowing behavior would affect our cost 

estimates, and we did not make an effort to model it directly. We also find it difficult to see how borrowing could proceed, given that S. 2191 intend to place allowances into accounts only on a year to year basis. Without having possession of one’s 

future allocations of allowances, borrowing would be a complex process, if possible 

at all. 
54 

4These are not ‘‘confidence intervals’’ but true minimum and maximum values over the set 

of scenarios we have run. We also note that there was nothing in the construction of our scenarios intended to capture a probability distribution of any sort. That would require much more 

work than has been accomplished. 

RANGES OF ESTIMATED MACROECONOMIC IMPACTS

Figure 1 presents the range of estimates of the marginal costs of meeting the S. 

2191 caps observed in the scenarios we have simulated. In this figure (and all that 

follow in my testimony), the two lines presented reflect the upper and lower bounds 

of our results.4 Individual scenarios’ results fall inside the ranges presented, with 

the exception of the single highest and lowest estimate for each year. 

The estimates shown in Figure 1 are the marginal costs of control, stated as dollars per short ton of CO2-e. This model output is commonly described as the allowance ‘‘price.’’ However, it is important to note (as will be discussed in a later part 

of this testimony) that actual market prices of allowances are highly volatile, and 

rarely reflect their long-run equilibrium level. The results presented here indicate 

the long-run equilibrium prices levels that may be expected under various different 

assumptions. The stringency of the cap itself is the greatest driver of these results, 

with higher prices associated with tighter caps. As noted above, just the uncertainty 

in what the actual numerical level of the cap may be under S. 2191 determines 

where in the range shown in Figure 1 one might expect to be. 

As Figure 1 reveals, marginal costs of controls are projected to be in the range 

of $32 to $55 per short ton of CO2 by 2015. Although our projections show prices 

rising to levels that are much higher after 2015, even the 2015 prices are ‘‘high’’ 

in an absolute sense. The 2015 projected price levels, if injected into the economy 

in a period of only a few years, would be disruptive to the economy, and cause a 

painful transition. Our modeling effort considers only long-run equilibrium outcomes, and does not in any way capture short-term transitional costs, that can be 

much larger. It is my assessment, looking at these initial prices levels, that the first 

few years of a cap such as prescribed in S. 2191 would be a time of substantial market turmoil that is not reflected in any of the impact estimates that I report next. 

MRN–NEEM is a model that optimizes economic welfare. Thus, the change in economic welfare that will result from a policy is its key output, and it is stated as 

a present value over the full time period analyzed, which is 2010–2050 in the current case. Our scenarios imply that S. 2191 would decrease U.S. average economic 

welfare by 1.1% to 1.7%. This impact varies by region, and the degree of regional 

impact can be varied by the formulas for allocating the allowances. Our analyses 
55 

included a representation of the allocation formulas in the draft version of S. 2191 

(i.e., the August ‘‘Annotated Table of Contents’’). Using that set of allocations and 

formulas for recycling of auction revenues, we find that New York, New England 

states, and California would experience welfare impacts substantially less than the 

U.S. average, while regions heavily reliant on fossil fuel energy sources would face 

impacts somewhat greater than the U.S. average. 

Figure 2 presents these economic welfare impacts restated in terms of changes in 

the annual value of all goods and services consumed by the average U.S. household. 

This measure is very similar to an estimate of the change in real disposable income. 

Our scenarios imply that real annual spending per household would be reduced by 

an average of $800 to $1300 in 2015. If the percentage consumption impacts projected for each future year were to be stated in terms of current real spending power 

(we use 2010 spending as the proxy for ‘‘current’’ here), these spending impacts 

would increase to levels of $1500 to over $2500 by the end of our modeled time period, 2050. The costs shown in Figure 2 reflect the net impact on consumption due 

to more than just higher household energy bills. These costs also capture the net 

effect of increased costs of all goods and services, which require energy to produce. 

Another commonly used metric of economic impact is gross domestic product 

(GDP). This declines as consumers demand fewer goods and services, and it also declines if U.S. businesses close down due to competition from international suppliers. 

Offsetting these declines are increases as new investments are made in advanced 

energy technologies. Our scenarios find a net reduction in 2015 GDP of 1.0% to 1.6% 

relative to the GDP that would occur but for S. 2191. The impact rises to the range 

of 2% to 2.5% thereafter. Figure 3 shows the associated dollar amount by which 

GDP would be reduced in each year, stated in real 2007 dollars. (Inflation will make 

the dollar amounts larger over time.) GDP would be lower in 2015 by about $160 

billion to $250 billion. Eventually, the annual loss in GDP would increase to the 

range of $800 billion to $1 trillion (stated in real, 2007 dollars). (To provide some 

context, current annual outlays for Social Security are about $600 billion.) 

Naturally, with reductions in GDP come reductions in real wages and job losses. 

We have estimated 1.2 million to 2.3 million net job losses by 2015 over our set of 

scenarios. By 2020, our scenarios project between 1.5 million and 3.4 million net job 

losses. There is a substantial implied increase in jobs associated with ‘‘green’’ businesses (e.g., to produce renewable generation technologies), but even accounting for 

these there is a projected net loss in jobs due to the generalized macroeconomic impacts of the Bill. 
56 

Figure 2. impacts to Average US Household's Annual Consumption (in terms of current spending) 

Range of Estimates for Change in Household Spending Power 

"500 

i 1000 

. 

> 

~ ~ ,1500 "0 

1 

~ 

& ·2000 ;; 

8 

2500 

Year 

Figure 3. Change in GDP by Year Compared to No Carbon Cap ("BAU") 

Range of Estimates for Dollar Change in GDP 

·200 

-400 

;;, 

~ -600 

~ 

~ -BOO 0 

~ 

"1000 

·1200 

-1400 

Year 
57 

5 All of the scenarios summarized in my testimony exempted household and commercial uses 

of natural gas, as they were prepared before the mark up of S. 2191 in which these sources 

became covered by the cap as well. 

RANGES OF ESTIMATED ENERGY MARKET IMPACTS

Impacts I have presented thus far reflect the economy-wide, or ‘‘macroeconomic’’ 

impacts that are projected to occur when a cap such as that of S. 2191 is imposed. 

Underlying those impacts are significant alterations to the way that energy needs 

are met. I will now turn to some of the changes in fuels and electricity markets that 

drive the macroeconomic impacts described above. 

In the near term, the only way to make large reductions in emissions without reducing energy use is to shift from coal-fired generation to natural-gas fired generation of electricity. As I will show later, the electricity sector is projected to make 

a very large increase in natural gas demand (i.e., up to 4 quadrillion Btus by 2015– 

2020). Somewhat offsetting this very large increase, our scenarios also project a decrease in natural gas demand from other productive sectors covered by the S. 2191 

cap.5 We project a net change in U.S. natural gas demand of up to 3 quadrillion 

Btus. (For context, current gas consumption in the U.S. is about 20 to 21 quadrillion 

Btus, of which 5 to 6 quadrillion Btus are consumed by electricity generators.) 

Naturally, increases in gas demand will translate into higher natural gas prices. 

Figure 4 presents the percentage changes in projected natural gas prices that our 

analysis estimates would occur under long-run equilibrium conditions. Even with a 

long-run equilibrium view, we project gas price increases of 15% to 20% by 2015, 

and staying high through 2030. As I mentioned earlier, however, sudden shifts in 

demand such as those projected by 2015 would cause significant market turmoil and 

much higher price spikes until a new long-run equilibrium of gas supply can be established. 

Figure 4 also shows that in later years (i.e., after 2030), natural gas demand actually starts to fall relative to currently projected future levels. This occurs as more 

advanced technologies are projected to become more widely available. Natural gas 

may emit less CO2 than current coal-fired generation, but it does still emit substantial amounts of CO2. In the longer run, as the cap tightens further, natural gas becomes the highest-emitting source of energy and also starts to face declines in demand. This suggests that near-term caps that can only be met through a disruptive 

shift to greater use of natural gas may be a more costly policy than necessary to 

achieve large cumulative, long-run reductions in greenhouse gas emissions. 

Our analyses of S. 2191 account for all sources of greenhouse gas emissions (including the non-CO2 greenhouse gases) on a nearly economy-wide basis. A substantial share of the long-run reduction is due to major shifts in all parts of the economy, including a transformation of the way that vehicles are fueled. However, the 

majority of the emissions reductions in the near-term come from changes in electricity generation emissions. These emissions account for about 34% of total greenhouse gas emissions today, but they are projected to contribute well over 50% of the 

emissions reductions under S. 2191 prior to 2030. I will therefore describe now the 

types of electricity sector changes that our analyses are projecting will occur in 

order to achieve the reductions under S. 2191. 
58 

Electricity-related emissions changes are projected to come from a mixture of use 

of different fuels, use of different technologies, and reduction in electricity demand. 

These are interrelated phenomena. For example, changes in emissions from generation will not be cheap, and they will drive up the wholesale price of electricity. That 

price increase, in turn, will incentivize efficiency improvements and behavioral 

changes to consume less electricity. 

Figure 5 presents the range of projected wholesale electricity price increases on 

a U.S. annual average basis after accounting for all of the combined effects in their 

most cost-effective combination. The increases are substantial, including a 36% to 

65% increase in those prices by 2015 alone. They continue to rise thereafter, reaching the range of an 80% to 125% increase by 2050. This occurs despite extensive 

technological advancements and efficiency enhancements. These estimates do not reflect any of the volatility in allowance or natural gas prices that can be expected, 

particularly in the initial years of the policy. 

Figure 6 portrays the extent to which our analyses project electricity growth to 

moderate. The projected ‘‘business as usual’’ (BAU) growth in U.S. electricity demand is shown as a range by the pink (i.e., upper two) lines (there is a range because our scenarios used different BAU growth paths). The range between the blue 

(i.e., lower two) lines shows demand after consideration of price-induced (and policyinduced) demand changes. These demand changes are on the order of 30% from 

BAU, and nearly levelize electricity demand growth. They do not occur costlessly. 

This degree of demand reduction can only occur because of the electricity price increases shown in Figure 5. These declines are, in part, induced by the higher cost 

of electricity, which makes technological and behavioral changes in consumption a 

cost-effective choice. However, to some degree, these declines also reflect reductions 

in the productive output of the U.S. economy, which is what I meant by the term 

‘‘policy-induced’’ demand reduction. To some extent the latter declines may reflect 

mere leakage, which I discuss in the next section of my testimony. 
59 

Figure 5. Projected Percentage Change in Wholesale Electricity Prices (Relative to "BAU") 

Range of Estimates for Percent Change in Wholesale Electricity Prices 

Figure 6. Electricity Demand with S.2191 and without a C02 Limit 

10000000 

9000000 

8000000 

7000000 

6000000 

~ 5000000 

4000000 

3000000 

2000000 

1000000 

2010 

us Electricity Demand -- Range of Estimates for BAU and for L-W Bill 

2015 2020 2025 2030 

Year 

2035 2040 2045 2050 
60 

6 Exceptions have occurred in the later years for scenarios with the largest allowed amounts 

of CCS combined with the lowest BAU demand forecast. Even in those cases, the projected use 

is at the maximum assumed to be possible in the mid-years, and very near the maximum even 

in the later years. 

Demand reduction, although large, contributes a relatively small share of the electric sector’s emissions reductions. In the short-run, the major response is a rapid 

and large increase in the use of natural gas. In the longer-run, new technology plays 

the major role. Figure 7 shows the amount of CCS capacity that is assumed to be 

possible to install over time in our set of scenarios. Although not yet commercially 

available, our scenarios allow between 200 GW and over 400 GW of this technology 

to be installed by 2030. These are highly uncertain assumptions because there has 

been very little done yet in terms of technical feasibility studies to suggest realistic 

expectations for constructing new and replacement generation on the rapid 

timescales implied by this type of policy. The projected uptake of this allowed 

amount is usually at its maximal allowed levels.6 To put these quantities into context, the current installed capacity of coal-fired generation in the U.S. is about 300 

GW. Thus, these scenarios allow the entire existing coal-fired asset base to be effectively replaced with CCS. (There are also very large amounts of zero-emitting renewables and nuclear generation that are available—and adopted—in these scenarios.) 

A notable element of Figure 7 relates to the timing of this large potential for future CCS installations. Although the scenarios assume that we can effectively replace our existing fossil fueled fleet with an equivalent capacity that has very low 

emissions (due to the CCS), this cannot be done in the near-term. Almost no CCS 

capacity can be realistically expected to help meet S. 2191 targets in 2012–2015. 

Even by 2025, the quantity that can realistically be brought into the generating system is very small compared to the ultimate potential. In brief, the emissions targets 

of S. 2191 are far ahead of the time curve of availability of the most critical technologies for achieving large emissions reductions. (We see similar temporal constraints on the low-carbon vehicle fueling options.) 

With the timing of the target stringencies so far ahead of the ability of advanced 

technologies to respond, the only option of the electricity sector to meet the limits 

of S. 2191 is a large shift from coal to natural gas generation during 2012 through 

2030, and then an equally large shift back in the years from 2030 through 2050. 

The magnitude of these cycles is visible in Figures 8 and 9. 

The projected cycle in coal and gas demands by the electricity sector will imply 

many types of costs and transitional issues not apparent in the model results. Huge 
61 

changes in energy supply infrastructure will have to occur to enable both the first 

phase of the cycle (through 2030) and then again for the later phase of the cycle 

(after 2030). This cycle can be avoided altogether by better aligning the timing of 

the emissions targets with the availability of the advanced technologies that are expected to represent the long-run solution to greenhouse gas emissions. Doing so 

would also eliminate the near-term shocks to energy and electricity prices (such as 

evident in Figures 4 and 5), and allow a more gradual increase to the ultimately 

high prices that are necessary to reduce emissions to levels far below current emissions. Given that climate change risks are a long-term, cumulative phenomenon and 

not a near-term acute concern, true policy cost-effectiveness will come from a policy 

that allows a more gradual and steady transition to a low-carbon economy. 

LEAKAGE: A CONCERN NOT FULLY ADDRESSED IN THE MODEL ANALYSIS

Some domestic companies whose products compete in international markets are likely 

to be driven out of business no matter what allocation they receive. 

A generous allocation could increase the shareholder value of a company that is 

unable to increase its prices due to competition in international markets (i.e., a 

‘‘trade exposed’’ industry). However, it will do this in a perverse way that policymakers need to be aware of. As the price of allowances rises, a company that cannot 

raise its product prices will experience falling margins. If that company is also 

granted free allocations, it can use them to offset some of the costs, and thus maintain profitability. However, this will only be true for a range of lower allowance 

prices. At some allowance price point, however, the profit margins will be negative 

and the company will cease production. There will be premature retirement of the 

existing productive assets in our trade-exposed sector, and reductions in the economic activities associated with those sectors. Given that the cause of the closures 

is international competition, these lost U.S. manufacturing activities would be replaced by foreign manufacturing: global emissions will not fall but the U.S. economy 

will still pay the price. 
62 

Figure 8. Cycle of Coal Demand by Electricity Sector due to 5.2191 Targets 

35000 

3DOOO 

25000 

20000 

15000 

10000 

5000 

2010 

Range of Estimates of Coal Used for Electricity Generation 

2015 2020 2025 203(1 

Year 

2035 2040 2045 

Figure 9. Cycle of Natural Gas Demand by Electricity Sector due to S.2191 Targets 

12000 

10000 

8000 

§ 6000 

4000 

2000 

2010 

Range of Estimates for Natural Gas Used in Electricity Generation 

2015 2020 2025 2030 

Year 

2035 2040 2045 

2050 

2050 
63 

7 J. Pauwelyn, U.S. Federal Climate Policy and Competitiveness Concerns: The Limits and Options of International Trade Law, Nicholas Institute for Environmental Policy Solutions Working 

Paper NI WP 07–02, April 2007. 

This perverse outcome of climate policy is called ‘‘leakage’’ because the policy is 

rendered ineffective environmentally when it causes emissions to ‘‘leak’’ across national borders. Emissions from any part of the globe have comparable impacts on 

climate risks, as they all first accumulate together in the global atmosphere to have 

their combined and joint effect on the global greenhouse effect. On the one hand, 

this fact offers important flexibility to reduce emissions anywhere in the globe that 

has cost-effective opportunities to do so, and not to confine domestic efforts to actions within U.S. borders. On the other hand, it also means that any GHG cap we 

impose domestically, and its attending domestic reductions, may be undermined by 

offsetting emissions increases in nations that do not have comparable caps on their 

own economies. Large sums of money could be spent with no actual global environmental benefit. U.S. economic output and jobs leak to other countries as well. 

Leakage has often been talked about in very general terms. Estimates of leakage 

due to a U.S. domestic policy are suggested in the range of about 10–15%, meaning 

that for every 10 tons that is reduced in the U.S., 1 ton is just emitted elsewhere 

in the world. This may sound like a relatively small price to pay in order to get 

a net 9 tons of reduction from U.S. action. The difficulty with this view, however, 

is that leakage is not a phenomenon that applies to every ton of emissions reduction. Instead, there may be almost no leakage associated with controls on emissions 

that are not trade-exposed (e.g., personal and commercial transportation, electricity 

generation, and services), but nearly 100% leakage associated with controls on emissions in sectors that are trade-exposed (e.g., many of the energy-intensive manufacturing processes such as cement, iron and steel, chemicals, transportation equipment manufacturing, textiles, etc.). Concentrated economic impacts on specific sectors that offer no benefit in terms of global emissions reduction make no sense as 

a matter of policy design. 

The potential severity of the impacts to trade-exposed industries appears not yet 

fully appreciated by policy analysts or policymakers. Most of the attention on estimating climate policy impacts has been focused on transportation and electricity 

generation, which are among the least concerned with potential leakage. The potential plight of the trade-exposed industries has been mostly thought to be something 

that could be dealt with through compensating allocations. While that might solve 

the concerns of some of the shareholders of those businesses, policymakers should 

closely examine whether they are prepared to face the economic impacts of reduced 

exports, increased imports, and losses of domestic output of many important elements of the U.S. manufacturing base. 

POLICYMAKERS SHOULD FOCUS ON HOW TO LIMIT U.S. EMISSIONS WITHOUT CREATING

LEAKAGE

There are two ways to mitigate leakage without exempting trade-exposed sectors 

from an emissions cap: 

1. The first is to impose domestic emissions limits only as part of a global agreement among all nations that compete with our products, or which might start to 

compete once a policy offers them a greater cost advantage than they have now. 

Clearly, the present policy proposals in the Congress would not accomplish this. 

2. The second is to find ways to remove the competitive advantages of competitors 

at our borders, through ‘‘border tax adjustments.’’ Border tax adjustments are allowed only under very special circumstances under the rules of the World Trade Organization (WTO). 

The legality of obtaining effective border tax adjustments in the case of a cap-andtrade system is quite questionable at present.7 Title VI of S. 2191 represents an attempt to construct a system of border tax adjustments in a way that would be WTOcompliant, but it appears to have dubious chances of success in limiting leakage due 

to a cap-and-trade proposal. Title VI contains a complex set of provisions, each 

aimed at addressing one of several hurdles that would be faced in order to achieve 

the ultimate goal of equalizing costs of imports at the U.S. border in a WTO-compliant manner. Each of these steps—believed to be required to satisfy international 

law—would be open to legal challenge, leaving multiple potential ways that the approach in Title VI could fail to provide the intended protection from leakage. Most 

critical in my mind, however, is that these many steps require time to accomplish. 

As embodied in S. 2191, the imposition of leakage protection might not be possible 

until 2019. Given that the cap in this Bill would start in 2012, this would imply 

up to seven years during which U.S. trade-exposed manufacturers would be facing 
64 

8 Ibid. 

9Some have argued that banking reduces price volatility. While it may reduce it, it certainly 

does not eliminate it. For example, the Title IV SO2 market has experienced high volatility over 

the past two years, even though it has a large bank already in place. During 2005, SO2 permit 

prices rose from about $600/ton to above $1600/ton, then plummeted to below $400/ton by the 

beginning of 2007. Additionally, banking offers little price stability at all during the start up 

of a new cap, simply because no bank yet exists, and this initial-period volatility can be very 

large if the first-period cap requires a substantial amount of reduction and/or has a relatively 

brief regulatory lead time. The experience of the first year in the NOx cap of the Ozone Transport Region of the northeastern U.S. is a classic example. 

competitive pressures, eroded ability to profitably continue in business, and experiencing leakage. Delays of this sort in obtaining that coverage are not acceptable for 

the businesses that face rapidly responding markets. 

The method of S. 2191 in Title VI for obtaining WTO-compliant leakage protection 

was crafted to work with a cap-and-trade form of proposal. Interestingly, the prospects of successfully and immediately implementing border tax adjustments are considered to be much greater in the case of a greenhouse gas tax than in the case 

of cap-and-trade.8 If a carbon tax would provide better prospects for an immediate 

and WTO-compliant border tax adjustment, perhaps we should consider applying 

this type of approach for industries exposed to leakage through international competition, so that they at least can have the protection from leakage, even while other 

less vulnerable sectors could be in a cap-and-trade scheme if they choose. This 

might be especially useful to consider for certain commodities for which a heavy reliance on imported supply might be a strategic concern for the U.S. Those having a 

hand in creating a climate policy for the U.S. should become much more familiar 

with the intricacies of WTO rules, and the likelihood of successfully creating immediate and durable protection from leakage under different types of greenhouse gas 

policy designs. This needs to be sorted out before and not after a greenhouse gas 

policy is enacted. 

In the absence of a clear mechanism for preventing leakage with a cap-and-trade system, the only alternative for keeping economic impacts within acceptable bounds 

is to place a ceiling on the cost of allowances. 

The higher the price of permits under the domestic cap, the more serious ‘‘leakage’’ is likely to be if there are no border tax adjustments in place. Thus, potential 

for leakage provides an important reason for directly ensuring that the price of permits that may occur under a domestic GHG cap-and-trade program will remain relatively low. The only way to design a domestic cap-and-trade program to address 

this international competitiveness risk is simply to keep the carbon price low 

enough that such losses remain within acceptable bounds. This, naturally, limits the 

amount of domestic emissions reductions that will be achieved as well. Until international competitiveness issues are resolved (either through coordinated action or 

a system of border tax adjustments) ambitions to make significant reductions 

through any domestic cap-and-trade program will be thwarted, or else highly disruptive to key parts of our economy. This also implies that any domestic cap-and-trade 

program that is implemented in advance of internationally coordinated efforts 

should be designed with clearly defined permit price caps. 

PRICE UNCERTAINTY AND VOLATILITY: ANOTHER CONCERN NOT ADDRESSED IN THE

MODEL ANALYSIS

An allowance price ceiling has important additional merits for businesses and government. 

Prices in all previous and existing cap-and-trade programs have exhibited substantial volatility, and this can be expected of GHGs as well.9 Price volatility, however, is likely to have much greater generalized economic impacts with a CO2 cap 

than for caps on SO2 and NOx. CO2 is a chemical that is an essential product during 

the extraction of energy from any fossil fuel. As long as fossil fuels are a key element of our energy system (which they are now, and will remain for many years 

even under very stringent caps), any change in the price placed on GHG emissions 

will alter the cost of doing business throughout the economy. This is because all 

parts of the economy require use of energy to one degree or another. 

In contrast, under the Title IV SO2 cap, a fluctuating SO2 permit price would only 

affect emissions from coal-fired electricity generation. In deregulated electricity markets, coal-fired electricity does not always affect the wholesale price of electricity, 

and even significant fluctuations in SO2 permit prices might have almost no effect 

on electricity prices. Even in regulated electricity markets, the impact of the SO2

price on the cost of all electricity generation would be diluted by the unaffected costs 
65 

10 By ‘‘base’’ operating cost, I mean the cost of generating a unit of electricity before accounting for the emissions price. The majority of this cost is the cost of the fuel. 11 However, the percentage increase in the base operating cost would be much smaller (i.e., 

about 30% compared to 175%) because natural gas is so much more expensive than coal. 12 Eurostat, ‘‘News Release—July 14, 2006’’ (Revised version 93/2006), available at http:/ 

ec.europa.eu/eurostat 13 Richard G. Newell and William A. Pizer 2003, ‘‘Regulating Stock Externalities Under Uncertainty,’’ Journal of Environmental Economics and Management, Vol. 45, pp. 416–432. 

of all other sources of generation before it reached customers. Also in contrast to 

an economy-wide GHG cap, no other sources of energy in the economy are affected 

at all by SO2 price changes. Finally, under the Title IV SO2 cap, price variations during the past year that range from $400/ton to $1500/ton (the range observed in 

the past year under Title IV) have a modest effect on the majority of coal-fired units 

that are already either scrubbed or burning low-sulfur coal. Such units might see 

the cost adder due to its SO2 emissions vary between 7% and 26% of its base operating cost,10 and (as noted) the impact on consumer’s cost of electricity would be 

much smaller, if anything. 

Variation of CO2 prices such as that observed in the EU ETS market over the past two years (approximately $0/ton to $35/ton) would cause all coal-fired units to 

see additional costs varying between about 10% and 175% of their base operating 

costs. Further, even gas-fired units would experience absolute cost increases equal 

to about half those of the coal-fired units.11 Since gas-fired units do frequently set 

the wholesale market price of electricity, consumer electricity prices would also vary 

markedly with the price of GHG permits. Retrofits would not be available to attenuate these costs (at least, not until even higher permit price levels would be achieved 

and sustained at those levels.) At the same time, all other key energy demands in 

the economy (e.g., for transportation, industrial process heat, building heating and 

air conditioning, etc.) would also experience similar fluctuations with varying GHG 

permit prices. Clearly, the effect on the economy could be disruptive. 

These are not just theoretical calculations. The EU’s statistics bureau, Eurostat, 

reports that electricity prices rose significantly throughout the EU in 2005. Household rates rose by 5% on average over all 25 EU countries, and industrial rates rose 

by 16% on average.12 The high prices of GHG permits under the EU ETS during 

that period is widely viewed as having contributed to this price increase, and indeed, wholesale electricity prices have fluctuated in step with the wide swings in 

ETS permit prices. It is not clear yet how or whether the wide variations in permit 

prices may begin to contribute to the variation in economic activity. However, it 

should also be noted that the EU ETS does not cover all sources of GHGs, or even 

a majority of sources of CO2 emissions in the EU. (This may dampen the impacts 

of CO2 permit price volatility on the EU economy, but is also a widely observed flaw 

in that cap-and-trade system’s potential to produce sufficient cuts in GHG emissions 

necessary for the EU to meet its GHG targets.) 

To sum up, price uncertainty and price volatility will impose impacts in the case 

of GHG emissions limits that are completely different in scale and scope from those 

under previous emissions trading programs. Their potential to increase variability 

in overall economic activity thus should be viewed as a core concern in designing 

a GHG cap-and-trade program. At the same time, the nature of climate change risks 

associated with GHG emissions is such that it is possible to design price-stability 

into a GHG cap-and-trade program without undermining its environmental effectiveness. In the case of a stock pollutant such as greenhouse gases, there is no need 

to absorb high costs in return for great specificity in achieving each year’s emissions 

cap.13 Economists widely agree that the cost to businesses of managing the price 

uncertainty of a hard cap is not worth the greater certainty on what greenhouse 

gas emissions will be from year to year. 

Businesses clearly prefer having reliable allowance price expectations, but even 

governments would probably prefer some stability in the year to year revenue 

streams from an auction. For example, would large variability and uncertainty in 

allowance auction revenues be of any use if those revenues are intended to fund important technology-related projects that have long-term funding needs? Even if the 

revenues would simply be rebated to citizens, would either the government or the 

citizens find any value in such uncertainty in the size of the rebate checks? 

A PRICE CEILING IS THE ONLY APPROACH THAT WILL OFFER THE REQUISITE DEGREE OF

PRICE CERTAINTY AND STABILITY

There are various ways to provide much greater price certainty under a cap-andtrade program, although none have been used in any trading programs to date. One 

of the simplest concepts that has gained substantial attention for GHGs has been 
66 

14Outside of the U.S., further confusion about the notion of a ‘‘safety valve’’ has been created 

by application of this term to the traditional notion of a penalty for noncompliance. The EU ETS 

has a penalty for noncompliance that is ÷40/ton CO2 in Phase I and will be ÷100/ton in Phase 

II, starting in 2008. This is often described as a price cap, but its very high level relative to 

the price at which the cap is expected to be met makes it extremely ineffective. Further, its 

role as a penalty rather than as an additional compliance mechanism clearly would undermine 

the willingness of companies to resort to its use for planning purposes. The same confusion of 

penalty and safety valve appeared in the proposal for an Australian emissions trading scheme 

released in 2007 by Australia’s National Emissions Trading Taskforce. The notion of a ‘‘safety 

valve’’ should be clearly separated from the role of a noncompliance penalty, with the former 

being set at a price that is considered an acceptable level of policy implementation cost, and 

the latter being set at a much higher level that is considered ‘‘punitive’’ and not acceptable as 

an indicator of the cost of meeting the policy goals. 15 ‘‘Cost Containment for the Carbon Market: A Proposal,’’ developed in consultation with the 

Nicholas Institute of Environmental Policy Solutions, Duke University, July 24, 2007. Available: 

http://www.nicholas.duke.edu/institute/carboncosts/carboncosts.pdf. 16 Ibid., p. 3. 17 Ibid., p. 7. 

called a ‘‘safety valve.’’ Unfortunately, this term has begun to be used loosely (e.g., 

under the rules of the Regional Greenhouse Gas Initiative, and in California’s AB32 

program) for a variety of mechanisms that do not actually provide the price certainty originally intended. To be quite specific, the cap-and-trade program mechanism that provides the requisite price cap is one where the government offers to 

issue any number of additional permits to regulated companies at a pre-specified 

and fixed price per permit. This price is set low enough that it is not considered 

punitive, but rather as an assurance by the government that it would not consider 

control costs above that level to be desirable as a normal course of events.14 This 

is the mechanism that has been incorporated into the bill of Senators Bingaman and 

Specter. 

Because regulated entities know that they need not ever pay more for a permit 

than the established safety valve price, it functions as a price ceiling. No company 

would ever pay more to purchase a regular permit in the emissions market if it 

knows that it can always obtain sufficient permits at that price from the government, if necessary. Permit prices may fluctuate at levels below the safety valve 

price, but by judicious selection of an appropriate safety valve price, policy makers 

can ensure that these variations would not rise to a level that might be viewed as 

potentially harmful to the economy at large. If the safety valve price is hit on an 

occasional basis under a cap, then the goal of achieving long-term reductions in 

emissions is not harmed, given that the primary environmental risk of GHG emissions is a long-term, cumulative one. If the safety valve price is hit on a perpetual 

basis, this suggests an important need for policy makers to consider how we should 

address the evidence that meeting targets that are more difficult than hoped; however, this policy deliberation will be possible without the urgent need to throw 

‘‘band-aid’’ solutions onto the cap-and-trade program, and with concrete evidence of 

the degree of economic pain that is associated with the initially-established maximum permit price. A higher price might then be deemed acceptable, but if not, the 

safety valve will have helped us avoid the greater pain of learning that fact through 

a hard cap approach. 

A final advantage of a price ceiling provision is that it will limit the potential for 

gaming and other concerns with market manipulation that are often expressed for 

cap-and-trade schemes. The possibility of limiting risks of unacceptably high policy 

costs, providing planning certainty, eliminating wasteful price volatility, and mitigating concerns with allowance market manipulations ought to seem like a powerful 

argument in favor of a price ceiling provision. 

THE CARBON MARKET EFFICIENCY BOARD OF S. 2191 WILL NOT PROVIDE PRICE

CERTAINTY OR STABILITY

Aversion to the idea of a price ceiling has been widespread among parties that 

prefer hard caps at any cost over a long-run policy that offers price certainty in exchange for some flexibility in year to year emissions outcomes. Recently, a proposal 

for a ‘‘Carbon Market Efficiency Board’’ (CMEB) was released that was supposed to 

offer an alternative to the price ceiling approach.15 This concept has been incorporated into S. 2191 as Title II.F. Title II.F would provide no cost certainty at all. 

In fact, the white paper for the CMEB proposal that Title II.F follows explicitly 

states that it does not wish to diminish allowance price volatility: ‘‘The cost relieve 

measures are not intended to relieve brief price spikes that are part of normal, 

healthy market volatility.’’16 The proposal goes on to assert that ‘‘ ‘volatility’ in price 

is expected and even desirable.’’17 As I have noted above, volatility creates unneces-
67 

sary planning and management costs to businesses, and should be eliminated if possible without harming one’s objectives for reducing emissions within acceptable cost 

bounds. This is entirely possible in the case of a market that is entirely the result 

of regulation, such as an allowance market. The CMEB proposal does not meet the 

objectives of providing price certainty or policy cost containment. 

CONCLUSION

There is no question that achieving significant reductions in greenhouse gas emissions will be very costly, and it is therefore important to strive to minimize those 

costs. The design of the program matters, and mitigating the ranges of costs I have 

estimated for S. 2191 will require taking care to incorporate several modifications 

to the present Bill. The most important attributes missing in S. 2191 are: • An approach that ensures policy costs will be held to a level considered acceptable to U.S. citizens. • A cap stringency that is timed to match the availability of new, low-carbon technologies. • A policy that offers businesses price certainty for planning major new investments in new technologies (e.g., in the form of a price ceiling). • A policy that protects against leakage of emissions to economically competing 

nations. • A supportive set of policies that provide effective incentives for research and development on breakthroughs in technologies that produce low-carbon energy. • Provisions in the policy to limit the costs that it will impose on the economy 

overall if emissions reductions turn out to be more expensive than considered acceptable. • A policy that will deliver even larger emissions reductions if the targets turn 

out to be less expensive to achieve than is considered acceptable. 

It may be wise for policymakers to take time to consider more closely alternatives 

to the cap-and-trade approach for greenhouse gases. Cap-and-trade is not the only 

form of market-based policy option, and others may be more able to offer the above 

list of attributes, and thus be better suited for meeting the challenge of reducing 

greenhouse gases to levels that are being proposed without excessive damages to our 

economy. 

RESPONSE BY ANNE E. SMITH, PH.D., TO AN ADDITIONAL QUESTION FROM

SENATOR INHOFE

Question. Based on your testimony and the testimony of the other witnesses, is 

there anything else you would like to add? 

Response. The figures cited are provided at the end of this document. 

Comparisons to the Nicholas Institute Analysis of the Lieberman-Warner Bill.—I 

would like to provide some insight about the reasons why the Nicholas Institute 

analysis reputed to be a simulation of the costs of S. 2191 are lower than those of 

CRA International that I summarized in my testimony of November 8, 2007. In 

doing so, I address some unfounded criticisms in the testimonies on S. 2191 of others (who are unfamiliar with CRA’s analysis). 

David Hawkins stated in his written testimony before the EPW committee (November 13, 2007, at p. 8) that CRA’s analyses are unreasonably constraining the 

use of carbon capture and sequestration (CCS) technology, the use of renewables, 

and emissions reductions in the transportation and industrial sector. Mr. Hawkins’s 

statements on this matter are unfounded in the facts. Jonathan Pershing made a 

similar statement during the hearing of November 8, in which he said he expected 

that CRA’s technology introduction constraints were a reason for a difference between CRA’s and the Nicholas Institute’s different cost estimates. Dr. Pershing’s 

guess was not correct. 

• First, it should be noted that CRA’s MRN–NEEM model and the ADAGE model 

used by Nicholas Institute are both the same generic type of model: a computable 

general equilibrium model. The CRA model appears to have a much more detailed 

representation of the U.S. electricity generating sector, with every unit in the country individually represented and dispatched economically within 28 electricity dispatch regions. The main differences in model results should therefore be tied to either input assumptions, or modeling detail. 

• Figure 1 below shows the electricity generation mix in CRA’s high and low end 

cases (defined as the runs with the high and low CCS uptake assumptions in Figure 

7 of my written testimony). I developed Figure 1 specifically to compare to Figure 

A–13 in the Nicholas Institute paper on the LW Bill, which I have copied here as 

Figure 2. 
68 

• In Figure 1, notice that renewables generation (which includes existing hydro) 

in CRA’s analysis more than doubles by 2015. In fact, when existing hydro generation is removed, the remaining non-hydro renewables rise by a factor of 3 to 5 between 2010 and 2015. A comparison of Figures 1 and 2 show that CRA’s analysis 

has about three times more renewables generation than the Nicholas Institute’s 

analysis. Note that CRA’s analysis allows a very rapid expansion of new renewables 

during the period 2010–2020. • Nicholas Institute assumes about 28% more nuclear than CRA, which implies 

that whereas CRA’s analysis allows up to 110 GW of new nuclear capacity by 2050, 

the Nicholas Institute is probably assuming up to 140 GW. This is not a large difference, but the Nicholas Institute is more optimistic about the potential rate of 

builds of new nuclear generation. • Comparison of Figures 1 and 2 also shows that CRA’s high-CCS case has approximately the same amount of CCS generation by 2050 as Nicholas Institute’s, 

and the market penetration of CCS technology (the one true ‘‘advanced’’ generation 

technology in either analysis) is actually faster in CRA’s analysis during the period 

prior to 2030. In CRA’s low-CCS case, the reduced access to CCS is compensated 

by a combination of even more renewables, less remaining gas-generation (fossil), 

and greater energy efficiency by the industrial as well as commercial and residential 

consumers. • CO2 emissions in the non-electric sectors drop off substantially in the CRA analysis. For the industrial sector, the MRN–NEEM model captures the following inputs 

to production: materials, labor, capital, and energy. These inputs are traded off 

against each other in response to carbon prices meaning that other inputs can be 

substituted for energy. The CRA model does not neglect opportunities to reduce 

emissions in industry as page 8 of Hawkins’s testimony suggests. • Page 8 of Hawkins’s testimony says that ‘‘CRA assumes business-as-usual coal 

technology’’ (in the baseline). CRA does not assume which coal technologies are chosen in the baseline—the technologies are chosen by economics. Indeed, IGCC technology (without CCS) is chosen by CRA’s model in the later years in the baseline. 

There is no IGCC with CCS chosen in the baseline—this is realistic (without a price 

signal to carbon, utilities will not install IGCC with CCS). 

CRA has not been able to determine through the available documentation how 

much energy efficiency is assumed in the Nicholas Institute analysis, but it plays 

a major role in CRA’s analysis. There is effectively a 0.6 price-elasticity of demand 

for all forms of energy in CRA’s MRN–NEEM analysis, meaning that a 100% increase in energy prices results in a 60% improvement in energy efficiency. This occurs as energy efficiency and conservation—businesses do not have to close in order 

for this amount of demand response to occur in CRA’s analysis, and it accounts for 

the large majority of the estimated reduction in energy demand that occurs in the 

MRN–NEEM analysis. This amount of energy efficiency response occurs within 

about 5 years of an energy price increase. Most energy analysts would agree that 

CRA energy efficiency assumptions are on the optimistic end of standard practice. 

They are far higher than that found in the EIA NEMS model. 

It is also not possible to compare CRA’s input assumptions about the transportation sector with those of the Nicholas Institute analysis given the information provided in the Nicholas Institute paper. However, there is a remarkable degree of improvement in transportation-related emissions rates over time in the CRA model. 

This appears in the form of a zero-carbon fuel alternative that is a perfect substitute 

for gasoline. (It can be thought of as cellulosic ethanol, but could be any new fueling 

alternative to petroleum products.) In our analyses, the alternative fuel starts to be 

used by 2015, and—as I stated in my testimony—by 2050 there is so much used 

that it is like a 100% conversion of all cars on the road today to be zero-emitting. 

On the other hand the Nicholas analysis shows increasing petroleum consumption 

in all years of their analysis (see p. 10). 

The costs of the technologies discussed above are consistent with publicly available data. Importantly, we allow learning curves for both the zero-emitting fuel, and 

also for CCS in one case, thus reducing technology costs over time. For example, 

at the outset, the alternative transportation fuel with zero-emissions costs 3 times 

the price of petroleum products now in use. By 2050 it costs only 50% more. Similarly, in one case, the cost of CCS is 75% lower by 2050 than its initial cost at the 

outset. We assume the current engineering estimates for this technology are consistent with costs in 2030, when it ought to be a mature technology, but costs continue to be cut in half again by 2050. 

Clearly technology limits and insufficient representation of the industrial and 

transportation sectors are not the reasons for the differences between CRA’s and 

Nicholas Institute’s results.—We at CRA have concluded that the key reasons for the 

different costs estimated by Nicholas Institute result from a combination of: 
69 

1 Available at http://www.epa.gov/climatechange/emissions/downloads06/07CR.pdf. 2See http://warner.senate.gov/public/index.cfm?FuseAction=Files.View&FileStore— 

id=42576573-e4cf-480d-b6fd-c5964f4f62dd. 

(a) Nicholas Institute assumes a looser cap than CRA does—and one that is looser 

than the 5200 mmt CO2 cap in 2012 that is written into the Bill. They say it is 

5450 million tons on p.2 of their write up. (We used 5200 million tons as dictated 

by the Bill) 

(b) Inspection of Nicholas Institute paper’s figures indicates that that analysis appears to assume 30% of the S. 2191 cap may be met using offsets, but the Bill only 

allows 15% through domestic offsets. (Regarding the 15% for use of ‘‘international 

allowances,’’ the word ‘‘offsets’’ was actually removed in the markup; we interpret 

that provision to allow U.S. emitters to use actual allowances issued under programs like the EU–ETS—if they can be had at a lower cost than the going price 

in the U.S. market, which we assume will not be the case anymore in the future 

than it is right now. Therefore, we do not expect significant international allowance 

purchases.) 

(c) Nicholas Institute apparently assumes offsets (even the 15% from domestic 

sources that we do agree the Bill provides for) are much cheaper than we do, by 

assuming away things like project transactions costs and timing constraints in getting forestry sequestration offsets to their maximal growth rates. (We have to base 

this statement on their EPA report of Lieberman-McCain analysis assumptions, as 

the Lieberman-Warner paper does not explain their offsets cost assumptions at all.) 

CRA has taken a more conservative—and we feel more realistic—approach. 

As a result, the actual US GHG emissions reductions achieved in the Nicholas Institute analysis are far less than those in CRA’s analysis. Figure 3 shows these 

emissions for both analyses. As is always the case, the larger the emissions reductions, the higher the cost. Therefore, the key question in assessing the relative merits of the two analyses, is whether CRA or Nicholas Institute have more correctly 

interpreted the wording of the LW Bill regarding the actual level of the cap that 

would be imposed, and the provisions of the Bill regarding use of offsets. Assumptions about the quantity of domestic offsets that would be available at various prices 

and in the initial years may also be important. 

Analyses of the Lieberman-McCain Bill Does Not Provide a Valid Estimate of the 

Impacts of S. 2191 

In his testimony, Mr. Hawkins repeatedly cited the costs from analyses of the 

Lieberman-McCain Bill as if they are also consistent with S. 2191. This is simply 

not the case. The Lieberman-McCain Bill has a much less stringent cap overall, and 

more lenient limits on offsets. Thus, it is not valid to suggest that any estimates 

made of that Bill are representative of cost estimates for S. 2191. CRA has also prepared scenarios of the Lieberman-McCain Bill using the same sets of input assumptions as we used for some of our scenarios representing S. 2191. Uniformly, the impacts for the Lieberman-McCain Bill are substantially lower than those we obtain 

for S. 2191. This fact is also reported and discussed at length in the Nicholas Institute report on the Lieberman-Warner analysis. As always, the stringency of the cap 

determines the cost and impact of the policy. 

Analyses of Carbon Limits by MIT Do Not Provide a Valid Estimate of the Impacts 

of S. 2191 

Dr. Pershing also cites cost estimates from MIT as if they were simulations of S. 

2191, which is not correct either. MIT’s report did not simulate scenarios of any specific bills at all, but only generic time paths of emissions reductions. None of those 

time paths are consistent with the caps specified in S. 2191. Additionally, the MIT 

analyses did not address any of the Bill’s specific provisions such as the limits on 

the quantities of offsets that may be used for compliance. These features change the 

costs of a policy. 

Lack of Clarity about the S. 2191 Cap Level 

A significant issue with respect to the Lieberman-Warner Bill is the level of the 

cap. As noted in my testimony repeatedly, the stringency of the cap is a very significant determinant of its costs. 

The cap covers CO2 and other greenhouse gas emissions from the Electric Power, 

Transportation and Industrial Sectors, as defined in ‘‘Inventory of U.S. Greenhouse 

Gas Emissions and Sinks: 1990–2005.’’1 In addition, the Manager’s Mark-up also 

added emissions from natural gas combustion. Senators Lieberman and Warner 

have stated, ‘‘The cap over those sources starts at the 2005 emission level in 2012 

and then lowers year-by-year at a constant, gradual rate, such that it reaches the 

1990 emissions level in 2020. . .’’2 However, the 2005 emissions level for Electric 

Power, Transportation and Industrial Sectors in 2005 does not equal the 5,200 million metric ton cap specified in S. 2191, nor does the 1990 emissions level equal the 
70 

3S. 2191, Sec. 1201(d) of Manager’s Markup and Table ES–7 of ‘‘Inventory of U.S. Greenhouse 

Gas Emissions and Sinks: 1990–2005.’’ 

2020 cap.3 These cap levels differ by almost 10%, which is particularly significant 

in early years. 
71 

1990 Emissions 2005 Emissions 

Electric Power 1,859.7 2,429.8 

Transportation 1,523.0 2,008.9 

Industrial 1,470.9 1,352.8 

Total 4,853.6 5,791.5 

S.2191 Cap 2020: 4,432 2012: 5,200 

Difference 421.6 591.5 

These numbers also do not reflect the 2005 emissions level of natural gas, which was added to the 

coverage of the bill in the Manager's Mark-up. Including the 2005 emissions associated with natural 

gas combustion from the Commercial and Residential sectors (and other sectors) would only widen 

the gap between the cap specified in S.2191 and the 2005 and 1990 emissions level that the cap is 

supposedly using. 

5 
72 

Figure 1. Generation Mil< for CRA High and Low CCS Uptake Cases 

3500 

3000 

1 2500 

'0 2000 

~ 1500 

:z 1000 

500 

Electricity Generations Mix by Source· High end of eRA range 

(for comparison to Nic Institue LWpaper's Figure A·13) 

Year 

__ Foss I Fue wloCCS 

---w/ecs 

nuc 

other non-bssil 

Electricitl Generation Mix by Source •• Low end of eRA range 

(t·~ compore to Niclmlt lW paper's Figure A-13) 

-+-Fossil Fuel wloCeS 

---wlecs 

nuc 

other lon-fossil 

6 
73 

Figure 2. Copy of Figure A-13 in Nicholas Institute paper with Same Information as in Figure 1 above. 

Figure A-13. Electricity Gener"lion ;'lUx OWl' Time: Lieberm"n-'Y"rner ys S.280 

7 
74 

Figure 3. Emissions Reductions in eRA's Analysis Are Greater than those in the Nicholas Institute's 

Analysis 

BODO 

7000 

6000 

'\' 5000 N 

0 

u 4000 

E 

E 3000 

2000 

1000 

0 

2000 

Total US GHG Emissions in Various Model Runs 

2010 2020 2030 204[) 

Ye<ll 

2050 2060 

____ Nic-LW "core" 

___ Nic-LW"Res-Comm" 

Nic-LW "tighter cap" 

CRA-maK 

--+--CRA-min 

8 
75 

Senator BOXER. Ms. Smith, I am sorry, we have to cut you off 

there, because Senator Inhofe and I have to run down to the Floor. 

We want to get a chance at some questions. 

Ms. Thorning, you are a Ph.D., you are a senior vice president 

and chief economist at the American Counsel for Capital Formation. Welcome. 

STATEMENT OF MARGO THORNING, PH.D., SENIOR VICE 

PRESIDENT AND CHIEF ECONOMIST, AMERICAN COUNSEL 

FOR CAPITAL FORMATION 

Ms. THORNING. Thank you, Madam Chairman. Thank you for inviting me to appear before this Committee. 

I will ask that my testimony be submitted for the record, and I 

will just briefly summarize. I have two or three charts I would like 

to draw your attention to. 

My analysis is not based on simulations, as was the previous witness, but merely looking at historical data. I would like to draw 

your attention first to the fact that the EIA forecast predicts that 

U.S. emissions will grow by approximately 30 percent between now 

and 2030. As you can see, the green line on my first chart shows 

that. The targets under S. 2191 would require a cut by 2030 of over 

4 billion metric tons. This presents sort of a visual of how stiff the 

challenge is. 

Given U.S. population growth, and projected growth and emissions, another way to look at this is with respect to the required 

reductions in per capita emissions. If I could have the second chart. 

Regarding, per capita emissions, the best we have ever done to reduce emissions was from 1990 to 2000, where we reduced over that 

whole decade per capital emissions by .8 percent. The targets in S. 

2191 would require a reduction of approximately 50 percent by 

2030. On that chart, the arrow should be out over the 2030. It is 

also table 1 in my testimony. So it would require an effort of 25 

to 35 times greater than we have ever done before to get per capita 

emissions down to the levels that would be required by S. 2191. 

Another point I would like to make is that the cap and trade system may not be the most appropriate way to go. If we are going 

to have a mandatory system of carbon reductions we might want 

to consider that most economists think that a carbon tax is a much 

more straightforward way. It allows for flexibility, it allows for economic growth. It prevents gaming of the system, as we have seen 

widespread instances of in Europe, and windfall profits being accrued by companies that were allocated the credits. 

A third point I would like to make is that the European Union 

is not on track to meet its emission reduction targets. In fact, the 

latest Fourth Assessment Report published in October suggests 

that European emissions will be 7 percent above, not 8 percent 

below, by 2010, without strong new measures, including extensive 

use of JI and CDM. Of course, those are subject to verification and 

may not be able to be achieved, given the difficulty of approving 

those types of projects. 

The final point I would like to make is that solutions to this important problem, and I think we all agree this is an important 

problem and that we do need to reduce greenhouse gas emissions, 

are going to be based on developing the technologies which do not 
76 

1The mission of the American Council for Capital Formation is to promote economic growth 

through sound tax, environmental, and trade policies. For more information about the Council 

or for copies of this testimony, please contact the ACCF, 1750 K Street, N.W., Suite 400, Washington, D.C. 20006–2302; telephone: 202.293.5811; fax: 202.785.8165; e-mail: info@accf.org; 

website: www.accf.org 

yet exist, as the previous witness made the case, to bring down 

emissions very rapidly. 

But if we take a look at where the emission growth is coming 

from, which as we know is from the developing countries, China 

and India, as my last chart makes the case, right now Chinese installed plant and equipment and Indian installed plant and equipment is far less energy-efficient than is that of the United States 

and Japan. Each billion dollars of GDP in China is associated with 

about .7 million metric tons of carbon. Their new investment, 

which I believe is the green bar, is much more energy-efficient as 

previous, but not nearly so efficient as the United States or Japanese investment. Studies by CRA International show that if we 

could get the latest technology into the developing country hands, 

we could reduce emissions by as much as would have been 

achieved under the Kyoto Protocol if all 39 signatories were to meet 

their target. 

Another point I would like to make is that the U.S. tax code, if 

we could consider improving depreciation, speeding up capital cost 

recovery. Our tax code provides the slowest capital cost recovery for 

energy-efficient investments in the industrial world. Smart meters, 

for example, an investor gets only 29 cents back on the dollar after 

5 years, whereas in China and India you get a dollar back after 5 

years. I would like to submit a full table for the record documenting that. 

Senator BOXER. Without objection, we will. 

[The referenced information follows on page 87.] 

Ms. THORNING. So finally, if we could consider the fact that economic growth itself can be a driver, the United States has reduced 

its emissions faster over the last couple of years. 

Senator BOXER. Sorry to interrupt you. We are going to move on 

now. 

[The prepared statement of Ms. Thorning follows:] 

STATEMENT OF MARGO THORNING, PH.D., SENIOR VICE PRESIDENT AND CHIEF

ECONOMIST, AMERICAN COUNCIL FOR CAPITAL FORMATION

INTRODUCTION

Madam Chairman and members of the Senate Committee on Environment and 

Public Works, my name is Margo Thorning, senior vice president and chief economist, American Council for Capital Formation (ACCF),1 Washington, D.C. I am 

pleased to present this testimony to the Committee. 

The American Council for Capital Formation represents a broad cross-section of 

the American business community, including the manufacturing and financial sectors, Fortune 500 companies and smaller firms, investors, and associations from all 

sectors of the economy. Our distinguished board of directors includes cabinet members of prior Republican and Democratic administrations, former members of Congress, prominent business leaders, and public finance and environmental policy experts. The ACCF is celebrating over 30 years of leadership in advocating tax, regulatory, environmental, and trade policies to increase U.S. economic growth and environmental quality. 

Senators Lieberman and Warner and the members of the Senate Environment 

and Public Works Committee are to be commended for their efforts to reduce greenhouse gas emissions so as to mitigate the threat of human-induced climate change. 

The questions we need to ask are first, what challenges will The America’s Climate 
77 

1 ‘‘Energy Market and Economic Impacts of S. 280, the Climate Stewardship and Innovation 

Act of 2007’’. U.S. Department of Energy, Energy Information Administration, August 2007 and 

ACCF calculations using S. 2191 targets. 

Security Act of 2007 (S. 2191) pose for the U.S. economy and second, what type of 

GHG reduction policies should the U.S and other countries adopt to minimize the 

impacts on economic growth and maximize the benefits to the environment? Greenhouse gas reduction policies should not be undertaken without considering their impacts on energy security, economic growth, and U.S. competitiveness. My testimony 

will address these key issues. 

THE AMERICA’S CLIMATE SECURITY ACT OF 2007 (S. 2191)

The goal of The America’s Climate Security Act of 2007 (S. 2191) is to substantially reduce U.S. greenhouse gas emissions (GHGs) over the 2012-2050 period. The 

Act covers electric power, transportation, and manufacturing sources, which account 

for 75 percent of U.S. emissions. The cap requires reducing emissions to 2005 levels 

by 2012 and then lowers emissions at a constant rate, reaching 1990 levels by 2020 

and then a target of 65 percent below 1990 levels by 2050. The Act also strengthens 

energy efficiency standards for appliances and buildings in order to address commercial and residential sector emissions not covered by the emission reduction targets. 

• U.S. Projected Growth in Emissions and Population: Effect on Achievement of 

S. 2191 Targets 

Emissions Growth 

A major stumbling block to the U.S.’s meeting the S. 2191 targets is projected increases in covered emissions (emissions included in the bill) and population over the 

next several decades. According to estimates by the U.S. Department of Energy’s 

Energy Information Administration, covered emissions under the baseline forecast 

(‘‘baseline’’ means no new mandatory carbon emission reduction programs) grow by 

30 percent from 2012 to 2030.1 The baseline forecast already includes assumptions 

about increased energy efficiency but, even so, covered GHG emissions are projected 

to rise to 6,613 million metric tons of carbon dioxide equivalent (MMTCO2e) by 

2020, compared to the S. 2191’s required reduction to 4,432 MMTCO2e. Sharp cutbacks in U.S. energy use would be necessary to close the 33 percent gap (2,181/ 

MMTCO2e) in 2020 between projected emissions and the S. 2191 target. By 2030, 

the gap between the baseline forecast and the S. 2191 target rises to 55 percent or 

4,311 MMTCO2e (see Figure 1). 

Per Capita Emissions 

The projected increase in U.S. population, from 308 million residents in 2010 to 

335 million residents in 2020 and 363 million in 2030, will make GHG emission reductions very challenging, since more people means more energy is needed for home 

heating and cooling, job growth and transportation (see Figure 2). To illustrate the 

difficulty of reducing U.S. emissions to S. 2191 levels, consider that over the decade 

between 1990–2000 period, per capita emissions in the U.S. fell by only 0.8 percent 

and they are projected to decline by a total of only 0.6 percent from 2000 to 2012 

(see Table 1). EIA’s forecast projects increases in per capita covered emissions between 2012 and 2030 (see Table 1). 
78 

~ 

" " 

~ ~ 

<T 

IU 

N 

0 

() 

<II 

c 

<> I-

<l ." 1i) 

:Ii 

c 

~ 

:i:l 

8000 

7000 

6000 

5000 

4000 

3000 

2000 

1000 

Figure 1. Greenhouse Gas Emissions: Under EIA Baseline Forecast and S. 2191 Targets 

(Million Metric Tons C02 Equivalent) 

2012 

Gap in 2030: 

4,311 MMtC02e 

S. 2191 Emissions Target 

1990 2000 2010 2020 2030 2040 2050 

Source' "Energy Mark€t and Economic Impacts of S280, tile Climate Stewardship and InnovatiOn Act of 2007". U.S. Department of 

Energy, Energy Information Administration, August 2007 anc! ACCF calculations 

Figure 2, U.S. Population Projected to Increase 

1990 2000 2010 2020 2030 2040 2050 

U.s. Census Bureau, 2004, by Age, Sex. Race, and Hispanic Origin," 

3 
Table 1. U.S. Per Capita Covered GHG Emissions under Baseline Forecast and Decrease 

Required for S. 2191 Targets 

Historical and Baseline Emission S. 2191 Targets 

Emissions Population Per Capita Percent S.2191 Required Per Capita Per Capita Percent 

Year (MMTC02E) (Millions) GHG Emissions Change Targets GHG Emissions Change in Emissions 

1990 4,810.15 248.71 19.34 

2000 5,413.78 282.13 19.19 -0.8% 5414 19.19 

2012 5,995.47 314.28 19.08 -0.6% 5,200 16.55 -13.8% 

2020 6,613.74 335.81 19.70 3.2% 4,432 13.20 -20.2% 

2030 7,783.32 363.58 21.41 8.7% 3,472 9.55 -27.6% 

2000-2030 11.6% -50.2% 2012-2030 12.2% -42.3% 

Note: Baseline is for covered emissions. 

Source: Source for historical and baseline Emission forecast is "Energy Market and Economic Impacts of 8.280, the Climate 

Stewardship and Innovation Act of 2007". U.S. Department of Energy, Energy Information Administration, August 2007 

and ACCF calculations using S.2191 targets. 
80 

In order to meet the emission reduction targets in S. 2191, U.S. per capita emissions would have to fall by a total of 13.8 percent over the 2000–2012 period, an 

additional 20.2 percent from 2012 to 2020 and a further 27.6 from 2020 to 2030 (see 

Table 1). In other words, the required reductions in per capita emissions are about 

25 to 35 times greater than what occurred from 1990 to 2000. The technologies simply do not exist to reduce total (and per capita emissions) over the next 17 years 

by the amounts mandated in S. 2191—to say nothing of the time and expense required to replace existing energy-using equipment—without severely reducing the 

growth in the U.S. economy and in employment. The analysis above tends to corroborate Senator Lieberman’s recent statement that S. 2191 would cost ‘‘hundreds 

of billions’’ of dollars over the next few decades. Previous macroeconomic analyses 

of emission reduction targets similar to those of S. 2191 have concluded that the 

required cuts in U.S. energy use would reduce GDP levels by 1.5 to 2.5 percent annually and result in significant net job loss. 

PROS AND CONS OF MANDATORY GREENHOUSE GAS EMISSION REDUCTION PROGRAMS: 

CAP AND TRADE VERSUS A CARBON TAX

As policymakers deliberate the imposition of mandatory approaches to reducing 

U.S. GHG emissions, it is helpful to evaluate the strengths and weaknesses of the 

two prominent strategies: a cap and trade system and a carbon tax. A cap and trade 

system puts an absolute restriction on the quantity of emissions allowed (i.e., the 

cap) and allows the price of emissions to adjust to the marginal abatement cost (i.e., 

the cost of controlling a unit of emissions). A carbon tax, in contrast, sets a price 

for a ton of emissions and allows the quantity of emissions to adjust to the level 

at which marginal abatement cost is equal to the level of the tax. 

In a recent paper, Ian Perry of Resources for the Future notes that as a result 

of the success of the U.S. sulfur dioxide trading program and the start up of the 

European Union’s Emission Trading System, many in Congress have expressed support for a cap and trade system in the U.S. Perry cautions, however, that other options, such as tax on carbon emissions, may be a superior instrument if a mandatory 

federal carbon emission program were to be established (Weathervane, March 23, 

2007). 

• Cap and trade system and carbon price volatility 

Price volatility for a permit to emit CO2 can arise under a cap and trade program 

because the supply of permits is fixed by the government, but the demand for permits may vary considerably year to year with changes in fuel prices and the demand 

for energy. As mentioned above, price volatility for energy has negative impacts on 

economic growth. In contrast, a CO2 tax fixes the price of CO2, allowing the amount 

of emissions to vary with prevailing economic conditions. 

For example, in the EU the price of a permit to emit a ton of carbon has varied 

by 17.5 percent per month over the first 22 months’ operation of the ETS. As a new 

study by Dr. Michael Canes, senior research fellow at LMI, points out, volatility in 

fossil energy prices have strong adverse impacts on U.S. economic growth. Even a 

reduction in the rate of growth from such a shock of as little as 0.1 percent per year 

implies costs of over $13 billion per year. (Why a Cap & Trade is the Wrong Policy 

to Curb Greenhouse Gases for the United States, The Marshall Institute, July, 2007). 

In addition, studies have shown that a cap and trade program that gives away 

(rather than auctioning the permits) can be highly inequitable; the reason is that 

firms receiving allowances reap windfall profits, which ultimately accrue to individual stockholders, who are concentrated in relatively high-income group. 

• Cap and trade system and flexibility in timing of reductions 

Many experts conclude that it makes economic sense to allow nationwide emissions to vary on a year-to-year basis because prevailing economic conditions affect 

the costs of emissions abatement. This flexibility occurs under a CO2 tax because 

firms can choose to abate less and pay more tax in periods when abatement costs 

are unusually high, and vice versa in periods when abatement costs are low. Traditional permit systems do not provide similar flexibility because the cap on economy 

wide emissions has to be met, whatever the prevailing abatement cost. 

• Cap and trade system: impact on consumers and workers 

Regardless of how the allowances were distributed (unless they were all auctioned 

and the proceeds rebated to low income households), most of the cost of meeting a 

cap on CO2 emissions would be borne by consumers, who would face persistently 

higher prices for products such as electricity and gasoline. Those price increases 

would be regressive in that poorer households would bear a larger burden relative 

to their income than wealthier households would. In addition, workers and investors 
81 

in parts of the energy sector—such as the coal industry—and in various energy-intensive industries would be likely to experience losses as the economy adjusted to 

the emission cap and production of those industries’ goods declined. (Congressional 

Budge Office, Economic and Budget Issue Brief, April 25, 2007.) In contrast, carbon 

tax revenues could be rebated to low income individuals to offset the impact of higher energy prices caused by the tax on fossil fuels. 

• Impact of a cap and trade system on innovation 

Caps on emissions are not likely to promote new technology development because 

caps will force industry to divert resources to near-term, ‘‘end of pipe’’ solutions 

rather than promote spending for long-term technology innovations that will enable 

us to reduce GHGs and increase energy efficiency. An emission trading system will 

send exactly the wrong signals to investors because it will create uncertainty about 

the return on new investment. A ‘‘safety-valve’’ price of carbon (designed to create 

a sense of confidence about future energy costs) can easily be changed. Such uncertainty means that the hurdle rate, which new investments must meet, will be higher (thus less investment will occur) and they will be less willing to invest in the 

U.S. A tax on carbon would provide more certainty for investors and allow them to 

replace old capital equipment with less carbon intensive equipment during the replacement cycle. 

• Impact of a U.S. cap and trade system on global GHG emission growth 

Finally, caps on U.S. emission growth are unlikely to succeed unless all the relevant markets exist (in both developed and developing countries) and operate effectively. All the important actions by the private sector have to be motivated by price 

expectations far in the future. Creating that motivation requires that emission trading establish not only current but future prices, and create a confident expectation 

that those prices will be high enough to justify the current R&D and investment 

expenditures required to make a difference. Motivating new investment requires 

that clear, enforceable property rights in emissions be defined far into the future 

so that emission rates for 2030, for example, can be traded today in confidence that 

they will be valid and enforceable on that future date. The EU’s experience over the 

last two years, with the price of CO2 emission credits fluctuating between 1 and 30 

euros per ton of CO2, does not inspire confidence in companies having to make investment decisions. The international framework for climate policy that has been 

created under the UNFCCC and the Kyoto Protocol cannot create that confidence 

for investors because sovereign nations have different needs and values. 

• Carbon taxes: potential drawbacks 

A carbon tax, as a system of inducing emissions reductions, is not without drawbacks. First, revenues from a CO2 tax (or auctioned permits) might end up being 

wasted; for example, if the revenue went toward special interests, rather than substituting for other taxes. Second, progress on emissions reductions is uncertain 

under a CO2 tax because emissions vary from year to year with economic conditions. 

WHAT CAN WE LEARN FROM THE EUROPEAN UNION’S EMISSION TRADING SYSTEM? 

As we attempt to choose the right path for a U.S. GHG emission reduction strategy, it is useful to examine the cost-effectiveness of current policies to reduce GHG 

emissions in developed countries. In the European Union, reduction of GHGs has 

become a major policy goal and billions of euros, from both the private and the public sector, have been spent on this policy objective. Many policymakers, the media 

and the public believe that the European Union’s Emission Trading System (ETS) 

has produced reductions in GHG emissions and that their system could serve as a 

model for the U.S. The ETS, created in 2005, is a market-based, EU-wide system 

that allows countries to ‘‘trade’’ (i.e., buy and sell) permits to emit CO2. The ETS 

covers about 11,500 installations and almost half of the EU’s GHG emissions. 

The EU 15 (the major industrial countries) have a Kyoto Protocol target of an 8 

percent reduction below 1990 levels in GHGs by 2010–2012. The European Environmental Agency’s latest projections (October 2006) show that without strong new 

measures, EU 15 emissions will be 7.4 percent above 1990 levels in 2010, rather 

than 8 percent below as required by the Kyoto Protocol (see Figure 3). Further evidence of the challenge the EU faces in meeting its Kyoto Targets is found in a recent report by the European Commission showing that electricity consumption continues to rise. Over the 1999–2004 period, residential and commercial electricity 

consumption increased by 10.8 percent and industrial electricity use rose by 6.6 percent in spite of numerous incentives to increase EU energy efficiency (Electricity 

Consumption and Efficiency Trends in the Enlarged European Union, Joint Research Centre, European Commission, July, 2007). 
82 

The fact that the European Environmental Agency projects that the EU 15 will 

be 7 percent above 1990 levels of emissions in 2010 (instead of 8 percent below) 

demonstrates that the mandatory ETS system as currently structured is not providing the desired results and that much stronger measures will be required to meet 

the Kyoto Protocol target as well as the new post-2012 target. In addition, the EU’s 

new report ‘‘The Fourth Assessment’’ (October 10, 2007) observes that ‘‘a further reduction of 7.1 percent or 303 million tonnes of CO2 equivalent is needed to meet 

the Kyoto target’’ and that further domestic policies and measures will have to be 

implemented. Implementing even tighter emission targets or higher energy taxes in 

the EU is likely to be politically difficult. 

STRATEGIES TO REDUCE GLOBAL AND U.S. GHG EMISSION GROWTH

Slowing the growth of global GHG emissions will depend on factors such as increased energy efficiency, technology developments in both fossil fuels (carbon capture and storage, for example) and renewable fuels (wind and solar, in particular) 

and, most likely, on increased reliance on nuclear power for electricity generation. 

In addition to reducing GHG growth in the developed countries, it will be necessary 

to increase energy efficiency and reduce the growth of greenhouse gas emissions in 

the developing world since that is where the strong growth in emissions is coming 

from (see Figure 4). Making progress on these objectives will require a significant 

commitment of resources, much of which will need to come from the private sector. 
83 

Technology development and deployment offers the most efficient and effective 

way to reduce GHG emissions and a strong economy tends to pull through capital 

investment faster. There are only two ways to reduce CO2 emissions from fossil fuel 

use—use less fossil fuel or develop technologies to use energy more efficiently to 

capture emissions or to substitute for fossil energy. There is an abundance of economic literature demonstrating the relationship between energy use and economic 

growth, as well as the negative impacts of curtailing energy use. Over the long-term, 

new technologies offer the most promise for affecting GHG emission rates and atmospheric concentration levels. 

The role of international partnerships in promoting institutional change and favorable investment climate in developing countries 

Research by Drs. David Montgomery and Sugandha Tuladhar of CRA International makes the case that agreements such as the Asia-Pacific Partnership on 

Clean Development and Climate (AP6), an agreement signed in 2005 by India, 

China, South Korea, Japan, Australia and the United States, offers an approach to 

climate change policy that can reconcile the objectives of economic growth and environmental improvement for developing countries. (See www.iccfglobal.org for the 

full paper.) Together, the AP6 partners have 45 percent of the world’s population 

and emit 50 percent of man-made CO2 emissions. The projections of very strong 

growth in greenhouse gases in developing countries over the next 20 years mean 

that there is enormous potential for reducing emissions through market-based 

mechanisms for technology transfer. 

Drs. Montgomery and Tuladhar note that there are several critical factors for ensuring the success of an international agreement which relies strongly on private 

sector investment for success. Their research shows that institutional reform is a 

critical issue for the AP6 because the lack of a market-oriented investment climate 

is a principal obstacle to reducing greenhouse gas emissions in China, India and 

other Asian economies. China and India have both started the process of creating 

market-based economic systems, with clear benefits in the form of increased rates 

of economic growth. But the reform process has been slow and halting, leaving in 

place substantial institutional barriers to technological change, productivity growth, 

and improvements in emissions. The World Bank and other institutions have carried out extensive investigations about the role of specific institutions in creating 

a positive investment climate. These include minimizing corruption and regulatory 

burdens, establishing an effective rule of law, recognition of intellectual property 

rights, reducing the role of government in the economy, removing energy price distortions, providing an adequate infrastructure and an educated and motivated labor 

force. 
84 

• Importance of technology transfer for emission reductions 

As described above, technology is critically important because emissions per dollar 

of income are far larger in developing countries than in the United States or other 

industrial countries. This is both a challenge and an opportunity. It is a challenge 

because it is the high emissions intensity—and relatively slow or non-existent improvement in emissions intensity—that is behind the high rate of growth in developing country emissions. 

Opportunities exist because the technology of energy use in developing countries 

embodies far higher emissions per dollar of output than does technology used in the 

United States; this is true of new investment in countries like China and India as 

well as their installed base (see Figure 5.) The technology embodied in the installed 

base of capital equipment in China produces emissions at about four times the rate 

of technology in use in the United States. China’s emissions intensity is improving 

rapidly, but even so its new investment embodies technology with twice the emissions intensity of new investment in the United States. India is making almost no 

improvement in its emissions intensity, with the installed base and new investment 

having very similar emissions intensity. India’s new investment also embodies technology with twice the emissions intensity of new investment in the United States. 

• The role of economic growth and technology in GHG reduction 

Many policymakers overlook the positive impact that economic growth can have 

on GHG emission reductions. For example, in 2006, while the U.S. economy grew 

at 3.3 percent, CO2 emissions fell to 5,877 MMTCO2, down from 5,955 MMTCO2 in 

2005, a 1.3 percent decrease. Overall energy use only declined by 0.9 percent, indicating the U.S economy is becoming less carbon intensive even without mandatory 

emission caps or carbon taxes. 

Internationally, the U.S. compares well in terms of reducing its energy intensity 

(the amount of energy used to produce a dollar of output). The U.S., with its voluntary approach to emission reductions, has cut its energy intensity by 20 percent 

over the 1992-2004 period compared to only 11.5 percent in the EU with its mandatory approach (see Figure 6). Strong U.S. economic growth, which averaged over 3 

percent per year from 1992 to 2005 compared to about 1 percent in the EU, is responsible for the U.S.’s more rapid reduction in energy intensity in recent years. 

• Accelerating U.S. energy efficiency and GHG reductions 

The development of various high technology programs and new energy efficient 

investments can be accelerated through government programs as well as by reforms 

to the federal tax. For example, some policies may be of particular help to taxable 

entities while others would be of more benefit to cooperatives (which pay little or 

no federal income tax). 
85 

Companies subject to the federal income tax 

The efforts of U.S. industries to increase energy security and efficiency and to reduce growth in GHG emissions are hindered by the slow rate of capital cost recovery 

allowed under the U.S. federal tax code and by the high U.S. corporate tax rate. 

As a new Ernst & Young international comparison shows, the U.S. ranks last or 

nearly last among our trading partners in terms of how quickly a dollar of investment is recovered for many key energy investments. For example, a U.S. company 

gets only 29.5.cents back after 5 years through depreciation allowances for each dollar invested for a combined heat and power project. In contrast, in China the investor gets 39.8 cents back, in Japan, 49.7 cents, in India, 55.6 cents and in Canada 

the investor gets 79.6 cents back after 5 years for every dollar invested. Another 

example is U.S, investment in ‘‘smart meters’’, which can substantially reduce electricity use. U.S. investors only get 29.5 cents back after 5 years, compared to $1.00 

in India and 63.1 cents in Germany (see Figure 7). (See full report at: http:// 

www.accf.org/pdf/Energy-Depreciation-Comparison.pdf.) 

In addition to slow capital cost recovery allowances, U.S. industry faces the highest corporate income tax rates among our primary trading partners. Of the 12 countries in the E&Y survey, only Japan had a higher corporate tax rate than the U.S. 

Reforms to the U.S. tax code to speed up capital cost recovery allowances and reduce 

the corporate tax rate would reduce the cost of capital and could have a positive 

impact on energy sector investment, and help ‘‘pull through’’ cleaner, less-emitting 

technologies. 
86 

Non-taxable entities 

For non-taxable entities such as electric utility cooperatives, other incentives 

could be provided to encourage the more rapid adoption of new technologies to reduce GHG emissions. For example, electric cooperatives and their consumers cannot 

apply or benefit from traditional tax incentives because as not-for-profit utilities, 

they do not have significant federal income tax liability to offset. However, to ensure 

that the not-for-profit electric utility sector is able to participate in incentives for 

advanced low carbon technologies, incentives comparable to those offered to for profit entities can be created. One example is the successful Clean Renewable Energy 

Bond program that permits electric cooperatives and others to issue bonds that act 

as interest-free loans for the purpose of building qualified renewable generation. 

The CREB program can be adapted for other technologies that achieve carbon reduction goals. Grants are another avenue to assist not-for-profits in adopting new 

technology. 

CONCLUSIONS

To be effective, policies to reduce global GHG emission growth must include both 

developed and developing countries. Polices which enhance technology development 

and transfer are likely to be more widely accepted than those that require sharp, 

near term reductions in per capita energy use. Extending the framework of the 

Asia-Pacific Partnership on Clean Development and Climate to other major emitters 

will allow developed countries to focus their efforts where they will get the largest 

return, in terms of emission reductions for the least cost. 

Finally, if the United States does adopt a mandatory greenhouse gas emissions 

reduction program, serious consideration should be given to implementing a carbon 

tax rather than an EU-style cap and trade system. A key component of any mandatory U.S. program should be allowing emissions to increase as both economic growth 

and U.S. population increase. 
International Comparison of Nominal Capital Costs Recov

After Five Years for Selected Energy InvestmentsJ 2006 

Electric TranSmlSSJOn & Distribl1tion Pollution Electric Generation Lines Conlml Petroleum R

Equipment 

Combined Self- Crude Unit 

Gas Coal Nuclear Heat & Generated Transmissfon Distrlbutmn Smart Discnarge (Dfstillatioo C

Power E.lectricity Lines Lines Mete", Modification Unit) C

Generation 

United 37.7% 2R5% 37J% 29.5% 37.7% 37.7% 29"5% 29"5% 64"3% 63"1% 

Slates 

Brazil 37.7% 47SY, NIA 3n% 63.1%1 20,6°/(1 20"6% 31.2% 89.6% 63.1% 

Canada 79.6% 79.6% 79.6% 79.6% 79_6% 31.2% 3L2% 63,1% 79.6% 79.6% 

Chi"" 39.8% 39.8% 39.8% 39.8% 39.8% 39.8% 39.8% 39"1>% 41"3% 39"8% 

- --

German'y 30.0% 30.0% 37"5% 30"0% 30"0% 33.1% 33"1% 63"1% 79.6% 72.3% 

--

India 55"6% 55.6% 55.6% 55.6% 55"6% 55.6% 55.6% 100.0% 100.0% 66"1% 

fndonesia 45"0% ! 45.0% 45.0% 45.0'11/0 45.0% 45"0% 45.0% 45.0% 4S.Q% 45.0% 

--

Japan 49"7% 49"7% 49J% 49J% 45"6% 37.4% 37.4% 49J% m9% n3% 

""----

Rep 01 57.7% 57."% 57]% 57.7% 57.7% 57.7% 57.7% 57.7% 89.0% 89.0% 

Korea 

--'-.-.. 

Malaysia 100.0% 100"0% 100"0% 100.0% 100.0% 90,0% 90.0% 90.0% 100"0% 90"0% 

I---- " -

Mexico 46.2% 46.2% 46.2% 462% 46.2% 23Y'{' 23.1% 231% 101,2% 32.3% 

-

TaIWan 49.7% 49.7% 49"7% 49.7% 49.7% 49]% 49.7% 49.7% 96"6% 78.5% 

':--c-.' April 25, :20ll7 Prepared by the Quanti!ati'il'e Loooomics al"ld Stahstics Group, Em
88 

RESPONSE BY MARGO THORNING, PH.D., TO AN ADDITIONAL QUESTION FROM

SENATOR INHOFE

Question. Based on your testimony and the testimony of the other witnesses, is 

there anything else you would like to add? 

Response. Executive Summary.—Impact of S. 2191 on U.S. Energy Use: A major 

stumbling block to the U.S.’s meeting the S. 2191 targets is projected increases in 

covered emissions and population growth over the next several decades. Forecasts 

of baseline covered emissions show emissions growing by 30 percent from 2012 to 

2030, from 5,995 to 7,783 million metric tons of carbon dioxide equivalent 

(MMTCO2e). Sharp cutbacks in U.S. energy use would be necessary to close the 55 

percent gap (4,311/MMTCO2e) in 2030 between projected emissions and the S. 2191 

target. 

Impact of S. 2191 on U.S. Per Capita Emissions: The projected 18 percent increase in U.S. population from 2010 to 2030 will make GHG emission reductions 

very challenging since more people means more energy is needed for home heating 

and cooling, job growth and transportation. Over the entire decade between 1990– 

2000, per capita emissions in the U.S. fell by only 0.8 percent and they are projected 

to decline by only 0.6 percent between 2000 and 2012. To meet the emission reduction targets in S. 2191, U.S. per capita emissions would have to fall by 50 percent 

from 2000 to 2030. S. 2191’s required reductions in per capita emissions are about 

25 to 35 times greater than what occurred from 1990 to 2000. The technologies simply do not exist to reduce emissions over the next 17 years by the amounts mandated in S .2191 without severely reducing the growth in the U.S. economy and in 

employment. 

The European Union’s Emission Trading System: Many policymakers, the media 

and the public believe that the European Union’s Emission Trading System (ETS) 

has produced reductions in GHG emissions and that their system could serve as a 

model for the U.S. Projections show that the major EU countries will be 7 percent 

above 1990 levels of emissions in 2010 (instead of 8 percent below). The mandatory 

ETS system as currently structured is not providing the desired results and much 

stronger measures will be required to meet the Kyoto Protocol target as well as the 

new post-2012 target. 

Strategies to Reduce Global and U.S. GHG Emission Growth: Slowing the growth 

of global GHG emissions will depend on factors such as increased energy efficiency, 

technology developments in both fossil fuels (carbon capture and storage, for example) and renewable fuels (wind and solar, in particular) and on increased reliance 

on nuclear power for electricity generation. In addition to reducing GHG growth in 

the developed countries, it will be necessary to increase energy efficiency and reduce 

the growth of greenhouse gas emissions in the developing world since that is where 

the strong growth in emissions is coming from. Initiatives like the Asia-Pacific Partnership on Clean Development and Climate and reforms to the U.S. federal tax code 

to reduce the cost of capital for new energy investments as well as programs designed for non-profit energy service providers could accelerate the uptake of cleaner, 

less-emitting technologies as well as strengthen U.S. economic growth. 

[See pages 115–147.] 

Senator BOXER. Mr. Barbour, please try to keep yourself within 

the limit. I should say, you are the executive director of Environmental Resources Trust. 

STATEMENT OF WILEY BARBOUR, EXECUTIVE DIRECTOR, 

ENVIRONMENTAL RESOURCES TRUST, INC. 

Mr. BARBOUR. Thank you, good morning, Madam Chairman and 

distinguished members of the Committee. My name is Wiley 

Barbour, I am the executive director of the Environmental Resources Trust, a non-profit organization dedicated to pioneering 

markets to protect and improve the global environment. 

I am here today to talk about the design of a greenhouse gas 

emissions cap and trade market that can deliver real results in 

emission reductions, cost effectively, real value to market participants and real progress in delivering low-carbon technologies and 

energy alternatives. I am a licensed professional environmental engineer. In my earlier life, I spent 6 years at the U.S. EPA in the 
89 

policy office and in the Clean Air Markets Division. I coordinated 

an interagency team that was responsible for compiling the Federal 

Government’s annual inventory of emissions by sources and removals by sinks of greenhouse gases and reporting that to the United 

Nations under the terms of the Framework Convention on Climate 

Change. 

I believe we succeeded in completing a policy relevant by policy 

neutral analytic framework which is used today by modelers, climate modelers, economists and policy makers on both sides of the 

issue. Our expertise is in the measurement of greenhouse gas emissions and the verification of corporate and project level emission reductions. We also own a portfolio of Government-issued allowances 

and credits. We have engaged in multi-million dollar trades of 

these as we have grown our portfolio of these emission allowances 

over time. I can tell you from first-hand experience that these markets work and can achieve real environmental benefit. 

We are not an advocacy group. We are an implementation shop, 

if you will. We work with a broad spectrum of companies that are 

serious about getting the numbers right about their carbon footprint. We work with Google, Wal–Mart, NewsCorporation, the 

owner of Fox News, Entergy Corporation, AIG, amongst many others. Many of these companies and private groups that we work 

with are actively participating now in environmental markets and 

emissions trading. Their motivations are as diverse as the companies themselves. Some of them are interested in purchasing emission reductions in order to offset their emissions and become carbon neutral; some of them are trying to sell these as part of a sustainable business practice. Some companies we work with are large 

emitters and they are purchasing these types of greenhouse gas offsets because they are likely to be regulated. They want a clear policy signal from Washington on what counts and what doesn’t. 

Also leading exchanges are listening very carefully from these 

statements from companies and trying to figure out what types of 

services they can provide. The New York Mercantile Exchange, for 

example, is working extensively with utilities, hedge funds, investment banks, environmental brokers to establish a set of contracts 

that market participants need to effectively manage the risk and 

gain exposure to these markets. NYMEX has cared an environmental market steering committee, which I chair, and reached out 

to leading experts in order to foresee and prepare for the needs of 

a future mandatory compliance system. 

I believe the lessons we have learned in this country on existing 

markets can serve as a model for the design of future markets. A 

professional community has developed in this country that understands how to support this trading system. We have the talent pool 

here that understands, how do we measure and monitor and verify 

these types of emission estimates. Based on that, we can create a 

fully fungible commodity of greenhouse gas reductions suitable for 

exchange in an environmental market, markets that will encourage 

real greenhouse gas reductions across the country in an effective 

manner. 

I am here today to testify to the feasibility of that market and 

the accounting systems that would be required to make that work. 

The one critical piece we are missing is the law that mandates that 
90 

cap. The cap creates the constraint which ultimately drives demand. To put it another way, only a cap on emissions can create 

the robust demand for allowances and credits that is needed to 

start and rev this market engine. For the last 20 years, we have 

tried to use voluntary programs in the United States, and despite 

all that outreach and participation and consultation of numerous 

public and private groups, the voluntary approach has failed to deliver at the national level absolutely reductions, or to even change 

the trend of our growing greenhouse gas emissions. 

I think that we have learned a lot from the acid rain program. 

In the interest of time, I will be very brief. We have found that this 

market-based approach works. It has reduced acid rain emissions 

by 5.5 million tons from 1990 levels. NOx emissions are down 3 

million tons, and at cost savings of $3 billion a year as opposed to 

a typical command and control approach, as the Government Accountability Office has recently found. This experience that we 

have gained from the acid rain program I think stands us in good 

stead. We have learned some of the provisions from that that I see 

reflected in the Senate Bill before us today. I believe that the 

greenhouse gas cap and trade system will be more complicated and 

will require participation from a larger number of sectors. But 

many of the mechanisms that we have learned apply, and I think 

we understand the core elements. I know given in the interest of 

time, I should probably stop there. So we stand ready to answer 

questions. 

[The prepared statement of Mr. Barbour follows:] 

STATEMENT OF WILEY BARBOUR, EXECUTIVE DIRECTOR OF ENVIRONMENTAL

RESOURCES TRUST, INC. 

Good morning Mr. Chairman and distinguished members of the Committee on Environment and Public Works. 

My name is Wiley Barbour, and I am the Executive Director of Environmental 

Resources Trust, a program of Winrock International. 

I’m here today to talk about how to design a greenhouse gas emissions cap and 

trade market that will deliver real results in emissions reductions, real value to 

market participants, and real progress in developing low-carbon technologies and 

energy alternatives. 

I am a licensed professional environmental engineer. In my earlier life I spent six 

years at the U.S. EPA working in the Policy Office and in the Clean Air Markets 

Division. I coordinated an interagency team that was responsible for compiling the 

Federal Government’s annual inventory of GHG emissions and reporting that to the 

United Nations under the terms of the Framework Convention on Climate Change. 

I instituted an expert and public peer review process which is still in use today to 

allow scientific and technical input into the development of the GHG emission calculations and I believe we succeeded in creating a policy relevant but policy neutral 

analytic framework which is widely used today by climate modelers, economists, and 

policymakers. 

Environmental Resources Trust is a politically neutral 501 (c)(3) nonprofit organization and we have been working on climate change and energy policy since our creation in 1996. Our mission is to pioneer and catalyze markets to protect and improve the global environment. Our expertise is in the measurement of greenhouse 

gas emissions, the verification of corporate and project level GHG emission reductions, and in the provision of registry services to companies who wish to buy or sell 

high quality greenhouse gas emission offsets. ERT owns a portfolio of emission allowances and credits and we have engaged in multimillion dollar trades as we have 

grown our portfolio over time, so I can tell you from firsthand experience that these 

markets work and can achieve real environmental benefit. 

ERT is composed primarily of scientists and engineers; we are not an advocacy 

group—we are a market implementation shop offering a variety of technical services 

to government agencies, private companies and multinational corporations who are 

serious about engaging in emerging environmental markets. We work with a broad 
91 

spectrum of companies that are serious about getting the numbers right—about accounting for their carbon footprint with the highest integrity. Amongst the companies that have engaged ERT to verify their global greenhouse gas emissions are 

Google, Wal-Mart, NewsCorporation (the owner of FoxNews), Entergy Corporation, 

and AIG. 

Our firm also owns 16,000 SO2 allowances and participates in the Acid Rain trading program. 

Many of the companies and private groups we work with are interested or actively 

participating in environmental markets and emissions trading. Their motivations 

are as diverse as the companies themselves; some are interested in purchasing 

verified emission reductions in order to offset their own emissions and thus become 

‘‘carbon neutral.’’ Some are seeking to sell offsets as part of a sustainable business 

practice. Some of the companies we work with are large emitters who are purchasing greenhouse gas reductions because they are likely to be regulated under a 

climate change bill and want to gain experience with market mechanisms. These 

companies are seeking a clear policy signal from Washington. 

Leading exchanges are also listening carefully to the statements from corporations 

and trying to forsee how the market can provide services. The New York Mercantile 

Exchange (NYMEX), for example, has worked extensively with utilities, hedge 

funds, investment banks, environmental brokers and environmental groups since 

March, 2007 to establish a set of contracts that market participants need to effectively manage risk and gain direct exposure to the emissions markets. NYMEX has 

created an Environmental Markets Steering Committee, which I serve on, and 

reached out to leading experts in an effort to foresee and prepare for the needs of 

a future compliance system. 

At ERT, we responded to the demand from the private sector and created the 

GHG Registry®, the world’s first on-line registry of greenhouse gas emissions and 

reductions. For over a decade, the GHG Registry Program has provided the tools, 

protocols, guidance, and infrastructure needed to create a fungible commodity for bilateral trading in voluntary environmental markets. The GHG Registry currently 

contains almost 17 million tons of tradable GHG offsets and members of the GHG 

Registry have traded over 1.3 million tons of GHG offsets so far this year. 

I believe that the lessons we have learned in the operation of our programs are 

valuable and can serve as a model for the design of mandatory markets. ERT’s experience demonstrates that a professional community has developed in this country 

that understands how to support a trading system. We now have a talent pool in 

this country that understands how verification and monitoring under appropriate 

rules and guidelines can measure real environmental improvements. Based on that 

knowledge, we know that we can create a fungible commodity of greenhouse gas 

emissions, suitable for exchange in an environmental market, markets that will encourage real greenhouse gas emission reductions across the economy in the most efficient manner. 

I’m here today to testify to the feasibility of a carbon market here in the United 

States. My colleagues in the GHG accounting business are doing everything we can 

to make a market function, but one critical piece is missing and that’s the law that 

mandates the cap, which creates the constraint, and ultimately drives demand. To 

put it another way, only a cap on emissions will create robust demand for allowances and credits that is needed to start the market engine. 

If there is any doubt over this observation, market activities over the last few decades should provide sufficient evidence. For the last 20 years we have tried to use 

voluntary programs in the United States to reduce our GHG emissions. Despite the 

outreach, consultation and participation of numerous public and private groups, the 

voluntary approach has failed to deliver at the national level absolute reductions or 

to change the trend of our ever increasing emissions. 

For all the activity in the voluntary markets, it is nowhere near the volume and 

capitalization we would see under a mandatory system—that volume would result 

in real emissions reductions, and would mobilize private sector players to develop 

low carbon alternatives in a way that we’re not seeing now. 

II. OBSERVATIONS

I’m sure that you have heard in previous testimony of the success of EPA’s Acid 

Rain Program, which has achieved significant environmental and public health benefits through use of a market-based approach similar to the cap-and-trade provisions 

of the Climate Security Act of 2007. 

In the eleven years that the program has operated, the Acid Rain Program has 

reduced SO2 emissions by more than 5.5 million tons from 1990 levels, or about 35 

percent of total power sector SO2 emissions. NOx emissions are down by about 3 
92 

million tons from 1990 levels, so that emissions in 2005 were less than half the level 

anticipated without the program. 

The General Accounting Office recently confirmed the benefits of this market approach to reducing acid rain pollution, finding that the SO2 allowance trading system has saved as much as $3 billion per year—over 50 percent—compared with a 

command and control approach typical of previous environmental protection programs. 

The SO2 program has provided valuable market experience for the electric generating industry, virtually all of which will be participants in a greenhouse gas emissions trading market. The SO2 program is a closed system that affected 3,456 operating electric generating units as of 2005 with most emissions produced by only 

about 1,100 coal-fired units. Over 16 million allowances have been issued under the 

Acid Rain program and of those almost 7 million are ‘‘banked’’ by participants seeking the flexibility to use them in the future, giving them price certainty and operational flexibility. 

Banking is an important feature of a well designed market based system—it 

incentivizes companies to over comply today and bank their unused allowances for 

later use. Participants in that program have expressed enthusiasm for the flexibility 

this mechanism provides. It’s often referred to as the ‘‘when/where’’ flexibility of the 

program—allowing individual firms to determine when and where it is best for them 

to make the required reductions. 

The program contains a robust trading market with multiple facilitators participating—including brokerage firms, traders, and bilateral, or firm to firm, trading. 

Despite early concerns about companies having to become more savvy about trading, 

the regulated companies have figured out how to do it, and have enjoyed greater 

efficiency in their compliance approaches as a result. 

The success of this program is a direct result of its excellent design. We can design a larger greenhouse gas emissions market to engage the same mechanisms to 

create similar efficiencies and flexibility—leaving it up to companies to decide how 

best to meet their emissions reduction targets. 

Admittedly, a cap-and-trade program for GHGs will be more complicated and require participation of a larger number of sources, but many of the same mechanisms 

apply. The experiences and lessons learned from existing greenhouse gas emission— 

or ‘‘carbon’’—markets, both here in the US as well as in Europe, will serve us well 

as we develop our own solutions. I’d like to talk a little bit more about: 

• What are core elements that make the market work? 

• What are the core things you have to watch out for? 

• (And I will get into the EU experience on both topics, which is very helpful for 

us.) 

BUILDING ENVIRONMENTAL MARKETS

The foundation for a successful market is built on our ability to measure, report, 

and verify GHG emissions by each source and to track these emissions over time. 

A market requires a set of rules governing the creation and ownership of allowances 

and credits and a system to track these as they are created, allocated, traded, and 

ultimately used and retired from the system. 

Fortunately, this market infrastructure is largely now in place. Based on our experience here in the U.S. with voluntary markets, and drawing on the experiences 

and lessons we have taken away from the Acid Rain program, the EU emissions 

trading program and the international GHG market, we now have in place the fundamental building blocks for successful environmental markets. 

First, the accounting of emissions and their reductions needs to be established 

and scientifically based. 

We have a scientific basis, grounded in peer reviewed literature, for quantifying 

emissions by sources, and removals by sinks, of greenhouse gases. These methods 

are described and documented in guidelines developed by the Intergovernmental 

Panel on Climate Change with extensive input and leadership by U.S. scientists and 

experts. We understand the processes that create greenhouse gas emissions. We 

have accepted methodologies for quantifying emissions of GHGs from combustion of 

fossil fuels, responsible for over 85% of total U.S. emissions of GHGs. In addition, 

we can quantify these emissions with very high degrees of certainty, often with a 

confidence level of plus or minus two percent or less. 

Offsets particularly fall into this category. What’s needed is to match or marry 

these scientific principles with clear policy guidance on what counts, such as: what’s 

the appropriate baseline to count emissions reductions against, how to account for 

non-permanent ‘‘sinks’’, such as forests, create specific rules for offset project accounting, such as how long the crediting period would last and how to distinguish 
93 

projects that create additional emissions reductions, and the rigor and frequency. A 

number of entities, including the USDA, EPA, and prominent universities have established standards for offset projects. 

These measurement protocols and methodologies allow for the creation of a standardized, fungible commodity that can be efficiently traded. 

Second, establish the mechanisms that will allow this accounting to take place. 

We have software systems, clearing mechanisms, measurement techniques, and 

ways to track ownership of allowances that could be rather quickly deployed to support the needs of the GHG cap and trade market. Some of these exist within the 

EPA as a result of the Acid Rain program; others, such as the financial clearing 

mechanisms, have been developed in the private sector and stand ready to be used 

in this market. 

Third, establish clear and consistent rules to allow all market participants to 

plan, make decisions, and allocate capital with a degree of certainty that the program goals are not going to change, such as: 

• Reporting requirements need to be clearly stated as soon as possible. 

• Information about how to apply for early action credits needs to be clear. 

• Provide requirements for auditing or verification of emissions. 

• Establish procedures for establishing non-compliance. The rules should 

incentivize compliance, being set up in such a way that the penalty for non-compliance exceeds the cost of compliance. 

These rules need to be articulated for the non-electric energy sector also, including 

the agriculture, transportation, and commercial sectors of the economy—basically 

anyone you would expect to be participating. 

Fourth, establish market mechanisms, exactly as outlined in the legislation, including banking, borrowing, and trading. These mechanisms are essential to allowing individual regulated entities the most flexibility, including the ability to manage 

their capital investment decisions, in pursuing emissions reduction goals. 

Fifth, allow broad intermediaries, service providers, agregators, and other entrepreneurs to participate, harnessing the creativity of the private sector. Those participants should be engaged unless there were some specific restriction. 

Now I will turn to the core things you need to watch out for. 

One of the things we learned from the earliest phase of the EU ETS, the European GHG cap and trade market, was that the allocation process itself is a critically 

important component of both creating a robust trading system and achieving the desired environmental outcome. 

In the first phase of the EU ETS, they overallocated allowances, and did not allow 

the value of permits to exist across allocation periods—in other words, there was 

no banking allowed across periods. As a result the price, and therefore the value, 

of those allowances, plummeted in the months before the end of the first trading 

phase. 

This brings up an important point: once regulated entities are participants in the 

market, they will not only be concerned with high prices, but they will also be concerned with making sure their allowances maintain value—they don’t want watch 

those credits turn into ‘‘Monopoly money’’. We can easily avoid this problem by allowing banking, as the EU now does, and through carefully constructed allocation 

schemes. 

Allocation to individual regulated entities should be conducted fairly, but in accordance with the desired environmental outcome; allocation at the beginning of a 

compliance period should be consistent with the desired environmental outcome to 

maintain their value. 

What we need now are clear market signals from policy makers, and clear guidance from the federal government on the rules of the road. In the absence of federal 

leadership on these issues, a host of NGOs, states, and industry groups have waded 

into these waters. The result has been some disagreement over what counts but this 

is not an intractable problem. 

I believe that S. 2191 contains many the most important elements and provides 

an excellent framework for developing a robust U.S. greenhouse gas emissions trading market. 

Once we have clear rules of the road the market will function and help identify 

the least cost approaches to reducing GHG emissions. I look forward to working 

with the Committee, EPA, DOE, and my colleagues in the private sector to assist 

in the transition to mandatory markets. I thank you for your time. 

Senator BOXER. Mr. Barbour, thank you very much. 

I will start right away. Ms. Smith, you are sort of the voice of 

doom and gloom on this today, laying out what horrible things are 
94 

going to happen to us if we adopt this environmental landmark legislation. I looked over a list of your clients, and I want to make 

sure I have it right. Is OPEC one of your clients, ma’am? 

Ms. SMITH. Not one of mine. 

Senator BOXER. No, one of the firm’s. 

Ms. SMITH. I don’t know. 

Senator BOXER. Well, it is in the list of your clients. Is ARCO one 

of the firm’s clients, ma’am? 

Ms. SMITH. It has been in the past. 

Senator BOXER. How about American Petroleum Institute, Chevron, ConocoPhillips, ExxonMobil, Halliburton, Occidental Oil and 

Gas, and Shell Oil? Are they your clients, the firm’s clients as well? 

Ms. SMITH. Anything listed on our web site are previous clients 

of ours. We have acknowledged that we worked for them publicly 

on some issue. We work in many areas far beyond environmental—— 

Senator BOXER. Well, I am just trying to make a point. Because 

I think when witnesses come before us and give us ‘‘independent 

analyses’’ I think it is really important to know, just as you want 

to know what our views are, and we are an open book on that, who 

you have represented in the past. The Natural Gas Supply Association, it goes on and on and on. 

So I am going to place the list of clients into the record, and I 

think the people need to put—— 

Ms. SMITH. That is the nature of working for business, to help— 

that is the nature of working for business, is to help them do a better job meeting their requirements. 

Senator BOXER. Well, there is business and there is business 

when it comes to global warming. We have had many businesses 

here that are very much in favor of moving, I mean, I don’t need 

to name them all. So I want to make sure people know who your 

clients are when you come up and you give us these analyses. 

Ms. SMITH. Among them are some who are supporting legislation 

for climate policy. 

Senator BOXER. Excellent. 

Now, I want to know, Ms. Smith, when you made your analysis, 

did you go look at what is going on in California? Do you believe 

in general that environmental laws are in conflict with a strong 

economy? Is that your underpinning belief? 

Ms. SMITH. No, I do not believe that. I don’t believe the economy 

could not reduce emissions, I said that the timing of these caps is 

too tight in the near term to achieve the caps without disruption 

in the near term. I did not say that we can’t achieve large emission 

reductions and economic growth. 

Senator BOXER. Well, excuse me, I listened to you and you talked 

about reductions in GDP, reductions in GDP, you said overall there 

will be all these job losses, even though we will have some growth. 

I asked you if you looked at the California experience, because on 

a bipartisan way, we have led the way. Do you know we’d be the 

fifth largest economy in the world if you looked at our State GDP? 

Are you aware of that, in California? 

Ms. SMITH. Yes, I am, and I am aware that California has 

achieved enormous reductions in energy intensity in its economy. 

I am also aware that this has in large part occurred as much of 
95 

the energy intense manufacturing has moved to other parts of the 

United States. 

Senator BOXER. Well, ma’am, I would like to tell you if you want 

to check out job growth in California, increase in incomes, and 

what has happened there, particularly in a bipartisan way as we 

have moved toward environmentally friendly legislation, including 

basically the Sanders-Boxer bill, with those goals, the excitement 

there, I would just say to both of the economists here, I would be 

happy to work with you on meeting some of our economic leaders 

in California. Because I think Mr. Barbour made the point very 

clearly that in fact, there is very good news on the horizon. 

Now, what I am going to do now is hand my questions over for 

another round to Senator Lieberman, hand him the gavel. I want 

to thank members of the panel very, very much for your testimony. 

Senator Inhofe. 

Senator INHOFE. Thank you, Madam Chairman. I think this is 

going to work, she is going to go down and take the first 71⁄2 minutes and I will be right behind you. 

Very quickly, let me just ask two yes or no questions to you, Mr. 

Darbee, and to you, Mr. Pershing. First of all, Mr. Darbee. If your 

company could not receive free allowances initially, would you still 

support the bill, yes or no? Time is getting by us here. 

Mr. DARBEE. I would have to look at the whole structure, but 

probably not. 

Senator INHOFE. All right, thank you very much. 

Mr. Pershing, would you organization support significant increases in nuclear power? 

Mr. PERSHING. My expectation is that we might, depending on 

the circumstances. 

Senator INHOFE. Ms. Smith, let me ask you a question. The organization CRA, have they ever in the past represented any environmental companies or organizations or any cap and trade organizations? 

Ms. SMITH. Yes, we have. 

Senator INHOFE. Now, I would like to ask you a question, and 

put it in some words that we can understand. I would like to ask 

you, how large are the costs to American consumers? Would they 

absorb? Can you kind of put these numbers in terms of a family 

budget, so we have some idea of what we would be talking about? 

Quickly. 

Ms. SMITH. Yes. We are estimating in 2015 between $800 and 

$1,300 per household per year. It rises after that. 

Senator INHOFE. Very good. Ms. Thorning, you heard the answer 

or the statement that was made by Ms. Smith about the targets 

in this bill getting out ahead of the likely availability of technology. 

Do you want to comment on that, targets and then technology? 

Ms. THORNING. The targets are very, very right, and the capital 

stock turns over very slowly. I think many policy analysts, many 

politicians need to be aware that the average appliance may last 

10 to 12 to 15 years, the average car lasts 8 years, the average production facility in a factory may last 25 to 35 years. Utility plants 

maybe 60 years or longer. So the slowness of the capital stock turnover means that it is much more cost effective to replace capital 

during the normal replacement cycle, and that is why more time 
96 

to meet tight targets would substantially reduce the cost of these 

targets. 

Senator INHOFE. Very good. Ms. Smith, I wrote down a statement 

that was made by the chairman of the subcommittee, Senator 

Lieberman, that we should not expect fuel switching under this 

bill, because it won’t happen until the price of an allowance hits 

$50 a ton. Comment, please? 

Ms. SMITH. That is about right, and we see prices of allowances 

hitting about that level earlier. We see the fuel switching because 

in the early years, the cap that is stated in the bill is extremely 

tight. In fact, it does not even appear to match 2005 emissions, 

even though that is its purported level. There is a lot of confusion 

in our minds. We have looked at analyses where the cap is looser, 

and of course the costs are lower. That is the issue of the timing. 

Senator INHOFE. What would happen to U.S. industries like 

steel, cement, if this bill should pass and we were to comply with 

these emission requirements? 

Ms. SMITH. I am sorry, I missed—— 

Senator INHOFE. What would happen to U.S. industries like iron 

and steel and cement? Do you have any comments on that? 

Ms. SMITH. I was mentioning leakage when I had to end my testimony. Our industries that compete in international markets, both 

those who compete in export and import markets, are extremely exposed by the high prices, not just of their own emissions, but of the 

electricity that they will have to use in their production processes. 

Some of these industries are so far on the edge that if there are 

not border tax adjustments, which are not in this bill, in a timely 

manner, they will likely suffer huge losses in their market shares. 

Senator INHOFE. All right, and Ms. Thorning, can households and 

businesses change their stocks of energy using appliances and factory equipment quickly, and how long does the average piece of 

equipment last? 

Ms. THORNING. People would be surprised that the average auto 

is probably kept in service 8 years or longer. Appliances last 10 to 

15 to 20 years, and of course, plant and equipment in factories may 

often last 35 to 40 years. Utility plants, 50, 60 years or even longer. 

So capital turns over very slowly. 

When we put premature requirements to curb emissions, we 

make the existing capital stock obsolete. 

Senator INHOFE. With 10 seconds here, I would like to ask you, 

I have commented several times, Ms. Smith, that I think a carbon 

tax is a more honest approach to it, and I would like to know why 

wouldn’t a carbon tax be better than the cap and trade? 

Ms. SMITH. I believe it is far more suited to this particular issue 

of climate policy. 

Senator INHOFE. Thank you. Thank you, Mr. Chairman. 

Senator LIEBERMAN [presiding]. Thanks, Senator Inhofe. 

I think I am next in the order. Senator Warner would then be 

next after me. Because he can’t be here, he has given me some 

questions. 

I think what I will do is try not to take the full 10 minutes, but 

rotate back and forth and ask a sampling of questions from each 

of us. 
97 

Let me go first to Mr. Darbee, because I thought you had a good 

statement and a very important exchange with Senator Inhofe, 

where he asked you if you would support the bill if the power sector didn’t get any allowances free. You said you would think about 

it, but probably not. I understand that, that is part of the balance 

that we put in the bill. 

But meeting these tough standards, particularly by 2020, to take 

us back below 1990 emissions, is going to cost the power plant sector of our economy hundreds of billions of dollars. Incidentally, 

where else would you get that except to raise rates? So one of the 

reasons why the rate impact is ultimately so low, as you pointed 

out in your testimony, is because you are getting those allowances 

for the initial years and of course, you are also getting some of the 

proceeds of the auctions. 

I just want to briefly ask you to comment, because you made an 

interesting suggestion, that you would like to see more detail in the 

Carbon Market Efficiency Board, which is the other kind of emergency mechanism we built in here to protect the economy. Just give 

us an idea of one or two of the things you would like to see the 

Market Efficiency Board have. 

Mr. DARBEE. Certainly, Senator. We have been giving this a lot 

of thought. One of the concerns on the part of business has been 

about possibly a mystical Fed-like mechanism. Therefore, we felt it 

would be better if there was more transparency. So what PG&E is 

recommending is the idea of a collar. That is that we would establish a ceiling for the price of carbon which would rise over time, 

as well as a floor for the price of carbon that would rise over time. 

The effect of this would provide assurance to policy makers and to 

businesses that the costs would not run up unexpectedly to high 

levels, somewhat like what we saw in California, with high energy 

prices, they went up much higher than people anticipated they ever 

would with deregulation. 

At the same time, the positive for perhaps the environmental 

community and certainly for venture capitalists and industrialists, 

is with the floor price of carbon, there would be certainty as to 

what the range of the price of carbon would be over a series of 

years. So we think that this balances both the concerns for the environment as well as pragmatic concerns about moderating the impact on the economy as well as providing certainty for investment. 

So we are intrigued by that, and we think that if those standards 

and prices were public and the Fed mechanism were required to 

enter the market, engaged in open market operations to stabilize 

the price of carbon and keep it in that area, that band, we think 

it would be very constructive. 

Senator LIEBERMAN. Very interesting ideas. We will continue to 

talk about them. 

Senator Warner’s first question was to you, too. I will ask you 

this part of it. How can we expedite the availability of the technologies needed to reduce greenhouse gas emissions, from your 

point of view? 

Mr. DARBEE. We think this cap and trade program would be the 

best solution in that respect. Because what is necessary is to put 

a price on carbon. Therefore, some technologies which might be 
98 

otherwise more expensive in effect are advantaged by this, and certainty is created for venture capitalists as well as for industrialists. 

So we think that the thing that could promote the development 

of these technologies best is to internalize the externality which 

now exists. That externality is the ability to spew carbon into the 

atmosphere at no cost. 

Senator LIEBERMAN. Thanks. I will go back to my next question, 

which is for Dr. Pershing. You mentioned in your testimony three 

separate modeling studies by the Nicholas Institute at Duke, MIT 

and the Clean Air Task Force. Dr. Smith’s testimony presents modeling results that differ greatly from those three others. What do 

yo think is the reason for that? Can you suggest anything in her 

analysis and theirs that might have led to such different predictions? 

Mr. DARBEE. I think there are a number of things that do that. 

Always, when one does models, the issues that one assumes and 

the inputs have enormous implications on the outputs. In this particular instance, it is always a question of where you start. 

These particular studies sought to start with what I think of as 

fairly standard projections. They began with some historical trends 

and projected forward using the Energy Information Administration, systems like EPA has run out going forward. They assume, 

for example, that the technology that we may have going forward 

has a trend looking like that of the past. You can go fairly quickly, 

new technologies can penetrate. As I understand Dr. Smith’s testimony, there are some limits on what technology might happen and 

the rate. 

These assessments assume that you can look at all sectors. They 

assume that you can look at the energy sector, at the transport sector, multiple options, multiple directions. As I understand again, 

although I have not seen her model in detail, it does not include 

all options in all sectors. My sense, finally, is that you get some 

change in the expected GDP and how things are recycled through 

the system. If you assume that there is going to be some benefit 

in terms of reducing those overall costs, for example, returning the 

revenues back to technology, which might reduce the price, returning the revenues back to the economy for distribution, you again 

get lesser impacts on the overall economy. 

Senator LIEBERMAN. That is very helpful. I thank you for that. 

Let me go back to a question from Senator Warner. A second 

question was to Mr. Barbour. We are all wanting to say, so I have 

to get it off my chest, if you are Haley Barbour’s wiley cousin. Because we always thought that Haley was fairly wiley. 

Mr. BARBOUR. Only if there might be a significant inheritance. 

But no, no family connection that I am aware of. 

Senator LIEBERMAN. Just re-elected Governor of Mississippi, so 

we congratulate him. 

Here is Senator Warner’s question. In your written testimony, 

you write, I believe that S. 2191 contains the most important elements and provides an excellent framework for developing a robust 

U.S. greenhouse gas emissions trading system. Senator Warner’s 

question is this. Of the criteria you listed, what are the components 

of this legislation, America’s Climate Security Act, that you think 

are most important for market efficiency? 
99 

Mr. BARBOUR. Thank you, Senator. I think the fundamental design element of a cap and trade system is the when and the where 

flexibility. That is really from my experience working for many 

years as a consultant to industry a very desired feature from industry. They want the flexibility to decide the schedule and the timing 

and the location of the reductions, so that they can achieve the 

least cost reductions at the most efficiency way possible. I think 

that is inherent in the design of a system. 

I also think that the banking provisions are very, very important. 

Under the current SO2 allowance trading program, about 16 million SO2 allowances have been issued. 

Seven million of those have been banked by participants seeking 

the flexibility to use those in the future, give them price certainty 

and some operational flexibility. This banking is an extremely important feature of a well-designed system. It incentivizes companies 

to over-comply today so that they can bank these unused allowances for later use. It incentivizes companies like my own to purchase these to send a signal of scarcity, so in essence, I can put 

money to bear in the most cost-effective way possible to get SO2 allowances. I can buy the permits. 

I think that this is an essential feature that has been well-represented and it is probably, as we look at some of the problems 

that we have seen in the European Union trading system, it is that 

failure of banking, the initial phase by definition did not allow the 

allowances to transfer into the next phase, and their value rapidly 

went to zero as we approached the end of the period. 

Senator LIEBERMAN. Thanks very much. 

I think I am going to submit the other questions that both Senator Warner and I have for the record to you, so we can give everyone else here a chance to ask questions. This may suggest a new 

way of questioning. If you ask one question, one Senator to ask 

questions for himself and another, you actually take less time. 

[Laughter.] 

Senator LIEBERMAN. I can’t figure that out economically. Maybe 

somebody here on the panel could help me. 

Senator Carper, you are next, and then Senator Voinovich. 

Senator CARPER. Thank you, Mr. Chairman. 

I want to ask really a question, I thought I heard Mr. Barbour 

and also Mr. Darbee talk about offsets, and to speak in terms that 

said offsets are an important way to help hold down reducing CO2

emissions. I would like to ask each of you to take just a minute and 

explain why, then I am going to ask each of our other three witnesses to let us know whether or not they agree or disagree. One 

of the things I like to do with a diverse panel like this is to find 

consensus. This is an issue that we need to broaden consensus, not 

diminish it. My hope is that this is one of the areas we can do that. 

So Mr. Barbour, and then Mr. Darbee, your thoughts again on 

the value of offsets, holding down the costs as we try to reduce CO2

emissions. 

Mr. BARBOUR. Thank you, Senator. I think the provision of the 

use of offsets to meet compliance is very wise, and if anything, I 

think I am a proponent of even greater use of offsets. I think this 

provides really a unique opportunity to capture the entrepreneurial 

spirit, the engineering know-how of our country and our problem 
100 

solvers here. The offset provisions allow project developers to go 

into areas that might not be covered directly by a cap, areas such 

as going into dairy operations, hog farms, landfills, abandoned coal 

mines, a variety of parts of the economy that are difficult to capture as a point source. It allows the project developers to invest 

capital in ways they can reduce greenhouse gas emissions. Fortunately, we have a system in place, as I had described in my testimony, a well-developed set of scientifically based, empirically based 

methodologies and procedures to capture and measure those greenhouse gas emissions and to do so efficiently, to report those and to 

track those over time, so that those reductions we can be assured 

of, they are real, they are measurable and they can become part 

of the overall compliance system. 

Senator CARPER. Thank you, sir. 

Mr. Darbee, your thoughts, please. 

Mr. DARBEE. The offset mechanism actually is one of the reasons 

that a cap and trade program is better than a tax. Because if you 

are a company, let’s say, like Pacific Gas and Electric Company, 

where it would cost you $15 to eliminate the need for, to reduce 

a ton of carbon, the alternative that they have is we might be able 

to go out and buy an offset which would accomplish the same for 

$5. Therefore, we would opt, by the $5 solution rather than the $15 

solution. 

So in short, offsets unleash the creativity and the innovation of 

the free market place, and therefore it delivers the opportunity to 

solve this problem of global warming more cost effectively than 

other alternatives. 

Senator CARPER. Thank you. 

Mr. Pershing, Ms. Smith, Ms. Thorning, your thoughts? 

Mr. PERSHING. I would agree with both of those two comments. 

I would add only that the need to ensure careful monitoring, 

verification, transparency, those kinds of questions, verifiability, 

must be assured or you don’t have the value of the offsets. But I 

very much agree. 

Senator CARPER. Thank you. 

Mr. Barbour, do I understand, and I am going to come back to 

Ms. Smith and Ms. Thorning, do I understand that your company 

actually validates offset projects, is that what you do? 

Mr. BARBOUR. Yes, sir, we do. We have developed greenhouse gas 

monitoring, reporting and verification protocols for a number of different sectors. We are also working with U.S. EPA and the Department of Energy on ways to measure and develop and quantify 

these things. 

Senator CARPER. Good. Ms. Smith, back to you, please. 

Ms. SMITH. A couple of points. Offsets are a good thing to add. 

They do help reduce the cost of the program. The limits on the offsets in the bill have something to do with the high cost, and it actually explains some of the differences between our cost estimates 

and those of the Nicholas School paper. 

But I also want to note that you can do offsets under carbon tax. 

There is no reason that can’t happen as well. 

Senator CARPER. Thank you. 

Ms. Thorning. 
101 

Ms. THORNING. I would just like to add the point that verifying 

the offsets can be a sticky issue. We have seen the issue with the 

Chinese offsets apparently being fraudulently generated and the 

carbon footprint initiative, a lot of that has been apparently not 

substantial offset. So you do need a real bureaucracy to monitor 

this sort of initiative. 

Senator CARPER. Thank you. As I recall, the offsets that are permitted or allowed under this bill have to be found within the 

United States, which I think is important, an important point. Let 

me just say how much we appreciate your being here and your providing this testimony and your willingness to respond to our questions. Frankly, to a number of you for your help in trying to chart 

these difficult waters and to come to a consensus. 

Mr. Darbee, I think both Senator Lautenberg and I mentioned 

earlier in our statements that allowances, we favor an approach 

which provides allowances on the basis of output. The idea is to reward those who produce the most electricity with the least amount 

of pollution. I believe a number of my colleagues believe it is important to incentivize renewables, including solar, wind, geothermal 

and so forth. I say that as an advocate of nuclear, too. 

Could you just explain for us briefly in ways that people can understand it, how output based allowances would do this? Can you 

give this a shot? 

Mr. DARBEE. Yes, I can, Senator. The way the allowances would 

work under an output basis is a company would receive a certain 

amount of allowances which they would apply to the kilowatt hours 

or megawatt hours that they would sell. The beauty of this is the 

contrast with applying or allocating allowances by historical standards. If one were to give allowances to, let’s say coal generators 

that had emitted a lot of carbon in the past, then there wouldn’t 

be an incentive for them to change. In fact, they might continue at 

the extreme producing electricity with coal for decades. 

Whereas if you provide allowances to those people that have low 

carbon emissions and it is based on output, you in effect are rewarding that kind of behavior and promoting more of it. The same 

would go with renewables as well as new cleaner technologies. So 

allocating allowances on the basis of output promotes the kind of 

behavior that we want to see out of the economy. It in effect provides economic advantage to those people who produce no carbon 

at all as they generate electricity or very low levels of carbon, such 

as natural gas-fired generation. 

Senator CARPER. Good. Thank you very much for that response. 

Senator LIEBERMAN. Thanks, Senator Carper. 

Senator Voinovich. 

Senator VOINOVICH. Thank you, Mr. Chairman. 

Ms. Thorning, could we put your charts up on the—the charts 

that showed China—yes, that is the one right there. Associated 

Press, November 7, Beijing: China will reject any agreement that 

calls for binding limits on carbon dioxide limits that will replace 

the Kyoto Protocol, EU officials said Wednesday. Today, London, 

the Economic Times: India will become the third biggest emitter of 

carbon dioxide by 2015, and rapid economic growth of the country 

and its neighbor China will have devastating consequences for the 

world’s energy supply unless the two Asian giants make efforts to 
102 

curb demand and greenhouse gas emissions, the International Energy Agency warned on Wednesday. 

There are those that look at what we are doing and conclude that 

unless we understand that it is a global problem and that we do 

something about it, that is more rapid than frankly what this bill 

provides, that in terms of making a difference and reducing greenhouse gases and climate change it is just fruitless. I for one think 

that what should drive this issue is technology, the technology to 

capture carbon, sequester the carbon. I think members of this Committee know we had a FutureGen project that we tried to get in 

Ohio. They are going to build that in 2012. 

My concern is that there is an urgency for us to move as quickly 

as possible to fast track this technology so that we get it right here, 

and then it is available for us to sell to other places in the world. 

That should be the thing that drives this. Mr. Chairman, I feel that 

this may not get the job done, this cap and trade. My feeling is that 

we ought to come up with some idea where we can look at the status of where our technology is, where can we find the money to 

move this along much quicker than what we anticipated. 

We talked earlier about a Manhattan Project, we talked about responding to Sputnik. I would like your comments on that, and I 

think it was you, Ms. Smith, who talked about a 70 percent increase in natural gas costs as we try to ramp this thing up and get 

the technology. I have to tell you, and maybe I look at things differently than some of the members of this Committee, but we have 

lost jobs in our State, substantially, because of high natural gas 

costs. I live in Cleveland, OH. My heating bill is up over 300 percent over what it was in 2000. I have people in my town that are 

poor and the elderly that are really hurting because of these high 

energy costs. 

One example, the chemical industry. We were number one in plastics when I was Governor, $19 billion exported in 1997. Now 

we import chemical products. I would just like your comments 

about the reality of what we are talking about here and are we 

moving fast enough and have we given enough consideration to the 

economic impact that it would have on this Nation. 

Ms. SMITH. We need to time the stringency of the caps to be consistent with the availability of the technologies. We also need, and 

S. 2191 fails to do that at this point. That is why there is such a 

shift in gas in some of the projections. A looser cap in the near 

term made up perhaps by a tighter cap in the long term could reduce the cost because it would be timed better with the technology. 

But also really importantly, there is no emphasis in this bill on 

establishing funding for research and development to actually bring 

down the costs of these technologies. While we may be able to get 

them out in the 2020 to 2050 time frame, they are still quite costly. 

Something needs to be done to bring those costs down to make us 

want to incur those costs as well later in time. 

Senator VOINOVICH. Ms. Thorning. 

Ms. THORNING. I would just like to add that the Asia Pacific 

Partnership which was put in place in 2005 is designated to do exactly what you are asking, how to get technology transferred to developing countries. Of course, the Major Economies Initiative that 

is a follow-up to the G8 meetings is an attempt to broaden that. 
103 

The Asia Pacific Partnership, the goals of that are to encourage 

business to business transactions, so that technology can be transferred. The study that we released last year by CRA International 

looked at what are the barriers to getting this technology transferred in places like India and China. In China, a key barrier is 

lack of protection for intellectual property rights, corruption, inability to get money in and out. In some cases, like India, a key problem is government ownership of major industrial sectors. 

So changing the institutional framework in developing countries 

can promote the kind of business to business transactions that will 

enable them to get access to our technology and Western technology without requiring huge Government subsidies. The Asia Pacific Partnership already has 130 program in effect, including one 

by Caterpillar Tractor, where they are capturing methane at Chinese coal plants and using it to produce electricity. 

So there is a lot going on, and I think we need to build on these 

types of programs. 

Senator VOINOVICH. Thank you. 

Senator LIEBERMAN. Thanks, Senator Voinovich. 

Senator Lautenberg, let me just mention that we are about 6 to 

7 minutes into a vote. I believe that Chairman Boxer’s intention 

was to have one round and then adjourn the hearing. So I will stay 

a while and then leave, and turn the gavel over to—I think she intended to adjourn it. So people who want to go and come back, and 

I will pass the gavel to the next sitting Senator. 

Senator Lautenberg. 

Senator LAUTENBERG. Yes, I would ask any of our friends on the 

panel, we thank you for your testimony, even though we have substantial agreement with some of you and disagreement, and agreement with others. So I will try to ask the questions quickly and if 

you could respond fairly quickly. 

One thing I want to get off the table here is we constantly refer 

to the specter that India, China, et cetera, these giant developing 

countries bring as dangerous to us with the greenhouse gas production. But in some cases, we invited that. Our automobile industry 

didn’t compete in the marketplace while cars came from Japan and 

took over the market, and make them more efficient, et cetera. So 

when we look and see what happened to us, and our profligate use 

of fossil fuels and without regard cost us our leadership. We can’t 

ask these things of these countries because we don’t deserve it. It 

was the talk, not the walk, that we provided. 

I want to ask Ms. Smith, do you think that our pace as presently 

structured in the Lieberman-Warner bill would be too rapid an attempt to reduce greenhouse gases, endangering our economy, et 

cetera? 

Ms. SMITH. It depends on how rapidly you want to go, you take 

on more costs. What I am presenting is that the rapid pace that 

occurs in the time period 2012 out through about 2020 to 2025 is 

so tight that it gets ahead of the technology. That doesn’t mean 

that it will be cheap to do it later, but at least it is doable later 

without the disruption. 

Senator LAUTENBERG. How about the longer term target that is 

tentatively listed here, 60, somewhere between 60 and 80 percent 

reduction in the year 2050? Is that too aggressive? 
104 

Ms. SMITH. It is extremely costly to meet, but it can be met without the disruption if we have a slower transition to it. 

Senator LAUTENBERG. OK. Do you see any dangers to society, humankind, wildlife, et cetera, as a result of global warming impact? 

Ms. SMITH. For the differences in a cap that is half as tight or 

as tight as the one in the bill currently, there would be no differences environmentally in the near term, from those near term 

differences. 

Senator LAUTENBERG. No, your view, apart from what is in front 

of you at the table. Do you think that, are there real dangers that 

come from having growth in global warming? 

Ms. SMITH. There is a serious risk issue that needs to be dealt 

with as a risk management situation. 

Senator LAUTENBERG. OK, so it is not like a fire in the forest or 

the town or anything like that? You don’t see an immediate need 

to get on these things, start squeezing down, et cetera? 

Ms. SMITH. Immediate reductions by the United States of this degree will not do anything to the rate of change. What is needed is 

global action, concerted, unified global action over the long haul. 

Senator LAUTENBERG. OK. Does the rapid ice melt around the 

world, do you believe that is taking place? 

Ms. SMITH. I am not an expert on the science, but I don’t doubt 

that there is melting in some parts—— 

Senator LAUTENBERG. You don’t have enough knowledge from 

things that you see, from reports that we get, that there is rapid 

ice melt? 

Ms. SMITH. There is ice melt in parts and there is ice build-up 

in others. But I am not debating that there is warming going on, 

not at all. 

Senator LAUTENBERG. I see enormous danger to sitting by, again, 

I used the example once before here, and that is that we are the 

doctor, and we know that we have to administer medicine, the 

question is how strong and how soon. 

Mr. Pershing, under this bill, new coal plants, coal power plants, 

can still be built without deploying any new technology to make 

them cleaner or more efficient. State of Kansas recently denied a 

permit for a coal plant because of global warming. Do you think 

Congress ought to require that all new coal plants use the most effective technology available as they produce these facilities? 

Mr. PERSHING. I think there is a very strong case to be made for 

requiring significant additional obligations on coal-fired plants, 

which tend to yield substantial portions of the total greenhouse gas 

emissions globally. If we do that, we are likely to make the technology penetrate more quickly. You can increase over time the level 

of stringency of those obligations. The cap and trade program essentially does that by providing a price and an incentive through 

a price mechanism to make that case. But additional resources 

could usually be also provided to promote the technology and create 

standards. 

Senator LAUTENBERG. Mr. Chairman, I make the observation, 

and I will steal seconds here, that the large percentage of view, the 

largest percentage coming from the table is that cap and trade 

works, contrary to some of the opinion that we have heard from the 

table here. Thank you. 
105 

Senator LIEBERMAN. Thanks, Senator Lautenberg. I must say 

that we have worked on this a lot, but it is a real pleasure to hear 

those who have thought about this a lot and lived within the system in some places as it has been carried out, certainly in the acid 

rain area, to hear you talk about it, because it has a vitality to it. 

This is a classically American, entrepreneurial market-based response to a mega environmental problem. I just don’t think there 

is, you can have debates about whether we are doing it exactly 

right, whether we can fix it in some ways, how much it will cost. 

But I don’t think there is a better way to deal with this problem 

than the way we are doing it. The contributions you have all made 

are great. 

Perfect timing, Senator Craig. Let me indicate how we are going 

to proceed. I want to thank the witnesses, all of you, for your testimony. I appreciate it very much. It has been helpful to the Committee. I am going to depart to vote; I cannot return. I know a couple of the other Senators are coming back, I know Senator Sanders 

is coming back. So Senator Craig, I am giving you the liberty to 

question until one other Senator comes back. This could be, this is 

a very open, participatory committee. 

The last Senator here who has not had questions yet will have 

the authority to adjourn the hearing. I thank you again very much, 

and call on my colleague, Senator Craig. 

Senator CRAIG [presiding]. Mr. Chairman, thank you very much. 

I shall try to do you no harm. 

[Laughter.] 

Senator CRAIG. Like all of us, we thank all of you for being with 

us today and the thought that you have put into it. I think all of 

us recognize that getting this issue right has all the right impacts 

on our world and our economy, and getting it wrong could have all 

the wrong impacts in a very severe way. I am very slow to move 

in shaping public policy until I am convinced that the modeling we 

use, the science we use and all of those things are as accurate as 

we can get it. I have looked at this issue for many years; I have 

traveled the world to most of our climate change conferences. I recognize concerns and urgencies. I also recognize in some instances 

the near impossibility of getting where some of us think we ought 

to go. 

Mr. Darbee, let me start with you. In 2006, 24 percent of PG&E’s 

total electrical output or generation was nuclear power. In your 

view, can this type of cap and trade legislation be implemented 

without a significant commitment to new nuclear? 

Mr. DARBEE. We have taken a look at the growth with respect 

to energy needs through the period 2030 through the EPRI organization which represents the electric utility industry. What is clear 

from that is that America’s energy needs are going to grow very 

substantially on all fronts. 

So what EPRI looked at was how much energy efficiency we will 

need, which is substantial, how much in the way of renewables, 

that amount is substantial, clean carbon technologies, IGCC with 

sequestration, very substantial. There remains a very significant 

gap beyond that. We believe at this time because of the size of that 

gap that nuclear needs to be on the table as an option. 
106 

But I do want to say that we also see great opportunity in the 

solar-thermal technology. Therefore, there is the possibility in 

many parts of the United States that if that technology grows sufficiently strongly as we anticipate it might, that could substitute for 

a substantial amount of nuclear power. So we think that the 

United States needs to keep its options open until that technology 

proves itself. But even with that, because of different climate differences in the United States, some amount of nuclear power may 

be required. 

Senator CRAIG. In all of those instances, to bring a new unit of 

any type of production online, what is the average cost per kilowatt 

hour? Well, let’s say photovoltaic, or solar in the instance that you 

are looking at and building. 

Mr. DARBEE. Let me give you, if I may, the whole spectrum. In 

terms of, we translate it through to the cost to the customer. So 

with respect to, let’s say, coal today from existing facilities, probably 3, 4 cents. Nuclear today from existing facilities, 4 cents; hydroelectric today, existing, 3 cents. 

If you look at the costs of solar-thermal that was mentioned 

today, 10 to 12 cents seems to be the range, with the opportunity 

going toward 8. If you look at photovoltaic, it is pretty expensive, 

it is about 30 to 40 cents a kilowatt hour before you look at installation costs. So I think that probably gives you the spectrum. 

Senator CRAIG. It does, it is an irony, or I should say a uniqueness of market in place at this moment in time. My State of Idaho 

is growing very rapidly. We are also fortunate that we have a 

largely hydro-based electrical economy, so we have the lowest cost 

power in the country. About 40 percent of our in-migration is coming out of California and they are retirees who are seeking our 

State for a variety of reasons, and clearly in the cost of all their 

dialogues is the cost of living and energy. 

My frustration, because the Chairman was talking about the dynamics of a California economy, it may be a dynamic place if you 

are alive, middle-aged and working hard. If you are retired or poor, 

a problem begins to happen. We see a substantial migration out of 

California today into Idaho and other places where there are different attributes, but one of them being cost of living. Energy is a 

very real factor there. 

Now, that leads me to you, Mr. Pershing, as it relates to how we 

allocate. Because we are a clean State, we don’t have a carbon footprint of any kind, we don’t have that kind of legacy. So it is not 

clear to me that a cap and trade system can be implemented without causing severe regional economic impacts. Idaho does not want 

to lose its advantages. Clearly, new energy in Idaho is going to be 

more expensive. We all know that all new energy is more expensive 

than old energy. It is also cleaner; we also understand all of those 

arguments. Idaho, as I have said, is one of those States that is the 

cleanest and least cost. 

So I guess my thoughts to you are one, WRI’s allocation preference, free or not free? 

Mr. PERSHING. WRI would propose that there be some mix. We 

believe that in the initial phase, it doesn’t seem politically possible 

to manage it with an entire auction, so we would start off with 

some share of being freely allocated. We do believe the auction 
107 

should be phased out over time. The more quickly it can be done 

the more quickly you get to an economic efficiency. 

But I would note that there is a space in this whole area for 

something to be done with the revenues, and with the allowances. 

This could provide partly, for example, mechanisms that are allocating allowances to the States, for some way to offset some of the 

costs that you have identified. There also is quite a lot of information in the economic literature and various studies being done for 

the States individually that suggests that some of these outcomes 

may not be as negative as you suggest. For example, while the electricity price that you pay may go up, the total electricity that you 

consume may go down. The balance between those may actually 

lead to a stable or even a marginal reduction in the price. 

The State of Illinois did this kind of analysis and showed that. 

Senator SANDERS [presiding]. Thanks. I guess I am acting Chair 

here. 

Larry, you were about 2 minutes over, as I understood it. Is that 

right? He had about 7 minutes, I think. 

Senator CRAIG. OK, fine, thank you. 

Senator SANDERS. It doesn’t look like a whole lot of us here, 

so—— 

Senator CRAIG. Why don’t we do that, I will stay for a couple 

more minutes. There are a few more questions I would like to ask. 

Thank you. 

Senator SANDERS. OK. Let me ask Mr. Darbee a question. Mr. 

Darbee, on page 12 of your written testimony, you mentioned, you 

discuss a study from the Federal Government’s own National Renewable Energy Lab solar plants to be? 

Mr. DARBEE. Well, absolutely, Senator. I might say one thing, before when we were talking about different technologies, I failed to 

mention that new clean coal technologies cost about 8 cents a kilowatt hour as we expect nuclear about 10 cents. 

Senator SANDERS. We are not really sure about clean coal, are 

we? 

Mr. DARBEE. We are not, indeed. So going to your point about 

solar-thermal technology, we as a company are very excited about 

that, because it is significantly cheaper than photovoltaic. So we 

are seeing the prices in the areas that you have mentioned 10 to 

12 cents right now and likely, hopefully will go to 8 cents. That is 

what the vendors are telling us. 

Senator SANDERS. I am not an expert on this, but everything 

being equal in terms of gas and other forms of energy, one assumes 

over a 25-year period that is going to go up pretty steep. If one 

were looking at 8 cents per kilowatt hour, in the year 2035 or 

whatever, am I wrong in saying that would be really quite cheap 

electricity? 

Mr. DARBEE. You are absolutely right. One of the things is with 

solar power, there is no input cost and no input uncertainty as 

there is, say, with natural gas, coal, things like that. So that is the 

case. The other thing is the technology is pretty simple and practical. You are basically taking the sun, concentrating it with mirrors, putting it on a pipe, turning water to steam and turning a 

turbine. 
108 

Senator SANDERS. Let me ask you this. You have signed a contract with a company called Solel for a 553 megawatt plant, is that 

right? I understand that in your part of the world, you and other 

utilities have a number of plants—you are thinking about developing a whole number of plants. What is the potential out there? 

How much electricity can we be generating, do you think, through 

solar plants? 

Mr. DARBEE. We are setting a target of 2,000 megawatts over the 

next number of years, 5 to 10 years. So the potential actually in 

the sunny parts of the United States, southwest and west in particular, what we are seeing is, we could deliver more solar-thermal 

power than nuclear plants, because frankly a nuclear plant takes 

10 years to build, at least, probably. 

Senator SANDERS. Sorry to be interrupting you—— 

Mr. DARBEE. So, very substantial. 

Senator SANDERS. Again, going back to this National Renewable 

Energy Lab, they are talking about the possibility of solar plants 

producing upwards of seven times the energy needed to serve the 

State of California. That sounds like an enormous amount of electricity and huge potential out there. Is that correct? 

Mr. DARBEE. That is, and that is conceivable, yes. 

Senator SANDERS. The other point that I want to make, when 

you talk about whether it is 8 cents or whatever it may be per kilowatt hour, as I understand it, you are just including now the investor production tax credit as your Federal assistance here? 

Mr. DARBEE. That is correct. 

Senator SANDERS. Now, our friends in coal, and I am not against 

coal, I want to explore the potential of clean coal, they are talking 

about getting hundreds and hundreds of billions of dollars in subsidies. Now, if we said to you that the Federal Government would 

build one of your $2 billion plants, we would put 50 percent of the 

cost in, am I wrong in saying that you could drive the price down 

to consumers to perhaps 4 or 5 cents per kilowatt hour? 

Mr. DARBEE. You are correct, Senator. 

Senator SANDERS. So I would simply say that before we talk 

about spending, I mean, this is a huge and significant statement 

that Mr. Darbee is making. This is not an unknown technology. 

This is a technology that is online now and will be only growing. 

It seems to me incumbent upon the Federal Government to strongly support it. 

My last question, Larry, I am going to take just two more minutes then give it over to you, is that I noticed in your remarks you 

talked a little bit about the provision regarding new sources for energy production. You noted in your testimony, basing allowance allocations solely on historic emissions only serves to reward and encourage the highest-emitting resources and discourages rapid development in deployment of clean or lower-emitting technologies. 

Can you elaborate on that, please? 

Mr. DARBEE. Basically, if one allocates enough allowances to existing old coal plants, the incremental cost of running those plants 

in a carbon-constrained environment will be zero. Therefore, people 

will continue to run the plants; in effect they are subsidized. 

So we believe that by shifting the allowance allocation to relatively clean fuels or non-emitting forms of generating energy, that 
109 

will promote the right behavior of rewarding those people that 

produce the cleanest technology. 

Senator SANDERS. I should just say that we are going to offer an 

amendment dealing just with that issue in the subcommittee. We 

will probably revisit that later on. 

Senator Craig. 

Senator CRAIG. Mr. Chairman, thank you very much. 

Mr. Pershing, you were completing a thought when time ran out. 

Let me ask this question, because I said it in my opening statement, and it frustrates me a great deal as we begin to move dollars 

around the country that actually don’t produce clean energy. I use 

the phrase, a transfer of wealth. 

Is not the allocation process, and you talked about rewards and 

benefits, is that not a transfer of wealth so legislated? 

Mr. PERSHING. To a certain extent, of course it is, yes. The issue 

in part is with what end and to what purpose. So in this instance, 

what we are seeking to do is to move revenues from systems, energy-generating systems that are highly carbon-intensive to those 

that are low carbon-intensity. Those should in theory be managed 

through a price mechanism and a structure. But it will move 

money from one place to another. 

Senator CRAIG. Thank you. 

Dr. Smith, 2191 attempts to aggressively cut domestic greenhouse gas emissions, so your testimony indicates that it will only 

be achieved through the transfer of domestic manufacturing activities from the United States to international competitors. We know 

that many of those international competitors will not be in any 

form of compliance until technology reaches them that allows them 

to comply. Under this scenario, what are the impacts to the economy, jobs, and frankly, to the global environment? 

Ms. SMITH. What you have described is what we call leakage, it 

is leakage of emissions from the United States to another country. 

When either United States or foreign sources supply our demand, 

our needs, with goods and services, emissions occur. We can either 

produce them ourselves and emit it here, or we can try and cap our 

emissions here. If the result of that is to create competitive disadvantage so that in fact we start to buy imports, all we have done 

is move the emissions from the United States to another part of the 

globe. The environment gains nothing if that occurs. 

I would like to correct something you said, I did not say that the 

entire cap is met through leakage. I did say that a cap with this 

degree of price increase, without protections at the border for our 

industry, which are not in the bill, those protections, would create 

tremendous amounts of leakage that would just be a perverse consequence of the bill. It would hurt our economy and do nothing for 

the environment. 

Senator CRAIG. Thank you. 

Dr. Thorning, I am not sure whether this fits, but I find it a fascinating idea. On October 20 of this year, San Francisco turned out 

their lights. They were out for an hour in an attempt to save electricity. I am told that to some it was a very frightening experience, 

because they didn’t have the security that lights and energy 

brought them. 
110 

You indicate that we would have to reduce our energy usage by 

significant amounts to meet the goals of 2191 based on the timing 

that all of you have spoken to. Can you give us an idea how realistic this energy savings approach is and would California have to 

go from 1 hour to 2 hours? Or I should say San Francisco. California didn’t do it all. 

Ms. THORNING. The targets on S. 2191 are so tight that it would 

clearly impinge on consumers’ lifestyles. I think it would require, 

as my testimony suggested, by 2030, reducing emissions by approximately 50 percent on a per capita basis. Stop and think what 

that means to what kind of appliances, what kind of house, what 

kind of transportation system you have. It would require much 

dimmer lighting, much more emphasis on building efficiency and so 

forth. All of those changes can be made in time. But because of the 

length of life of our capital stock, it is very, very costly, as Dr. 

Smith’s analysis suggests, to make these transitions in a matter of 

15, 20 or even 25 years. 

So I think we need to look very carefully at the kind of challenge 

we are putting in front of consumers and business with the targets 

in this bill. 

Senator CRAIG. Thank you, 36 seconds left, quick question of you, 

Mr. Barbour. How can we be certain that any cap and trade system 

employed here in the United States can in fact avoid the volatility 

that the European experience has had, and when it was established over there, the reaction to it? 

Mr. BARBOUR. Senator, I think there were several lessons to be 

learned from that experience. Certainly there was an over-allocation of allowances to industry, which, once that was discovered, 

that really diminished their value over time. So the allocation 

needs to be tightly matched to the desired environmental goal, not 

only to reach that goal, but also to preserve their value over time. 

Secondly, as I had mentioned, there was no provision for banking 

into the next period. It simply ended, and that really drove the 

value to zero. I think we still have yet to discover how well the system will work. The Kyoto Protocol’s first compliance period actually 

begins in 2008, 2012. So it is a little premature to judge. Maybe 

in 2012 we will know how well the system works. But it hasn’t 

even started yet. 

Senator CRAIG. Thank you all very much for your time with us. 

We appreciate it. 

Senator SANDERS. Senator Whitehouse. 

Senator WHITEHOUSE. Thank you all for staying with us. I appreciate the time that you have given us. It is important work that 

we are embarked on, and it is important to get it right. 

I would be interested in anybody’s thoughts on how to police the 

integrity of the auction and trade system. I think the concept that 

we are getting at is the right one. But we are almost still at the 

position paper level. We have seen over and over again markets 

that overheated, we have seen markets that were taken advantage 

of by people who were out to game the system. We have an entire 

Securities and Exchange Commission set up to police our capital 

markets. We have had unpoliced markets in, for instance, electric 

energy in California that created disastrous outcomes. Enron trade 
111 

in a sort of quasi-market in energy futures and was a phony and 

fraud, it was a nightmare for people who were involved with that. 

So I think between where we are now and where we need to get 

when this bill emerges, there have to be some pretty serious safeguards built into that process to make sure that it is not captured. 

Particularly you consider that billions and over time perhaps even 

trillions of dollars of carbon or greenhouse gas credit might very 

well flow through the entity that markets them. There is an enormous motivation, just as there is in this building, of people to try 

to get their hooks into that money for ulterior purposes than just 

the public benefit. 

When you consider the safeguards that are set up here, the safeguards that are set up in our judicial system, the safeguards that 

are set up for the stock market, the safeguards that are set up everywhere, this thing right now looks like the wild west. Where 

would you recommend that we go for models? We could probably 

try to think this thing through from scratch, but usually it is better 

to try to get some tested ideas that have withstood some practical 

experience in their areas. Where should we go to fill in that concern about these markets either being run out of control or corrupted or gamed by speculators? 

Mr. Darbee. 

Mr. DARBEE. Senator, that is something we have given a lot of 

thought to. Having been in California at the time that Enron was 

taking advantage of it, we had a fair amount of experience. We 

have several thoughts in that regard. 

Senator WHITEHOUSE. One quick interruption. You can agree 

with me that if there is a market failure of some kind happening, 

relying on the market to sort it out doesn’t help? 

Mr. DARBEE. Exactly right. I think in general, the SEC is a good 

model. Many people think that we have gone possibly too far with 

Sarbanes-Oxley and put a lot of cost on it. But certainly prior to 

Sarbanes-Oxley I think the SEC regulation of the security markets 

was viewed as really the model in the word. So the SEC is very 

capable of identifying market manipulation. That is certainly what 

we saw in the energy crisis in California, where Enron and others, 

it would appear, took advantage of the market. Of course, those 

players have settled and paid hundreds of millions, if not billions 

of dollars, to rectify that. 

So I think we would want to take a look at how the SEC monitors the securities markets, and establish a similar methodology 

with respect to the energy markets, and also monitoring the financial instruments that are synthetic alternatives to the real-time 

market there. So that is the first. 

Second, as I mentioned earlier, and I am not sure if you were 

here at the time, we would like to propose extending on the Fed 

model that is embedded in the Lieberman-Warner legislation and 

have the Fed-like entity that is created work with a collar on prices 

that would rise over time. Specifically, there would be a proposed 

ceiling for the price of allowances, a proposed floor for it. What 

would happen is when the prices started to go above market, the 

Fed-like entity would borrow from the future allowances to provide 

supply into the market, to handle that pressure. Because we saw 

in California, when the markets went out of control on energy, the 
112 

price of energy went up far more than anybody expected. I think 

as policymakers, you want to be concerned to protect against things 

like that. That wouldn’t be good for the environment, this policy, 

or for the economy. 

At the same time, by creating both the floor and the ceiling, 

which would rise over time, what would happen is there would be 

increased certainty on the part of venture capitalists and industrialists to create new technology as they go down, because they will 

know what the price of carbon is within a range over a period of 

time. So we think that that would be very helpful to resolving this 

problem. So those are just a couple of suggestions. 

Senator SANDERS. Why don’t you take another minute, if you 

need? 

Senator WHITEHOUSE. I don’t need another minute, I just would 

wish to hear from the other witnesses, to the extent that others 

have something to add. 

Senator SANDERS. Sure. 

Senator WHITEHOUSE. Mr. Pershing. 

Mr. PERSHING. Thank you very much. Just one comment to add 

to Peter Darbee’s, which is the other side of the equation, how can 

you monitor it effectively. We actually have a whole series of techniques that would enable us to do that. One of the best examples 

clearly is the continuous emissions monitor that comes at the end 

of the smokestack. But there are others that could be applicable 

and parallel for almost all sectors. 

Then we need a registry. We have to have a place to record this 

information and to allow for full transparency in that. I would note 

that there are now more than almost 40 States that have been 

working collectively to design exactly that kind of registry. That 

provides a very good model for a place to start. 

Senator WHITEHOUSE. Ms. Smith. 

Ms. SMITH. I would just like to comment on the idea of a price 

ceiling and the idea of a collar. That will be the mechanism that 

will provide some certainty in the market, will reduce the degree 

to which businesses face huge risks in the face of uncertain auctions and the volatility in prices that will occur in the market, 

which really undermine the ability of businesses to plan against a 

long-term future cap. 

The only problem I would like to point out is that a collar, where 

there is a price ceiling and a price floor that is pre-established will 

not be viable to sustain over the long period, unless those prices 

that are established are consistent with the cap and what the CPA 

will cost to achieve. So one can resolve the volatility and should 

through a price ceiling. But the only way to ensure that certainty 

on the prices over the long run will be a price ceiling, more in the 

form of a safety valve. But that is necessary in order to make this 

a viable policy going forward, to provide protection against the 

kinds of risks, economic risks in the short run that I was talking 

about. 

Senator WHITEHOUSE. Ms. Thorning, would you like to say something? 

Ms. THORNING. I would just like to make one observation about 

the idea that the SEC might be a model for this. With the SEC, 

you have buyers and sellers on opposite ends of the transaction. 
113 

They each have an interest in policing the accuracy of the information, because if one cheats, the other one loses, it is a zero sum 

game. But when you have an ETS, it could be in both parties’ interest to collude, and it is not a zero sum game. So I think using 

SEC as a regulatory model may not hold in this type of situation. 

Senator WHITEHOUSE. Mr. Barbour. 

Mr. BARBOUR. I appreciate the concern. I think the Carbon Market Efficiency Board has implemented in the legislation, I think it 

addresses that as well as we can. 

Mr. DARBEE. If I can just add one other thing. People look to Europe and say, gee, that is an example of where the cap and trade 

system didn’t work too well. As people recall that experience, the 

price of allowances went up very, very high and then came down 

and were very low. The idea of a collar would protect against both 

instances. 

So if allowances were issued, additional ones at the time that 

there was a lot of demand and prices were heading up, the benefit 

of the collar is that the Fed-like mechanism would be in purchasing 

allowances if in fact we saw the prices go back down. That purchase of allowances would bring them into the collar range, and 

therefore avoid a problem like we saw in Europe. 

Senator SANDERS. Thank you, Senator. 

Let me just very briefly ask what will be the last question. Ms. 

Thorning a moment ago indicated that if we move forward vigorously in cap and trade the result might be a significant lowering 

of our standard of living and cutbacks in electric consumption and 

so forth. I would simply say that in my city of Burlington, Vermont, 

we have grown reasonably well over the last 15 or 16 years. The 

city is, because of strong energy conservation, approaches, we are 

consuming no more electricity than we did 16 years ago. I think in 

California, over a 30-year period, as I understand it, per capita 

electric consumption has remained fairly level. I am not aware that 

the people in California are living in caves and huts and seeing a 

major decline in their standard of living. 

So my question that I throw out is, what is the potential of energy conservation? Maybe Mr. Pershing, do you want to start that 

off, and is there great potential out there? 

Mr. PERSHING. I think there is enormous potential. The models 

range quite substantially. In addition to the examples that you 

cited, there are clearly equivalent examples in Europe. I would 

note that even countries like China, which was raised earlier by 

Senator Craig, has a very aggressive energy efficiency program precisely for this reason. In fact, it is driven partly by climate change, 

but even more by energy security. It is that dynamic that reduces 

the total costs at very modest overall effort with side benefits, benefit for local pollution, benefits for jobs and the local economy, 

which are things like installation of insulation and things like new 

technologies around efficient lighting. 

We had a comment earlier that you couldn’t do much for your 

lighting, you would have to have dim lights. Well, we went to a 

compact fluorescent and got a 50 percent improvement. We can go 

now to an LCD and we can get an additional 70 percent improvement. I don’t believe that the problem is insurmountable. Efficiencies are huge. 
114 

Senator SANDERS. Mr. Darbee, did you want to comment on that? 

Mr. DARBEE. Senator, I have heard people in our industry suggest, as we have heard here today, that the technology doesn’t exist 

and we need to wait until it does. My reaction to that is that it is 

nonsense. The experience you cited in Burlington, VT, the experience that we have shown in California is that with just energy efficiency alone, there are great strides that can be made. 

We have actually entertained delegations from China looking at 

the experience of energy efficiency in California. They are gobbling 

up that information and taking it back and applying it to China, 

because they know that they are using energy in a wasteful fashion 

and that not only is that bad for the environment, but they want 

to be even more competitive than they are today. They know that 

energy efficiency will make them more competitive. 

So there is a lot we can do today with just energy efficiency. Of 

course, technology is developing all the time. So the time for action 

is now, and waiting is not the appropriate course of action. 

Senator SANDERS. OK, maybe on that tone we will wrap it up. 

On behalf of the Chair, let me thank all of you very much. It has 

been a very productive hearing. Thank you. 

[Whereupon, at 12:30 p.m., the committee was adjourned.] 

[Additional material submitted for the record follows.] 
115 
116 

International Comparison of Depreciation Rules 

and Tax Rates for Selected Energy Investments 

Prepared by 

The Quantitative Economics and Statistics Group, Ernst & Young LLP 

Prepared for 

The American Council for Capital Formation 

May 2, 2007 
117 

Table of Contents 

Executive Summary 

Introduction 

Energy Investments Analyzed 

Methodology 

Results 

Appendix I: Calculation Methodology 

Appendix II: Individual Country Results 

List of Tables 

Table I: International Comparison of Nominal Capital Costs Recovered 

After Five Years for Selected Energy Investments 

Table 2: Countries where Nominal Capital Costs Recovered After Five 

Years are Greater, Similar, and Less than under United States' 

Tax Depreciation Rules 

Table 3: International Comparison of Nominal Capital Costs Recovered 

After Ten Years for Selected Energy Investments 

Table 4: Countries where Nominal Capital Costs Recovered After Ten Years 

are Greater, Similar, and Less than under United States' Tax 

Depreciation Rules 

Table 5: International Comparison of the Net Present Value of Capital 

Costs Recovered for Selected Electric Investments 

Table 6: Countries where the Net Present Value of Capital Costs Recovered 

is Greater, Similar, and Less than under United States' Tax 

Depreciation Rules 

Table 7: International Comparison of Effective Tax Rates on Selected Energy 

Investments 

Table 8: Countries where the Effective Tax Rate on Capital Investments 

is Lower, Similar, and Higher than under United States' Tax Rules 

Appendix Table I: Rates of Economic Depreciation 

Appendix Table 2: Corporate Income Tax Rates 

Appendix Tables 3-14: Value of Depreciation and Corporate Effective 

Tax Rates on Selected Energy Investments: U.S., Brazil, Canada, 

China, Germany, India, Indonesia, Japan, Republic of Korea, 

Malaysia, Mexico, and Taiwan 

3 

3 

4 

6 

A-I 

A-4 

8 

9 

10 

II 

12 

13 

14 

15 

A-2 

A-3 

A4-AI5 
118 

International Comparison of Depreciation Rules 

and Tax Rates for Selected Energy Investments 

Executive Summary 

The American Council for Capital Formation requested from the Quantitative Economics 

and Statistics group of Ernst & Young LLP an analysis comparing the tax depreciation 

rules for various energy investments between the United States and selected foreign 

countries. 

The analysis examined eleven asset types used in the energy sector across twelve 

countries. The analysis examined the tax depreciation in several ways: I) the percentage 

of the original investment recovered during the first five years, 2) the percentage of the 

original investment recovered during the first ten years, 3) the net present value of the 

depreciation deductions over the life of the asset, and 4) the effective tax rate of the 

investment taking into account depreciation, tax credits and the countries' marginal tax 

rate. 

The results of the study are: 

• The United States generally has less favorable tax depreciation rules for electric 

generation, electric transmission and distribution, and petroleum refining than 

many other countries, including a number of the U.S.'s major trading partners. 

• The U.S. generally has slower cost recovery during the first five and ten years 

after the investment than the comparison countries. For example, investments in 

electric generation fueled by natural gas, nuclear and coal recovers less than 38% 

of the original investment during the first five years and 68% during the first ten 

years in the U.S., compared to 80% and 97%, respectively in Canada. 

• When the time value of money is taken into account, the U.S. depreciation rates 

remain less favorable than most of the competitor countries. Again, an 

investment in electric generation fueled by natural gas, nuclear and coal has a net 

present value of depreciation over the entire recovery period of less than 66% of 

the original investment in the U.S. compared to 84% in Canada. 

• Because the United States has the second highest statutory corporate marginal tax 

rate among OECD countries combined with generally less favorable tax 

depreciation rules, the differences in effective tax rates are even greater. Based 

on a number of assumptions including economic depreciation, we estimate the 

corporate effective tax rate on investments in electric generation fueled by natural 

gas, nuclear and coal at 27-31 % in the U.S., compared to 14% in Canada. 
119 

• These findings are consistent across all of the energy assets studied, including 

different types of electric generation, electricity transmission and distribution, 

pollution control equipment, and petroleum refining. 

• Cross-country comparisons require a number of assumptions and limitations to 

summarize the complex tax treatment of multiple investments across mUltiple 

countries. The analysis makes note of the assumptions and limitations. 

2 
120 

Introduction 

International Comparison of Depreciation Rules 

and Tax Rates for Selected Energy Investments 

The American Council for Capital Formation requested from the Quantitative Economics 

and Statistics group of Ernst & Young LLP an analysis comparing the tax depreciation 

rules for various energy investments between the United States and selected foreign 

countries. 

The analysis examined eleven asset types used in the energy sector across twelve 

countries. The analysis examined the tax depreciation in several ways: the percentage of 

the original investment recovered during the first five years and during the first ten years, 

the net present value of the depreciation deductions over the life of the asset, and the 

effective tax rate of the investment taking into account depreciation, tax credits and the 

countries' marginal tax rate. The net present value and effective tax rate analyses are 

presented with a constant inflation rate across countries. The analysis uses the tax rules 

in effect in 2006. 

The eleven countries besides the United States the American Council for Capital 

Formation has selected include many important trading partners of the United States. 

According to OECD statistics, in 2005, the selected countries accounted for more than 

65% of United States imports and more than 60% of United States exports. 1 

Energy Investments Analyzed 

The eleven energy investments analyzed range from electric generation, transmission and 

distribution, to pollution control equipment and petroleum refinery equipment. The 

specific assets evaluated are: 

Electric Generating Facilities: Gas - Includes assets used in the production of electricity 

for sale fueled by gas. In the United States, these assets are in Asset Class 49.15 (IRS 

Revenue Procedure 87-56) with a class life of20 years, and a recovery period of 15 

years. 

Electric Generating Facilities: Coal- Includes assets used in the production of 

electricity for sale fueled by coal. In the U.S., these assets are in Asset Class 49.13 with a 

class life of28 years and a recovery period of20 years. 

Electric Generating Facilities: Nuclear - Includes assets used in the nuclear power 

production of electricity for sale, but does not include nuclear fuel assemblies which have 

a five year recovery period. In the U.S., these assets are in Asset Class 49.12 with a class 

life of 20 years and a recovery period of 15 years. 

t Organisation for Economic Co-operation and Development, SourceOECD 2005 Annual Statistics of 

International Trade 

3 
121 

Combined Heat and Power Using Conventional Fuel- These assets include cogeneration facilities that use a heat engine or power station to generate both electricity 

and useful heat. In the U.S., these assets are in Asset Class 49.13 with a class life of 28 

years and a recovery period of 20 years. 

Distribution of Electrical Heat and Steam Generated for Self Use - These assets are used 

in the production and/or distribution of electricity for use by the taxpayer in its industrial 

manufacturing process or plant activity and not ordinarily available for sale to others. In 

the U.S., these assets are in Asset Class 00.4 with a class life of20 years and a recovery 

period of 15 years. 

Electric Transmission Lines - Includes assets used in the transmission of electricity for 

sale. In the U.S., these assets are generally in Asset Class 49.14 with a class life of30 

years and a recovery period of 15 years. 

Electric Distribution Lines - Includes assets used in the distribution of electricity for sale. 

In the U.S., these assets are in Asset Class 49.14 with a class life of 30 years and a 

recovery period of 20 years. 

Electricity Smart Meters - Includes assets that are a general class of meter which not only 

measures the quantity of kilowatt hours but also the "quality of supply" functions and is 

capable of being read remotely. Smart meters communicate electricity consumption data 

automatically to and from a central computer, usually by radio frequency or power line 

communication. In the U.S., these assets are currently treated as part of the electric 

distribution system, and are included in Asset Class 49.14 with a class life of 30 years 

and a recovery period of 20 years. 

Pollution Control Discharge Modification Equipment: These assets include pollution 

control equipment that modifies the outputs (e.g., thermal discharge control) rather than 

modifying inputs (e.g., scrubbers). In the U.S., these assets have a recovery period of 

seven years. 

Petroleum Refining Crude Unit (Distillation): Includes assets used for the distillation of 

crude petroleum into gasoline and its other components. In the U.S., these assets are in 

Asset Class 13.3 with a class life of 16 years and a recovery period of 10 years. 

Petroleum Refining Fluid Catalytic Cracking Unit: Includes assets used for the catalytic 

cracking of crude petroleum and its other components. In the U.S., these assets are in 

Asset Class 13.3 with a class life of 16 years and a recovery period of 10 years. 

Methodology 

Ernst & Young used its foreign tax desk network to collect information from the nonU.S. countries. Tax specialists for each of the countries provided information about the 

tax depreciation rules, any special credits, and any other special tax rules applying to the 

4 
122 

specific assets. For purposes of this analysis, a number of assumptions and limitations 

needed to be made to summarize the comparative tax treatment of multiple assets across 

many countries. 

Tax depreciation rules require the classification of many assets into different recovery 

periods. The U.s. assignment of cost recovery allowances may depend on the particular 

asset or the particular industry activity in which the asset is used? For example, the U.S. 

has a single recovery period for assets used in electric generating facilities, whether they 

are structures or machinery. Some countries, such as Germany, have different recovery 

periods depending on the specific assets used within the electric generating facility. In 

such cases, a single asset recovery period representing a significant asset was chosen 

rather than attempting to estimate an average recovery period or estimating mUltiple 

recovery periods for multiple assets for a single facility. 

Many countries have special tax rules (accelerated depreciation, credits, or lower rates) 

for certain types of activities or fuels. For example, the U.S. and several ofthe 

comparison countries have favorable tax treatment for renewable fuels. A number of 

countries have more favorable tax treatment for economic activity occurring in special 

economic zones. For purposes of this study, the estimates are based on tax rules for 

general activity rather than targeted geographic or targeted input incentives. 

The estimates assume the investments were put in place July 1,2006. Many countries 

have half-year or monthly conventions for tax depreciation. The tax rules are those 

applicable in 2006. Some of the tax provisions are temporary and will change in future 

years. 

Where there is an option of depreciation rules, the estimate calculates the most favorable 

tax rule. For example, if companies have the choice between straight-line depreciation 

and double-declining balance depreciation, the double-declining balance depreciation is 

used. Some companies may choice to use straight-line depreciation due to otherwise 

expiring net operating losses or some other reason. 

Some countries have more favorable tax rules that are available under certain 

circumstances including approval by the tax administrator. If the tax provision is not 

automatic and generally available, then that special provision is not included in the 

estimate. 

Net Present Value of Depreciation Deductions. 

Depreciation deductions generally are taken over multiple years. Deductions taken in 

future years do not have the same financial value as deductions taken in the year of the 

investment, due to the time value of money. Net present values adjust a stream of future 

deductions into the current period equivalent. Calculating net present values requires an 

assumption about the discount rate used to value future income or expenses. Most 

2 U.S. Department of the Treasury, Report to The Congress on Depreciation Recovery Periods and 

Methods, July 2000, p. 31. 

5 
123 

financial analysts use a weighted average of the returns to debt and equity. This can vary 

by a number of factors across firms and countries, by the debt/equity ratio, the statutory 

marginal tax rate, real rates of return, and inflation rates. 

A recent Congressional Budget Office studl estimated the weighted average cost of 

funds was 6.63%. We have rounded up to 7% to calculate the net present value based on 

a U.S. weighted average cost offunds, which might be most applicable to a U.S. based 

multi-national corporation. In comparison, Michael Devereux in a recent analysis of 

international tax rules assumed a 10% interest rate and a fixed inflation rate of 3.5%,4 A 

higher discount rate would lower the net present value more for longer-lived assets. 

Effective Tax Rate on Energy Investments 

An additional measure comparing the effect of tax systems on investments across time, 

assets, and/or countries is a measure of an effective tax rate. An effective tax rate takes 

into account not only tax depreciation but also statutory marginal tax rates and tax 

credits. 

An effective tax rate measures the difference between the pre-tax rate of return and the 

after-tax rate of return as a percentage of the pre-tax rate of return. There are numerous 

potential effective tax rates.5 For purposes of this analysis, we have calculated the 

effective corporate tax rate on investment, after-corporate income tax and before personal 

income taxes.6 For purposes of this analysis, the estimates assume that multinational 

corporations provide an after-corporate tax, but pre-individual investor tax, rate of7,0% 

real, which is the long-term historical U.S, average on corporate equities, 

The Appendix I describes the calculation of the effective tax rate measures. 

Results 

The international comparison results are presented in four tables. 

International Comparison o/Nominal Capital Costs Recovered After Five Years/or 

Selected Energy Investments 

Table I shows the amount recovered during the initial five years of cost recovery 

deductions in the U.S. for the selected energy investments ranges from 30% for coal 

electric generation facilities, distribution lines and smart meters to 64% for pollution 

control equipment. Coal electric generation facilities are recovered over 20 years under 

3 Congressional Budget Office, Computing Effective Tax Rates on Capital Income, December 2006. 

4 Devereux, M.P., R. Griffith, and A. Klemm, "Corporate Income Tax Reforms and International Tax 

Competition", June 2002 

5 CBO, ibid. 

6 CBO, ibid, King, M.A. and Don Fullerton, The Taxation of Income from Capital. A Comparative Study 

of the United States. the United Kingdom, Sweden and West Germany (1984), Jorgenson, D.W., and Ralph 

Landau, Tax Reform and the Cost of Capital: An International Comparison (1993). 

6 
124 

a double declining balance method with a half-year convention in the first year. Pollution 

control equipment is recovered straight-line over seven years. 

Other countries' capital cost recovery in the first five years ranges from 21 % for electric 

transmission and distribution lines in Brazil to immediate write-off of 100% for all of the 

selected assets in Malaysia plus a number of other assets in several other countries. 

Mexico allows over 100% of the historical nominal cost for pollution control equipment 

during the first five years, because it provides an inflation adjustment plus a short 

recovery period. Table I compares nominal capital costs recovered after five years as 

percent of total asset value for selected energy investments. 

7 
Table 1: International Comparison of Nominal Capital Costs Recovered After Five Years for Selected Energy Investments, 2006 

Electric Transmission & Distribution Pollution Electric Generation Lines Control Petroleum 

Equipment 

Combined Self- Crude Unit 

Gas Coal Nuclear Heat & Generated Transmission Distribution Smart Discharge (Distillation 

Power Electricity Lines Lines Meters Modification Unit) 

Generation 

United 37.7% 29.5% 37.7% 29.5% 37.7% 37.7% 29.5% 29.5% 64.3% 63.1% 

States 

Brazil 37.7% 47.5% NfA 37.7% 63.1% 20.6% 20.6% 31.2% 89.6% 63.1% 

Canada 79.6% 79.6% 79.6% 79.6% 79.6% 31.2% 31.2% 63.1% 79.6% 79.6% China 39.8% 39.8% 39.8% 39.8% 39.8% 39.8% 39.8% 39.8% 41.3% 39.8% 

Germany 30.0% 30.0% 37.5% 30.0% 30.0% 33.1% 33.1% 63.1% 79.6% 72.3% 

India 55.6% 55.6% 55.6% 55.6% 55.6% 55.6% 55.6% 100.0% 100.0% 66.1% Indonesia 45.0% 45.0% 45.0% 45.0% 45.0% 45.0% 45.0% 45.0% 45.0% 45.0% 

Japan 49.7% 49.7% 49.7% 49.7% 45.6% 37.4% 37.4% 49.7% 76.9% 72.3% 

Rep of 57.7% 57.7% 57.7% 57.7% 57.7% 57.7% 57.7% 57.7% 89.0% 89.0% 

Korea 

Malaysia 100.0% 100.0% 100.0% 100.0% 100.0% 90.0% 90.0% 90.0% 100.0% 90.0% 

Mexico 46.2% 46.2% 46.2% 46.2% 46.2% 23.1% 23.1% 23.1% 101.2% 32.3% 

Taiwan 49.7% 49.7% 49.7% 49.7% 49.7% 49.7% 49.7% 49.7% 96.6% 78.5% 

, , 

8 
126 

Table 2 compares the nominal capital costs recovered after five years to the proportion 

recovered under United States' tax depreciation rules. In addition to the number of 

countries with greater, similar and lower amounts recovered after five years, the table 

also shows the percent of United States international trade with countries in each of the 

three groUpS.7 

Table 2: Countries where Nominal Capital Costs Recovered After Five Years are 

Greater, Similar, and Less than under United States' Tax Depreciation Rules, 2006 

Number of Countries Percent of 

International Trade Asset Group Asset 

Greater Similar Less Greater Similar Less 

Gas 9 1 1 58% 2% 5% 

Coal 10 1 0 59% 5% 0% 

Electric Nuclear 9 1 0 58% 5% 0% Generation 

Combined Heat & 10 1 0 59% 5% 0% Power Generation 

Self-Generated 10 0 1 59% 0% 5% Electricity 

Electric Transmission Lines 6 1 4 19% 8% 37% 

Transmission & Distribution Lines 9 0 2 51% 0% 13% Distribution 

Lines Smart Meters 10 0 1 53% 0% 11% 

Pollution Control Discharge 9 0 2 52% 0% 12% Equipment Modification 

Crude Distillation 7 1 3 39% 2% 23% Petroleum Unit 

Refining Fluid Catalytic 7 1 3 39% 2% 23% Crackina Unit 

International Comparison of Nominal Capital Costs Recovered After Ten Years for 

Selected Energy Investments 

Table 3 shows the amount recovered during the initial ten years of cost recovery 

deductions in the U.S. for the selected energy investments ranges from 53% for coal 

electric generation facilities, distribution lines and smart meters to 100% for pollution 

control equipment. Coal electric generation facilities are recovered over 20 years under 

a double declining balance method with a half-year convention in the first year. Pollution 

control equipment is recovered straight-line over seven years. 

7 Percent of international trade is calculated by dividing the sum of imports and exports with each country 

by total United States imports and exports. The countries under consideration account for 64% oftota! 

imports and exports combined, so the total for each row equals 64%. The figures for nuclear generation 

are slightly lower because Brazil is excluded since it does not have any nuclear generating facilities. 

9 
Table 3: International Comparison of Nominal Capital Costs Recovered After Ten Years for Selected Energy Investments, 20

Electric Transmission & Distribution Pollution Electric Generation Lines Control petroleum 

Equipment 

Combined Sell- Crude Unit 

Gas Coal Nuclear Heat & Generated Transmission Distribution Smart Discharge (Distillation 

Power Electricity Lines Lines Meters Modification Unit) 

Generation 

UnHed 67.5% 53.2% 67.5% 53.2% 67.5% 67.5% 53.2% 53.2% 100.0% 96.7% 

States 

Brazil 63.2% 74.4% N/A 63.2% 87.9% 38.6% 38.6% 54.7% 99.2% 87.9% 

Canada 96.6% 96.6% 96.6% 96.6% 96.6% 54.7% 54.7% 87.9% 96.6% 96.6% China 84.8% 84.8% 84.8% 84.8% 84.8% 84.8% 84.8% 84.8% 67.2% 84.8% 

Germany 63.3% 63.3% 79.2% 63.3% 63.3% 57.3% 57.3% 87.9% 96.6% 93.4% 

India 80.3% 80.3% 80.3% 80.3% 80.3% 80.3% 80.3% 100.0% 100.0% 84.9% 

Indonesia 71.8% 71.8% 71.8% 71.8% 71.8% 71.8% 71.8% 71.8% 71.8% 71.8% 

Japan 76.6% 76.6% 76.6% 76.6% 72.4% 62.8% 62.8% 76.6% 95.0% 93.4% 

Rep 01 83.8% 83.8% 83.8% 83.8% 83.8% 83.8% 83.8% 83.8% 100.0% 100.0% 

Korea 

Malaysia 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 

Mexico 103.7% 103.7% 103.7% 103.7% 103.7% 51.8% 51.8% 51.8% 101.2% 72.5% 

Taiwan 76.6% 76.6% 76.6% 76.6% 76.6% 76.6% 76.6% 76.6% 100.0% 96.2% 

10 
128 

Other countries' capital cost recovery in the first ten years ranges from 39% for electric 

transmission and distribution lines in Brazil to immediate write-off of 100% for most of 

the selected assets in Malaysia. Table 3 compares nominal capital costs recovered after 

ten years as percent of total asset value for selected energy investments. 

Table 4 compares the nominal capital costs recovered after ten years to the proportion 

recovered under United States' tax depreciation rules. The table shows both the number 

of countries with greater, similar and lower amounts recovered and the percent of United 

States international trade with countries in each of the three groups. 

Table 4: Countries where Nominal Capital Costs Recovered After Ten Years are 

Greater, Similar, and Less than under United States' Tax Depreciation Rules, 2006 

Number of Countries Percent of 

International Trade Asset Group Asset 

Greater Similar Less Greater Similar Less 

Gas 9 0 2 58% 0% 6% 

Coal 11 0 0 64% 0% 0% 

Electric Nuclear 10 0 0 62% 0% 0% Generation 

Combined Heat & 11 0 0 64% 0% 0% Power Generation 

Self-Generated 10 0 1 59% 0% 5% Electricity 

Electric Transmission Lines 6 0 5 19% 0% 44% 

Transmission & Distribution Lines 9 0 2 51% 0% 13% Distribution 

Lines Smart Meters 10 0 1 53% 0% 11% 

Pollution Control Discharge 1 5 5 11% 9% 43% EQuipment Modification 

Crude Distillation 2 2 7 4% 22% 38% Petroleum Unit 

Refining Fluid Catalytic 2 3 6 4% 26% 33% Cracking Unit 

International Comparison of the Discounted Present Value of Capital Costs Recovered 

Over the Entire Asset Life for Selected Energy Investments 

Table 5 shows the discounted present value of cost recovery deductions over the entire 

asset life in the U.S. for the selected energy investments range from 58% for coal electric 

generation facilities, distribution lines and smart meters to 79% for pollution control 

equipment. Other countries' discounted present value of depreciation deductions ranges 

from 43% for electric transmission and distribution lines in Brazil to 100% for pollution 

control equipment in India. Table 5 compares the net present value of capital costs 

recovered as percent of total asset value for selected energy investments. 

II 
Table 5: International Comparison of the Discounted Present Value of Capital Costs Recovered for Selected Energy Investments ov

Entire Asset Life, 2006 

Electric Transmission & Distribution Pollution Electric Generation Lines Control Petroleum 

Equipment 

Combined Sell· Crude Unit 

Gas Coal Nuclear Heat & Generated Transmission Distribution Smart Discharge (Distillation 

Power Electrictty Lines Lines Meters Modification Unit) 

Generation 

Untted 65.9% 58.2% 65.9% 58.2% 65.9% 65.9% 58.2% 58.2% 78.6% 79.7% 

States 

Brazil 60.9% 68.0% NJA 60.9% 76.7% 43.0% 43.0% 55.2% 88.1% 76.7% 

Canada 83.9% 83.9% 83.9% 83.9% 83.9% 55.2% 55.2% 76.7% 83.9% 83.9% China 73.5% 73.5% 73.5% 73.5% 73.5% 73.5% 73.5% 73.5% 73.5% 81.5% 

Germany 62.8% 62.8% 68.5% 62.8% 62.8% 56.9% 56.9% 76.7% 83.9% 80.9% 

India 73.0% 73.0% 73.0% 73.0% 73.0% 73.0% 73.0% 98.4% 100.0% 79.3% 

Indonesia 71.3% 71.3% 71.3% 71.3% 71.3% 71.3% 71.3% 71.3% 71.3% 71.3% 

Japan 69.6% 69.6% 69.6% 69.6% 67.0% 60.9% 60.9% 69.6% 95.0% 93.4% 

Rep 01 74.1% 74.1% 74.1% 74.1% 74.1% 74.1% 74.1% 74.1% 87.9% 87.9% 

Korea MalaYl'ia 93.5% 93.5% 93.5% 93.5% 93.5% 94.7% 94.7% 94.7% 98.3% 94.7% Mexico 79.2% 79.2% 79.2% 79.2% 79.2% 64.1% 64.1% 64.1% 97.3% 72.2% 

Taiwan 69.3% 69.3% 69.3% 69.3% 69.3% 69.3% 69.3% 69.3% 91.5% 83.5% 

12 
130 

Table 6 compares the net present value of capital costs recovered during the first fifty 

years of the asset life to the proportion recovered under United States' tax depreciation 

rules. The table shows both the number of countries with greater, similar and lower 

amounts recovered and the percent of United States international trade with countries in 

each of the three groups. 

Table 6: Countries where the Net Present Value of Capital Costs Recovered is 

Greater, Similar, and Less than under United States' Tax Depreciation Rules, 2006 

Number of Countries Percent of 

International Trade Asset Group Asset 

Greater Similar Less Greater Similar Less 

Gas 9 0 2 58% 0% 6% 

Coal 11 0 0 64% 0% 0% 

Electric Nuclear 10 0 0 62% 0% , 0% Generation 

Combined Heat & 11 0 0 64% 0% 0% Power Generation 

Self-Generated 10 0 1 59% 0% 5% Electricity 

Electric Transmission Lines 6 0 5 19% 0% 44% 

Transmission & Distribution Lines 8 0 3 38% 0% 26% Distribution 

Lines Smart Meters 10 0 1 62% 0% 2% 

Pollution Control Discharge 9 0 2 52% 0% 12% Equipment Modification 

Crude Distillation 7 1 3 49% 1% 13% Petroleum Unit 

Refining Fluid Catalytic 6 1 4 38% 1% 25% Cracking Unit 

International Comparison ojthe Corporate Effective Tax Ratejor Selected Energy 

Investments 

Table 7 shows the corporate effective tax rates in the U.S. for the selected energy 

investments range from 22% for petroleum refining assets to 51 % for electric distribution 

smart meters. Corporate effective tax rates incorporate not only depreciation deductions, 

but also marginal tax rates and tax credits. 

Other countries' corporate effective tax rates range from -19% for pollution control 

equipment in Taiwan to 47% for electric distribution smart meters in Brazil. Table 7 

compares effective tax rates for selected energy investments. 

13 
Table 7: International Comparison of the Effective Tax Rate on Selected Energy Investments, 2006 

Electric Transmission & Distribution Pollution 

Electric Generation Lines Control Petroleum 

Equipment 

Combined Sell- Crude Unit 

Gas Coal Nuclear Heat & Generated Transmission Distribution Smart Discharge (Distillation 

Power Electricity Lines Lines Meters Modification Unit) 

Generation 

United 26.7% 30.8% 26.7% 30.8% 26.7% 27.5% 31.7% 51.1% 23.4% 21.6% 

States 

Brazil 25.7% 22.0% N/A 25.7% 17.1% 33.5% 33.5% 47.1% 13.0% 19.9% 

Canada 13.5% 13.5% 13.5% 13.5% 13.5% 30.3% 30.3% 33.7% 18.1% 15.8% China 19.0% 19.0% 19.0% 19.0% 19.0% 19.0% 19.0% 34.6% 25.0% 22.1% 

Germany 28.3% 28.3% 25.1% 28.3% 28.3% 31.4% 31.4% 35.8% 19.5% 19.8% 

India 16.6% 16.6% 16.6% 16.6% 16.6% 16.6% 16.6% 2.6% 0.0% 15.5% 

Indonesia 18.4% 19.0% 19.0% 19.0% 19.0% 19.0% 19.0% 34.6% 25.0% 22.1% 

Japan 25.5% 25.5% 25.5% 25.5% 27.1% 30.6% 30.6% 43.6% 21.3% 20.4% 

Rep 01 5.2% 5.2% 5.2% 5.2% 5.2% 5.2% 5.2% 11.0% -9.7% -9.7% 

Korea 

Malaysia 4.8% 4.8% 4.8% 4.8% 4.8% 3.9% 3.9% 8.3% 1.8% 7.1% 

Mexico 1:2.7% 12.7% 12.7% 12.7% 12.7% 20.1% 20.1% 36.1% 2.6% 19.0% 

Taiwan 14.9% 14.9% 14.9% 14.9% 14.9% 14.9% 14.9% 23.3% -18.8% 10.2% 

14 
132 

Table 8 compares the effective tax rates on capital investments to the proportion 

recovered under United States' tax rules. The table shows both the number of countries 

with lower, similar and higher effective tax rates and the percent of United States 

international trade with countries in each of the three groups. 

Table 8: Countries where the Effective Tax Rate on Capital Investments is Lower, 

Similar, and Higher than under United States' Tax Rules, 2006 

Number of Countries Percent of 

International Trade Asset Group Asset 

Lower Similar Higher Lower Similar Higher 

Gas 9 1 1 58% 2% 5% 

Coal 11 0 0 64% 0% 0% 

Electric Nuclear 10 0 0 62% 0% 0% Generation 

Combined Heat & 11 0 0 64% 0% 0% Power Generation 

Self-Generated 9 1 1 52% 8% 5% Electricity 

Electric Transmission Lines 7 0 4 31% 0% 33% 

Transmission & Distribution Lines 9 1 1 58% 5% 2% Distribution 

Lines Smart Meters 11 0 0 64% 0% 0% 

Pollution Control Discharge 9 0 2 52% 0% 12% Equipment Modification 

Crude Distillation 9 2 0 52% 12% 0% Petroleum Unit 

Refining Fluid Catalytic 9 2 0 52% 12% 0% CrackinQ Unit 

Appendix Tables 3-14 show the same results presented separately for each country 

individually. 

15 
133 

Appendix I: Calculation Methodology 

Calculation of Effective Tax Rates 

Effective tax rates are computed by dividing the difference between the before tax rate of 

return on an investment and the after tax rate of return on an investment by the before tax 

rate of return on an investment. At the margin, a firm will make an investment if the after 

tax rate of return is at least equal to the interest payments required for such an investment 

plus inflation. This rate is the real interest rate, r. The real interest rate is composed of 

the nominal interest rate and inflation in the following form: 

r=i+1r 

Where i is the nominal interest rate and 1r is the rate of inflation. Our estimates assume a 

nominal interest rate of 5% and an inflation rate of 2% for a total real interest rate of 7%. 

The before tax rate of return necessary to reach a sufficient after tax return may be 

expressed with the following expression: 

(r+q) p=--(l-uz-k)-q I-u 

Where p represents the before tax rate of return equal to the real interest rate, q represents 

the economic depreciation of the asset, u represents the corporate income tax rate, Z 

represents the net present value of tax depreciation allowances, and k equals the present 

value of any tax credits or incentives available for the investment. 

The net present value of depreciation allowances, z, is the discounted sum of depreciation 

allowances. We calculate the net present value of depreciation allowances using the 

following formula. We examine depreciation allowances during the first fifty years after 

an investment: 

50 z. Z-'" 1 - L... (I )1-1 j=1 +r 

Where) is the year starting with year I, the first year of the investment, and zjis the 

depreciation allowance credited in year j. 

The marginal effective tax rate, ETR, may thus be expressed in the following manner: 

ETR= p-r 

p 

A-I 
134 

Rates of Economic Depreciation 

For this study, we assume electric generation and transmission equipment other than 

smart meters depreciate at a rate of 5% per year, petroleum refining equipment 

depreciates at a rate of 7.5% per year, pollution control equipment depreciates at a rate of 

10% per year, and smart meters depreciate at a rate of 20% per year. 

The rates applied for each investment are derived from the following asset classes from 

the U.S. Bureau of Economic Analysis: 8 

Appendix Table 1: Rates of Economic Depreciation 

Investment SEA Asset Class SEA Rate of Assumed 

Depreciation Rate 

Electric Generation Steam engines and turbines 5.16% 5% 

Electric Transmission Electrical transmission, distribution, 5.00% 5% (other than smart meters) and industrial apparatus 

Electric Transmission Other electrical equipment 18.34% 20% (smart meters) 

Pollution Control Special industrial machinery, n.e.c.; 10.31%-

Equipment General industrial and materials 10.72% 10% 

handling equipment 

Petroleum Refining Petroleum and natural gas 7.51% 7.5% exploration, shafts and wells 

8 Bureau of Economic Analysis, "BEA Rates of Depreciation, Service Lives, Declining-Balance Rates, and 

Hulten-Wykoff Categories" (1997) available at http://www.bea.govfbeaianl0797fr/table3.htm.this table is 

found in Fraumeni, Barbara, "The Measurement of Depreciation in the U.S. National Income and Product 

Accounts," (1997) available at http://www.bea.govfbeaian/0797fr/maintext.htm 

A-2 
135 

Corporate Income Tax Rates 

Below are the corporate income tax rates applied in the effective tax rate calculations: 

Appendix Table 2: Corporate Income Tax Rates, 2006 

Country Tax Rate 

United States 39.3%" 

Brazil 34.0% 

Canada 36.1% 

China 33.0% 

Germany 38.3% 

India 30.0% 

Indonesia 30.0% 

Japan 39.7% 

Rep of Korea 35.0% 

Malaysia 28.0% 

Mexico 29.0% 

Taiwan 25.0% 

Source: OECD and Ernst & Young Corporate Tax Guide 

, Section 199 ("production deduction") reduces the combined federal and state marginal corporate income 

tax rate from 39.3% to 38.3% in 2006 for electric generation, pollution control and petroleum refining 

assets. 

10 The Malaysian corporate income tax for firms in the petroleum industry is 38%, for other firms the 

corporate income tax is 28%. 

A-3 
136 

Appendix II: Individual Country Results 

Appendix Table 3: Value of Depreciation Deductions and Effective Tax Rates 

on Selected Energy Investments, 2006 

United States 

Percent of Cost Recovered Net Present 

Value of Effective Tax 

Depreciation Rate 

Five Years Ten Years Deductions 

Gas 37.7% 67.5% 65.9% 26.7% 

Coal 29.5% 53.2% 58.2% 30.8% 

Electric Nuclear 37.7% 67.5% 65.9% 26.7% Generation 

Combined Heat & Power Generation 

Facilities Using Conventional Fuel 29.5% 53.2% 58.2% 30.8% 

(assumes power for sale) 

Distribution of Industrial Steam & 37.7% 67.5% 65.9% 26.7% Electricity Generated for Self-Use 

Transmission Lines 37.7% 67.5% 65.9% 27.5% 

Electric 

Transmission & Distribution Lines 29.5% 53.2% 58.2% 31.7% 

Distribution Lines 

Smart Meters 29.5% 53.2% 58.2% 51.1% 

Pollution Control Discharge Modification (e.g. thermal 64.3% 100.0% 78.6% 23.4% 

Equipment discharge control) 

Crude Unit (Distillation Unit) 63.1% 96.7% 79.7% 21.6% 

Petroleum 

Refining 

Fluid Catalytic Cracking Unit 63.1% 96.7% 79.7% 21.6% 

A-4 
137 

Appendix Table 4: Value of Depreciation Deductions and Effective Tax Rates 

on Selected Energy Investments, 2006 

Brazil 

Percent of Cost Recovered Net Present 

Value of Effective Tax 

Depreciation Rate 

Five Years Ten Years Deductions 

Gas 37.7% 63.2% 60.9% 25.7% 

Coal 47.5% 74.4% 68.0% 22.0% 

Electric Nuclear N/A N/A N/A N/A Generation 

Combined Heat & Power Generation 

Facilities Using Conventional Fuel 37.7% 63.2% 60.9% 25.7% 

(assumes power for sale) 

Distribution of Industrial Steam & 63.1% 87.9% 76.7% 17.1% Electricity Generated for Self-Use 

Transmission Lines 20.6% 38.6% 43.0% 33.5% 

Electric 

Transmission & Distribution Lines 20.6% 38.6% 43.0% 33.5% 

Distribution Lines 

Smart Meters 31.2% 54.7% 55.2% 47.1% 

Pollution Control Discharge Modification (e.g. thermal 89.6% 99.2% 88.1% 13.0% Equipment discharge control) 

Crude Unit (Distillation Unit) 63.1% 87.9% 76.7% 19.9% 

Petroleum 

Refining 

Fluid Catalytic Cracking Unit 63.1% 87.9% 76.7% 19.9% 

A-5 
138 

Appendix Table 5: Value of Depreciation Deductions and Effective Tax Rates 

on Selected Energy Investments, 2006 

Canada 

Percent of Cost Recovered Net Present 

Value of Effective Tax 

Depreciation Rate 

Five Years Ten Years Deductions 

Gas 79.6% 96.6% 83.9% 13.5% 

Coal 79.6% 96.6% 83.9% 13.5% 

Electric Nuclear 79.6% 96.6% 83.9% 13.5% Generation 

Combined Heat & Power Generation 

Facilities Using Conventional Fuel 79.6% 96.6% 83.9% 13.5% 

(assumes power for sale) 

Distribution Of Industrial Steam & 79.6% 96.6% 83.9% 13.5% Electricity Generated for Self-Use 

Transmission Lines 31.2% 54.7% 55.2% 30.3% 

Electric 

Transmission & Distribution Lines 31.2% 54.7% 55.2% 30.3% 

Distribution Lines 

Smart Meters 63.1% 87.9% 76.7% 33.7% 

Pollution Control Discharge Modification (e.g. thermal 79.6% 96.6% 83.9% 18.1% Equipment discharge control) 

Crude Unit (Distillation Unit) 79.6% 96.6% 83.9% 15.8% 

Petroleum 

Refining 

Fluid Catalytic Cracking Unit 79.6% 96.6% 83.9% 15.8% 

A-6 
139 

Appendix Table 6: Value of Depreciation Deductions and Effective Tax Rates 

on Selected Energy Investments, 2006 

China 

Percent of Cost Recovered Net Present 

Value of Effective Tax 

Depreciation Rate 

Five Years Ten Years Deductions 

Gas 39.8% 84.8% 73.5% 19.0% 

Coal 39.8% 84.8% 73.5% 19.0% 

Electric Nuclear 39.8% 84.8% 73.5% 19.0% Generation 

Combined Heat & Power Generation 

Facilities Using Conventional Fuel 39.8% 84.8% 73.5% 19.0% 

(assumes power for sale) 

Distribution of Industrial Steam & 39.8% 84.8% 73.5% 19.0% Electricity Generated for Self-Use 

Transmission Lines 39.8% 84.8% 73.5% 19.0% 

Electric 

Transmission & Distribution Lines 39.8% 84.8% 73.5% 19.0% 

Distribution Lines 

Smart Meters 39.8% 84.8% 73.5% 34.6% 

Pollution Control Discharge Modification (e.g. thermal 41.3% 67.2% 73.5% 25.0% Equipment discharge control) 

Crude Unit (Distillation Unit) 39.8% 84.8% 81.5% 22.1% 

Petroleum 

Refining 

Fluid Catalytic Cracking Unit 39.8% 84.8% 73.5% 22.1% 

A-7 
140 

Appendix Table 7: Value of Depreciation Deductions and Effective Tax Rates 

on Selected Energy Investments, 2006 

Germany 

Percent of Cost Recovered Net Present 

Value of Effective Tax 

Depreciation Rate 

Five Years Ten Years Deductions 

Gas 30.0% 63.3% 62.8% 28.3% 

Coal 30.0% 63.3% 62.8% 28.3% 

Electric Nuclear 37.5% 79.2% 68.5% 25.1% Generation 

Combined Heat & Power Generation 

Facilities Using Conventional Fuel 30.0% 63.3% 62.8% 28.3% 

(assumes power for sale) 

Distribution of Indusllial Steam & 30.0% 63.3% 62.8% 28.3% Electricity Generated for Self-Use 

Transmission Lines 33.1% 57.3% 56.9% 31.4% 

Electric 

Transmission & Distribution Lines 33.1% 57.3% 56.9% 31.4% 

Distribution Lines 

Smart Meters 63.1% 87.9% 76.7% 35.8% 

Pollution Control Discharge Modification (e.g. thermal 79.6% 96.6% 83.9% 19.5% Equipment discharge control) 

Crude Unit (Distillation Unit) 72.3% 93.4% 80.9% 19.8% 

Petroleum 

Refning 

Fluid Catalytic Cracking Unit 79.6% 96.6% 83.9% 17.1% 

A-8 
141 

Appendix Table 8: Value of Depreciation Deductions and Effective Tax Rates 

on Selected Energy Investments, 2006 

India 

Percent of Cost Recovered Net Present 

Value of Effective Tax 

Depreciation Rate 

Five Years Ten Years Deductions 

Gas 55.6% 80.3% 73.0% 16.6% 

Coal 55.6% 80.3% 73.0% 16.6% 

Electric Nuclear 55.6% 80.3% 73.0% 16.6% Generation 

Combined Heat & Power Generation 

Facilities Using Conventional Fuel 55.6% 80.3% 73.0% 16.6% 

(assumes power for sale) 

Distribution of Industrial Steam & 55.6% 80.3% 73.0% 16.6% Electricity Generated for Self-Use 

Transmission Lines 55.6% 80.3% 73.0% 16.6% 

Electric 

Transmission & Distribution Lines 55.6% 80.3% 73.0% 16.6% 

Distribution Lines 

Smart Meters 100.0% 100.0% 98.4% 2.6% 

Pollution Control Discharge Modification (e.g. thermal 100.0% 100.0% 100.0% 0.0% Equipment discharge control) 

Crude Unit (Distillation Unit) 66.1% 84.9% 79.3% 15.5% 

Petroleum 

Refining 

Fluid Catalytic Cracking Unit 66.1% 84.9% 79.3% 15.5% 

A-9 
142 

Appendix Table 9: Value of Depreciation Deductions and Effective Tax Rates 

on Selected Energy Investments. 2006 

Indonesia 

Percent of Cost Recovered Net Present 

Value of Effective Tax 

Depreciation Rate 

Five Years Ten Years Deductions 

Gas 45.0% 71.8% 71.3% 18.4% 

Coal 45.0% 71.8% 71.3% 19.0% 

Electric Nuclear 45.0% 71.8% 71.3% 19.0% Generation 

Combined Heat & Power Generation 

Facilities Using Conventional Fuel 45.0% 71.8% 71.3% 19.0% 

(assumes power for sale) 

Distribution of Industrial Steam & 45.0% 71.8% 71.3% 19.0% Electricity Generated for Self-Use 

Transmission Lines 45.0% 71.8% 71.3% 19.0% 

Electric 

Transmission & Distribution Lines 45.0% 71.8% 71.3% 19.0% 

Distribution Lines 

Smart Meters 45.0% 71.8% 71.3% 34.6% 

Poliution Control Discharge Modification (e.g. thermal 45.0% 71.8% 71.3% 25.0% Equipment discharge control) 

Crude Unit (Distillation Unit) 45.0% 71.8% 71.3% 22.1% 

Petroleum 

Refining 

Fluid Catalytic Cracking Unit 45.0% 71.8% 71.3% 22.1% 

A-1O 
143 

Appendix Table 10: Value of Depreciation Deductions and Effective Tax Rates 

on Selected Energy Investments, 2006 

Japan 

Percent of Cost Recovered Net Present 

Value of Effective Tax 

Depreciation Rate 

Five Years Ten Years Deductions 

Gas 49.7% 76.6% 69.6% 25.5% 

Coal 49.7% 76.6% 69.6% 25.5% 

Electric Nuclear 49.7% 76.6% 69.6% 25.5% Generation 

Combined Heat & Power Generation 

Facilities USing Conventional Fuel 49.7% 76.6% 69.6% 25.5% 

(assumes power for sale) 

Distribution of Industrial Steam & 45.6% 72.4% 67.0% 27.1% Electricity Generated for Self-Use 

Transmission Lines 37.4% 62.8% 60.9% 30.6% 

Electric 

Transmission & Distribution Lines 37.4% 62.8% 60.9% 30.6% 

Distribution Lines 

Smart Meters 49.7% 76.6% 69.6% 43.6% 

Pollution Control Discharge Modification (e.g. thermal 76.9% 95.0% 95.0% 21.3% Equipment discharge control) 

Crude Unit (Distillation Unit) 72.3% 93.4% 93.4% 20.4% 

Petroleum 

Refining 

Fluid Catalytic Cracking Unit 72.3% 93.4% 93.4% 20.4% 

A-II 
144 

Appendix Table 11: Value of Depreciation Deductions and Effective Tax Rates 

on Selected Energy Investments, 2006 

Rep of Korea 

Percent of Cost Recovered Net Present 

Value of Effective Tax 

Depreciation Rate 

Five Years Ten Years Deductions 

Gas 57.7% 83.8% 74.1% 5.2% 

Coal 57.7% 83.8% 74.1% 5.2% 

Electric Nuclear 57.7% 83.8% 74.1% 5.2% Generation 

Combined Heat & Power Generation 

Facilities Using Conventional Fuel 57.7% 83.8% 74.1% 5.2% 

(assumes power for sale) 

Distribution of Industrial Steam & 57.7% 83.8% 74.1% 5.2% Electricity Generated for Self-Use 

Transmission Lines 57.7% 83.8% 74.1% 5.2% 

Electric 

Transmission & Distribution Lines 57.7% 83.8% 74.1% 5.2% 

Distribution Lines 

Smart Meters 57.7% 83.8% 74.1% 11.0% 

Pollution Control Discharge Modification (e.g. thermal 89.0% 100.0% 87.9% -9.7% Equipment discharge control) 

Crude Unit (Distillation Unit) 89.0% 100.0% 87.9% -9.7% 

Petroleum 

Refining 

Fluid Catalytic Cracking Unit 89.0% 100.0% 87.9% -9.7% 

A-12 
145 

Appendix Table 12: Value of Depreciatiou Deductions and Effective Tax Rates 

on Selected Energy Investments, 2006 

Malaysia 

Percent of Cost Recovered Net Present 

Value of Effective Tax 

Depreciation Rate 

Five Years Ten Years Deductions 

Gas 100.0% 100.0% 93.5% 4.8% 

Coal 100.0% 100.0% 93.5% 4.8% 

Electric Nuclear 100.0% 100.0% 93.5% 4.8% Generation 

Combined Heat & Power Generation 

Facilities Using Conventional Fuel 100.0% 100.0% 93.5% 4.8% 

(assumes power for sale) 

Distribution of Industrial Steam & 100.0% 100.0% 93.5% 4.8% Electricity Generated for Self-Use 

Transmission Lines 90.0% 100.0% 94.7% 3.9% 

Electric 

Transmission & Distribution Lines 90.0% 100.0% 94.7% 3.9% 

Distribution Lines 

Smart Meters 90.0% 100.0% 94.7% 8.3% 

Pollution Control Discharge Modification (e.g. thenmal 100.0% 100.0% 98.3% 1.8% Equipment discharge control) 

Crude Unit (Distillation Unit) 90.0% 100.0% 94.7% 7.1% 

Petroleum 

Refining 

Fluid Catalytic Cracking Unit 90.0% 100.0% 94.7% 7.1% 

A-13 
146 

Appendix Table 13: Value of Depreciation Deductions and Effective Tax Rates 

on Selected Energy Investments, 2006 

Mexico 

Percent of Cost Recovered Net Present 

Value of Effective Tax 

Depreciation Rate 

Five Years Ten Years Deductions 

Gas 46.2% 103.7% 79.2% 12.7% 

Coal 46.2% 103.7% 79.2% 12.7% 

Electric Nuclear 46.2% 103.7% 79.2% 12.7% Generation 

Combined Heat & Power Generation 

Facilities Using Conventional Fuel 46.2% 103.7% 79.2% 12.7% 

(assumes power for sale) 

Distribution of Industrial Steam & 46.2% 103.7% 79.2% 12.7% Electricity Generated for Self-Use 

Transmission Lines 23.1% 51.8% 64.1% 20.1% 

Electric 

Transmission & Distribution Lines 23.1% 51.8% 64.1% 20.1% 

Distribution Lines 

Smart Meters 23.1% 51.8% 64.1% 36.1% 

Pollution Control Discharge Modification (e.g. thermal 101.2% 101.2% 97.3% 2.6% Equipment discharge control) 

Crude Unit (Distillation Unit) 32.3% 72.5% 72.2% 19.0% 

Petroleum 

Refining 

Fluid Catalytic Cracking Unij 32.3% 72.5% 72.2% 19.0% 

A-14 
147 

Appendix Table 14: Value of Depreciation Deductions and Effective Tax Rates 

on Selected Energy Investments, 2006 

Taiwan 

Percent of Cost Recovered Net Present 

Value of Effective Tax 

Depreciation Rate 

Five Years Ten Years Deductions 

Gas 49.7% 76.6% 69.3% 14.9% 

Coal 49.7% 76.6% 69.3% 14.9% 

Electric Nuclear 49.7% 76.6% 69.3% 14.9% Generation 

Combined Heat & Power Generation 

Facilities Using Conventional Fuel 49.7% 76.6% 69.3% 14.9% 

(assumes power for sale) 

Distribution of Industrial Steam & 49.7% 76.6% 69.3% 14.9% Electricity Generated for Self-Use 

Transmission Lines 49.7% 76.6% 69.3% 14.9% 

Electric 

Transmission & Distribution Lines 49.7% 76.6% 69.3% 14.9% 

Distribution Lines 

Smart Meters 49.7% 76.6% 69.3% 23.3% 

Pollution Control Discharge Modification (e.g. thermal 96.6% 100.0% 91.5% -18.8% Equipment discharge control) 

Crude Unit (Distillation Unit) 78.5% 96.2% 83.5% 10.2% 

Petroleum 

Refining 

Fluid Catalytic Cracking Unit 78.5% 96.2% 83.5% 10.2% 

A-15 
148 

SiS Sf:XT~ENTH 'STREET, N.W. 

WASHING1"oN, D.C. 2:0006 

LEGISLJlTIVE JlLEBT! 

November 5, 2007 

The Honorable Bal'bar-a Boxer, Chairwoman 

Sella!c Committee on Environment and Pubii~ Works 

456 Dirksen Senate Office Building 

Washington, D.C 20510 

Dear Chairwoman Bo=: 

AJOHAAO L tRUMAA $€Cj~!.:iiJ\'·(""fRfA~"j";';· 

lJIi.IOA-~~'rHOMf"SON 

FXECUl'l"t-·VIC'" .fIf'~ :YGr.\'1 

r am writing to e"-press the AFL·C10'H views (}il the America's Climate Secnrity Act (S, 21(1). We 

recognize that tbe original draft MS. 2191 responded IQ U number oflhe AFL-C!O's recommendations. 

However,lhe Subcommittee ha, adopted two amendments that add to 011.r reservations anGUt the impaet of 

this legiSlation on indus-try ~ workers~ and their communities. This letter idenfifies our specific c{mcerns with 

the bill and ofths solutions lhat we believe will improve it 

TIle AFL·CIO i$ on record in support ofthc bipartisan Htngaman-Spectet climate bill, S, 1766. We 

have also openly and honestly participated in stakeholder meNings ",·1th the Sfa'IT of Senators Lieberman and 

Warner regarding the development of Ame·rica's CHmalc Security Act. Our July 24,1007 testim(my before 

the Environment and rublic Works Committee, "A 21 st Ce-nu.tty Gnergy Policy fot Environmental and 

Economic Progress," idemiiled our reeommendations regarding the Subcommittec'socvclopment of new 

legislation We alBo provided every member aflhe Commitlee with a detailed wrirtc'1 response to the 

Liebennan-Wamer outline. 

The AFt-C!O takes to heart the statement in S. 219\ U,.t this legislation should .thieve its purpose 

"while prcserv·jng robust grow-Ill in the United Stat~s economy and avoiding the imposition of hardship on 

United States citizens." The bill's inclusion of international language will help preserve this growth while 

taking an imp0l1ant step forward to engaging the developing world in seeking a solutbn 10 global warming, 

Hmv-e ... ,cr, modest mociifkat[ons to the intcfllationaJ timeline £md implementation PW(''eSS iJ./ol!id strenglhen 

tlus section. 

We. appreciate the fact t118t the original draft of S. 2191 incorporated nInny of OUf investment 

recommendations, The indusion of bonus allowances will promote <otly lec-nnology deployment, and thc 

early auction of allowances will enable the jump-start ofthe K&:D agenda Most imponanl, the original dm!'t 

of S, 219] made critical long term eommitmc-nt. to t""hn,;io!!), development and deployment with illl 

investment pOlifaHo that includes zero or low carbo1J em.'Tgy technologies (rencwablcs and applianccrs)) 

cellulosticbiomass fuels, an advanced coal and sequ('stnltion program, and the advtlnc~'{! technology vehicles 

manufacturing incentive program, 

Unfo!1unateJy, the latter two pieces of the investment portfolio were severely undcnnincd by autorelated and ~nal·related ame!ldmems adopted by the Subcommiuee. On November 1 \he Subcumntitlee 

adopted an amendment hy Sen. Sanders limiting the advanced technoloQ.v ve;hicies rnanufacfurin£l incemive 
149 

program to vehicles that get 35 miles per gallon or more, and an amendment by Sen. Barasso IUlliting the 

types of coal that can be used in projects. These amendments are counterproductive and 3llillally undennine 

the technological transition this legislation is attempting !{) achieve. 

Furthermore, we feel that the legislation falls short, in a n\lm bel' of other areas, of providing an 

assu)"ed basis that economic developmelJt and environmental progress can go hand-In-hand: 

An ()vel'ly aggressive Phase I emissioll reduction target, now increased from a 10 percent to a 

15 percent reduction. of greenhouse gas emissions below 2005 levels by 1020,hei'ore the 

anticipated commercial availability of carboll capture and storage technologies; 

An unequivocal commitment to achkvinga 70 percc!1t J1ational emission redudion below 

2005 levels by 20S(), regardless of the· degree ()f subsequent participation of major tieve\opmg 

nations like China and India in agJQbal climate protection framework; 

• The failure !() identify "domestic economic development" as a t1ndln~ of Congress, a purpose 

ofthe legislation, ll!1d the failure to require tfull funding thJm this legislation be dedicated to 

domestic inveStments for !lew technology and the creation of jobs fi'mn pf()ductioo 1<) 

construction and exports. 

The absence· of an effective safety valve price for carbon dioxide allowances, which willllave 

an adverse impact upon hwestment deeisio@ and consumer and industry pricing, 

• The need for a restricted and regulated market system tbat does rlOt fall prey \0 predatory 

trading practices, hoarding ofal!owances, and the creation of c.aroon billionaires, which an 

open market and unlimited banking of allowances can lead tn, 

• The extent of the use of international allowances combined wilh offset~, and the possibility of 

double dipping with oft~ets by providing allowMces for activities that would have been done 

anyway. 

Inappropriate allocations of emissions "UnwaIlCes, such a~ the! Gpercen! allocation tn "wires 

cnmpanies" to encountge, energy efficiency-a goal thatma)' be better accomplished through 

direcllegislalion on energy efficiency stmuiards, now incorporated in other pr()visi()ns oflhe 

bilL 

We \o<ik forward to working with Congress to achieve an energy policy j()f the twenty-first century 

thai: will.resu!r in a cle!ll1el' planet, greater energy efficiency, andlhe revituliZ<liit>n of our manufacturing base, 

Sincer:ly" I'" ".//{ /7 i?ilU/ ,W,("I{, .J.. , 

William Samuel; Director 

DEPARTMENT Of LEGISLATION 

c: Members of the Senate Committee on Em~.ronment and Public Works 
150 

Apperidix: AFL·CIO Recommeoollti()DS fOT Am"r\c'l'S Climate S""urity Act 

Advanced Technology Vehicles Mimufaduriilg Incentive Program 

As pre,viottsly indicated, the AFL-CIO stronglysuppotts the thnlS1 aftlle Advanced Technology Vehicles 

Manufacturing lncentivc Progrum created under g, 2191. Th\s program can help to accelerate the 

introduction of advanced technology vehicles. and thus to help our country make major strides III reducing 

greenhouse gas emissions and ollr dependenee on foreign oil. At the same time, it can ensure that the 

vehicles of the future aTe built in this cmmtry, thereby creating tens of thousands of jobs for American 

workers. 

Hov.'ever, we believe tbe language ill thes~ provisions needs to be improved in several respeNs, First, the 

language in Section 4405(b)(l) should be modified to clarify thai awards under the program can only he 

made to manufacturers and components suppliers for re-equipping or expanding a manufacturing facility "in 

the U.nited States" to produce qualifying advanced tc.chnoiogy vehicles and compommls, Obviously. we 

should not he providing f'U!lds to subsidize investment in manufacturing fac~ilities in other countries, 

Second, dUJing ilie Subeommilteemarkup, an amendment by Sen. Sanders was adopted by voice vote that 

requires all qualilYing advanced technology vehicles to meet a 35 miles per gallon standard 10 be eligible for 

assistance under ihis program, Un:fbrtunalely, thi~ amendment totally eviscerates the program. In order to 

maJ..e meaningful progr"ss in reducing our dependence on foreign oil and greenhouse gas emi.sions, the aU!<l 

indtlStry needs to improve fuel economy across the entire spe<:lrum ofvehicks, II needs to put hybrid and 

advanced diesel technology inw pickups, sports utility vehicles (SUVs).minivans, and larger pass'mger cars. 

as well as smalleTvcbic.les like the Prius, Indeed, some of tbe gremest ga.ins in re4uced oil consumption and 

grecnh()cuse gas emissions can c.ome from improving the fuel economy of these bigger vebicles, Howev,-'r. 

because many of these vehicles would still be below 1he 35 miles per gallon level, even with the hybrid or 

diesel advanced technology, the Sanders amendment w(ll<ld el'feclj,,~ly exclude them from being able to get 

ll11yaslilSlilnce under ilie munufacturing progralll, As a result, tbiswould greatly reduc.e the eifectivene!!S of 

(he program in. achieving the environmental goals. as well as its ability to generate jobs for American 

workers. 

it is also important to note that fhe S~~lders amendment directly conflkts with the CAFE provisions tba.t were 

approved earlier this yc,ar by (he Scnate in the energy legislation, and that were supported hyenvironmental 

groups. Those CAFE proviSions speciJied that the fleet of vehicles fur [he entire industry must meet a 35 

miles per gallon standard. not iliat each and every vehicle must meet tbis standard. Indeed, under the 

refor:rrted, attribute-based CAFE system approved by the Senate. it was eXIJl'cssly recognized that differcrH 

,i;,:es and types of vebieles would have 10 achieve different fuel ec()cnomy levels, depending on their 

particular attlibules, Unfortunately, the Sanders amendment depurts lrom (his approach, and instead imposes 

a rigid, onc'sizc,1its-a.ll mandate on all vehicles. 

Finally, Scc.jion4405(c)(1} specilks that themanufllcluringincentive program only applies to facilities and 

equipment plac.ed in service before January 1,2016. In our judgtncnl, this time period is fur too restrictive, 

especially since the CAFE provisions previously approved by the Senate have a lill' longer time period, 

stretching to 2()20 and beyond. 
151 

Subcommittee Amendment: Coal Preference 

We are concerned about the amendment approve<\ by ihe Subcommittee coneeming prete,rences for "low 

rank" coals with a heat content less than '10,000 BTU/polmd. There should be no distinction among co~1 

types in allowance allocations to electric generitting units, or the distribution of aucrkll1 rewnues as 

incentives to promote clem' coal technologies. 'Ibis sets up a regional preference for coal. 

This was a, major flaw in tl\e EPA's Clean Air Mercury Rule, which awarded extl'uallowances to Jow"rank 

western lignite and sub-bituminous coals, despite a growing body of ",1denc'l that oontrofling mercury [TOm 

these coals costssub~1antially less ilian from f{\s\ern biruminolls coals. While there a!:. minordiffer~nces in 

the C02 emisSions of coals ~f different rank, C02 emissions can be captured by a vllJ'idy of emerging 

control teebn(tlogjes potentially applicable to all coal types at both ne.w and existing units. 

We believe that all coals should compete for incentives on a kvel playing field without regional preferences 

or exemptions, The bill should remain as origioolly drafted. 

Timelincs aDd Stantllll'd. 

Our moSI serious concern is the magnitude and timing of2020 redllctions (15 percent below 2005) compared 

to Bingaman-Specter (2006 levels). Reductions on the coal fired power generalion will come from 

illvestments in increased eflieleney in existing facilities, new loec (combined cycle technoit'gy that is only 

ill the early developmental phase with n demonstration plan! scheduled 10 be huilt in Ohio), and the 

development of ca,bon sequestJ'ation lecllllology. Full development Qftllese latter technologies will take a 

decade, and deploymCJ1l to scale "ill take decades more. 

There is insufficient time to develop and demonstrate CCS technology at comm<1rcial scale. 2()2{) is 

effectiveJy 5 years from now in (em}s of corporate plannh1g for investment" Meeting 2(}06 levels by 2020 is 

a major reduction g.iven 1 percent popula!iongrowth and 2-3 p<;rcent CDP growth. The bill suggeSls that th<1 

annual reviews will allow adjustments of the targets, b1l1experienc~ with the· Clean Air Act does nut support 

tlits view, 

Economic Devciol>tnent and Domestic Investment 

1b;5 legislaii'()!l dues have a dual pttrpose: enviromnental prolectkm and economic development. The 

legislation needs to make explicit the implkit economic development goals cmbod",d in the bilrs investment 

strategy and its s(ated purpose of "preserving robust growth," We believe thaI this is in the national interest, 

and it is tbe intent of CtlIlgrcss ttl assure that investment dollars generated by this legislatiol1l'ecirculate in 

OUI' domestic economy. Tbe iegislatiun needs to say so. 

To fulfill its dual purpose, this legislation.ncods to promote domestic investment as an economic 

development strategy that mns from R&D to production and construction. The findings, purpose, and 

Climate Change Credit Corporatioll sectiollS need In be explicit about this intent. For example: 

Finding: "The Congress finds prompt and decisive domestic climate change investments arc un 

unprecedented ecollomic development opportunity for the natiOll. 

4 
152 

Purpose: "to accomplish thalj)urpose oymaking dimale change investmel11s in domestic technology 

development, proil\lction, and constructi<m." 

CHma!" Change Credit Corporation: "the financial resources ofihe. corporation shall,be dedicated lb 

dom~'S(icinvestmellts so as to assure that the nation delives the maximum economic development 

return from those investments; 

o Clil11ate Change Credit Corporation domestic Il1vesunent program will be desi1jned to C<lptllre 

intellectual property, encourage industry development, and to retaiu and create new jobs in 

production, construction and comervaiion of eD0rgy. 

o Existing facilities and populated areas shall be considered a. slmlegic priori.!), for 

manufacturing-related investments, 

o Energy incentives and investments by the rcderal government must not encourage off-shoring 

of mrumfacturing or the sale ()f assets. 

o The Climate Change CrediiCorporation will report to Congress on an annual basis about t.~e. 

dOIllestic eC{)!Jomie and environmental impact ofits.investmems." 

Sllfety Valves and Market Intervention 

The AFL-em supported the cost conlrol mechanism (the, Technology Accelerator Payment) in the 

Bingamilo-Specter bill because it provides pricing certainty for long-ternl investment decisions, aSSlll'CS a 

modest effect 011. fuel a,)d e!ectricllY prices. and avoids short-term price, ~pikes that can lead. to fuelswitching. In this cah'e, the legislation also sets a beginning price of j; 12 pet ton that rises 5 percent a year 

above inflation, We aT'e open /0 discussing a/remative levels Cii C/ safety valve prier. 

The proposed Carbon Markel Efficiency Board (CMEB) also a!tempts to act a,~ a eOSI c{lntrol mechanism, 

bul its open martet system undermines this approilch and its Imervention tool is at beSl slow and of 

questionable value. The CMEB is empowered to act in cases where there are prolonged price hikes in 

allowances (180 Of more days) that threaten economic damag~ to tb~ nation, The CMEB wiil aiso b"v<, to 

determine what that "sweet spoC (price) is. With limited allowances that lirms need to use annually, in 180 

days the damage will already have been done, The issl1anee of "future" allowtl!1ces to drop prices seems to 

be t)f dubiolls valuealld of real cnncel11 given how lhis market is structured. 

Allowance ooIT()wing n'om the filture isnot likely to work due to uncertainty about jl1lure allowance prices. 

V,,'itIl a $l 0 <'tlTren! price, utilities would not borrow 10 years ahe~d unless there were certainty (htl! prices 

would not be above $25 at Olot lime (using n typical utility weighted average cost of caplial of95 pef cent), 

Cap and Trade and the Open Market 

We r~majn deeply troubled ""th a 'imple market··only'appmach. Today the s(}·called market has let! tlw 

nation in a honsing crisis and the world capital markets in tum",;L The nation is still dealing with the ilillnul 

of Enron and the cicrcgLllatiull ofthe utility industry, which will make any carbon emission legislation even 

more difficult 10 administer. We support a limiltld market appr<>ach, with regulatolY mechanisms that act as 

a Slife!; valve ttl prevent allY seriollli long-term damage to the econmny. If the poin! of a cap and trade 

5 
153 

system is to move l1.ms and utilities to Challge domestic behavior, then we need to be sure this market 

mech1inlsm does that. 

The open and "unlimited trading" of allowances means that anynne, not ju;'t firms that need to use them, eM 

buy allowances from a limited and declining pooL In addition, .purchasers are allowe<l to hank these 

allowances ill perpetuity, This is no! the stock market or a cQmmoditles market, nor should it be treated as 

such, Tbe open access to allowances, and the bankin£, of allowancc5. lend themselws to the kiod of 

predatory and speculative behavim that leads to hoarding and 10 Ihe creation of c!\fban billionaires. This 

would bave a detrimental pricing impact on the public and the utilities and ellergy .. intensive industries. 

imagine a sct:narlQ in which a major naIion with over B trillion dollars in a~c"mulnred trade surpluses decides 

to create a carbon allowance shmtage on the US. market to make OUT domeslic finns less competitive and 

push them out afbllsiness. Or imagine !\ major hedge fund trying to COrD"l' the carhon market and to cx(ract 

royalties frum domestic industry. \Vith limited allowances, one would only have to capt1.lre a limited pottion 

to have control. 111a\ is not lhdntent of thi 5 legis! aiion. This needs to be regulated: 

'n,e trading ofallow81'lccs should be regulated and should lx' done in such a way that it assures thm 

allowances that are sold are used. In other words, markel participants should be limited to nrms that 

intend to use the allowanccil. With a deolining po,,) of allowances, available prkes will rise but llN 

be anificially inHaled by speculators. 

• The bank jng of allowance for an unlimited time raises the sanlC concerns about hoarding and 

predatory behavior that Jeads to plice spikes and attillciaHy elevated prices, Iflhe point is to (L,,, Ii 

diminishing allowance system to eft~ct real behavior change and to have a fUDctioning market that 

fairly sets prices, then allowances need tn have a a deadlfncby which they must be, used or expir~. 

Offsets lind Illtemaiion;d All"wnllces 

We are concerned about Ih" legitimate use of offsets and international allowances; the ability to monit!.lt {heir 

legitimacy, especially ill the intemaHol1almarket; and ways in which they could undermine domestic 

investment ill industry, This proposal aUows lor up 10 30 percent of the al1nnu{ a1Iowllnces lhat u covered 

entity must submit to be comprised of offsets (15 percent) and internationally purcha.'led a11nwances (15 

percent), 

If the goal (lfth!s legislationls to change the behavior of domestic power producers mId indllstry and to 

cneOll""!,. the domestic investment needed to introduce new teChnology, tius could prove to be a roadblock. 

One option is 10 iimillheir use in combination, or simply to lower the amount 

The expanded forestry/agriculture ullowanc,:s under S, 219J raise;, broader ql1CStiDli over pOlCntial dOllhlc 

dipping with later offset provi'ion~ in the bill, For example, Otegon and otheT Rlntcs alft~ad)' provide tax 

incentives for Iree planting. fn additi()fl, the wood products industry is under It'ga! and business l}bl.igations 

R, plant trees year round. Will the offset proVisions doubly reward already-ex isting behavior thaI has been 

backed by tax incentives or existing business imperatives? If n "tility company helps underwrite a timber 

firm's requir.;;d replanting of a logged urea, could they \hen daim offset credits? 

This simple example shows how exisiingtm; incentives and business r(.'quircments could be used to create 

offSets that (kl not provide real value added to the eJ1viromhenl. Offsets should be the result of creating 
154 

something new or in additkm to whatnomlally would have been doe as a course (;j' business. The ability to 

doub!~ dip should be prohihitcd. 

lllternationallinkage.s 

'The AFL-CIO welcomes the inclusion ofllle Binp.aman-Spectcr p!\wisions Oll imerna.lanal trade within 

ACSA, providing a means to impose emissioll oil' set requirements on imported g()()ds trom major 

international trading partners that have not takeJ.l comparable action to protect the global climate. However, 

H,e language needs reiinemenl. Implementation can and should taKe Illuea [lIr sooner than 2020. 

The bm should require the President to opennegoiiations inunediuteiy upon pass,tge, Once Ihe r"gulations 

are in place and tile c<>p and tmde is in (}peration for two to three yean;, tbe imemational action Call be 

implemented. 'Ibis Jest step should be an administrative actIon. not something subject to presidential waiver, 

In addition, the timetable and goals shoUld be lied to the intel'l1t1tionai language in S. 2191. It is Il',w ev"n 

more apparent than it was when the Kyoto Accord was ne.gotiated that tnking unilate.ra! steps is not enough 

to ,'ngage. the devcioping world. The Committe(' should include the rive-year rev1t'w provisioll Included in 

Sectio1l50 1 of S. t 766, with its rcquirem<''I1t jur presidential reviews and recommelldations related to 

progress in international negotia!ions seeking commitments f,'olll major trading partners: 

Presiifen#aI Recommendations to COIfgress. SUhsection (b) provid~.s that, durihg a period belween April 

15, 2D 17 and May 31,2017, und every 5 ycars thereafter, the President shall submit t(l the HOllse of 

Representatives and the Senate a report describing any recommendation of the President with respect to 

changes in the Act. The President shEll! make recommendations with re~pect tn--· 

Wbether the U,S. should challge (he allowance amOlmts ror future alloca!ion periods as necessary!() 

ensure dIM the United State, is \l11der:taking its equitable share of the responsihility fbr reducing 

greenhouse gas elnisskms, un\! in any case will rea,onahly lead the United States to reduce its ,mnua! 

emissions to levels at le('51 60 p()rcent below currcnt emission levels by 2050. 
155 

The Honorable Joseph Liebenman, Chairman 

The Honorable John Wamer, Ranking Member 

Senate SubcOmmittee on Private Sector and Consumer 

Solutions to Global Wanming and Wildlife Protection 

456 Dirksen Office Building 

Washington, DC 20510 

Dear Senator, 

November 1, 2007 

James E. Ford VkePr~ldent 

GovemmMt Afhirs 

1210 L Street, NW 

WashIngton, DC 20005-4070 

USA 

Telephonq 

,,, 

Emall 

\iIIWW.apLorg 

(202)682-8210 

(202) 682-8416 

fordJ@lapl.org 

On behalf of API and its member companies, I write to you regarding "America's Climate Security Act" (ACSA, 

S.2191). In our view, this bill is deeply flawed and several key aspects require a substantial amount of revision or 

we will not be able to support this legislation. API represents nearly 400 member companies engaged in all 

aspects of the oil and natural gas industry, including exploration, production, refining, distribution, marketing, 

research and development. 

API believes that global climate change is a very serious matter and we all have a role to play in addressing 

emissions. We urge you to insist that any climate change policy be environmentally effective; promote a positive 

investment environment that allows for rapid development and deployment of energy-efficient and emissionreduction technology; provide access to all domestic energy sources, including natural gas which will face 

increased demand; be transparent and understandable to consumers and all stakeholders; avoid severe damage 

to the U.S. economy; and keep U.S. energy production competitive in the global marketplace. 

API supports the following principles as elements of a sound approach to the long-tenm challenge of potential 

climate change: 

Promoting advanced, energy efficient technologies and sequestration options as part of a long-term, costeffective strategy, without govemment selection of "winners and losers"; 

Encouraging the rapid development and adoption of energy-efficiency technologies and enabling 

accelerated capital stock tumover by addressing legal, fiscal and regulatory impediments to such 

technologies; 

Identifying and expanding cost-effective, near-tenm voluntary actions to mitigate GHG emissions; 

Providing assurance that companies will not be disadvantaged later for their current voluntary actions; 

Supporting economic growth and avoiding damage to the economy posed by in-effective policies 

involving unrealistic near-tenm emission targets and timetables; 

Exporting advanced, energy-efficient technologies to the developing world through financing incentives 

and reduced export barriers, while protecting property rights; 

Promoting global participation, including by developing countries, to address this challenge costeffectively; 

Carefully weighing the potential consequences of any policy that would make energy producers 

responsible for emissions outside their control (i.e., consumer emissions); 

Equitably treating the emissions from all sources of greenhouse gases economy-wide, and ensuring that 

the burden of legislation does not fall disproportionately on any particular industry, source or group of 

sources of greenhouse gases; and 

An equal opportunity employer 
156 

-2-

Continuing to advance scientific understanding of global climate change in order to calibrate and adapt 

future policies appropriately and effectively. 

Oil and natural gas companies are addressing climate change in diverse ways, taking action to reduce 

greenhouse gas emissions now, and investing in technologies that will reduce them even more in the future. For 

example, we are five years into our 10-year goal under the Climate Vision Program to improve refinery energy 

efficiency. In the last year alone, the energy savings from this were equivalent to taking 525,000 cars off the road. 

The Department of Energy (EIA) has reported that even with increased renewable sources, our growing economy 

will need an estimated 28% more oil and 19% more natural gas in year 2030 than in 2005. Any climate change 

policy must begin with improving our domestic sources of energy, including natural gas, which has the lowest 

emissions per btu of any fossil fuel. 

However, many of the provisions in "America's Climate Security Act" would have a detrimental effect on the 

American economy, reliable and affordable domestic energy, and the growth of low- and zero-emission 

technologies. 

We are alarmed that the legislation in its current form could result in disproportionate impacts on the 

transportation sector that may have serious and potentially distorting economic effects. These include more 

volatility in future energy costs for investments and consumers, potential confiicts with emerging fuels 

reqUirements, non-harmonization with state and regional programs, decreased supply of clean-buming natural 

gas and competitiveness issues that will further hamper our domestic energy industry. This legislation could have 

very burdensome impacts on energy consumers and suppliers. We also want to emphasize the need for other 

economies, including developing nations, to share the burden in reducing greenhouse gas emissions. 

Under a cap-and-trade system similar to this bill, industry analysis shows a likely decrease in U.S. energy 

production, including natural gas, as well as a decrease in U.S. refining capacity, thus resulting in increased fuel 

imports. 

Senate consideration of the ACSA bill should be robust and deliberative in order to allow time for policymakers to 

be informed and to provide an opportunity to correct any unintended consequences of this particular piece of 

legislation. This complex cap-and-trade system covers a broad scope of activities and creates between $70 billion 

and $200 billion worth of required permits in its first year of operation and selectively allocates them to targeted 

industries. Economic impacts, including impacts on consumers, need to be fully understood with legislation of this 

magnitude. The proposed legislation should not be rushed; instead, it should be given the benefit of the full scope 

of regular legislative process so that a thorough, transparent and informed debate can occur. 

Thank you for your consideration of our views and please do not hesitate to contact API if we can provide 

additional information. 
157 

Detailed comments regarding "America's Climate Security Act" 

Transportation Allocation 

API strongly believes that emissions from all sources should be treated equitably so that the 

burden of legislation does not fall disproportionately on any particular sector, such as 

transportation. A ton of CO2 emissions that accumulate in the atmosphere would have the 

same effects regardless of their source; accordingly emissions from one source should not be 

treated differently than emissions from another. Under the ACSA bill, fuel producers (refineries) 

would be responsible for both their own operating emissions and the broader transportation or 

"tailpipe' emissions. Using referenced EPA reports, oil and natural gas operators would be 

allocated permits only for operating emissions, but no permits for tailpipe emissions, resulting 

overall in only 10% of the permits needed. This is a disproportionate and immediate burden 

when compared to some economic sectors which receive 77% of the permits needed. Climate 

policies need to be equitable in imposing costs and burdens on society. 

Fuels Policy 

The proposed bill ignores emerging policies on fuels. This bill would compound the difficulty of 

meeting mandatory policies underway on transportation emissions (specifically EPA drafting 

mandatory Low Carbon Fuel Standards) and the tightening environmental requirements for U.S. 

transportation fuels. 

Fuel Imports 

The ACSA bill will likely result in U.S. fuel production shifting to foreign refineries, resulting in 

increased fuel imports in order to meet energy demand from economic growth. Although 

analysis on ACSA is not completed, under the less stringent lieberman-McCain climate bill, 

U.S. refinery throughput could be reduced by as much as 2 million barrels per day by year 2020 

with a corresponding increase in refined product imports. 

Natural Gas S\.Ipply 

This legislation would likely decrease natural gas production due to both extending the coverage 

to suppliers and a resulting increase in abandoned marginal natural gas wells due to costs from 

methane emissions. In contrast, any climate change policy should begin by utilizing domestic 

sources of clean-burning natural gas, which has the lowest emissions per btu of any fossil fuel. 

Although ACSA analysis is not completed, under the less stringent lieberman-McCain climate 

bill, U.S. natural gas production could drop by up to 11 % by year 2030. 

Federal Pre-emption 

This proposal for U.S. climate policy lacks federal preemption of regional and state greenhouse 

gas reduction programs. Nationwide consistency is needed among programs to reduce 

regulatory uncertainty and increase the efficiency and effectiveness of federal climate change 

policy. 

Carbon Market Efficiency Board 

Meeting demand for reliable and affordable fuel requires billion dollar investments in facilities 

that provide energy for decades. The ACSA bill's "Carbon Market Efficiency Board' is intended 

to contain costs, but may create unstable conditions for energy infrastructure investments and 

consumer protections. The board does not provide any assurances against economic volatility. 

Emission permits 

Emission permits are not restricted to operators and governments, so third parties - including 

hedge funds, activists or foreign competitors or anyone - may buy auctioned permits. This adds 
158 

volatility and effectively decreases the available emission credits in an already constrained 

market. 

Carbon Capture and Storage (CCS) 

API supports the promotion of CCS and our industry is ready to contribute decades of 

experience in this area from oil recovery projects. While API supports the inclusion of CCS, we 

note that the program only provides incentives if the CO2 comes from electric power generation. 

Climate policies should encourage emission reductions from all sectors, including refineries and 

production facilities. 
159 

GoVERNMENT AFFAIRS 

J_ph M. St4nloll 

Chief Lobbyist 

The Honorable Joe Lieberman, Chainnan 

Subcommittee on Private Sector and Consumer 

Solutions to Global Warming and Wildlife 

Protection 

410 Dirksen Senate Office Bldg. 

Washington, DC 20510 

October 31, 2007 

The Honorable John Warner, Ranking Member 

Subcommittee on Private Sector and Consumer 

Solutions to Global Warming and Wildlife 

Protection 

456 Dirksen Senate Office Bldg. 

Washington, DC 20510 

Dear Chainuan Lieberman and Ranking Member Warner: 

On behalf of the 235,000 members of the National Association of Home Builden (NAHB), I 

write to express serious concerns with Section S201 ofS. 2191-America's Climate SecurityAcl 0/2007 

that will be marked up by the Subcommittee on lbunday, November 1. As home builders, we believe I 

the provisions in this section will nol achieve the gains thaI Congress hopes 10 realize by imposing 

aggressive increases to State building codes coupled with federal intervention into the code development 

process. 

Section 5201 focuses primarily on new construction, which is already substantiaUy more energy 

efficienl than existing homes. Data from the Energy Information Administration (ElA) shows that homes 

built between 1991 and 2001 consumed only 2.5% of the total energy in the residential ~ector compared 

to older homes (pre-1991) which accounted for 17.1%'. The dramatic energy savings are principally a 

result of building code improvements that have resulted in significant efficiency gains in new homes. 

If Congress hopes to achieve additional improvements in energy efficiency in the residential 

sector, it must address residential energy 10.8 in existing homes rather than seek substantial increases 

from new construction, which may nover materialize. Most importantly, these building code 

improvements have occurred within the existing framework of a voluntary consensus process that ensures 

that both the regulators and the regulated community have input. Further, these disparate parties must 

agree to implement agreed-upon benchmarks to improve health, safety, welfare, and of coune, energy 

efficiency. 

11te power to enforce building and energy codes rests solely with the States, as provided for in the 

U.S. Constitution. This is important for many reasons, but in simplest terms, State. are better equipped to 

addreas specific geographic needs and enforce codes that are uniquely appropriate for their jwisdiction. 

Energy efficiency means something different in Connecticut than it docs in Florida. Homebuyen, 

builders, and the general public rely upon Slate and local governments to make determinadons about 

1 U.S. Department of Energy. Energy lnConnation Administration. Annual Energy Review. 2001 Residential Energy 

Conswnption Survey. 1201 Uas ...... NW. waslllngl"', DC 2OOOS.2800 

(l02) 266-8470. (800) 368-S242, exl8470. FIX: (201) 166-8S71 

E.moil:J_.n@pahb ..... 
160 

appropriate code requirements in their specific areas. Congress should do evetything in its power to 

preserve this oversight role for the States. 

Government regulations that mandate market outcomes are the least effective tool for achieving 

energy efficiency. In practical terms, these rules simply increase construction costs (without reference to 

consumer demand), thereby reducing new home construction, and increasing the share ofthe nation's 

housing stock that is older and less energy-cfficient. Furthermore, mandates and rules thaI demand 

compliance require substantial oversight. The Deparbnent of Energy (DOE), in order to comply wilh lhe 

provisions in this section, would have to ensure enough staff capacity to detennine compliance rates, 

review reports, draft code change proposals or modifications to codes, and equip and uain staff to act as 

enforcement officials. In terms of staffing and enforcement alone, tbis would add tremendous 

government cost in order to ensure that the goals Congress is sening are achieved. 

Congress could achieve greater efficiency in the residential sector by providing incentives both to 

shift lhe market towards higher efficiency and to encourage consumers in existing (older) homes to 

upgrade for efficiency. The resources that the government would spend at DOE to enforce Section 5201 

could have a much greater impact if they were directed atlhe largest component of residential energy 

loss: existing homes. Providing meaningfultalt incentives to homeowners that choose high-c:fficiency 

windows with low-emissive glass or thaI upgrade older HV AC systems with a minimum SEER 13 

compressor, for example, would have a much broader reach (120 million existing homes versus 

approximately only 1.2 million new homes built each year) and save more energy (17% energy loss in 

existing homes versus 2.5% energy consumed by newer homes). 

Congress should extend the Internal Revenue Code Section 4SL New Energy Efficient Home Tax 

Credit program permanenlly. The Energy Policy Act of 200' established a tax incentive of $2,000 for a 

home achieving SO% energy savings and il expu-es atlhe end of 2008. Because, the home building 

process is lenglby and requires substantial lead times, most builders are reluctant to pursue a tax credit 

with such a short and unpredictable duration. NAHB was disappointed that Congress did not extend this 

important incentive in either H.R. 6 or H.R. 3221 and recenlly signed a joint letter with a number of 

energy and environmental advocates (e.g., Alliance to Save Energy, National Resources Defense Council, 

to name a few) that are working coDectively to urge Congress to extend (he Section 4SL credits for as 

long as possible. AdditionaUy, Congress should extend and expand the Internal Revenue Code Seclion 

1790 Energy Efficient Commercial Buildings Deduction. The deduction provides a tax incentive 10 

owners of commerciill properties, including many mullifami1y apartment buildings, to install energy 

efficient systetns. To increase the effecliveness oflhis provision, Congress should expand lhe definition 

of a qualifYing building to include all multifamily properties used for business purposes (i.e. low-rise 

rental apartment properties). 

It is likely that Congress wiD not realize lhe efficiency goals SOl forlb in Section S201 due to a 

number of practical, technical, and administrative issues that are not sufllcienlly addressed in this section. 

Because our memben have real expertise in residential energy efficiency and are leaden in energy- and 

resource-efficient home construction, NAHB urges you to reconsider the approach laid out in Section 

5201. A1lhough some organizations have weighed in supporting these provisions, it is important to 

realize chal many of these groups neither understand nor reprcsentthe interests of lhe building community 

at large, simply because they do nol build anything. Therefore, NAHB cautions againsl haphazardly 

establishing requirements thaI are impractical, inappropriate, or thaI sideline States' rights as you anempl 

10 address greenhouse gas emissions in lhe residential sector as part of S. 2191. 

NAHB's members are proud oflhe strides lhal have already been made in residential energy 

efficiency for new homes, mostly achieVed through building code improvements allhe Slale and local 

level, but agree lhat Congress has an opportunity to encourage even greater energy savings. like you, the 

nation's home builden are also concerned about energy efficiency and have gone above and beyond in 

many proactive ways to inlegnJtc greater energy and resource efficiency in home construction. To tbis 

1201 U"SIm:I, NW. w .... lng ..... DC 20005·2800 

(l02) 266-8470. (800) 36805242. exl8470. Fax: (l02) 266-8S72 

E-malI:J_~.1#It 
161 

end, NAHB urges a removal of Section S201 and an extension of the Seclion 4SL New Energy Efficient 

Home Tax Credit. On behalf of our nalion's home builders, I thank you for considering our views. 

Sincerely, 

A..4/t1y-4,..-

~ poseph M. Stanton 

JMSleo 

cc: Senale Committee on Environment and Public Works 

1201 U"SInCl. NW. Waohlngton. DC ZOOOS·l800 

(202) 266-1470 • (BOO) 368-5242 • .,,1.1470. Fax: (202) 166-8S72 

E...,l/l:Jmmt"n@nahb.«>m 
162 

CECIL 11:. ROBERTS 

INTUNAT'1ONAL., ~C::!itDa:NT 

__ a 

f"1OSI 108·71.110 

FAX C?a8t &ea-71 S2 

UftltlT8D MlN!: WORKER'" HttADQUAfn'EMB 

8a,s '-Kit "JCaHWAY l!fMl!ea" 22D3\·.2;215 

October 23, 2007 

By Hand Delivery 

Honorable Joseph r. Lieberman, Chairman 

Subcommittee on Private Sector and 

Consumer Solutions to (Jloha! Warming 

And Wildlife Protection 

410 Dirksen Senate Office Building 

Washington, DC 20510 

Honorable John Warner, Ranking Minority Member 

Subcommittee on Private Sector and 

Consumer Solutions 10 Global Warming 

And Wildlife Protection 

456 Dirksen Senate Office Building Washington, DC 20510 

Re: UMWA's Concerns with America's Climate Security Act 

Dear Senators Lieberman and Warner: 

As the Subcommittee prepares to address national climate change legislation, I am writini 

to express the initial concerns that the UMW A has with respect to America'$ Climate Security Act 

(ACSA). In its current form, the UMWA is not able to support this legislation due to its probable 

extreme adverse effccts on coal mining and utilization, consumer energy prices, and the need for a balanced and secure national portfolio ofenergy supplies. We hope that Subcommittee action will 

improve the bill in key respects to alleviate the concerns expressed here and by others. 

We, along with other member unions ofthc AFL·CrO, are on record in support oflhe 

bipartisan Bingaman-Specter climate bill, S. 1766. The UMWA already has communicated a variety of concerns about the initial outline of ACSA released last AU8uSt. We are disappointed that thc legislation introduced last week does not adequately reflect the concerns we and our colleagues have raised. In sum, ollr C(1ncems include: 

An overly aggressive Phase l emission reduction target, now increased from a 10% 

to a 15% reduction (If greenhouse ~as emissions below 2005 levels by 2020.before 

the anticipated commercial availahllity of carbon capture and storage technologies; 
163 

Absence of an effective safety valve price for carbon dioxide allowanCC$; 

Inappropriate allocations of emissions allowances, such as the 10% allocation to 

"wires companies" to encourage energy efficiency (better accomplished through 

direct legislation on energy efficiency standards, now incorporated in other 

provisions of the bill); 

Unequivocal commitment to achieving a. 70% national emission reduction below 

2005 levels by 2050 regardless of the degree of participation ofm.yordeveloping 

nations like China and India in a global climate protection ftamework. 

everLY aggressiye 2040 tamet 

The proposed 2020 target of 15% below 2005 emissions is unrealistic and would impose seVere 

disruptions on domestic energy markets. EIA's 2007 analysis of the 2007 McCain-Liebennan bill 

(S. 280) underscores the risks in setting such an aggressive reduction target just 13 years from now. 

We estimate ACSA's 2020 target as 5.06 billion tons of C02 equivalent from theenergy 

sector, given EIA's 5.515 billion ton emission estimate fur 2005. The contmJtea emissions achieved 

by 2020 in ElA's S. 280 analysis amount to 6.12 billion tons, about 1.0 billion tollS hI8b£ than 

ACSA's target reduction. EtA's findings fur the fuel market impacts of 5.280 are thus very 

conservative as a yardsticlc. for comparison. EIA concluded (at page 35): 

"To reduce its C02 emissions, the power industry, includin~ generators in the industrial 

and commercial sectors, is expected to $hift away from Its hiStOrical reliance on coal 

generation. Coal generation in 2030 in the main S. 280 cases is below current levels, 

ranging ftom 7 pen:ent below in the Fixed 30 Percent Offsets case to 70 percent lower in 

the No International case. Coal generation in the 5. 280 Core case is 26 percent below the 

reference case level in 2020 and 69 percent lower in 2030, a reduction of2,295 billion 

kilowatthours. Relative to the 2005 level, coal generation in the S. 280 Core case is 48 

percent lower In 2030. In the re~rcnce case, coal accounts for 58 percent oftota! 

generation in 2030, but its share falls to between 11 percent and 35 peroent in the main S. 

280I;ases." 

EIA'$ findings are indicative of the potentlally severe impaCts on coal mining production and 

employment if aggressive reduction targets are set too soon, before CCS and related technologies are commercially available to captUre, transport and sequester cBlbon from the electric generation 

sector. In order to bring an advanced coal generation plant with full CCS capability into 

commercial service by 2020, all applicable pennitting should be substantially completed within the 

next year or two. This is simply impracticable given the substantial number of unresolved 

technical. legal and regulato~ uncertainties confronting major CCS projects. Por example. U.S. 

EPA just recently announced plans for developing regulations for CCS Injection well permitting to 

meet Safe Drinking W~r Act requirements. These regu1ations may not be finali7..ed for two years or more. 

Whilo we welcome your inclusion of bonus allowances fur CCS teClmologies in ACSA, along with other provisions intended to accelerate the commercial availability and reg\llatory framework 

needed to advance CCS, the aggressivene5$ of the 2020 tatgct would force many utilit.ies away 

from coal·based genenltion at both new and existing plants. The~ is no conceivable set of 

emission reductions from other m~or source sectors, such as the transportation fleet, that could 

avoid severe market disruptions in the electric generation sector, including a maJor shift 10 scarce natural gas or imported LNG that would fo~ energy prices higher throughout the economy. 

2 
164 

The intractable difficulties fiUling a truly global agreement on climate reinforce our view that 

the actions that Congress takes on climate change should be guided by the 2005 Sense of the 

Senate Resolution, and by Senate, Res. No, 98, the 1997 Byrd-Hagel resolution adopted 

unanimously prior to the negotiation of the kyoto Protocol, 

Each of these Senate resolutions emphasi7..es that any legally binding conslnlints on gTIICllhouse 

gas emissions should not adversely impact the U.S. economy. The 2005 Senate Resolution 

recommended enactmen1 of ' 'market-based Umits and incentives on emissions of greenhouse gases" 

that"will not significantly hmn the United States economy" and "will encourage comparable 

action by other nations ..... (l S 1 Cong. Rec. 57033, June 22, 2005). 

EstabUshing an appropriate linkage of U.S. commitments to developing countly actions is vital 

to the economic, trade and national energy security interests of the United States. The U.S. cannot 

reasolUlbly assume that an 8ggre.,sive unilateral commitment to greenhouse gas reductions would 

cJlcitcomparable restx'uses from major Asian trading partners. A more gradual course of U.S. 

commitments, conditioned to the responses of our major trade competitors - similar to the 

approach in S. 1766 - would help to preserve U.S. negotiating flexibility whUe international 

pressures mount for global actions to address climate change. 

Fe4Srat ptAAIlUltion 

The UMW A is concerned that the growing number of states enacting mandatory climate 

change legislation will produce a patehwork ~uilt of inconsistent state regulation, similar to the 

various state acid rain laws enacted prior to Title IV of the 1990 CAAA. 

For example, states in the Northeast are moving ahetld on emission allowance auctioo 

programs. Emitting sources should not be subject to duplicative state and federal requirements, 

with emIssion auctions potentially requiring soUtteS to purchase one federal and one state 

allowance to cover the same ton of emissions. National climate legislation should contain limited 

preemption language to ensure a level playing field among slates. eliminating conflicting state capand-trade and related aUowanee auction programs. Such an approach woulcl preserve state climate 

initiatives in alUS such as energy conservation and efficiency, renewable energy standards, 

agriculture, \and use and transportation planning. 

We will appreciate your consideration of our views as the Subcommittee proceeds with its 

work on elimate legislation, 

ce: Honorable JeffBiogatnan 

Honorable Arlen Specter 

Honorable Robert C. Byrd 

Honorable Jolm D. Rockefeller IV 

Honorablelohn D. Dingell Honorable Rick Boucher 

t!J?tJM 

Ceeil E. Roberts 

Daniel J. Kane, International Secretary-Treasutt:r, UMWA 

Richard L. Tnamka, Secretary-Treasurer, AFL-CIO 

4 
(165) 

AMERICA’S CLIMATE SECURITY ACT OF 2007, 

S. 2191 

TUESDAY, NOVEMBER 13, 2007 

U.S. SENATE, COMMITTEE ON ENVIRONMENT AND PUBLIC WORKS, Washington, DC. 

The full committee met, pursuant to notice, at 11 a.m. in room 

406, Dirksen Senate Office Building, Hon. Barbara Boxer (chairman of the full committee) presiding. 

Present: Senators Boxer, Inhofe, Baucus, Lieberman, Carper, 

Cardin, Klobuchar, Whitehouse, Warner, Voinovich, Isakson, Alexander, Bond, Barrasso, and Craig. 

STATEMENT OF HON. BARBARA BOXER, U.S. SENATOR FROM 

THE STATE OF CALIFORNIA 

Senator BOXER. The hearing will come to order. 

We are holding this hearing to further consider the landmark 

global warming legislation of Senators Lieberman and Warner. 

They have been working on this comprehensive bill for several 

months. I cannot tell you how grateful I am for their continued 

leadership. 

I also want to say thank you to the other members of the Committee and also to the staff on both sides. I think we showed last 

week when we had an open briefing that members were interested 

and staff was absolutely prepared to answer each and every question. 

We are going to continue this, and I know Senator Alexander has 

some concerns about the schedule, and I want it to be noted that 

we already have moved to add hearings, briefings and also every 

day, all that any staffer of any Senator on the Committee has to 

do, or any Senator has to do is call here and they will have a private meeting set up with the appropriate staff. So thank you to all 

for your continued engagement as we move toward a markup. 

The legislation before us provides a strong framework for global 

warming action. We are building upon this foundation and I am 

committed to making this the best bill that it can be. I remain 

dedicated to a deliberative and transparent process. We have had, 

as you know, over 20 hearings on global warming. This is our third 

hearing specifically on this bill. We have a fourth one on Thursday. 

We will continue to work on legislation in consultation with stakeholders, members and staff as we proceed. 

I want to thank your witnesses for coming today. I look forward 

to your testimony. I know this was short notice, I really appreciate 

that you are here. And I face this challenge, as I have said many 
166 

times, with hope, not fear. By facing this challenge now, we can 

maximize our chances of avoiding the most dangerous effects of climate change, and we will position America to capitalize on the tremendous opportunities ahead. 

I believe we have a moral obligation to do everything we can, 

starting now, to fight global warming. When we do, we will reinforce our role, America’s role, as a beacon of hope to other nations 

who look to us on these important issues. 

With that, I would yield to Senator Warner. 

STATEMENT OF HON. JOHN WARNER, U.S. SENATOR FROM 

THE COMMONWEALTH OF VIRGINIA 

Senator WARNER. Thank you, Madam Chair. 

I am still in a rapidly mending posture, but I am not able to 

bend or sit. But that doesn’t keep the old brain from cranking 

away, and I will proceed to my office now where I take a more relaxed position to thereby take in every single bit of wisdom you will 

impart today. I thank this distinguished panel. 

Madam Chairman, I have watched you and the distinguished 

Ranking Member and others on this Committee consult with Senator Lieberman and myself about procedural matters. I think we 

are doing everything we can to strike a balance in the sense of urgency to move on with this legislation against the need to allow 

members of the Committee to advocate their positions and to otherwise address it so that we can have a good understanding as we 

proceed toward markup. 

Now, we certainly are all aware in this room about the potential 

economic impacts of this legislation. So last week, Senator 

Lieberman and I wrote the Department of Energy Information Administration and the EPA, and I will just read one of the letters: 

‘‘We are writing to request that the EIA estimate the economic impacts of S. 2191, America’s Climate Security Act,’’ and a similar request being made to the Environmental Protection Agency. ‘‘We ask 

that these agencies begin this process by meeting with our staff as 

soon as possible to discuss the parameters, methods and duration 

of the analysis.’’ 

That I think will be a helpful step. Also, I want to thank several 

colleagues on my side of the aisle who, while they still have some 

very grave concerns about the legislation, are trying to offer cooperative suggestions by which we could perhaps in the markup session 

address with the thoroughness that they deserve, such issues as 

are of concern to them. I hope that the December markup session 

as now scheduled does have that much flexibility to add on time 

to allow colleagues on this side to have their issues addressed. I 

particularly want to thank my colleague from Tennessee. 

With that, Madam Chairman, I yield the floor and return to my 

office off-campus, so to speak. 

Senator BOXER. Senator Warner, thank you for your continued 

leadership. As you know, it was your strong words that led to this 

additional hearing and additional briefings, and yes, we are not 

going to rush a markup. We are going to start it and we are going 

to end it when everyone feels they have had a chance to offer their 

amendments and their comments. We will work with your staff and 

you on that so that you feel satisfied. 
167 

Senator WARNER. Thank you very much. 

Senator BOXER. We are going to go in order of seniority, so we 

are going to go to Senator Baucus. . 

STATEMENT OF HON. MAX BAUCUS, U.S. SENATOR FROM THE 

STATE OF MONTANA 

Senator BAUCUS. Thank you very much, Madam Chairman. 

Thank you for holding this very, very important hearing. You are 

showing great leadership, and this is a very important thing to do. 

I thank you for it. 

And obviously, I thank my colleagues, Senators Lieberman and 

Warner, for all the work that you have put into this project. You 

have worked very, very hard, listened to a lot of people, various 

perspectives, and made your own judgment as to what you thought 

would be a good start. We all thank you for all of that. 

Baseball great Wade Boggs once said, and I have chosen Wade 

Boggs, because he is both a Yankee and a Red Sox player, he said, 

‘‘I didn’t get over 1,300 walks without knowing the strike zone.’’ 

Well, Madam Chairman, I think the Senators serving on this Committee have all played crucial roles in passing important pieces of 

legislation. We are fortunate to have such experienced and dedicated public servants seated on this Committee. I think we all 

know a strike when we see one. And I think most will agree that 

this ball is a strike, it is down the middle. 

I am wary, however, of some of the proposals that have been 

made that would pull this bill too far one direction or another. 

America’s Climate Security Act apparently hit the sweet spot. It 

once again makes the United States a leader in addressing climate 

change. It is very important that we do that, for the United States 

to be a leader by calling for emissions reductions of 70 percent 

below 2005 levels by the year 2050. 

The bill also keeps the economy growing by including important 

incentives for carbon capture and sequestration technology. This 

technology will allow the United States to continue to use its most 

abundant and affordable energy source: coal. In my State of Montana alone, we have 120 billion tons of coal, that is one tenth of 

all the coal in the world. The bill also includes provisions allowing 

America’s farmers and foresters to generate offsets. These provisions both contain the costs to the economy and create new sources 

of revenue for America’s farmers and ranchers. Even if only half of 

Montana’s feed growers switched to no-till farming, they could generate as much as $48 million annually in revenue. 

The balance Senators Warner and Lieberman have achieved in 

their bill is no small task. I have heard some of my colleagues say 

that the bill goes not far enough one direction or the bill does not 

go far enough. Some have said that caps should be tighter and allowances to industry phased out more quickly. I have heard other 

colleagues say that Congress should cede its authority to tighten 

the cap in future years to the Administration. I must respectfully 

disagree with these proposals. 

We will not solve climate change with one bill. What we need is 

a Marshall Plan for America that aims to build a cleaner economy. 

The United States did not rebuild Europe after World War II in a 
168 

day. It took time. Likewise, addressing climate change will take 

years and multiple policies, such as a greening of the tax code, 

working with our trading partners, increasing competitiveness and 

efficiency of our economy. 

I am also afraid that through a good intention shifting of allowances and auction revenue we may upset the delicate balance currently in the bill. I have heard some of my friends say the bill does 

not do enough to incentivize nuclear, renewable energy and natural 

gas. Clearly we will need all of these energy sources to meet the 

needs of our economy. But I must say under the bill as currently 

drafted, all of these energy sources are already eligible for incentives. 

So my colleagues have also stated an interest in allocating allowances to existing power plants based on electricity output. I disagree. That approach would amount to subsidizing existing plants 

with no economic or environmental added value. Allowances should 

go to those power plants that need them in order to comply with 

regulations and invest in cleaner technologies. 

America’s Climate Security Act is a strong, balanced bill. We 

have the pitch we want and we ought to hit it out of the park. 

Thank you. 

Senator BOXER. Thank you, Senator. 

Senator Isakson. 

STATEMENT OF HON. JOHNNY ISAKSON, U.S. SENATOR FROM 

THE STATE OF GEORGIA 

Senator ISAKSON. Thank you, Madam Chairman. 

I will submit my entire statement for the record, as unanimous 

consent to submit the entire statement and I will be brief, just 

make a couple of points and move on so we can hear the testimony. 

I believe that we should take proactive steps, both personally and 

as a Nation to reduce our Nation’s footprint. One of those steps is 

addressing the carbon issue. The only way you reduce that is by 

addressing the burning of fossil fuel. The only way that you do that 

substantially is by looking at alternative sources and existing 

sources, particularly the enhancement of nuclear, cellulose-based 

ethanol and other renewable sources. 

I don’t see the emphasis in this legislation on nuclear that I 

would like to see. I think that is one of the main ways we do it. 

I would like to welcome Dr. Greene and all the members who are 

here today. I read Dr. Greene’s testimony earlier, and as a person 

interested in transportation, I look forward to his testimony on the 

effects of cap and trade as a carbon reduction policy for the transportation sector. I am especially interested in his thoughts on lowcarbon fuels such as cellulose-based biofuels. While his testimony 

focuses on surface-based transportation, I am also interested in 

hearing his views on how cap and trade will affect other transportation sectors, such as the airline industry, which is a huge part 

of my State of Georgia’s economy. 

I welcome all of our panelists who are here today, and I think 

the Chairman for giving us this opportunity at this hearing. 

Senator BOXER. Thank you, Senator. We will put your full statement in the record. 

Senator Lieberman. 
169 

STATEMENT OF HON. JOSEPH I. LIEBERMAN, U.S. SENATOR 

FROM THE STATE OF CONNECTICUT 

Senator LIEBERMAN. Thanks very much, Chairman Boxer. 

Thanks for holding this hearing, a series of hearings in a very, 

what I think is a very deliberative process. I know some of our colleagues have been concerned about the time given it. We have had 

a lot of hearings in this Committee and we are going to continue 

to have a lot of hearings before we get to the markup. 

And then as always happens with any major piece of legislation, 

and this is just about as just about as major as you can get, when 

we get to the Floor, there is going to be a lot of time to work together to try to find common ground. Senator Alexander made reference to former Senator Dirksen convening, opening up his office 

for deliberations on the Civil Rights Act when it got to the Floor 

during the 1960s; Senator Mitchell, former majority leader, did the 

same with the Clean Air Act. Those meetings went on for weeks 

and weeks and weeks, but finally reached resolution and progress. 

I believe we can do that here. 

So there is a lot to do in this Committee, but this is not, if we 

are able to report it out, the end of the process. I want to come to 

Senator Baucus in this regard. I thought his opening statement 

was excellent; not the least reason for which was his mention of 

Wade Boggs to bring out this figure of reconciliation between these 

two deeply competitive forces, the Yankees and the Red Sox, and 

to evoke thereby the possibility of reconciliation across different 

points of view on climate change is inspirational. I thank him for 

that. 

And look, as Senator Baucus said, some want it go further one 

direction, others want to pull it back. We want to do this thoughtfully, but let’s be honest with one another, because most of us here 

recognize the reality that the globe is warming. We are in a race 

with time here. One can conjure, talk about Nero fiddling while 

Rome burned, one can conjure up a picture in one’s mind where we 

continue to debate and pursue the perfect climate change bill while 

the waters are rising along the coasts of America and the rest of 

the world and the climate is adversely affected. We cannot let that 

happen. 

In my statement opening the last hearing, I talked about the various projections of costs for America’s Climate Security Act, which 

in my opinion are manageable and relatively minor, considering 

what we will achieve thereby, which is to avoid the potentially disastrous consequences of climate change. I just want to spend a moment to talk about a factor that is not calculated in those estimates 

of cost, which is, what are the costs of not doing anything? The 

IPCC has cited some factors here and real world consequences, and 

basically concludes that the United States will shoulder quite significant costs by mid-century unless we act now to reduce our 

greenhouse gas emissions. 

Let me give you some of the examples. Warming in our western 

mountains will decrease the snow pack, causing more winter flooding, reduced summer flows and increased competition for already 

strained water resources. So we have the costs and conflict. 

Droughts and new invasions of insects will kill crops as well as forests and leave forests even more prone to fires, more costs and dis-
170 

location. Coastal communities and habitats will be battered by intensified storms with the damage compounded by more erosion, 

again, enormous costs. 

In March, the Government Accountability Office issued a report 

entitled Climate Change: Financial Risks to Federal and Private 

Insurers in Coming Decades are Potentially Significant. Madam 

Chair, I would ask unanimous consent to place that report in the 

record at this time. 

Senator BOXER. Without objection. 

[The referenced material follows on page 272.] 

Senator LIEBERMAN. But here are some of the report’s conclusions in brief. Storm-related economic losses will increase at an exponential rate as storm strength increases. Category 4 storms tend 

to cause 100 times the economic damage that category 1 storms 

cause. And real climate change will bring about more category 4 

storms. One half to two thirds of the structures in U.S. flood plains 

do not have flood insurance at all. 

The Federal Government’s two main insurance programs, the 

National Flood Insurance Program and the Federal Crop Insurance 

Program, have grown markedly more exposed to weather-related 

losses since 1980. The impact of unchecked global warming on 

those two programs alone, according to the GAO, could substantially increase the annual budget imbalance, and therefore the 

overall deficit, of our Government. 

Thus I would submit in closing, Madam Chairman, that the economic costs to this Country of unchecked global warming will be 

grievous by mid-century unless we act not to mandate significant 

reductions in greenhouse gas emissions as America’s Climate Security Act does. I thank the Chair. 

[The prepared statement of Senator Lieberman follows:] 

STATEMENT OF HON. JOSEPH I. LIEBERMAN, U.S. SENATOR FROM THE

STATE OF CONNECTICUT

Thank you, Chairman Boxer. I would like to spend a few minutes discussing cost. 

Here are some of the costs-expressed in terms of real-world consequences—that the 

Nobel Prize-winning Intergovernmental Panel on Climate Change—the IPCC—finds 

the United States will shoulder by mid-century unless we act now to reduce our 

greenhouse gas emissions: 

Warming in our western mountains will decrease the snowpack, causing more 

winter flooding, reduced summer flows, and increased competition for already 

strained water resources. 

Droughts and new invasions of insects will kill crops as well as forests, and will 

leave forests even more prone to fires. Coastal communities and habitats will be battered by intensified storms, with the damage compounded by more erosion. 

In March, the Government Accountability Office issued a report entitled, ‘‘Climate 

Change: Financial Risks to Federal and Private Insurers in Coming Decades are Potentially Significant.’’ I seek unanimous consent to place that report in the record. 

Here are some of the report’s conclusions: 

Storm-related economic losses increase at an exponential rate as storm strength 

increases. Category 4 storms tend to cause 100 times the economic damage that 

Category 1 storms cause. 

One-half to two-thirds of the structures in U.S. floodplains do not have any flood 

insurance at all. 

The federal government’s two main insurance programs—the National Flood Insurance Program and the Federal Crop Insurance Program—have grown markedly 

more exposed to weather-related losses since 1980. 

The impact of unchecked global warming on those two programs alone could, according to the GAO, substantially increase the annual budget imbalance and the 

overall deficit. 
171 

In 1999, the Agriculture Department’s Risk Management Agency declared, ‘‘The 

risks of climate change, such as higher temperatures, changes in precipitation, increased climate variability, and extreme weather events can result in significant impacts on agriculture, forestry, and rural areas.’’ 

Thus, I would submit, Madame Chairman, that the economic cost to this country 

of unchecked global warming will be catastrophic by midcentury unless we act now 

to mandate significant reductions in greenhouse gas emissions. 

On its own, America’s Climate Security Act would, according to the Natural Resources Defense Council, reduce total U.S. greenhouse gas emissions by 18 to 24 

percent below the 2005 level by 2020 and by 59 to 66 percent below the 2005 level 

by 2050. 

According to the modelers at the Environmental Protection Agency, those reductions in U.S. emissions would keep atmospheric greenhouse gas concentrations 

below dangerous levels even if countries such as China and India did not start taking serious action until 2025. 

I will digress to say that I believe those nations can and should start acting sooner. No one seriously believes, though, they will start until we do, considering that 

we are responsible for most of the global warming that is now irrevocably dialed 

into the climate system. Besides, I for one would prefer that we develop advanced 

energy technologies here, and export them there, rather than the other way around. 

So the emissions caps in America’s Climate Security Act are tight enough to avert 

the economic catastrophe this nation will face if we fail to take strong action now. 

What is the cost of implementing America’s Climate Security Act? 

At last week’s hearing, I reviewed some of the findings that the Clean Air Task 

Force had reached using the Energy Information Administration’s model. 

First, the price of an emission allowance would not exceed $50 until after 2030. 

According to EIA’s October 29 report to Senators Inhofe, Voinovich, and Barrasso, 

fuel switching from coal to natural gas would not make any economic sense until 

the price of an allowance exceeds $50. So one should not expect fuel switching to 

occur under America’s Climate Security Act before 2030. By 2030, even the pessimists say we will have commercial deployment of carbon capture and sequestration technology for coal. 

The analysis goes on to project that U.S. gross domestic product would more than 

double by 2030. The projected increase is only 1 percentage point lower than the 

increase projected in the absence of America’s Climate Security Act. 

Electricity and natural gas rates would, over 25 years, rise by about 18 and 5 percent, respectively. 

However, because of the technology development and deployment and energy efficiency measures in the bill, energy usage would drop considerably. The drop in energy needed would result in reduced monthly electrical and natural gas bills for residential, commercial and industrial customers. 

So, it turns out that the bill’s cost is very manageable—and miniscule compared 

to the cost of inaction. 

Thank you, Chairman Boxer. 

Senator BOXER. Senator, thank you for that statement. 

Senator Barrasso. 

STATEMENT OF HON. JOHN BARRASSO, U.S. SENATOR FROM 

THE STATE OF WYOMING 

Senator BARRASSO. Thank you, Madam Chairman. As I stated 

throughout the debate on this legislation, we must adapt, we must 

make changes to address the effects of global warming. We must 

be ready to put our money where our best hopes are. We cannot 

simply shut off current, traditional energy sources. 

I have stated that the current language that requires any new 

coal-fired power plants to be able to capture 85 percent of its carbon emissions is not feasible today. We must, as a Nation, invest 

in the technology to let us make the best use of all of our energy 

resources. 

Today we have incredible resources of coal in places like Wyoming and Montana. It is recovered there because of the investment 

of the infrastructure and the skilled work force. Now, those things 
172 

may not be there in 20 years if we prevent new coal-fired plants 

from being built because we require them to sequester 85 percent 

of the carbon today instead of a staged or stepped approach over 

time. 

Now, I have heard members say that we should not let perfect 

be the enemy of good, and I think that applies here. There is also 

no doubt that we have to take care of those who are negatively impacted by this bill. Some of those will be Wyoming residents who 

have terrific jobs, they have retirement plans, they have health insurance. I am not yet satisfied with the answers that I have gotten 

regarding how many workers are going to be displaced by this Act. 

It seems fair that we have a real figure. American workers deserve 

no less. 

I also believe that States will have to play a vital role in this regard. The Carbon Market Efficiency Board must address the significant harm not just to the Country, but to individual States. The 

bill, to me, as drafted, has still a one size fits all approach to the 

States. We must give each State flexibility to spend money to assist 

their people as they see fit. 

Finally, let me reiterate that I do want to address this problem 

of global warming. We can get there, but only if we show China 

and India that we can pass a bill that strengthens our economy, 

that creates jobs, that looks after our workers, that develops the 

needed technology and then allows those nations to use that technology to address the problem on a worldwide basis, not just a national basis. 

I would like to work with you, Madam Chairman, to make sure 

that the legislation we pass achieves those objectives. Thank you 

very much. 

Senator BOXER. Thank you, Senator Barrasso. 

Senator Carper. 

STATEMENT OF HON. THOMAS R. CARPER, U.S. SENATOR 

FROM THE STATE OF DELAWARE 

Senator CARPER. Thank you, Madam Chair. 

To our witnesses, welcome. It is good to see all of you. We appreciate your time with us today and your testimony and your responses to our questions. 

Most of us had a chance last week to say our piece and we did. 

I am not going to say much today, but I just want to reiterate a 

couple of points if I could. I hope to support the legislation that is 

before us on which this hearing is being held. I want to support 

this legislation on which this hearing is being held. In order to be 

able to do so, I need to be assured on three points. 

One is that we are not going to forget as we go through this process the problems that are created, particularly for those of us on 

the eastern side of the United States who suffer because of emissions of sulfur dioxide, nitrogen oxide and mercury. I need to be assured that the allocation of credits will be just somewhat better 

balanced, so that a few more credits can go to the producers of electricity producing that electricity with reasonably less input, less energy in the first place. 

The third point, I want to make sure that as we pass this legislation, we don’t do so in ways that punish companies that are al-
173 

ready taking early action to help reduce the threats to our world 

and to our atmosphere. 

I suggested last week that I thought we might be able to broaden 

support for our legislation by addressing three areas that are addressed, but I think not directly in our legislation. One of those is 

with respect to transportation. I think our focus should be on clean 

fuels, clean cars and trying to encourage ways to provide transportation options to people other than our cars, trucks and vans. 

A second is to see if we can’t put together an amendment that 

speaks to the potential that nuclear can provide in helping to address our dependence on foreign oil and the creation of these greenhouse gases. The third way I think we may be able to provide support for this bill in Committee or beyond Committee on the Floor 

is to better protect the U.S. industrial sector in a way that recognizes that they have already made significant CO2 reductions. I 

think one of our witnesses will speak to that today, and we need 

to be mindful of that and reflect that in the legislation that we 

pass. 

Thank you, Madam Chair. 

Senator BOXER. Thank you, Senator Carper. 

Senator Voinovich. 

STATEMENT OF HON. GEORGE VOINOVICH, U.S. SENATOR 

FROM THE STATE OF OHIO 

Senator VOINOVICH. Thank you, Madam Chairman. 

Starting from the flawed premise that trading programs are the 

only vehicles we can use to address climate change, we now begin 

the second of three hearings on yet another iteration of a cap and 

trade bill. The key variable in determining cost-effective carbon reductions is the extent to which the program can cause the development and deployment of research and development of transformational technology. 

But aggressive caps and time frames are more likely to stimulate 

avoidance behavior in the form of fuel switching or buying carbon 

offsets instead of investment in needed R&D efforts. That is the 

opinion of many organizations that have looked at this legislation. 

Moreover, the severe costs of the policy undermine economic 

growth and therefore starve capital markets of the true tools needed to invest in innovation. Indeed, this will be a very costly policy, 

and will do little to affect the problem of global climate change. 

This is demonstrated by EIA’s analysis of S. 280, that was the 

Lieberman-McCain bill, a less aggressive predecessor to this legislation that predicted to the economy and standards of living, even 

while assuming increases in nuclear and biomass generation and 

a development time line for carbon and capture sequestration technology, that due to political, regulatory, financial and technical obstacles, achieving what we say we are going to achieve would almost be impossible. 

If the results were adjusted to account for more realistic scenarios of our Nation’s future energy future, as in the recent analysis that I requested along with Senators Inhofe and Barrasso, the 

results are staggering. Among other things, the analysis predicted 

that by 2030, the policy could increase natural gas prices by 49 to 

72 percent; increase electricity prices by 38 to 45 percent; reduce 
174 

GDP by a factor of well over a trillion dollars. Of course, EIA’s use 

of discounting and their inability to accurately account for costs beyond 2030 masks the policy’s true costs due to rapidly escalating 

impacts that are expected beyond this period. 

Now, many engaged in this debate will downplay the impacts described above. But increasing home heating costs by 38 to 45 percent would have real impact outside of the beltway, especially those 

who are on fixed incomes. One of last week’s witnesses suggested 

that job losses in certain sectors would simply be made up by shifting jobs to other sectors. But the witness failed to recognize that 

we are talking about real people, real families and real communities. What am I supposed to say to the men and women, families 

and communities that find themselves on the wrong end of the 

shift? I think Senator Barrasso made a good point of that in terms 

of the people that are already working. 

The impact is particularly troubling when one considers that this 

wealth transfer will move resources from areas like the South and 

Midwest, whose States’ per capita income largely fall below the national average, to other areas of the Country. 

Madam Chairman, I think it is time to focus on American 

strengths of entrepreneurship and innovation. If we do so, we can 

create appropriate incentive for the development and deployment of 

new technologies. We will master the carbon challenge and lower 

the costs of control to the point where the developing world won’t 

view these continued emissions as a source of competitive advantage. In a real sense, such a new way of viewing the challenge of 

carbon emissions is our only valuable chance of success. 

Basically what I am saying is, we are going into a new regime. 

One of the things that I am going to ask in my letter to EPA be 

included in the record—— 

Senator BOXER. Without objection. 

Senator VOINOVICH [continuing].——is asking them to look at the 

administration of this program, the number of people that are 

going to be involved in administering it, the number of new boards 

and commissions that we are going to be setting up in this legislation. I just came from the Oversight and Government Management 

Homeland Security, and Senator Lieberman is familiar with it, 22 

agencies, a gigantic management challenge that has not been met. 

That place is still—pardon me—screwed up. It seems to me that 

when we talk about a brand new regime, new responsibilities for 

the Environmental Protection Agency and moving some things out 

of USTR there, and out of the Department of Energy, that we 

should look at some other options. That option, in my opinion, is 

trying to figure out, as the Chairman of this Committee and I 

talked about 4 months ago, is some type of response like we had 

to Sputnik, to find the resources that we have to jump start the 

technology initiative here in this Country so that we can solve the 

problems that we have here in the United States and at the same 

time then sell that technology to the Chinese and to the Indians 

and whoever else is out there in these emerging economies that we 

have throughout the world. 

For us just to do this and adopt this regime without being realistic about the impact that it is going to have on reducing greenhouse gases and on our competition, I think is naive. I am hoping 
175 

that somewhere, somehow between the time that we mark up this 

bill, that we will have an opportunity to look at my suggestion in 

terms of how do we get that done. 

Senator BOXER. Thank you, Senator. 

Senator Klobuchar, welcome. 

STATEMENT OF HON. AMY KLOBUCHAR, U.S. SENATOR FROM 

THE STATE OF MINNESOTA 

Senator KLOBUCHAR. Thank you very much. I was sitting here 

trying to think of my own sports analogy, Chairman, after I heard 

Senator Baucus. After our weekend at home with the Gophers having their worst season ever and the Packers shutting out the Vikings, I decided to stay away from those. 

But I will say that I did visit with some third graders yesterday 

as well as some fifth graders and high school classes at three different schools, one in a more suburban area, one in greater Minnesota and one in an urban area. These kids are ready to go. I 

asked them why they thought that they were so focused on climate 

change and doing something about it, and that some of the grownups weren’t. They said, well, that is because the grown-ups aren’t 

going to be around when we have kids. They seemed very, actually 

quite educated on the topics of what is going on. It brought me 

back here promising them that I would give their thoughts to this 

Committee. 

I believe that at its core, the America’s Climate Security Act of 

2007 offers an incredibly strong framework for addressing climate 

change. I think that is because there is no single industry or source 

that is responsible for greenhouse gas emissions, and because of 

that, there is no single policy or technology that is going to solve 

global warming. That is why I like the idea of this comprehensive 

approach. As someone once said, we don’t need a silver bullet, we 

need a silver buckshot. 

This is more than just a cap and trade bill. It provides support 

for the research and development of clean technologies. It provides 

direct incentives for energy-efficient products and develops a wide 

range of climate adaption programs. I also think it is important to 

note that it is not a cure-all. It is meant to work in tandem with 

other policies that we have developed and that we are developing. 

That is why I am glad, when I read your testimony, Dr. Greene, 

your written testimony, and I couldn’t agree with you more that 

cap and trade works best in combination with other measures. 

As members of the Commerce Committee, a number of us on this 

Committee have worked hard to increase the fuel efficiency standards of the Nation’s cars and trucks. In my opinion, you cannot 

view the increase in the CAFE standards in a vacuum, that it can’t 

be a separate policy. I believe that together, the upstream cap on 

greenhouse gas emissions in the transportation section of this bill, 

along with the 35 mile per gallon CAFE standard, will significantly 

reduce greenhouse gas emissions. 

I believe we also can’t separate out what the States are doing 

now. I have told this Committee several times about how aggressive on a bipartisan basis our State has been with a Republican 

Governor and a Democratic legislature. States already implementing greenhouse gas reduction strategies and/or renewable elec-
176 

tricity standards make it easier to achieve the targets in this bill. 

I think that is why it is important to make sure that we facilitate 

these interrelated policies as much as possible. 

I believe it is important that we recognize the leadership certain 

States have taken. We should also recognize States that are working hard to meet their own aggressive renewable energy standards 

when allocating allowances. We should also set the baseline for allocations at an appropriate point in time, so as not to penalize 

these States for their farsighted action. 

This is a hearing to examine the nuts and bolts of America’s Climate Security Act of 2007. So I look forward to hearing from our 

panelists on not only the nuts and bolts of this bill, but how it 

interacts with other policies that we already have in place or that 

we are considering now before this Congress, including the renewable electricity standard that is in the House side of the Energy 

Bill and the CAFE standard increase that is in the Senate side of 

the Energy Bill. 

Thank you, Madam Chairman, and I look forward to working 

with you and all my EPW colleagues on reporting a strong bill to 

the Senate Floor. 

Senator BOXER. Thank you, Senator. 

Just in terms of how we are going to proceed, Senator Craig is 

next and then Senator Cardin has graciously said, Senator 

Whitehouse, since you have been here for so long, that you will go 

next and then he will be the next Democrat. 

So we will go to Senator Craig. 

STATEMENT OF HON. LARRY CRAIG, U.S. SENATOR FROM THE 

STATE OF IDAHO 

Senator CRAIG. Madam Chairman, thank you very much. 

The hearings of last week, the questioning sessions, the hearings 

this week and more to come with the questioning sessions are extremely valuable. If anybody doesn’t believe that this is a complex 

bill, then they ought to start trying to read it and understand it. 

That is going to be critically important for us to even attempt to 

get it halfway right. To understand the complexities and broad implications of capping an entire economy is really beyond any of our 

talents or our abilities. So to try to understand that, the letter that 

we have sent, the letter that Senator Warner mentioned that he 

and Senator Lieberman have sent to EIA and EPA are critical. 

That is part of the overall understanding that we have to have before we can vote responsibly on this kind of policy. 

So in all fairness, Madam Chairman, I am glad the Bali or Bust 

idea is out. I am glad we are going to take now a sit-down, roll up 

our sleeves approach instead of trying to get an awfully good byline 

in a statement coming out of Bali in December. It may be good for 

international politics, but it would be very bad for our policy. So 

thank you. 

We still stay at it, we will stay diligent. Just beginning to peel 

back the pieces here, the page after page, is reflective of some 25 

or 30, 40 amendments that my staff and I feel would be necessary 

to offer in a responsible way. Or we could do the Markey approach 

to the EPAC policy of 2005 and we could do hundreds of amend-
177 

ments which would be deleterious. But we will look at a good number. 

Cap and trade approaches of the kind that we are now referencing, oh, well, we did SO2, and therefore we can do this, that 

is pretty wrong-headed in my opinion, and I think a very poor analogy when you are addressing carbon in every sector of the U.S. 

economy. What is it Senator Barrasso just said? Here is the impact 

we think could happen to Wyoming, because they are a coal-producing State. Idaho is not a coal-producing State. We happen to be 

the cleanest State in the Nation as it relates to particulates in the 

air. 

And we happen to be largely a renewable energy State, which 

means our power bills go up fairly dramatically because we gain 

no benefit from this bill. Whereas in Wyoming, their power bills go 

up at the same rate, but they lose jobs in the meantime, potentially. Those are the realities on a State by State basis that clearly 

we have to grasp and understand, if we are going to be not only 

responsible to our environment on the long term, but responsible 

to our environments, and that includes working environments and 

economies, in the short term. 

The bill is not ready for prime time, even though the advertisements have been top of the line. And it won’t be ready for prime 

time until we do exactly what you have outlined that we are going 

to now do, Madam Chair, and I truly appreciate that. This is a 

piece of work, a potentially major public policy that demands scrutiny of the closest order, and I am glad you are now willing to allow 

us to do that in a way that I think the Senate best operates. I 

thank you. 

Senator BOXER. Senator, I just want to be clear, I was always intending to allow the longest possible time for a markup. You will 

have 40 amendments, I am sure that Senator Bond will raise you 

one, and Senator Alexander, and we are ready. We are ready to 

stay as long as it takes. 

Senator CRAIG. That is very productive, thank you. 

Senator BOXER. We are absolutely prepared for that and we expect that. We will start on December 5, and we will go as long as 

it takes to deal with all amendments that are offered. 

Yes, Senator Lieberman? 

Senator LIEBERMAN. I was just—thank you, you just clarified 

that we are going to go ahead in December, which is very important. 

Senator BOXER. Yes. 

Senator LIEBERMAN. I do want to, on the Bali or Bust idea, I 

want to encourage Senator Craig and others to think more in favorable terms of Bob Hope and Dorothy Lamour in the Road to Bali, 

a very happy ending. 

[Laughter.] 

Senator CRAIG. Oh, if it was only Bob Hope again. Thank you. 

Senator BOXER. Senator Whitehouse, we look forward to your remarks. 
178 

STATEMENT OF HON. SHELDON WHITEHOUSE, U.S. SENATOR 

FROM THE STATE OF RHODE ISLAND 

Senator WHITEHOUSE. Thank you, Chairman. I will be very brief. 

I appreciate Senator Cardin yielding his hard-earned seniority to 

me very briefly for this. 

Senator KLOBUCHAR. Yes, but he made a deal that you had to 

mention Chesapeake Bay. 

Senator WHITEHOUSE. I was just about to say, it is something he 

learned, no doubt, on the shores of the Chesapeake Bay. 

[Laughter.] 

Senator WHITEHOUSE. As we go forward, I would be very interested in hearing from the witnesses about three areas where I 

think there is still work to be done. Let me put this in the context 

of saying that I think what Chairman Boxer has accomplished here 

is extraordinarily significant. I think the sponsorship of Senator 

Warner and Senator Lieberman is extraordinarily significant. We 

have come an enormously long way. But as I said before, we may 

be standing on the shoulders of these giants, but there is yet work 

to be done. I think that the areas in which there is work to be done 

is to inquire into whether the standards that we have set for ourselves are truly adequate. Unlike the sort of traditional haggling, 

split the baby school of legislation, there is a bar here. If we miss 

it, it is going to be very unfortunate. So the adequacy of the standards and the ability to enforce them, or the actions that are triggered if it looks like they are not going to be met I think are a significant piece. 

The second significant piece to me is the integrity to market. We 

are putting an awful lot of this Nation’s wealth through the cap 

and trade process. I am at this point not yet satisfied with the governance. I am at this point not yet satisfied with the protection of 

that entity from market manipulation by crooks and speculators. 

And at this point I am not yet satisfied that we can distinguish 

real from counterfeit savings in this process. So there are at least 

three layers of integrity protection that I think that facility needs. 

As important as that facility is, we have to get it right. 

And the third is, I think the concern of fairness to low-income 

folks who are not a part of this discussion is very important. An 

enormous amount, as I said, of our Nation’s wealth is going to be 

put through this process. That creates an enormous motivation for 

special interests to line up and get their grab on all of that. I think 

it is very important for all of us to sequester whatever we need to 

for designated purposes to try to balance the economy and so forth. 

But really the bulk of the return on this has to go back to the 

people who are going to pay it in the end, which is the American 

consumer, and the low-income American consumer will take the hit 

harder than anybody else. So I am interested in issues like the 

CBPP’s ideas for flowing it through EITCs, through the electronic 

benefit transfer, through the withdrawal, so that it is more automatic and flows back to folks. But I think it is vitally important 

what you have accomplished, and I appreciate it, Chairman. 

Senator BOXER. Senator, we are as you know working with you 

and your staff on these matters. 

I just wanted to, while we have the maximum number of people 

here, go through what we are doing on this bill so you can make 
179 

some notes. We have of course this hearing. Then we have a briefing today, 2:30 to 3:00 is closed for members, and then 3:00 is open. 

Hearing on Thursday morning on the bill at 10 a.m. There is regular staff level meetings all through the week on demand for whoever wants them, members and staff. And then a modeling briefing 

on Wednesday for staff and Senators, if they wish to come. So I 

wanted to announce that, while everybody is here. 

And now, Senator Alexander, the floor is yours. 

STATEMENT OF HON. LAMAR ALEXANDER, U.S. SENATOR 

FROM THE STATE OF TENNESSEE 

Senator ALEXANDER. Thank you, Madam Chairman. And thank 

you for the extra hearings, extra briefings, extra time. That is a big 

help. 

I want to especially welcome David Greene from the Oak Ridge 

Laboratory, a real expert on many things, including fuel efficiency. 

I would like to state my view as clearly as I can. I want a bill. I 

want to be able to vote for a bill on climate change. I think the 

time to act is now. From my first year in the Senate, Senator Carper and I offered legislation that put cap and trade on power 

plants, that is 40 percent of the carbon dioxide, 33 percent of 

greenhouse gases. We still agree on every part of that except allocation. Senator Lieberman and I are now co-sponsoring of that bill. 

So I want a bill. 

My respectful suggestion to the Chairman and to the sponsors, 

and they have big decisions to make on how to proceed, I know 

they don’t want to lose momentum, are two. One is, I think we 

would be better off with a sector by sector approach, rather than 

the current structure. And two, I think it is very important that 

we take sufficient time in the markup process to bring a bill toward the Floor that can get 60 votes. 

Let me describe what I mean by sector to sector. I am looking 

for the lowest cost, simplest, easiest to explain, fewest surprises 

piece of legislation that will address climate change in this session 

of Congress. There is a danger of this becoming like the comprehensive immigration bill, which started out great but ended up 

not passing, because there were so many problems with it. 

I would rather start out with the other end. What steps would 

I suggest? One would be the electricity step and two would be the 

transportation step. And that would be it. That would be two thirds 

of the carbon produced in our economy today. We might even get 

more out of those two segments, depending upon what the standards are. With electricity, I am ready to vote for a cap and trade 

program for power plants. We have had 16 years experience on 

that with acid rain, we know what we are doing. We can measure 

it. I think it would make sense. We can explain it. 

Two, I would add to that everything we can think of that has to 

do with green buildings. Japan has said it has had its biggest problem reaching its own standards since Kyoto because of buildings. 

And we can a lot with buildings, so we could take just the electricity sector and get at least a third of the carbon. 

Second, with transportation, how would we do that? Well, the 

easiest thing and the first thing to do would be for the House to 

pass the Senate Energy Bill, which has a CAFE standard that is 
180 

far-reaching and that would require 35 mile per gallon standard by 

2020. The second thing to do is also in that bill, which is to go from 

7 to 36 billion gallons of renewable fuels. A third thing to do would 

be a low-carbon fuel standard for all fuels. The Chairman has proposed that, others have as well. I think it might be better than a 

so-called upstream cap on fuel, which I don’t fully understand. I am 

afraid the upstream cap on fuel might simply add a cost to gasoline 

without changing behavior. 

One of the examination of the McCain–Lieberman bill suggested 

that such a cap on gasoline would add 25 cents to the cost of a gallon of gas. And that is a big increase. So a low-carbon fuel standard 

might be better. So then we could explain we are stepping out with 

electricity and then with transportation. Those are two big steps, 

65 or 70 percent of the economy, rather than the 80 or so which 

I understand this structure is. I think it is more likely to get 60 

votes, and then we could take other steps as they seem to make 

sense. 

The problems and issues that I would like to see discussed by the 

witnesses include the low-carbon fuel standard, they include the 

auction, most auctions in Tennessee are designed to get the highest 

price. I think we want the lowest price. I would like to know what 

we are going to do with all this money. Nothing is more dangerous 

in Washington, D.C. than a pile of unallocated money that Congress can get its hands on. 

The allocation system is a very difficult problem and will be in 

the Committee. It seems to me that the one here encourages the 

use of natural gas. That is bad for farmers, homeowners and manufacturers, and causes those in fossil fuel States to pay twice. 

So I agree with Senator Carper that we ought to also deal with 

sulfur, nitrogen and mercury. That is as important to me as carbon 

in this bill. And I agree with Senator Isakson that we ought to be 

dealing with nuclear. That is an inconvenient truth as well. That 

is most of the solution, along with conservation and efficiency. 

So I hope, Madam Chairman, to be able to vote in the end for 

the bill. I thank you for the extra time, and I look forward to attending all the briefings. 

Senator BOXER. Thank you so much, Senator. 

Senator Cardin. 

STATEMENT OF HON. BENJAMIN L. CARDIN, U.S. SENATOR 

FROM THE STATE OF MARYLAND 

Senator CARDIN. Thank you, Madam Chair. It is nice to get my 

seniority back. 

[Laughter.] 

Senator CARDIN. First, let me agree with some of the comments 

of Senator Alexander, but let me point out that the immigration 

bill was not marked up in Committee. I think that was one of the 

problems we had. I am going to thank the Chairman of our Committee for an open process that has been used on this very important legislation. Many members introduced legislation. The Chairwoman then gave us a chance to come together and allow the 

Chairman and Ranking Member on the Subcommittee to come up 

with a bill and I feel very confident with Senator Lieberman and 

Senator Warner’s leadership that hopefully, Senator Alexander, we 
181 

can reach that 60 vote threshold. Because I think that would make 

life a lot easier. 

In order to accomplish that, we all have to listen a lot more and 

be willing to come to a bill that can pass but can also be a meaningful bill and not just insist on our specific revision being included 

in that bill. I hope we will be able to do that, because I think the 

issues are very important to our Country and very important to our 

international leadership. Again, I congratulate our Chairman Boxer 

and Senator Lieberman and Senator Warner for giving us the leadership. 

Now that I said we have to listen, let me tell you what I think 

needs to be in the bill. Let me just use my time to talk about one 

specific issue that I hope we can strengthen, and that is the use 

of public transit. I particularly want to comment on Dr. Greene’s 

testimony. He makes a very interesting point. He notes that we 

burn 6,300 gallons of oil every second to fuel our transportation 

sector. So it is no wonder that we have to look at a more responsible transportation policy. That sector is responsible for one quarter of the greenhouse gas emissions, according to the EPA’s study 

for 2005. I think the funding that is provided in the bill that we 

have before us is allowable activities for State funds to be able to 

use for transit. 

But I think we need to be stronger. Because I don’t think that 

is strong enough to make the type of progress that we need in public transit. We need to get people out of their cars into fast, convenient and reliable mass transit systems. We need that to reduce 

greenhouse gases; we need that to become energy independent. We 

need that to improve the quality of life, and anyone in this region 

knows all too well how difficult gridlock becomes as you try to 

move around the Washington area. Not only just during rush 

hours, during just about any time of the day. So we need to make 

a more significant investment in public transportation. 

Operating costs for transit systems are already skyrocketing as 

fuel prices have increased. That is only going to continue. We need 

to rebuild our aging transit infrastructures in many of our cities as 

well as new systems to meet growing demands. 

So for all of those reasons, I would hope that we would find a 

way to have more specific funds available through this legislation 

to help absorb the problems that will be confronted by our constituents. One of the things that Senator Whitehouse talked about is 

the economic impact of this bill, who is going to be adversely affected by the additional cost of energy. Well, public transportation 

allows us to deal with the social needs of the people in our community. I think it is very appropriate that we do more to help provide 

that alternative to transit users. 

The problem is not only because of large rises in fuel prices, it 

is also increased ridership. It has been its own problem in getting 

the type of funds in order to keep the system in the condition that 

is needed to meet increased demands. 

So I will be interested in listening to our witnesses today. I can 

assure you I am very much interested in working with the leadership of this Committee and every member of this Committee in the 

Senate to achieve a meaningful bill, a bill that really will move us 

in the necessary directions to deal with global climate change, that 
182 

will provide the credibility for U.S. leadership internationally and 

one that we can be proud of to have been able to get enacted into 

law. 

Thank you, Madam Chair. 

[The prepared statement of Senator Cardin follows:] 

STATEMENT OF HON. BENJAMIN L. CARDIN, U.S. SENATOR FROM THE

STATE OF MARYLAND

Madame Chairman, thank you. 

Given our late starting time today, I will keep my remarks to a minimum. 

There are a number of facets to dealing with the global greenhouse gas emissions 

issue. Our complex economy will be affected in numerous ways. I want to take a 

moment to focus on one of them: transit. 

In Dr. Greene’s testimony today, he notes that we burn 6,300 gallons of oil every 

second to fuel our transportation sector. It is no wonder that this sector is responsible for more than one-quarter of all U.S. greenhouse gas emissions in 2005, according to the EPA. 

Although funding for transit systems is one of the allowable activities for state 

funds in the legislation we are considering, I am concerned that it is not sufficient. 

We need to get people out of their cars and into fast, convenient, and reliable mass 

transportation systems. That will take a major investment. 

Operating costs for transit systems are already skyrocketing as fuel prices have 

increased. That’s only going to continue. And we need to rebuild aging transit infrastructures in many of our cities as well as new systems to meet our growing needs. 

The bill currently envisions a mechanism to cushion the rate increases low- and 

middle-income Americans are likely to feel from rising utility rates as we reduce our 

carbon emissions. But the legislation does not provide a similar cushion for someone 

who rides the bus or subway to work everyday to absorb the rising costs of transit. 

Here in the Washington metropolitan area, the Metro system is considering a 

record rate increase. This is due in large part to rising fuel costs and increased ridership. We should be encouraging more people to take the bus and subway, but if 

they are faced with rapidly rising costs, we may be squandering a great opportunity 

to reduce greenhouse gas emissions from the transportation sector. 

I will be interested in hearing from today’s witnesses on this crucial aspect of climate change legislation. And I look forward to working with the bill’s sponsors and 

the members of this Committee to craft a stronger commitment to transit in the bill 

as we move toward markup. 

Thank you. 

Senator BOXER. Thank, Senator Cardin. 

Senator BOND. Last but absolutely not least. 

STATEMENT OF HON. CHRISTOPHER BOND, U.S. SENATOR 

FROM THE STATE OF MISSOURI 

Senator BOND. Thank you, Madam Chair. It is a pleasure to join 

you for another one of these hearings and raise concerns as you 

may expect I will about what I think are some of the untoward impacts of a cap and trade bill. 

I raise these in the sincere hope that the Committee will consider 

them carefully. In the past, I have talked about how the poor will 

suffer from higher heating and power costs. Last week, I expressed 

the views of the agricultural community on how farmers would be 

hurt under this particular cap and trade system. Today, I address 

how blue collar jobs across America are at risk under the bill my 

distinguished friends from Connecticut and Virginia have offered. 

Middle class families, supported by blue collar breadwinners, those 

aspiring to the middle class or those hanging on to their middle 

class lives, their health care, their meager retirement savings, can 

all suffer under this bill. Many of the blue collar jobs depend on 

energy-intensive manufacturing. 
183 

Now, we know that natural gas is a key raw material and electricity and natural gas are both essential to power manufacturing. 

I said last week how important natural gas was in fertilizer for 

farmers and in the farming operation. But rising energy prices 

from this bill, I believe, will threaten blue collar jobs in automotive 

assembly, steel, aluminum, cement, plastics and fertilizers. These 

manufacturers will flee high prices, as they have already done. 

They have fled the United States and taken the jobs with them to 

lower energy cost countries as close as Mexico or as far as China. 

No matter how far away they go, they will find cheaper energy 

there and we will feel the pain here. 

Here is a picture of an aluminum smelter, not the one in my 

State, but that is an aluminum smelter. One just like it on the 

banks of the Mississippi River in New Madrid, Missouri. The plant 

employees 1,100 people with a payroll of over $43 million annually. 

This is a critically important industry and thousands of middle 

class families depend on that payroll. Just like New Madrid, dozens 

of communities’ school budgets and fire departments would be decimated without the payrolls of those smelters. 

Now, here is a picture of Main Street of New Madrid, Missouri. 

It is a wonderful town. But there is not a whole lot there. The average family income in New Madrid is $27,400. Outside of the town, 

where they don’t have the jobs and the smelter, poverty runs as 

high as 30 percent. Middle class employment supporting jobs are 

few and far between. If higher energy prices under LiebermanWarner force these aluminum jobs overseas, New Madrid families 

as well as families across the Country will join the poverty rolls. 

We have another key hiring industry in Missouri, cement. It is 

a carbon producer. Limestone is a key component. Processing the 

limestone releases carbon dioxide. Firing the kiln to make cement 

requires energy either from natural gas or coal, and that releases 

carbon. So much carbon that a ton of carbon emissions produces 

only enough cement to generate a $10 profit. Now, let me give you basic economics here. A new cost of $15 per 

ton for that ton of carbon, when they are only making a $10 profit, 

would erase the profit and put that maker of cement out of business, in the hole. Instead of losing money, American producers 

would choose, rationally, to benefit, take the benefit of cheaper energy sources in Mexico, Korea or China. 

Missouri has cement plants, but its communities will not be the 

only ones to lose those blue collar jobs. Thirty-nine States across 

America also risk losing their cement jobs to overseas competition. 

All of the orange States, States like Oklahoma, Virginia, Ohio, 

Georgia, Tennessee, Wyoming, and Idaho are all in the cement job 

chopping block. 

My friends on the other side of the aisle will not be spared. California, Montana, New York and Maryland are all in the cement job 

loss cross-hairs. It doesn’t have to be this way. We can do, as my 

colleague from Montana said, have a Marshall Plan for clean energy. Get nuclear power, which legislation and Governmental action has stalled too long, but which is a very significant part of the 

solution. We can get a clean portfolio standard. 

I support an aggressive but achievable auto emissions standard 

or CAFE standard. And we need clean coal technologies and se-
184 

questration. This is where we should be putting our money rather 

than expecting to mandate draconian standards for cap and trade 

that will do nothing. They will not produce the technology we need, 

and they will drive jobs overseas and have a devastating impact on 

our economy. 

I thank you, Madam Chair. 

Senator BOXER. Thank you very much. 

Well, now we are on to our panel. Thank you for your patience. 

So let me welcome all of you again. David Hawkins, Director, Climate Center, NRDC. I will be able to stay for the first panelist, 

then I have to fulfill an obligation and I will be back. Senator 

Lieberman is going to hold the gavel until I get back. So please 

proceed, Mr. Hawkins. 

STATEMENT OF DAVID HAWKINS, DIRECTOR, CLIMATE 

CENTER, NATIONAL RESOURCES DEFENSE COUNCIL 

Mr. HAWKINS. Thank you, Madam Chairman. 

My primary message today is that we have no time left for delay. 

We are already seeing the kind of damage that a disruptive climate 

can inflict: drought, floods, fires, insect infestation, stronger storms, 

killer heat waves. The problem with climate disruption is that it 

is a front-loaded problem. What I mean by that is, we create the 

harm long before we can see it around us. The global warming pollution that we have put up in the last 25 years has already locked 

in additional climate disruption. It is already in the pipeline. That 

added disruption is like an armed missile, and we have already 

pushed the button to launch the missile. We don’t know how much 

damage the missile will do, but it is speeding toward us. 

The job for us today is to stop launching more missiles. Now, the 

good news is we have the ability to solve this problem by creating 

the conditions where clean energy solutions get built and get rewarded in the marketplace. America’s Climate Security Act will 

bring these solutions forward, showing U.S. leadership, proving we 

can act to protect the climate, creating new business opportunities 

in a world that will reward low-polluting products and services. 

We have all heard the claims that the bill will be too costly. Well, 

these claims are made with broken calculators. They are based on 

an imaginary future, a future where climate disruption is assumed 

to have no impact on the performance of the economy. That is not 

the real world. As Sir Nicholas Stern’s study has pointed out, in 

the real world, climate disruption will harm economic growth. The 

growth-maximizing strategy is to protect the climate, not to poison 

it. 

The critics’ imaginary business as usual future is like a plan for 

a new airliner, an airliner that has no air conditioning, nothing to 

eat or drink, a 50 percent chance of being grounded every time it 

gets out on the tarmac for mechanical problems, and a 10 percent 

chance of crashing on every flight. When presented with a better 

design that will get us to our destination safely, and with reasonable comfort, they argue, we can’t afford it. Well, the truth is, the 

modeling that they are peddling is no bargain: it won’t work. 

Now, the bill before you contains numerous provisions to allow 

its pollution reduction targets to be achieved efficiently and at low 

overall costs. Let me quickly list them. First, trading. Trading of 
185 

emission control obligations under the bill will allow the lowest cost 

opportunities to be pursued first. Second, banking. Banking of 

emission reductions allows firms to make hay while the sun shines, 

and used the banked reductions to reduce costs later. Third, public 

purpose investments, by gradually shifting all allowance allocations 

to public purposes through auctions and public purpose allowance 

accounts, the bill recognizes the power of emission allowances to 

drive new technology, promote efficiency, protect consumers and 

vulnerable firms, such as cement and smelters. 

Fourth, offsets. The offsets provisions of the bill balance the risk 

that some offsets may be of questionable value in reducing the 

emissions against the benefit of creating incentives for additional 

low-cost reductions in areas that are too complex to regulate directly. In addition, the bill allows borrowing of allowances from future years to deal with tight market conditions or periods before 

new technologies come online. 

The Carbon Market Efficiency Board, with broad powers to adjust terms to create market conditions that enable us to smoothly 

transition from the unsustainable business as usual path to one 

that protects the climate. And finally, the bill addresses the concern about international competitiveness by establishing a program 

that ensures countries which fail to act to cut emissions will not 

gain a market advantage over our domestic economy. 

Now, in each of these key areas, reduction targets, allowance allocations, cost containment, complementary policies, international 

issues, protection of the vulnerables, you have heard expressions of 

concern. And NRDC shares a number of those concerns, as I note 

in my testimony. But we are ready to work to address those issues 

that the bill moves forward and hope others will participate in that 

same spirit of cooperation. 

Finally, no one is under the illusion that the bill reported from 

this Committee will go immediately to the President’s desk for signature. There will be continuing negotiations over key issues at 

every step in the process. But the imperative now is to take the 

next step so that the later steps are possible. So we ask the Committee to approve critical strengthening amendments and then to 

report a bill to the full Senate this year. 

The world is watching what this body does. The opportunity to 

make a positive impact on the pace of required action is enormous, 

and we urge you to seize it. Thank you. 

[The prepared statement of Mr. Hawkins follows:] 

STATEMENT OF DAVID HAWKINS, DIRECTOR, CLIMATE CENTER, NATURAL RESOURCES

DEFENSE COUNCIL

Thank you for the opportunity to testify today regarding America’s Climate Security Act. My name is David Hawkins. I am the Director of the Climate Center of 

the Natural Resources Defense Council (NRDC). NRDC is a national, nonprofit organization of scientists, lawyers and environmental specialists dedicated to protecting public health and the environment. Founded in 1970, NRDC has more than 

1.2 million members and online activists nationwide, served from offices in New 

York, Washington, Los Angeles and San Francisco, Chicago and Beijing. 

Chairwoman Boxer, I would like to thank you for the opportunity to testify and 

share NRDC’s views on the America’s Climate Security Act (S. 2191) and for your 

leadership in addressing the critical challenge posed by global warming. I also want 

to thank Senator Lieberman and Senator Warner for all of your work to develop this 

legislation and improve it in Subcommittee. We view favorable Committee action on 

this measure as an important, initial step toward enactment of comprehensive glob-
186 

1Frances Beinecke, Testimony before the Subcommittee on Public and Consumer Solutions to 

Global Warming and Wildlife Protection Committee on Environment and Public Works, ‘‘America’s Climate Security Act’’, October 24, 2007. http://docs.nrdc.org/globalwarming/ 

glo—07102401A.pdf. 2Sir Nicholas Stern, ‘‘Stern Review: Economics of Climate Change’’, January, 2007. http:// 

www.hm-treasury.gov.uk/independent—reviews/stern—review—economics—climate—change/ 

stern—review—report.cfm. 3M. Ruth, D. Coehlo, D. Karetnikov, ‘‘The US Economic Impacts of Climate Change and the 

Costs of Inaction,’’ A Review and Assessment by the Center for Integrative Environmental Research (CIER) at the University of Maryland, October 2007. http://www.cier.umd.edu/ 

climateadaptation/index.html. 

al warming legislation and we look forward to working closely with you, and the 

other members of the Committee, as you act to report legislation to the full United 

States Senate. 

On October 24th NRDC President Frances Beinecke testified before the Subcommittee on Public and Consumer Solutions to Global Warming and Wildlife Protection on America’s Climate Security Act (ACSA).1 In her testimony she stated that 

the time for action on global warming is now. Climate scientists warn us that we 

must act now to begin making serious emission reductions if we are to avoid truly 

dangerous global warming pollution concentrations. Failure to pursue significant reductions in global warming pollution very soon will make the job much harder in 

the future—both the job of stabilizing atmospheric pollution concentrations and the 

job of avoiding the worst impacts of climate chaos. 

A growing body of scientific research indicates that we face extreme dangers to 

human health, economic well-being, and the ecosystems on which we depend if global average temperatures are allowed to increase by more than 2 degrees Fahrenheit 

from today’s levels. We have good prospects of staying below this temperature increase if atmospheric concentrations of CO2 and other global warming gases are 

kept from exceeding 450 ppm CO2-equivalent and then rapidly reduced. To make 

this possible requires immediate steps to reduce global emissions over the next several decades, including action to halt U.S. emissions growth within the next few 

years and then cut emissions by approximately 80% by mid-Century. 

This goal is ambitious, but achievable. It can be done through an annual rate of 

emissions reductions that ramps up to about a 4% reduction per year. But if we 

delay and emissions continue to grow at or near the business-as-usual trajectory for 

another 10 years, the job will become much harder. In such a case, the annual emission reduction rate needed to stay on the 450 ppm path would double to 8% per 

year. In short, a slow start means a crash finish, with steeper and more disruptive 

cuts in emissions required for each year of delay, or if insufficient action is taken 

a seriously disrupted climate. 

COSTS OF INACTION

The claim that climate protection is ‘‘too expensive’’ treats it like a discretionary 

expense—perhaps like a luxury car or exotic vacation that is beyond this year’s 

budget. No harm is done by walking away from a high-end purchase that you can’t 

quite afford. But if we walk away from climate protection, we will be walking into 

danger. Unless we act now, the climate disruption will continue to worsen, with 

health, economic, and environmental costs far greater than the price of protection. 

Scholars and economists have only begun a serious assessment of the costs of inaction but it is clear from their work that it is climate disruption, not climate protection programs, which will wreck the economy. 

• The Stern Review, sponsored by the British government and directed by Sir 

Nicholas Stern, formerly the chief economist at the World Bank, estimated that 5% 

of world economic output would be lost, given a narrowly defined estimate of economic damages. Add in an estimate for environmental damage and for the increased 

chance of an abrupt climate change catastrophe, and Stern’s estimates of losses 

from climate disruption climb to 11% or more of world economic output.2

• A recent study from the University of Maryland reviews the extensive research 

literature on the costs due to plausible climate change in the U.S., including coastal 

property losses from sea level rise, increased damages from intensified hurricanes, 

drought and wildfire risks in the west, disruption of water supplies, decreased agricultural yields in most of the country, and many more harmful impacts.3

This extended excerpt from the report provides a sobering summary of how high 

the economic stakes are: 

‘‘The effects of climate change will be felt by the entire nation: 

‘‘• all sectors of the economy—most notably agriculture, energy, and transportation—will be affected; 
187 

4 Ibid. 

5See, e.g., ‘‘On Modeling and Interpreting the Economics of Catastrophic Climate Change,’’ 

(November 2007), where Weitzman argues that conventional cost-benefit analyses of climate 

change are misleading because they ignore nontrivial risks of genuine disaster. ‘‘Standard conventional cost-benefit analysis (CBA) of climate change does not even come remotely close to 

grappling seriously with this kind of potential for disasters. When CBA is done correctly, by including reasonable probabilities of (and reasonable damages from) catastrophic climate change, 

the policy implications can be radically different from the conventional advice coming out of a 

standard economic analysis that (essentially) ignores this kind of potential for disasters.’’ http:// 

www.economics.harvard.edu/faculty/Weitzman/papers/Modeling.pdf 

• essential infrastructures that afford us reliable services and high standards of 

living (such as water supply and water treatment) will be impacted; and 

• ecosystems, on which quality of life relies (such as forests, rivers, and lakes), 

will suffer. 

‘‘In the West and Northwest, climate change is expected to alter precipitation patterns and snow pack, thereby increasing dry fuel loads and the risk of forest fires. 

Forest fires cost billions of dollars to suppress, and can result in significant loss of 

property. The Oakland, California fire of 1991 and the fires in San Diego and San 

Bernardino Counties in 2003 each cost over $2 billion. Every year for the past four 

years, over 7 million acres of forests in the National Forest System have burned 

with annual suppression costs of $1.3 billion or more. 

‘‘The Great Plains and the Midwest will suffer particularly from increased frequency and severity of flooding and drought events, causing billions of dollars in 

damages to crops and property. For example, the North Dakota Red River floods in 

1997 caused $1 billion in agricultural production losses, and the Midwest floods of 

1993 inflicted $6–8 billion in damages to farmers alone. 

‘‘The Northeast and Mid-Atlantic regions will see increased vulnerability to sea 

level rise and storms. Depending on the category of the event, evacuation costs for 

the Northeast region may range, for a single event, between $2 and $6.5 billion. 

Since 1980, there have been 70 natural weather-caused disasters, with damages to 

coastal infrastructure exceeding $1 billion per event. Taken together, their combined 

impact surpassed $560 billion in damages. 

‘‘Decreased precipitation levels in the South and Southwest will strain water resources for agriculture, industry and households. For the agriculturally productive 

Central Valley in California alone, the estimated economy-wide loss during the driest years is predicted to be around $6 billion per year. Net agricultural income for 

the San Antonio Texas Edwards Aquifer region is predicted to decline by 16–29% 

by 2030 and by 30–45% by 2090 because of competing uses for an increasingly 

scarce resource—water. 

‘‘The true economic impact of climate change is fraught with ‘‘hidden’’ costs. Besides the replacement value of infrastructure, for example, there are real costs of 

re-routing traffic, workdays and productivity lost, provision of temporary shelter and 

supplies, potential relocation and re-training costs, and others. Likewise, the increased levels of uncertainty and risk brought about by climate change impose new 

costs on the insurance, banking, and investment industries, as well as complicate 

the planning processes for the agricultural and manufacturing sectors and public 

works projects. Since the early 1990s, and especially during the 21st century, significant progress has been made in understanding the impacts of climate change at 

national, regional, and local scales.’’4

• States particularly vulnerable to climate change are likely to suffer considerable 

negative economic impacts. Florida, a prime example, can expect large revenue 

losses due to decreases in tourism as the climate worsens, losses to coastal residential property from sea level rise, intensified hurricane damages, and increased electricity costs for air conditioning. Those categories of damages will significantly affect 

the gross state product. In addition, Florida, like many other states, will face a 

water crisis, as hotter temperatures increase the demand for water but decrease the 

usable supply. 

Inaction on climate change also increases the chance of an abrupt, irreversible catastrophe, which would be much worse than the predictable costs of inaction discussed above. This point is emphasized in the Stern Review, and the economic analysis behind it is supported by recent research by Harvard University economist 

Martin Weitzman.5 The collapse and complete melting of either the Greenland or 

West Antarctic ice sheets would cause sea levels to rise by 20 feet or more, causing 

devastation of coastal cities and regions where a large fraction of the American population lives. No one can say for certain at what temperature this will occur, but 

it becomes more likely as the world warms. We are taking a gamble, where the 
188 

6 California Department of Finance, http://www.dof.ca.gov/html/FS—DATA/STAT—ABS/TABLES/d1.xls. 7 Bureau of Economic Analysis, U.S Department of Commerce, http://www.bea.gov/national/ 

xls/gdplev.xls. 8 United States Environmental Protection Agency’s Analysis of Senate Bill S. 280 in the 110th 

Congress, The Climate Stewardship and Innovation Act of 2007, July 2007. http://www.epa.gov/ 

climatechange/economicanalyses.html#s280 

stakes are unbelievably high and the odds get worse the longer we stay on our current course. 

No sensible person bets his or her home on a spin of the roulette wheel. But inaction on climate change is betting the only home humanity has. Who knows, we 

might get lucky and win the bet; a few scientists still doubt that hurricanes are getting worse. But the consequences of a bad bet are enormous. Without arguing that 

Katrina was ‘‘caused’’ by global warming, the misery it caused the people of Louisiana and Mississippi and the continuing economic turmoil it produced are wakeup calls that show how much harm a disrupted climate can produce. 

A catastrophe, such as 20 feet or more of sea level rise, is not certain to occur; 

we don’t know enough today to say how quickly we may lock in these catastrophic 

events with current emission paths. But homeowners buy fire insurance although 

they are not likely to have a fire next year; healthy young parents buy life insurance 

to protect their children, although they are not likely to die next year. The most 

catastrophic dangers from climate change are so immense that even if we believe 

the chance of catastrophe is small, it is irresponsible to ignore them. Taking action 

against climate change is life insurance for our home planet, needed to protect everyone’s children. 

COSTS AND BENEFITS OF ACTION

The debate on global warming in Washington has turned decisively from ‘‘Is it a 

problem?’’ to ‘‘What are we going to do about it and how much is it going to cost?’’ 

In fact, we can’t afford not to solve global warming. Economic analyses of the cost 

of reducing global warming pollution do not attempt to tally the benefits of preventing global warming. As the studies just discussed make clear, the costs of inaction are far higher than the costs of reducing emissions. 

Even considering only the direct economic implications, it is clear that action to 

reduce global warming pollution presents opportunities as well as costs, as recognized by the leading business and environmental leaders that have formed the US 

Climate Action Partnership. We need only look to California as a prime example of 

how aggressive implementation of climate friendly energy efficiency measures has 

been accompanied by strong economic growth. Due to these measures, California’s 

per capita electricity consumption has been level over the last 30 years while that 

of the US as a whole has steadily increased. Per capita electricity consumption in 

California is now more than 40 percent lower than in the rest of the country. Meanwhile, from 1990 to 2005 the California economy grew by more than 50 percent in 

real terms, an average annual growth rate of 2.9 percent.6 And from 2003–2006 

California has had an average annual real growth rate of 4 percent, while nationally 

the growth rate was 3.1 percent per year.7

The results of recent economic studies analyzing the costs of global warming cap 

and trade bills have shown that we can cut our global warming pollution substantially in a manner that is affordable for consumers and the US economy as a whole. 

A useful starting point is EPA’s analysis of the ‘‘Climate Stewardship and Innovation Act of 2007’’ (S. 280), introduced by Senators Joe Lieberman (I–CT) and John 

McCain (R–AZ) in January of this year.8 This bill is similar to ACSA in its cap levels and overall structure. The bottom line from this EPA analysis is that solving 

global warming is affordable. 

EPA finds that reducing global warming pollution will have an imperceptible effect on economic output overall. If we take no action to cut emissions, GDP is projected to grow at 2.61–2.72 percent per year from 2010 to 2050, which of course ignores the prospect that climate disruption in this period would harm the economy. 

With S. 280, GDP grows between 2.54–2.69 percent per year. EPA’s analysis, which 

we consider to be conservative, finds that the reduction in GDP growth from enacting the Climate Stewardship Act is a mere 0.03–0.07 percent per year. If S. 280 

were enacted, consumption of goods and services by U.S. households would increase 

103% between 2005 and 2030, according to the Applied Dynamic Analysis of the 

Global Economy (ADAGE) model used by EPA, which is virtually indistinguishable 

from the 105% increase projected without the legislation. Of course, household consumption is not the same as welfare. It does not include the value we place on reducing the risk of catastrophic storms, preserving our favorite beaches and alpine 
189 

9 B.C. Murray and M.T. Ross, ‘‘The Lieberman-Warner America’s Climate Security Act: A Preliminary Assessment of Potential Economic Impacts’’, October 2007. http:// 

www.nicholas.duke.edu/institute/econsummary.pdf. 10 Acid Rain Program: 2005 Progress Report, http://epa.gov/airmarkets/progress/docs/ 

2005report.pdf 

meadows, and preventing polar bears and countless other species from being driven 

to extinction. 

What about energy prices? Changes would be far smaller and less disruptive than 

those consumers have experienced in recent years. According to EPA’s analysis, S. 

280 would have modest impacts on electricity and gasoline prices, and natural gas 

prices would not be significantly affected. The ADAGE model projects that the price 

of CO2 allowances will be $27/ton in 2030, which would add 23 cents per gallon to 

the price of gasoline. But unlike recent, much larger, price increases, the money 

won’t go to OPEC or national oil-producing economies under laws like ACSA. The 

money we spend on global warming solutions will be spent in the U.S., creating new 

jobs and economic opportunities. ACSA helps ensure this result by directing over 

time the entire economic resource created by the emission allowance program to 

public benefits, such as helping finance more fuel-efficient vehicles, homes, and appliances for American consumers and promoting the deployment of climate-friendly 

technologies here at home. 

EPA projects that S. 280 would increase electricity prices somewhat (less than 1 

cent per kilowatt-hour), but we don’t write checks for prices, we write them for energy bills. EPA concludes that under S. 280 the total cost of generating electricity 

would decrease 7 percent in 2025 because energy efficiency measures will reduce 

total electricity consumption. Along with lower power production come significant 

health benefits from lower particulate and mercury emissions from power plants. 

Using a version of the ADAGE model employed by EPA, the Nicholas Institute 

at Duke University just completed an analysis of the August 2nd version of ACSA.9

Their results were very similar to EPA’s results for the Climate Stewardship Act. 

In particular, the Duke study found that compliance with the targets has a small 

effect on rising GDP. By 2030 GDP is projected to increase 112% from 2005 levels 

in the Reference Case, and by 2050 the projected increase in GDP from 2005 levels 

is 238%. Under ACSA, GDP is projected to increase 111% by 2030 and 236% by 

2050. 

In reality, the opportunities to cost-effectively reduce total energy demand are 

greater than considered in EPA’s or Duke’s analysis. Stronger building and appliance efficiency standards, a national Renewable Electricity Standard, and higher vehicle fuel economy standards are all part of a sound energy policy designed to increase energy security and lower consumer costs by overcoming market barriers 

that are slowing the adoption of these technologies. These policies would also help 

achieve the global warming pollution reductions required by ACSA, reducing compliance costs. EPA’s analysis of S. 280 does not consider these complementary energy 

policies. As a result it understates the role that renewable energy and vehicle efficiency improvements can play in achieving the emission reductions required by the 

bill, and overstates the role of other low-emission electricity generating technologies, 

offsets, and international credits. Several such complementary energy policies are 

included in ACSA and Congress can act even more quickly to adopt these policies 

by enacting this year a strong energy bill incorporating the best elements of the 

House- and Senate-passed bills. 

It bears highlighting that no economic model can fully anticipate the advances in 

technology likely to be spurred by a policy package that caps and reduces emissions 

and uses allowances and performance standards to promote innovation. For example, prior to enactment of the cap on SO2 emissions in the 1990 Clean Air Act 

amendments, EPA projected that the price of SO2 allowances would be $500–$1000 

per ton.10 In fact, prices have been far lower, generally in the range of $100 to $200 

per ton until it became clear that emission limits would be tightened further than 

originally enacted by Congress. 

To ensure the affordability of a global warming cap and trade bill the legislation 

must be designed smartly. That means establishing a firm pollution cap that will 

spur innovation, allowing trading such that emission reductions can be made at 

least-cost, and using the value of emission allowances in the public interest making 

it possible to offset any increases in energy costs for low and middle-income consumers. A recent MIT analysis of the Lieberman-McCain Climate Stewardship Act 

found that a family of four could receive in 2015 more than $3500 in revenue from 
190 

11S. Paltsev, J.M. Reilly, H.D. Jacoby, A.C. Gurgel, G. E. Metcalf, A.P. Sokolov, and J.F. 

Holak, ‘‘Assessment of U.S. Cap-and-Trade Proposals’’, MIT Joint Program on the Science and 

Policy of Global Change, Report No. 146, p. 25, April 2007. http://web.mit.edu/globalchange/ 

www/MITJPSPGC—Rpt146.pdf 

the auction of allowances under this legislation, increasing over the years of the program.11

Some economic analyses estimate much higher costs. In particular, during the 

hearing last Thursday (November 8, 2007) you heard testimony from Dr. Anne 

Smith of CRA International and Dr. Margo Thorning of American Council for Capital Formation. We believe their analyses are seriously flawed. The attached memorandum from several well respected economists who have worked and published in 

the field of climate economics and energy economics for over three decades identifies 

some of the most serious defects, including the failure to examine the economic benefits of protecting the climate and the unjustified assumption that the business as 

usual economy operates in a perfect welfare-maximizing fashion. The memo’s purpose is to promote understanding of the issue of abatement cost studies by pointing 

out the economic logic, assumptions, and deficiencies of the CRA and ACCF analyses in relation to best-practice in this field. This is especially important because 

these analyses have been privately produced and have not appeared in the peer-reviewed literature. 

Focusing briefly on Dr. Smith’s testimony, her analysis suggests that most of the 

emission reductions will occur in the electricity sector, neglecting opportunities to 

reduce emissions in industry and the transportation sector. Further, the CRA model 

limits the amount of advanced technology that can come into the electricity sector 

in the future—for example, constraining deployment rates for carbon capture and 

disposal systems and assuming less penetration of renewable energy than Energy 

Information Administration’s Annual Energy Outlook. 

Other issues with CRA modeling include an artificially high emissions ‘‘baseline’’ 

(what would happen without a cap), which results in much higher costs for complying with emission caps. For example, the Energy Information Administration estimates additional lower carbon energy capacity will come on board even without 

a climate policy. EIA assumes that in coming decades if new coal plants are built 

they will probably be IGCC plants. However, CRA assumes business as usual coal 

technology and therefore factors in the full cost of new advanced technologies like 

IGCC with CCS when only the incremental costs of CCS should be included, thereby 

significantly increasing the overall cost estimates. 

As a result of these and other assumptions, the cost impacts predicted by CRA 

are much higher than EPA’s or Duke University’s Nicholas School’s recent modeling, 

which find that compliance with the emissions targets has only a small effect on 

GDP. 

Finally, CRA’s suggestion that delaying emission reductions would reduce costs ignores the primary driver of innovation. Entrepreneurs will only invest in developing 

and deploying the low-emission technologies we need if a market for these innovations is established by capping global warming pollution now. Delaying action will 

only delay progress in further reducing the costs of the many technology options 

available today. 

When all is said and done, solving global warming is not only affordable, it is likely to be beneficial to the economy as well as our environment and public health. 

But even if it costs several times as much as EPA’s or Duke’s estimates, it is still 

a much better choice than gambling our future through inaction. (See attached 

‘‘Economists’ Statement on Climate Change’’) 

We have the solutions—cleaner energy sources, new vehicle technologies and industrial processes and enhanced energy efficiency. What we lack is the policy framework to push business investments in the right direction and to get these solutions 

in the hands of consumers. America’s Climate Security Act is a solid start on a policy framework that will trigger the necessary technological innovation in a manner 

that will strengthen our economy and lower the risk of catastrophic climate disruption. 

GLOBAL WARMING POLLUTION REDUCTIONS UNDER ACSA (AS AMENDED IN

SUBCOMMITTEE)

NRDC appreciates that ACSA was amended in the Subcommittee last week to expand its coverage of natural gas emissions. The bill covers all sources of global 

warming pollution that emit more than 10,000 tons of carbon dioxide equivalent per 

year in the electric power and industrial sectors as well as all transportation fuel 

providers whose products will produce more than 10,000 tons per year when con-
191 

12While some ‘‘anyway’’ tons are likely to be promoted through these programs the cost per 

ton to reduce emissions through biological sequestration is expected to be less than the market 

price for allowances within the cap. The assumption here is that price differential between the 

incentives for biological sequestration and the price of allowances sold compensates for the anyway tons. 

sumed, and as amended in the Subcommittee, all emissions from natural gas consumption in the United States. 

The expanded coverage adopted in Subcommittee significantly increases the emission reductions that ACSA would achieve. A recent analysis by the World Resources 

Institute (WRI) estimates that the bill, as amended, covers 84% of U.S. emissions, 

up from 75% as originally introduced. 

The impact of the bill on total greenhouse gas emissions depends on assumptions 

made about state action, emissions from non-covered sources, and changes in biological carbon sequestration. The bill includes incentives for states to adopt climate 

policies that are more stringent than the federal program, to adopt and enforce 

model building codes, decouple electric and gas utility revenue from sales, and make 

energy efficiency investments as profitable as increasing energy supplies. The bill 

also includes energy efficiency standards for residential boilers and provisions requiring regular updates to residential and commercial building codes. Finally, the 

bill sets aside 5% of the total allowance pool to promote increased biological sequestration in domestic farms and forests and an additional 2.5% for similar international efforts. 

These provisions will reduce emissions from non-covered sources below business 

as usual levels but the magnitude of these benefits is difficult to quantify. NRDC 

has constructed an Optimistic and Pessimistic case to bound the likely range of total 

greenhouse gas emission reductions under the bill. • State Programs: 

• The Optimistic case assumes that any states that enact climate programs 

more stringent than the federal program retire the bonus allowances allocated 

to them (2% of the total allowance pool). While the bill makes clear that 

states have the authority to enforce global warming pollution standards more 

stringent than federal requirements currently there is no clear mechanism by 

which these state programs would result in reductions in national emissions 

other than by retiring their bonus allowances. Further elaboration of the state 

authority provisions could allow for greater national benefits from state programs. 

• The Pessimistic case assumes that these states programs help achieve the 

emission caps specified in the bill but do not achieve additional environmental 

benefits. 

• Emissions from non-covered sources: 

• In the Optimistic case non-covered emissions from the residential and commercial sectors and non-covered methane emissions are assumed to decline at 

the same annual rate as they did from 2000 to 2005 (0.7% and 1.2%, respectively). Emissions of nitrous oxide and other non-covered greenhouse gases 

are assumed to remain constant at 2005 levels. In addition, the 7.5% allowance set aside for biological sequestration is assumed to generate one ton of 

benefits for each ton of allowances devoted to this purpose.12

• In the Pessimistic case emissions from all non-covered sources are assumed 

to increase at the rate projected by EPA in its analysis of S. 280 using the 

ADAGE model (0.3% per year) and the 7.5% allowance set aside for biological 

sequestration is assumed to generate 0.5 tons of benefits for each ton of allowances devoted to this purpose. 

Based on these assumptions, we estimate that ACSA, as reported by the Subcommittee, would reduce total U.S. greenhouse gas emissions by 18 to 24 percent 

in 2020 compared to 2005 levels. By 2050 the bill would reduce total emissions by 

59 to 66 percent. More detailed results are provided in the table below. 

Year Emissions of Covered 

Sources 

Estimated Total 

Emissions Optimistic 

Case (MMTCO2e) 

Estimated Total 

Emissions Pessimistic Case 

(MMTCO2e) 

Reductions in Emissions from Covered 

Sources (2005 Baseline) 

Estimated Range of 

Reductions in Total 

Greenhouse Gas 

Emissions (2005 

Baseline) 

2012 ................... 5,773 6,359 6,715 6% 8–12% 

2020 ................... 4,920 5,538 5,923 20% 18–24% 

2030 ................... 3,854 4,517 4,933 37% 32–38% 
192 

13 10,000 tons of CO2 corresponds to 183 million cubic feet of natural gas. There are about 

500 entities that distribute this volume of natural gas or more to residential and commercial 

customers. 

Year Emissions of Covered 

Sources 

Estimated Total 

Emissions Optimistic 

Case (MMTCO2e) 

Estimated Total 

Emissions Pessimistic Case 

(MMTCO2e) 

Reductions in Emissions from Covered 

Sources (2005 Baseline) 

Estimated Range of 

Reductions in Total 

Greenhouse Gas 

Emissions (2005 

Baseline) 

2040 ................... 2,789 3,501 3,945 54% 46–52% 

2050 ................... 1,732 2,499 2,966 72% 59–66% 

COVERAGE OF EMISSIONS

The cap and trade program should cover as much of the economy’s GHG emissions 

as is possible. We commend the Subcommittee for expanding the bill’s coverage to 

include all emissions from the use of natural gas. Similar to the transportation sector, it is not feasible to cover emissions from natural gas use in homes and offices 

at the point of emission due to the very large number of small sources. It is, however, feasible to include these emissions within the cap by moving the point of regulation upstream. We believe the most straightforward way to implement full coverage of natural gas is to keep coverage in the electric power and industrial sector 

at the point of emission as in ACSA as introduced, and to make all natural gas distributors above a given size threshold responsible for managing allowances for emissions by their residential and commercial customers (e.g. all distributors that sell 

natural gas to residential and commercial customers, the combustion of which generates more than 10,000 tons of carbon dioxide equivalents).13

Alternatively, allowances could be managed by interstate and intrastate pipelines 

or by a combination of natural gas processors, importers, and pipelines for gas that 

is not processed. Downstream sources would not be required to submit allowances 

for emissions associated with their use of natural gas. This option is only acceptable 

if it is implemented in a way that prevents bypass of the point of regulation. Furthermore, this option moves the point of regulation further away from the actors 

who have direct control or influence over emissions. This could reduce the responsiveness of emitters to the cap, increasing compliance costs. 

ALLOWANCE ALLOCATIONS AND OTHER POLICIES UNDER ACSA

ACSA would implement its cap and reductions through an allowance trading system. NRDC agrees that—combined with complementary policies, some of which are 

contained in this bill and in other legislation, such as the pending energy bill—this 

is the most effective and efficient approach to curbing global warming pollution. As 

the sponsors are aware, a cap and trade system requires attention to how the emissions allowances are allocated, and for what purposes. It is important to distinguish 

between the abatement cost of a cap and trade system and its distributional implications. The abatement cost will be significant, but far less than the cost of inaction. 

At the same time, the value of the pollution allowances created by the law will be 

higher than the abatement costs: some estimates place their value between $30 and 

100 billion per year. 

NRDC believes these pollution allowances are a public trust. They represent permission to use the atmosphere, which belongs to all of us, to ‘‘dispose of’’ global 

warming pollution. As such, they are not a private resource owned by historical 

emitters and such emitters do not have a permanent right to free allowances. The 

value of the allowances should be used for public purposes including promoting 

clean energy solutions, protecting the poor and other consumers, ensuring a just 

transition for workers in affected industries, and preventing human and ecosystem 

impacts both here and abroad, especially where they can lead to conflicts and 

threats to security. 

ACSA embraces the principle that these pollution allowances should be used for 

public purposes but it implements the principle too slowly. NRDC believes that over 

the first 25 years of the program the bill gives away more allowances to the biggest 

emitting firms than is needed to fully compensate such firms for the effects of their 

compliance obligations on the firms’ economic values. The result is that there are 

not enough allocations available to fully meet public needs. As discussed more fully 

below, the allowance allocations in the bill can be substantially improved. 
193 

ACSA also allows the owner or operator of a covered facility to satisfy up to 15 

percent of a given year’s compliance obligation using ‘‘offsets’’ generated within the 

United States. These offsets would come from activities that are not covered by the 

emissions cap. The 15 percent limitation is essential to ensure the integrity of the 

emissions cap in the bill and to spur technology innovation. The total amount of offsets allowed should not be increased. In addition, as discussed below, further 

changes to the bill should be made regarding the types of offsets that should be allowed and the conditions for such offsets. 

We are pleased to note that ACSA includes ‘‘cost containment’’ provisions that 

protect the integrity of the emissions cap and preserve incentives for technology innovation. In particular, we commend your rejection of the misnamed ‘‘safety valve’’ 

concept that would allow the government to print unlimited pollution allowances at 

a set price. 

The fundamental problem with the safety valve is that it breaks the cap without 

ever making up for the excess emissions. Simply put, the cap doesn’t decline as 

needed or, worse, keeps growing. ‘‘Safety valve’’ is actually a misleading name. In 

boiler design, the role of a safety valve is to allow pressures to build within the vessel to working levels, well above atmospheric pressure. A safety valve’s function is 

to open on the rare occasion when the boiler is pressured beyond its safe operating 

range, to keep it from exploding. In the life of a well-run boiler, the safety valve 

may never open. Imagine, however, a boiler designed with a valve set to open just 

slightly above normal atmospheric pressure. The valve would always be open, and 

the boiler would never accomplish any useful work. That is the problem with the 

safety valve design in other legislative proposals. The valve is set at such a low level 

that it is likely to be open virtually all the time. 

In addition to breaking the U.S. cap, a safety valve also would prevent U.S. participation in international trading systems. If trading were allowed between the U.S. 

and other capped nations, a major distortion would occur. Firms in other countries 

(acting directly or through brokers) would seek to purchase U.S. lower-priced allowances. Their demand would almost immediately drive the U.S. allowance price to 

the safety valve level, triggering the ‘‘printing’’ of more American allowances. Foreign demand for newly-minted U.S. safety valve allowances would continue until the 

world price dropped to the same level. The net result would be to flood the world 

market with far more allowances—and far less emission reduction—than anticipated. 

Although NRDC believes that the primary and most effective cost containment device in any mandatory legislation will be the cap and trade system itself, NRDC also 

supports other means of providing flexibility. Banking has long been a feature of 

cap and trade systems. We also support the bill’s provisions allowing firms to borrow allowances with appropriate interest and payback guarantees. The bill includes 

a further provision, nicknamed the Carbon Fed, based upon a proposal developed 

by Senators Warner, Graham, Lincoln and Landrieu. The board created under this 

provision is charged with monitoring the carbon market and is authorized to change 

the terms of allowance borrowing, including the interest rate and the time period 

for repayment. Crucially, however, the Carbon Fed does not have the authority to 

change the cumulative emissions cap. Under such a proposal, the environment is 

protected and cost volatility is minimized. 

AREAS FOR ADDITIONAL IMPROVEMENT

While ACSA provides a solid framework for sound global warming legislation, 

there are some significant areas in which it can and should be substantially improved. A more detailed discussion of these areas follows: 

Scientific Review of Targets 

The bill as introduced includes a provision under which the National Academy of 

Sciences would assess the extent to which emissions reductions required under the 

Act are being achieved, and would determine whether such reductions are sufficient 

to avoid dangerous global warming. However, unlike the similar provisions of the 

Sanders/Boxer legislation, ACSA does not authorize the Environmental Protection 

Agency to respond to the NAS assessments and reports by adjusting the applicable 

targets. The bill should be revised to allow EPA to take all necessary actions to 

avoid dangerous global warming by requiring additional reductions, including by 

changing applicable targets or through increasing the coverage of the bill. 

Complementary Performance Standards 

Performance standards for key sectors are an important complement to the comprehensive cap on emissions. The bill recognizes the importance of performance 

standards for building codes and appliance efficiency and contains standards for 
194 

14See, e.g., the ‘‘Special Report on Carbon Dioxide Capture and Storage’’ of the Intergovernmental Panel on Climate Change discussed in Appendix C. See also, MIT’s report on ‘‘The Future of Coal’’ (2007). The MIT report’s lead authors, Professors John Deutch and Ernest Moniz, 

had this to say about the safety of multi-million ton injection projects to the Senate Energy and 

Natural Resources Committee in March 2007: Each plant will need to capture millions of metric 

tonnes of CO2 each year. Over a 50-year lifetime, one such plant would inject about a billion 

these energy consuming activities. But energy producers also need performance 

standards to avoid counterproductive investments in the early years of the program. 

Carbon Capture and Disposal 

Perhaps the most important performance standard for the energy production sector is for coal-fired electric generation. It is critical to recognize that continued investments in old technology will ‘‘lock in’’ high carbon emissions for many decades 

to come and create a tremendous economic burden. This is particularly so for the 

next generation of coal-fired power plants. Power plant investments are large and 

long-lasting. A single plant costs around $2 billion and will operate for 60 years or 

more. If we decide to do it, the United States and other nations could build and operate new coal plants that return their CO2 to the ground instead of polluting the 

atmosphere. With every month of delay we lose a piece of that opportunity and commit ourselves to 60 years of emissions. The International Energy Agency (IEA) forecasts that more than 20 trillion dollars will be spent globally on new energy technologies between now and 2030. 

It is critical that we stop building new coal plants that release all of their carbon 

dioxide to the air. The Sanders-Boxer bill contains two complementary performance 

standards for coal plants and we recommend the Committee incorporate these concepts into ACSA. The first standard is a CO2 emissions standard that applies to new 

power investments. California enacted such a measure in SB1368 last year. It requires new investments for sale of power in California to meet a performance standard that is achievable by coal plants using CO2 capture. 

The second standard is a low-carbon generation obligation for coal-based power. 

The low-carbon generation obligation requires an initially small fraction of sales 

from coal-based power to meet a CO2 performance standard that is achievable with 

carbon capture. The required fraction of sales would increase gradually over time 

and the obligation would be tradable. Thus, a coal-based generating firm could meet 

the requirement by building a plant with carbon capture, by purchasing power generated by another source that meets the standard, or by purchasing credits from 

those who build such plants. This approach has the advantage of speeding the deployment of carbon capture systems while avoiding the ‘‘first mover penalty.’’ Instead of causing the first builder of a commercial coal plant with carbon capture to 

bear all of the incremental costs, allowance incentives and the tradable low-carbon 

generation obligation would spread those costs over the entire coal-based generation 

system. 

With such performance standards included, the bill could—at no added cost—prevent construction of new uncontrolled coal power plants and free up some of the incentive allowances for other purposes. 

The bill contains several incentive provisions to reward developers who incorporate carbon capture and geologic disposal systems for new coal plants. NRDC supports such incentives though we believe that the bill currently over allocates to carbon capture and disposal (CCD) projects. In particular, the program for advanced 

coal under the auction is limited to 20 GW, but is allocated more revenue than it 

would need to deploy this capacity. As a result this amount could be reduced significantly without reducing the number of projects that are supported. In addition, the 

bonus allowance program for CCD provides more of an incentive than is needed 

given the caps in the bill. These revenues and allowances could be put toward other 

public benefits such as the adaptation needs of disadvantaged peoples and communities in the U.S and internationally who will be adversely affected by global warming impacts. 

Some have argued that key technologies, such as carbon capture and disposal 

(CCD) are not yet available or are only available now at exorbitant cost. Such arguments are incorrect. All the elements of CCD systems are actually in use today but 

not are used in an integrated fashion. Arguments that claim full CCD systems are 

not ready because they are not in use today, under today’s market conditions, fundamentally miss the point that sound global warming legislation will create the 

market conditions for deployment of such systems going forward from today. 

Expert studies have concluded that we have the knowledge base now to proceed 

safely with geologic disposal of carbon dioxide in the amounts produced by the typical coal fueled power plant.14
195 

barrels of compressed CO2 for sequestration. We have confidence that megatonne scale injection 

at muiltiple well-characterized sites can start safely now, but an extensive program is needed 

to establish public confidence in the practical operation of large scale sequestration facilities 

over extended periods and to demonstrate the technical economic characteristics of the sequestration activity.’’ (Deutch, emphasis supplied); ‘‘I think the important thing to emphasize, so 

there’s no confusion, is that we feel very, very confident about the wisdom of going ahead now 

with those mega-ton per-year projects.’’ (Moniz). U.S. Senate, Energy and Natural Resources 

Committee, ‘‘Future of Coal,’’ March 22, 2007, S. Hrg. 110–69 at 9, 11. 15 Appendix C contains a more thorough discussion of the readiness of carbon capture and disposal systems. 

Taking a frozen snapshot of the cost of carbon control technologies today is also 

misleading. Think how wrong such an assessment would have been if applied to 

computer technology at any point in the last thirty years. Speed and capacity have 

increased by orders of magnitude as costs plummeted. We now carry more computing power in our cell phones than the Apollo astronauts carried to the moon. 

Once market signals are in place, it will be the same for technologies such as carbon 

capture and disposal.15

Low-Carbon Fuels Standard 

Other complementary policies should also be considered for sectors such as the 

transportation area. NRDC supports a Low Carbon Fuel Standard, which would cut 

greenhouse gas emissions from fuels by 10% from today’s levels by 2020 and spur 

development and use of cellulosic ethanol and other low carbon fuels. We support 

inclusion of such a performance standard in ACSA. It is also important to note that 

other ongoing efforts in the Senate, such as the Corporate Average Fuel Economy 

measures included in the Senate energy bill, could lead to substantial reductions in 

greenhouse gas emissions and if enacted, will provide another important complement to the provisions in ACSA. 

Offsets 

ACSA allows the owner or operator of a covered facility to satisfy up to 15 percent 

of a given year’s compliance obligation using ‘‘offsets’’ generated within the United 

States. These offsets would come from activities that are not covered by the emissions cap. 

While there are many emission reduction activities outside the cap that are worth 

encouraging, many experts have worked for more than 30 years in an attempt to 

produce reliable, workable offset programs in both the clean air and global warming 

contexts but there is little reason for satisfaction with the results. Even if criteria 

for measurability and enforceability are met, offsets still have the potential to break 

the cap because of difficulties in assuring that actions being credited are actually 

‘‘additional’’—i.e., that they are not simply actions that would have taken place anyway in the absence of credit. 

The additionality problem is not readily soluble, because it is extraordinarily difficult to devise workable rules for determining business-as-usual baselines at the 

project level. In some areas, credits may leverage new actions that would not have 

occurred, with a minimum of credit bestowed on ‘‘anyway’’ actions. But far more 

often, ‘‘anyway’’ actions make up a large—even dominant—fraction of the reductions 

credited. If offsets represent even a small percentage of ‘‘anyway’’ tons, climate protection actually moves backwards. A full ton is added to the cap in exchange for an 

action that may represent only 0.9 ton of reduction—or worse, 0.1 ton of reduction. 

With each offset, net emissions increase. 

Offsets also can delay key industries’ investments in transformative technologies 

that are necessary to meet the declining cap. For instance, unlimited availability of 

offsets could lead utilities to build high-emitting coal plants instead of investing in 

efficiency, renewables, or plants equipped with carbon capture and storage. 

For these reasons, NRDC has proposed setting aside a portion of the allowances 

from within the cap to incentivize mitigation actions from sources, like agriculture, 

that are outside the cap. Since the allowances would come from within the cap, they 

do not run the risk of expanding actual emissions as a result of rewarding this activity. Another acceptable approach would be to allow only a limited quantity of offsets in the cap-and-trade design. 

The Lieberman/Warner bill takes both approaches. The bill includes a ‘‘set aside’’ 

for agricultural reductions which would provide allowances from within the cap, and 

the bill also limits domestic offsets from outside the cap to 15 percent of a facility’s 

annual compliance obligation. 

NRDC believes that there are some additional changes needed in the offset provisions to remove offsets for forest management activities, where additionality fundamentally cannot be guaranteed. Moreover forest management activities focused on 
196 

maximizing carbon storage could result in ecological damage to forests, which have 

many functions in addition to carbon storage. The authority of the Carbon Market 

Efficiency Board to expand the use of offsets should also be constrained. A number 

of other safeguards need to be strengthened. We will be glad to continue working 

with your staff regarding these provisions. 

ALLOCATION OF ALLOWANCES

The Lieberman/Warner bill recognizes that allowances can and should be used to 

achieve important public purposes, but the bill provides too many allowances for 

free to emitters in the early years of the program. 

The bill provides allowances for public purposes in two ways: 

(1) auctioned allowances, with the proceeds of the auction going for such purposes 

as climate-friendly technologies, low income energy consumers, wildlife adaptation, 

national security/global warming measures and worker training. 

(2) free allowances to electricity consumers, state and tribal governments, and 

U.S. farmers and foresters, for a range of designated public purposes. 

But the bill also initially gives 40 percent of the allowances for free to emitters 

in the electric and industrial sectors with no requirement that these allowances be 

used for public purposes. These free allowances to emitters continue at gradually 

reduced rates until 2036 when they are terminated. The amount of allowances that 

are auctioned for public purposes grows from 24 percent in 2012 to 73 percent in 

2036. 

NRDC appreciates the substantial changes that have been made to ACSA since 

the bill outline was released in August. These changes include eliminating the perpetual free allocation to industrial emitters and removing free allowances to oil and 

coal companies. 

The current bill’s allocation to electric power and industrial emitters, however, is 

still much higher than justified under ‘‘hold-harmless’’ principles and will result in 

windfall profits to the shareholders of emitters. For example, an economic analysis 

by Larry Goulder of Stanford University suggests that in an economy-wide upstream cap and trade program, only 13% of the allowances will be needed to cover 

the costs that fossil-fuel providers would not be able to pass on to their customers. 

Similar analyses, with similar results, have been conducted by Resources for The 

Future and the Congressional Budget Office. 

As a result, NRDC believes that the bill should be improved substantially by reducing the starting percentage of free allowances to emitters and phasing them out 

faster—within 10–15 years of enactment. This would allow a greater percentage of 

the allowances to be devoted to public purposes initially and in later years. In particular, reducing the free allocations to emitters would allow for more resources to 

be directed to states, to low-income consumers in the United States, and to the most 

vulnerable among us both here and abroad. 

INTERNATIONAL COOPERATION

The bill includes a provision to encourage other nations to join in action to reduce 

greenhouse gas emissions, and to protect American businesses and workers from unfair competition if specific nations decline to cooperate. Under this provision, the 

United States would seek to negotiate for ‘‘comparable emissions reductions’’ from 

other emitting countries within 8 years of enactment. Countries failing to make 

such commitments would be required to submit greenhouse gas allowances for certain carbon intensive products. NRDC supports this provision, while bearing in 

mind that the U.S., as the world’s greatest contributor to the burden of global 

warming pollution already in the atmosphere, needs to show leadership in meeting 

the global warming challenge. 

ADAPTATION ISSUES

The sad truth is that if we do our utmost to cut global warming pollution starting 

tomorrow, people and sensitive ecosystems we depend on will still suffer serious impacts due to the emissions that are already in the air and those ‘‘in the pipeline.’’ 

We must do what we can now to ensure that communities and natural ecosystems 

are best prepared to withstand and adapt to ongoing and expected change. 

The impacts of global warming will be felt to a much greater extent by vulnerable 

communities abroad, particularly those in the least developed countries that bear 

the smallest share of responsibility for increases in greenhouse gas concentrations. 

The average American is responsible for many times more emissions than an average citizen of most African countries. Providing assistance for international adaptation is not only the right thing to do, it is also in our national interest. Global 

warming is a destabilizing force that will act against our hopes for the advancement 
197 

of human rights and democracy. It will elevate the risk of displacement, famine, and 

poverty—the kind of conditions in which violence, oppression, and radical ideologies 

can flourish. Providing support for adaptation will also help advance international 

negotiations toward an effective global agreement for the period beyond 2012. 

But our motive for providing help should not rest solely on whether these countries are a ‘‘security’’ threat, but also because this is the right thing to do, and because we have a crucial opportunity to ameliorate worldwide suffering by assisting 

these nations in adopting more sustainable energy and development paths. 

Chairman Boxer, and the other members of the Committee, the work that you and 

your staff have done on this bill marks an important milestone in the movement 

toward enactment of strong, bipartisan global warming legislation. We look forward 

to further progress as your legislation moves through the Environment and Public 

Works Committee, and we at NRDC stand ready to assist in anyway possible. 

Thank you for the opportunity to testify and I would be pleased to answer any 

questions that you may have. 
198 

APPENDIX A 

Economists' Statement on Climate Change 

Statement Signed November 7, 2007 

As economists, we believe that the overwhelming scientific evidence of climate change warrants 

significant reductions in greenhouse gas emissions to insure against potentially catastrophic 

social, environmental, and economic risks. 

The Bush Administration and Congress have repeatedly heard that policies reqUlnng 

domestic emission reductions will prove too costly to the economy and result in significant job 

loss. As economists, we disagree with this assessment. Economic theory does not require us to 

ignore the threat of climate change. Climate policy should reflect our responsibility to future 

generations, the long-term benefits of a growing and innovative economy, and equity in sharing 

the burdens associated with the necessary reductions in emissions of greenhouse gases. We need 

to invest in an "insurance policy" that reduces the risks of catastrophic climate change. Welldesigned policies that encourage switching to energy-efficient technologies and renewable energy 

resources will enable these emissions reductions to be made cost-effectively, and will encourage 

additional technological progress as well. The economy cannot be stable and dynamic in the long 

run if the Earth is threatened by disastrous climate change. 

Smart climate policy will involve: (i) large-scale public investment to support the rapid transition 

to new technologies, (ii) a cap-and-trade system that sells polluters the rights to generate a limited 

and steadily declining amount of emissions and recycles the revenues equitably, and (iii) a 

cooperative international approach to climate change that situates domestic emissions reduction 

as part of a global response to climate change. As the largest and most powerful nation in the 

world economy, it is our responsibility to lead the search for global warming solutions. 

Sincerely, 

Frank Ackerman, Tufts University 

Paul Baer, EcoEquity 

James Barrett, Redefining Progress 

James Boyce, University of Massachusetts, Amherst 

Nathan Sivers Boyce, Willamette University 

Gardner Brown, University of Washington 

Graciela Chichilnisky, Columbia University 

Herman Daly, University of Maryland 

Stephen DeCanio, University of California, Santa Barbara 

Thomas Drennen, Hobart and William Smith College 

Jon Erickson, University of Vermont 

James K. Galbraith, University of Texas 

Gloria Helfand, University of Michigan 

Eban Goodstein, Lewis and Clark College 

Robin Hahnel, American University 

Darwin Hall, California State University, Long Beach 

Jane Hall, California State University, Fullerton 

Farzin Hossein, University of California, Davis 

Richard Howarth, Dartmouth College 

William Jaeger, Oregon State University 

Neha Khanna, State University of NY, Binghampton 

John "Skip" Laitner, American Council for an Energy Efficient Economy 
199 

David Levy, University of Maryland, Baltimore 

Roz Naylor, Stanford University 

Richard Norgaard, University of Cali fomi a, Berkeley 

Astrid Scholz, Ecotrust 

Juliet Schor, Boston College 

Kristen A. Sheeran, St. Mary's College of Maryland 

Tom Tietenberg, Colby College 

David J Vail, Bowdoin College 

All signatories endorse this statement as individuals and not on behalf of their institutions. 
200 

Memorandum to: 

From: 

APPENDIXB 

Senator Boxer 

Chair of the Senate Environment and Public Works Committee 

Kristen A. Sheeran Ph.D. 

Executive Director 

Economics for Equity and the Environment: E3 Network 

Having examined the statements of Anne E. Smith of Charles River Associates (CRA), 

and Margo Thorning of the American Council for Capital Formation (ACCF) regarding 

the impacts of America's Climate Security Act (S.2191), I have drafted the following 

response on behalf of E3 Network's climate economists. We bring to this analysis our 

combined experience and expertise as professional and academic economists who have 

worked and published in the field of climate economics and energy economics for over 

three decades. 

The purpose of this memorandum is not to review all of the studies that have been 

conducted on S. 2191, nor to provide a comprehensive review of the literature. Our 

purpose is to illuminate the debate over S.2191 by pointing out the economic logic, 

assumptions, and deficiencies of the CRA and ACCF analyses in relation to best-practice 

in this field. This is especially important because these analyses have been privately 

produced and have not appeared in the peer-reviewed literature. Without a careful 

discussion of their methodology, it is difficult, if not impossible, for lawmakers to assess 

its value as policy guidance. 

The Broader Context: 

It goes without saying that legislation such as S. 2191 has both moral and economiC 

dimensions. Climate legislation will impact the quality of life for future generations here 

and abroad. We understand the science of climate change to be unequivocal: climate 

change is a real phenomenon with the potential for serious, and potentially catastrophic, 

disruptions to natural, social, economic, and political systems. The question for 

economists is not whether to take action now to reduce emissions, for the science tells us 

we must, but how to achieve those reductions in a cost-efficient manner that distributes 

the burdens equitably. 

Sound climate policy will involve: (i) large-scale public investment to support the rapid 

transition to new and more energy efficient technologies, (ii) a cap-and-trade system that 

sells polluters the rights to generate a limited and steadily declining amount of emissions 

and recycles the revenues equitably, and (iii) a cooperative international approach to 

climate change that situates domestic emissions reduction as part of a global response to 

climate change. The economic costs will be lower, and the economic benefits of avoided 
201 

climate change damages will be higher, if we act sooner, rather than, later to enact 

meaningful climate legislation. 

eRA bases their analysis on the results of their MRN-NEEM model. This model is a type 

of Integrated Assessment Model (lAM) that economists often use to estimate the 

economic impacts of climate policy options. There is a lengthy scholarly literature that 

compares model results for policies such as S.2l91. As a privately produced model, 

MRN-NEEM has not appeared in the scholarly literature. Our purpose is not to engage in 

a "dueling models" comparison. Rather, we will point out several deficiencies in the 

eRA model that contradict emerging best practice in the field. 

Exclusion of Benefits: 

In her testimony, Anne E. Smith states that "net societal costs are an inescapable aspect 

of an emissions limit via a cap-and-trade program that cannot be eliminated through any 

allocation formula that may be devised" (Anne E. Smith, prepared testimony dated 8 

November 2007). It is impossible for her to arrive at any other conclusion, since eRA's 

model includes only costs and virtually no benefits. Excluding the benefits of emissions 

reduction from the analysis is equivalent to assuming that the science predicting potential 

damages from climate change is flawed and that environmental improvements have no 

impact on human well-being and happiness. Neither point is substantiated in the 

literature. 

In contrast, the benefits of avoided damages from climate change are well-supported by 

the literature. The recent Stem Report commissioned by the British government by Sir 

Nicholas Stem, former chief economist of the World Bank, estimated conservatively that 

the equivalent of 5% of world output would be lost from economic damages from climate 

change. A Tufts University forthcoming study estimates damages to the state of Florida 

from climate change equivalent to 5% of Gross State Product by the close of the century. 

A recent University of Maryland study reviews the literature on the costs of inaction on 

climate change in the US. Damages include coastal property loss from flooding and sea 

level rise, loss of life and property from more frequent and severe hurricanes and tropical 

storms, increased drought and wildfire risks, and disruption of water supplies. Until 

recently, it was believed that warming might increase agricultural yields in the colder 

northern states. However, a recent MIT study finds that the increase in ground level 

ozone from the increased use of fossil fuels will offset any possible benefits from 

warming and concludes that agricultural yields will decline throughout the US as the 

climate warms. While difficult to aggregate all of these costs into one single dollar value 

for the nation as a whole, these studies reveal the hidden real costs of inaction in every 

region of the country. The costs of inaction - the benefits of avoided damages - should be 

included in any sensible debate over climate policy. 

Failure to act on climate change also increases the likelihood of abrupt, irreversible 

climate catastrophe, the costs of which would be far worse than the predictable costs of 

inaction highlighted above. The Stem Review emphasized this point, and estimated that 

world output could decline by as much as 11 % in the event of abrupt catastrophic change. 
202 

Stem's emphasis on risk and uncertainty is supported by Harvard economist Martin 

Weitzman. Best practice in economics with regards to uncertainty and risk is rapidly 

evolving, partly in response to the challenges posed by climate change. The CRA model 

does not incorporate these new approaches. 

It is also possible to make the benefits of avoided climate damages "disappear" through 

the use of the mathematically convenient, but ethically questionable, practice of 

discounting future benefits. The CRA analysis uses a 5% annual discount rate. At this 

rate, a dollar of income fifty years from now is worth only $.08 today. First, we challenge 

whether real people are actually this myopic in their consideration of the environment. 

Discounting the importance of future generations seems to contradict the concerns of 

most Americans for the well-being of their children and their grandchildren. On a more 

technical level, we challenge the use of a high discount rate as applied to highly uncertain 

future outcomes. Economists such as Sir Partha Dasgupta of Cambridge have noted that 

if environmental damage is sufficiently great as to reduce consumption in the future, the 

discount rate would be much smaller than society's pure rate of time preference, and 

potentially even negative. A negative discount rate would mean that any sum of money 

spent today to avoid climate change would be worth less than the equivalent sum of 

money in the future. Other economists, like Harvard's Weitzman, have noted that the 

existence of uncertainty creates a precautionary motive for increased savings, which 

lowers the discount rate. 

Inadequate Treatment of Costs: 

The CRA analysis essentially eliminates the possibility for "no-regrets" options. A noregret strategy is one that could reduce greenhouse gas emissions without curtailing 

economic productivity or economic performance. It does this by assuming, as most lAMs 

do, that business organizations and consumers behave rationally to achieve their 

objectives and are successful in optimizing their behaviors. However, it is well-known in 

the economics literature that businesses do not exploit every opportunity for profit. There 

are many opportunities to increase efficiency, reduce costs, and improve productivity that 

are routinely "left on the table" due to organizational and institutional constraints. Recent 

studies by the American Council for an Energy Efficient Economy (ACEEE) have 

estimated that cost-effective reductions of 25-30% of current emissions are now possible. 

The role of climate legislation is to provide clear and persistent policy signals to the 

market to seize upon these existing opportunities and rapidly develop others. 

There are more satisfying ways of mapping cost-effective technologies into lAMs than 

CRA has done. Studies by DeCanio et. al and Laitner et. ai, which embed technology in a 

more meaningful way in their analyses, reach different conclusions about the economic 

costs of emissions limits. The CRA model documentation (see footnote 1 in Smith's 

testimony) admits, in effect, that no engineering assessment was done on the demand 

side, to determine the potential savings from reduced energy consumption. On the supply 

side, their model includes no combined heat and power, no recycled energy or other 

conversions of waste to useful energy. These technologies could provide upwards of 20% 

oftoday's existing electricity generation at a substantial reduction in emissions. There are 
203 

additional technologies that could be developed and could become cost-effective if there 

were clear and persistent policy signals to guide the market. 

Without even considering productivity improvements for the economy in the long term, it 

is clear that technological change in response to climate legislation will improve 

economic performance in the near-term. Cost-effective technologies can stimulate new 

investment, save consumers money, stimulate productive research and development with 

spill-over benefits for other sectors and positive multiplier effects, and help to reduce 

energy imports and increase technology exports. As the rest of the world moves ahead 

with policies to curb emissions, the U.S. risks losing its technological advantage globally. 

In the early 1980s, US companies led the world in wind energy technologies. Today, we 

import those technologies from Europe. 

Misrepresenting policy outcomes: 

S. 2191 would reduce carbon pollution by instituting a cap-and-trade system. Economists 

widely agree that well-designed cap-and-trade systems can achieve any level of 

emissions reduction at the lowest total cost of compliance. But a critical question 

surrounding cap-and-trade still remains: how should we get the permits into the hands of 

polluters? The question sounds trivial, but it may be the single most important issue at 

stake with regards to climate policy. How government distributes and invests the 

revenues from that auction will have a significant impact on the economy. Economists 

used to consider the issue of how permits are distributed as largely one of fairness. 

Economists now understand that how permits are distributed affects economic outcomes. 

The mechanism for distributing permits must be included in any sensible debate over 

climate policy. Here is what we know: 

The effect on energy prices will be the same whether the legislation requires that permits 

are auctioned or given away for free (grandfathered). No matter how permits are 

distributed, polluters will not receive enough permits to cover their current pollution 

levels, and at least some polluters will need to cut their pollution. Polluters who can do it 

cheaply will cut their emissions and sell their unused permits to polluters with relatively 

high abatement costs. In either case, someone somewhere will now have to either pay for 

a permit or pay to cut emissions. They will pass at least some of those production cost 

increases onto consumers. And once one producer increases prices, the rest will follow 

suit. 

In case you're not convinced, try the following analogy. Imagine buying World Series 

tickets from a scalper. Would he charge you any less ifhe found the tickets on the ground 

or got them free from a friend inside the ticket office? Of course he wouldn't. In fact, 

scalpers typically buy their tickets for far less than they sell them. But don't ask for a 

discount based on that. Like energy, the street price of World Series tickets is based on 

supply and demand. The supply and demand for tickets is the same no matter how much 

the scalper paid for them, and so the price he charges you will also be the same no matter 

how he got them. Of course, the scalper would much rather get his tickets for free. And 

that's precisely the point. Polluters are financially much better off if permits are given 
204 

away instead of auctioned, but the cost of cutting emissions and the resulting effect on 

energy prices will be the same no matter how the permits are delivered. 

Giving permits away for free allows polluters to raise their prices without raising their 

costs. It would result in the transfer of hundreds of billions of dollars every year from 

consumers and businesses to the polluters themselves: energy companies and their 

stockholders. It's no surprise that energy companies have lobbied for grandfathered 

permits. 

But fairness and the distribution of wealth from energy policy is not all that is stake. If 

the government auctions permits, the revenues from the permit auction could be used to 

"make whole" low-income consumers who might otherwise be hurt by the regressive 

increase in carbon prices. This could be done either by distributing some or all of the 

income from permit sales on a per capita basis, or by targeting low-income families with 

a subsidy. Recent work by DeCanio and, Boyce and Riddle show that per capita 

distribution of the revenues would benefit of majority of Americans. Furthermore, 

government can use the revenues from permit auctions to invest in new and more energy 

efficient technologies. By auctioning permits, government could potentially accelerate 

economic growth and job creation faster than would have happened without climate 

policy in the first place. For these reasons, we strongly recommend that 100% of the 

permits in any cap-and-trade scheme should be auctioned. Since S.2191 auctions only a 

portion of the permits, it falls short in this regard. This is the most salient criticism of 

S2191. 

Sincerely, 

Kristen A. Sheeran, on behalf of: 

Frank Ackerman 

Paul Baer 

James Barrett 

Stephen DeCanio 

Eban Goodstein 

John "Skip" Laitner 

Astrid Scholz 
205 

References 

Dasgupta, Partha, K.G. Maler, and S. Barrett. 1999. "Intergenerational Equity, Social 

Discount Rates, and Global Wanning", Published in P.R. Portney and J.P. 

Weyant, eds., Discounting and Intergenerational Equity, Washington DC: 

Resources for the Future. 

DeCanio, Stephen J., 2007. "Distribution of Emissions Allowances as an Opportunity," 

Climate Policy (forthcoming). 

Boyce, James K., and Matthew Riddle, 2007. "Cap and Rebate: How to Curb 

Global Wanning while Protecting the Incomes of American Families." Amherst, 

MA: Political Economy Research Institute, Working Paper No. 150. 

Krause, Florentin, Stephen J. DeCanio, J. Andrew Hoerner, and Paul Baer, 

2002. "Cutting Carbon Emissions at a Profit (Part I): Opportunities for 

the United States," Contemporary Economic Policy, Vol. 20, No.4 

(October): 339·365. 

Krause, Florentin, Stephen J. DeCanio, J. Andrew Hoerner, and Paul Baer, 

2003. "Cutting Carbon Emissions at a Profit (Part II): Impacts on U.S. 

Competitiveness and Jobs," Contemporary Economic Policy, Vol. 21, No.1 

(January): 90·105. 

Laitner, John A., Donald A. Hanson, Irving Mintzer, and J. Amber Leonard, 2006. 

"Adapting for Uncertainty: A Scenario Analysis of U.S. Technology Energy 

Futures", Energy Studies Review, Vol. 14 (1): 120135. 

Ruth, Matthias, Dana Coelho, and Daria Karetnikov. "The U.S. Economic Impacts of 

Climate Change and the Costs oflnaction" 2007. College Park, Maryland: 

University of Maryland Center for Integrative Environmental Research. 

Weitzman, Martin, 2007. "A Review of The Stem Review on the Economics of 

Climate Change," Journal o/Economic Literature, Vol. XLV (September): 

703·724. 

Weitzman, Martin, 2007. "Structural Uncertainty and the Value of Statistical Life 

in the Economics of Catastrophic Climate Change," available at 

http://www.economics.harvard.eduifaculty/weitzmanipapersNaIStatLifeClimate. 

pdf (accessed 11-9·07). 

Worrell, Ernst, John A. Laitner, Michael Ruth, and Hodayah Finman, 2003. "Productivity 

Benefits of Industrial Energy Efficiency Measures" Energy, Vol. 21 (2003): 1081· 

1098. 
206 

Economics for Equity and the Environment: E3 Network 

Climate Economics Taskforce Biographies 

Frank Ackerman, Ph.D. 

Research Director 

Global Development and Environment Institute, Tufts University 

Frank Ackerman is the director of the Research and Policy Program at the Global 

Development and Environment Institute at Tufts University. He has written widely on the 

limitations of cost-benefit analysis of health and environmental protection, and has 

worked closely with environmental groups including NRDC, Riverkeeper, Greenpeace, 

the Alliance for a Healthy Tomorrow (Massachusetts), and the Farmworker Justice Fund. 

His recent books include Priceless: On Knowing the Price of Everything and the Value of 

Nothing (The New Press, 2004, jointly with Lisa Heinzerling), and The Flawed 

Foundations of General Equilibrium: Critical Essays on Economic Theory (Routledge, 

2004, jointly with Alejandro Nadal). Some of his recent work on precautionary 

approaches to toxic chemicals has been supported by European governments and NGO's. 

Ackerman is a Member Scholar at the Center for Progressive Reform. He received a B.A. 

in mathematics and economics from Swarthmore College and a Ph.D. in economics from 

Harvard University. 

Paul Baer, Ph.D. 

Research Director 

EcoEquity 

Paul Baer is an interdisciplinary scholar-activist with expertise in ecological economics, 

ethics, philosophy of science, risk analysis, and simulation modeling, specializing in 

climate science and policy. He completed his PhD in 2005 at UC Berkeley's Energy and 

Resources Group; his dissertation examined the interconnection between equity, risk and 

scientific uncertainty, three topics at the heart of the climate problem. He also has a BA 

in Economics from Stanford University and a Masters in Environmental Planning and 

Management from Louisiana State University. He recently completed a post-doctoral 

research fellowship at Stanford University's Center for Environmental Science and 

Policy, addressing the interaction of climate change and forest fire in Alaska. He is 

currently the Research Director for EcoEquity, a climate-advocacy organization he cofounded in 2000 with Tom Athanasiou, with whom he also co-authored the 2002 book 

"Dead Heat: Global Justice and Global Warming (Seven Stories Press). 
207 

Jim Barrett, Ph.D. 

Executive Director 

Redefining Progress 

Dr. Barrett has worked on a variety of issues concerning energy and environmental 

economics, including the impacts of carbon reduction programs on the U.S. economy, the 

economic implications of opening the Arctic National Wildlife Refuge to oil exploration, 

and the technical and economic feasibility of hydrogen production. Prior to joining 

Redefining progress, Dr. Barrett was an economist at the Economic Policy Institute, 

senior economist on the Democratic staff of the Joint Economic Committee of the U.S. 

Congress, and staff economist at the Center for the Advancement of Genomics and the 

Institute for Biological Energy Alternatives. Dr. Barrett earned his B.A. in economics 

from Bucknell University and his M.A. and Ph.D. in economics from the University of 

Connecticut. 

Stephen DeCanio Ph.D. 

Professor of Economics 

University of California, Santa Barbara. 

Dr. DeCanio served as Senior Staff Economist at the President's Council of Economic 

Advisers. He has been a member of the Economic Options Panel convened by the 

United Nations Environment Programme to review economic aspects of the Montreal 

Protocol on Substances that Deplete the Ozone Layer, and is currently Co-Chair of the 

Montreal Protocol's Agricultural Economics Task Force of the Technical and Economics 

Assessment Panel. His research focuses on the economics of climate change, protection 

of the stratospheric ozone layer, factors affecting the diffusion of energy-efficient 

technologies, and the impacts of greenhouse gas reduction policies. He is one of the 

founders ofUCSB's Computational Laboratories Group. His most recent book, Economic 

Models of Climate Change: A Critique, is available from Pal grave-Macmillan. His 

resume gives a complete list of publications, and a selection of them is shown below 

Eban Goodstein, Ph.D. 

Professor of Economics 

Lewis and Clark College 

Portland, OR 97219 

Eban Goodstein is Professor of Economics at Lewis and Clark College in Portland 

Oregon. He is the author of a college textbook, Economics and the Environment, (John 

Wiley and Sons, 2004) now in its fourth edition, as well as The Trade-off Myth: Fact and 

Fiction about Jobs and the Environment (Island Press, 1999). His current research focuses 

on the economics of global climate change, a subject on which he has spoken widely. 

Articles by Goodstein have appeared in the Journal of Environmental Economics and 

Management, Land Economics, Ecological Economics, and Environmental Management. 
208 

His research has been featured in The New York Times, Scientific American, Time, 

Chemical and Engineering News, The Economist, and The Chronicle of Higher 

Education. He received his B.A. from Williams College and his Ph.D. from the 

University of Michigan. He serves on the editorial board of Environment, Workplace and 

Employment, and is a Member Scholar at the Center for Progressive Reform. From 2006 

to 2008 Goodstein is directing a national educational imitative on global warming 

solutions for America, Focus the Nation. 

John A. "Skip" Laitner 

Visiting Fellow and Senior Economist 

American Council for an Energy-Efficient Economy 

Skip Laitner is a resource economist with more than 35 years experience in energy and 

economic impact studies, public policy analysis, and economic development planning. 

He most recently served 10 years as the Senior Economist for Technology Policy within 

EPA's Office of Atmospheric Programs. In that capacity, Skip was awarded EPA's 1998 

Gold Medal for his work with a team of EP A economists that helped set the foundation 

for the Kyoto Protocol on Greenhouse Gas Emissions. In 2003 he was acknowledged as 

a technology leader when given the "CHP Champion" award by the U.S. Combined Heat 

and Power Association. 

In May 2006 Skip resigned his position with EPA to join the American Council for an 

Energy-Efficient Economy (ACEEE), an established and respected think tank based in 

Washington, DC. In his current capacity Skip will focus on characterizing the scale and 

scope of energy efficiency technologies as that larger resource might promote a 

significant but cost-effective reduction in greenhouse gas emissions. He will also explore 

more dynamic economic modeling techniques to better reflect and evaluate the 

macroeconomic impacts of productive energy efficiency investments. Skip has written 

more than 160 papers and reports in the fields of community and economic development, 

decision sciences, energy and utility costs, and natural resource issues. He is a widely 

recognized speaker and has given both technical and public policy presentations in the 

United States and abroad. Skip has a master's degree in resource economics. 

Astrid Scholz, Ph.D. 

Vice President, Knowledge Systems 

Ecotrust 

Astrid Scholz is Vice President for Knowledge Systems at Ecotrust, a Portland, Oregon, 

based conservation organization committed to building a future that strengthens 

communities and the environment from Alaska to California. An ecological economist by 

training, she conceptualizes and analyzes the linkages between ecological, economic and 

social systems in the West Coast's emerging conservation economy. In her capacity as a 

member of Ecotrust's executive team, she is responsible for managing a staff of 12, 

overseeing several projects and contracts, and fundraising. She is an affiliate faculty 
209 

member of Oregon State University's College of Oceanic and Atmospheric Sciences, and 

is the co-editor of a book on integrated marine geographic information systems, Place 

Matters (OSU Press, 2005). She serves on the boards of the Pacific Marine Conservation 

Council, Habitat Media, and the Living Oceans Society, and is a member of the Science 

Advisory Team to the Marine Life Protection Act in California. She received her M.A. in 

Economics and Philosophy from the University of St. Andrews, her M.Sc. in Economics 

from the University of Bristol, and her Ph.D. in Energy and Resources from the 

University of California, Berkeley. 

Kristen Sheeran, Ph.D. 

Executive Director 

Economics for Equity and the Environment 

Associate Professor of Economics 

St. Mary's College of Maryland 

Kristen Sheeran is an Associate Professor of Economics at St. Mary's College of 

Maryland, Maryland's public honors college. While on sabbatical, Kristen will serve as 

executive director of Economics for Equity and Environment Network. A political 

economist by training, her research focuses on the political economy of climate change; 

specifically the tension between equity and efficiency in international climate control 

efforts. Articles by Sheeran have appeared in Environmental and Resource Economics, 

Ecological Economics, Eastern Economic Journal, and The International Journal of 

Economic Development. She has worked as an economist for the World Resources 

Institute and the U.S. Department of Agriculture. She works with environmental 

organizations in Maryland, including the Chesapeake Climate Action Network, Maryland 

Public Interest Research Group, and the Maryland Sierra Club. She graduated summa 

cum laude with her B.A. in economics and political science from Drew University. She 

completed her Ph.D. in economics from American University. 
210 

APPENDIXC 

Is Carbon Capture and Disposal (CCD) Ready for Broad Deployment? 

David Hawkins 

Director, Climate Center 

Natural Resources Defense Council 

Key Questions about CCD 

I started studying CCD in detail ten years ago and the questions I had then are those 

asked today by people new to the subject. Do reliable systems exist to capture C02 from 

power plants and other industrial sources? Where can we put C02 after we have captured 

it? Will the CO2 stay where we put it or will it leak? How much disposal capacity is 

there? Are CCD systems "affordable"? To answer these questions, the 

Intergovernmental Panel on Climate Change (IPCC) decided four years ago to prepare a 

special report on the subject. That report was issued in September, 2005 as the IPCC 

Special Report on Carbon Dioxide Capture and Storage. I was privileged to serve as a 

review editor for the report's chapter on geologic storage of CO2. 

CO2 Capture 

The IPCC special report groups capture or separation of CO2 from industrial gases into 

four categories: post-combustion; pre-combustion; oxyfuel combustion; and industrial 

separation. I will say a few words about the basics and status of each of these 

approaches. In a conventional pulverized coal power plant, the coal is combusted using 

normal air at atmospheric pressures. This combustion process produces a large volume 

of exhaust gas that contains C02 in large amounts but in low concentrations and low 

pressures. Commercial post-combustion systems exist to capture CO2 from such exhaust 

gases using chemical "stripping" compounds and they have been applied to very small 

portions of flue gases (tens of thousands of tons from plants that emit several million tons 

of CO2 annually) from a few coal-fired power plants in the U.S. that sell the captured 

CO2 to the food and beverage industry. However, industry analysts state that today's 

systems, based on publicly available information, involve much higher costs and energy 

penalties than the principal demonstrated alternative, pre-combustion capture. 

New and potentially less expensive post-combustion concepts have been evaluated in 

laboratory tests and some, like ammonia-based capture systems, are scheduled for small 

pilot-scale tests in the next few years. Under normal industrial development scenarios, if 

successful such pilot tests would be followed by larger demonstration tests and then by 

commercial-scale tests. These and other approaches should continue to be explored. 

However, unless accelerated by a combination of policies, subsidies, and willingness to 

take increased technical risks, such a development program could take one or two 
211 

decades before post-combustion systems would be accepted for broad commercial 

application. 

Pre-combustion capture is applied to coal conversion processes that gasify coal rather 

than combust it in air. In the oxygen-blown gasification process coal is heated under 

pressure with a mixture of pure oxygen, producing an energy-rich gas stream consisting 

mostly of hydrogen and carbon monoxide. Coal gasification is widely used in industrial 

processes, such as ammonia and fertilizer production around the world. Hundreds of 

such industrial gasifiers are in operation today. In power generation applications as 

practiced today this "syngas" stream is cleaned of impurities and then burned in a 

combustion turbine to make electricity in a process known as Integrated Gasification 

Combined Cycle or !GCC. In the power generation business, IGCC is a relatively recent 

development-about two decades old and is still not widely deployed. There are two 

!GCC power-only plants operating in the U.S. today and about 14 commercial !GCC 

plants are operating globally, with most of the capacity in Europe. In early years of 

operation for power applications a number of !GCC projects encountered availability 

problems but those issues appear to be resolved today, with Tampa Electric Company 

reporting that its !GCC plant in Florida is the most dispatched and most economic unit in 

its generating system. 

Commercially demonstrated systems for pre-combustion capture from the coal 

gasification process involve treating the syngas to form a mixture of hydrogen and C02 

and then separating the CO2, primarily through the use of solvents. These same 

techniques are used in industrial plants to separate C02 from natural gas and to make 

chemicals such as ammonia out of gasified coal. However, because C02 can be released 

to the air in unlimited amounts under today's laws, except in niche applications, even 

plants that separate C02 do not capture it; rather they release it to the atmosphere. 

Notable exceptions include the Dakota Gasification Company plant in Beulah, North 

Dakota, which captures and pipelines more than one million tons of C02 per year from its 

lignite gasification plant to an oil field in Saskatchewan, and ExxonMobil's Shute Creek 

natural gas processing plant in Wyoming, which strips C02 from sour gas and pipelines 

several million tons per year to oil fields in Colorado and Wyoming. 

Today's pre-combustion capture approach is not applicable to the installed base of 

conventional pulverized coal in the U.S. and elsewhere. However, it is ready today for 

use with !GCC power plants. The oil giant BP has announced an !GCC project with precombustion C02 capture at its refinery in Carson, California. When operational the 

project will gasify petroleum coke, a solid fuel that resembles coal more than petroleum 

to make electricity for sale to the grid. The captured CO2 will be sold to an oil field 

operator in California to enhance oil recovery. The principal obstacle for broad 

application of pre-combustion capture to new power plants is not technical, it is 

economic: under today' s laws it is cheaper to release CO2 to the air rather than capturing 

it. Enacting laws to limit CO2 can change this situation, as discussed in my testimony. 

While pre-combustion capture from !GCC plants is the approach that is ready today for 

commercial application, it is not the only method for C02 capture that may emerge if 
212 

laws creating a market for C02 capture are adopted. I have previously mentioned postcombustion techniques now being explored. Another approach, known as oxyfuel 

combustion, is also in the early stages of research and development. In the oxyfuel 

process, coal is bumed in oxygen rather than air and the exhaust gases are recycled to 

build up CO2 concentrations to a point where separation at reasonable cost and energy 

penalties may be feasible. Small scale pilot studies for oxyfuel processes have been 

announced. As with post-combustion processes, absent an accelerated effort to leapfrog 

the normal commercialization process, it could be one or two decades before such 

systems might begin to be deployed broadly in commercial application. 

Given, the massive amount of new coal capacity scheduled for construction in the next 

two decades, we cannot afford to wait and see whether these alternative capture systems 

prove out, nor do we need to. Coal plants in the design process today can employ proven 

IGCC and pre-combustion capture systems to reduce their CO2 emissions by about 90 

percent.· Adoption of policies that set a C02 performance standard now for such new 

plants will not anoint IGCC as the technological winner since alternative approaches can 

be employed when they are ready. If the alternatives prove superior to !GCC and precombustion capture, the market will reward them accordingly. As discussed in my 

testimony, adoption of C02 performance standards is a critical step to improve today's 

capture methods and to stimulate development of competing systems. 

I would like to say a few words about so-called "capture-ready" or "capture-capable" 

coal plants. Some years ago I was under the impression that some technologies like 

!GCC, initially built without capture equipment could be properly called "capture-ready." 

However, the implications of the rapid build-out of new coal plants for global warming 

and many conversations with engineers since then have educated me to a different view. 

An !GCC unit built without capture equipment can be equipped later with such 

equipment and at much lower cost than attempting to retrofit a conventional pulverized 

coal plant with today's demonstrated post-combustion systems. However, the costs and 

engineering reconfigurations of such an approach are substantial. More importantly, we 

need to begin capturing CO2 from new coal plants without delay in order to keep global 

warming from becoming a potentially runaway problem. Given the pace of new coal 

investments in the U.S. and globally, we simply do not have the time to build a coal plant 

today and think about capturing its C02 down the road. 

Implementation of the Energy Policy Act of2005 approach to this topic needs a review in 

my opinion. The Act provides significant subsidies for coal plants that do not actually 

capture their C02 but rather merely have carbon "capture capability." While the Act 

limits this term to plants using gasification processes, it is not being implemented in a 

manner that provides a meaningful substantive difference between an ordinary IGCC unit 

and one that genuinely has been designed with early integration of C02 capture in mind. 

Further, in its FY2008 budget request, the administration seeks appropriations allowing it 

to provide $9 billion in loan guarantees under Title XVII of the Act, including as much as 

$4 billion in loans for "carbon sequestration optimized coal power plants." The 

administration request does not define a "carbon sequestration optimized" coal power 

plant and it could mean almost anything, including, according to some industry 
213 

representatives, a plant that simply leaves physical space for an unidentified black box. If 

that makes a power plant "capture-ready" Mr. Chairman, then my driveway is "Ferrariready." We should not be investing today in coal plants at more than a billion dollars 

apiece with nothing more than a hope that some kind of capture system will turn up. We 

would not get on a plane to a destination if the pilot told us there was no landing site but 

options were being researched. 

Geologic Disposal 

We have a significant experience base for injecting large amounts of C02 into geologic 

formations. For several decades oil field operators have received high pressure CO2 for 

injection into fields to enhance oil recovery, delivered by pipelines spanning as much as 

several hundred miles. Today in the U.S. a total of more than 35 million tons of C02 are 

injected annually in more than 70 projects. (Unfortunately, due to the lack of any 

controls on CO2 emissions, about 80 per cent of that CO2 is sources from natural CO2 

formations rather than captured from industrial sources. Historians will marvel that we 

persisted so long in pulling CO2 out of holes in the ground in order to move it hundreds 

of miles and stick in back in holes at the same time we were recognizing the harm being 

caused by emissions of the same molecule from nearby large industrial sources.) In 

addition to this enhanced oil recovery experience, there are several other large injection 

projects in operation or announced. The longest running of these, the Sleipner project, 

began in 1996. 

But the largest of these projects injects on the order of one million tons per year of CO2, 

while a single large coal power plant can produce about five million tons per year. And 

of course, our experience with man-made injection projects does not extend for the 

thousand year or more period that we would need to keep CO2 in place underground for it 

to be effective in helping to avoid dangerous global warming. Accordingly, the public 

and interested members of the environmental, industry and policy communities rightly 

ask whether we can carry out a large scale injection program safely and assure that the 

injected CO2 will stay where we put it. 

Let me summarize the findings of the IPCC on the safety and efficacy of geologic 

disposal. In its 2005 report the IPCC concluded the following with respect to the 

question of whether we can safely carry out carbon injection operations on the required 

scale: 

"With appropriate site selection based on available subsurface information, a monitoring 

programme to detect problems, a regulatory system and the appropriate use of 

remediation methods to stop or control C02 releases if they arise, the local health, safety 

and environment risks of geological storage would be comparable to the risks of current 

activities such as natural gas storage, EOR and deep underground disposal of acid gas." 

The knowledge exists to fulfill all of the conditions the IPCC identifies as needed to 

assure safety. While EPA has authority regulate large scale CO2 injection projects its 

current underground injection control regulations are not designed to require the 

appropriate showings for permitting a facility intended for long-term retention of large 
214 

amounts of CO2. With adequate resources applied, EPA should be able to make the 

necessary revisions to its rules in two to three years. We urge the members of this 

Committee to support legislation to require EPA to undertake this effort this year. 

Do we have a basis today for concluding that injected C02 will stay in place for the long 

periods required to prevent its contributing to global warming? The IPCC report 

concluded that we do, stating: 

"Observations from engineered and natural analogues as well as models suggest that the 

fraction retained in appropriately selected and managed geological reservoirs is very 

likely to exceed 99% over 100 years and is likely to exceed 99% over 1,000 years." 

Despite this conclusion by recognized experts there is still reason to ask about the 

implications of imperfect execution of large scale injection projects, especially in the 

early years before we have amassed more experience. Is the possibility of imperfect 

execution reason enough to delay application of CO2 capture systems to new power 

plants until we gain such experience from an initial round of multi-million ton 

"demonstration" projects? To sketch an answer to this question, my colleague Stefan 

Bachu, a geologist with the Alberta Energy and Utilities Board, and I wrote a paper for 

the Eighth International Conference on Greenhouse Gas Control Technologies in June 

2006. The obvious and fundamental point we made is that without CO2 capture, new 

coal plants built during any "delay and research" period will put 100 per cent of their CO2 

into the air and may do so for their operating life if they were "grandfathered" from 

retrofit requirements. Those releases need to be compared to hypothetical leaks from 

early injection sites. 

Our conclusions were that even with extreme, unrealistically high hypothetical leakage 

rates from early injection sites (10% per year), a long period to leak detection (5 years) 

and a prolonged period to correct the leak (1 year), a policy that delayed installation of 

CO2 capture at new coal plants to await further research would result in cumulative CO2 

releases twenty times greater than from the hypothetical faulty injection sites, if power 

plants built during the research period were "grand fathered" from retrofit requirements. 

If this wave of new coal plants were all required to retrofit CO2 capture by no later than 

2030, the cumulative emissions would still be four times greater than under the no delay 

scenario. I believe that any objective assessment will conclude that allowing new coal 

plants to be built without C02 capture equipment on the ground that we need more large 

scale injection experience will always result in significantly greater CO2 releases than 

starting CO2 capture without delay for new coal plants now being designed. 

The IPCC also made estimates about global storage capacity for C02 in geologic 

formations. It concluded as follows: 

"Available evidence suggests that, worldwide, it is likely that there is a technical 

potential of at least about 2,000 GtC02 (545 GtC) of storage capacity in geological 

formations. There could be a much larger potential for geological storage in saline 

formations, but the upper limit estimates are uncertain due to lack of information and an 

agreed methodology." 
215 

Current CO2 emissions from the world's power plants are about 10 Gt (billion metric 

tons) per year, so the IPCC estimate indicates 200 years of capacity if power plant 

emissions did not increase and 100 years capacity if annual emissions doubled. 
216 

RESPONSE BY DAVID HAWKINS TO AN ADDITIONAL QUESTION FROM

SENATOR LAUTENBERG

Question. You state that free allowances should be phased out significantly faster—between 10–15 years of enactment. I also believe that we should move to full 

auction significantly earlier. What are the benefits from an earlier full auction date? 

How could we use the greater auction proceeds to minimize any economic dislocation? 

Response. NRDC believes pollution allowances are a public trust. They represent 

permission to use the atmosphere, which belongs to all of us, to ‘‘dispose of’’ global 

warming pollution. As such, they are not a private resource owned by historical 

emitters and such emitters do not have a permanent right to free allowances. The 

value of the allowances should be used for public purposes including promoting 

clean energy solutions, protecting the poor and other consumers, ensuring a just 

transition for workers in affected industries, and preventing human and ecosystem 

impacts both here and abroad, especially where they can lead to conflicts and 

threats to security. 

ACSA embraces the principle that these pollution allowances should be used for 

public purposes but it implements the principle too slowly. NRDC believes that over 

the first 25 years of the program the bill gives away more allowances to the biggest 

emitting firms than is needed to fully compensate such firms for the effects of their 

compliance obligations on the firms’ economic values. The result is that there are 

not enough allocations available to fully meet public needs. 

As you indicate in your question, NRDC believes that the bill should be improved 

substantially by reducing the starting percentage of free allowances to emitters and 

phasing them out faster—within 10–15 years of enactment. 

In assessing the merits of any allocation proposal, it is important to recognize that 

regardless of whether allowances are auctioned or given away for free, in either 

case, the resulting revenue stream can be directed toward public or private purposes. Moreover, while phasing out of free allocations as soon as possible is desirable, the total amount of allowances to be received over time by any given entity— 

and whether that amount will be used for appropriate purposes—is perhaps the 

most important consideration. 

The Lieberman Warner bill provides allowances for public purposes in two ways: 

(1) auctioned allowances, with the proceeds of the auction going for such purposes 

as climate-friendly technologies, low income energy consumers, wildlife adaptation, 

national security/global warming measures and worker training. 

(2) free allowances to electricity consumers, state and tribal governments, and 

U.S. farmers and foresters, for a range of designated public purposes. 

But the bill also initially gives 40 percent of the allowances for free to emitters 

in the electric and industrial sectors with no requirement that these allowances be 

used for public purposes. These free allowances to emitters continue at gradually 

reduced rates until 2036 when they are terminated. The amount of allowances that 

are auctioned for public purposes grows from 24 percent in 2012 to 73 percent in 

2036. 

Although NRDC appreciates the substantial changes that have been made to 

ACSA since the bill outline was released in August, the current bill’s allocation to 

electric power and industrial emitters, however, is still much higher than justified 

under ‘‘hold-harmless’’ principles and will result in windfall profits to the shareholders of emitters. For example, an economic analysis by Larry Goulder of Stanford 

University suggests that in an economy-wide upstream cap and trade program, only 

13% of the allowances will be needed to cover the costs that fossil-fuel providers 

would not be able to pass on to their customers. Similar analyses, with similar results, have been conducted by Resources for The Future and the Congressional 

Budget Office. 

Thus, faster phase out of the free allowances that would reduce the overall number of allowances that emitters receive is desirable. A faster phase out of free allowances also recognizes that while companies may need time to transition to lower and 

zero carbon energy solutions, they should do so as quickly as possible. Continued 

allocation of free allowances based on historical emissions discourages innovation 

and adoption of new technologies. 

In addition to a faster phase out of free allowances to emitters, the initial number 

of free allowances to emitters should be reduced as well, to eliminate the possibility 

of windfall profits. By taking both of the steps above, the pool of allowances that 

can be either given for free or auctioned for public purposes can be substantially 

increased. 

In particular, more revenue can be made available in the auction pool for low income energy consumers and in the free allowance pool for electricity consumers, 
217 

worker training and other public purposes. As you indicate, redirecting these revenues can have a substantial impact in terms of mitigating economic impacts and 

economic dislocation for those that can least afford such costs. Instead of providing 

windfall profits for a select group of shareholders, these funds can aid consumers 

and workers in adjusting to increased costs associated with the need to reduce emissions. This result should be the preferred policy outcome and under the current 

structure of the bill it can be achieved by a combination of a faster free allowance 

phaseout, and a substantial reduction in the overall amount of allowances that are 

allocated for free to emitters. 

Senator LIEBERMAN [Presiding]. Thanks very much, Mr. Hawkins. We appreciate the testimony. 

Dr. David Greene is the next witness. Dr. Greene is a corporate 

fellow, Geography and Environmental Engineering, at the Oak 

Ridge National Laboratory. Thanks very much for coming, and we 

look forward to your testimony now. 

STATEMENT OF DAVID L. GREENE, CORPORATE FELLOW, ENGINEERING SCIENCE AND TECHNOLOGY DIVISION, OAK 

RIDGE NATIONAL LABORATORY 

Mr. GREENE. Thank you, Senator Lieberman. 

Thank you for inviting me to discuss this very important legislation and its relation to the mitigation of greenhouse gas emissions 

from transportation. Our transportation system produces more climate-changing carbon dioxide than any other nation’s entire economy except for China. The transportation sector was responsible for 

28 percent of total U.S. greenhouse gas emissions from our economy in 2005. Climate policy must effectively address the mitigation 

of emissions from transportation. 

A policy that sends an economy-wide price signal to reduce 

greenhouse gas emissions as the greenhouse gas cap and trade system of the America’s Climate Security Act of 2007 will do is the 

essential cornerstone of a meaningful climate change strategy. But 

analyses such as by the Energy Information Administration have 

shown that carbon prices that are capable of cutting electric utilities, greenhouse gas emissions in half by 2030 would have a far 

smaller impact on the transportation sector. There are two principal reasons for this. 

One is the insensitivity of fuel economy to the price of fuel, and 

the second is the inter-dependencies among land use, transportation infrastructure investments and vehicle travel and the central role of governments in those processes. Fuel economy is relatively insensitive to the price of fuel, because the market for fuel 

economy is not efficient. 

A national survey of 1,000 U.S households this last May found 

that 39 percent never considered fuel economy at all in their vehicle purchase decisions. And of those who did, only 14 percent mentioned taking economic factors, like annual fuel cost or the price of 

fuel into consideration. In-depth interviews of the car-buying histories of 57 California households by the University of California 

at Davis turned up none that had ever considered the value of fuel 

savings over the life of a vehicle or that use concepts like pay-back 

periods when considering fuel economy. 

But consumers are not irrational. The economic value of increased fuel economy to a car buyer is the difference between the 

present value of future fuel savings and the price that must be 
218 

paid for it at time of purchase. But the value of future fuel savings 

is uncertain. The future price of fuel, the fuel economy that will be 

achieved in real world driving, annual miles of travel, the life of 

the vehicle, all of these factors and more are uncertain. From this 

perspective, increased fuel economy looks like a risky bet to a car 

buyer. 

And for the typical loss averse consumer, there is little reason to 

calculate the value of increased fuel economy, and as a consequence, no responsible automobile manufacturer would spend billions of dollars to retool and redesign its product lines, to provide 

fuel economy for which consumers are not willing to pay. This is 

why the world’s major economies, the United States, the European 

Union, Japan, China, Canada, Korea, all have adopted fuel economy standards for light duty vehicles. 

Fortunately, fuel economy standards work. Past fuel economy 

standards raised the miles per gallon of U.S. light duty vehicles by 

50 percent and are saving U.S. motorists approximately 60 billion 

gallons of fuel each year. Medium and heavy trucks and buses account for 20 percent of transportation greenhouse gas emissions. In 

the past, we have assumed that these markets function efficiently 

and there is no need for fuel economy standards. The Japanese 

government has directly challenged that assumption in setting 

weight-based standards for fuel economy of heavy trucks in March 

2006. We should investigate that option as well. 

Creating an economy-wide price signal to reduce greenhouse gas 

emissions, as a cap and trade system will do, is the cornerstone of 

a comprehensive climate change strategy. However, an efficient response from transportation will be hindered by deficiencies in the 

market for fuel economy, together with the central role of land development policies and transportation infrastructure investments 

in driving demand for vehicle travel. Fuel economy policy is essential. Intelligent land use and infrastructure policies that enhance 

the attractiveness of walking, biking and public transit can also 

make an important and potentially critical difference by 2050. 

At present, it is not known how effective a cap and trade system 

can be in reducing the carbon content of transportation fuels. Especially in the early years, a low-carbon fuel standard may also be 

needed. Ultimately, significant technological advances will be required if transportation’s greenhouse gas emissions are to be reduced by 50 to 80 percent over current levels by 2050. 

Thank you for the opportunity to present my views on this enormously important legislation. 

[The prepared statement of Mr. Greene follows:] 

STATEMENT OF DAVID L. GREENE, CORPORATE FELLOW, ENGINEERING SCIENCE AND

TECHNOLOGY DIVISION, OAK RIDGE NATIONAL LABORATORY

Good afternoon. Thank you for inviting me to discuss the adequacy of greenhouse 

gas (GHG) cap-and-trade as a policy for mitigating GHG emissions from the transportation sector, and the need for additional policy measure for the transportation 

sector. The views I express today will be entirely my own and do not necessarily 

reflect the views of Oak Ridge National Laboratory or the Department of Energy. 

Our transportation system is the largest in the world. Each second, it burns 6,300 

gallons of oil, producing more climate changing carbon dioxide emissions than any 

other nation’s entire economy, except China (EIA, 2007, table H.1CO2). The transportation sector was responsible for 28% of total U.S. greenhouse gas emissions in 

2005 (USEPA, 2007a, table 2–16). Climate policy must effectively address the miti-
219 

gation of emissions from transportation. Other policies will be needed in addition 

to a cap-and-trade system in order to make the reductions in GHG emissions that 

are likely to be necessary. 

A policy that sends an economy-wide price signal to reduce greenhouse gas emissions, as the GHG cap-and-trade system of the America’s Climate Security Act of 

2007 will do, is the essential cornerstone of a meaningful climate change strategy. 

Analyses by the Department of Energy’s Energy Information Administration (EIA, 

2006), for example, estimate that such policies will bring about major reductions in 

GHG emissions from electric power generation (figure 2). Unfortunately, the same 

level of economic incentives that could cut electric utility GHG emissions in half by 

2030 would have a much smaller impact on transportation’s GHG emissions. 

A carbon price of $30 to $50 per ton of CO2 equivalent greenhouse gas emissions, 

such as analyzed in the EIA study, translates into roughly $0.25 to $0.50 per gallon 

of gasoline. This is not a trivial price signal and it will help reduce demand for fossil 
220 

1The America’s Climate Security Act of 2007 appropriately recognizes that steps must be 

taken to offset the regressive impact of carbon prices on lower income households. 

carbon fuels and encourage energy efficiency.1 However, recent statistical analyses 

(e.g., Small and Van Dender, 2007; Hughes et al., 2007) have shown that price signals of this magnitude will have constructive but insufficient impacts on vehicle 

travel and fuel consumption. It is important to understand why this is so, and to 

implement additional policies for transportation that can cost-effectively achieve the 

magnitude of reductions in transportation greenhouse gas emissions that are needed. 

Fuel economy is relatively insensitive to the price of fuel because the market for 

fuel economy is not efficient. A recent national random sample survey of 1,000 U.S. 

households found that 39% did not consider fuel economy at all in their last vehicle 

purchase (Opinion Research, 2007). Of those who did, only 14% mentioned taking 

economic factors, like annual fuel costs or gasoline prices into consideration. In 

depth interviews of the car buying histories of 57 California households (Turrentine 

and Kurani, 2005) turned up none that had ever considered the value of fuel savings 

over the life of a vehicle, or that used concepts like a payback period when considering fuel economy. When I served on the National Academy of Sciences Committee 

on the Effectiveness and Impact of Corporate Average Fuel Economy Standards 

(NAS, 2002), manufacturers told us they believed consumers would pay for only 2– 

4 years of fuel savings. Survey evidence backs them up (Opinion Research, 2004). 

In a 2004 survey, half the respondents were asked how much they would be willing 

to pay for a more fuel efficient new vehicle that would save them $400 per year in 

fuel. The other half were asked how much a vehicle would have to save them in 

fuel each year to justify paying $1,200 more for it. The payback periods implied by 

the answers from the two groups were strikingly similar. Consumers wanted to be 

paid back in 1.5 to 2.5 years (figure 3). The expected lifetime of a U.S. passenger 

car or light truck is 15 years, or more (Davis and Diegel, 2007, tables 3.8 and 3.9). 

Consumers are not irrational. The value of future fuel savings is highly uncertain, 

and consumers are in general loss-averse (Tversky and Kahneman, 1992). The economic value of increased fuel economy to a car buyer is the difference between the 

present value of future fuel savings and the price that must be paid for it at time 

of purchase. Using fuel economy cost data from the 2002 NAS study, figure 4 shows 

the expected fuel savings, increased vehicle cost and net present value for increasing 

the fuel economy of an average U.S. passenger car from 28 to 46 miles per gallon. 

While the value of fuel savings increases to more than $2,000, the expected net 

value is much smaller, varying between $500 and ¥$500. Between 32 mpg and 38 

mpg, there is no more than a $100 difference in expected net value. But the value 

of future fuel savings is uncertain. The price of fuel, the fuel economy that will be 
221 

achieved in real world driving, annual usage, the life of the vehicle, all of these factors and more are uncertain. From this perspective increased fuel economy looks 

like a risky bet to a car buyer. From the perspective of a typically loss-averse consumer, the expected $400 net benefit of increasing fuel economy from 28 to 35 mpg, 

because of uncertainty and loss aversion, turns out to have a value of ¥$30 

(Greene, German and Delucchi, 2007). To the typical consumer, there is little reason 

to calculate the value of increased fuel economy, and no responsible automobile 

manufacturer would spend billions of dollars to retool and redesign its product lines 

to provide fuel economy for which consumers are not willing to pay. 

This is why the world’s major economies, the European Union, Japan, China, 

Canada and the United States, even those with fuel prices substantially higher than 

the U.S., have all implemented fuel economy standards for light-duty vehicles (An 

et al., 2007). Like the markets for energy efficiency in other durable consumer goods 

such as refrigerators or air conditioners, the market for automotive fuel economy is 

not efficient. As in these other markets, consumers do not fully value the savings 

fuel economy improvements provide over the lifetime of a vehicle. Because car buyers are generally not willing to pay the full value of fuel economy improvements, 

manufacturers do not provide them. 

Fortunately, fuel economy standards work (Greene, 1998). Past fuel economy 

standards raised the fuel economy of U.S. light-duty vehicles by 50% (figure 4.) saving U.S. motorists approximately 60 billion gallons of fuel in 2005 (figure 5). Fuel 

economy standards are not the only policy that can correct the fuel economy market 

failure. A market-based policy, called ‘‘feebates’’ also has great promise (Greene, et 

al., 2006). A feebate system would reward vehicles with greenhouse gas emissions 

below a target fuel consumption (gallons per mile) value and charge a fee to vehicles 

above it. The amount of the rebate or fee would depend on the amount by which 

the vehicle’s fuel consumption deviated from the target level. The target itself can 

be a function of vehicle attributes, such as the NHTSA’s footprint metric. A significant advantage of feebates over fuel economy standards is that they provide a continuing incentive to develop and implement advanced fuel economy technology. 
222 

Medium and heavy trucks and buses account for 20% of transportation’s greenhouse gas emissions (EPA, 2007, table 2–17). In the past, we have assumed that 

these markets do function efficiently and that there is no need for heavy vehicle fuel 

economy standards. The Japanese government, directly challenging that assumption, set weight-based fuel economy standards for heavy trucks in March 2006 

(Goto, 2007). The standards call for an average 12% increase in new heavy truck 

fuel economy over the 2002 level by 2015. In my opinion, we should investigate this 

option, as well. Significant energy efficiency improvements are also possible in air 

travel, rail and shipping. According to the International Air Transport Association 

aircraft CO2 emissions could be reduced by 12% through improved air traffic management, and by 6% through operational improvements that could be made by airlines and airports (JITI, 2007). The Advisory Council for Aeronautics Research in 

Europe has set a goal of reducing the fuel consumption of new commercial aircraft 

by 50% by 2020 (JITI, 2007). 
223 

LAND USE AND TRANSPORTATION INFRASTRUCTURE

Another important reason we should not expect a cap-and-trade policy alone to 

bring about an efficient reduction in transportation GHG emissions is the central 

role that local, state and national governments play in providing and operating 

transportation infrastructure and influencing development. The geographic distribution of people and places, especially the density of development, strongly influences 

the demand for transportation. The way settlements are designed—whether neighborhoods have sidewalks and bikepaths, whether homes are within walking distance 

of shops or public transportation—influences both the amount of travel and the 

modes chosen. To have the greatest beneficial impact on travel in metropolitan 

areas, development policies should be coordinated with investments in public transportation. Changes in the spatial structure of the built environment take time but 

can pay large dividends. Based on a review of the literature, it appears that vehicle 

travel could be reduced by about 5% in 10 years and by 10% in 25 years, versus 

what it would otherwise have been (Greene and Schafer, 2003). Given more time, 

even greater impacts should be achievable. 

LOW CARBON FUELS

How strongly the cap-and-trade policy will affect the carbon content of transportation fuels is not yet clear. Without a doubt, the GHG permit price will provide 

an economic incentive to reduce the carbon content of transportation fuels. However, 

especially in the early years, permit prices may not be sufficient to cause significant 

reductions, nor will they reflect the need of the nation to reduce its dependence on 

petroleum. 

In 2006, the U.S. used 5.5 billion gallons of fuel ethanol, more than a three-fold 

increase over the year 2001. Still, ethanol supplied only 2.5% as much energy for 

transportation as gasoline. The Renewable Fuels Standard calls for a further increase in renewable fuel use to 7.5 billion gallons by 2012, although the EPA 

projects that renewable fuel use will exceed 11 billion gallons in that year (EPA, 

2007c). But the greenhouse gas impacts of renewable fuels vary greatly depending 

on precisely how they are produced and the feedstocks used (Farrell et al., 2006). 

Biofuels unquestionably have a role to play in reducing GHG emissions, as well as 

U.S. oil dependence. However, the best strategy for using biomass to power transportation vehicles is not yet clear. In view of that, a low carbon fuels standard appears to be a better option than a renewable fuels mandate. The advantage of a low 

carbon fuels standard is that it does not dictate to fuel suppliers how they should 

reduce the fossil carbon content of their fuels. Instead, it allows them to use their 

ingenuity to find the most economically efficient solution. 

RESEARCH AND DEVELOPMENT

In the future, much greater reductions in emissions could be achieved with advanced technologies. Researchers at the Massachusetts Institute of Technology’s 

Sloan Automotive Laboratory have estimated that by 2030 advanced internal combustion engine vehicles with the same size and performance as model year 2005 vehicles could achieve 80% better fuel economy (Kasseris and Heywood, 2007). MIT 

researchers also estimate that advanced hybrids could achieve three times the miles 

per gallon of today’s internal combustion engine vehicles (Kromer and Heywood, 

2007) (Figure 7). Beyond 2030, when our electricity sector is substantially de-carbonized, plug in hybrid vehicles could further reduce GHG emissions from motor vehicles. If carbon capture and storage is successful, hydrogen fuel cell vehicles may 

someday drive motor vehicle GHG emissions to zero. None of these technologies is 

ready for commercialization today. Substantial investments in research and development are necessary for reductions in transportation’s GHG emissions of 50% to 80% 

over current levels to be achievable by 2050. 
224 

CONCLUDING OBSERVATIONS

Creating an economy-wide price signal to reduce greenhouse gas emissions, as a 

cap-and-trade system will do, is the cornerstone of a comprehensive climate change 

strategy. However, cap-and-trade is not a sufficient policy for the transportation sector. An efficient response from transportation will be hindered by deficiencies in the 

market for fuel economy, together with the central role of land development policies 

and transportation infrastructure investments in driving demand for transportation. 

Fuel economy policy is essential. Intelligent land use and infrastructure policies that 

enhance the attractiveness of walking, biking, and public transport can also make 

an important and potentially critical difference by 2050. At present, it is not known 

how effective a cap-and trade system can be in reducing the carbon content of transportation fuels. Especially in the early years, a low carbon fuel standard may be 

needed. Ultimately, significant technological advances will be required if transportation’s GHG emissions are to be reduced by 50% to 80% over current levels by 

2050. 

Thank you for the opportunity to present my views on this enormously important 

legislation. 
225 

References 

1. An, F., D. Gordon, H. He, D. Kodjak and D. Rutherford, 2007. ‘‘Passenger Vehicle Greenhouse Gas and Fuel Economy Standards: A Global Update’’, The International Council on Clean Transportation, Washington, D.C., July. 

2. Davis, S.C. and S.W. Diegel, 2007. Transportation Energy Data Book Edition 

26, ORNL 6978, Oak Ridge National Laboratory, Oak Ridge, Tennessee. 

3. Energy Information Administration (EIA), 2007. International Energy Annual 

2005, table H.1CO2, posted September 18, 2007 at http://www.eia.doe.gov/pub/ 

international/iealf/tableh1CO2.xls, U.S. Department of Energy, Washington, D.C. 

4. Energy Information Administration, 2006. ‘‘Energy Market Impacts of Alternative Greenhouse Gas Intensity Reduction Goals’’, SR/OIAF/2006–01, March 2006, 

Washington, D.C. 

5. Farrell, A.E., R.J. Plevin, B.T. Turner, A.D. Jones, M. O’Hare and D.M. 

Kammen, 2006. ‘‘Ethanol Can Contribute to Energy and Environmental Goals’’, 

Science, vol. 311, pp. 506–508. 

6. Goto, Y., 2007. ‘‘Ex Post Evaluation in Japan’’, National Traffic Safety and Environment Laboratory, Japan, presented at the International Workshop: ‘‘Fuel Efficiency Policies for Heavy Duty Vehicles’’, International Energy Agency and International Transport Forum, Paris, June 21–22, 2007. 

7. Greene, D.L., J. German and M.A. Delucchi, 2007. ‘‘Fuel Economy: The Case 

for Market Failure’’, presented at the 11th Annual Asilomar Conference on Sustainable Transportation, Pacific Grove, California, available from the lead author, National Transporation Research Center, Oak Ridge National Laboratory, Oak Ridge, 

Tennessee. 

8. Greene, D.L., P.D. Patterson, M. Singh and J. Li, 2005. ‘‘Feebates, rebates and 

gas-guzzler taxes: a study of incentives for increased fuel economy’’, Energy Policy, 

vol. 33, no. 6, pp. 757–776 

9. Greene, D.L. and A. Schafer, 2003. ‘‘Reducing Greenhouse Gas Emissions from 

U.S. Transportation’’, Pew Center on Global Climate Change, Arlington, Virginia. 

10. Greene, D.L., 1998. ‘‘Why CAFE Worked’’, Energy Policy, vol. 26, no. 8, pp. 

595–614. 

11. Hughes, J.E., C.R. Knittel and D. Sperling, 2007. ‘‘Evidence of a Shift in the 

Short-run Price Elasticity of Gasoline Demand’’, presented at the 86th Annual Meeting of the Transportation Research Board, National Research Council, January 21– 

25, Washington, D.C. 

12. Japan International Transport Institute (JITI), 2007. ‘‘Issues Concerning the 

Reduction of Carbon Dioxide in International Aviation’’, Washington, D.C., August. 

13. Kasseris, E.P. and J.B. Heywood, 2007. ‘‘Comparative Analysis of Automotive 

Powertrain Choices for the Next 25 Years’’, SAE Technical Paper Series, No. 2007– 

01–1605, Society of Automotive Engineers, Warrendale, PA. 

14. Kromer, M.A. and J.B. Heywood, 2007. ‘‘Electric Powertrains: Opportunities 

and Challenges in the U.S. Light-Duty Vehicle Fleet’’, Pub. No. LFEE 2007–02 RP, 

Sloan Automotive Laboratory, Massachusettes Institute of Technology, Cambridge, 

MA. 

15. National Research Council (NRC), 2002. Effectiveness and Impact of Corporate Average Fuel Economy (CAFE) Standards, National Academies Press, Washington, D.C. 

16. Opinion Research Corporation, 2007. ‘‘CARAVAN ORC Study 716159 for the 

National Renewable Energy Laboratory, Princeton, New Jersey, April 13, 2007. 

17. Opinion Research Corporation, 2004. ‘‘CARAVAN ORC Study 713218 for the 

National Renewable Energy Laboratory, Princeton, New Jersey, May 20, 2007. 

18. Small, K.A. and K. Van Dender, 2007. ‘‘Fuel Efficiency and Motor Vehicle 

Travel: The Declining Rebound Effect’’, The Energy Journal, vol. 28, no. 1, pp. 25– 

51. 

19. U.S. Environmental Protection Agency (EPA), 2007a. Inventory of U.S. Greenhouse Gas Emissions and Sinks: 1990–2005, Office of Atmospheric Programs, EPA 

430–R–07–002, Washington, D.C., April. 

20. U.S. Environmental Protection Agency (EPA), 2007b. ‘‘Light-Duty Automotive 

Technology and Fuel Economy Trends: 1975 through 2007’’, EPA420–R–07–008, Office of Transportation and Air Quality, Ann Arbor, Michigan, September. 

21. U.S. Environmental Protection Agency (EPA), 2007c. ‘‘Renewable Fuel Standard Program’’, Office of Transportaton and Air Quality, http://www.epa.gov/otaq/ 

renewablefuels/420f07019.htm 
226 

RESPONSES BY DAVID GREEN TO ADDITIONAL QUESTIONS FROM SENATOR INHOFE

Question 1. You touched on this in your written testimony, but can you elaborate 

on why a low carbon fuels standard is a better option than a renewable fuels mandate. Isn’t it true that a low carbon fuels standard allows fuel suppliers to find the 

most economically efficient solution rather than mandating that they use biofuels? 

Response. A low carbon fuels standard allows fuel suppliers to find the most economically efficient solution and also creates an incentive for innovation. The term 

‘‘carbon’’ in ‘‘low carbon fuels standard’’ (LCFS) is shorthand for lifecycle global 

warming impact. Thus, the first advantage of the LCFS for addressing global climate change is that it directly targets the environmental impact of greenhouse gas 

emissions. Compliance with a renewable fuels mandate is not measured by the reduction in global warming impact but rather by the quantity of biofuel sold. Its 

greenhouse gas mitigation benefits therefore depend on the tendency of biofuels to 

have lower lifecycle, or well-to-wheel, greenhouse gas emissions than the petroleum 

fuels they replace. As the answer to question 2 clearly shows, the greenhouse gas 

impacts of biofuels depend strongly on the feedstocks from which, and production 

processes by which they are produced. As a result, the greenhouse gas mitigation 

benefits of a renewable fuels standard can range from a little to a lot. 

The second advantage of a LCFS is that it is a performance standard and does 

not mandate a particular technological solution. It requires only that lifecycle global 

warming impact be reduced; it does not specify how that must be accomplished. A 

renewable fuels standard limits the range of options available to fuel suppliers to 

renewable fuels. Renewable fuels could turn out to be the best option, but if this 

were the case then the result of the LCFS would be no different from the renewable 

fuels standard. However, the LCFS allows fuel suppliers the opportunity to invent 

or discover a lower cost alternative that accomplishes the same result. In terms of 

economic efficiency, the LCFS will achieve a given reduction in greenhouse gas 

emissions as efficiently, or more efficiently than the renewable fuels standard. By 

allowing the widest possible range of responses, the LCFS also creates a greater incentive to find innovative solutions. 

Question 2. Do renewable fuels have greenhouse gas emissions? Does this vary 

based on how they are produced and the feedstocks used? How so? 

Response. Renewable fuels can produce net lifecycle greenhouse gas emissions depending on the feedstock from which they are produced and the process used to convert the feedstock into liquid fuel. Different methods of cultivating biomass generate 

different amounts of greenhouse gases. Use of nitrogen fertilizer and tilling, harvesting and transporting biomass with machinery powered by petroleum fuel are 

significant sources of lifecycle greenhouse gas emissions in feedstock production. Use 

of fossil energy in conversion processes can also be a significant source of greenhouse gas emissions. The table shown below is taken from the technical analysis 

supporting California’s low carbon fuels standard (Farrell & Sperling, 2007) and is 

based on what I believe to be the two most authoritative lifecycle greenhouse gas 

models for the United States. The estimates based on Argonne National Laboratories’ GREET model indicate that ethanol produced from corn using the corn stover 

as a source of fuel in a dry milling process produces only a little more than half 

the lifecycle greenhouse gas emissions of California reformulated gasoline. On the 

other hand, if ethanol is produced from corn using coal for energy, the lifecycle emissions are more than 20% higher than California reformulated gasoline. The same 

model indicates negative greenhouse gas emissions for diesel produced via gasification of poplar trees produced in California and fuel synthesis via the FischerTropsch process. There are sometimes important differences between the estimates 

produced by the two models. For example, the GREET model estimates a two thirds 

reduction in lifecycle greenhouse gas emissions from the production of biodiesel from 

soybeans, while the LEM model estimates more than a doubling of lifecycle greenhouse gas emissions. Such differences are attributable to differing assumptions, especially with respect to indirect impacts on land uses. There is still a great deal to 

be learned about the full lifecycle impacts of biofuel production, yet there is no 

doubt that renewable fuels can produce very significant greenhouse gas emissions 

and that the quantities produced are very sensitive to feedstocks and production 

methods. 
227 

Question 3. Studies have shown that modest improvements to traffic flow would 

reduce carbon dioxide emissions by as much as 77 percent and conserve more than 

40 billion tons of fuel over a 20-year period (stats from letter from transportation 

construction coalition). What does, or should this bill do to alleviate congestion on 

the highways? 

Response. I have not read the study on which these estimates are based but I am 

extremely skeptical that a modest improvement in traffic flow could reduce carbon 

emissions by anything close to 77%. On the other hand, 40 billion gallons of fuel 

over a 20-year period is an average of 2 billion gallons per year, on the order of 

1% of total motor fuel use on U.S. highways (USDOT, FHWA, table VM–1, 2005). 

An impact on the order of 1% seems far more plausible to me as an assessment of 

the potential for congestion mitigation to reduce fuel use and thereby reduce greenhouse gas emissions. In my opinion, this bill should not concern itself with traffic 

congestion mitigation. Traffic congestion is a very significant problem for transportation and has serious economic impacts. However, in my opinion, it should be addressed directly via other policies such as improving traffic management, congestion 

pricing, investing in capacity expansion and alternative transport modes, land use 

planning and urban design. 

I hope that my responses have adequately and appropriately addressed your questions. Please accept my thanks for the important work you are doing and my very 

best wishes for a successful result. 

REFERENCES

1. Farrell, A.E. and D. Sperling, 2007. A Low-Carbon Fuel Standard for California, Part 1: Technical Analysis, UCD–ITS–RR–07–07, Institute of Transportation 

Studies, University of California, Davis, August 1. 

2. U.S. Department of Transportation, Federal Highway Administration, 2006. 

Highway Statistics 2005, FHWA–PL–06–009, Washington, DC. 

Senator BOXER. Thanks very much, Dr. Greene, for that thoughtful testimony. I appreciate it. 

Now we go to Robert Baugh, who is the executive director of the 

Industrial Union Council of the AFL–CIO. We are very grateful 

that you are here and welcome your testimony now. 
228 

STATEMENT OF ROBERT C. BAUGH, EXECUTIVE DIRECTOR, 

AFL–CIO INDUSTRIAL UNION COUNCIL AND CHAIR, AFL–CIO 

ENERGY TASK FORCE 

Mr. BAUGH. Thank you, Senator, we appreciate the opportunity 

to testify before the Committee today. 

The AFL–CIO believes that taking action to address global 

warming and to achieve energy independence are mutually reinforcing goals for the Nation, and they are in the best interests of 

our economic, environmental and national security. We have participated actively in stakeholder discussions all the way through 

this process, and it led many of us to endorse another piece of legislation. When Senator Boxer empowered you and Senator Warner to 

move ahead, we actively and openly participated in the stakeholder 

process again around the creation of America’s Climate Security 

Act. We share the belief in the Act that the legislation should 

achieve its purpose while preserving robust growth in the United 

States economy and avoiding the imposition of hardship on the 

United States citizens. 

I am here this morning to address five areas of the bill that we 

think could be improved to achieve that goal. First, the investment 

portfolio. We commend you, Senator Lieberman and Senator Warner, for the original draft of this legislation, which made the critical long-term commitments to technology development and deployment that are part of the key to solving our carbon footprint. 

Unfortunately, two pieces of the investment portfolio were severely undermined by the automobile and coal-related amendments 

adopted during the subcommittee markup. The AFL–CIO believes 

these amendments are counterproductive and actually undermine 

the technological transition this legislation is attempting to 

achieve. We encourage the Committee to return to the original language. 

Secondly, on the time lines and targets, we support realistic time 

lines and goals for the emissions reductions, but we are concerned 

that there continues to be a disconnect between the reduction targets and the actual development and deployment of new technology. This bill sets a 15 percent reduction of greenhouse gas 

emissions below 2005 levels by 2020. This is prior to the anticipated commercial availability of a carbon capture and storage technologies. Similar deployment and developmental issues remain in 

the renewable side of the equation, too, to achieve these goals in 

such a short time period. 

And finally, this sets a standard 70 percent below the 2005 levels 

by 2050. Previously, we had supported a 60 percent reduction, but 

tied to presidential reviews and the participation of the developing 

world in this process to solve this problem. 

On job creation, we believe that this legislation can serve a dual 

purpose: environmental protection and economic development. The 

legislation, though, needs to make this implicit idea in the bill very 

explicit. We urge the Committee to adopt language to direct the 

Climate Change Credit Corporation that the financial resources of 

the corporation shall be dedicated to domestic investments. We 

think the findings section of the bill and the purpose section of the 

bill should strengthen that and reflect the same idea that we are 
229 

reinvesting these monies to recycle these dollars in the American 

economy. 

The cost control and market system. The AFL–CIO supports a 

limited market approach to cap and trade with price control mechanisms that prevent serious long-term damage to the economy. The 

Carbon Market Efficiency Board has a cost control mechanism, but 

frankly, we believe this works at cross purposes with the way the 

market system is actually being set up. The legislation’s open and 

unlimited trading of allowances and the ability to bank them in 

perpetuity leaves the system open to predatory and speculative 

trading practices. The hoarding of allowances will fuel volatile pricing and a market will result in damaging increases in prices to consumers, industry and utilities. 

The cost control mechanism in S. 2191 may be triggered after 

180 days. By that point, when people have to purchase allowances 

annually, the damage will have been done, it is too late. We think 

that the mechanism of borrowing against the future is not necessarily effective and we believe we should explore other tools to 

do that. We should not allow the banking of allowances in perpetuity. We should prohibit a wide open market system that allows 

speculators to play. 

We support the international provisions. We have been very clear 

on that. We think they can be strengthened. The 2020 date was arbitrary. And it can be moved back. Upon enactment of this bill, the 

President should engage in negotiations with the developing world 

about participation in this process. As we employ the regulations 

and open the market system, you can then actually take action and 

it should be triggered at that point. 

Finally, the offsets in international allowances portion, up to 30 

percent of the allowances that a firm is supposed to be using can 

come from international allowances and offsets. We think this 

number is too high, and in fact, may act as a disincentive for making the investments in the transition and transformational technologies that need to be made. We suggest that the Committee look 

at this. These figures should be lower. 

And we have a second concern with offsets. It is very easy to pay, 

allow for offsets for a business activity that would occur as a natural course of doing business. In my longer testimony, I have used 

the forest products industry as an example. But we are very concerned about the legitimacy of offsets that actually do reduce 

greenhouse gases and not pay for activity that would happen as a 

normal course of business or as covered by law. 

We look forward to working with the Congress and with this 

Committee to achieve legislation that will result in a cleaner planet, greater energy efficiency and the revitalization of our manufacturing base. Thank you. 

[The prepared statement of Mr. Baugh follows:] 

STATEMENT OF ROBERT C. BAUGH, EXECUTIVE DIRECTOR AFL–CIO INDUSTRIAL

UNION COUNCIL AND CHAIR AFL–CIO ENERGY TASK FORCE

Chairman Boxer, on behalf of the 9 million members of the AFL–CIO, I want to 

thank you and the members of the Environment and Public Works Committee for 

the opportunity to testify this afternoon on America’s Climate Security Act (S. 

2191). 
230 

America needs an energy policy for the twenty first century that will result in a 

cleaner planet, greater energy efficiency and the revitalization of our manufacturing 

base. It is an opportunity for our nation to prove that economic development and 

environmental progress can and should go hand-in-hand. We believe that taking action to address global warming and energy independence are mutually reinforcing 

goals that are in the best interest of the nation’s economic, environmental and national security. 

The AFL–CIO has actively participated in various stakeholder meetings with 

members of both the House of Representatives and the Senate that have led to legislative proposals that the AFL–CIO and many of our affiliates have supported. We 

have also participated openly and honestly in the stakeholder meetings that resulted in S. 2191, America’s Climate Security Act. It is our intention to continue 

working with the members of this committee to develop ‘‘cap-and-trade’’ legislation 

that addresses the environmental health of the planet while assuring that good paying jobs are not sacrificed to overseas competition. 

The AFL–CIO takes to heart the statement in S. 2191 that this legislation should 

achieve its purpose ‘‘while preserving robust growth in the United States economy 

and avoiding the imposition of hardship on United States citizens.’’ Today we wish 

to recognize the aspects of S. 2191 that the AFL–CIO supports and to offer our 

thoughts on how to strengthen the legislation. 

INVESTMENT PORTFOLIO

We appreciate the fact that the original draft of S. 2191 incorporated many of our 

investment recommendations such as the inclusion of bonus allowances to promote 

early technology deployment and the early auction of allowances for quick investment into research and development. We commend Senator Lieberman and Senator 

Warner for their original draft of S. 2191 which made critical long term commitments to technology development and deployment with an investment portfolio that 

includes renewable energy supplies, appliance efficiency, biomass, advanced coal 

and sequestration program, and the advanced technology vehicles manufacturing incentive program. 

Unfortunately, the latter two pieces of the investment portfolio were severely undermined by automobile and coal-related amendments adopted during the subcommittee markup. The AFL–CIO believes these amendments are counterproductive 

and actually undermine the technological transition this legislation is attempting to 

achieve. We encourage the committee to return to the original language 

TIMELINES AND TARGETS

The AFL–CIO supports realistic timelines and goals for emission reduction. We 

are concerned that there is a disconnect between the reduction targets and the actual development and deployment of new technology. S2191 set a 15 percent reduction of greenhouse gas emissions below 2005 levels by 2020. This is prior to the anticipated commercial availability of carbon capture and storage technologies. Similarly, renewable technologies have their own set of technology development and deployment issues that seriously call into question the ability to meet the reduction 

levels without drastic economic harm. 

S. 2191 also requires a 70 percent national emission reduction below 2005 levels 

by 2050. The AFL–CIO has supported a 60 percent or greater reduction by 2050 

that was tied to a Presidential review of the participation of the developing nations 

like China, India, Brazil, etc in a global climate protection framework. We urge the 

Committee to also make this linkage and include five-year review requirement. 

JOB CREATION

We believe that S. 2191 can serve a dual purpose: environmental protection and 

economic development. The legislation needs to make explicit the implicit economic 

development goals embodied in the bill’s investment strategy and its stated purpose 

of ‘‘preserving robust growth.’’ It is in the national interest to assure that the investment dollars generated by this legislation are reinvested in our domestic economy. 

We urge the Committee to adopt language to direct the Climate Change Credit 

Corporation that ‘‘the financial resources of the corporation shall be dedicated to domestic investments. In addition, we suggest that ‘‘domestic economic development’’ 

be identified as a finding of Congress and that domestic investments in technology 

development, production and construction’’ be identified as a purpose of the legislation. 
231 

COST CONTROL AND THE MARKET SYSTEM

The AFL–CIO supports a limited market approach to cap and trade, with regulatory mechanisms that act as a price control to prevent any serious long-term damage to the economy. The Carbon Market Efficiency Board (CMEB) has a cost control 

mechanism, but we believe its market intervention tool and its open market system 

work at cross-purposes. 

The CMEB is empowered to take action after prolonged allowance price hikes of 

180 or more days but that may be too late because firms are required to obtain and 

use allowances annually. In 180 days the irreparable economic damage will already 

have been done. Additionally, the intervention tool allowing the issuance of ‘‘future’’ 

allowances to drop prices seems to be of limited value given how this market seems 

to be structured. 

S. 2191’s open and ‘‘unlimited trading’’ of allowances and the ability to bank them 

in perpetuity leaves the system open to predatory and speculative trading practices 

and the hoarding of allowances that will fuel volatile pricing in the market. This 

will have a detrimental pricing impact on the public, utilities sector, and energyintensive industries. 

To address these concerns, the AFL–CIO recommends that the trading of allowances be regulated and restricted. Market participation should be limited to firms 

that intend to use the allowances. The banking of allowances be limited by setting 

a ‘‘time certain’’ by which they must be used or expire. These steps will help create 

a more certain less speculative trading environment. In addition, the CMEB market 

intervention timeline should be shortened and additional intervention tools considered. 

INTERNATIONAL PROVISIONS

The AFL–CIO endorses S. 2191’s inclusion of international language which will 

help preserve American jobs while taking an important step forward to engaging the 

developing world in seeking a solution to global warming. However, modest modifications to the international timeline and implementation process would strengthen 

this section. 

Implementation can and should take place far sooner than 2020. The bill should 

require the President to open negotiations immediately upon enactment. Once the 

regulations are in place and the cap and trade program is in operation for two to 

three years, then the international action can be implemented. This last step should 

be an administrative action, not something subject to presidential waiver. 

OFFSETS AND INTERNATIONAL ALLOWANCES

We are concerned about the use of offsets and international allowances; the ability 

to monitor their legitimacy; and ways in which they could undermine domestic investment in industry. Under S. 2191, for up to 30 percent of the annual allowances 

a firm must submit be comprised of offsets (15 percent) and internationally purchased allowances (15 percent). This could prove to be a disincentive to firm investments in transformational technology. 

The AFL–CIO believes that the S. 2191 should either limit the use of offsets and 

international allowances in combination, or simply to lower the amount available. 

We also have a related concern over the possibility of double dipping, whereby allowances are granted for offset activity that would have been done anyway as a 

course of law, tax policy and/or business practice. This does not add to greenhouse 

gas reduction and should be prohibited. 

We look forward to working with Congress to achieve an energy policy for the 

twenty-first century that will result in a cleaner planet, greater energy efficiency, 

and the revitalization of our manufacturing base. 

An appendix accompanies this testimony that provides additional information 

about our testimony. 

APPENDIX: AFL–CIO RECOMMENDATIONS FOR AMERICA’S CLIMATE SECURITY ACT

THE INVESTMENT PORTFOLIO

Advanced Technology Vehicles Manufacturing Incentive Program 

As previously indicated, the AFL–CIO strongly supports the thrust of the Advanced Technology Vehicles Manufacturing Incentive Program created under S. 

2191. This program can help to accelerate the introduction of advanced technology 

vehicles, and thus to help our country make major strides in reducing greenhouse 

gas emissions and our dependence on foreign oil. At the same time, it can ensure 
232 

that the vehicles of the future are built in this country, thereby creating tens of 

thousands of jobs for American workers. 

However, we believe the language in these provisions needs to be improved in several respects. First, the language in Section 4405(b)(1) should be modified to clarify 

that awards under the program can only be made to manufacturers and components 

suppliers for re-equipping or expanding a manufacturing facility ‘‘in the United 

States’’ to produce qualifying advanced technology vehicles and components. Obviously, we should not be providing funds to subsidize investment in manufacturing 

facilities in other countries. 

Second, during the Subcommittee markup, an amendment by Sen. Sanders was 

adopted by voice vote that requires all qualifying advanced technology vehicles to 

meet a 35 miles per gallon standard to be eligible for assistance under this program. 

Unfortunately, this amendment totally eviscerates the program. In order to make 

meaningful progress in reducing our dependence on foreign oil and greenhouse gas 

emissions, the auto industry needs to improve fuel economy across the entire spectrum of vehicles. It needs to put hybrid and advanced diesel technology into pickups, 

sports utility vehicles (SUVs), minivans, and larger passenger cars, as well as smaller vehicles like the Prius. 

Indeed, some of the greatest gains in reduced oil consumption and greenhouse gas 

emissions can come from improving the fuel economy of these bigger vehicles. However, because many of these vehicles would still be below the 35 miles per gallon 

level, even with the hybrid or diesel advanced technology, the Sanders amendment 

would effectively exclude them from being able to get any assistance under the manufacturing program. As a result, this would greatly reduce the effectiveness of the 

program in achieving the environmental goals, as well as its ability to generate jobs 

for American workers. 

It is also important to note that the Sanders amendment directly conflicts with 

the CAFE provisions that were approved earlier this year by the Senate in the energy legislation, and that were supported by environmental groups. Those CAFE 

provisions specified that the fleet of vehicles for the entire industry must meet a 

35 miles per gallon standard, not that each and every vehicle must meet this standard. Indeed, under the reformed, attribute-based CAFE system approved by the Senate, it was expressly recognized that different sizes and types of vehicles would have 

to achieve different fuel economy levels, depending on their particular attributes. 

Unfortunately, the Sanders amendment departs from this approach, and instead imposes a rigid, one-size-fits-all mandate on all vehicles. 

Finally, Section 4405(c)(1) specifies that the manufacturing incentive program 

only applies to facilities and equipment placed in service before January 1, 2016. 

In our judgment, this time period is far too restrictive, especially since the CAFE 

provisions previously approved by the Senate have a far longer time period, stretching to 2020 and beyond. 

Subcommittee Amendment: Coal Preference 

We are concerned about the amendment approved by the Subcommittee concerning preferences for ‘‘low rank’’ coals with a heat content less than 10,000 BTU/ 

pound. There should be no distinction among coal types in allowance allocations to 

electric generating units, or the distribution of auction revenues as incentives to 

promote clean coal technologies. This sets up a regional preference for coal. 

This was a major flaw in the EPA’s Clean Air Mercury Rule, which awarded extra 

allowances to low-rank western lignite and sub-bituminous coals, despite a growing 

body of evidence that controlling mercury from these coals costs substantially less 

than from eastern bituminous coals. While there are minor differences in the CO2

emissions of coals of different rank, CO2 emissions can be captured by a variety of 

emerging control technologies potentially applicable to all coal types at both new 

and existing units. 

We believe that all coals should compete for incentives on a level playing field 

without regional preferences or exemptions. The bill should remain as originally 

drafted. 

TIMELINES AND TARGETS

Our most serious concern is the magnitude and timing of 2020 reductions (15 percent below 2005) compared to Bingaman-Specter (2006 levels). Reductions on the 

coal fired power generation will come from investments in increased efficiency in existing facilities, new IGCC (combined cycle technology that is only in the early developmental phase with a demonstration plant scheduled to be built in Ohio), and 

the development of carbon sequestration technology. Full development of these latter technologies will take a decade, and deployment to scale will take decades more. 
233 

There is insufficient time to develop and demonstrate CCS technology at commercial scale. 2020 is effectively 5 years from now in terms of corporate planning for 

investments. Meeting 2006 levels by 2020 is a major reduction given 1 percent population growth and 2–3 percent GDP growth. The bill suggests that the annual reviews will allow adjustments of the targets, but experience with the Clean Air Act 

does not support this view. 

JOB CREATION

Economic Development and Domestic Investment 

This legislation does have a dual purpose: environmental protection and economic 

development. The legislation needs to make explicit the implicit economic development goals embodied in the bill’s investment strategy and its stated purpose of ‘‘preserving robust growth.’’ We believe that this is in the national interest, and it is 

the intent of Congress to assure that investment dollars generated by this legislation recirculate in our domestic economy. The legislation needs to say so. 

To fulfill its dual purpose, this legislation needs to promote domestic investment 

as an economic development strategy that runs from R&D to production and construction. The findings, purpose, and Climate Change Corp. sections need to be explicit about this intent. For example: 

• Finding: ‘‘The Congress finds prompt and decisive domestic climate change investments are an unprecedented economic development opportunity for the nation. 

• Purpose: ‘‘to accomplish that purpose by making climate change investments in 

domestic technology development, production, and construction.’’ 

• Climate Change Credit Corporation: ‘‘the financial resources of the corporation 

shall be dedicated to domestic investments so as to assure that the nation derives 

the maximum economic development return from those investments; 

• Climate Change Credit Corporation domestic investment program will be 

designed to capture intellectual property, encourage industry development, and 

to retain and create new jobs in production, construction and conservation of 

energy. 

• Existing facilities and populated areas shall be considered a strategic priority for manufacturing-related investments. 

• Energy incentives and investments by the federal government must not encourage off-shoring of manufacturing or the sale of assets. 

• The Climate Change Credit Corporation will report to Congress on an annual basis about the domestic economic and environmental impact of its investments.’’ 

COST CONTROL AND MARKET SYSTEMS

Safety Valves and Market Intervention 

The AFL–CIO supported the cost control mechanism (the Technology Accelerator 

Payment) in the Bingaman-Specter bill because it provides pricing certainty for 

long-term investment decisions, assures a modest effect on fuel and electricity 

prices, and avoids short-term price spikes that can lead to fuel-switching. In this 

case, the legislation also sets a beginning price of $12 per ton that rises 5 percent 

a year above inflation. We are open to discussing alternative levels of a safety valve 

price. 

The proposed Carbon Market Efficiency Board (CMEB) also attempts to act as a 

cost control mechanism, but its open market system undermines this approach and 

its intervention tool is at best slow and of questionable value. The CMEB is empowered to act in cases where there are prolonged price hikes in allowances (180 or 

more days) that threaten economic damage to the nation. The CMEB will also have 

to determine what that ‘‘sweet spot’’ (price) is. With limited allowances that firms 

need to use annually, in 180 days the damage will already have been done. The 

issuance of ‘‘future’’ allowances to drop prices seems to be of dubious value and of 

real concern given how this market is structured. 

Allowance borrowing from the future is not likely to work due to uncertainty 

about future allowance prices. With a $10 current price, utilities would not borrow 

10 years ahead unless there were certainties that prices would not be above $25 at 

that time (using a typical utility weighted average cost of capital of 9.5 per cent). 

Cap and Trade and the Open Market 

We remain deeply troubled with a simple market-only approach. Today the socalled market has left the nation in a housing crisis and the world capital markets 

in turmoil. The nation is still dealing with the fallout of Enron and the deregulation 

of the utility industry, which will make any carbon emission legislation even more 
234 

difficult to administer. We support a limited market approach, with regulatory 

mechanisms that act as a safety valve to prevent any serious long-term damage to 

the economy. If the point of a cap and trade system is to move firms and utilities 

to change domestic behavior, then we need to be sure this market mechanism does 

that. 

The open and ‘‘unlimited trading’’ of allowances means that anyone, not just firms 

that need to use them, can buy allowances from a limited and declining pool. In addition, purchasers are allowed to bank these allowances in perpetuity. This is not 

the stock market or a commodities market, nor should it be treated as such. The 

open access to allowances, and the banking of allowances, lend themselves to the 

kind of predatory and speculative behavior that leads to hoarding and to the creation of carbon billionaires. This would have a detrimental pricing impact on the 

public and the utilities and energy-intensive industries. 

Imagine a scenario in which a major nation with over a trillion dollars in accumulated trade surpluses decides to create a carbon allowance shortage on the U.S. market to make our domestic firms less competitive and push them out of business. Or 

imagine a major hedge fund trying to corner the carbon market and to extract royalties from domestic industry. With limited allowances, one would only have to capture a limited portion to have control. That is not the intent of this legislation. This 

needs to be regulated: 

• The trading of allowances should be regulated and should be done in such 

a way that it assures that allowances that are sold are used. In other words, 

market participants should be limited to firms that intend to use the allowances. With a declining pool of allowances, available prices will rise but not be 

artificially inflated by speculators. 

• The banking of allowance for an unlimited time raises the same concerns 

about hoarding and predatory behavior that leads to price spikes and artificially 

elevated prices. If the point is to use a diminishing allowance system to effect 

real behavior change and to have a functioning market that fairly sets prices, 

then allowances need to have a deadline by which they must be used or expire. 

INTERNATIONAL PROVISIONS

The AFL–CIO welcomes the inclusion of the Bingaman-Specter provisions on 

international trade within ACSA, providing a means to impose emission offset requirements on imported goods from major international trading partners that have 

not taken comparable action to protect the global climate. However, the language 

needs refinement. Implementation can and should take place far sooner than 2020. 

The bill should require the President to open negotiations immediately upon passage. Once the regulations are in place and the cap and trade is in operation for 

two to three years, the international action can be implemented. This last step 

should be an administrative action, not something subject to presidential waiver. 

In addition, the timetable and goals should be tied to the international language 

in S. 2191. It is now even more apparent than it was when the Kyoto Accord was 

negotiated that taking unilateral steps is not enough to engage the developing 

world. The Committee should include the five-year review provision included in Section 501 of S. 1766, with its requirement for presidential reviews and recommendations related to progress in international negotiations seeking commitments from 

major trading partners: 

Presidential Recommendations to Congress.—Subsection (b) provides that, during 

a period between April 15, 2017 and May 31, 2017, and every 5 years thereafter, 

the President shall submit to the House of Representatives and the Senate a report 

describing any recommendation of the President with respect to changes in the Act. 

The President shall make recommendations with respect to— 

Whether the U.S. should change the allowance amounts for future allocation periods as necessary to ensure that the United States is undertaking its equitable 

share of the responsibility for reducing greenhouse gas emissions, and in any 

case will reasonably lead the United States to reduce its annual emissions to 

levels at least 60 percent below current emission levels by 2050. 

OFFSETS AND INTERNATIONAL ALLOWANCES

We are concerned about the legitimate use of offsets and international allowances; 

the ability to monitor their legitimacy, especially in the international market; and 

ways in which they could undermine domestic investment in industry. This proposal 

allows for up to 30 percent of the annual allowances that a covered entity must submit to be comprised of offsets (15 percent) and internationally purchased allowances 

(15 percent). 
235 

If the goal of this legislation is to change the behavior of domestic power producers and industry and to encourage the domestic investment needed to introduce 

new technology, this could prove to be a roadblock. One option is to limit their use 

in combination, or simply to lower the amount. 

The expanded forestry/agriculture allowances under S. 2191 raise a broader question over potential double dipping with later offset provisions in the bill. For example, Oregon and other states already provide tax incentives for tree planting. In addition, the wood products industry is under legal and business obligations to plant 

trees year round. Will the offset provisions doubly reward already-existing behavior 

that has been backed by tax incentives or existing business imperatives? If a utility 

company helps underwrite a timber firm’s required replanting of a logged area, 

could they then claim offset credits? 

This simple example shows how existing tax incentives and business requirements could be used to create offsets that do not provide real value added to the 

environment. Offsets should be the result of creating something new or in addition 

to what normally would have been done as a course of business. The ability to double dip should be prohibited. 

RESPONSES BY ROBERT C. BAUGH TO ADDITION QUESTIONS FROM SENATOR INHOFE

Question 1. Do you think the Carbon Market Efficiency Board can operate as a 

‘‘safety valve’’ or cost control mechanism to protect the U.S. economy in time in the 

event of shocks to that economy created by the very system we have put in place? 

Response. As in prior legislation, the AFL–CIO strongly supports effective cost 

control mechanisms as a tool for avoiding shocks to the economy and proving pricing 

certainty for critical long-term private sector investment decisions. The cost control 

effectiveness of any oversight organization will be determined by its structure, governance and the tools it has to work with. 

The Carbon Market Efficiency Board (CMEB) is responsible for overseeing the 

market system and has been given limited market intervention tools. We believe the 

‘‘system’’ and tools rather than reinforcing one another, actually work at cross-purposes. The legislation designs a trading system that provides open access to anyone 

and allows those buyers to bank their allowances in perpetuity. This is an open invitation to predatory behavior by speculators and hoarding of allowances that will 

drive price volatility. 

To combat the volatility, the CMEB is empowered to take action after prolonged 

allowance price hikes of 180 or more days, but that may be too late because firms 

are required to obtain and use allowances annually. In 180 days the irreparable economic damage will already have been done. Additionally, the intervention tool allowing the issuance of ‘‘future’’ allowances to drop prices seems to be of limited value 

given how this market seems to be structured. 

To address these concerns, the AFL–CIO recommends that the trading of allowances be regulated and restricted. Market participation should be limited to firms 

that intend to use (not just buy and sell) the allowances. The banking of allowances 

should be limited by setting a ‘‘time certain’’ by which they must be used or expire. 

These steps will help create a more certain less speculative trading environment. 

The CMEB market intervention timeline should be shortened and Congress should 

consider additional/stronger intervention tools. 

We are open to the consideration of any effective cost control mechanisms that 

will avoid serious shocks to the American economy. At the same time, we remain 

committed to an investment strategy in the transformational technologies needed to 

change our carbon footprint. 

Question 2. What are American workers and employers to do under this legislation when the technology that everyone is hoping for turns out not to be widely 

available on schedule but the stringent reduction requirements kick in. 

Response. The AFL–CIO supports realistic timelines and goals for emission reduction. As we testified before the committee, we are concerned that there is a disconnect between the reduction targets and the actual development and deployment 

of new technology. S. 2191 sets a 15 percent reduction of greenhouse gas emissions 

below 2005 levels by 2020. This is prior to the anticipated commercial availability 

of carbon capture and storage technologies. Similarly, renewable technologies have 

their own set of technology development and deployment issues that seriously call 

into question the ability to meet the reduction levels without drastic economic harm. 

The legislation does call for annual reviews of the standards that have been 

adopted, the status of efforts to meet the standards and the status of technology development and deployment needed to meet the timelines and empowers the EPA to 

change the standards. Unfortunately, that has not been our experience with the 
236 

Clean Air Act. The reviews are important but not sufficient. We believe Congress 

should play a role in any review and/or revision process. 

In addition, American workers and employers must be engaged in this process. 

They should be represented on all the related agencies and organizations responsible for carrying out this legislation including the CMEB, Climate Change Corp., 

and EPA advisory bodies responsible for the reviews. 

In addition, S. 2191 also requires a 70 percent national emission reduction below 

2005 levels by 2050. The AFL–CIO has supported a 60 percent or greater reduction 

by 2050 that was tied to a Presidential review of the participation of the developing 

nations like China, India, Brazil, etc., in a global climate protection framework. We 

urge the Committee to also make this linkage and include five-year review requirement. 

Question 3. What do these same American workers do/what happens to them 

when China and India continue to do nothing to address their rapidly widening carbon footprints. 

Response. To put it bluntly, it is not in our national interest to see our efforts 

to reduce carbon emissions become yet another advantage that a developing nation 

uses to attract business. However, it is in our interest and the world’s interest to 

have developing nations become part of the solution because the problem cannot be 

solved without them. Thus, the U.S. needs an approach that provides incentives for 

participation like the transfer of clean coal technology and penalties for non-participation such as a border adjust cost. 

The AFL–CIO endorses S. 2191’s inclusion of international language, which will 

help preserve American jobs while taking an important step forward to engaging the 

developing world in seeking a solution to global warming. However, the international timeline and implementation process needs to be strengthened. 

Implementation can and should take place far sooner than 2020. The bill should 

require the President to open negotiations immediately upon enactment. Once the 

regulations are in place and the cap and trade program is in operation for two to 

three years, then the international action can be implemented. This last step should 

be an administrative action, not something subject to presidential waiver. 

S. 2191 also touches on the international impacts of climate change by providing 

some resources to help nations suffering the affects of global warming. These resources should also be made available to help transfer newer cleaner energy technology to the developing world. 

The AFL–CIO and Congress also have the opportunity to address this issue in 

international forums. In December, the AFL–CIO and a number of our affiliates will 

be participating in the UN sponsored meetings in Bali to discuss the post Kyoto protocols. The AFL–CIO has been working with the International Trade Union Confederation (ITUC) to adopt language that makes it clear that a unilateral approach is 

no longer viable and developing nations must become part of the solution. As part 

of the ITUC delegation we will also be supporting incentives for the adoption of 

clean coal and other technologies by developing nations. 

Senator BOXER. Thanks, Mr. Baugh. Thanks for your participation in the stakeholder process up until now. Obviously we welcome 

you as this goes forward. You got a lot into five minutes there. 

Thank you. 

Next we have Andrew Sharkey, president and CEO of the American Iron and Steel Institute. We welcome you and your testimony. 

STATEMENT OF ANDREW G. SHARKEY III, PRESIDENT AND 

CEO, AMERICAN IRON AND STEEL INSTITUTE 

Mr. SHARKEY. Thank you, Senator Lieberman. On behalf of the 

American Iron and Steel Institute, I express my gratitude to the 

members of the Committee for the opportunity to testify today. 

The American steel industry is part of the solution in this debate, not the problem. We are the most energy-efficient steel industry in the world and we have the data to prove it. We not only beat 

the Kyoto targets 11 years early, we are already doing on our own 

what S. 2191 seeks to do for the entire economy. Largely through 

recycling and investments in new technology, we have reduced energy use per ton of steel shipped by over 40 percent over the past 
237 

25 years. Reduction in carbon emissions per ton of steel shipped between 1990 and 2006 exceeded 29 percent. 

If you will, this industry is laying golden eggs. Steel is the most 

recycled material. The entire domestic industry is using more scrap 

metal. The use of recyclable materials as a raw material feedstock 

in manufacturing processes can significantly reduce and even 

avoid, in some cases, greenhouse gas emissions. While our present 

processes are optimized, we are not standing still. The steel industry has embarked on an aggressive research and development program to advance the next generation of iron and steel making technologies that will dramatically reduce or eliminate CO2 emissions. 

Regarding steel in material, our products lead the way in reducing the greenhouse gas emissions of our customers. For example, 

through the design of automobiles using advanced high-strength 

steels, which permit much lower vehicle weights and require much 

less fuel, all the while retaining vehicle safety. If you take only one 

thing away from this hearing, it should be the impact of climate 

change legislation on U.S. workers and manufacturers. I want to 

be as clear as possible on this point. If climate legislation fails to 

address the competitiveness vis-a`-vis foreign products, it will have 

devastating consequences not only for the U.S. economy but also 

for the environment. Not only will we export American jobs but 

greenhouse gas emissions will rise. The carbon footprint of our 

major foreign competitors selling in the U.S. market is substantially higher than the domestics as a whole. 

It goes without saying that in a market open to imports such as 

ours, any legislation that undermines the competitiveness of U.S. 

mills will encourage steel production to leave this market in favor 

of markets with low environmental standards. Such an outcome 

will necessarily result in higher volumes of greenhouse gas emissions worldwide. 

To put it bluntly, the big winner in such a scenario will be countries like China and India and the big losers will be U.S. workers 

and the global environment. Some examples, our energy costs will 

rise under the bill beginning in 2012, costs that our foreign competitors do not face. Our allowance obligations commence in 2012, 

further driving our costs up. The bill does not impose allowance obligations on foreign manufacturers if at all until 2020, 8 years 

later. For a cyclical industry like steel, 8 years is an eternity. 

The bill’s baselines for our foreign competitors invite gaming. 

The purchase of international allowances invites subsidies by foreign governments. And I would add under the international allowance mechanism in Title VI, any allowances that you give for free 

to American carbon-intensive industries must be subtracted from 

the allowance obligations of foreign manufacturers. That is true, 

apparently, even if you are trying to offset higher energy costs from 

cap and trade that the foreign manufacturers do not have. 

We are also very concerned that S. 2191 will encourage fuel 

switching from coal to natural gas, further escalating natural gas 

prices. Electricity price hikes will unquestionably follow, not just 

for us, but for the entire economy. Unfortunately, energy supply is 

woefully neglected in this bill and in the pending energy legislation. 
238 

We believe that any competitiveness provision should one, apply 

simultaneously to domestic and foreign firms selling in the U.S. 

market; two, use the same baseline periods; three, not invite subsidies by foreign governments; and four, not enable the Administration to waive the requirements on foreign manufacturers. 

In short, the best way to deal with an industry facing foreign 

competitors would be to adopt an approach that requires everyone 

selling in this market, whether domestic or foreign, to live up to 

the best practices and highest standards in terms of carbon performance of their manufacturing operations, based on the particular manufacturing process that is employed. Such mandatory 

performance standards would be fair, equitable and have the immediate effect of actually lowering global emissions without creating market distortions. Such a policy would ensure that manufacturers in the United States and elsewhere would compete on even 

terms, because all producers active in this market, including us, 

would be subject to the same rules. This approach would give your 

bill a true global reach and not put the domestic steel industry at 

a competitive disadvantage. 

As our trade deficit shows, everyone wants to be in this market. 

Why not use that fact to encourage greener production abroad? Instead of a race to the bottom, in which manufacturers have the incentive to make the product in countries with the least restrictive 

standards, why not encourage a race to the top where manufacturers world-wide compete to meet our standards? 

Senator Lieberman, we certainly agree on one thing. We must 

find prudent means of addressing climate change. But we disagree 

on much of what is contained in S. 2191, we want to work with you 

and other members of this Committee to find reasonable and effective policies. We are not just saying no, we hope that you will regard our suggestions as constructive. Thank you. 

[The prepared statement of Mr. Sharkey follows:] 

STATEMENT OF ANDREW G. SHARKEY III, AMERICAN IRON AND STEEL INSTITUTE

On behalf of the American Iron and Steel Institute, I express my gratitude to 

Chairwoman Boxer, Ranking Member Inhofe and the Members of the Committee for 

the opportunity to testify today. 

The American steel industry is part of the solution in this debate, not the problem. We are the most energy efficient steel industry in the world and we have the 

data to prove it. We not only beat the Kyoto targets 11 years early, we are already 

doing on our own what S. 2129 seeks to do for the entire economy. The domestic 

industry, largely through recycling and investments in new technology, has reduced 

energy use per ton of steel shipped by over 40% over the past 25 years. Reductions 

in carbon emissions per ton of steel shipped between 1990 and 2006 exceeded 29% 

(a detailed chart appears below). If you will, relative to the rest of the economy, this 

industry is laying golden eggs. 
239 

Steel is the most recycled material. The entire domestic industry is using more 

scrap metal, both mini-mills and integrated mills. I understand that Senator Carper 

may offer a recycling amendment to the bill. The use of recyclable materials as raw 

material feedstock in manufacturing processes can significantly reduce, and even 

avoid in some cases, greenhouse gas emissions. The proposed amendment, which is 

purely voluntary and market based, allows manufacturers eligibility for offsets 

when implementing a variety of activities including increasing the use of recycled 

materials, manufacturing of products that can be increasingly recycled, eliminate or 

reduce substances that impede recycling, employ other recycling practices that increase recycling or any combination of these activities. Our industry commends Senator Carper for recognizing the important positive contributions that recycling provides for the environment. The recycling issue must be part of any approach to the 

reduction of GHG. 

While our present processes are optimized, we are not standing still—the U.S. 

steel industry, in collaboration with the rest of the global steel industry, has embarked on aggressive research and development programs to develop the next generation of iron and steelmaking technologies that will drastically reduce or eliminate 

CO2 emissions. 

We continue to work to make strides but one reality needs to be taken into account—steel is an alloy of iron and carbon. That is, carbon is necessary in the current steelmaking process technologies and unless we undo the laws of physics, it is 

a reality that must be taken into account. 

The steel industry has and is developing new types of steel products that lead the 

way in reducing the greenhouse gas emissions of our customers, for example, 

through the design of automobiles using advanced high strength steels which permit 

much lower vehicle weights and require much less fuel, all while maintaining vehicle safety. Use of some steel products results in more efficient buildings and infrastructure and is integral in pressure vessels for electrical power generation and energy transportation. Fighting global warming will require significant amounts of 

new steel products. 

If you take only one thing away from this hearing, it should be the impact of climate change legislation on U.S. workers and manufacturers. I want to be as clear 

as possible on this point: if climate legislation fails to address the competitiveness 

issues vis-a`-vis foreign products, it will have devastating consequences not only for 

the U.S. economy, but also for the environment. Not only will we export American 

jobs, greenhouse gas emissions will rise. The carbon footprint of our major foreign 

competitors selling in the U.S. market is substantially higher than that of the domestics as a whole. 

It goes without saying that in a market open to imports (such as ours) any legislation that undermines the competitiveness of U.S. mills will encourage steel production to leave this market in favor of markets with lower environmental standards. 

Such an outcome will necessarily result in higher volumes of greenhouse gas emissions worldwide. In other words, any climate change legislation that does not adequately account for competitiveness issues will have precisely the opposite effect 

from that intended by its supporters. To put it bluntly, the big winner in such a 
240 

scenario would be countries like China and India—and the big losers would be U.S. 

workers and the global environment. 

Looking specifically at S. 2129, energy costs will rise under the bill beginning in 

2012, costs that our foreign competitors do not face. Our allowance obligations commence in 2012 further driving our costs up. The bill does not impose allowance obligations on foreign manufacturers, if at all, until 2020, eight years later. For a cyclical industry like steel, eight years is an eternity. The bill’s baselines for our foreign 

competitors invite gaming. The purchase of international allowances invites subsidies by foreign governments. And I would add, under the international allowance 

mechanism in Title VI, any allowances that you give for free to American carbon 

intensive industries must be subtracted from the allowance obligations of foreign 

manufacturers. That is true, apparently even if you are trying to offset higher energy costs from cap and trade that the foreign manufacturers do not have. 

We believe that any competitiveness provision should (1) apply simultaneously to 

domestic and foreign firms selling in the U.S. market; (2) use the same baseline periods; (3) not invite subsidies by foreign governments; and (4) not enable the Administration to waive the requirements on foreign manufacturers. 

In short, the best way to deal with an industry facing foreign competitors would 

be to adopt an approach that requires everyone selling in this market—whether domestic or foreign—to live up to the best practices and highest standards in terms 

of the carbon performance of their manufacturing operations, based on the particular manufacturing process that is employed. Such mandatory performance 

standards would be fair, equitable, and would have the immediate effect of actually 

lowering global emissions without creating market distortions. Such a policy would 

ensure that manufacturers in the United States and elsewhere would compete on 

even terms, because all producers active in this market, including us, would be subject to the same rules. This approach would give your bill a true global reach and 

not put the domestic steel industry at a competitive disadvantage. And as our trade 

deficit shows, everyone wants to be in this market. Why not use that fact to encourage greener production abroad? Instead of a ‘‘race to the bottom’’ in which manufacturers have an incentive to make the product in countries with the least restrictive 

standards, why not encourage a ‘‘race to the top’’ where manufacturers worldwide 

compete to meet our standards? 

We still have grave doubts generally about how well cap and trade can address 

climate change. Cap and trade worked reasonably well on the acid rain problem. 

The climate change issue is quite different. With climate change we have major 

technological gaps, the need for global reach, the presence of foreign competitors, 

and no guaranteed ability for regulatory cost pass-through. 

More specifically, S. 2129 rewards states with extra allowances if they impose 

more stringent cap and trade requirements than the federal scheme. I shudder to 

think how American industry can cope with a federal cap and trade program and 

a multitude of conflicting, more stringent state programs. Recall that the states, 

under the U.S. Constitution and our trade laws, have no mechanism to achieve global reach, to avoid giving foreign manufacturers who sell in our markets a competitive advantage over domestic firms. 

Finally, we are very concerned that S. 2191 will encourage fuel switching from 

coal to natural gas, further escalating natural gas prices. This scenario is already 

occurring, just in anticipation of legislation. Electricity price hikes will unquestionably follow, not just for us, but for the entire economy. The technologies we need 

are not in place, and won’t be for many years. Unfortunately, energy supply is woefully neglected in this bill, and in the pending energy legislation. Obviously, if U.S. 

energy costs continue upwards unabated, this will only increase the likelihood that 

foreign manufacturers, who have access to affordable energy, will capture U.S. jobs 

and domestic market share, and consequently increase greenhouse gas emissions. 

Madam Chairman, we certainly agree on one thing. We must find prudent means 

of addressing climate change. While we disagree on much of what is contained in 

S. 2192, we want to work with you and the other members of this committee to find 

reasonable and effective policies. We are not just saying ‘‘no.’’ We hope you will regard our suggestions as constructive. 

RESPONSE OF ANDREW SHARKEY TO AN ADDITIONAL QUESTION FROM

SENATOR INHOFE

Question. Is there anything else that you would like to add into the record? 

Response. We in the steel industry recognize that recycling is an important aspect 

of reducing carbon emissions, reducing energy consumption, and preserving natural 

resources. Every steel producer uses scrap material (recycling) as a vital feedstock 
241 

to lower the cost of producing steel. 2006 figures from the Steel Recycling Institute 

indicate that U.S. steel producers consumed approximately 70 million tons of scrap 

to produce just over 100 million tons of steel. Seventy percent of steel produced in 

the United States is eventually recycled. On average, a ton of steel will be recycled 

eight times in the course of fifty years. Our recyclability, coupled with our durability, is a key reason our GHG profile, on a life cycle basis, is low. 

We support actions that increase recycling, and appreciate the efforts of the Recycling Roundtable to develop language that will induce additional recycling in our 

economy. We applaud you for recognizing the positive contributions that recycling 

provides for the environment. The recycling issue must be part of any approach to 

the reduction of GHG. 

At the same time we want to ensure that the Congress, through this legislation, 

recognizes that steel is the most recycled commodity in the world today, and that 

the domestic steel industry, through the use of recycling, has already reduced its 

carbon footprint and continues to supply a basic building block of the economy with 

the minimum amount of energy consumption and carbon emissions possible. 

We also believe the maturity of steel recycling demonstrates the drawbacks of imposing emissions caps on an industry which is leading the world in global steel 

emissions reductions. 

We want to work with you, the Committee and the Congress to ensure that the 

domestic steel industry is not disadvantaged, and in fact is enhanced as the most 

carbon conservative steel industry in the global economy, through this amendment 

and by exploring other possibilities. 

Senator LIEBERMAN. Thank you, Mr. Sharkey. That is exactly the 

way I heard your testimony. I appreciate it very much. We do look 

forward to engaging with you in more detail. 

I do want to say, going back to the first part of your testimony, 

that the iron and steel industry really has done exactly what you 

said it has done. It is a great and I hope encouraging model of the 

way the market drives, in necessity, in a way, drives innovation to 

the point where you have done exactly some of the things that we 

are hoping and intending that this Climate Security Act do for a 

lot of the rest of America’s economy. So we have a lot of work to 

do together. 

Our final witness on the panel is Donald R. Rowlett, Director of 

Regulatory Policy and Compliance for the OG&E Energy Corporation. Good afternoon, and thank you for being here. 

STATEMENT OF DONALD R. ROWLETT, DIRECTOR OF REGULATORY POLICY AND COMPLIANCE, OG&E ENERGY CORPORATION 

Mr. ROWLETT. Thank you, Senator Lieberman, members of the 

Committee. My name is Donald Rowlett, I am Director of Regulatory Policy and Compliance for OG&E Energy Corporation, which 

is an electric utility and natural gas pipeline headquartered in 

Oklahoma City. 

Senator Inhofe, I would like to offer the appreciate of OG&E and 

particularly everybody in Oklahoma for the bipartisan leadership 

that you and Chairman Boxer showed in moving the long-overdue 

and very important Water Resource Development bill into enactment last week. 

OG&E is a medium-sized utility serving approximately 780,000 

customers in Oklahoma and western Arkansas. Our fossil fuel generation mix is about 60 percent natural gas-fired and about 40 percent coal. We currently have wind power capacity of 170 

megawatts, or roughly 3 percent of our total generation. Recently 

we announced a major initiative to quadruple the wind generation 

capacity to around 800 megawatts. 
242 

I would like to say that all utilities are not alike. They vary in 

terms of size, weather demands, financial resources, generation 

mix, renewable resources and of course, their State and regulatory 

and political environments in which they operate. These differences 

explain why utilities, especially those with nuclear generation, may 

have substantially different perspectives to S. 2191 than we have. 

We can not yet sufficiently determine the economic impact of S. 

2191 on our customers or on our operations. With the stakes so 

high, a credible economic assessment is needed at this time and 

certainly before enactment. We were pleased to hear from Senator 

Warner that this is being undertaken as we speak. 

While still tentative, our best analysis thus far produces a sobering picture of the challenges presented by the bill for both OG&E 

and its customers. The distribution of free allowances under Section 3901 is crucially important to our ability to transition during 

the early years of the legislation’s cap and trade program. S. 2191 

does not appear to provide enough allowances to mitigate what we 

believe will be the economic cost of this program and the compulsion to engage in significant fuel switching to natural gas. 

Conservatively, we estimate OG&E’s share of the free allowance 

pool will only be about 36 percent of the allowances needed by 

OG&E in 2012. Whatever the market cost will be for additional allowances that OG&E will need to buy, this cost will be significant. 

If the additional allowances are priced at $30 when OG&E needs 

to purchase them in 2012, it will cost us nearly $500 million. This 

is almost a third of our 2006 gross revenues of approximately $1.6 

billion. It is unclear how OG&E will recover these costs, since assumptions about retail rates and the customer’s ability to pay them 

are all uncertain at this time. 

But the bill will require OG&E to do more than simply buy allowances. Our options are limited but do not likely include building 

new nuclear generation or even coal generation of any kind, including clean coal plants. Wind is not a suitable replacement for baseload generation needs. Perhaps domestic agricultural offsets might 

be available. 

For sure, though, we will be faced with a compelling incentive to 

switch a significant amount of our coal-based generation to natural 

gas. If we took the drastic step of replacing all of our current generation with natural gas, it would raise the average bill for a typical retail customer over 40 percent. We believe that the incentive 

to switch fuels from coal to natural gas would be equally compelling to most other coal-burning utilities, because it is a strategy 

that utilities can rely on, they can quantify and it offers them the 

greatest level of control. 

Switching to natural gas raises the prospect of stranding our investment in our coal plants, thus creating stranded costs. We think 

the bill could provide accommodations through allowances or other 

compensations for that outcome. S. 2191 unfairly discriminates 

against cooperatively-owned utilities, against investor-owned utilities. Under Section 3903, co-ops get all allowances necessary to 

cover their 2006 CO2 equivalent emissions, whereas what remains 

in the free pool after the co-ops are fully satisfied gets distributed 

pro rata to everyone else. 
243 

This political accommodation is unfair. Finally, we cannot bear 

the cost of compliance any more than cooperatives. Co-ops burn 

coal, just like we do. Our need for allowance relief is no different 

than theirs. All utilities should be treated the same with regard to 

distribution of free allowances. 

S. 2191 overly restricts the use of domestic offsets to 15 percent 

of the utilities’ annual obligation and too severely limits allowances 

for carbon capture and sequestration development to prevent fuel 

switching. Allowances for CCS should not decline over the time 

frame after 2017, since we don’t expect CCS to be available until 

2020. Nor should allowances for CCS projects be limited to 10 

years or be subject to pro-ration among worthy projects. 

In our judgment, the Carbon Market Efficiency Board is less desirable than a safety valve to protect the economy from extreme adverse impacts. We also suggest that the Committee evaluate 

whether it might be more effective and efficient to impose carbon 

tax initially and delay implementation of a cap and trade regime. 

I would like to thank you for the opportunity to present our comments today. 

[The prepared statement of Mr. Rowlett follows:] 

STATEMENT OF DONALD R. ROWLETT, DIRECTOR OF REGULATORY POLICY AND

COMPLIANCE OGE ENERGY CORP. 

My name is Donald R. Rowlett. I am the Director of Regulatory Policy and Compliance for OGE Energy Corp., which is an electric utility and natural gas pipeline 

company headquartered in Oklahoma City. Our electric utility, which is called 

OG&E, serves approximately 780,000 customers in Oklahoma and western Arkansas. Our fossil fuel generation mix is approximately 60% natural gas-fired, 40% coalfired, and we currently have wind power capacity of 170 megawatts or roughly 3% 

of our total generation. 

My company and I appreciate the opportunity to come before you today to provide 

our perspective and recommendations regarding what perhaps may be the most important environmental and economic legislation the Congress has ever considered— 

America’s Climate Security Act of 2007 (S. 2191). I characterize S. 2191 in that historic manner because, consistent with its stated purpose in attempting to avoid catastrophic global environmental disaster, the bill’s implications may very well result 

in the most far-reaching re-engineering of modern society ever attempted by Congress. The sheer complexity and enormity of that undertaking underscores the need 

to take special care to avoid approaches that would wreak serious and broad damage to the nation’s economy, a goal which we believe everyone shares. 

I. OG&E’S EXPERIENCE PROVIDING LOW COST, RELIABLE AND ENVIRONMENTALLY

RESPONSIBLE ELECTRICITY INFORMS OUR PERSPECTIVE ON S. 2191 

All utilities are not alike. They vary in many important ways: in terms of size, 

weather demands, financial resources, generation mix, renewable resources, and of 

course their state regulatory and political environment in which they operate. 

OG&E is a medium sized investor owned utility and lacks the resources that many 

of the much larger utilities that have appeared before this Committee possess. 

These differences can explain why larger utilities, especially those with nuclear generation, may have a substantially different perspective on S. 2192 than OG&E does. 

To understand our specific views on S. 2191 more fully, it may be helpful to the 

Committee to first have a sense of OG&E’s individual persona as a utility and our 

particular experience and perspective in providing low cost, reliable and environmentally responsible electric service to our customer. 

As a regulated utility, OG&E bears the responsibility of its ‘‘obligation to serve’’ 

all electricity customers in its service area and we take this obligation extremely 

seriously. This obligation to serve carries with it the requirement to provide reliable 

electric power at the lowest reasonable cost to our customers. But beyond that obligation to serve, OGE strongly believes that it is incumbent on us as a good corporate citizen to produce reliable and low cost power for our customers in an environmentally responsible manner. Our company’s response in adopting cleaner 
244 

sources of power generation is therefore motivated not necessarily by a legal compulsion but by a belief that it is simply the right thing to do. Producing electricity 

with fewer emissions is a prudent, rational and worthy objective unto itself, independent of global climate change concerns. Our customers want their electricity to 

be inexpensive and reliable, but also as cleanly generated as we can make it. It 

makes good business sense to respond to our customers in that regard. It also 

makes good business sense in our line of work to diversify our generation mix to 

reduce dependency on any one fuel choice option. 

OG&E and Wind Power 

I can report firsthand to you from Oklahoma that the interest in environmentally 

friendly energy and energy related consumer behavior certainly exists in our state. 

In the western part of our state wind farms seem to be popping up everywhere. 

Oklahoma has gone from virtually no wind power just a few years ago to being 

ranked 6th nationally in existing installed wind power generation capacity today. 

And, more is on the way. On October 30, 2007, OGE Energy announced that, in response to market demand, OG&E plans to quadruple its wind power generation capacity. We also announced plans to build new transmission lines running between 

western and central Oklahoma to allow renewable power being developed in sparsely populated western Oklahoma to reach customers where it can be used. Under this 

expanded renewable energy initiative, OG&E could increase its wind power capacity 

from its current 170 megawatts to about 770 megawatts, and move Oklahoma up 

the ranking of states in terms of wind generation from its current sixth ranking to 

as high as third. And I might emphasize that all of this is happening without state 

or federal mandates. 

As proud as we are of this wind initiative, we certainly recognize that it is very 

aggressive for a utility our size. Building this wind generation capacity and the 

transmission lines needed to make it useful is very expensive and creates difficult 

operational issues involving dispatch and reliability which increase in scale to the 

extent even more wind capacity might be added to address obligations created by 

S. 2191. 

OG&E and Efficiency 

In addition to wind power, we are renewing our interest and focus on demand side 

management (‘‘DSM’’) programs aimed at reducing energy use.. Through programs 

like time of use rates, weatherization programs, highly efficient lighting and appliance incentive programs, commercial and industrial load curtailment programs and 

consumer education we are already reducing our system’s demand for power by approximately 200 megawatts. With additional customer education, better technology 

such as smart meters, and other programs, we believe that there is another 100 or 

so megawatts of additional energy savings to be obtained. 

OG&E is envied in the industry as a low cost utility and we have some of the 

lowest electricity rates in the nation. What is important for the Committee to understand though is that as a very low cost electricity provider, it is far more difficult 

for OG&E to use efficiency to shift demand for power—meaning, for us to lower the 

volume of electricity our customers use—than it is for high cost utilities. 

OG&E and Clean Coal 

OG&E’s low electricity rates are primarily attributable to the favorable cost implications of our coal burning generation. Often 70% of our baseload generation will 

be from our coal generation, with natural gas largely used for the balance of baseload generation and for peaking demand. We use low sulfur Powder River Basin 

coal which has kept both our emissions and our electricity rates to our customers 

low, which in turn has contributed very significantly to Oklahoma’s economic viability and competitiveness, as well as our enviable standard of living enjoyed by our 

citizens. 

Obviously, a primary purpose of S. 2191 is to make coal a significantly more expensive fuel to mitigate its traditional use and thereby mitigate its uncontrolled 

greenhouse gas emissions. We note that S. 2191 also has provisions to spur development of clean coal technologies, including carbon capture and sequestration (CCS) 

technology, that will allow the nation to continue to use ‘‘clean’’ coal for electric generation. OG&E strongly supports the development of such clean coal initiatives. But 

our very recent experience in responsibly trying to get state regulatory approval for 

the cleanest of existing state of the art clean coal technologies—an ultra-super critical coal plant—provides a very cautionary tale that makes us question the ability 

to construct any new coal plant in Oklahoma for the foreseeable future even if it 

is the cleanest available coal technology. I believe the Committee would benefit from 

an understanding of our recent experience in that regard. 
245 

Along with our sister utilities in the state, Public Service Company of Oklahoma 

and the Oklahoma Municipal Power Authority, we are experiencing the need for 

more baseload generating capacity in the 2012 timeframe. We partnered with those 

two utilities to propose building one 950 megawatt ultra-super critical coal-fired 

power plant together rather than each of us individually building, smaller, less efficient plants scattered across the state. An ultra-super critical plant represents the 

very latest in proven state-of-the-art technology and offers major efficiency and environmental performance advantages over older technology and even compared to 

modern super critical coal plants. With the addition of this plant, we projected 

OG&E’s carbon footprint could be as much as 3% lower than today. This would be 

accomplished by being able to reduce the use of our less efficient coal plants and 

through increased use of wind power. 

In reaching the decision of what type of plant to build, we quickly discounted 

wind power because it is not suitable for base load generation. We also discounted 

nuclear because our need for power is in 2012 which would be impossible to meet 

with the timeframes associated with nuclear plant construction. In addition the financial costs and regulatory risks associated with building new nuclear plants exceed the resource profile that OG&E can afford. We have no appreciable untapped 

hydro power to speak of in Oklahoma and it was apparent we could not conserve 

our way out of the need for base load power. So that left gas and coal as our effective options. 

Both those fossil fuel options come with pros and cons. Natural gas is certainly 

a cleaner burning fuel, but comes with higher prices and enormous price volatility. 

We have low electric rates in Oklahoma but because the summers are so hot and 

so long, electric bills can be quite high since our customers tend to use a lot of electricity for air conditioning. By the same token, just 2 winters ago we were in emergency meetings trying to determine how we could supplement the funding of public 

and private low income assistance programs that were not going to be able to meet 

the projected heating needs of those customers that winter due to gas prices that 

had spiked over $10. During this time I appeared before the Oklahoma Corporation 

Commission in a hearing it convened to understand the reasons for these high 

prices and to find out what utility companies were doing to mitigate these costs. 

Consequently, summer or winter, we very much understand from our customers and 

our state regulator how much importance they attach to the price of their power. 

In recent years, we in Oklahoma, like many other states, have had our share of 

manufacturing plant closings. Just in the Oklahoma City area alone we have had 

a large tire plant and an automobile plant close, taking with them in excess of 4,000 

jobs. In each case, we were called upon by many, including the Governor of our 

state, to see if there was anything we could do to lower the energy costs of these 

plants. We did as much as we could at the time, but were unable to do enough on 

our own to convince the manufacturers to preserve the local plants and the associated jobs. In every one of our state regulatory proceedings our industrial customers 

constantly remind the regulators that they compete in a global marketplace and any 

cost disadvantage may be the difference between staying in Oklahoma or not. So 

given the high price and high volatility of generating electricity by natural gas, you 

can understand why that is a significantly disfavored option from the perspective 

of its impact on customers. 

Coal on the other hand is both abundant domestically and significantly cheaper 

than natural gas—even with the uncertainties of future environmental regulation 

factored in—and it still handily beats the price of natural gas by many multiples. 

Clearly, however, the downside to coal is the environmental cost concern. Consequently, in proposing to build an ultra-super critical coal plant, we believed we 

had combined a very significant emission reduction strategy with $5.5 billion in demonstrable cost savings for consumers—a tremendous value proposition for both 

Oklahoma’s environment and economy. 

After an extensive and thorough public review and comment process at the Oklahoma Corporation Commission, last August an administrative law judge issued a 

lengthy and detailed recommendation strongly in favor of approval of our proposed 

ultra super critical plant, citing the $5.5 billion in customer savings compared to 

deployment of a gas-fired base load alternative. Nonetheless, in September our application was denied in a 2–1 vote by the Oklahoma Corporation Commissioners. 

The Commission’s majority cited concerns about process, the evidence of the need 

for the power, and cost recovery. Of special interest to this Committee, environmental concerns per se were not identified as reasons for denial of the application. 
246 

II. OGE’S VIEWS AND RECOMMENDATIONS ON S. 2191

A. We cannot yet sufficiently determine the economic impact of S. 2191 on our customers or our operations 

In our view, as serious as this legislation is for the entire nation, we would assume that before the Committee would turn to marking up S. 2191 it would be able 

to articulate in a reasonably confident way the macro-economic impact of the bill 

and understand how the constituencies in each Senator’s state would be affected by 

the bill. But we understand that such economic analysis has yet to be done. The 

many witnesses at prior hearings, both supporting and criticizing the legislation, 

have made a compelling case that the costs of a cap and trade regime such as that 

contained in S. 2191 will be enormous. We would observe that Section 2605 of the 

bill requires the Congressional Budget Office to estimate the price range at which 

emission allowances will trade during the two year period of the initial greenhouse 

gas emission market and the impact of allowance trading on the U.S. economy no 

later than July 14, 2014, which is two years after the implementation of the bill’s 

allowance regime in 2012. It appears to us that this kind of analysis is needed now 

even more than in 2014. Given the unprecedented stakes for this legislation in 

terms of environmental and economic impacts, we urge the Committee to demand 

a credible ‘‘macro-economic’’ assessment at the earliest moment and certainly before 

enactment. 

But we are also in need of more information to perform a detailed assessment of 

the bill’s ‘‘micro-economic’’ impact on our own OG&E operations, our credible range 

of compliance options, and the consequent impact on our customers. We would draw 

the Committee’s attention to Section 3901 et seq., which provides for distribution 

of ‘‘free’’ allowances to ‘‘incumbent utilities’’. Section 3903 uses several variables including an upfront reservation of a portion of the ‘‘free’’ pool for ‘‘new entrants’’ and 

rural cooperatively-owned utilities that reduces the overall number of such allowances available to the balance of the utility sector, which includes us, on a pro-rated 

basis. We cannot estimate the number of allowances that will be reserved for new 

entrants and the co-ops, and therefore cannot determine what is left to be prorated 

among the rest of the power sector. But even then we cannot determine how much 

of that residuum of the ‘‘free’’ allowances that we might receive on a pro-rated basis 

since to do so requires that we know the ratio of our CO2 equivalents emissions during the 3 years prior to the bill’s enactment to the annual average of the aggregate 

quantity of CO2 equivalents from all of the nation’s covered power plants during 

those same three years. While we can estimate our OG&E CO2 equivalents over any 

three years from our recent actual experience, it is necessary to know what the national emissions denominator is in that ratio, and different data bases can give different answers that can materially change the result. Without knowing what are the 

values that the Committee is using for those variables no utility can determine with 

even reasonable accuracy the number of allowances that it may actually stand to 

receive under that section. And therefore we cannot confidently deduce the number 

of allowances that we will need to secure through the auction process or by purchase 

from groups favored with allowances that they receive from other provisions under 

the bill or through offsets. We would note that, as recommended in Subsection J 

below, a carbon tax provides far greater certainty as to the carbon price signal and 

allows for more reliable estimations of costs and compliance options. 

We presume that the Committee is working with a set of assumed values for 

those variables and for the purpose of being able to work along with the Committee 

on an equal factual footing, regardless of whether there is consensus on the particular values the Committee might be assuming, we would urge that the Committee publish its assumptions in that regard so that estimates and comparisons 

can all be made by all interested parties on an ‘‘apples to apples’’ basis. In similar 

vein, we do not know what dollar value the Committee is assuming for allowances 

in the auction market in any particular year or even in the first year (2012), or the 

estimated value that allowances will demand when sold by sponsors of offsets. In 

our view, no Senator on the Committee can expect to understand the actual impact 

of the bill on their respective state’s constituents without such information. By the 

same token, no utility can fairly evaluate compliance options and the cost thereof 

without such information. Certainly, the residential, commercial and industrial electric customers, and the public utility commissions in each state will want to know 

such information. So, we would recommend that such information be made available 

immediately and that the Committee allow the affected public a suitable period of 

time to reflect on that and similar information before a full Committee markup so 

that any further legislative action is properly informed. 

Notwithstanding the limitation on our ability to estimate with the desired degree 

of accuracy the cost and compliance implications of S. 2191, our best analysis thus 
247 

1While we appreciate that S. 2191 projects a 65% emissions reduction from 1990 levels by 

2050, we view whatever may occur beyond the general 2020 timeframe to be sufficiently uncertain and speculative that it is unrealistic to predict with much confidence what our situation 

Continued 

far produces a sobering conceptualization of the challenge presented by the bill for 

both OG&E and our customers. We estimate that OG&E’s CO2 emissions represent 

approximately 0.9 percent of the total annual average CO2 emissions of the electric 

power industry in the United States. Thus, under Section 3903’s allocation methodology for ‘‘incumbent’’ utilities such as us, OG&E would receive approximately 9.5 

million allowances in 2012. These credits are only about thirty-six (36) percent of 

the allowances needed by OG&E in 2012. OG&E would still need approximately 

16.5 million additional allowances in 2012. This is a conservative estimate, as it is 

unclear how many allowances will be available to investor-owned utilities when all 

other allocations are made for ‘‘new entrants’’, ‘‘cooperatively owned utilities’’ and 

others before investor-owned utilities (IOUs) such as us receive their shares of the 

‘‘free’’ allowance pool in 2012. 

While it not clear what the market costs will be for the allowances that OG&E 

will need (i.e., possibly 16.5 million allowances in 2012), OG&E believes that these 

costs will be significant. For example, if allowances are priced at $30 when OG&E 

needs to purchase them in 2012 and we opt to buy them, OG&E will have to spend 

nearly $500 million that year. {This illustration’s cost is scalable in accord with 

one’s assumption of the allowance price.) It is unclear how OG&E will recover these 

costs since assumptions about retail rates and customers’ ability to pay are all unknowns at this time. 

Since the purpose of S. 2191 is to provide incentives for companies to change their 

operations to reduce greenhouse gas emissions rather than simply buy allowances 

to cover an unchanged emission rate, OG&E would likely have to do more to comply 

than simply buy allowances. For example, OG&E could retire all of its coal-fired 

generating units and switch to 100 percent natural gas generation. If OG&E pursued this option, OG&E would face the following costs: 

• $2 billion in capital cost to construct the gas-fired generation. Note: This option 

is not possible for 2012. 

• An increase of over $1.1 billion in fuel costs per year. This is more than double 

OG&E’s current annual fuel costs. 

• Even if OG&E eliminated coal from its generation portfolio, OG&E would still 

need to buy 7.8 million allowances which could cost $234 million in 2012 (if allowances are priced at $30 per allowance). 

• OG&E could mitigate part of the increase in fuel costs and the cost of purchasing allowances if it installed significant amounts of additional wind generation. 

However, OG&E believes that 1000 MW of wind generation would only reduce the 

increased fuel costs and allowance costs by forty to fifty percent. The capital cost 

associated with 1000 MW of additional wind generation would be approximately $2 

billion. 

• It is unclear who would pay for the very significant stranded costs associated 

with the retired coal-fired generating units. 

Employing this full switch from coal to natural gas would increase the average 

monthly bill for a 1000 kWh OG&E customer by approximately forty percent—representing an increase of $40 over the current $100 per month bill. And as noted 

above, even after this fuel cost impact, OG&E would still need to spend perhaps 

hundreds of millions of dollars on allowances in order to comply. The costs of these 

allowances would also presumably be passed on to OG&E’s customers, if permitted 

by our state regulator, thus making the estimated $40 per month price increase to 

customers from full fuel switching very conservative and not all-inclusive. 

B. S. 2191 fails to provide coal-based generation with sufficient transition support 

needed to protect customers from adverse cost and reliability impacts: 

We understand the bill’s objective of injecting a so-called ‘‘price signal’’ into the 

utility market to induce changes for cleaner electricity generation. However, OG&E 

is the type of utility that will be seriously challenged in the early years of S. 2191’s 

regime because we do not sense that it provides adequate transitional support for 

us to protect our customers from adverse cost and reliability impacts. 

The objective of reducing national CO2 emissions by 15% compared to 2005 levels 

by 2020 will be very aggressive for us primarily due to two factors: first, our high 

use of coal-based generation and second, the few lower-emission alternatives available to us in what we view as the initial, transitional term of the bill, i.e. 2012 

through 2020.1
248 

will be then, especially if we cannot successfully navigate the early transition years leading up 

to 2020. 

Nuclear generation opportunities have much longer lead times than S. 2191’s implementation date of 2012 would allow. As suggested in the narrative in Section I 

above, based on the Oklahoma Corporation Commission’s decision not to allow construction of an ultra-super critical coal plant that would have saved Oklahoma rate 

payers $5.5 billion compared to a gas plant, we have serious doubts about the ability 

to build any new coal plant in Oklahoma in the near future. Beyond Oklahoma, we 

observe that other clean coal plants are also encountering significant difficulty in 

being approved by state regulators, with their difficulties often largely attributable 

to the opposition of environmentalists and the advocacy by natural gas sellers who 

see economic opportunity for themselves in the demise of any new coal plant. We 

also note efforts to push EPA to prevent by regulation the construction of any new 

coal plants that are not equipped with CCS technology. The needed CCS technology 

that will allow the cleaner, continued use of coal is a decade or more away, and perhaps will not be commercially available until 2025. Renewable resources such as 

wind, solar and geothermal are not reliable for base load purposes. 

We therefore view the distribution of what are referred to colloquially as ‘‘free’’ 

allowances under Section 3901 et seq. to be critically important to our ability to 

transition during the early years of the legislation’s cap and trade regime. If anything, we view the current provisions of Section 3903 as likely not providing enough 

allowances to mitigate what we believe will be the economic cost of this program 

and to relieve the compulsion to engage in significant fuel switching to natural gas. 

In addition, while there are certainly advocates of auctioning all the allowances 

who will criticize the number of allowances distributed through Section 3903 as excessive or as a ‘‘windfall’’, we strongly disagree. We envision no realistic scenario 

where we do not need to continue to rely substantially on our coal generation fleet 

during the transition period to meet base load demand, notwithstanding the pressure for increased use of wind and natural gas generation. Any ‘‘free’’ allowances 

will mitigate the suite of new increased cost factors we will encounter from (i) our 

continued use of coal and increased use of more wind and natural gas generation 

and (ii) the expense of buying needed additional allowances through auction or offset projects. 

C. S. 2191 unfairly discriminates between co-operatively owned utilities and investorowned utilities 

Section 3903 differentiates in its distribution of ‘‘free’’ allowances between co-operatively owned utilities and the balance of the electric power sector. Under Section 

3903, co-ops get a distribution of allowances to cover all of their 2006 CO2 equivalent emissions, whereas what remains in the ‘‘free’’ pool after the co-ops are fully 

satisfied gets distributed pro-rata to the rest of the utility sector based on their ratio 

of emissions to the total national emissions of the utility sector. To us this appears 

to be a political accommodation that is unjustified and unfair. If there truly is an 

impending environmental catastrophe the ownership structure of the source of the 

green house gases does not change the impact on the environment. From a financial 

perspective, we are not necessarily better situated to absorb the cost of compliance 

any more than a co-operative is. Moreover, most of the co-operative utilities have 

a generation mix that tilts heavily toward coal-burning just like ours does. Our need 

for allowance relief is no different than theirs. S. 2191 should treat all utilities the 

same with regard to the distribution of Section 3903 allowances. 

D. S. 2191 overly restricts the use of domestic offsets: 

Section 2402 generally restricts the amount of allowances that a utility can use 

from domestic offsets to 15% of its annual obligation. A utility of OG&E’s size and 

resource capability likely will not be engaging in international offset activity, ergo 

what is available from domestic offsets is of far more interest and potential usefulness. While it remains to be seen how expensive and available such offset projects 

may be, it is not lost on us that Oklahoma is an agricultural state where presumably agricultural offset opportunities as envisioned by the bill may exist for us. We 

believe that a ton of CO2 equivalent offset is the same as a ton of CO2 reduction 

at our own plants. While we cannot realistically determine so now, potentially offsets could provide a cost-effective tool for us, especially in the transition period before clean coal technology is both commercially available and politically acceptable 

to state regulators. We would recommend significantly increasing the percentage of 

offset-based allowances that a utility could use during the period prior to 2020, or, 

even better, completely eliminating any limit on the use of verifiable domestic offsets. 
249 

E. In the absence of available alternatives in the immediate future, S. 2191 will compel massive fuel switching from coal to natural gas by utilities: 

Even without being able to quantify the cost of possibly alternative compliance 

strategies, it is evident beyond any doubt that S. 2191 will compel coal-burning utilities to engage in massive fuel switching to natural gas. The dramatic mismatch between the allowances that will be distributed to utilities under Section 3901 et seq. 

compared to their historic emission profiles, and the absence of new alternative 

technology such as clean coal/CCS to accomplish compliance while still using coal, 

will drive utilities into the allowance auction market and to the offset allowance 

market, the cost of neither of which can be reliably estimated initially or controlled 

over time. In the absence of new coal plants and other good, reliable technological 

choices for the indefinite future, and given the onset of the cap and trade regime 

in 2012—just four short years from now—no serious coal-burning utility company’s 

board of directors, knowing that state utility regulators are watching and need to 

approve every significant resource supply decision, will passively leave their company’s or their customers’ fate to the unknown and uncontrollable allowance auction 

market. Instead they will be compelled to adopt a compliance policy that has elements over which they exercise the maximum amount of control. We assume this 

is exactly the behavior the bill is intended to motivate. And for OG&E and other 

utilities that meet our profile, by far the most accessible and dependable such policy 

option is to switch from burning coal to burning natural gas. The Committee must 

recognize in its legislative deliberations this stark and unavoidable reality; to do 

otherwise is not to anchor the legislation in reality. 

Not surprisingly, the EU’s recent experience shows that such fuel switching apparently accounts for the bulk of emission reductions in the EU cap and trade regime. Too many credible and expert witnesses before this Committee have warned 

about the similar overwhelming and compelling incentive our U.S. coal burning utilities will experience to switch from coal to natural gas. They have warned that utilities, with their laudable obligation to serve their customers, will do all that is necessary to serve their customers reliably, economically and with environmental responsibility. Even if the utilities themselves did not feel compelled to do so, their 

state regulatory commissions would certainly insist on it. Moreover, assuming the 

usual ability to pass-through the cost of fuel used to generate electricity, utilities 

will have the economic incentive to do what will be universally viewed as the ‘‘right 

thing’’ for their customers. And no one should expect otherwise. Nor should anyone 

expect that increasing utilities’ incentive to switch to natural gas will have anything 

other than a dramatic upward pressure on the price of natural gas, the supply of 

which is not increasing sufficiently to meet this demand. 

While an increased price for natural gas is most certainly good news for many 

in Oklahoma’s robust natural gas production industry, it imposes predictable and 

unavoidable adverse consequences on everyone else who either uses electricity or 

natural gas. Numerous experts have already testified that, with the supply of natural gas effectively not increasing, the massive increase in demand for natural gas 

represented in coal burning utilities switching away from coal-burning will significantly increase the price of natural gas all across this country. The adverse impact 

of the increased costs of natural gas to residential, commercial and industrial customers will be enormous. This will result in major economic challenges for residential, commercial and industrial users of natural gas in every state in the Union. For 

example, hospitals and other health care facilities are large energy consumers. 

These significant increases will place even greater cost burdens on an already overwhelming health care dilemma. But the bottom line is that utilities will get the natural gas they need to generate cleaner electricity for their customers and in so doing 

other gas users will either have to pay the higher price or do without natural gas, 

which raises a host of issues about demand destruction, job loss and other adverse 

economic consequences that have already been well established in prior testimony 

before the Committee by a spectrum of witnesses extending from the AFL–CIO to 

the Industrial Energy Consumers of America. 

F. S. 2191 does not address the issue of stranded costs that may be caused by compliance with the bill’s cap and trade obligations 

If we are correct that significant fuel switching to natural gas will occur, leaving 

coal-burning facilities idled, we have a very big question as to who will deal with 

the stranded costs associated with those idled coal plants. The bill is silent in that 

regard, but we are confident that state utility commissions and electric customers 

will be very concerned with those stranded costs. This issue is an enormous concern. 

It would appear to us that in the event of such stranded costs the bill should accommodate the impact it causes by providing allowances or other compensation to the 

adversely affected utilities. 
250 

G. Load Serving Entities should be permitted to apply Section 3501 allowances 

against their cap and trade obligation 

OG&E qualifies as a ‘‘load serving entity’’ under Section 4(18). Section 3501 distributes allowances to load serving entities, including utilities like OG&E, for the 

purpose of defraying the cost impact of the cap and trade regime on low and middle 

income electricity customers. The provision appears to require the load serving entity (perhaps envisioning entities having no electric generation-related emission obligations) to sell these distributed allowances for cash, and then use that revenue to 

reduce the rates that their low- and middle-income customers pay. In our view, 

while the distribution of allowances to load serving entities is justified in recognition 

of their obligation to serve customers, requiring utilities that both generate electricity and qualify as load serving entities such as OG&E to sell those allowances 

for cash rather than simply to apply them directly to meet their basic allowance obligation is inefficient. Load serving/generating utilities are going to need every allowance they can acquire to meet those basic obligations and in so applying their 

share of the load serving entity allowance distribution in that manner they will directly benefit all their customers, including their low and middle income customers. 

H. S. 2191 too severely limits allowances for carbon capture and sequestration development 

If one is concerned about the impacts of fuel switching in the transition period 

before 2020 as we are, you can understand why we prioritize the expeditious development of clean coal technologies including carbon capture and sequestration that 

will facilitate the continued use of coal or the resumption of the use of coal if there 

is switching to natural gas. The entire cap and trade regime envisioned by S. 2191 

benefits by the most rapid implementation of clean coal technologies and CCS by 

reducing pressure to switch fuels to natural gas. 

However, Section 3601 only allocates 4% of the allowances to CCS development 

projects. In our view this is well below the value of CCS development to the goal 

of cutting CO2 emissions and well below the amount of interest coal burning utilities 

and their customers have in expeditiously incorporating CCS into their existing and 

possibly future coal-generation fleets. 

It is also counter-productive that the allowances for CCS decline over time after 

2017 (see Section 3603) when in our view they should increase since we do not expect CCS to be available until well beyond the 2020–2025 timeframe. Nor is it good 

policy to limit the allowances for CCS projects to 10 years (see Section 3604) or limit 

and prorate the pool of CCS allowances (see Section 3605). In addition, Section 

3602(2) seems to limit allowances to geological sequestration, thus excluding other 

types of sequestration opportunities which can offer similarly favorable and beneficial results. If CCS is so critical to allowing an emission free use of coal, which 

will provide low cost electricity and mitigate fuel switching, we view allocating more 

allowances to incentivize that objective to be a far greater national priority than S. 

2191 currently does. 

I. The Carbon Market Efficiency Board is less desirable than a ‘‘Safety Valve’’ to protect the economy from extreme adverse economic impact 

We are aware of the vibrant difference of opinion between advocates of the safety 

valve limit on the price of an allowance and the advocates of the Carbon Market 

Efficiency Board approach. Between those two options, OG&E supports the notion 

of the safety valve as a more effective and efficient means of preventing undesirable 

economic adversity. The safety valve provides far more predictability and legal certainty to affected parties. The powers of the Carbon Board are inherently restricted—ultimately the Board cannot increase the number of allowances—and any 

relief it grants in terms of increasing allowances in a year must be effectively ‘‘made 

up’’ by similar reductions in available allowances in future years. The Board is 

placed in a very rigid constraint and we simply do not agree that that level of inflexibility is either wise or needed. 

J. A Carbon Tax may well be more efficient and effective in the early years of any 

global climate control regime: 

While we cannot sufficiently quantify the compliance options and their costs as 

we need to do, we are impressed that the cap and trade regime in S. 2191 imposes 

substantial energy cost, but also significant transactional costs in the early years. 

The bill appears intended to drive utilities and industrial entities into a frenzy of 

activity including but not limited to amassing information, recordkeeping, reporting, 

negotiating for fuels and technologies, finding available and affordable allowances— 

all requiring lawyers and accountants, reminiscent of the overhead impressed on 

American business in Sarbanes-Oxley. We have observed that most economists who 
251 

1OGE Energy believes that the Carbon Board is not the preferred technique to prevent adverse economic impact from the cap and trade regime in S. 2191. As we testified on November 

13, a carbon tax that establishes a pre-determined price for carbon, which can be both adjusted 

and designed to alleviate the cost impact on low and middle income taxpayers, is a better approach. Even without a carbon tax though, a safety valve price for allowances in a cap and trade 

regime will provide more predictability in the market for affected entities which is critical to 

making the investments and establishing compliance strategies needed to achieve the emission 

reduction goals of S. 2191. 

have opined on the matter emphasize that imposition of a carbon tax has far greater 

transactional efficiencies and operational attributes than any cap and trade regime. 

A carbon tax needs no bureaucracy to monitor and administer it in the way a cap 

and trade regime does; plus a carbon tax can be readily adjusted up or down to ease 

economic adversity or provide enhanced incentive to reduce emissions. In addition, 

a carbon tax permits more confidence and predictability in making the significant 

investment decisions that utilities like OG&E are going to be faced with. 

For all these reasons, it may be more efficient and effective in sending a price 

signal to change behavior that will produce environmental/climate benefits to impose a carbon tax than a cap and trade regime with its transactional costs and economic dislocations. We would suggest that the Committee evaluate whether it would 

be more effective and efficient to amend S. 2191 to initially impose a carbon tax and 

delay implementation of any cap and trade regime to a date when the technologies 

such as clean coal and CCS are actually politically and commercially available so 

that coal remains a vibrant contributor to the solution and not a reason to drive 

natural gas markets out of control. 

CONCLUSION

OGE Energy Corp. wants to thank the Committee for allowing us to present our 

views. We respect the earnest desire of the Committee members to wrestle with the 

global climate issue in a responsible manner and would hope that the Committee 

members understand that OGE Energy has a tradition and overriding sense of obligation to do the right thing for our customers. 

RESPONSE BY DONALD R. ROWLETT TO AN ADDITIONAL QUESTION FROM

SENATOR CARDIN

Question. What guideline should govern the Carbon Market Efficiency Board’s 

intervention in the allowance market to mitigate price volatility? 

Response. Assuming Congress adopts the Carbon Market Efficiency Board approach in a global climate regime,1 it is imperative that the Board have wide discretion to intervene in the allowance market to mitigate undue price volatility. As currently drafted, S. 2191 inadequately arms the Board with tools to limit destructive 

economic impacts in a timely manner. That said, we view this question as assuming 

the existing provisions of S. 2191 are enacted and that the question is asking for 

insights into appropriate guidelines that should govern the Board’s intervention in 

the allowance market in order to mitigate price volatility. 

As an initial comment, volatility is not in itself something that the Board should 

manage with the idea of completely eliminating volatility. Generally, volatility is the 

reflection of an imbalance in the supply and demand situation for a commodity— 

including GHG emission allowances—and expecting the Board to over manage the 

market to eliminate volatility and enforce equilibrium is unrealistic, and potentially 

is destructive in itself in that it can introduce artificial constraints on the market 

which only further enhance volatility or produce a wide array of undesirable behaviors and unintended consequences. The Board must be able to analytically segregate 

volatility that is acceptable from volatility that is not, which means it must develop 

a valid model of the parameters of making such threshold distinctions. 

There are ranges of volatility that, as is the case in all commodities, are controllable through various normal business tools such as hedging on commodity futures 

markets, and the informed use of derivatives or insurance products. So volatility per 

se is not necessarily a concern that will always rise to a need for Board action. What 

is of concern is undue volatility that has destructive impacts that cannot be mitigated by reasonable business practices or are the result of manipulations of the 

market. Thus, the Board’s guidelines must reflect an understanding of what levels 

of carbon allowance price volatility businesses should reasonably be expected to handle through available financial market risk control mechanisms (such as the use of 

futures, derivatives etc.) in order to be able to assess when the Board itself has an 

obligation to step in to take action. 
252 

From our perspective as a regulated utility that will likely rely heavily on the 

purchase of allowances in the market due primarily to our continued use of coal and 

natural gas based generation, a major concern we see with volatility involves the 

inability to reasonably predict allowance prices so that investment and compliance 

decisions can be made reliably. If the price of an allowance proves unpredictable, 

it will induce risk that, if not reasonably hedged, will definitely deter the kind of 

economic decision making by utilities and other affected industries that S. 2191 

seeks. Another aspect of concern of volatility though involves the spiking of the cost 

of allowances, especially if such high prices are sustained over a period of time or 

are caused by manipulation. Note that high prices of allowances can cause tremendous adverse economic impact on us, our customers and everyone in the economy 

regardless of whether such prices are caused by manipulation or simply by too small 

a supply of allowances in the market in the face of a given level of demand, or even 

the combination of general economic factors independent from the cap and trade regime which create the environment in which the cap and trade regime is operating. 

The fact is the Board needs to have the tools to respond to sustained, high prices 

as well as to respond to undue volatility in prices since the ruinous impact of each 

can be the same. We suggest the Board should consider the following as guidelines 

governing its intervention in the allowance market: 

A. The Board should be actively monitoring on a daily basis within each region 

of the country: • The amount of fuel switching actually being undertaken by utilities moving 

from coal-based generation toward natural-gas based generation, and the consequent price supply/demand impact of such fuel-switching on utilities, the industrial and commercial sector, and residential sector. • The actual (vs. predicted) commercial availability of advanced technologies to 

coal-based utilities to mitigate switching to natural gas-based generation. • Unemployment levels and other indicators of regional economic dislocation to 

workers and employers attributable both to the domestic cap and trade regime and 

to other factors that materially contribute to the overall economic environment within which the cap and trade regime operates. • The impact of the global climate regime as a demonstrated reason for U.S. manufacturers to shift operations and/or employment overseas to reduce cost. • A reduction in U.S. GDP of .25% (one-quarter of a percent) in any fiscal quarter 

or over two successive fiscal quarters attributable to implications of the global climate regime compared to a reasonable baseline. • Evidence that the allowance market is being manipulated or that attempts are 

being made to manipulate the allowance market. 

B. The Board should establish as part of its intervention guidelines a set of ‘‘volatility ranges’’ for daily, weekly and monthly allowance trading where any exceeding 

of the upper level of the respective range will trigger the Board’s immediate analysis 

and consideration of causative factors, and where the Board concludes responsive 

action is necessary, an analysis of appropriate actions to mitigate the volatility. The 

Board should establish this ‘‘volatility range’’ analytical tool in advance and should 

establish a guideline of being able to respond with appropriate action within 48 

hours of a determination that such action is warranted. The objective must be to 

act expeditiously to mitigate, or perhaps even to prevent, adverse impacts in the 

economy from volatility. 

C. The Board’s intervention guidelines should be premised on establishing a close 

and ongoing working relationship with the Commodity Futures Trading Commission 

which has the expertise among federal agencies in monitoring, policing and overseeing commodity futures markets in this country. We expect carbon allowances to 

trade on futures exchanges and the CFTC already has the regulatory regime to collect trading information on a very timely and useful basis from market participants 

and to monitor for manipulations of the markets. The Board should not try to replicate that expertise of the CFTC, but rather should use that agency’s expertise efficiently and effectively. Of note, the CFTC has emergency authority to deal expeditiously with excessive speculation in the markets and to take emergency action to 

prevent serious economic harm and threats implicating systemic risk to the economy. CFTC can also issue cease and desist orders to prevent activity that is in violation of its statutory mandates or to prevent harm to the economy within the ambit 

of its jurisdictional mission. The CFTC should be viewed as a valuable asset at the 

disposal of the Board. The Board should enter into a Memorandum of Understanding with the CFTC to cover its cooperative activity and to be able to make referrals to the CFTC for detailed investigation in cases where the Board has evidence 

of or merely suspects manipulation in the allowance trading market. 

D. Speed: The Board cannot analyze the situation to the point where action that 

is needed to mitigate—or perhaps even prevent—adverse economic impacts is de-
253 

layed. The Board must be in position to assess market conditions and act if necessary within 48 hours, allowing itself time thereafter to take further action that 

modifies the initial action (i.e. more or additional intervention or reversing the initial action). 

E. Bias toward increasing allowances: Where the concern is the spiking of allowances that threatens increased costs and related adverse economic impact, the 

Board’s bias of action should be toward first increasing the availability of allowances 

in the market, not such alternatives as adjusting the ability to bank allowances or 

the interest rate on borrowed allowances etc. This broad based action parallels the 

value that the Federal Reserve’s interest rate adjustment activity achieves. Just as 

the Fed’s interest rates affect the whole financial market, adjustment of the number 

of allowances in the trading market will impact the entire allowance market—not 

just some identifiable subset of the allowance market. There intentionally will be 

only one, national allowance market, not a set of regional allowance markets. So 

broad, national action of the nature of the Fed’s interest rate adjustment are what 

will be needed and should be developed as the primary tool used by the Board. 

Senator LIEBERMAN. Thank you, Mr. Rowlett, very helpful testimony. 

We are going to do a five minute round of questions for each of 

the Senators. In Chairman Boxer’s absence, I will begin. 

Mr. Hawkins, I would like to start with you. The National Resources Defense Council is a member of the U.S. Climate Action 

Partnership, correct? 

Mr. HAWKINS. That is correct. 

Senator LIEBERMAN. The Climate Action Partnership was announced earlier this year, was it January? 

Mr. HAWKINS. It was early February. 

Senator LIEBERMAN. Early February. I think that when we look 

back, we are going to see that announcement as a tipping point toward actually getting something done on climate change by the 

U.S. Because it was quite a remarkable coalition of environmental 

groups, such as your own, and significant representation from 

American business, particularly industries that are emitters of 

greenhouse gases, who are essentially saying, okay, we feel a responsibility to be part of a solution. And they set out a series of 

standards, if you will, for what Climate Action Partnership would 

find to be an acceptable climate change bill. That is specifically in 

reduction of emissions by different dates, 2012, 2022, et cetera, 

there were ranges. 

This morning, in your testimony, you have presented your own 

estimates of what America’s Climate Security Act would achieve by 

the various dates. I must say, I am pleased as I hear them and 

read them, because your numbers certainly indicate that in the 

first two periods, which are critically important, 2012 and 2022, 

this legislation would actually achieve more emissions reductions 

than the U.S. CAP recommends for those years and that the emissions reductions achieved by our bill in 2027 and 2050 fall within 

the range recommended by U.S. CAP. 

So let me ask you first the bottom line question, can you say that 

on behalf of NRDC that at least when it comes to emissions reductions this bill passes the test? And if that is the standard that a 

Senator applies, then one should vote aye on December 5th. 

Mr. HAWKINS. Thank you, Senator Lieberman. First, let me correct what I told you about the announcement date. It was the last 

week of January of this year, the date before the State of the 

Union, as I recall. 
254 

With respect to your question on emission targets, I will speak 

for NRDC. NRDC is a member of U.S. CAP, but I am not here 

today representing U.S. CAP. NRDC views the emission pathway 

in this bill as a very good start on what we need to do. The emission reductions in the early years are strong. It is not possible to 

say they are stronger than what we need. We have waited far too 

long to get started. 

Toward the end of the period, we think the emission reductions 

will need to be stronger than they are in the bill, which is one of 

the reasons that we support the scientific review process to allow 

that to be adjusted. But from the standpoint of emission reductions, we think this bill merits support and merits an affirmative 

vote in this Committee. 

Senator BOXER. Thanks so much, Mr. Hawkins. 

Mr. Baugh, let me ask you this question. As I heard your testimony, I was interested that you said that some of the things we 

did as part of the process on the subcommittee to come to a meeting of minds and also to get the four votes to get it out of the subcommittee you felt took it too far in one or another direction. In 

particular, I was interested in your comment on timeliness and targets and the qualifying criteria for the technology, for some of the 

technology subsidies. 

As you know, there are members of this Committee who would 

like the bill to move further in that direction before it is reported 

out of this Committee. Are there any areas in which you believe 

that further movement of that sort would be particularly unwise 

from the AFL–CIO point of view? 

Mr. BAUGH. We have concerns about the phase-out, but I think 

moving it even faster creates greater problems. I think it comes 

from both the investment side of moving to transformational technology—— 

Senator LIEBERMAN. Just clarify what you mean by the phaseout. 

Mr. BAUGH. One of the points that I understand has been made 

is that there is the phase-out period for the free allocations that go 

to industry. 

Senator LIEBERMAN. Correct. 

Mr. BAUGH. I think we need to understand that some would like 

to have a system that is purely auctioned and no free allocations, 

which in essence would say to all of manufacturing, you are going 

to have to go buy allowances and you are going to have to invest 

in these transformational technologies. I think the idea here is that 

those allowances are let to businesses, and as the gentleman at the 

end said, they don’t cover the full spectrum. It is a limited pool 

that declines over time. 

But I think it is important to do that, so that these allowances 

are available for doing business. They are going to have to purchase more allowances and make investments in transformational 

technologies. And they are rewarded to some degree when in fact 

they do this and cut their carbon emissions. 

So I think this is an extremely important point that this phaseout is a tough thing to stand against. We certainly wouldn’t want 

to see it further tightened. We had concerns about it to begin with. 

I would share with the Committee, we actually have four studies 
255 

coming back in the next month that we worked with the National 

Commission on Energy Policy to take a look at what is the impact 

of cap and trade on energy-intensive industries. We looked at four 

sectors, and we will share that with the Committee as soon as we 

have it. 

Senator LIEBERMAN. We would appreciate that. 

My time is up, but I think what you said is significant. This is 

a balance, so this law would make some very serious demands on 

businesses, and they would have to spend a lot of money to comply 

with it, and of course, we are worried about the employment. One 

of the ways you cut back costs is by cutting back employees. And 

it was with that in mind that we created the allowances, the socalled free allowances. But we phased them out over time. 

I think it is significant that AFL–CIO is saying today through 

you that any shortening of that phase-out period you think would 

be unwise. 

Mr. BAUGH. We think it is damaging. 

Senator LIEBERMAN. Thank you. 

Senator Inhofe. 

Senator INHOFE. Thank you, Mr. Chairman. 

First of all, let me thank Senator Boxer, who was kind enough 

to extend the opening of this to 11 o’clock to accommodate my 

schedule, then Northwest was an hour late due to mechanical problems. So I would like to ask that my opening statement be made 

a part of the record. 

Senator LIEBERMAN. Without objection. 

Senator INHOFE. Mr. Hawkins, last week when we had Mr. Pershing here from the World Resources Institute, I asked him whether or not his organization would support nuclear power and he 

equivocated. I would like to ask you the same question, since it is 

going to be necessary in order to level off and then bring them 

down, in my opinion. Do you support nuclear power without a caveat, without equivocation? 

Mr. HAWKINS. I would like to break the answer into two parts. 

Senator INHOFE. I am sorry, for the record, then, why don’t you 

answer in two parts. But right now, do you have a yes or no answer? 

Mr. HAWKINS. We don’t support diversion of additional subsidies 

to nuclear power. We have no objection to nuclear power being an 

active participant in a greenhouse gas protection program. 

Senator INHOFE. Mr. Baugh, I have been troubled a little bit, I 

have talked to a lot of union members from various unions about 

the loss of jobs. Just a short answer, what is the impact of having 

requirements apply to plants that employ Americans starting in 

2012 if China and India continue to do nothing to address their 

rapidly increasing carbon footprints? First of all, you are not naive 

enough to think that they are going to reduce theirs, are you? 

Mr. BAUGH. No, Senator, I am not. And that is why we have supported the international language in this legislation. We would like 

to see the time lines moved up for its implementation. 

The second half of that is, we think the investment side of this 

portfolio, that it is invested domestically in American firms so that 

we capture the technology, that we make it here, that we deploy 

it here and have it available for export, is part of the balancing at 
256 

of how we address the jobs issue that is contained in this legislation. There is a huge opportunity for the Nation to do that. 

Senator INHOFE. Okay, I do appreciate your comment that you 

don’t believe that China and India and the developing nations are 

going to be doing this. 

Mr. Sharkey, if we adopted unilateral mandates, is there anything we can do in legislation to ensure that steel imports incur the 

same climate control costs as U.S.-manufactured steel products and 

exports? 

Mr. SHARKEY. I would just come back to reiterate our testimony, 

there are four things that would need to be done at a minimum. 

One is to make sure that we have simultaneous start dates, not 

2012 and then eight years later for foreign manufacturers. Have 

the same baseline period, make sure that we don’t have government-subsidized the allowances. And frankly, when you are dealing 

with China, of the largest 20 steel producers in China, 91 percent 

are government-owned or government-controlled. The subsidy issue 

is huge. 

Then the fourth thing is obviously we can’t have it be discretionary, they would have to be binding. 

Senator INHOFE. All right, thank you. 

Mr. Rowlett, I appreciate your being here today. I am sorry I was 

late, but I did hear your testimony. If this bill increases the demand for natural gas used for electric generation, what effect 

would this have? You talked about it, you gave a percentage of increase. I want to make sure that people paid attention to you. Why 

don’t you repeat that part of your testimony. As I came in, I heard 

you say something reflecting the increase in the prices on residential natural gas heating bills. 

Mr. ROWLETT. We looked at one of the more credible alternatives 

for us to meet the requirements of the cap and trade program, to 

be switching from coal generation to natural gas. That would have 

an impact of increasing a typical customer’s bill by 40 percent if 

we switched all the coal to natural gas. That typical customer 

would use about 1,100 megawatts, which is a very small family 

user. It is not a large home. 

Senator INHOFE. How would that disproportionately affect the 

poorer people, as opposed to the middle income people? 

Mr. ROWLETT. Because their energy use is a much higher percentage of their costs—— 

Senator INHOFE. Of their expendable income, yes. 

All right. The bill currently contains aggressive initial emissions 

reductions from targets in 2012 and 2020. Now, wouldn’t it be true 

that if you had a less aggressive reduction requirement in the early 

years it would give time for technology to catch up a little bit and 

perhaps be able to make this workable, or more workable than I 

think it will be? 

Mr. ROWLETT. That is one of our concerns, is that in the initial 

years, there is no commercially available or credible technology 

that is available to offset these costs, which pushes us more toward 

the side of fuel switching. 

Senator INHOFE. Let me give you the auction question here. Can 

you elaborate on why being regulated can cause you to face significant problems if you are forced to operate under an auction ap-
257 

proach for allocating emissions allowances, particularly given that 

State utility regulators need to approve every significant resource 

decision? 

Mr. ROWLETT. Before we choose any kind of resource, we have to 

go before our State regulators. Any kind of cost we incur, we have 

to get past the muster of the State regulators. So nothing is automatic. Everything has to go through our State regulatory commissions to determine how cost recovery will occur. 

Senator INHOFE. All right. Thank you. My time expired, Mr. 

Chairman. Thank you very much. 

Senator LIEBERMAN. Thank you very much, Senator Inhofe. The 

collegial courtesy continues unabated here today and threatens to 

go out of control. 

[Laughter.] 

Senator LIEBERMAN. Senator Carper is yielding his seniority in 

the direction of Senator Klobuchar to ask the next round of questions. 

Senator KLOBUCHAR. Thank you very much, Senators, for doing 

that. 

I had some questions, first of all, for Dr. Greene regarding the 

CAFE standards and what you think the effect would be on meeting the goals of the Climate Security Act if the Senate failed to or 

the Congress failed to pass an increase to the gas mileage standards. 

Mr. GREENE. I think increasing the fuel economy standards is 

the single most important policy for the transportation sector. And 

I think not just for light duty vehicles, but we should look strongly 

at whether we want to have fuel economy standards for heavy duty 

vehicles, as the Japanese do. Fuel economy standards have proven 

to be very effective at increasing the fuel economy of new cars and 

as the fleet turns over, increasing the fuel economy of vehicles in 

the fleet and reducing our energy use and petroleum use by vehicles. 

I think that one of the things we have not touched on really 

today is the importance of that in terms of our oil dependence and 

in terms of its positive impacts on the world oil market in reducing 

oil prices. If we can have an impact on world oil prices, reducing 

the cost of a barrel of oil by $10, that is equivalent to 25 cents a 

gallon, just as a $25 ton of carbon price would be. 

Senator KLOBUCHAR. You also talked about how aircraft CO2

emissions could be reduced by 12 percent through improved aircraft management and by 6 percent through operational improvements that could be made by airlines and airports. Could you 

elaborate on that? 

Mr. GREENE. These are estimates made by the airline organizations, ICAO and others, as to what could be achieved in terms of 

better flight planning. It requires things like reducing air traffic 

congestion, which we would all love to do for other reasons and 

greenhouse gas emissions as well. So there are a variety of steps 

in terms of the way flights are planned, flown and managed once 

they are in the air that can reduce the circuity of the travel and 

reduce the fuel burn rates of the aircraft while they are in travel. 

Senator KLOBUCHAR. Then I have some questions just to follow 

up on what Mr. Baugh was saying. I guess I would start with you, 
258 

Mr. Hawkins, about the effect that this could have, which of course 

we are all concerned about, on the economy and workers. We want 

to make sure that we have done this in a way that doesn’t hurt 

our economy and some of the predictions that have been made, that 

I don’t agree with. But I would like to know what Europe, having 

done cap and trade, what effect the cap and trade they have in 

place has had on their economy. And I would ask the same thing 

of you. I will start with Mr. Hawkins. 

Mr. HAWKINS. First, I would say that the European trading system is very much an initial trial run. It has had some bumpy spots 

with respect to price fluctuations. The Europeans recognized that. 

Fortunately, we recognize it, too, and the authors of this bill recognize it and have lots of provisions to prevent those kinds of things 

from happening. 

But we have not seen harm to the European economy as a result 

of this initial run. We think that given the provisions in S. 2191, 

we will not see harm to the U.S. economy. To the contrary, we will 

see economic opportunity created by the technologies that are stimulated under this bill. That will create jobs, it will not threaten 

jobs. 

Senator KLOBUCHAR. Mr. Baugh. 

Mr. BAUGH. We have seen, the European system has created a 

lot of carbon billionaires. They made some big mistakes in the way 

they structured their system to begin with. 

Senator KLOBUCHAR. Correct. 

Mr. BAUGH. It is having an impact. We are going to be participating in the Bali meetings with trade unions from around the 

world, and we will be discussing this. 

But I think that we do have concerns about the impact on jobs 

in this Country. We have a particular sensitivity toward energy-intensive industries. We need to look hard at how the cap and trade 

works. That’s why we help commission these studies. And we want 

to share them with the Committee. We have to look hard about 

how that impacts those industries. 

Secondarily is the investment side of the portfolio and how is 

that used to generate the jobs in this Country. You should be assured in the State of Minnesota that if Minnesota is going to make 

the choice and invest in renewable technologies that they are made 

here, they are made in your State, they are made in the region, 

they are made in the Country and we capture that ability. That is 

why I keep coming back to our point in the legislation. Make it a 

provision of legislation. These are domestic investments. We are 

trying to generate new industry and economic opportunity for our 

people as we make a transition. 

Senator KLOBUCHAR. Then just one last question. Mr. Sharkey, 

I share Senator Lieberman’s views of the good work that you have 

done. Coming from an iron ore State, I appreciate what you have 

been doing. You talked about that the steel industry is developing 

new types of steel products that can lead the way to reducing 

greenhouse gas emissions. Can you talk a little bit about that and 

elaborate on that, what the products are, what the time line is? 

Mr. SHARKEY. They are both products and processes. In terms of 

products, I think the critical one I would cite would be the new 

generation of advanced high strength steels, which is the fastest- 
259 

growing automotive material. We are working very closely with our 

car company partners to get this in the next generation of vehicles, 

because it really helps them meet their fuel efficiency goals, basically affordability goals, and also their safety goals. 

In terms of processes, the projects that we have underway are 

not only here in North America, but they are underway globally. 

We call them CO2 breakthrough projects. Basically, these are 

longer term research projects, I don’t want to hold out the prospect 

that we are going to have the results of these in the next 3 to 5 

years. These are 15 to 20-year time lines. But basically, these 

would be processes that would fundamentally look to eliminate CO2

from the production process. That is the challenge we have made 

for ourselves. 

I think we can get there. But again, it is going to take capital 

to get there. And I would only stress that probably the single most 

important thing in terms of deploying these new technologies, we 

need a steel sector that has strong financial performance, that generates the capital to put into the new technology. 

Senator KLOBUCHAR. Thank you. 

Senator LIEBERMAN. Thanks very much, Senator Klobuchar. 

Senator Voinovich, you are next. 

Senator VOINOVICH. Thank you. 

Mr. Sharkey, I have been in this business a long time. I remember the voluntary restraint agreements that we tried to get through 

to protect our steel industry. Then when I came to the Senate, the 

201 investigation so we could protect our steel industry, I think 

back to my days as a State legislator, when we pushed the steel 

industry to clean up the air and water. I woke up one day and 

found out that the rest of the steel industry around the world was 

modernizing and we needed the money to modernize. Finally we 

got Japanese investment in here so we could modernize. 

So I am really concerned about the steel jobs that we have here 

in this Country and I am sure that Mr. Baugh is concerned about 

the same thing. I am concerned about the issue of fuel switching. 

I believe in my State of Ohio, our recession started in 2001 when 

gas prices spiked and we saw a dramatic impact on manufacturing 

jobs in our State and around the Country. If you believe fuel 

switching is going to occur, and Anne Smith testified that she 

thought as much as 65 percent higher by 2015, 125 percent by 

2050, that was a witness we had last week, would there be any domestic industry remaining, and what would it mean to American 

consumers? 

Mr. SHARKEY OR MR. Baugh. The point is that there is a substantial testimony and evidence that some very smart people believe that as a result of this legislation, we are going to genuinely 

have fuel switching in this Country. The question is, if that does 

occur, what is going to happen to our jobs and to our steel industry? 

Mr. SHARKEY. Just very briefly, energy represents 20 percent of 

our production costs. So you think about that, you understand the 

magnitude of how important it is. Anything that raises our cost of 

energy makes us less competitive. Fundamentally, what will happen is that companies will make decisions about where their investment goes based on their competitiveness. We are already basi-
260 

cally seeing that in the EU. I think it is very unlikely you will see 

a new steel plant in the EU. They are going to put them in Brazil, 

they are going to put them everywhere because of the burden that 

we see in the EU right now. 

So it is a very important issue for the steel industry. We think 

that fundamentally, wholesale fuel switching to get more gas-fired, 

natural gas power plants is a big problem for the industry. This 

legislation unfortunately doesn’t address that. 

Senator VOINOVICH. Mr. Baugh, do you think that the Carbon 

Market Efficiency Board can readily operate as a safety valve or 

cost control mechanism to protect the U.S. economy in the event of 

shocks to that economy created by the system that we would be 

putting in place with this legislation? 

Mr. BAUGH. Senator, as currently structured, I do not believe so. 

My testimony was directed toward that. It is a system that has 

weak tools. It takes too long to implement them when there are 

prolonged price hikes, 180 days. It has an open market system. 

Anybody can compete. 

Let me give you an example of the volatility. The State of Illinois 

is actually doing carbon market trading. I just talked to the Electrical Workers from there two weeks ago at an energy conference. 

The number one bidder for allowances was a utility, the number 

two bidder was a utility. The number three bidder was Goldman 

Sachs. 

If you want speculatory behavior, speculation, if you want predatory behavior, we are going to create it. I think that is why we 

would argue for a much more restricted market system that would 

operate to avoid hoarding, to avoid predatory action and to say that 

you can bank allowances, but in perpetuity, that again can lead to 

other forms of bad behavior. I think we have questions about the 

effectiveness of that. 

Senator VOINOVICH. Thank you. 

Senator LIEBERMAN. Thank you. It is my pleasure now to call on 

the Chairwoman herself, Senator Barbara Boxer. 

Senator BOXER. Thanks so much. I am sorry I had to run out for 

a couple of minutes. 

The gloom and doom presented to try and stop this bill for members is simply belied by the facts. Mr. Hawkins pointed out he 

didn’t see any harm. But I want to tell you about a meeting I had 

with David Miliband, Britain’s Foreign Secretary. He is the former 

Environment Minister. He told us that since 1990, Great Britain 

has reduced its greenhouse gas emissions by 15 percent and its 

economy has grown by over 40 percent. So people can lob grenades 

on this point and try to scare folks, but it is just not true. 

All you have to do is look at my State, which is now starting 

down the path, it is the most exciting place in America to be. I 

would urge my colleagues who are so nervous about this, I don’t 

blame you, change is hard, we all know that. But if we do nothing, 

it is very dangerous. Come to my State, just see what is happening 

in the venture capital community. There is a coming together of 

folks from the business community, there is a coming together with 

the environment community, with Republicans, with Democrats, 

with Independents, with students, everybody focused on this. 
261 

The investments, I say to my friends Senator Lieberman and 

Senator Warner, who I know is listening to every word, the excitement because of your work and the signal it sends, the optimistic 

signal it sends. So I would argue every step of the way, those who 

are predicting gloom and doom. You sound just like the folks who 

predicted gloom and doom when we passed the Clean Air Act, the 

Safe Drinking Water Act, all the landmark laws. I am going to go 

back and actually get some of the nay-sayers’ comments. And you 

will find you fight right, oh, we are rushing this, we haven’t really 

looked at this. The fact is, when you do the right thing for the 

American people, by stepping up to the plate and addressing a 

threat like this, it has its rewards. And not to do it is, in my view, 

very, very dangerous. 

Now, I wanted to ask Mr. Rowlett about his support of the carbon tax instead of the cap and trade. Is that correct? Is that what 

your position is? 

Mr. ROWLETT. We have asked the Committee to consider a carbon tax in lieu of a cap and trade program, particularly during the 

transition period. It gives a better opportunity for the technologies 

to develop that would be necessary to operate under the cap and 

trade. 

Senator BOXER. Well, I think a carbon tax is what would hit 

lower income people the hardest. Right now, the way the 

Lieberman-Warner bill is written, it provides that low-income consumers will receive assistance from auction revenue in order to offset the costs. So I would posit that a carbon tax is the worst thing 

you can do. First of all, it is dead on arrival. I don’t know too many 

colleagues that want new taxes. And secondly, I think it would be 

much more harmful to low-income people than what we have here. 

And then I would say, Mr. Sharkey, I understand your concerns 

about foreign competition for the steel industry. You look at my 

record, I have stood there and said, I want to do what is right for 

the American economy and I am sure you would see that in my voting record. 

Now, this bill addresses international competition by providing 

special allowances and resources to U.S. energy-intensive industries like steel. Are you recommending we delete these provisions? 

Mr. SHARKEY. We are simply indicating that we don’t think they 

go far enough. We recognize the effort to address this particular 

problem, but we think the language that is currently in the bill is 

flawed and will not provide the necessary protection from competitors bringing product into this particular marketplace that is produced with a lower environmental standard. 

Senator BOXER. And so you have looked at the language that the 

Senators have really taken from the Jeff Bingaman approach? 

Mr. SHARKEY. Yes. 

Senator BOXER. And you don’t think it goes far enough? 

Mr. SHARKEY. That is correct, ma’am. 

Senator BOXER. Well, let me say, this last summer, I went to 

meet with people who run the markets, the new carbon markets. 

I met with a lot of industry people. One of the amazing giants of 

industry there who is involved with steel and concrete and all this, 

they are really embracing this. They had concern at first. But they 

are embracing this. Because you know, if you look ahead, again, 
262 

the cost of doing nothing. Now, I know industry in America and I 

used to be a stockbroker, so I watched very carefully what industry 

does to make sure profits are up and the rest. 

One of the major criticisms we have always seen is that there is 

not enough long-term thinking. I would just suggest to you that 

there is this train coming down the road called unfettered global 

warming. If we don’t step up to the plate and address it, and I 

think what our colleagues have done here is to really take an approach that considers everyone. I think, when you hear some of the 

criticism of the bill, some say, give too much to steel, give too much 

to coal. Others say, don’t give enough to steel, don’t give enough 

to coal. Something, you have hit that balance, it seems to me, when 

you get that. 

From my view, I would do 100 percent auction first thing out of 

the box. And I will support those amendments when they come on 

the Floor of the Senate. Everyone knows where I am at on this. 

But to do nothing, again to make the perfect the enemy of the good 

I think is a big mistake. I would just urge you to stay at the table 

with us. I would hate to see you away from the table, because this 

is going to happen eventually, because it has to happen. 

And I want to thank you, Senator Lieberman. That would be all 

I have to say. 

Senator LIEBERMAN. Thank you very much for what you did say. 

Senator Barrasso. 

Senator BARRASSO. Thank you, Mr. Chairman. 

Mr. Baugh, in your testimony on page 6, you said you were concerned about an amendment that I did in conjunction with Senator 

Baucus. It is an amendment that defined the terms low-rank coal 

in the bill. In your testimony you state you believe the amendment 

would undermine the technology transition that this legislation is 

attempting to achieve. 

In expressing concerns about my amendment, you stated in your 

amendment that there should be no distinction among coal types, 

such as higher rank or lower rank. I just wanted to know if you 

realize that in the underlying bill, it already made that distinction 

among coal types by setting aside allowances and that the amendment merely put a definition on what was called low-rank coal? 

Mr. BAUGH. I would have to go back and look. I was responding 

to our colleagues from the United Mine Workers and others who 

raised that issue with us. They believed that it created a preference 

for western coal. We just said we didn’t believe there should be 

preferences. 

Senator BARRASSO. Well, there has been a lot of praise for the 

Lieberman-Warner bill. Are you saying that the Lieberman-Warner 

bill was not correct initially in ensuring utilization of lower-ranked 

coal by promoting a small fraction of assistance to projects that 

used that coal? Because that is in the original bill. 

Mr. BAUGH. Senator, I will have to go back and look. Honestly, 

I can’t answer that question because I don’t know for sure. 

May I clarify something, though? The bigger issue that was in 

there that I was implying that the transformation need for investments is in particular directed at the auto provision that was put 

into the bill that said you can’t invest in anything other than an 

automobile that goes more than 35 miles per gallon. Frankly, when 
263 

you talk about making research and development investments, 

whether it is hydrogen or hybrids or other things, you are investing 

in raising the energy efficiency of the fleet. 

You can’t sort these things out this way. That is not how the industry works. We just think that that was a mistake, that it really 

should go back to the original language. We really do want to raise 

the level of the entire fleet. To do that, we have to make investments into these transformational technologies. 

Senator BARRASSO. Mr. Hawkins, the target date on the bill is 

2050. How much cooler do you think the planet will be if we pass 

this legislation but yet China and India don’t follow suit with a 

similar cap and trade approach? 

Mr. HAWKINS. Senator, if the United States passes this legislation, I am confident that China and India and other countries will 

engage much faster. And the contrary position, if the United States 

hesitates and does not pass legislation like this, we can be assured 

that China and India will not engage, and we will indeed be in a 

heap of trouble. 

Senator BARRASSO. That sounds rather speculative. It is just a 

confidence you have in India and China’s commitment to make that 

change in spite of what impact it may have on their own economies? 

Mr. HAWKINS. It is a confidence that I have in the respect that 

the United States has in the world community and countries pay 

attention to what the United States does and they pay attention to 

what the United States does not do. For the last 10 years, I have 

been going to China a couple of times a year and meeting with 

business leaders and political leaders as well. Every time we bring 

up advanced technology and ask the Chinese what they are doing 

about it, the first question they ask is, what is the United States 

doing about it. 

So the more that we can say that the United States is doing the 

more opportunities we have to engage them. This is not speculation. This is a method that works. We cleaned up cars in the 1970s. 

The Chinese then acted to clean up their cars. We took lead out 

of gasoline in the 1970s and 1980s. The Chinese have taken lead 

out of gasoline. They are now putting scrubbers on power plants, 

after we put scrubbers on power plants. 

Senator BARRASSO. Mr. Hawkins, I have limited time to ask 

questions. 

So the answer is, you don’t know if the planet will be cooler or 

not cooler if we do all this and China and India do not follow suit, 

which was the initial question? 

Mr. HAWKINS. I am confident that if we take this action, the 

planet will be much cooler and the climate will be protected to a 

degree that we cannot count on if we fail to act. 

Senator BARRASSO. Could you talk a little bit about jobs? I am 

very concerned about the Wyoming economy. How many jobs do 

you predict would be lost in our State if this does take place? Because you had talked about jobs increasing rather than decreasing. 

Mr. HAWKINS. Yes. We think, jobs are created when goods and 

services that people value are created. The world is going to value 

clean energy solutions. Renewable energies from your State are 

going to enjoy a thriving business. With coal technologies that cap-
264 

ture carbon, which are going to be incented by this bill, again you 

will have a market for technologies. There will be industries as 

companies like Rio Tinto have observed. They will get paid for taking carbon out of the ground and they will get paid for putting carbon back into the ground. This is a job creation program. 

Senator BARRASSO. And of course, that company has just announced it is going to sell all its North American assets. 

Thank you, Mr. Chairman. 

Senator LIEBERMAN. But before they did, they announced that 

they were going to be members of the U.S. Climate Action Partnership. 

[Laughter.] 

Senator LIEBERMAN. Senator Carper. 

Senator CARPER. Thanks, Mr. Chairman. Again, to our witnesses, 

thanks so much for your testimony and your responses here today. 

I have a couple of questions for Mr. Sharkey and one for Mr. 

Hawkins. Let me just start with Mr. Sharkey. In an earlier version 

of your testimony, you talked a little bit about the very fine job 

that the industry you represent has done with respect to recycling. 

We applaud you for that and want to make sure that it continues. 

You mentioned in your testimony, your earlier testimony, you said, 

I understand that Senator Carper may offer a recycling amendment to the bill. That is correct. Then you go on to say the use of 

recycling materials as raw materials, feedstock, in the manufacturing process can significantly reduce and even avoid in some 

cases greenhouse gas emissions. I would say amen. 

In crafting an amendment that we are probably going to offer on 

recycling, and my colleagues that I will be asking to support, give 

us some idea what you think might be constructive. 

Mr. SHARKEY. We will need to take that under advisement and 

we will be back to you very shortly. 

Senator CARPER. If you could respond for the record, I would appreciate that. 

A second one, if you would, I think in your testimony you discussed the reductions in CO2 emissions per ton of steel that your 

industry has achieved I think since 1990. In your opinions, are 

there some policies that we could include in this legislation that 

are discussing today that would reward the progress that your industry has already achieved? 

Mr. SHARKEY. Obviously we would pay very close attention to 

credit for early action and whatever timeframe might be set for 

that. I think that would be an important issue. 

I think support for new technology deployment is very important. 

We currently have a public-private partnership with the Department of Energy, working on many of these technologies. But frankly, the United States is way behind what is occurring in Japan, 

Korea, the EU, where there are very aggressive support programs 

to develop this new technology. 

Senator CARPER. All right, thank you. 

And one for Mr. Hawkins, if I could. Mr. Sharkey expressed earlier some concerns over I think the allowance obligations that the 

industrial sector will face in, I believe it is 2012. I would just ask, 

and this may not be a fair question, but I will ask it anyway, and 

if you can answer it, fine. If not, just come back to me on the 
265 

record. But what will those obligations be? And what are the 2005 

industrial emissions compared to the amount of allowances that 

will be given for free? Just think about that. What allowances are 

going to be given for free and what actually do they emit for CO2

in 2005? 

Mr. HAWKINS. The bill provides that 20 percent of the total allowance pool is available for free initially to the industrial sector. 

Another 20 percent is available to the electric power production 

sector. I can get you the figures on what the industrial emissions 

were in 2005. I don’t have those figures broken out separately for 

the industrial and the power production sector. The total covered 

emissions in 2005 for all covered sources are on the order of 6 billion tons of carbon dioxide per year. 

Senator CARPER. Somehow, I am thinking in the back of my 

mind that the allowances may actually be greater, the ones that 

are for free, might actually be greater than the level of emissions 

in 2005. I don’t know if it is just with respect to one sector of the 

industrial economy or more. But if that is the case, that is an interesting point. We will get to the bottom of that, if you can answer 

for the record, I would appreciate it. 

Mr. HAWKINS. I would be happy to do that. If they aren’t greater, 

they are certainly a very high fraction of their total obligation. And 

when combined with offset provisions and others, we think that the 

argument that the industrial sector will have difficulty in meeting 

these targets is not well-founded. 

Senator CARPER. Does anybody else have a thought on this point 

before we move on? No? 

Okay, Mr. Chairman, thanks so much. 

Senator LIEBERMAN. Senator Carper, thank you very much. 

Senator Alexander. 

Senator ALEXANDER. Thank you, Mr. Chairman. 

Dr. Greene, I want to make sure I understood your comments 

correctly. The Senate in its Energy Bill passed higher CAFE standards, 35 miles per hour average, by 2020. Did I understand you to 

say that would be the single most important policy that the Congress could take in the transportation sector for reducing our dependence on oil? 

Mr. GREENE. That and reducing greenhouse gas emissions. 

Senator ALEXANDER. So in both cases, that would be the single 

most important policy within the transportation sector? 

Mr. GREENE. In my opinion, yes. 

Senator ALEXANDER. In order to reduce greenhouse gases and reduce our dependence on oil. You also mentioned some figures, and 

I was trying to follow them. Did you say that the change in a $10 

price in the barrel of oil was equal to about 25 cents in a gallon 

of gas? 

Mr. GREENE. Yes. 

Senator ALEXANDER. So if the price of oil went from $90 to $100 

in the last couple of weeks, that basically will eventually raise the 

price at the pump a quarter? Is that right? 

Mr. GREENE. Yes. 

Senator ALEXANDER. What did you say, you said something about $25 a ton. Does the cost of $25 a ton of carbon cost about a quarter 

on a gallon of gas, or did I misunderstand you there? 
266 

Mr. GREENE. No, that is correct. 

Senator ALEXANDER. I would like to ask you about the idea of a 

low-carbon fuel standard. How would you define what we mean by 

a low-carbon fuel standard? 

Mr. GREENE. Well, one sets a limit for the quantity of carbon 

that can be emitted from burning, say, all of transportation fuels 

in the United States. 

Senator ALEXANDER. So you would basically say to the oil companies or to the seller of gasoline that in the blend that you mix you 

have to have a steadily decreasing amount of carbon? 

Mr. GREENE. Probably to the refiners, yes. 

Senator ALEXANDER. You would say it to the refiners? 

Mr. GREENE. Probably. You could do it in different ways. 

Senator ALEXANDER. But probably to the refiners. 

Mr. GREENE. Yes. 

Senator ALEXANDER. Now, compared to a so-called upstream tax 

on the economy, which includes fuel, it seems to me that the possibility that we put an upstream tax on fuel, economy-wide tax that 

also includes fuel, that we might raise the cost, that the companies 

or refiners might just simply pass that tax along to the customer 

at the pump, and it wouldn’t have the effect of changing behavior, 

while a low-carbon fuel standard should have the effect of actually 

reducing the amount of carbon in the air. Is that a valid comment? 

Mr. GREENE. I don’t know of a study that looks at the effect of 

the carbon tax on eventual carbon content of fuels. So how sensitive is the transportation fuel industry to a tax on carbon I don’t 

think we really understand yet. But clearly, the low-carbon fuel 

standard sets a performance standard. I think the reason California has gone ahead with a low-carbon fuel standard is their belief that it is a method of pulling technology along. 

Senator ALEXANDER. If I may ask, I have one other question I 

want to ask Mr. Rowlett, if you had an effective low-carbon fuel 

standard, a steadily-decreasing requirement in the transportation 

sector for fuels, why would you also need a so-called upstream tax 

on fuels? Why wouldn’t the low-carbon fuel standard, properly administered, be sufficient? 

Mr. GREENE. I think this is the same question as, should there 

be a tax on carbon or should there be a carbon cap and trade system, on the sense that the low-carbon fuel standard essentially sets 

a performance goal and says, this is how much carbon you can emit 

and what that costs remains to be seen. 

Then the carbon cap and trade system in this case would put a 

price on the carbon and how much reduction in carbon that price 

would achieve remains to be seen. 

Senator ALEXANDER. Thank you, Dr. Greene. 

Mr. Rowlett, I understood you to say that while you are quadrupling your investment in wind that it is not an alternative to 

your baseload requirements. 

Mr. ROWLETT. Exactly. 

Senator ALEXANDER. Do you then use it as a reliable alternative 

during peak periods? 

Mr. ROWLETT. It is not dependable at all during peak periods. 

Senator ALEXANDER. Well, if you don’t use it for baseload or peak 

periods, why are you investing in it? 
267 

Mr. ROWLETT. We are investing in it to lower our carbon footprint. 

Senator ALEXANDER. So you mean you can’t use it, but regulations are requiring you to build wind turbines? 

Mr. ROWLETT. We can use it when the wind is available. And it 

offsets—— 

Senator ALEXANDER. But it is not a baseload and it is not peaking? 

Mr. ROWLETT. Absolutely. 

Senator ALEXANDER. What other use do you have for electricity, 

if it’s not baseload or peaking? 

Mr. ROWLETT. Well, to provide for needs when it is not baseload 

and it is not peaking. 

Senator ALEXANDER. When would that be? 

Mr. ROWLETT. It is whenever the wind is available. When the 

wind is blowing and it is generating electricity, it offsets coal 

or—— 

Senator ALEXANDER. But your testimony is you don’t use it in 

your utility for baseload and you can’t use it for peaking? 

Mr. ROWLETT. Right. 

Senator ALEXANDER. But you do it because you are required to 

lower your carbon footprint? 

Mr. ROWLETT. Well, in our case we don’t have an RPS standard. 

We are doing it, we are trying to take some proactive actions to reduce our carbon footprint without it ever being a mandate. That is 

sort of the bargain that we have reached with our local and State 

legislators. 

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

Senator LIEBERMAN. Thank you, Senator Alexander. 

And now for the climax of the hearing, Senator Whitehouse. You 

don’t have to mention Long Island Sound. 

Senator WHITEHOUSE. Can I mention Narragansett Bay? 

Senator LIEBERMAN. Yes, you can. 

[Laughter.] 

Senator WHITEHOUSE. Mr. Baugh, I wanted to follow up with you 

because your testimony addresses most directly the concern about 

integrity of the allowance marketplace. First of all, you have the 

concern about offsets and about monitoring their legitimacy, particularly when it gets to overseas, potentially duplicative credits. 

Beyond that concern, do you have any recommendations on what 

we should set up institutionally to protect against that concern? 

How would you see us evaluating the legitimacy of offsets and 

claims and protect against the counterfeit carbon savings problem? 

Mr. BAUGH. In all honesty, Senator, we haven’t thought this 

through, to give you a straight-up answer on that. We think it 

needs to be done. We recognize it is a problem. We are more than 

willing to sit down with everyone and work through this, so that 

the legitimacy of the overseas issues are addressed and taken care 

of. We think the 33 percent total ability to offset from domestic and 

international is a lot. And we worry that, is that a disincentive to 

manufacturers and those to make the transitional investments we 

need to have made in the domestic economy. 

The other piece of that is this issue of the offsets that are here 

domestically, there have been some things that were put into the 
268 

bill to address this. But I am concerned about paying for behavior 

that is going to happen anyway. We don’t want to do that. 

Senator WHITEHOUSE. Well, I look forward to working with you 

as well. I feel about it the same way you do, we have a big problem, and I am looking around for people who have thought ahead 

through the switches a couple of steps. I am not finding much 

there. 

The other is the question of how you regulate the allowance trading itself. We have seen in American history numerous examples 

of markets gone bad, silver markets, stock market scams, all sorts 

of things. Here there is going to be an awful lot of money flowing. 

In my view, the regulation of it is very minimal. 

You have proposed restrictions on the timing, of how long allowances can be held, and the access, who can trade in those. 

Mr. BAUGH. I think very simply, I think this can act as sort of 

a natural regulatory mechanism, in a sense, that if the access to 

the market is limited to the people who have to use allowances to 

begin with, and remember, it is a declining pool, it is a diminishing 

pool to begin with, they have to buy them anyway, but limit it to 

the people who actually have to use them. Goldman Sachs should 

not be buying allowances. That leads to all kinds of bad outcomes 

for people. Artificially high prices, which people are worried about 

on this Committee, and the banking issue I think is problematic 

from that point of view. There may be legitimate reasons to allow 

certain forms of banking. But again, when does banking become 

hoarding and lead to behavior you really don’t want to use? 

I think the idea of the carbon market board and the trading system is, people have to buy these because they have to use them. 

It should be done in such a way that it is also encouraging the investment of their resources into the transitional technology at the 

same time. That is why we oppose this idea of just this wide open 

market system. We think it is very problematic and will have huge 

price outcomes, bad ones, for the American public and American industry. 

Senator WHITEHOUSE. Do you think someone needs to oversee 

the board? 

Mr. BAUGH. Oh, absolutely. I know the suggestion is that it is 

like a Federal reserve. That may be. I think Congress has a role 

here. 

Senator WHITEHOUSE. Maybe more like the stock market, which 

has a pretty active SEC requirement. 

Mr. BAUGH. Well, I don’t know if we need to go the SEC and our 

criticisms of that. But it is a problem, that is like the foxes guarding the henhouse there. I don’t think we want that, either. 

Senator WHITEHOUSE. You do think there needs to be some entity of some kind? 

Mr. BAUGH. I think there needs to be some entity of some kind. 

Senator, we share your concerns that you raised in your opening 

statement. 

Senator WHITEHOUSE. Are you convinced that the governance of 

this board is adequate? 

Mr. BAUGH. I think it is a start. I think it should be broadly 

based. We think labor should be represented on it. We said as 

much in our earlier testimony. 
269 

Senator WHITEHOUSE. And I wonder about the accountability of 

it and the openness of it, the transparency of it, just in terms of 

things like open meetings requirements, open records requirements, Administrative Procedures Act requirements. 

Mr. BAUGH. As a public body, that should be a given. I think this 

issue of transparency, that the public sees, that industry sees the 

people that are participating, everybody understands what is happening here. 

My last comment would be, people don’t want to talk about 

taxes, but in fact, the cap and trade program is in effect a tax. 

Senator WHITEHOUSE. It sure is. 

Mr. BAUGH. It will raise revenue just like you could raise tax revenue. You can choose to use some of that revenue to offset the impacts on the low-income people, just like the cap and trade proposal 

does. Nobody is fooling each other: this will raise the cost of energy. 

The question is, how do we do it in a way that does not have negative impacts on our industrial base of this Country, that is done in 

such a way that the consumers don’t get hit very hard about this, 

and that we make this transition, and that the investments that 

we are going to put out there should be made. 

There are allowances allowed for the line agencies, right, for the 

transmission agencies. Well, make it clear on the record that if 

they are going to get allowances, they don’t generate or produce 

carbon. If they are going to do that, then they have to make that, 

take that money, that resources and invest in high-efficiency energy with technologies that are there. It can make a big step toward some of the energy efficiency needs we have. 

I guess I am saying, there are a number of ways we need to be 

more direct in the legislation to look out for the interests of the Nation, to assure that these jobs are created here, that we keep the 

jobs we have, and that we get the rest of the world to play. 

Senator WHITEHOUSE. Thank you very much. 

My time has expired. I thank the Chair. 

Senator LIEBERMAN. Thanks, Senator Whitehouse. Those were 

very interesting questions and answers. I will just say real briefly 

that Senator Warner and I, Senator Warner was particularly focused, in the construction of the bill, on maintaining the integrity 

of the systems. I will say to you that the Carbon Market Efficiency 

Board, as we have conceived it thus far in the bill, plays a role 

much more akin to the Federal Reserve Board than to the SEC. It 

could be that, well, you probably know, check me, on the acid rain 

system, they are subject to regulation by the CFTC, or the SEC? 

Mr. HAWKINS. Actually, the acid rain, sulfur dioxide trading program has many of the features that concern Senator Whitehouse 

but don’t have the problems that he is worried about. There is free 

and open trading. There is unlimited banking. Anyone can hold allowances. We have not seen the problems develop that Mr. Baugh 

and Senator Whitehouse have indicated. 

Senator LIEBERMAN. But remind me, is that trading system subject to oversight by the Commodities Futures Trading Corporation? 

Mr. HAWKINS. Individual trading firms like the Chicago Board of 

Trade are subject to the standard, whatever they are subject to 

with respect to any other commodities. But the acid rain permit 

system itself is operated by EPA. EPA issues the permits, the cer-
270 

tificates. They are traded. They have to be turned into EPA every 

year. And as I say, the problem with hoarding, the problem of stock 

speculation, simply hasn’t occurred. 

Senator LIEBERMAN. This is something we want to continue to 

work on, because it may be that we want to give some enumerated 

oversight to some existing regulatory entity like the SEC or CFTC. 

But as you said, these markets presumably will occur on one of the 

existing exchanges. And those exchanges are subject to review by 

existing regulatory groups. 

But this is an open question. I would love to continue working 

on it with you. 

The second is that you are right, that this business of the allowances and the auctions, the auctions are going to raise a very significant amount of money. To me, that says two things. One, we 

want to make sure that to the best of our ability, we create a system in which the Climate Change Credit Corporation, which will 

collect and distribute this considerable amount of money, sets up 

systems to make sure that, to the best of anybody’s ability, that it 

is spent well. Our intention here is to both reduce some of the price 

impacts of our system, but also, and this is most significant, to reinvest the money collected as a result of the auctions in technologies that will drive exactly what happened in the iron and steel 

sector of our economy, hopefully creating more jobs, certainly protecting jobs. 

I will tell you that we have phrased the allocation of the auction 

proceeds in terms of percentages. But there are groups outside who 

have now tried to convert that, in a reasonable basis, to actual dollars. It is an enormous amount of money. And I want to say in a 

positive sense, if we do everything we can to guarantee the integrity of it, and it is intended to achieve public purpose, in fashioning 

a system to deal with the global challenge of global warming, we 

have within our grasp the opportunity to create what a lot of people have been saying we needed to do for a long time, whatever 

your metaphor is, whether it is a Manhattan Project or a moon 

shoot, to make America energy independent. And incidentally, to 

also help to clean up other forms of air pollution that affect people’s 

health. 

So there is a real opportunity here, and as others have said, a 

lot of money will be on the table. But we have to be, Senator Warner and I want to make very sure that we do everything we can 

to not only ensure the integrity of the system when that money is 

on the table, but that it is used as a kind of vast venture capital 

pool to really unleash the most aggressive entrepreneurial, innovative talents that history shows us are there in the American economy. 

You have given us a lot of time and I thank the witnesses. This 

has been a very interesting hearing, as the last one was. I think 

in both the question and the comments of the members of the Committee and the exchanges with the witnesses, we are going to a 

level of practical detail about the bill, which is very encouraging. 

It is not that everybody agrees, and not that everybody says yes, 

I support the bill. But I don’t hear anybody much any more saying 

this is not a problem. I think everybody is pretty much saying we 

have a problem here, now what is the most sensible, effective way 
271 

to solve it. These hearings and your testimony today has really 

helped us to do that. 

So I appreciate it very much. The hearing record will stay open 

for an additional week for statements that other Committee members may want to ask the witnesses, or if you or others want to file 

additional statements for the record. 

With that, I thank you again and adjourn the hearing. 

[Whereupon, at 1:30 p.m., the committee was adjourned.] 

[Additional statements submitted for the record follow.] 
272 

GAO 

March 2007 

GAO-07-285 

United States Government Accountability Office 

Report to the Committee on Homeland 

Security and Governmental Affairs, 

U.S. Senate 

CLIMATE CHANGE 

Financial Risks to 

Federal and Private 

Insurers in Coming 

Decades Are 

Potentially Significant 

GAO 

Accountability .. Integrity· Reliability 
273 

Highlights of GAO·07·285, a report to tM 

Committee. on Homeland Securlly and 

Governmenta! Affairs, U,S, Senate 

Why GAO Old This Study 

Weather",related events have cost 

the nation billions of dolla:rs in 

damages OVer the past decade, 

Many of these losses are borne by 

private insurers and by two federal 

insura!)ce programs-the National 

Flood lnsura!)ce Program (NFlP), 

which insures praperties agaInst 

floodlng, ahd the Federal Crop 

insurance Corporation (FOIC), 

which insures crops against 

drought or other weather disasters, 

GAO was asked to (I) describe 

how climate change may affect 

future weather-related losses, (2) 

determine past insured weather~ 

related losses, and (3) detemime 

what major private insurers and 

federal insurers are doing to 

prepare for potential increases in 

such losses. In response, among 

other things, GAO reviewed key 

scientific assessments; an.alyzed 

insured loss data; and contacted 

private insurers, NFlP, and FCIC, 

What GAO Recommends 

GAO is recommending that the 

Secretaries of Agriculture and 

Homeland Security analyze the 

potential long-term flSC.ai 

implications of climate change for 

the FClC and the NFlI', 

respectively, and report their 

findings to the Congress, In 

commenting on a draft of this 

report, the two agencies agreed 

with the recommendation, The 

Departments of Agriculture and 

Commerce made co:nunents and 

suggestions on the presentation of 

several fmdings, The Department 

of Energy elected not to comment, 

WWIJ"!.gao·90vfcgl-blnfgetrpt?GAO-07~285, 

To view the full product, Including the scope 

and methodology, click on the link above, 

For more information, contact John 

Stephenson at (202) 512-3$41 Of 

stephensonj@gao.gov, 

March 2007 

CLIMATE CHANGE 

Financial Risks to Federal and Private 

Insurers in Coming Decades Are 

Potentially Significant 

What GAO Found 

Key scientific assessmenls report that the effects of clirnate change on 

weather-related event...:; and, subsequentlYl insuT€d and uninsured losses, 

could be significant. The global average surlace temperature has increased 

by 0,74 degrees Celsius over the past 100 years and climate models predict 

additional, perhaps accelerating, increases in temperature. The key 

assessments GAO reviewed generally found that rising temperatures are 

expected to increase the frequency and severity of damaging weather-related 

events, such 3..'i flooding or drought, although the timing and magnit.ude arc 

as yet undetermined, Additional research on the effect of increasing 

teruperatures on weather events is expected in. the near future, including a 

highly anlidpated assessment of the state of clil'nate science this year. 

Taken together, pIivate and federal insurers paid more than $320 bil1ion in 

claims on weather-related losses from 1980 to 2005, Claims varied 

significantly from year to year-largely due to the effects of catastrophic 

weather events such as hurricanes and droughts-but have generally 

increased during this period. The growth in population in hazard-prone areas 

and resulting real estate development have generally increased liabilities for 

iHsurers, and have helped to explain the increase in losses. Due to these and 

other factors, federal insurers' exposure has grown substantially. Since 1980, 

NFIP's exposure quadrupled, nearing $1 trillion in 2005, and program 

expansion increased FCIC's exposure 2(}-fold to $44 billion, 

Major private and federal insurers are both exposed to the effects of climate 

change over coming decades, but are responding differently. Many large 

privat.e irll:lUrers are incorporating climate change into their annual risk 

management practices, and some are addressing it strategically by assessing 

its potcntiallong~term industry-wide impacts, The two major federal 

insurance programs, however, have done little to dcv£'1op comparable 

mfonnation, GAO acknowledges that the federal iIt.surance programs are not 

profit-ortented, like private insurers. Nonetheless, a strategic analysis of the 

potential implications of climate change for the major federal insurance 

programs would help the Congress manage an emerging high-risk area with 

significant implications for the nation's growing fiscal imbalance, 

Growth in Exposure of Federal Insurance Programs ($2005) NflI' FCIC 

Oollarsl" blmomt Dollarn In !)ImOM 

1,COO 50 

ffi Dll~ ~DD[lD 1000 1m 1990 H)95 2000 2005 

U~l ""'==="--'''--' ..... ,,-' •• .J.....J 

Sou,w:GAQ, 

______________ Unlted States Government Accountability Office 
274 

Contents 

Letter 

Appendix I 

Appendix II 

Appendix III 

Appendix IV 

Appendix V 

Appendix VI 

Results in Brief a 

Background 6 

Climate Change May Increase Losses by Altering the Frequency or 

Sevedty of Weather-Related Events 

Insured Weather-Related Losses Have Been Sizeable, and Federal 

Insurers' Exposure Has Grown Significanlly 17 

Major Private and Public Insurers Differ in How They Manage 

Catastrophic Risks A9Sociated with Climate Change 29 

Conclusions 37 

Reconuncndation for Executive Action a8 

Agency Comments and Our Evaluation 39 

Scope and Methodology 

Scientific Literature 

Insured Loss Data 

Interviews with Major Insurers 

National Flood Insurance Program 

How the Program Works 

Risk Assessment Prdcticcs 

Program F\mding 

Federal Crop Insurance Corporation 

How the Program Works 

Risk Assessment Practices 

Program Funding 

Consensus Statement among Participants at 2006 

Munich Re Workshop 

Comments from the Department of Agriculture 

GAO Comments 

Comments from the Department of Commerce 

GAO Comments 

41 

41 

42 

44 

4G 

47 

49 

50 

51 

52 

5:3 

55 

56 

58 

61 

63 

66 

Page i GAO-07·285 Climate Change 
275 

Appendix VII GAO Contact and Staff Acknowledgments 67 

Related GAO Products 68 

Tables 

Table 1: Selected !PCC Estimates of Confidence in Projected 

Changes in Weather-Related Events 12 

Table 2: Insured Losses Associated with Hurricanes 25 

Table 3: Key Policy-Oriented Scientific Assessments Reviewed by 

GAO 41 

Figures 

Figure 1: Time Line of Key Scientific Assessments 9 

Figure 2: July 1993 Flood Damage at Chesterfield Airport in St.. 

Louis, Missouri 15 

Figure 3: Economic Damages by Hurricane Category for U.S. 

Hurricanes Making Landfall, 1900-2005 16 

Figure 4: Annual Weather- and Nonweather-Related Insured Losses 18 

Figure 5: Weather-Related Losses Paid by Private Insurers 19 

Figure 6: Weather-Related Losses Paid by NFlI' 21 

Figure 7: Weather-Related Losses Paid by FCIC 22 

Figure 8: NHP Policies and Total Coverage 28 

Figure 9: FCIC Total Coverage 2n 

Figure 10: Modeling Potential Catastrophe Losses 31 

Page il GAO-07·281) Climate Change 
276 

Abbreviations 

AAA 

AMO 

CCSP 

FAIR 

FEMA 

FCIC 

HUD 

IPCC 

NAIC 

NAS 

NFlP 

NRC 

NOAA 

PCS 

RMA 

SAP 

SFlP 

USDA 

American Academy of Actuaries 

Atlantlc Multidecadal Oscillation 

Climate Change Science Program 

Fair Access to Insurance Requirements 

Federal Emergency Management Agency 

Federal Crop Insurance Corporation 

Department of Housing and Urban Development 

Intergovernmental Panel on Climate Change 

National Association of Insurance Conunissioners 

National Academy of Sciences 

National Flood Insurance Program 

National Hurricane Center 

National Oceanic and Atmospheric Administration 

Property Claim Services 

risk Management Agency 

synthesis and assessment product 

standard flood insurance policy 

U.S. Department of Agriculture 

This is a work of the U.S. government and is not subject to copyright protection in the 

United States. it may be reproduced and distributed in its entirety without further 

permission from GAO, However, because this work may contain copyrighted images or 

other material, permission from the copyright holder may be necessary if you wish to 

reproduce this material separately. 

pagelii GAO-07·285 Climate Change 
277 

• #i;GAO AccollntablUty * Il'Itegrtty ~ AeUab/flty 

United States Government Accountability Office 

Washington, DC 20548 

March 16, 2007 

The Honorable Joseph I. Liebennan 

Chairman 

The Honorable Susan M. Collins 

Ranking Member 

Corrnnittee on Homeland Security and Governmental Affairs 

United States Senate 

As the 2004 and 2005 hurricane seasons demonstrated, weather-related 

events can devastate affected commtmities and individuals, and are costly 

to the insurance industry, government disaster assistance programs, and 

other relief organizations. Apart from the record-setting losses 

experienced in 2005, weather-related events over the past decade have 

cost the country tens of billons of dollars each year. 

The property and casualty segment of the insurance industry, spanning 

both the private and public sector, bears a large portion of weather-related 

losses.' The private sector includes primary insurers that insure 

individuals and businesses directly, and reinsurers that provide insurance 

to the primary insurers. The public sector includes federal programs-in 

particular, the National Flood Insurance Program (NFlP), which insures 

properties at risk of damage from flooding, and the Federal Crop 

Insurance Corporation (FCIC), which insures crops that are vulnerable to 

drought, floods, or other natural disasters. Many states also administer 

insurance pools that provide coverage for losses caused by weatherrelated events. 

The uncertain and potentially large losses associated with weather-related 

events are among the biggest risks that property insurers face. Virtually 

anything that is insured-property, crops and livestock, business 

operations, or human life and health-is vulnerable to weather-related 

events. To remain financia\ly solvent, the insurance industry must estimate 

and prepare for the potential impact of weather-related events. As such, 

any unanticipated changes in the frequency or severity of weather-related 

lInsurers use the term Uloss" to refer to the dollar value of approved or settled claims 

arising from damages incurred by a policyholder. For the purposes of this report, weatlIer~ 

related loss refers to the dollar value of claims made on damage attributable to weather~ 

related events. "Loss" does not account for premium or other income, deductibles, copayments, or damages in excess of coverage. 

Pagel 
278 

events can have financial consequences at the company level and industrywide. 

The earth's climate and weather patterns are dynamic, varying on 

seasonal, decadal, and longer time scales. The global average surface 

temperature has increased by 0 .. 74 degrees Celsius over the past 100 years 

and climate models predict additional, perhaps accelerating, increases in 

temperature. While the temperature increases to date may appear small, 

climate models project that additional changes in temperature may alter 

social and economic activities in potentially profound ways. Much 

research and policy debate has centered on the extent to which human 

activities have contributed to the warming and how much is due to natural 

variability. For the purposes of this report, climate change refers to any 

change in the climate over time, whether due to natural variability or as a 

result of human activity.' Regardless of the cause, some contend that 

increasing temperatures-accompanied by changes in other aspects of the 

climate-may have adverse financial consequences for property insurers, 

which might slow the growth of the industry and shift more of the burden 

to governments and individuals. 

Concerned about the implications of climate change for weather-related 

losses incurred by federal agencies and private insurers, you asked us to 

(1) describe what is known about how climate change might affect insured 

and uninsured losses, (2) determine insured losses incurred by mllior 

federal agencies and private insurers and reinsurers resulting from 

weather-related events, and (3) determine what mllior federal agencies and 

private insurers and reinsurers are doing to prepare for the potential risk 

of increased losses due to more frequent or more severe weather-related 

events associated with climate change. 

To describe how climate change might affect insured and uninsured 

losses, we reviewed and swnmarized key scientific assessments by 

reputable international and national research organizations, including the 

Intergovernmental Panel on Climate Change Third Assessment Report, 

National Academy of Sciences reports, and the multifederal agency 

2More specifically, we used the Intergovernmental Panel on Climate Change definition, 

which refers to climate change as a statistically significant variation in either the mean 

state of the climate or in its variability, persisting for an extended period (typically decades 

or longer), Climate change may be due to natural factors (e.g., internal processes or 

external forcings such as solar variations or heavy volcanic activity), or to persistent 

human-induced changes in the composition of the atmosphere or land use patterns. 

Page 2 GAO·01~28/i Climate Chaage 
279 

Results in Brief 

Climate Change Science Program. To determine insured losses 

attributable to weather-related events, we analyzed data from 1980 

through 2005 from the Department of Homeland Security's Federal 

Emergency Management Agency (FEMA) for the NF1P; from the 

Department of Agriculture's Risk Management Agency (RMA) for FCIC; 

and from the Property Claims Service, a leading source of insurance data. 

We analyzed changes in weather-related losses since 1980 and 

supplemented this analysis with a review of existing literature and the 

views of subject area experts on the key drivers of changes in losses. 

To determine what key federal agencies and private insurers are doing to 

assess and manage the potential for increased losses, we conducted 

semistructured interviews with officials from the NFIP, RMA, and a 

sample of the largest private primary insurers and reinsurers in the United 

States, Europe, and Bennuda, The companies we interviewed represent 

about 45 percent of the total domestic insurance market but should not be 

generalized to represent all insurance companies. We also interviewed 

officials from catastrophe modeling firms, insurance industry associations, 

the National Association of Insurance Commissioners (NAlC),' and 

universities to provide additional context for respondents' statements. To 

supplement these interviews, we reviewed documentation of federal 

agencies' risk management practices, studies by subject area experts, 

industry reports, insurance company documents, and previous GAO 

reports. We performed our work between February 2006 and January 2007 

in accordance with generally accepted government auditing standards. A 

more extensive discussion of our scope and methodology appears in 

appendix I. 

Assessments by the National Academy of Sciences (NAS) and the 

Intergovernmental Panel on Climate Change (lPCC), a leading source for 

international climate expertise, report that the effects of climate change 

on weather-related events and-by extension-weather-related losses 

could be substantial. IPCC reports that global mean temperatures 

increased by 0.74 degrees Celsius over the last 100 years and are projected 

to continue to rise over the next century. Although temperatures have 

varied throughout history due to natural processes, such as changes in the 

Earth's orbit and volcanic eruptions, the IPCC and NAS report that the 

1'he National Association of Insurance Commissioners is an organization of insurance 

regulators from the 50 states, the District of Columbia, and the five U.S. temtories. 

Page 3 GAO~07~285 Climate Change 
280 

observed temperature increase during the twentieth century cannot be 

explained by natural variability alone but is largely attributable to human 

activities. Warmer surface temperatures are linked to gJobal-scale 

oceanographic, meteorological, and biological changes. For example, as 

the earth warms, more water evaporates from oceans and other sources, 

eventually falling as rain or snow. Key assessments that rely on both 

observational data and computer models have reported that warmer 

temperatures are expected to increase the frequency and severity of 

damaging extreme weather-related events (such as flooding or drought), 

although the timing, magnitude, and duration of these changes are as yet 

undetermined. Further research on the effect of increasing temperature on 

weather events is ongoing. Of particular note, the IPCC is expected to 

release its fourth assessment of the state of climate science throughout 

2007, and the Climate Change Science Program is currently assessing 

potential changes in the frequency or intensity of weather-related events 

specific to North America in a report scheduled for release in 2008. 

Taken together, private and federal insurers paid more than $320 billion in 

claims on weather-related losses from 1980 through 2005. In constant 

dollars, private insurers paid the largest part of the claims during this 

period, $243.5 billion (about 76 percent); followed by federal crop 

insurance, $43.6 billion (about 14 percent); and federal flood insurance, 

$34.1 billion (about 11 percent). Claims varied significantly from year to 

year-largely due to the incidence and effects of catastrophic weather 

events such as hurricanes and droughts-but generally increased during 

this period. In particular, the years with the largest insured losses were 

generally associated with mllior hurricanes, which comprised well over 

one-third of all weather-related losses since 1980. The growth in 

population in hazard-prone areas, and resulting real estate development 

and increasing real estate values, have increased federal and private 

insurers' exposure, and have helped to explain the increase in losses. In 

particular, heavily-populated areas along the Northeast, Southeast, and 

Texas coasts have among the highest value of insured properties in the 

United States and face the highest likelihood of mllior hurricanes. Due to 

these and other factors, federal insurers' exposures have grown 

substantially. Since 1980, NTIP's exposure has quadrupled, nearing $1 

trillion, and program expansion has increased FCIC's exposure nearly 26-

fold to $44 billion. These escalating exposures to catastrophic weather 

events are leaving the federal government at increased financial risk. FCIC 

officials told us, for example, that if the widespread Midwest floods of 

1993 were to occur today, losses would be five times greater. 

Page 4 GAO-07~285 Climate Change 
281 

While both major private and federal insurers are exposed to increases in 

the frequency or severity of weather-related events associated with 

climate change, the two sectors are responding in different ways. Using 

computer-based catastrophe models, many major private insurers are 

incorporating some near-term elements of climate change into their risk 

management practices. One consequence is that, as these insurers seek to 

limit their own catastrophic risk exposure, they are transferring some of it 

to policyholders and to the public sector. In addition, some private 

insurers are approaching climate change at a strategic level by publishing 

reports outlining the potential industry-wide impacts and strategies to 

proactively address the issue. Federal insurance programs, on the other 

hand, have done little to develop the kind of information needed to 

understand the programs' long-term exposure to climate change for a 

variety of reasons. The federal insurance programs are not oriented 

toward earning profits like private insurers but rather toward increasing 

participation among eligible parties. Consequently, neither program has 

had reason to develop information on their long-term exposure to the 

fiscal risks associated with climate change. 

We acknowledge the different mandate and operating environment in 

which the major federal insurance programs operate, but we believe that 

better information about the federal government's exposure to potential 

changes in weather-related risk would help the Congress identify and 

manage this emerging high-risk area-one which may not constitute an 

immediate crisis, but which does have significant implications for the 

nation's growing fiscal imbalance. Accordingly, GAO is recommending 

that the Secretary of Agriculture and the Secretary of Homeland Security 

direct the Under Secretary for Farm and Foreign Agricultural Services and 

the Under Secretary of Homeland Security for Emergency Preparedness to 

analyze the potential long-term fiscal implications of climate change for 

the FCIC and the NFIP, respectively, and report their findings to the 

Congress. 

In commenting on a draft of this report, both the Departments of 

Agriculture (USDA) and Homeland Security (DHS) agreed with our 

recommendation, and USDA commented on the presentation of several 

findings in the draft. The Department of Commerce neither agreed nor 

disagreed with the report's findings, but instead commented on the 

presentation of several issues in the draft and offered teclmical comments 

which we incorporated into this report as appropriate. The Department of 

Energy elected not to provide comments on the draft. 

Page Ii GAO-07~285 Climate Change 
282 

Background Insurance is a mechanism for spreading risk over time, across large 

geographical areas, and among industries and individuals. While insurers 

assume some financial risk when they write policies, they employ various 

strategies to manage risk so that they earn profits, limit potential fmancial 

exposures, and build capital needed to pay claims.' For example, they 

charge premiums for coverage and establish underwriting standards, such 

as refusing to insure customers who pose unacceptable levels of risk, or 

limiting coverage in particular geographic areas. Insurance companies may 

also purchase reinsurance to cover specific portions of their financial risk. 

Reinsurers use similar strategies to limit their risks, including charging 

premiums, establishing underwriting standards, and maintaining close, 

long-term business relationships with certain insurers. 

Both insurers and reinsurers must also predict the frequency and severity 

of insured losses with some reliability to best manage financial risk.' In 

some cases, these losses may be fairly predictable. For example, the 

incidence of most automobile insurance claims is predictable, and losses 

generally do not occur to large numbers of policyholders at the same time. 

However, some infrequent weather-related events--hurricanes, for 

example-are so severe that they pose urrique challenges for insurers and 

reinsurers. Commonly referred to as catastrophic or extreme events, the 

unpredictability and sheer size ofthese events-both in terms of 

geography and number of insured parties affected-have the potential to 

overwhelm insurers' and reinsurers' capacity to pay claims. Catastrophic 

events may affect many households, businesses, and public infrastructure 

across large areas, resulting in substantial losses that deplete insurers' and 

reinsurers' capital 

Given the higher levels of capital that reinsurers must hold to address 

catastrophic events, reinsurers generally charge higher premiums and 

restrict coverage for such events. Further, in the wake of catastrophic 

events, reinsurers and insurers may sharply increase premiums to rebuild 

capital reserves and may significantly restrict insurance and reinsurance 

coverage to limit exposure to similar events in the future. 

4Federal insurance programs are not designed to earn financial profits. 

f>rro insure a risk, private insurers must be able to both estimate an event's occurrence and 

its associated damages and be able to set premiums sufficient to cover their risk and earn a 

profit In some cases, insurers may be prevented from charging sufficient premiums due to 

state regulatory actions. 

Page 6 GAQ...07~285 ClImate Change 
283 

Under certain circumstances, the private sector may determine that a risk 

is uninsurable. For example, while homeowner insurance policies typically 

cover damage and losses from fire and other perils, they usually do not 

cover flood damage because private insurance companies are largely 

unwilling to bear the financial risks associated with its potentially 

catastrophic impact. In other instances, the private sector may be willing 

to insure a risk, but at rates that are not affordable to many property 

owners. Without insurance, affected property owners must rely on their 

own resources or seek out disaster assistance from local, state, and 

federal sources. 

In situations where the private sector will not insure a particular type of 

risk, the public sector may create markets to ensure the availability of 

insurance. For example, several states have established Fair Access to 

Insurance Requirements (FAIR) plans, which pool resources from insurers 

doing business in the state to make property insurance available to 

property owners who cannot obtain coverage in the private insurance 

market, or cannot do so at an affordable rate. In addition, six southern 

states have established windstorm insurance poois that pool resources 

from private insurers to make insurance available to property owners who 

cannot obtain it in the private insurance market. 

Similarly, at the federal level, the Congress established the NFIP and the 

FCIC to provide coverage where voluntary markets do not exist.' The 

Congress established the NFIP in 1968, partiy to provide an alternative to 

disaster assistance for flood damage. Participating communities are 

required to adopt and enforce floodplain management regulations, thereby 

reducing the risks of flooding and the costs of repairing flood damage. 

FEMA, within the Department of Homeland Security, is responsible for, 

among other things, oversight and management of the NFIP. Under the 

program, the federal government assumes the liability for covered losses 

and sets rates and coverage limitations. 

The Congress established the FCIC in 1938 to temper the economic impact 

of the Great Depression and the weather effects of the dust bowl. In 1980, 

the Congress expanded the program to provide an alternative to ru.aster 

assistance for farmers that suffer financial losses when crops are damaged 

by droughts, floods, or other natural disasters. Farmers' participation is 

{lSee appendixes II and m fOT additional information on how these programs operate, how 

they assess risk, and how they are funded, 

Page 7 GAO·07·285 Climate Change 
284 

Climate Change May 

Increase Losses by 

Altering the 

Frequency or Severity 

of Weather-Related 

Events 

Warming Temperatures 

Are Expected to Alter the 

Frequency and Severity of 

Damaging Extreme 

Weather-Related Events 

voluntary, but the federal govenunent encourages it by subsidizing their 

insurance premiums. USDA's RMA is responsible for administering the 

crop insurance program, including issuing new insurance products and 

expanding existing insurance products to new geographic regions, RMA 

administers the program in partnership with private insurance companies, 

which share a percentage of the risk of loss or the opportunity for gain 

associated with each insurance policy written, 

Global temperatures have increased in the last 100 years and are projected 

to continue to rise over the next century, Using observational data and 

computer modeling, climatologists and other scientists are assessing the 

likely effects of temperature rise associated with climate change on 

precipitation patterns and on the frequency and severity of weatherrelated events, The key scientific assessments we reviewed generally 

found that warmer temperatures are expected to alter the frequency or 

severity of damaging weather-related events, such as flooding or drought, 

although the timing, magnitude, and duration of these changes are as yet 

undetermined. Additional research on the effect of increasing temperature 

on weather events is expected in the near future. Nevertheless, research 

suggests that the potential effects of climate change on damaging weatherrelated events could be significant. 

We reviewed the reporis released by [PCC, NAS, and the federal Climate 

Change Science Program (CCSP) that are shown in figure L' These leading 

scientific bodies report that the Earth warmed during the twentieth 

century-O,74 degrees Celsius from 1906 to 2005 according to a recent 

[PCC report-and is projected to continue to warm for the foreseeable 

future.' [PCC, NAS, CCSP, and other scientific bodies report that this 

increase in temperature cannot be explained by natural variation alone. 

[PCC's 2001 assessment of the impact of increasing temperatures on 

extreme weather events found that it was likely the frequency and severity 

7Appendix I contains additional infonnation on the specific assessments we reviewed. 

CCSP is a multiagency effort to coordinate federal climate change science that is 

responsible for preparing a series of 21 climate science synthesis and assessment products 

(SAP) for tile United States by 2008, 

Bntis estimate comes from a recently released summary of a key component of IPCC's 

Fo'UrrhAssessment Report of the state of climate science, which reported an updated 100-

year linear trend (1906-2005) of O. 74 degrees Celsius-larger than the corresponding 0.6 

degrees Celsius reported in the 2001 Third Assessmrnt Report. 

Page 8 GAO·07·283 Clintate Change 
285 

of several types of events will increase as greenhouse gas emissions 

continue,lI 

Figure 1: Time Line of Key Scientific Assessments 

2001 

IPCCi$sues 

Third 

Assessment 

Report 

NASissues 

review of 

abrupt 

climate 

ct1ange. 

Average Global Temperatures 

Have Increased and Are 

Expected to Continue to Rise 

200' 2004 2005 2007 2008 

NAS issues 

reporlfrom 

forum on 

linkages 

between climate 

and disasters. 

NASissues 

review of 

radiative 

forcings. 

NASissues 

climate 

change 

primer. 

NAS [$'Sues 

review of 

surface 

temperature 

reconstructions. 

Forthcoming: 

!PCCto 

issue-Fourth 

Assessment 

Report. 

Forthcoming: 

CCSP 

expected 10 

Issue SAP 

3.3 on climate 

extremes 

forNMh 

America. 

NASissues 

revlewotclimale 

feedbacks. 

Source: GAO. 

CCSP issues 

SAP 1.1 on 

temperature 

tmnds in tower 

atmosphere. 

The earth's climate system is driven by energy from the sun and is 

maintained by complex interactions between the atmosphere, the oceans, 

and the reflectivity of the earth's surface, among other factors. Upon 

reaching the earth, the sun's energy is either reflected back into space, or 

is absorbed by the earth and is subsequently reemitted. However, certain 

gases in the earth's atmosphere-such as carbon dioxide and methaneact like the glass in a greenhouse to trap some of the sun's energy and 

prevent it from returning to space. While these gases play an important 

part in maintaining life on earth, their accumulation in the atmosphere can 

significantly increase global temperatures. 

The earth warmed by roughly 0.74 degrees Celsius over the past 100 years, 

and is projected to continue warming for the foreseeable future. While 

temperatures have varied throughout history, triggered by natural factors 

such as volcanic eruptions or changes in the earth's orbit, the key 

scientific assessments we reviewed have generally concluded that the 

observed increase in temperature in the past 100 years cannot be 

explained by natural variability alone. In recent years, major scientific 

\lFor the purposes of this report, extreme weather-related events are those with a low 

frequency of occurrence, but that cause severe damage, such as hurricanes, drought, 

winter stonns, tornadoes, wildfires, and floods, among others. 

Page 9 GAO·07·285 Climate Change 
286 

bodies such as the IPCC, NAS, and the Royal Academy (the United 

Kingdom's national academy of science) have concluded that human 

activities, including the combustion of fossil fuels, industrial and 

agriculture processes, landfills, and some land use changes, are 

significantly increasing the concentrations of greenhouse gases and, in 

turn, global temperatures. 

Although climate models produce varying estimates ofthe extent of future 

changes in temperature, NAS and other scientific organizations have 

concluded that available evidence points toward continued global 

temperature rise. Assuming continued growth in atmospheric 

concentration of greenhouse gases, the latest assessment of computer 

climate models projects that average global temperatures will warm by an 

additional 1.8 to 4.0 degrees Celsius during the next century." 

Some scientists have questioned the significance of the earth's present 

temperature rise relative to past fluctuations. To address this issue, the 

NAS recently assessed the scientific community's efforts to reconstruct 

temperatures of the past 2,000 years and place the earth's current warming 

in an historical context. 11 Based on its review, the NAS concluded with a 

high level of confidence that global mean surface temperature was warmer 

during the last few decades of the twentieth century than during any 

comparable period during the preceding 400 years. Moreover, NAS cited 

evidence that temperatures at many, but not all, individual locations were 

higher during the past 25 years than any period of comparable length over 

the past 1,100 years. 

lo.Ipcc narrowed its range of projected warming in its recently released summary from the 

corresponding range of 1.4 to 5.8 degrees Celsius reported in the 2001 Third Assessment 

Report. Although these two sets of projections are broadly consistent, they are not directly 

comparable. IPee notes in the summary that the new range is more advanced in that it 

provides best estimates and an assessed likelihood range. It also relies on a larger number 

of climate models of increasing complexity and realism, as well as new information 

regarding the nature of feedbacks from the carbon cycle and constraints on climate 

response from observations. 

IINational Research Council, SUiface Temperature .Reconstructionsjor the Last 2,000 

Years (Washingtonl D.C.: 2(06). 

Page 10 
287 

IPCC Expects Continued 

Wanning to Alter Frequency 

and Severity of Damaging 

Extreme Weather-Related 

Events 

Detennining the precise nature and extent of the relationship between 

average global temperatures and weather-related events is an exceedingly 

challenging task. Several key assessments of the state of this science have 

addressed the large body of work on this topic. Using observational data 

and computer models, scientists are examining the effects of rising 

temperatures on precipitation patterns and the frequency and severity of 

extreme weather-related events. The complexity of weather systems, 

together with the limited statistical precision of projections of the extent 

of future temperature change, often produces different model results, and 

the results themselves represent a range of potential future conditions. 

Nonetheless, a key assessment of climate model projections indicates that 

an increase is likely In the frequency or severity of damaging extreme 

weather-related events. In 2001, the IPCC, a leading scientific authority on 

climate science, released its Third Assessment Report, which assessed the 

state of knowledge of, among other things, the potential for global changes 

In extreme weather-related events. The IPCC described the relationship 

between temperatures, precipitation, and weather-related events. 

Increased global mean surface temperatures are linked to global-scale 

oceanographic, meteorological, and biological changes. For example, as 

the earth wanns, more water evaporates from oceans or lakes, eventually 

falling as rain or snow. IPCC reported that pennafrost is thawing, and the 

extent of sea ice, snow cover, and mountain glaciers are generally 

shrinking. The !PCC also noted that global sea level rose between 0.1 and 

0.2 meters during the twentieth century through thennal expansion of 

seawater and widespread loss of land ice, and that this sea level rise could 

increase the magnitude of hurricane stonn surge in some areas. Wannlng 

is expected to change rainfall patterns, partly because warmer air holds 

more moisture. 

Based on model projections and expert judgment," the IPCC reported that 

future Increases In the earth's temperature are likely to increase the 

frequency and severity of many damaging extreme weather-related events 

(summarized in table 1). For instance, IPCC reported that increased 

drought is likely across many regions of the globe, including the U.s. Great 

12Likelihoods for projected changes are defined by the following conditions set by the 

IPCC: "very likely" indicates that a number of models have been analyzed for such a 

change, all those analyzed show it in most regions, and it is physically plausible; and 

"likely" indicates that theoretical studies and those models analyzed show such a change, 

but only a few models are configured in such a way as to reasonably represent such 

changes. 

Page 11 
288 

Plains. Also, IPCC concluded that the intensity of precipitation events is 

very likely to increase across ahnost ail regions of the globe and that heavy 

precipitation events are expected to become more frequent. Compared 

with projected temperature increases, changes in the frequency and 

severity of extreme events can occur relatively rapidly, according to the 

IPCC. 

Table 1: Selected IPee Estimates of Confidence in Projected Changes in WeatherRelated Events 

Weather-related event 

Higher maximum temperatures and more hot days over 

nearly an land areas 

Confidence in projected 

future changes 

Very likely 

Higher minimum temperatures and fewer cold and frost days Very likely 

over nearly all land areas 

More intense precipitation events 

Increased summer drying and associated risks of drought 

Increase in hurricane peak wind intensities 

Increase in hurricane average and peak precipitation 

intensities 

Source: !pce, Climate Change 2001: The SCientific Basl5, 2001. 

Very likely 

Likely" 

Likely 

aprojections for most midtatitude continental interiors. IPee found a lack of consistent projections in 

other regions. 

~IPee reported that changes In the regional distribution of hurricanes are possible but have not been 

established. 

Much research has been done since the IPCC's Third Assessment Report, 

but there has not been a similarly rigorous assessment of what is mown 

with regard to temperature increase, precipitation, and weather-related 

events for the United States." However, significant assessments will be 

completed in the near future. In particular, the IPCC is expected to release 

its Fourth Assessment Report throughout 2007. 

13The most recent national assessment for the United States, entitled Climate Change 

Impacts on the United States, wa.s forwarded by a federal advisory committee to the 

Congress and the President in 2000 as required by the Global Change Research Act of 1990. 

We reported in 2005 that the subsequent assessment was not submitted in November 2004 

as required by the act. Instead, according to the Department of Commerce, CCSP ha.s 

committed to issuing 21 shorter reports by 2008. See GAO, Climate Change Assessment: 

Administration Did Not Meet Reponing Deadline, GAO-05-3~38H (Washington, D,C,: 

Apr. 14,2005). 

Page 12 GAO-07-285 Climate Change 
289 

Whlle we were completing our review, the IPCC released a summary of the 

first of three components of its Fourth Assessment Report, which builds 

upon past IPCC assessments and incorporates new fmdings from the 

physical science research since the Third Assessment Report. The 

summary reports higher confidence in projected patterns of warming and 

other regional-scale features, including changes in wind patterns, 

precipitation, and some aspects of extreme events. In particular, the 

summary reports that it is very likely that hot extremes, heat waves, and 

heavy precipitation events will continue to become more frequent. 

Moreover, based on a range of models, IPCC's summary states that it is 

likely that future tropical cyclones (typhoons and hurricanes) will become 

more intense, with larger peak wind speeds and more heavy precipitation 

associated with ongoing increases in tropical sea surface temperatures. 

IPCC reports less confidence in projections of a global decrease in the 

number of tropical cyclones, and that the apparent increase in the 

proportion of very intense stonus since 1970 in some regions is much 

larger than simulated by current models for that period. The full first 

component report was not publicly released prior to the issuance of our 

report and is expected some time aner May 2007. 

The other two components of the Fourth Assessment Report will cover 

impacts, adaptation, and vulnerability, and mitigation. These reports are 

expected to assess, among other things, key vulnerabilities and risks from 

climate change, including changes in extreme events. Additionally, the 

IPCC has committed to producing a capping report that is intended to 

synthesize and integrate material contained in the forthcoming reports, as 

well as other IPCC products. 

In addition to the IPCC's work, CCSP is assessing potential changes in the 

frequency or intensity of weather-related events specific to North America 

in a report scheduled for release in 2008. According to a National Oceanic 

and Atmospheric Administration (NOAA) official and agency documents, 

the report will focus on weather extremes that have a significant societal 

impact, such as extreme cold or heat spells, tropical and extra-tropical 

stonus, and droughts. Importantly, officials have said the report will 

provide an assessment of the observed changes in weather and climate 

extremes, as well as future projections. 

Page 13 GAO-07~285 Cfuna.te Change 
290 

More Frequent or More 

Severe Extreme WeatherRelated Events Could 

Significantly Increase 

Insured Losses 

Extreme weather-related events impact communities and economic 

activity by damaging homes and vehicles (e.g., see fig. 2), interrupting 

electrical service and business operations, or destroying crops. IPCC 

reported that the insurance industry-especially the property and casualty 

segment-are sensitive to the effects of weather-related events. This was 

highlighted in the Department of Commerce's comments on a draft of this 

report, which observed that altering either the frequency or severity of 

high impact extreme weather-related events could result in a significant 

increase in the risk posed to an insurer. For example, the agency said that 

what had been considered a 500-year event (i.e., its probability of 

occurring in a given year is 1 in 500) could shift under climate change to 

become a 100-year event (Le., its probability of occurring in a given year is 

1 in 100). Consequently, more frequent or more severe events have a 

greater potential for damage and, in turn, insured losses. As an official 

from Aon Re Australia, a large global reinsurer, reported, "The most 

obvious impact of climate change on the insurance sector will be the 

increase in insured property losses from extreme weather events. "14 

I4Andrew Dlugolecki, The Changing Ri')k Landscape: Implications Jor Insurance Risk 

Management (1999) hj;tp://www.aon.com.au/pdf!T(~insunln(.f>/Aon_Climate_Chrul.~l •. pdt' 

(downloaded Jan. 8,2007). 

PageU GAO·07~283i Climate Change 
291 

Figure 2: July 1993 Flood Damage at Chesterfield Airport in St. Louis, Missouri 

Soor<:e:FEMA 

Note: According to FEMA, the depth of the floodwaters underscores the extent of the damage caused 

by the 1993 Midwest flood. A tolal of 534 counties in nine stales were declared for federal disaster 

aid. 

Notably, the economic damages associated with some extreme weatherrelated events could increase at a greater rate in comparison with changes 

in the events themselves. Seemingly small changes in the characteristics of 

certain weather-related events can lead to substantial increa.<;es in damage. 

For example, recent work on hurricanes by researchers at the University 

of Colorado, the National Weather Service, and olher institutions 

examined losses a'3sodated with hurricanes that made landfall in the 

United States since 1000:" Holding constant the increased population and 

development in coastal counties during this period, the study compared 

the economic danlage of stronger stonns with weaker storms, ba~ed on 

et aI., Normahzed HU'rricane Damages in the United States: 1900-

Page 15 GAO·07·285 Climate Change 
292 

the Saffir-Sirnpson Hurricane Scale." The researchers found that stronger 

storms have caused many times more economic damages than weaker 

storms, as shown in figure 3. These findings are consistent with other 

independent analyses conducted by insurers and catastrophe modelers. 

Figure 3: Economic Damages by Hurricane Category for U.S. Hurricanes Making 

Landfall, 1900-2005 

Economic damage In relation 10 Category One hurricane 

150 

100 

75 

50 

25 

-------------~ • , Damage from Category Four stOirn 

I is nearly 100 tImes greater then 

Category One storm 

t 

Sarn .... S!mpson Hurricane Scale 

SoUI'Cl!: GAO adap\loo of Plelke et al. data. 

133.1 

-

Note: Value of each bar compares the median economic damage associated with hurricanes of thaI 

Safrir-Simpson category with the median economic damage of Category One storms. Of the 159 

hurricanes reviewed, only three were Category Five. 

Moreover, public reports from several of the world's largest reinsurance 

companies and brokers underscore the potential for substantially 

increased losses. These reports note that, in addition to greater losses in 

I~e Saffu-Simpson hurricane intensity category system was developed in the 19708 to 

calculate the destructive force of hurricanes. The scale ranges from Category One to 

Category Five, with Category Five being the most severe. For example, Category Three 

hurricanes have winds of III to 130 mph, whereas Category I<ive hurricanes have \\'mds 

greater than 155 mph. 

Page 16 GAO..()7~285 Climate Change 
293 

Insured WeatherRelated Losses Have 

Been Sizeable, and 

Federal Insurers' 

Exposure Has Grown 

Significantly 

Claims Paid on WeatherRelated Losses Totaled 

More Than $320 Billion 

between 1980 and 2005 

absolute terms, the potential for greater variability in weather,related 

events could significantly enhance the volatility of losses. 

Taken together, insurers paid more than $320 billion in claims for weatherrelated losses between 1980 and 2005." Claims varied significantly from 

year to year-largely due to the effects of catastrophic weather events 

such as hurricanes and droughts-but generally increased during this 

period. The growth in population in hazard-prone areas, and consequent 

real estate development and increasing real estate values, have generally 

increased insurers' exposure to weather-related events and help to explain 

their increased losses. Due to these and other factors, the federal 

insurance programs' liabilities have grown significantly, leaving the federal 

government increasingly vulnerable to the financial impacts of extreme 

events. 

Based on an examination of loss data from several different sources, 

insurers incurred more than $320 billion in weather-related losses from 

1980 through 2005 (see fig. 4). Weather-related losses accounted for 88 

percent of all property losses paid by insurers during this period. All other 

property losses, including those associated with earthquakes and terrorist 

events, accounted for the remainder. Weather-related losses varied 

significantly from year to year, ranging from just over $2 billion in 1987 to 

more than $75 billion in 2005. 

110ata throughout this section are presented in constant 2005 dollars to allow for a 

comparison of the dollar value of losses over time and are not otherwise adjusted. See 

appendix I for more information on data used in this report. 

Page 17 
294 

Figure 4: Annual Weather- and Nonweather~Related Insured Losses 

Dollars In billions 

eo 

70 U 

// // 

40 

" 

20 

I. 

UMU~U~~3U~I~U~I_UMUMI~_lmU~lmU~U%U~UMU~_~m2'~ __ 

Year 

Weather-related 

Nonweather-re!ated 

Sources: GAO anElyls,s of PCS. NFIP, ami FCIC daHl 

Page 18 GAO-07-285 Climate Change 
295 

Privately-Insured Losses Of the $321.2 billion in weather-related loss payments we reviewed, private 

insurers paid $243.5 billion-over three-quarters of the totaL" Figure 5 

depicts the breakdown of these payments among key weather-related 

events. Of the $243.5 billion paid by private insurers, hurricanes accounted 

for $124.6 billion, or slightly more than half. Wind, tornados, and hail 

associated with severe thunderstorms accounted for $77 billion, or nearly 

one-third of the private total Winter storms were associated with $25.1 

billion, or about 10 percent. 

Figure 5: Weather-Related Losses Paid by Private Insurers 

Dollars 11'\ billions 

.0 

55 

50 

// 

30 

25 

20 

15 

10 

// 

'~'WU.U~"M'~U~'~"M'mUOO'_'=U~"MU%"%_7U~'~2~~nW~2~WMW~ 

Year 

Other 

Severe thunderstorms 

Winter storms 

Hurricanes 

Snurc(;rGAOanaiys,sofPCSdata 

11lProperty Claim Servlces (peS), an authority on insured property losses, maintains a 

database of estimated losses determined to be "catastrophes"-that is, loss events larger 

than $25 million that affect a significant number of policyholders. pes estimates include 

losses under personal and commercial property Insttr<mce policies and typically include 

paymE'nts made on behalf of state-administered risk pools. pes data are described in 

greater detail in appendix 1. 

Page 19 GAO·07·285 Climate ChaJUte 
296 

Federally-Insured Losses The two major federal insurance programs-NF1P and FCIC-paid the 

remaining $77.7 billion of the $321.2 billion in weatheNelated loss 

payments we reviewed." Although the performance of both NF1P and 

FCIC is sensitive to weather, the two programs insure fundamentally 

different risks and operate in very different ways. 

NF1P provides insurance for flood damage to homeowners and 

commercial property owners in more than 20,000 communities. 

Homeowners with mortgages from federally regulated lenders on property 

in communities identified as being in high flood risk areas are required to 

purchase flood insurance on their dwellings. Optional, lower cost flood 

insurance is also available under the NF1P for properties in areas of lower 

flood risk. NF1P offers coverage for both the property and its contents, 

which may be purchased separately. 

NF1P claims totaled about $34.1 billion, or about 11 percent of all weatherrelated insurance claims during this period. AB shown in figure 6, NF1P 

covers only one cause of loss-flooding. Claims averaged about $1.3 

billion per year, but ranged from $75.7 million in 1988 to $16.7 billion in 

2005. 

19Appendixes n and ill provide additional infonnation about the structure and operation of 

FCIC and NF1P, Importantly, totals only reflect what was paid during this time-some 

losses incurred in 2005 may be omitted from this data set, 

Page 20 GAO·07~285 Climate Change 
297 

Flgur. 6: Weather-Related Los.e. Paid by NFIP 

Dollar In billions 

17 

,. o 

// 

1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 

Voar 

Sourct!; GAO aMy\sis of NF'!P data. 

FCIC insures commodities on a crop-by-crop and county-by-county basis 

based on fanner demand for coverage and the level of risk associated with 

the crop in a given region. Over 100 crops are covered by the program. 

Major crops, such as grains, are covered in almost every county where 

they are grown, and specialty crops, such as fruit, are covered only in 

some areas. Participating fanners can purchase different types of crop 

insurance, including yield and revenue insurance, and at different levels. 

For yield insurance, participating fanners select the percentage of yield of 

a covered crop to be insured and the percentage of the commodity price 

received as payment if the producer's losses exceed the selected 

threshold. Revenue insurance pays if actual revenue falls short of an 

assigned target level regardless of whether the shortfall was due to low 

yield or low commodity market prices. 

Page 21 GAO·07·285 Climate Change 
298 

Since 1980, FeIe claims totaled $43,6 billion, or about 14 percent of all 

weather-related claims during this period, FeIe losses averaged about $1, 7 

billion per year, ranging from $53L8 million in 1987 to $4,2 billion in 2002, 

Figure 7 shows the three causes of loss----drought, excess moisture, and 

hail-that accOlmted for more than three~quarters of crop insurance 

claims, In particular, drought accounted for $1806 billion in losses, or more 

than 40 percent of all insured crop losses. Excess moisture totaled $11.2 

billion, followed by hail with total claims of $4.2 billion. The remailling 

$9.6 billion in claims was spread among 27 different causes of loss, 

including frost and tornados. 

Figure 7: Weather~Related losses Paid by FCIC 

DoUars in bH!ions 

4,500 

4,000 

3,500 

3,000 

2,500 

2,001) 

1,500 

1,000 

500 

'~_'~'~'~'~H.'_HOOHMH~UMH.H.U.U~U~UDH.u •• ~~n~2 ••• W •• 

Year 

Other 

Hail 

Excess moisture 

Drought 

Sowce: GAO analysis of FCIC data 

Page 22 
299 

Insured Losses Understate 

Total Economic Damage 

Importantly, the insured loss totals used in our analysis do not account for 

all economic damage associated with weather-related events. W 

Specifically, data are not available for several categories of economic 

losses, including uninsured, underinsured, and self-insured losses. As we 

reported in 2005, FEMA estinmtes that one-half to two-thirds of structures 

in floodplains do not have flood insurance because the uninsured owners 

either are unaware that homeowners insurance does not cover flood 

damage, or they do not perceive a serious flood risk. 21 Furthennore, 

industry analysts estimate that 58 percent of homeowners in the United 

States are underinsured-that is, they carry a policy below the 

replacement value of their property-by an average of 21 percent." 

Finally, some individuals and businesses have the means to ilself-insure" 

their assets by assuming the full risk of any damage. 

Various public and private disaster relief organizations provide assistance 

to communities and individuals who suffer noninsured economic losses, 

although it was beyond the scope of this report to collect data on these 

losses. In particular, since 1989, $78.6 billion in federal disaster assistance 

funds have been obligated through the Disaster Relief Fund administered 

by FEMA, the largest-but not only-conduit for federal disaster 

assistance money provided in the wake of presidentially declared disasters 

and emergencies. 

Overall, according to data obtained from Munich Re, one of the world's 

largest reinsurers, the type of insured losses we reviewed account for no 

more than about 40 percent of the total losses attributable to weatherrelated events." NOAA's National Hurricane Center (NHC) uses a similar 

proportion to produce the agency's estinmtes of total economic damage 

2OWeather-related damages are also responsible for many indirect and non-market impacts 

that are not entirely accounted for, if at all, in economic tenus, such as environmental 

damage. See NAS, The Impacts of Natural Disasters: A Prameworkfor Loss Estimation 

(Washington, D.C.: 1991l), 5&-64. 

21GAO, Catastrophe Risk.: U.S. and European Approaches to Insure Natural Catastrophe 

and Terrorism Risks, GAO-05~1H9 (Washington, D.C: Feb. 28, 2005), 61. 

'lZEstirnate was produced by Marshall & SwiftlBoeckh, a leading supplier of local building 

cost information, residential and commercial property valuation services for the property 

and casualty insurance sector in the United States. GAO did not independently evaluate the 

reliability of this estimate. 

2.'lMunich Re, Topics 2000: Natural. Catastrophes-the Cu'rrent Position. Geoscience 

Research Group (Munich, Gennany: 1999). 

Page 23 GAO-07~28/) Climate Change 
300 

Catastrophic WeatherRelated Events Help 

Explain the Significant 

Year-to-Year Variance in 

Losses 

attributable to hurricanes." Although we did not independently evaluate 

the reliability of these estimates, subject area experts we spoke with 

confirmed that it was the best such estimate available and is widely used 

as an approximation of the relative distribution of losses. 

The difficulties we and others faced in accounting for weather-related 

losses were the subject of the National Academies' The Impacts of 

Natural Disasters: A Prameworkfor Loss Estimation.~ Reporting how 

best to account for the costs of natural disasters, including weatherrelated events, NAS found that there was no system in place in either the 

public or the private sectors to consistently capture information about the 

economic impact. Specifically, the NAS report found no widely accepted 

framework, formula, or method for estimating these losses. Moreover, 

NAS found no comprehensive clearinghouse for the disaster loss 

information that is currently collected. To that end, NAS recommended 

that the Office of Management and Budget, in consultation with FEMA and 

other federal agencies, develop annual, comprehensive estimates of the 

payouts for disaster losses made by federal agencies. Reviewing the status 

of this recommendation was beyond the scope of this report. Nevertheless, 

our experience with trying to obtain comprehensive information on 

disaster costs and losses underscores the NAS findings. 

The largest insured losses in the data we reviewed were associated with 

catastrophic weather events. These events have a low probability of 

occurrence, but their consequences are severe. Notably, both crop 

insurers and other property insurers face the catastrophic risks posed by 

extreme events, although the nature of the events for each is very 

different. In the case of crop insurance, drought accounted for more than 

40 percent of all insured losses from 1980 to 2005, and the years with the 

largest losses were associated with drought. Taken together, though, 

hurricanes were the most damaging event experienced by insurers in the 

data we reviewed. Although the United States experienced an average of 

only two hurricanes per year from 1980 through 2005, weather-related 

claims attributable to hurricanes totaled more than 45 percent of all 

weather-related insured losses-more than $146 billion. Moreover, these 

losses appear to be increasing. 

24NHC estimates total losses by extrapolating from insured losses by assuming they 

account for approximately 50 percent of total losses. 

"NAS (1999), 1. 

Page 24 GAO·07·285 Climate Cho.nge 
301 

In the data we reviewed, the years with the largest insured losses were 

generally associated with major hurricanes, defined as Category Three, 

Four, or Five on the Saffir-Simpson Hurricane Scale. Table 2 shows that, 

while 29 Category One and Two storms account for nearly $18 billion in 

losses, the 21 major storms account for over $126 billion in losses. In fact, 

claims associated with major hurricanes comprised 40 percent of all 

weather-related insured losses since 1980. 

Table 2: Insured Losses Associated with Hurricanes 

Dollars in thousands 

categories One, Categories Three, 

Two Four, Five Total 

19808 $807,422 (11) $9,905,042 (6) $10,712,464 (17) 

19908 9,038,801 (11) 29,099,303 (8) 38,138,104 (19) 

20008 8,071,619 (7) 89,210,093 (7) 97,281,712 (14) 

Total $17,917,842 (29) $128,214,438 (21) $146,132,280 (50) 

Sources: GAO 8rJlllysls of pes and NFIP data; NOAA (hurricar.e intensily clasSIfication). 

Note: Totals do not include crop losses associated witll hurricanes, Number of hurricanes associated 

with losses Is included in parentheses. Hurricane classification was based on peak Intensity at 

landfall. 

Importantly, hurricane severity is only one factor in detennining the size of 

a particular loss-the location affected by the hurricane is also important. 

Generally, the more densely populated an area, the greater the extent of 

economic activity and accumulated value of the building stock. For 

instance, several studies have reviewed the economic impact of Hurricane 

Andrew, which tracked over Fiorida in 1992, in light of the dramatic real 

estate development that has occurred in the meantime. Researchers have 

nonnalized losses associated with the stonn to account for societal 

changes by holding constant the value of building materials, real estate, 

and other factors so that the stonn's impact could be adjusted to reflect 

contemporary conditions." Hurricane Andrew, which resulted in roughly 

$25 billion in total economic losses in 1992, wouid have resulted in more 

than twice that amount-$55 billion-were it to have occurred in 2005, 

given current asset values. 

26 A nonnalization provides an estimate of the damage that wouJd occur if stonns from the 

past affected the same location under the societal conditions of another year. 

Page 25 GAO-07·285 Cllmate Change 
302 

Several recent studies have commented on the apparent increases in 

hurricane losses during this time period, and weather-related disaster 

losses generally, with markedly different interpretations. Some argue that 

loss trends are largely explained by changes in societal and economic 

factors, such as population density, cost of building materials, and the 

structure of insurance policies." Others argue that increases in losses have 

been driven by changes in climate." 

To address this issue, Munich Re and the University of Colorado's Center 

for Science and Technology Policy Research jointly convened a workshop 

in Germany in May 2006 to assess factors leading to increasing weatherrelated loss trends." The workshop brought together a diverse group of 

international experts in the fields of climatology and disaster research. 

Among other things, the workshop sought to determine whether the costs 

of weather-related events were increasing and what factors account for 

increasing costs in recent decades. 

Workshop participants reached consensus on several points, including 

that analyses of long-term records of disaster losses indicate that societal 

change and economic development are the principal factors explaining 

observed increases in weather-related losses. 30 However, participants also 

agreed that changing patterns of extreme events are drivers for recent 

increases in losses and that additional increases in losses are likely given 

IPCC's projected increase in the frequency or severity of weather-related 

events. 

27See, for example, Roger A Pielke, Jr., "Disasters, Death, and Destruction: Making Sense 

of Recent Calamities," Oceanography, vol. 19, no. 2 (2006)i Stanley A. Changnon et al" 

"Human Factors Explain the Increased Losses from Weather and Climate Extremes," 

BuUetin oj the American Meteorological Society, voL 81, no. 3 (2000); and Roger A. Pielke, 

Jr., and Christopher W. Landsea, "Nonnalized HUnlcane Damages in the United States: 

1925-95," Weather and Forecasting, vol, 13 (1998). 

28See, for example, Evan Mills, Richard J. Roth, Jr., and Eugene Lecomte, Availability and 

AfJordability of Insurance Under Climate Change: A Growing Challengefor tlu; U.s. 

(Boston, Mass.: December 2005); Paul Epstein and Evan Mills, eds" Climate Change 

Futures: Health, Ecological, and Economic Dimensions (Boston, Mass.: November 2005); 

and Cynthia Rosenzweig et al., "Increased Crop Damage in the U ,S, from Excess 

Precipitation Under Climate Change,» Global Environmental Change, voL 12 (2002), 

Z9Peter Hoppe and Roger Pielke, Jr" eds., Report of tlu; Workshop on Climate Change and 

Disaster Losses: Understan.ding and Attributing Trends and Projections, Hohenkammer, 

Germany, May 25--26, 2006 (Munich, Gennany: October 2006). 

ooConsensus statements agreed to at the workshop are listed in their entirety in appendix 

IV. 

Page 26 
303 

Value at Risk in Federal 

Insurers' Portfolios 

Increased Significantly 

between 1980 and 2005 

The growth in population in hazard-prone areas, and consequent real 

estate development and increasing real estate values, are leaving the 

nation increasingly exposed to higher insured losses, The close 

relationship between the value of the resource exposed to weather-related 

losses and the amount of damage incurred may have ominous implications 

for a nation experiencing rapid growth in some of its most disaster-prone 

areas, We reported in 2002 that the insurance industry faces potentially 

significant financial exposure due to natural catastrophes," Heavily 

populated areas along the Northeast, Southeast, and Texas coasts have 

among the highest value of insured properties in the United States and 

face the highest likelihood of m,yor hurricanes, According to insurance 

industry estimates, a large hurricane in Miami could cause up to $110 

billion in insured losses with total losses as high as $225 billion, Several 

states-including Florida, California, and Texas-have established 

programs to help ensure that coverage is available in areas particularly 

prone to these events.''12 

AIR Worldwide, a leading catastrophe modeling finn, recently reported 

that insured losses should be expected to double roughly every 10 years 

because of increases in construction costs, increases in the number of 

structures, and changes in their characteristics. AIR's research estimates 

that, because of exposure growth, probable maximum catastrophe loss 

grew in constant dollars from $60 billion in 1995 to $110 billion in 2005, 

and it will likely grow to over $200 billion during the next 10 years, 

Data obtained from both the NFIP and FCIC programs indicate the federal 

government has grown markedly more exposed to weather-related losses 

regardless of the cause, For example, NFIP data show that the number of 

policyholders and the value of the properties insured have both increased 

since 1980, Figure 8 shows the growth of NFIP's exposure in terms of both 

number of policies and the total coverage, The number of policies has 

more than doubled in this time period, from 1.9 million policies to more 

than 4,6 million, Moreover, although NFJP limits coverage to $250,000 for a 

personal structure and $100,000 for its contents, and $500,000 of coverage 

31GAO, Cata.strophe Insurance Risks: The Role of Risk-Linked Securities and Factors 

Affecting Their Use, GAO-02·941 (Washington, D,C,: Sept, 24, 2002), 3. 

32Past GAO work provided infonnation on the F10rida Hurricane Catastrophe FundI 

California Earthquake Authority, and the Texas Windstonn Insurance Association. See 

GAO-H2-H41 and GAO, Catastrophe Insurance Risks: Status oj E;jJorts to Securitize 

Natural Catastrophe and Terrorism Risk, GAO-O:3-1O;J:3 (Washington, D.C: Sept. 24, 2003). 

Page 27 
304 

for a business structure and $500,000 on its contents, more policyholders' 

homes are approaching (or exceeding) these coverage limits. Accordingly, 

the total value covered by the program increased fourfold in constant 

dollars during this time from about $207 billion to $875 billion in 2005. 

Figure 8: NFIP Policies and Total Coverage 

Thousands of policies 

5.000 

4,sao 

4,000 

3,500 

3,000 

001/818 in billion8 

1.000 

-; 900 

800 

700 

.00 

2.sao , - r- - __ r- ..... 500 

~ -, __ ,--1 ~~ 

1,500 WLJL~-+HHHt1I111nl 

400 

1,000 

sao 

1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 

Year 

__ Totalcoverage 

DPoIlcies 

Souroa: GAO analysis 01 NF1P daHl 

300 

200 

100 

Similarly, RMA data show that FCIC has effectively increased its exposure 

base 26-fold during this period (in constant dollars). In particular, the 

program has significantly expanded the scope of crops covered and 

increased participation. Figure 9 shows the growth in FCIC exposure since 

1980." 

J.'ITo maintain comparability with other data, GAO did not adjust these data for changes in 

agricultural prices. 

Page 28 GAO-07-2S5 Climate Change 
305 

Figure 9: FCIC Total Coverage 

Dollars In billions 

5lI 

45 

40 

35 

3. 

25 

2. 

15 

, . 

. ------------------------------------------------------------------- 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1996 1999 2000 2001 2002 2003 2004 2005 

Year 

Major Private and 

Public Insurers Differ 

in How They Manage 

Catastrophic Risks 

Associated with 

Climate Change 

Source.. GAO analysis 01 FCIC data. 

A senior RMA official told us that the main implication of FCIC's growth is 

that the magnitude of potential claims, in absolute tenus, is much greater 

today than in the past. For example, if the Midwest floods of 1993 were to 

occur today, losses would be five times greater than the $2 billion paid in 

1993, according to RMA officials. 

Although the relative contribution of event intensity versus societal factors 

in explaining the rising losses associated with weather-related events is 

still under investigation, both major private and federal insurers are 

exposed to increases in the frequency Of severity of weather-related events 

associated with climate change. Nonetheless, major private and federal 

insurers are responding to this prospect differently. Many large private 

insurers are incorporating some elements of near-term climate change into 

their risk management practices. Furthermore, some of the world's largest 

insurers have also taken a long-term strategic approach toward changes in 

climate. On the other hand, for a variety of reasons, the federal insurance 

programs have done little to develop the kind of information needed to 

understand the programs' long-term exposure to climate change. We 

acknowledge the different mandate and operating environment in which 

the major federal insurance programs operate but believe that better 

information about the federal government's exposure to potential changes 

Page 29 
306 

Major Private Insurers 

Prospectively Manage 

Potential Increases in 

Catastrophic Risk 

Associated with Climate 

Change 

in weather-related risk would help the Congress identify and manage this 

emerging high-risk area; one which may not constitute an immediate crisis 

but which may pose an important longer term threat to the nation's 

welfare. 

Extreme weather events pose a unique financial threat to private insurers' 

financial success because a single event can cause insolvency or a 

precipitous drop in earnings, liquidation of assets to meet cash needs, or a 

downgrade in the market mtings used to evaluate the soundness of 

companies in the industry. To prevent these disruptions, the American 

Academy of Actuaries (AAA)-the professional society that establishes, 

maintains, and enforces standards of qualification, practice, and conduct 

for actuaries in the United States-has outlined a five-step process for 

private insurers to follow to manage their catastrophic risk. These steps 

include the following: 

identifying catastrophic risk appetite by determining the maximum 

potential loss they are willing to accept; 

measuring catastrophic exposure by determining how vulnemble their 

total portfolio is to loss, both in absolute terms and relative to the 

company's risk management goals; 

• pricing for catastrophic exposure by setting mtes to collect sufficient 

premiums to cover their expected catastrophic loss and other expenses; 

controlliug catastrophic exposure by reducing their policies in areas 

where they have too much exposure, or transfening risk using reinsurance 

or other mechanisms; and 

• evaluating their ability to pay claIms by determining the sufficiency of 

their financial resources to cover claims in the event of a catastrophe. 

Additionally, insurers monitor their exposure to catastrophic weatherrelated risk using sophisticated computer models called 'catastrophe 

models."" AAA emphasizes the shortcomings of estimating future 

catastrophic risk by extrapolating solely from historical losses and 

34There are three main catastrophe modeling firms: AIR Worldwide, Risk Management 

Solutions, and EQECAT. Although many of the insurers we interviewed use models from 

these finns, two of the eleven insurers have developed their own catastrophe models. 

Page 30 
307 

endorses catastrophe models as a more rigorous approach.'" Catastrophe 

models incorporate the underlying trends and factors in weather 

phenomena and current demographic, financial, and scientific data to 

estimate losses associated with various weather-related events. According 

to an industry representative, catastrophe models assess a wider range of 

possible events than the historical loss record alone. These models 

simulate losses from thousands of potential catastrophic weather-related 

events that insurers use to better assess and control their exposure and 

inform pricing and capital management decisions. Figure 10 illustrates the 

difference between estimating future catastrophic losses using historical 

data versus catastrophe models. 

Figure 10; Modeling Potential Catastrophe Losses 

Historicalloss·baaed model 

Past insurer losses 

Peer group losses 

Industry losses 

Catastrophe model 

Frequency, severity. location, 

and other 

chal"ll.cleriSlicsof 

\Wslher-related events 

Sourc;!lS: Adapi8d from the Amencatl Academy 0' Ac1usn8S and Towers Pamn, 

35 American Academy of Actuaries, Catastrophe Exposures and Insurance Industry 

Catastrophe Management Practices (Washington, D.C.: American Academy of Actuaries, 

June 10, 2001), http://\\\.\-"W.aetnary.orgipdflcasualtykata..':;trophp _()61001,pdf (downloaded 

Jan. 3, 2007),10-12. 

Page 31 GAO·07·285 Climate Change 
308 

To determine what major private insurers are doing to estimate and 

prepare for risks associated with potential changes in climate arising from 

natural or hwnan factors, we contacted 11 of the largest private insurers 

operating in the U.S. property casualty insurance market. Representatives 

from each of the 11 major insurers we interviewed told us they use 

catastrophe models that incorporate a near-term higher frequency and 

intensity of hurricanes. Of the 11 private insurers, 6 specifically attributed 

the higher frequency and intensity of hurricanes to the Atlantic 

Multidecadal Oscillation, which-according to NOAA-is a 20- to 40-year 

climatic cycle of fluctuating temperatures in the north Atlantic Ocean. The 

remaining 5 insurers did not elaborate on the elements of climate change 

driving the differences in hurricane characteristics. 

Industry reports indicate that insurance companies' perception of 

increased risk from hurricanes has prompted them to reduce their nearterm catastrophic exposure, in both reinsurance and primary insurance 

coverage along the Gulf Coast and eastern seaboard. For example, a 

recent industry analysis from a leading insurance broker reported that 

reinsurance coverage is substantially limited in the southeastern United 

States and that reinsurance prices have more than doubled from 2005 to 

2006, following a record-setting hurricane season." According to the 

Insurance Information Institute, a leading source of information about the 

insurance industry, primary insurance companies have also raised prices 

in coastal states to cover rising reinsurance costs." Additionally, a recent 

report co-authored by a major international insurance company cites 

several examples of large primary insurers either limiting coverage or 

:JGGuy Carpenter. The World Catastroplw Reinsumnce Market: Steep Peaks Overshadow 

Plateaus (New York, N. y,; Guy Carpenter, September 2006), 

http://www.guy('arp.C'om/portaVextranetlinsightsireports.html'!vhl=30 (do\VT\loaded Jan. 3, 

2007). 

37Insurnnce Information Institute, Catastrophes: lnsumnce Issues (New York, N. Y.: 

Insurance Information Institute, November 2006), 

http://wv .. -wjiLorg/media/hottopicS/insuraJl(~e/xxx/ (dO\vnloaded Jan, 3, 2007), 

Page 32 GAO·01·28& Clhnate Change 
309 

withdrawing from vulnerable areas such as Florida,"' the Gulf Coast, and 

Long Island.'" 

As private insurers limit their exposure, catastrophic risk is transferred to 

policyllOlders and the public sector. Insurance companies transfer risk to 

policyholders by increasing premiums and deductibles, or by setting lower 

coverage limits for policies. Insurers can also transfer risk to policyholders 

by passing along the mandatory participation costs of state-sponsored 

insurance plans.'" For example, after the 2004 hurricane season, insurers 

assessed a surcharge of about 7 percent to every policyholder in Florida to 

recoup the cost of insurers' participation in the state-sponsored wind 

insurance plan. The public sector assumes management of weather-related 

risk at the local, state, and national level by providing disaster relief and 

recovery, developing mitigation projects, appropriating funds and, 

ultimately, providing insurance programs when private insurance markets 

are not sufficient or do not exist. 

In addition to managing their aggregate exposure on a near-term basis, 

some of the world's largest insurers have also taken a long-term strategic 

approach to changes in catastrophic risk. For example, major insurance 

and reinsurance companies, such as Allianz, Swiss Re, Munich Re, and 

Uoyds of London, have published reports that advocate increased industry 

awareness of the potential risks of climate change and outline strategies to 

address the issue proactively. Moreover, 6 of the 11 private insurers we 

interviewed provided one or more additional activities they have 

undertaken when asked if their company addresses changes in climate 

through their weather-related risk management processes. These activities 

include monitoring scientific research (4 insurers), simulating the impact 

of a large loss event on their portfolios (3 insurers), and educating others 

38 Allianz Group and World Wildlife Fund! Climate CMnge and Insurance: An AgendaJor 

Action in the United States (New York, N.Y.: Allianz Group and World Wildlife Fund, 

October 2006), 

http://v. ... 'w.a1lianz.com/entallianz~roup/slL~tainability/insight!studies_<ln{l_n"ports/pagel. 

htm[,?hit,<;=reports (downloaded Jan. 4, 2007), 

~e report notes that these decisions were due, in part, to state restrictions on rate 

increases that are designed to maintain insurance prices that are affordable, but may not 

accurately reflect the true potential for loss faced by the insured, 

4Orntirty_one states have FAIR plans, and six southern states have state-sponsored wind 

insurance plans that pool resources fTom insurers to cover the cost of coverage for their 

participants. 

Page 33 
310 

Major Federal Insurers 

Have Taken Little Action 

to Prospectively Assess 

Potential Increases in 

Catastrophic Risk 

Associated with Climate 

Change 

in the industry about the risks of climate change (3 insurers), among 

others. 

Furthermore, recent research on insurers' activities to address climate 

change outlines several other actions that private sector companies are 

taking, such as developing specialized policies and new products, 

evaluating risks to company stock investments, and disclosing to 

shareholders information about company-specific risks due to climate 

change." Additionally, concern over the potential impacts of climate 

change on the availability and affordability of private insurance has led 

state insurance regalators to establish a task force to formally address the 

issue. The report, issued by the NAIC, is expected to be published in the 

summer of 2007. 

The goals of the major federal insurance programs are fundamentally 

different from those of private insurers. Specifically, whereas private 

insurers stress the financial success of their business operations, the 

statutes goventing the NF1P and FCIC promote affordable coverage and 

broad participation by individuals at risk. Although both programs manage 

risk within their statutory guidelines, unlike the private sector, neither 

program is required to limit its catastrophic risk strictly within the 

programs' ability to pay claims on an annual basis. One important 

implication of the federal insurers' risk management approach is that they 

each have little reason to develop information on their long-term exposure 

to the potential risk of increased low-frequency, high-severity weather 

events a.sociated with climate change. 

The statutes governing the NF1P and FCIC promote broad participation 

over financial self-sufficiency in two ways: (1) by offering discounted or 

subsidized premiums to encourage participation and (2) by making 

additional funds available during high-loss years." For example, 

discounted insurance premiums are available under the NF1P for some 

older homes situated within high flood risk areas where insurance would 

41Evan Mills and Eugene Lecomte, From Risk to 0pp01·tunity.' How Insurers Can 

Proactively and Profitably Manage Climate Change (Boston, MA: Ceres, August 2006), 

http://w,.;w.ceres.org!pub/dot's!CefeB_ln.<;urance_Climar€,_YiJ20Report_082Z0u.pJf 

(doYt'nloaded Jan. 3, 2007), 34. 

42N ote that the federal government covers most, but not aU, payment"l in the event of loss 

under the FCIC--insurance providers also share in the risk, as described in detail in 

appendixm. 

Page 34 
311 

otherwise have been prohibitively expensive. FEMA is also authorized to 

borrow additional federal funds for the NFIP on an as-needed basis, 

subject to statutory limits, to cope with catastrophes." One effect has been 

that the NFlP's exposure has expanded well beyond the ability to pay 

claims in high-loss years. 

Similar to the discounted premiums offered by the NFlP, the Fele's 

subsidized premiums are designed to make crop insurance available and 

affordable to as many participants as possible. For example, the Fele is 

mandated to provide fully subsidized catastrophic coverage for producers 

in exchange for a minimal administrative fee, as well as partial subsidies 

for additional levels of coverage. Also like the NFIP, the Fele is 

authorized to use additional federal funds on an as-needed basis during 

high-loss years-although, unlike the NFlP, the Fele is not required to 

reimburse those additional funds. 

Unlike the private sector, the NFlP and the Fele can use additional 

federal funds, and so neither program is required to assess and limit its 

catastrophic risk strictly within its ability to pay claims on an annual basis. 

Instead, each program manages its risk to the extent possible, within the 

context of its broader purposes, in accordance with its authorizing 

statutes and implementing regulations." For example, the Fele uses 

coverage limits, exclusions, and premium rates to meet their statutory goal 

of a long-term loss ratio no greater than l.075--including premium 

subsidies." Although the program has experienced high-loss years that 

required additional federal funds, over time, these high-loss years have 

been offset by low-loss years, which have allowed the program to meet its 

goal and build reserves." 

~e Congress increased the NF1P's borrowing authority from $1.5 billion to 

approximately $20.8 billion in the wake of unprecedented losses associated with the 2005 

hurricane season. 

44 A detailed description of each program's risk management practices can be found in 

appendixes II and ill for the NF1P and FCIC, respectively. 

4.51os5 ratio, an indicator used to evaluate program performance, is calculated by dividing 

claims paid by total premiums collected. A loss ratio greater than LOO indicates that the 

program paid more in claims than was collected in premiums 

~e Fele's average loss ratio from 1995 through 2005 was 0.91. From 1981 through 1994~ 

it was 1.47. See appendix TIl for more infonnation on the FCIC's perfonnance. 

Page 3& 
312 

Information on 

Agencies' Long-term 

Exposure to Catastrophic 

Risk Could Better Inform 

Congressional Decision 

Making 

By developing a goal to generate sufficient revenue to pay for an average 

loss year, the NFlP has also been able to generate a surplus in low-loss 

years despite borrowing funds in high-loss years. In the past, the program 

has been able to repay borrowed funds with interest to the Department of 

the Treasury, however, it is unlikely FEMA will be able to repay the nearly 

$21 billion borrowed following the 2005 hurricane season based on the 

program's current premium income. 

Although neither program faces the potential of financial ruin like the 

private sector, both programs have occasionally attempted to estimate 

their aggregate losses from potential catastrophic events. For example, 

FCIC officials stated that they had modeled past events, such as the 1993 

Midwest floods, using current participation levels to inform negotiations 

with private crop insurers over reinsurance tenns. NFIP and FCIC officials 

explained that these efforts were informal exercises and were not 

peIformed on a regular basis. FCIC officials also said they use a hurricane 

model developed by NOAA to inform pricing decisions for some 

commodities such as citrus crops, according to FCIC officials. However, 

unlike the catastrophic risk faced by private insurers, hurricane damages 

have not been a primary source of crop insurance claims. 

According to NFlP and FCIC officials, their risk management processes 

adapt to near-tenn changes in weather as they affect existing data. As one 

NFlP official explained, NFlP is designed to assess and insure against 

current-not future-risks. Over time, agency officials stated, this process 

has allowed their programs to operate as intended. However, unlike the 

private sector, neither program has conducted an analysis to assess the 

potential Impacts of an increase in the frequency or severity of weatherrelated events on their program operations over the near- or long-term. 

While comprehensive information on federal insurers' long-term exposure 

to catastrophic risk associated with climate change may not inform the 

NFlP's or FCIC's annual operations, it could nonetheless provide valuable 

information for the Congress and other policymakers who need to 

understand and prepare for fiscal challenges that extend well beyond the 

two programs' near-term operational horizons. We have highlighted the 

need for this kind of strategic information in recent reports that have 

expressed concern about the looming fiscal imbalances facing the nation. 

In one report, for example, we observed that, "Our policy process will be 

Page 36 
313 

Conclusions 

challenged to act with more foresight to take early action on problems that 

may not constitute an urgent crisis but pose important long-term threats to 

the nation's fiscal, economic, security, and societal future."41 The prospect 

of increasing program exposure, coupled with expected increases in 

frequency and severity of weather events associated with climate change, 

would appear to pose such a problem. 

Agency officials identified several challenges that could complicate their 

efforts to assess these impacts at the program level. Both NFIP and FCIC 

officials stated there was insufficient scientific information on projected 

impacts at the regional and local levels to accurately assess their impact 

on the flood and crop insurance programs. However, members of the 

insurance industry have analyzed and identified the potential risks climate 

change poses, despite similar challenges. Moreover, as previously 

discussed, both the IPCC and CCSP are expected to release significant 

assessments of the likely effect of increasing temperatures on weather 

events in coming months. 

The experience of many private insurers, who must proactively respond to 

long-term changes in weather-related risk to remain solvent, suggests the 

kind of information that might be developed to help congressional and 

other policymakers in assessing current and alternative strategies. 

Specifically, to help ensure their future viability, a growing number of 

private insurers are actively incmporating the potential for climate change 

into their strategic level analyses. In particular, some private insurers have 

run a variety of simulation exercises to determine the potential business 

impact of an increase in the frequency and severity of weather events. For 

example, one insurer simulated the impact of large weather events 

occurring simultaneously. A similar analysis could provide the Congress 

with valuable information about the potential scale of losses facing the 

NFIP and FCIC in coming decades, particularly in light of the programs' 

expansion since 1980. 

Recent assessments by leading scientific bodies provide sufficient cause 

for concern that climate change may have a broad range of long-term 

consequences for the United States and its citizens. While a number of key 

uncertainties regarding the timing, location, and magnitude of impacts 

41GAO, 21st Century ChaUenges: Reexamining the Base of the Federal Government, 

GAO~05~:125SI' (WaslUngton, D.C.: February 2005), 77. 

Page 37 
314 

Recommendation for 

Executive Action 

remain, climate change has implications for the fIscal health of the federal 

government, which already faces other signifIcant challenges in meeting 

its long-term fiscal obligations. NFIP and FCIC are two major federal 

programs which, as a consequence of both future climate change and 

substantial growth in exposure, may see their losses grow by many billions 

of dollars in corning decades. 

We acknowledge that to carry out their primary missions, these public 

insurance programs must focus on the near-term goals of ensuring 

affordable coverage for individuals in hazard-prone areas. Nonetheless, we 

believe the two programs are uniquely positioned to provide strategic 

information on the potential impacts of climate change-information that 

would be of value to key decision makers charged with such a long-term 

focus. Most notably, in exercising its oversight responsibilities, the 

Congress could use such information to examine whether the current 

structure and incentives of the federal insurance programs adequately 

address the challenges posed by potential increases in the frequency and 

severity of catastrophic weather events. While the precise content of these 

analyses can be debated, the activities of many private insurers already 

suggest a number of strong possibilities that may be applicable to 

assessing the potential implications of climate change on the federal 

insurance programs. 

We recommend that the Secretary of Agriculture and the Secretary of 

Homeland Security direct the Administrator of the Risk Management 

Agency and the Under Secretary of Homeland Security for Emergency 

Preparedness to analyze the potential long-term implications of climate 

change for the Federal Crop Insurance Corporation and the National 

Flood Insurance Program, respectively, and report their findings to the 

Congress. This analysis should use forthcoming assessments from the 

Climate Change Science Program and the Intergovernmental Panel on 

Climate Change to establish sound estimates of expected future 

conditions. Key components ofthis analysis may include: (1) realistic 

scenarios of future losses under anticipated climatic conditions and 

expected exposure levels, including both potential budgetary implications 

and consequences for continued program operation and (2) potential 

mitigation options that each program might use to reduce their exposure 

to loss. 

Page 38 GAO-07·285 Climate Cha.nge 
315 

Agency Comments 

and Our Evaluation 

We provided a draft oftbis report to the Departments of Agriculture 

(USDA), Commerce, Energy, and Homeland Security (DHS) for their 

review. DHS agreed via email with the report's recommendation, noting 

that conducting an assessment of the impact of climate change beyond 

FEMA's current statistical modeling (which is based on historical loss 

experience) could be helpful if resources were available to pursue such an 

analysis. 

USDA also agreed with the report's recommendation, and commented on 

the presentation of several findings. (See app. V for the letter from the 

Under Secretary for Farm and Foreign Agricultural Services and GAO's 

point-by-point response.) In particular, USDA disagreed that it had thus far 

taken little action to prospectively assess potential increases in 

catastrophic risk associated with climate change. USDA explained that 

RMA does assess both the current and long-term exposure of the crop 

insurance program to catastrophic weather events, noting specifically that 

RMA (1) updates and publishes total program liability on a weekly basis 

and (2) estimates expected changes in liability up to 10 years ahead 

through its baseline projections. We acknowledge these activities, but 

believe it is important to note that they are limited in scope, focusing 

almost exclusively on retrospective measures of performance and not on 

the potential for increasingly frequent and intense weather-related events. 

These events, including drought and heavy precipitation events, are the 

key events acknowledged by USDA as posing catastrophic risk to the crop 

insurance program. Moreover, other RMA efforts to capture changes in 

weather-related risk rely on data reflecting what has been experienced in 

the past, not on what could be experienced in the future. 

The Department of Commerce neither agreed nor disagreed with the 

report's fmdings, but instead offered several comments on the 

presentation of several issues in the draft (particularly the depth in which 

several issues are discussed) as well as technical comments. We have 

incorporated these comments as appropriate and address them in detail in 

appendix VI. Notably, the Department of Commerce underscored the 

vulnerability of high-risk coastal development, stating that such 

vulnerabilities will only be amplified by climate change-related increases 

in the frequency or severity of weather-related events. 

Finally, the Department of Energy elected not to provide comments on the 

draft. 

Page 39 GAO·07~285 Climate Change 
316 

As agreed with your offices, unless you publicly announce the contents of 

this report earlier, we plan no further distribution until 30 days from the 

report date. At that time, we will send copies of this report to the 

Secretaries of Agriculture, Commerce, Energy, and Homeland Security, as 

well as other interested parties. We also will make copies available to 

others upon request. In addition, the report will be available at no charge 

on the GAO Web site at http://www.gao.gov. 

If you or your staff has any questions regarding this report, please contact 

me at (202) 512-3841 or stephensor\i@gao.gov. Contact points for our 

Offices of Congressional Relations and Public Mfairs may be found on the 

last page of this report. Key contributors are listed in appendix VII. 

John B. Stephenson 

Director, Natural Resources and Environment 

Page 40 
317 

Appendix I: Scope and Methodology 

Scientific Literature 

We were asked us to (1) describe what is known about how climate 

change might affect insured and uninsured losses, (2) determine insured 

losses incurred by major federal agencies and private insurers and 

reinsurers resulting from weather-related events, and (3) determine what 

major federal agencies and private insurers and reinsurers are doing to 

assess and manage the potential risk of increased losses due to changes in 

the frequency and severity of weather-related events associated with 

climate change. 

To address the first objective, we reviewed and summarized existing 

literature from significant policy-oriented scientific assessments from 

reputable international and national research organizations including the 

Intergovernmental Panel on Climate Change, National Academy of 

Sciences, and the multifederal agency U.S. Climate Change Science 

Program, as specified in table 3. It was beyond the scope of this report to 

independently evaluate the results of these studies. 

Table 3: Key Polley-Oriented Scientific Assessments Reviewed by GAO 

Organization 

Intergovernmental 

Panel on Climate 

Change (IPCC) 

Climate Change 

Science Program 

(CCSP) 

National Academy of 

Sciences (NAS) 

Source: GAO. 

Publication 

Climate Change 2007: The Physical Science Basis, Summary 

for Policymakers (2007) 

Climate Change 2001: Synthesis Report (2001) 

Climate Change 2001: The Scientific Basis (2001) 

Climate Change 2001: Impacts, Adaptation & Vulnerability 

(2001) 

Temperature Trends in the Lower Atmosphere: Steps for 

Understanding and Reconciling Differences, Synthesis and 

Assessment Product 1, 1 (2006) 

Surface Temperature Reconstructions for the Last 2,000 Years 

(2006) 

Understanding and Responding to Climate Change: Highlights 

of National Academies Reports (2006) 

Radiative Forcing of Climate Change: Expanding the Concept 

and Addressing Uncertainties (2005) 

From Climate to Weather: Impacts on Society and EconomySummary of a Forum, June 28,2002, Washington, D,C, (2003) 

Understanding Climate Change Feedbacks (2003) 

Abrupt Climate Change: Inevitable Surprises (2002) 

Climate Change Science: An Analysis of Some Key Questions 

(2001) 

Note: Publication year follows publicatkln title in parentheses. 

Page 41 GAO·07-285 Climate Change 
318 

Insured Loss Data 

pes 

Appendix I: Scope and Methodology 

To address the second objective, we analyzed insured loss data from 

January 1, 1980, through December 31, 2005, from the Federal Emergency 

Management Agency (FEMA) for the National Flood Insurance Program 

(NFlP); the Department of Agriculture's Risk Management Agency (RMA) 

for the Federal Crop Insurance Corporation (FCIC); and the Property 

Claim Services (PCS) for private property insurance. Through electronic 

testing and other means, we assessed the reliability of each of the data sets 

to determine whether the data were sufficiently reliable for our purposes. 

Specifically, we interviewed the sources for each of the data sets to gather 

information on how records were collected, processed, and maintained. 

Because not all catastrophes are weather-related, we excluded all events 

attributable to terrorist acts, tsunamis, earthquakes, and other 

nonweather-related losses, based on discussions with the data provider. 

To acljust for the general effects of inflation over time we used the chainweighted gross domestic product price index to express dollar amounts in 

inflation-acljusted 2005 dollars. We reviewed any changes in data 

collection methodologies that have occurred over time, and evaluated the 

effect of any changes on our ability to report losses. We believe that these 

data are sufficiently reliable for the purpose of describing insured losses. 

We note, however, that these data likely understate the actual insured 

losses. 

PCS data are estimates of insured losses, or claims paid by private 

insurance companies, for catastrophe loss events for the 50 states, as well 

as the District of Columbia, Puerto Rico, and the U.S. Virgin Islands. PCS 

defines "catastrophes" as events that, in their estimation, affect a 

significant number of policyholders and that cause more than $25 million 

in damages. To identify catastrophes, PCS reviews daily weather reports 

and wire service news stories to determine if potentially damaging 

weather has occurred anywhere in the nation. PCS contacts acljusters, 

insurance claims departments, or public officials to gather additional 

information about the scope of damage and potential insured losses for 

events. Damages associated with a single storm event are grouped 

together as a single catastrophe, even if they are separated by distance. 

PCS obtains its insured loss data from information reported by insurers. 

PCS estimates include losses under personal and commercial property 

insurance policies covering real property, contentsl business interruptionl 

vehicles, and boats. PCS estimates also typically include amounts paid by 

state wind pools, joint underwriting associations, and certain other 

residual market mechanisms, such as Fair Access to Insurance 

Requirements (FAIR) plans. However, PCS estimates do not include 

damage to uninsured or self-insured property including uninsured publicly 

Page 42 GAO~07-285 Climate Change 
319 

NFIP 

FCIC 

Appendix I: Scope and Methodology 

owned property and utilities; losses involving agriculture, aircraft and 

property insured under NF1P or certain specialty lines (such as ocean 

marine), or loss adjustment expenses. Generally, PCS finalizes its 

estimates within 6 months of the occurrence of a PCS-identified 

catastrophe, according to company documents. PCS does not 

independently verify or audit the accuracy of the reported losses. Thus, 

loss totals are the best estimates of primary insurers compiled by PCS 

professionals, and mayor may not accurately and completely reflect 

actual industry-insured losses. Nevertheless, PCS has determined their 

data to be very close to other independent estimates. PCS officials said 

that, when compared with state insurance commissioners' estimates based 

on all loss data from insurance companies following particularly large 

catastrophes, PCS data are within 3 to 5 percent of actual amounts. For 

the data used in our review, company officials told us that most estimates 

included in the data provided to us are fmal, except the 2005 hurricanes. 

NF1P data are actual claim payment totals, not estimated amounts. NF1P 

data represent the budget outlays that satisfy claims submitted by NF1P 

policyholders to their participating program companies. The companies 

report these data to the NF1P on a monthly basis. According to a senior 

program official, the Department of Homeland Security performs periodic 

audits of company records reported to NFIP. Although nearly all claims in 

the NF1P data we reviewed are considered closed by the agency (and, 

therefore, final), a small portion of claims associated with 2004 and 2005 

hurricane season are not reflected in data we reviewed, according to the 

agency's database manager. 

The loss data provided by FCIC represent the actual amount paid to 

policyholders, not estimates. FCIC data represent the budget outlays that 

satisfy claims submitted by policyholders to their participating insurance 

companies. Participating insurance companies submit claims information 

for processing through a computerized validation system. Automated 

processing of claims information OCClUS annually for a period going back 5 

years, but agency officials said that indemnities may have changed after 

automated processing closed in very specific cases, such as settlement of 

litigation or arbitration cases. 

Page 43 
320 

Identifying Insured Losses 

Associated with 

Hurricanes 

Independent Studies 

Interviews with Major 

Insurers 

Appendix I: Scope and Methodology 

To determine the insured losses associated with major and nonmajor 

hurricanes, we identified losses associated with hurricanes in both the 

PCS and NFIP data sets. We used the name and year of each hurricane to 

link loss records to information from the National Oceanic and 

Atmospheric Administration (NOAA) on the peak intensity of each 

hurricane at or near landfall. 

We supplemented our descriptive analysis with a review of existing 

literature and the views of subject area experts on the primary drivers of 

changes in the weather-related loss record in general. Given the data 

challenges faced by natural hazard researchers, the data sets used in these 

studies are generally different. 

To address the third objective, we conducted semistructured interviews 

with officials from the NFIP, RMA, and a nonprobability sample of the 

largest private property/casualty primary insurance and reinsurance 

companies as defined by national market share. In the private sector, 11 

out of 14 potential respondents elected to participate, drawing from 

companies in the United States, Europe, and Bermuda. Although the 

results from this sample should not be generalized to represent all 

insurance companies, the companies we interviewed represent about 45 

percent of the total domestic insurance market. In developing our 

semistructured questionnaire, we reviewed existing literature on risk 

assessment and management practices, GAO guidance on risk 

management, and interviewed subject area experts knowledgeable about 

the insurance industry and federal insurance programs. Insurance industry 

experts included representatives from insurance brokers, catastrophe 

modeling firms, industry associations, the Insurance Information Institute, 

and academics. To reduce response error, we pretested our Questions for 

clarity, relevancy, and sensitivity with representatives from several 

insurance industry associations, including the American Insurance 

Association, the National Association of Mutual Insurance Companies, the 

Property Casualty Insurance Association of America, and the Reinsurance 

Association of America. On the basis of feedback from the pretests, we 

modified the questions as appropriate. We distinguished proactive risk 

management responses to climate change from other responses according 

to whether insurers indicated that they were acljusting their activities 

based on projected changes in underlying weather trends rather than 

adapting only as changes in weather conditions reveal themselves in 

historical data. During our interviews, some private insurers attributed 

their actions to changes in the Atlantic Multidecadal Oscillation (AMO). 

Page 44 GAO·07·285 Climate Change 
321 

Appendix I: Scope IUId Methodology 

Because NOAA considers the AMO to be a climatic cycle, we categorized 

the actions of these insurers as responding to climate change. 

We asked the participating federal agencies and private insurance and 

reinsurance companies to identify individuals knowledgeable about their 

weather-related risk management practices for our interviews. Based on 

these criteria, we spoke with a range of senior officials and representatives 

that included actuaries, underwriters, catastrophe specialists, regulatory 

affairs and counsel. During the interviews, we asked a series of questions 

about risk assessment and management practices for weather-related risk, 

significant drivers of changes to past and future weather-related risk, 

respondents' perception of and actions to address climate change in their 

risk management processes, and risk management best practices that 

might be transferable to federal insurers. 

We also interviewed officials from rating agencies, catastrophe modeling 

firms, insurance industry associations, the National Association of 

Insurance Commissioners, and universities to provide additional context 

for respondents' statements. To supplement our inteIViews, we reviewed 

documentary evidence of risk management practices from federal 

agencies, studies from subject area experts, industry reports, publicly 

available insurance company documents, and previous work from GAO to 

provide context and support for respondents' statements. 

We performed our work between February 2006 and January 2007 in 

accordance with generally accepted government auditing standards. 

pag." 46 GA()"07·285 Climate Change 
322 

Appendix II: National Flood Insurance 

Program 

F100ds are the most cornmon and destructive natural disaster in the 

United States. According to NFIP statistics, 90 percent of aU natural 

disasters in the United States involve flooding. Because of the catastrophic 

nature of flooding and the inability to adequately predict flood risks, 

private insurance companies largely have been unwilling to underwrite 

and bear the risk of flood insurance. As a result, flooding is generally 

excluded from homeowner policies that cover damages from other types 

of losses, such as wind, fire, and theft. 

The NFIP was established in 1968 to address uninsured losses due to 

floods. Prior to the establishment of the NFIP, structural flood controls on 

rivers and shoreUnes (e.g., darns and levees) and disaster assistance for 

flood victims were the federal government's primary tools for addressing 

floods. The Mississippi River Commission, created in 1879 to oversee the 

development of a levee system to control the river's flow, was the first of 

these federal efforts to address flooding. Due to the limited effectiveness 

of structural flood controls, continued development in flood-prone areas, 

and a desire to reduce postdisaster assistance payments, the Congress 

began examining the feasibility of pre funding flood disaster costs via 

federal insurance in the 1950s. Although the first federal flood insurance 

program authorized by the Congress in 1956 failed due to lack of funding, 

a series of powerlul hurricanes and heavy flooding on the Mississippi 

River in the early 1960s prompted the Congress to revisit the issue and 

direct the Department of Housing and Urban Development (BUD) to 

conduct a feasibility study of a federal flood insurance program. The 1966 

HUD feasibility study helped lead to the passage of the National F100d 

Insurance Act of 1968,' which authorized the creation of the NFIP.' 

Since its inception, the NFIP has undergone several major changes in 

response to significant flood events. Hurricane Agnes in 1972 led to the 

mandatory flood insurance requirements on certain persons in flood-prone 

areas included in the F100d Disaster Protection Act of 1973, which also 

significantly increased coverage limits in a further effort to increase 

participation.' FoUowing the Midwest floods of 1993, the Congress enacted 

the National F100d Insurance Reform Act of 1994, which strengthened 

'Pub. L. No. 90-448, 82 Stat. 573. 

2Senate Committee on Banking and Currency, Insurance and Other ProgramsjoT 

Financial Assistance to Flood Victims, 89th Cong., 2d Sess., 1966, Committee Print. 

'Pub. L. No. 93-234, 87 Stat. 975 (1973). 

Page 46 GAO-07-285 Climate Change 
323 

How the Program 

Works 

Appendix 11: National Flood Insurilllce 

Program 

lender compliance requirements with mandatory purchase provisions 

requiring mortgage-holders in flood-prone areas to purchase flood 

insurance and prohibited flood disaster assistance for properties that had 

not maintained their mandatory coverage.' In 2004, recognizing that losses 

from repetitive flooding on some insured properties was straining the 

financial condition of the NF1P, the Congress passed the Flood Insurance 

Reform Act of 2004, which provided NF1P with additional tools to reduce 

the number and financial Impact of these properties.' These tools include: 

increased authorization of funding for mitigation of repetitive loss 

properties and statutory authority to penalize policyholders who refuse 

government assistance to mitigate certain structures that have been 

substantially or repetitively damaged by flooding, among others. Recently, 

the Congress has begun exploring additional changes to the NF1P to 

address the financial and operational challenges presented by the 2005 

hurricane season. 

FEMA, within the Department of Homeland Security (DHS), is responsible 

for the oversight and management of the NFIP.' Under this program, the 

federal government assumes the liability for covered losses and sets rates 

and coverage liruitations, among other responsibilities. 

The NF1P combines three elements: (1) property insurance for potential 

flood victims, (2) mapping to identify the boundaries of the areas at 

highest risk of flooding, and (3) incentives for communities to adopt and 

enforce floodplain management regulations and building standards (such 

as elevating structures) to reduce future flood damage. The effective 

integration of all three of these elements L. needed for the NF1P to achieve 

its goals of 

'Pub. L. No. 103-325, 108 Stat. 2255 (1994). 

~e Bunning~Bereuter~Blumenauer F100d Insurance Reform Act of 2004, Pub. L. No. 108-

264, 118 Stat. 712. 

~n March 2003, FEMA and its approximately 2,500 staff became part of the Department of 

Homeland Security (DHS). Most of FEMA-including its Mitigation Division, which is 

responsible for administering the NFlP-is now part of the department's Emergency 

Preparedness and Response Directorate. However, FEMA retained its name and individual 

identity within the department. Under a reorganization pian proposed by the current 

Secretary of DHS, the Emergency Preparedness and Response Directorate would be 

abolished, and FEMA would report directly to the Undersecretary and Secretary of DHS. 

Page 47 GAo..07 ~285 Climate Change 
324 

Appendix II: National Flood Insurance 

Program 

providing property flood insurance coverage for a high proportion of 

property owners who would benefit from such coverage, 

reducing taxpayer-funded disaster assistance when flooding strikes, and 

reducing flood damage through floodplain management and the 

enforcement of building standards. 

Over 20,000 communities across the United States and its territories 

participate in the NFIP by adopting and agreeing to enforce state and 

community floodplain management regulations to reduce future flood 

damage. In exchange, the NFlP makes federally backed flood insurance 

available to homeowners and other property owners in these 

communities. As of 2005, the program had over 4.9 million policyholders, 

representing about $875 billion in assets. Homeowners with mortgages 

from federally regulated lenders on property in communities identified to 

be in high flood risk areas are required to purchase flood insurance on 

their dwellings. Optional, lower cost coverage is also available under the 

NFIP to protect homes in areas of low to moderate risk. The mandated 

coverage protects homeowners' dwellings only; to insure furniture and 

other personal property items against flood damage, homeowners must 

purchase separate NFlP personal property coverage. 

Prior to the 2005 hurricanes, NFIP had paid about $14.6 billion in flood 

insurance claims, primarily from policyholder premiums that otherwise 

would have been paid through taxpayer-funded disaster relief or borne by 

home and business owners themselves. According to FEMA, every $3 in 

flood insurance claims payments saves about $1 in disaster assistance 

payments, and the combination of floodplain management a.nd mitigation 

efforts save about $1 billion in flood damage each year. 

To make flood insurance available on "reasonable terms and conditions to 

persons who have need for such protection/'7 the NFIP strikes a balance 

between the scope of the coverage provided and the premium amounts 

required to provide that coverage. Policy coverage limits arise from statute 

and regulation, including FEMA's standard flood insurance policy (SFIP), 

which is incorporated in regulation and issued to policyholders when they 

purchase flood insurance. As of 2006, FEMA estimated 26 percent of its 

policies were subsidized, and 74 percent were charged "full-risk premium" 

'42 U.S.C. § 4001(0)(4). 

Page 48 GAO~07"281i Clhnate Change 
325 

Risk Assessment 

Practices 

Appendix II: National Flood In.surance 

Program 

rates. In 1981, FEMA set the operating goal of generating premiums at 

least sufficient to cover losses and expenses relative to the "historical 

average loss year." However, the heavy losses from the 2005 hurricane 

season may increase the historical average loss year to a level beyond the 

expected long-term average. In light of this, FEMA is currently revisiting 

the use of the historical average loss year as a premium income target. 

The NFIP uses hydrologic models to estimate loss exposure in flood-prone 

areas, based on the method outlined in the 1966 HUD report, Insumnce 

and Other Programs for Financial Assistance to Flood Victims.' These 

techniques of analysis were first developed by hydrologists and hydraulic 

engineers to determine the feasibility of flood protection. 

The hydrologic method uses available data on the occurrence of floods 

and flood damages to establish both the frequency of flood recurrence and 

the damage associated with a flood of a given height. The NFIP augments 

available flood data with detailed engineering studies, simulations, and 

professional judgment to establish the scientific and actuarial basis for its 

risk assessment process and rates. 

Flood-elevation frequency data for specific communities is published in 

Flood Rate Insurance Maps, which differentiate areas based on their flood 

risk These maps are the basis for setting insurance rates, establishing 

floodplain management ordinances, and identifying properties where flood 

insurance is mandatory. 

To estimate expected annual losses and determine the basis for rate 

setting, NFlP combines flood-elevation frequency data with depth-damage 

calculations to estimate a range of flood probabilities and associated 

damages. Each possible flood is multiplied by the expected damage should 

such a flood occur, and then each of these is added together. The total of 

each possible flood's damage provides an expected per annum percentage 

of the value of property damage due to flooding. This expected damage 

can then be converted to an expected loss per $100 of property value 

covered by insurance. This per annum expected loss provides the 

fundamental component of rate setting. Rates are also adjusted to 

8Senate Committee on Banking and Currency, Insurance and Other ProgramsJor 

Financial Assistance to Flood Victims. 

Page 49 GAO·07·285 Climate Change 
326 

Program Funding 

Appendix II: National Flood lruiurance 

Program 

incolPorate additional expense factors, such as adjustment costs and 

deductibles. 

To the extent possible within the context of its broader PUlJloses, the 

NF1P is expected to pay operating expenses and flood insurance claims 

with premiums collected on flood insurance policies rather than with tax 

dollars. However, as we have reported, the program is not actuarially 

sound by design because the Congress authorized subsidized insurance 

rates to be made available for policies covering certain structures to 

encourage communities to join the program. As a result, the program does 

not collect sufficient premium income to build reserves to meet the longtenn future expected flood losses.' FEMA has statutory authority to 

borrow funds from the Department of the Treasury to keep the NF1P 

solvent." Prior to the 2005 hurricane season, FEMA had exercised its 

borrowing authority four times, when losses exceeded available fund 

balances. For example, FEMA borrowed $300 million to pay an estimated 

$1.8 billion on flood insurance claims resulting from the 2004 hurricane 

season. Following hurricanes Katrina, Rita, and Wilma, FEMA estimates it 

will need to borrow nearly $21 billion dollars to cover outstanding claims. 

Although FEMA has repaid borrowed funds with interest in the past, 

FEMA does not expect to be able to meet the $1 billion in annual interest 

payments for these borrowed funds. 

9GAO, Hood Insurance: biformation on the Financial Condition of the National Flood 

Insurance Pmgram, GAO~OI+mJ2T (Washington, D.C.: July 19, 2001). 

"See 42 U.S.C. ! 4016. 

Page 50 GAO-07~285 ClimBte Change 
327 

Appendix III: Federal Crop Insurance 

Corporation 

In general, farm income is detennined on the basis of farm production and 

prices, both of which are subject to wide fluctuations due to external 

factors. Because a substantial part of farming depends on weather, farm 

production levels can vary substantially on an annual basis. Commodity 

prices are also subject to significant swings due to supply and demand on 

the domestic and international markets. The Congress created FCIC in 

1938 to administer a federal crop insurance program on an experimental 

basis to temper the weather effects of the dust bowl and the economic 

effects of the Great Depression.' 

The federal crop insurance program protects participating farmers against 

financial losses caused by droughts, fioods, or other natural disasters. 

Until 1980, the federal crop insurance program was limited to major crops 

in the nation's primary production areas. The Federal Crop Insurance Act 

of 1980 expanded crop insurance both in terms of crops and geographic 

areas covered.' The expansion was designed to allow the disaster 

assistance payment program provided by the government under previous 

farm bills to be phased out. To encourage participation, the 1980 act 

required a 30 percent premium subsidy for producers who purchased 

coverage up to the 65 percent yield level. Despite the subsidies, program 

participation remained low, and the Congress authorized several ad hoc 

disaster payments between 1988 and 1993. Congressional dissatisfaction 

with the size and frequency of these payments prompted the Congress to 

pass the Federal Crop Insurance Reform Act of 1994, which mandated 

participation in the crop insurance program as a prerequisite for other 

benefits, including agriculture price support payments.' The 1994 act also 

introduced catastrophic risk protection coverage, which compensated 

farmers for losses exceeding 50 percent of their average yield at 60 percent 

of the commodity price. Premiums for catastrophic risk protection 

coverage were completely subsidized, and subsidies for other coverage 

levels were also increased. 

As part of the 1996 Farm Bill, the Congress created the Office of Risk 

Management under the U.S. Department of Agriculture (USDA), and USDA 

established RMA to administer the FCIC insurance programs, among other 

IFederal Crop Insurance Act, tit. V, 52 Stat. 72 (1938) (codified a..c; amended at 7D.S.C. §§ 

1501·1524). 

'Pub. L. No. 96-365, 94 Stat. 1312 (1980). 

'Pub. 1. No. 103·354, 108 Stat. 3178 (1994). 

Palle lit 
328 

How the Program 

Works 

Appendix III: Federal Crop Iruurance 

Corporation 

things.' The Congress also required the creation of a revenue insurance 

pilot project and repealed the mandatory participation provision of the 

1994 Act. However, participation in the crop insurance program has not 

necessarily precluded the need for further disaster assistance. For 

example, due to low commodity prices in Igg7 and multiple years of 

natural disasters, the Congress enacted an emergency farm financial 

assistance package totaling almost $6 billion in 1998, which included over 

$2 billion in crop disaster payments, and an $8.7 billion financial 

assistance package in 1999 that included $1.2 billion in crop disaster 

payments. 

In 2000, the Congress enacted the Agricultural Risk Protection Act, which 

further increased subsidies for insurance above the catastrophic risk 

protection coverage level, subsidized a portion of the cost of revenue 

insurance products, improved coverage for farmers affected by multiple 

years of natural disasters, required pilot insurance programs for livestock 

farmers, and authorized pilot programs for growers of other commodities 

not currently covered, gave the private sector greater representation on 

the FCIC Board of Directors, reduced eligibility requirements for 

permanent disaster payment programs for noninsured farmers, and 

provided new tools for monitoring and controlling program abuses, among 

other provisions.' These changes required $8.2 billion in additional 

spending from fiscal years 2001 through 2005. 

RMA has overall responsibility for supervising the federal crop insurance 

program, which it administers in partnership with private insurance 

companies. Insurance policies are sold and completely serviced through 

approved private insurance companies that have their losses reinsured by 

USDA. These companies share a percentage of the risk of loss or 

opportunity for gain associated with each insurance policy written. In 

addition, RMA pays companies a percentage of the premium on policies 

sold to cover the administrative costs of selling and servicing these 

policies. In turn, insurance companies use this money to pay commissions 

to their agents who sell the policies and fees to adjusters when claims are 

filed. RMA oversees the development of new insurance products and the 

expansion of existing insurance products to new areas to help farmers 

reduce the chance of fmancialloss. 

'Pub. L. No. 104-127, 110 Stat. 888 (1996). 

'Pub. L. No. 106-224,114 Stat. 358 (2000). 

Page 52 
329 

Risk Assessment 

Practices 

Appendlx III: Federal Crop lruurance 

Corporation 

The USDA determines whether the federal crop insurance program will 

insure a conunodity on a crop-by-crop and county-by-county basis, based 

on farmer demand for coverage and the level of risk associated with the 

crop in the region, among other factors. Over 100 crops are covered; major 

crops such as grains are covered in almost every county where they are 

grown, and specialty crops such as fruit are covered in some areas. For 

many commodities, producers may also purchase revenue insurance. 

Based on conunodity market prices and the producer's production history, 

producers are assigned a target revenue level. The producer receives a 

payment if their actual revenue falls short of the target level, whether the 

shortfall was due to low yield or low prices. Premiums for revenue 

insurance are subsidized at the same level as traditional crop insurance 

policies. 

Farmers' participation in the federal crop insurance program is voluntary, 

but the federal goverrunent encourages it by subsidizing the insurance 

premiums. Participating farmers are assigned a "normal" crop yield based 

on their past production history and a conunodity price based on 

estimated market conditions. The producer selects both the percentage of 

yield to be covered and the percentage of the conunodity price received as 

payment if the producer's losses exceed the selected threshold. Premium 

prices increase as levels of yield and price coverage rise. However, all 

eligible producers can receive fully subsidized catastrophic risk protection 

coverage that pays producers for losses exceeding 50 percent of normal 

yield, at a level equal to 55 percent of the estimated market price, in 

exchange for a $100 administrative fee. Producers who purchase this 

coverage can buy additional insurance at partially subsidized rates up to 

85 percent of their yield and 100 percent of the estimated market price. 

As an alternative, the Group Risk Plan provides coverage based on county 

yields rather than a producer's actual production history. If county yield 

falls below the producer's threshold yield (a percentage of the historical 

county yield), then the producer receives a payment. 

RMA's risk assessment/rate-setting methodology is complex because the 

risk of growing a particular crop varies by county, farm, and farmer. 

Because of all the possible combinations involved, hundreds of thousands 

of rates are in place. Each year, RMA follows a multistep process to 

establish rates for each crop included in t.he program. The process 

involves establishing base rates for each county crop combination and 

adjusting these basic rates for a nunlber of factors, such as coverage and 

Page !S3 
330 

Appendix IU: Federal Crop Insurance 

Corporation 

production levels. In addition, rates are a<ljusted to account for the 

legislated limitations in price increases. 

For each crop, RMA extracts data on counties' crop experience from its 

historical database. The data elements for each crop, crop year, and 

county include (1) the dollar amount of the insurance coverage sold, (2) 

the dollar amount of the claims paid, and (3) tile average coverage level. 

The historical data are a<ljusted to the 65 percent coverage level (the most 

commonly purchased level of coverage) so that liability and claims data at 

different coverage levels can be combined to develop rates. Using the 

a<ljusted data, FCIC computes the loss-cost ratio for each crop in each 

county. The loss-cost ratio is calculated by dividing the total claim 

payments by the total insurance in force; the result is stated as a 

percentage.' To reduce the impact a single year will have on the average 

loss-cost ratio of each county, RMA caps the a<ljusted average loss-cost 

ratio for any single year at 80 percent of all years.' To establish the base 

rate for each county, the average for all the years since 1975 is calculated 

using the capped loss-cost ratios and a weighting process to minlmize the 

differences in rates among counties. 

Rates are further a<ljusted by: a disaster reserve factor, a surcharge for 

catastrophic coverage for each crop based on pooled losses at the state 

level,' a prevented planting factor, farm divisions, crop type, and 

differences in both average yield and coverage leveis.' 

fiFor example, if the claims paid in 1 year totaled $7.36 and the insurance in force was $100, 

the loss~cost ratio is 7.36 percent. The percentage represents the rate that would need to be 

charged per $100 of insurance coverage if total premiums are to equal the total claim 

payments for that year. In this example, the 7.36 percent indicates that a rate of $7.36 was 

required per $100 of insurance coverage sold. 

7The excess of losses above the capped amount is pooled at the state level and reallocated 

to the counties. According to FCIC, this procedure is intended to reduce the variation of 

rates from one year to the next. 

'7he surcharge is established by pooling the amount of insurance in force and the claim 

payments for capped years with the highest loss~cost ratios in each county that were not 

factored into the county unloaded rates at the state level. These data are used to calculate a 

statewide surcharge for catastrophic coverage (pooled claims payments divided by pooled 

insurance in force). If the pooled losses at the state level exceed five points, the excess is 

returned to the cOlmties and included in the county unloaded rate. 

9Prevented planting factor adds a provision for losses due to crops that were never planted 

because of external factors not directly related to yield loss. 

Page $4 GAO·07~285 Climate Change 
331 

Program Funding 

Appendix III: Federal Crop Insuranc:e 

Corporation 

The crop insurance program is financed primarily through general fund 

appropriations and farmer-paid premiums. In addition to the premiums 

paid by producers, FeIe receives an annual appropriation to cover 

necessary costs for the program's premium subsidies, excess losses, 

delivery expenses, and other authorized expenses. According to USDA 

budget documents, for fiscal year 2005, insurance premium and 

administrative fee revenue from farmers was approximately $2.1 billion, 

and gross claims equaled almost $3.3 billion. Total government operating 

costs in fIscal year 2005 were approximately $3 billion. 

RMA is required to set crop insurance premiums at actuarially sufficient 

rates, defined as a long-run loss ratio target of no more than 1.075. From 

its initial expansion in 1981 through 1994, the crop insurance program had 

an average loss ratio of 1.47 and paid roughly $3.2 billion in claims excess 

of subsidized premium income during that period." From 1995 to 2005, the 

program had an average loss ratio of 0.91, and collected roughly $2.7 

billion in subsidized premium excess of claims during that period. 

Excluding subsidies and measuring performance on the basis of a 

producer premium, from 1981 to 1994, the crop insurance program 

averaged a loss ratio of 1.93 and paid roughly $5.2 billion in claims excess 

of producer premium over that period; from 1995 to 2005, the program 

averaged a loss ratio of2.15 and paid roughly $14.2 billion in claims excess 

of a producer premium during that period. 

Generally, producers can purchase crop insurance to insure up to 85 

percent of their normal harvest (yield), based on production history. In 

2007, the USDA expects the FeIe to provide $48 billion in risk protection 

on 287 million acres nationwide, which represents approximately 80 

percent of the nation's acres planted to principal crops. The USDA 

estimates this level of coverage will cost the federal government $4.2 

billion in 2007. 

IOThe Federal Crop Insurance Reform Act of 1994 mandated participation in the program to 

receive other commodity support payments, although this requirement was rescinded in 

1996. 

Page 55 GAO-07 ~285 Climate Change 
332 

Appendix IV: Consensus Statement among 

Participants at 2006 Munich Re Workshop 

Munich Re, one of the world's largest reinsurance companies, and the 

University of Colorado jointly convened an international workshop on 

climate change and disaster loss trends in May 2006 in Hohenkammer, 

Germany. The workshop brought together 32 experts in the fields of 

climatology and disaster research from 13 countries. White papers were 

prepared and circulated by 25 participants in advance of the workshop and 

formed the basis of the discussions. In the course of the event, participants 

developed a list of statements that each represent a consensus among 

participants on issues of research and policy as related to the workshop's 

two central organizing questions: (1) What factors account for increasing 

costs of weather related disasters in recent decades? and (2) What are the 

implications of these understandings, for both research and policy? 

Consensus (unanimous) statements of the workshop participants: 

1. Climate change is real, and has a significant htunan component related 

to greenhouse gases. 

2. Direct economic losses of global disasters have increased in recent 

decades with particularly large increases since the 1980s. 

3. The increases in disaster losses primarily result from weather related 

events, in particular storms and floods. 

4. Climate change and variability are factors which influence trends in 

disasters. 

5. Although there are peer reviewed papers indicating trends in storms 

and floods there is still scientific debate over the attribution to 

anthropogenic climate change or natural climate variability. There is 

also concern over geophysical data quality. 

6. !PCC (2001) did not achieve detection and attribution of trends in 

extreme events at the global level. 

7. High quality long-term disaster loss records exist, some of which are 

suitable for research purposes, such as to identify the effects of 

climate and/or climate change on the loss records. 

8. Analyses of long-term records of disaster losses indicate that societal 

change and economic development are the principal factors 

responsible for the documented increasing losses to date. 

Page 56 
333 

Appendix IV: Con.sensus Statement among 

Participants a.t 2006 Munieh Re Workshop 

9. The vulnerability of communities to natural disasters is determined by 

their economic development and other social characteristics. 

10. There is evidence that changing patterns of extreme events are drivers 

for recent increases in global losses. 

11. Because of issues related to data quality, the stochastic nature of 

extreme event impacts, length of time series, and various societal 

factors present in the disaster loss record, it is still not possible to 

determine the portion of the increase in damages that might be 

attributed to climate change due to greenhouse gas emissions. 

12. For future decades the IPCC (2001) expects increases in the 

occurrence and/or intensity of some extreme events as a result of 

anthropogenic climate change. Such increases will further increase 

losses in the absence of disaster reduction measures. 

13. In the near future the quantitative link (attribution) of trends in storm 

and flood losses to climate changes related to greenhouse gas 

emissions is unlikely to be answered unequivocally. 

14. Adaptation to extreme weather events shouid playa central role in 

reducing societal vulnerabilities to climate and climate change. 

15. Mitigation of greenhouse gas emissions should also playa central role 

in response to anthropogenic climate change, though it does not have 

an effect for several decades on the hazard risk. 

16. We recommend further research on different combinations of 

adaptation and mitigation policies. 

17. We recommend the creation of an open-source disaster database 

according to agreed upon standards. 

18. In addition to fundamental research on climate, research priorities 

should consider needs of decision makers in areas related to both 

adaptation and mitigation. 

19. For improved understanding of loss trends, there is a need to continue 

to collect and improve long-term and homogenous data sets related to 

both climate parameters and disaster losses. 

20. The conununity needs to agree upon peer reviewed procedures for 

normalizing economic loss data. 

Page 57 GAO·07-285 Climate Change 
334 

Appendix V: Comments from the U.S. 

Department of Agriculture 

Note: GAO comments 

supplementing those in 

the report text appear at 

the end of this appendix, 

FEB 2 3 2007 

Mr, JQhn B. Stephenson 

njr~lor 

Natura! Resources and Environment 

(iovcnlment Accountability Office 

441 G Street N.W 

Washmgton, D.C. 20548 

Dear Mr. Stephenson: 

USDA 

.. 

OrIo¢I!o'ITlell.oc'lIta,y 

Wallhl~Q"'" DC 20250 

Enclosed I:'> Ihe Fann amI ~on'ign Agricultural SCfVU:C'S rtsponsc 10 lhe drllH rcrort titled, 

CUMATE CHANGE: FiJ\::mdal R!~ks to Federal and Private Insurers in Commg Decades arc 

Polentially Significant." Thank yuu for tbe opportunity 10 provide comments. IfYOll have <In)' 

qucs!\ons regarding our respunse, please contact Michael Haml at 202- 720·l\642 

Smeere!y. 

Mark Kecnum 

UndcrSecrclaT) 

Fann aud Foreign Agncu\tura! Services 

Enclosure 

Page 58 GAO-07·2S5 Climate Change 
335 

See commenl1. 

See comment 2. 

See comment 3. 

Appendix V: Comments from the U.S. 

Department of Agriculture 

U.S. Department of Agriculture 

RespoBse to the 

U.S, Govunment AccountB.biUty Omce DroJt Report GA,O~07~21l5 

"CLIMATE CHANGE: I'lnlllnclal Riaks to Federal and Private Insure" in Coming 

Dt'csdcs are Pot~IlIi.lly SignlOClot" 

February 8,1007 

Wealhet·related e\'i:nt~ have callsed b!llIons of dollars til damage O\'cr the paM !.kcatle. GAO 

c:'lamined actions taken h> t'ri\"ate and Federal insuf(,fs to aJurcs.~ thl' potcnt!al il1crC<1Sc In IOl>scs . 

.'\s (j re~ult of the study, (dO I ,'(Ullll1lClf(/_" thlllihe /"'m/I!'II Slllle~ fkpill"fm('1I1 (If IgrtndfU/{! 

(USDA). spcq(ic{//~" Ihi' Risk MOl1ageml!1II Agemy (RMAj. {muJy::e In(' pOII:ntwl {ollg~/crm 

IIlIplic<TtfOiIS oldilllmc change 1/~/IIgforthcoll1l/!g aS5nsm('l/t~JIO!ll tiR' llllergohTnml'lIIai PI/ne! 

VII Climate Change fa eswbllSh SOl/lid estimllfes of t!xpf!cted ji/ture cumhfWIlS 

USDA Response 

USDA is in general agreement \Hth GAO's recommendation. 

SptelOc CQn'lmI'Ab 

Although USDA agrees Wltn G.·\O's recommendation. we do not agree with ~Ilmc of the 

conclusions drawn "i.thin the report 

Much o(the focus oftllls report is with losses related to coastal wcother eVentS, especially 

hunicanc.~. Howover. the main cause of catastropnic lasses for the crop insurance program is 

drought in the nation's interior. This IS why the lo~~ expericnce of the crop insurallce program is 

distJnct from the Joss expenenee ue~cribed In the repon for thc r...ational Flood lnsur3.nce 

Program and propocl1y and casualty losses for private Ulsurcn;. 

The increMe in crop insurance indemnities over time reOects the rapid gmwth of the em" 

insurance program, not an Increasc to either the frcquency and/or seventy ofcatastfOphlC 

weather events. In fact. the sl' .... en!y <.lfl<.lss f<.lf the crop Insurance program. as mcasuroo h)" the 

loss ratio, has been generally lower in the 1990's and 1000's than in the 1980·~. rhus./r 

anything, the frequency anu ~e\'erity of catastrophic los." events for thi: trot' insurance program 

appears to be decreasmg. 

USDA docs not tlgrce thalli has "taken little scuon to prospectively asscss potcmial Increases in 

cata."trophic risk assOCIated with <:limate change." RMA tracks total program tiabilit) - a 

definitive measure of the loud value at risk from climalic weather events. This nunlber is 

updated on a weekly basis and IS (\.\·ailable on R..~lA 's puotic weositc 

Page 59 GAO-07-Z85 Climate Change 
336 

See comment 4, 

See comment 5, 

Appendix V: Comments frOUt the U.S. 

Department of Agriculture 

RMA also estimates expected t"hanges m h>lbihtj up 10 10 years ~head IhmL.!gh R:'AA '$ baschne 

projCt;tiofls. Therefore, RMA do(!,v assess the- lon!;Henn, as well as ClllTen!. exposurc- of(hc crop 

insurdnce program \0 catastrophic w("ather C\lents, 

GAO's drall report treal!; the rttumng 20,\0 40-year Atlanlic hurricane cycle as l>ynonymous 

with climate change, However, olher I'M1S of the report describe climate changc in !ctms.ofa 

lons-run progression, such as ~lc!J.al wanning. thaI lcads 10 an increase in [rc'lvcncy inK! severilY 

ofwulher events. Referring to the normal cycle of Atlantic hurricanes M dimnte e-bange 

appears to be inconsistent with how climate cbange J$ described in other puns. of the report. 

When GAO sUI"\'c-yed pri\'ate insurHS aboUl what Iht'Y are doing to cstinl1lle and prepare for the 

risks ofc!imalf' change. they found (hal insurerf; .... erc using catastrophe !1l\ldds thu\ incorporatc 

the hulT!cane cyell.". ItMA also lllcorporates hurricane risk jnto prcmium m!cs Ihr scveral ofils 

insured commodities. However. ratht'T than focusillg on short"term fluc\ml!\ons mlhc hUlTicill\e 

cycle, RMA uses hislolical hurrkanc dala that spans several cydes. 

Page 60 GAO·07~285 Clima.te Change 
337 

GAO Comments 

Appendix V: Comments from the U.S. 

Deplll"tment of Agriculture 

The following are GAO's comments on the U.S. Department of 

Agriculture's letter dated February 23, 2007. 

1. We agree that the loss experiences of NFIP, FCIC, and private insurers 

are distinct and sought to reflect these distinctions in our draft report. 

For example, we acknowledged on page 23 of the draft the specific 

distinction USDA highlights-that the main cause of catastrophic 

losses for FCIC is drought in the nation's interior (see pages 24 and 25 

of this document). Despite these and other differences, however, we 

believe the report's rmdings and underlying message are still 

applicable to the NFIP, the FCIC, and private insurers. 

2. Our analysis of insured losses does not attempt to attribute increases 

in past losses to changes in the severity of weather events in the data 

sets we reviewed, as implied by the comment. Moreover, we 

acknowledge that the increase in FCIC's losses (indemnities) largely 

reflected the rapid growth of the crop insurance program. However, 

given the IPCC's projections for potential increase in the frequency 

and severity of weather-related events-including those that affect 

crops-we believe that limiting an evaluation of FCIC'sfuture 

weather-related risk to the program's loss ratio-which only captures 

historical performance of the program based on past climatic and 

market conditions-to be a potentially misleading metric upon which 

to make a prospective assessment. 

3. We acknowledged these activities in the draft report. However, we 

believe that USDA's actions are limited in scope, focusing almost 

exclusively on actuarial performance and not on the potential 

implications of climate change for FCIC's operations (Le., changes in 

the frequency and severity of weather-related events, weather 

variability, growing seasons, and pest infestations). Accordingly, we 

believe the program should do more to prospectively assess the 

implications of climate change. 

4. We employed the IPCC's definition of climate change, which includes 

statistically significant variations in climate, brought on by factors that 

are both internal and external to the earth's climate system, and that 

persist over time--typically decades or longer. Under this definition, 

the Atlantic hurricane cycle, as with other significant variations that 

are understood to be internal to the earth's climate system, can be 

considered climatic changes. Our use of the definition was 

corroborated by a senior NOAA scientist. 

Page 61 GAO-07·285 Climate Change 
338 

Appendix V: Comments from tb.e U.S. 

Department of Agricnltn-re 

5. We updated our discussion of FCIC's modeling activities (see page 36) 

to reflect this hurricane model. However, as stated on page 22, 75 

percent of FCIC's claims were associated with drought, excess 

moisture, and hail from 1980 to 2005, whereas hurricanes were 

associated with a much smaller portion of FCIC's claims during this 

period. Accordingly, we believe that if more sophisticated, prospective 

risk assessment techniques (such as those used in FCIC's hurricane 

model) were applied to drought, moisture, and hail events, it would 

allow for a far more useful assessment of the potential implications of 

climate change for FCIC's operations. 

Page 62 GAO'{)7·283 Climate Change 
339 

Appendix VI: Comments from the 

Department of Commerce 

Note: GAO comments 

supplementing those in 

the report text appear at 

the end of this appendix. 

Mr. 10hn B. Stephenson 

Director 

Natura] Resources and Environment 

U.S. Government Accountability Office 

44! G Street, NW 

Washington, D.C 20548 

Dear Mr. Stephenson: 

UNITED BTAT1!I!I QIlPAATMBNT OF COMMI!RCII! 

T ... Ut,d_ e-...-.y at Cornm ...... 

for o-.... d Atm.-ph_ 

W-i'"Iingu:Io"I. D.G. e:e3O 

FEB 262007 

Tltank you for the opportunity to review and comment on the Government Accountability 

Office's drnfl report entitled Climafe Change: FilUlIlc/(l1 Rish 10 Federal (md Pril'ale lltlur(!r.~ 

In Coming Dccadcs are Poten/ially Si1!/lif/ctml (GAO·07.285). Enclosed is the National 

Oceanic and Atmospheric Administration's comments on the draft rcport. 

Enclosure 

Page 63 

Sincerely. 

~~ Conrad C. Lautenbacher. Jr. 

Vice Admiral. U.S. Navy (Ret.) 

Under Secretary of Commerce for 

Oceans. and Atmosphere 

-'~). 

THE ADMlNlSTRt>.TOR i IJ 

'-. 

GAO~07·285 Climate Change 
340 

See comment 1. 

See comment 2. 

Appendlx VI: COlDIIlenUi from the Department 

of Commerce 

Department of Commerce 

National Oceanic and Atmospheric Administration 

Comments on the Draft GAO Repon Entitled 

"Climate Change: FinlllJeial Risks to Federal and Private Insure" 

In Coming Decades are Potentially Significant" 

(GAo-07-185lMarch 2007) 

General Comments 

The Department of Commerce (DOC) appreciates the opportunity to review this report. The 

issues covered in the report are very important and reflect the real world intersection between 

science, policy, and economics. 

We have three major comments on the structure of the report. First. GAO should provide a dear 

definition of the phrase "climate change" at the beginning of its report. While it is addressed on 

page 2, DOC recommends the authors refer to lhe definition provided by the 2007 

Intergovernmental Panel on Climate Change {TPee) Working Group 1: 

IPCC Working Group 1 Climate Change Definition 

Climate change refers to a change in the state oflhc climate that can be identified (e.g .. 

using statistical tests) by chlUlgcs in the mean andlor the variability of its properties, and 

that persist.~ for an extended period, typically decades or longer. Climate change may be 

due to natural internal processes or external forcings, or to persistent anthropogenic 

changes in the composition ofthe atmosphere Of in land use. 

The second comment is directed to page 2 of the report and relates to the discussion of frequency 

and intensity of weather phenomenon. The authors write: 

"Regardless ofthe cause, increasing lc:mperatures--accomplll1ied by changes in other 

aspects ofthe climate-may impact communities and, by extension, the insurance 

industry by altering the frequency or severity of wc:ather~related events such as 

hurricanes, tornadoes, severe thunderstonns and hail events, and wildfires." 

\Vhile DOC recognizes the IPee's Fourth Assessment Report was not available at the time {If 

GAO's revlew, the issue of frequency and intensity has b~ well discussed in the scientific 

community, IlI1d policy makers would benefit from drawing infurmation from the IPce's 

Summary for Policy Makers for Working Group 1. According to page 10 of this summary, 

"there is insufficient evidence to determine wheihcr trends e.'(ist, . .in small scale phenomena such 

as tornadoes, hail. lightning, and d\l!ll storms." The authors could state the frequency of heavy 

precipitation events has increased over most land areas ... (page 8). On hurricanes, trCe notes 

an increase in "intensctropiclIl cyclone activity," but also mentions ''there is no clear lrend in the 

annual numbers oftropiC!lI cy(:loncs," which refers to frequency. Tropical cyclones projections 

are addressed on page 16 ofthe summary, where the fPee projects future tropical cyclones will 

become more intcose, but there is less confidence in projections of a global decrea'l.e in numbers 

of tropic II! cyclones. 

Page 64 GAO-07-285 Climate Change 
341 

See comment 3. 

See comment 4. 

Appendix VI: Comments from the Department 

of Commerce 

Further, DOC notes the rcport could be strengthened by a discussion of what is meant by 

"altering the frequency or severity of wcalh~"related events" and how this is link.ed to risk. For 

example, altering either the frequency or severity (lfhigh impact elltreme weather-related events 

could result in II five fold increase in risk for what has been considered a 500-year event (i.e., 

probability of occurring in a given yeliC"" 1/500) shifts under climate change to be a IOO-year 

cvcnt (i.e., probability of occurring in a given year'" 1/100). 

Thc third comment is the report should examine coaslal development impacts more rigorously. 

Thc National Oceanic and Atmospheric AdministrJtion (NOAA) has. done work that uses data 

from the Bureau of the Census to show coastal communities have seen population growth of 

nearly 40 million pcople from 1970 to 2000. The authors refer to Roger Pie1k.e, Jr.'s work on 

coastal impacts. but cite it only to show that more intense hurricanes tend to have higher impacts. 

Pielke, Jr., and others, including Chris Landsca of NOAA and Kerry Emanuel of Massachusetts 

Institute of Technology, have examined hurricanes;, climate change, and de,<elopment, and found 

coastal development has increased the vuln~abiljty to winter storm surge, wind damage, and 

hurricanes. These vulnerabilities, due to high risk coasta! development, will only be amplified 

b)" climate change related increases in the f~ue!1ey nr severity (lfhigh impact extreme weather· 

rclatedevents. 

The authors cite anecdotal evidence, ~uch as increased de,<c1npment in the area hit by Hurricane 

Andrew, but the report lacks analysj~ of the long. term trenus and does not quantify what portion 

of the increase in loilSes is attributable In s()cietal change and economic development as 

referenced on page 58 in the Munich Re consensus statement. This would be useful iniormation 

for policy makers. 

Page 65 GAO--07-281) Climate Change 
342 

GAO Comments 

Appendlx VI: Comments from the Department 

of Commerce 

The following are GAO's comments on the Department of Commerce's 

letter dated February 26, 2007. 

1. We agree that a clear and accurate definition of climate change is a 

necessary prerequisite for any discussion of the issue. While a variety 

of defInitions for the term are in use, we did not attempt to 

independently define the term. Rather, we relied upon the IPCC's most 

current publicly-available definition. 

2. We revised the introductory statement referred to in Commerce's 

comments for editorial purposes (see page 2). To the extent 

practicable, we also incorporated the Working Group I Summary for 

Policymakers of the IPCC's Fourth Assessment Report into the 

detailed discussion of the potential changes in the frequency and 

severity of weather-related events identified in the 2001 Third 

Assessment Report (see pages 8 to 13). 

3. We included an elaboration on page 14 of how altering the frequency 

and severity of weather-related events is linked to risk. 

4. It was outside the scope of this report to conduct our own quantitative 

trend analysis of the relative roles of societal factors (such as 

development or agricultural prices) and climate change in shaping the 

increases in weather-related insured losses observed in the data. In 

response to the comment, however, we clarified which studies we 

reviewed that addressed this question, both for coastal hazards (such 

as hurricanes) and inland hazards (such as drought and excess 

moisture). 

Page 66 GAO-07~285 Climate Change 
343 

Appendix VII: GAO Contact and Staff 

Acknowledgments 

GAO Contact 

Staff 

Acknowledgments 

John Stephenson, (202) 512-3841, or stephcllSol\i@gao.gov 

In ad<lition to the in<lividual named above, Steve Elstein, Assistant 

Director; Chase Huntley; Alison O'Neill; Michael Sagalow; and Lisa Van 

Arsdale made key contributions to this report. Charles Bausell, Jr.; 

Christine Bonham; Mark Braza; Lawrence Cluff; Arthur James, Jr.; 

Marisa London; Justin Monroe; and Greg Marchand also made important 

contributions to this report. 

We also wish to give special tribute to our dear friend and colleague, 

Curtis Groves, who <lied many years too soon after a long battle with 

multiple myeloma near the conclusion of our work. 

Page 67 GAO~07~285 Cllmate Change 
344 

Related GAO Products 

(360664) 

National Flood Insurance Program: New Processes Aided Hurricane 

Katrina Claims Handling, but FEMA's Oversight Should Be Improved. 

GAO-07-1Gll. Washington, D.C.: December 15, 2006. 

Catastrophic Disasters: Enhanced Leadership, Capabilities, and 

AccountalJility Controls WiU Improve the Effectiveness of the Nation's 

Preparedness, Response, and Recovery System. GAO-06-618. Washington, 

D.C.: September 6, 2006. 

Crop Insurance: More Needs To Be Done to Reduce Program's 

VulneralJility to Fraud, Waste, and Abuse. GAO-On-87ST. Washington, 

D.C.: J1llle 15, 2006. 

High-Risk Program. GAO-06-497T. Washington, D.C.: March 15, 2006. 

Federal Emergency Management Agency: Improvements Needed to 

Enhance Oversight and Management of the National Flood Insurance 

Program. GAO-OG-1l9. Washington, D.C.: October IS, 2005. 

Crop Insurance: Actions Needed to Reduce Program's Vulnerability to 

Fraud, Waste, and Abuse. GAO-05-528. Washington, D.C.: September 30, 

2005. 

Catastrophe Risk: U.S. and European Approaches to Insure Natural 

Catastrophe and Terrorism Risks. GAO-05-199. Washington, D.C.: 

February 28, 2005. 

21st Century Challenges: Reexamining the Base of the Federal 

Government. GAO-05-325SP. Washington, D.C.: February 2005. 

Climate Change: hI/ormation on Three Air Pollutants' Climate Effects 

and Emissions Trends. GAO-03-25. Washington, D.C.: April 28, 2003. 

Page 68 GAO~07"285 Climate Change 
345 

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PRINTED ON \6<9 RECVCLED PAPER 

(347) 

AMERICA’S CLIMATE SECURITY ACT OF 2007, 

S. 2191 

TUESDAY, NOVEMBER 15, 2007 

U.S. SENATE, COMMITTEE ON ENVIRONMENT AND PUBLIC WORKS, Washington, DC. 

The full committee met, pursuant to notice, at 10 a.m. in room 

406, Dirksen Senate Office Building, Hon. Barbara Boxer (chairman of the full committee) presiding. 

Present: Senators Boxer, Inhofe, Lieberman, Carper, Klobuchar, 

Warner, Voinovich, Isakson, Vitter, Barrasso, Craig, Alexander, 

and Bond. 

STATEMENT OF HON. BARBARA BOXER, U.S. SENATOR FROM 

THE STATE OF CALIFORNIA 

Senator BOXER. Good morning. The hearing will come to order. 

We are very happy to be here again to talk about a very important subject that my colleagues wanted to have more hearings on. 

We are hoping they do come. 

I note Senator Voinovich is here, and that is very good, Senator, 

I think that much of you. 

But let me just say, instead of going through my usual opening 

of these hearings, which is that we have to act, we must act, and 

praising Senators Lieberman and Warner for all their work and all 

my colleagues for their help and the outside groups, what I want 

to do for my opening statement, which is 5 minutes, is to call our 

attention to an article today in the New York Times: Governors 

Join in Creating Regional Pacts on Climate Change. There are 

three really wonderful photographs of my Governor, Governor 

Schwarzenegger, talking about the threat of greenhouse gases. We 

all know that Arnold Schwarzenegger is a Republican. Utah Governor John Huntsman said western Governors are setting ambitious targets. He is in this article. And he is a Republican. And 

Democratic Governor Brian Schweitzer, a Democrat, of Montana, 

saying, do something, anything, move. 

And I can’t tell you how excited I am about this, because there 

is going to be a big advertising campaign. Now, I am not underestimating the fact that the other side will have one as well. But 

I want to talk about this one. Beginning Monday, three western 

Governors will appear in a nationwide television advertising campaign sponsored by an environmental group trying to generate public and political support for climate change legislation now before 

the Senate. The 30-second ad features Arnold Schwarzenegger, Republican, of California, John Huntsman, Republican, of Utah, and 
348 

Brian Schweitzer, Democrat, of Montana, standing in casual 

clothes in scenic spots, talking about the threat posed by greenhouse gas emissions. 

The Nation’s Governors are acting, but Congress is not, they say. 

Now it is their turn, says Arnold Schwarzenegger. And indeed, I 

couldn’t agree more. This is the moment, and we are poised to do 

landmark legislation. I know that I sometimes reiterate and my 

kids tell me that all the time, but I think some things are worth 

repeating, and that is that we have a window here to act, and we 

need to act. I truly believe that our generation is going to be judged 

by whether or not we do the right thing at this moment. 

Senator Warner, who I understand will be here in a little while, 

when he comes, if it is okay with my colleagues, we will stop what 

we are doing and listen to him, because he has that problem of not 

being able to sit for long periods of time. And Senator Lieberman, 

this amazing breakthrough that they achieved, the many hearings 

that we have held and all the groups that have come to the table, 

this is not an easy thing to do. But I am convinced we can and 

must act. 

With that, here we are at another hearing. I am very happy to 

see three of my Republican friends here. I hope colleagues on both 

sides will come throughout the morning. That is about what I have 

to say. I have made copies of this article for Senators, if you are 

interested in reading the entire thing. I will place this in the 

record, without objection. 

We are going to go in order of arrival, which I have here as Senator Barrasso. 

STATEMENT OF HON. JOHN BARRASSO, U.S. SENATOR FROM 

THE STATE OF WYOMING 

Senator BARRASSO. Thank you, Madam Chairman. Thank you 

again for the hearing. 

As I have stated throughout this debate on this legislation, we 

must adapt, we must make changes to address the effects of global 

warming. This past weekend, flying home to Wyoming as I do 

every weekend, there is a special energy section of the Financial 

Times. And in it, they said, Big Hopes Pinned on Carbon Capture. 

I would just like to read a couple of paragraphs from here. It says, 

‘‘Coal is abundant and relatively cheap. China and India have huge 

coal reserves and are using it to fuel their rapid economic development.’’ Then it says, ‘‘Asking developing countries not to exploit 

their coal reserves is unrealistic, say many energy analysts. The 

answer is finding a way to burn coal that limits its carbon emissions, hence the current interest in so-called clean coal technology. 

Clean coal technology includes equipment to make coal-fired power 

plants more efficient, such as super-critical boilers. But the most 

exciting prospect is so-called carbon capture and storage, which involves capturing the carbon dioxide before it is released into the atmosphere, turning it into a liquid and storing it.’’ 

Then it goes on, and I have a chart to show exactly this quote. 

This is from Lord Oxbow. It says, ‘‘Lord Oxbow, former chairman 

of Shell, said in an energy debate last month that clean coal technology was the world’s best hope for tackling climate change.’’ 

Clean coal technology, the world’s best hope for tackling climate 
349 

change. He said coal would continued to be burned, and while renewables and nuclear could play a part in reducing emissions, carbon capture was the only technology for managing climate change 

that we cannot do without. The only technology for managing climate change that we cannot do without. 

Madam Chairman, the World Energy Congress met this past 

week in Rome. There is a story out in the Associated Press today, 

dateline actually yesterday, it says, ‘‘China and India are under 

pressure to reduce their carbon emissions by energy executives and 

Government representatives. The energy executives and Government representatives agreed yesterday that the two blooming economics will be sticking with coal, whether the rest of the world 

likes it or not.’’ 

And then they quote the Secretary of the Indian Ministry of 

Power: ‘‘India and China need cleaner coal technology. That is the 

technology they are going to use for generating power, whether the 

rest of the world likes it or not.’’ And we heard here in testimony 

the other day that, well, if we develop the technology and put on 

these restraints that may affect our economy negatively, that 

China and India would just follow suit because of our leadership 

in the world. I am not convinced, and this comment out of the 

World Energy Congress by the Indian Ministry of Power says they 

are continuing to use coal, whether the rest of the world likes it 

or not. So Madam Chairman, I think that we need to work and put 

the effort into the technology, which then we can get spread around 

the world, so we can continue to use the sources of energy which 

are certainly important in the west, coal, but also which are going 

to continue to be used for the next half century in China and India. 

Thank you, Madam Chairman. 

Senator BOXER. Senator Barrasso, I just think you made the case 

for the Lieberman-Warner bill. The Lieberman-Warner bill has 

many provisions designed to assure that coal will continue to play 

a large role in our energy portfolio, clean coal. And this bill devotes 

tens of billions of dollars to clean coal. It is really a Manhattan 

Project for coal. 

So I hope that in your conversations with Senator Warner and 

Senator Lieberman, you will give them the opportunity to go 

through this and show you why what you said is thoroughly consistent with the bill that they have written. 

Senator BARRASSO. As long as there are guidelines that are such 

that we can continue to move toward credible numbers, rather than 

put a number so high that people wave a surrender flag. 

Senator BOXER. Well, you know, everybody wants it done exactly 

the way they want it done. But I just need to tell you that everything that you said about coal is reflected in this bill. In many 

ways, so much so that other people are critical of it, they say it is 

too much. But it is all right. I think what you said is key. I think 

again, it gives me hope that you can come on board with this bill, 

hopefully. 

Senator Carper. 
350 

STATEMENT OF HON. THOMAS R. CARPER, U.S. SENATOR 

FROM THE STATE OF DELAWARE 

Senator CARPER. I have no comments, other than to say welcome, 

we are delighted to have you here. We have had a chance to say 

our piece for the last couple of weeks, and today we would love to 

hear you say yours. Thank you for joining us and to help us shape 

this legislation. 

Senator BOXER. Thank you, Senator. 

Senator Voinovich. 

STATEMENT OF HON. GEORGE VOINOVICH, U.S. SENATOR 

FROM THE STATE OF OHIO 

Senator VOINOVICH. I thought this was good, what Senator 

Barrasso said. We want to accomplish the same thing. 

Senator BOXER. Good. 

Senator VOINOVICH. The question is how do we get there. 

Senator BOXER. Good. 

Senator VOINOVICH. On this final hearing before markup, I want 

to again express my concern with the lack of time to respond to the 

legislative text or receive an EIA or EPA analysis of what must be 

the most significant legislation ever to appear before this Committee, rivaling the Clean Air Act and the Clean Water Act and 

other environmental statutes combined. We have to understand 

that this is the most significant legislation that we have ever considered in this Committee probably in its history. 

The bill will place a massive bureaucratic intrusion into the 

American lives, it will have a profound impact on businesses, communities and families. Madam Chairman, you seem ready to disregard the modeling data presented by Charles River Associates 

during last week’s hearing, preferring analyses conducted by environmental organizations instead. But this is the only comprehensive analysis of the proposal we have. And while we may not like 

the story that emerges from the data, there is no credible reason 

to disregard its results. 

The analysis presented by Anne Smith, who is a highly regarded 

economist, presented a devastating critique of this policy proposal, 

estimating that by 2020, the policy would result in the loss of as 

many as 3.4 million American jobs, an annual decrease in disposal 

income by as much as $2,500 and annual losses in GDP of $1 trillion. It is important to note that these projections are national 

averages. 

In reality, the impacts will be far greater for States in the Midwest, Great Plains and Southeast who depend on coal for much of 

their electricity. In fact, Duke Energy, a major electricity provider 

in Ohio, released data indicating that customers in their service 

area could suffer a 53 percent increase in electricity bills when this 

policy becomes effective in 2012. Duke Energy, as many of you 

know, is a U.S. CAP company, many of whom are now coming out 

against this policy proposal as demonstrated by a November 14th 

letter from the International Climate Change Partnership. 

Madam Chairman, I would ask that this letter be inserted in the 

hearing record. 

Senator BOXER. Without objection. 
351 

Senator VOINOVICH. I see nothing that would dispute the modeling results presented by Ms. Smith. In fact, they are consistent 

with what many expected from this proposal. Senator Lieberman 

himself confirmed this policy was more aggressive and costly than 

S. 280, and the numbers bear this out. 

I urge my colleagues to take a hard look at Ms. Smith’s analysis. 

Indeed, we are staring down the barrel of a gun. But the gun has 

two barrels. One may be climate change, but the other is our competitive position in the global marketplace. While there is little 

question that this policy will hurt our economy, it is far from clear 

that the bill will do anything to avert climate change. In fact, we 

look to EPA’s analysis of previous bills, some even more stringent 

than this proposal, and the evidence suggests that it will not. 

I agree with the Chairman’s statement of Tuesday that we 

shouldn’t let the perfect be the enemy of the good. But this problem 

is not so simple. The evidence suggests that this bill is neither perfect nor good. Proponents of this legislation like to point to the economic impacts of previous environmental initiatives as evidence 

that compliance costs won’t be as dire as predicted. 

And maybe the impacts won’t be as hard-hitting in States that 

use little or no coal for electricity or have no manufacturing base. 

But in States like Ohio, we are all too familiar with the results. 

Natural gas prices are up 300 percent since 2001. And we have 

seen the exodus of manufacturing jobs to overseas markets, stemming largely from poorly-calibrated environmental policies. 

Moreover, solving the problem is not as simple as forcing companies to install end of pipe technologies, because the technologies 

don’t exist. Senator Barrasso made a good point with the Financial 

Times. Solving this problem will require technological revolution 

and a wholesale transformation of our economy centered on the 

way we use and produce energy. 

I will be the first to agree that there has been a void in the debate concerning the appropriate policy in terms of climate change. 

But there are alternative policies now under consideration that are 

less intrusive, less costly and that will achieve greater reductions 

in emissions faster than what we are considering today. Policy approaches that better stimulate actual innovation and transformative technologies, better avoid administrative complications, 

and this will be a gigantic administrative undertaking by the EPA 

to put this legislation into place, better address the challenge of a 

newly-industrialized world, and that better address avoidance behavior and that limit opportunities to game the system. 

I urge my colleagues to slow this process down, so that a reasonable policy to address climate change can be developed. It makes 

no sense for us to empower a gigantic bureaucracy with control 

over nearly every aspect of the American economy and indeed, our 

lives, for little or no environmental benefit. There are alternatives 

that should be and must be considered before moving forward with 

this proposal. 

And Madam Chairman, I hope that we consider those alternative 

proposals before we hit the Floor, and if we don’t, then we will discuss them next year when this bill does hit the Floor of the United 

States Senate. 

[The prepared statement of Senator Voinovich follows:] 
352 

STATEMENT OF HON. GEORGE V. VOINOVICH, U.S. SENATOR FROM THE

STATE OF OHIO

Madam Chairman, 

On what is the final hearing scheduled for S. 2191 before mark-up, I again want 

to express my concern with the lack of time to respond to the legislative text, or 

receive an EIA or EPA analysis, of what may be the most significant legislation ever 

to appear before this committee—rivaling the Clean Air Act, Clean Water Act and 

other environmental statutes combined. 

This bill contemplates a massive bureaucratic intrusion into Americans lives that 

will have a profound impact on businesses, communities and families. Madam 

Chairman, you seemed ready to disregard the modeling data presented by Charles 

River Associates during last week’s hearing—preferring analyses conducted by environmental organizations instead. But this is the only comprehensive analysis of the 

proposal we have. And while we may not like the story that emerges from the data, 

there is no credible reason to disregard its results. 

The analysis presented by Anne Smith, who is a highly regarded economist, presented a devastating critique of this policy proposal, estimating that by 2020 the 

policy would result in the loss of as many as 3.4 million American jobs; an annual 

decrease in disposable income by as much as $2500; and annual losses in GDP of 

$1 trillion. Naturally, the prices of electricity, natural gas, gasoline and other necessities skyrocket under this proposal. 

It is important to note that these projections are national averages. In reality, the 

impacts will be far greater for states in the Midwest, Great Plains and Southeast 

who depend on coal for much of their electricity. In fact, today Duke Energy, a 

major electricity provider in Ohio and a U.S. Cap company I might add, released 

data indicating that customers in their service area could suffer a 53 percent increase in electricity bills when this policy becomes effective in 2012. 

I have seen nothing that would dispute the modeling results presented by Ms. 

Smith. In fact, they are consistent with what many expected from this proposal. 

Senator Lieberman confirmed in last week’s hearing that this was a more aggressive 

and costly policy than S280, and the numbers bear this out this prediction. 

I urge my colleagues to take a hard look at Ms. Smith’s analysis. Indeed we are 

staring down the barrel of a gun, as many of our environmental friends like to point 

out. But the gun has two barrels—one may be climate change, but the other is our 

competitive position in the world market place. And while there is little question 

that this policy will hurt our economy, it is far from clear that the bill will do anything to avert climate change. In fact, if we look to EPA’s analyses of previous 

bills—some even more stringent than this proposal—the evidence suggests that it 

will not. 

I agree with the Chairman’s statement of Tuesday that we shouldn’t let the perfect be the enemy of the good. But this problem is not so simple: the evidence suggests that this bill is neither perfect, nor good. 

Proponents of this legislation like to point to the economic impacts of previous environmental initiatives as evidence that compliance costs won’t be as dire as predicted. And maybe the impacts won’t be as hard hitting in states that use little or 

no coal for electricity or that have no manufacturing base. But in states like Ohio, 

we’re all too familiar with the results: natural gas prices are up 300 percent, and 

we’ve seen an exodus of manufacturing jobs to overseas markets, stemming largely 

from poorly calibrated environmental policies. 

Moreover, Carbon dioxide is more ubiquitous and more difficult to control than 

the criteria air pollutants subject to caps under current Clean Air Act programs. 

Solving this problem is not as simple as forcing companies to install end of pipe 

technologies because the technologies don’t exist. Solving this problem will require 

technological revolution and a wholesale transformation of our economy, centered on 

the way we use and produce energy. 

I will be the first to agree that there has been a void in the debate concerning 

the appropriate policy address climate change, leaving many to believe that cap and 

trade is the only policy option to address this problem. But there are alternative 

policies now under consideration that are less intrusive, less costly and that will 

achieve greater reductions in emissions faster than what we now consider. Policy 

approaches that: better stimulate actual innovation in transformative technologies; 

better avoid administrative complications, better address the challenge of the newly 

industrializing world; and that better address avoidance behavior and that limit opportunities to ‘‘game the system.’’ 

I urge my colleagues to slow this process down so that a reasonable policy to address climate change can be developed. It makes no sense for us to empower a giant 

bureaucracy with control of nearly every aspect of the American economy, and in-
353 

deed our lives, for little or no environmental benefit. There are alternatives that 

should and must be considered before moving forward with this proposal. 

Thank you. 

Senator BOXER. Thank you, Senator. 

Senator I wanted you to know yesterday our staff walked your 

staff through a modeling that used the EIA data, the same computer modeling. So they have been briefed on this and I want to 

make sure that you get a copy of it. So the Department of Energy, 

we use the same computer modeling the Clean Air Task Force did, 

and we came up with a model here which we shared with your 

staff. We have also joined, Senator Lieberman has, in asking EPA 

to do a model. So we are very much looking forward, because this 

model came out really well in terms of economic growth. But I just 

wanted to make sure you knew your staff was briefed on this. 

Senator VOINOVICH. May I point out, Madam Chairman, that the 

Clean Air Task Force is an environmental organization. 

Senator BOXER. Yes, I know that. 

Senator VOINOVICH. And I want to say this, I want to publicly 

thank you for the fact that you and your staff have requested an 

impact statement of this legislation by the EPA and by the Energy 

Information Agency. Thank you very much. 

Senator BOXER. You are very, very welcome. This is true that the 

Energy Department will, however, use the same computer. So I 

just, hopefully that will come out the same way. 

Now, we are just going to go down in order of arrival, but I have 

to ask if my wonderful Ranking Member will give his opening 

statement, and then we will go down the rest. 

STATEMENT OF HON. JAMES M. INHOFE, U.S. SENATOR FROM 

THE STATE OF OKLAHOMA 

Senator INHOFE. I will, and I thank you for that. 

We have a problem that Senator Warner and I both have, and 

that is that we are having our U.S. Army hearing in the Senate 

Armed Services Committee, it is required attendance. Kind of like 

this is, Madam Chairman. 

Senator BOXER. Yes, I know. 

Senator INHOFE. I found the legislative hearings conducted over 

the last week to be really informative. I am sure it has been the 

case for other members of the Committee. As we begin the process 

of digesting this testimony, I would like to share what I think are 

common themes of all the hearings. This will be very, very costly. 

I think we understand that. The impacts will be severe and the bill 

will have significant impacts on energy markets. 

There remain some fringe elements who still claim that this bill 

will create jobs instead of destroy them. But most of the people are 

acknowledging that this bill will cost a great deal of money. Indeed, 

I appreciate the acknowledgement by one of the sponsors of this 

bill, Senator Lieberman, who was quite candid that this bill would 

cost hundreds of billions of dollars. We have heard testimony from 

perhaps the premier econometric modeling firms in the Country 

that found the impacts of this bill would be substantial, with the 

national costs escalating up to between $800 billion and $1 trillion 

a year. The Midwest and South will see the most dramatic increases. If we are lucky, the Northeast and California will see dra-
354 

matic increase in the LNG imports. If we are not, the economic 

consequences of the bill will be even worse. 

A November 6th Washington Post article put it succinctly when 

it stated that the current global warming proposals will ‘‘require a 

wholesale transformation of our Nation’s economy and society.’’ The 

fact is that many U.S. businesses are at the margin and industries 

such as iron and steel, concrete, fertilizer, manufactured goods 

would be forced overseas. We have found several witnesses that 

were very emphatic as to that kind of effect it would have on America. 

So what I would like to do, Madam Chairman, is I will be going 

back and forth between the two committees, I would like to put the 

rest of my statement into the record. 

[The prepared statement of Senator Inhofe follows:] 

STATEMENT OF HON. JAMES M. INHOFE, U.S. SENATOR FROM THE

STATE OF OKLAHOMA

Madame Chairman, I have found the legislative hearings conducted over the last 

week to be quite informative, as I’m sure has been the case for other Members of 

the Committee. As we begin the process of digesting the testimony, I would like to 

share what I think are the common themes of all these hearings: this will be very, 

very costly; the impacts will be severe; and the bill will have significant impacts on 

energy markets. 

There remain some fringe elements who still claim that this bill will create jobs 

instead of destroy them. But most people are acknowledging that this bill will cost 

a great deal of money. Indeed, I appreciate the acknowledgment by one of the sponsors of this bill, Senator Lieberman, who was quite candid that this bill will cost 

hundreds of billions of dollars. We have heard testimony from perhaps the premier 

econometric modeling firms in the country that found the impacts of this bill would 

be substantial—with national costs escalating to between $800 billion to $1 trillion 

per year and costs of up to $2700 annually or more than $200 per month to the 

average family. Within just a few years, up to 2.3 million people will be put out of 

work by this bill and the cost of gasoline, natural gas and electricity will skyrocket, 

with electricity prices climbing 36–65 percent. 

The Midwest and the South will see the most dramatic increases. If we’re lucky, 

the Northeast and California will see dramatic increases in LNG imports. If we’re 

not, the economic consequences of this bill would be even worse. 

A November 6 Washington Post article put it succinctly when it stated that the 

current global warming proposals ‘‘will require a wholesale transformation of the 

nation’s economy and society.’’ 

The fact is that many U.S. businesses are at the margin, and industries such as 

iron and steel, concrete, fertilizer, and manufactured goods would be forced overseas 

where the carbon footprint would only grow. I would also add that if the costs to 

provide concrete increases dramatically, it will drive up the costs of highway 

projects. Moreover, no one has any idea how we will make up the over 30% energy 

shortfall by 2020. 

Much has been made about the California experience, but it is important to remember they are still in the planning phase, and not only have they not decided 

how to make their reductions yet, but they haven’t started reducing yet either. 

The fact is that this bill is not ready for prime time. It appears structured to fail. 

While they have yet to oppose it officially, it is clear from the positions taken by 

organized labor that it has serious concerns with this bill and what that will mean 

to America’s workers. In closing, I would ask my colleagues who are thinking of voting for this bill one question: for all the pain and disruption this bill will cause to 

our nation’s families, what are we buying? 

From EPA’s October 1st analysis, it is clear that our unilateral actions of this 

magnitude will still do nothing to avert increasing concentrations of greenhouse 

gases—instead of being slightly above 700 parts per million at the end of the century, we will be at slightly under 700 parts per million—300 parts per million above 

today’s levels. If there is to be any opportunity to reduce global concentrations, it 

will have to come from the emerging nations that will be responsible for increasing 

those concentrations. This bill fails to do that. 

It was true ten years ago when we passed Byrd-Hagel, and it is true today—we 

should not pass a law if it harms the American economy or if developing countries 
355 

are not part of the equation. This bill fails on both those fronts and should be rejected. 

Senator BOXER. Yes, sir, absolutely will do. And we will go back 

to our time of arrival, and that would be Senator Vitter. 

STATEMENT OF HON. DAVID VITTER, U.S. SENATOR FROM THE 

STATE OF LOUISIANA 

Senator VITTER. Thank you, Madam Chair. I continue to have 

very serious concerns about the bill, and I will mention just a few. 

First of all, I want to agree with Senator Voinovich, associate 

myself with all of his comments about the absolute need for more 

time to understand the precise impacts of this specific bill. I don’t 

think we have had that. Just as a for instance, every day I heard 

from Louisiana constituents about energy prices, about prices at 

the pump, about the price of natural gas, and that impact, about 

all energy prices. I would like to see a clear, rigorous analysis, a 

clear consensus opinion on what this bill does to energy prices, gasoline prices at the pump, natural gas prices. I haven’t seen that 

clear, rigorous consensus analysis. 

I think that is a pretty minimal request to consider and vote on 

this bill and amendments to this bill, particularly when every day, 

all of us are deluged with calls about energy prices, what is going 

to be the impact. That is just one example. We need more time for 

that rigorous analysis. 

I know there are models out there, all sorts of other things. Most 

of them are based on general discussion and not the specifics of 

this bill, which we need to look at. 

Secondly, I also want to agree with Senator Barrasso. I just have 

a fundamental disagreement, I guess, with some people’s notions of 

international negotiations and negotiating strategy. Everyone 

agrees that no U.S. legislation will have any impact on the problem 

if there isn’t dramatic change in countries like China and India. 

Everybody agrees with that. I think it is a pretty fundamental 

question whether the right way to achieve that is just going off on 

our own and causing enormous costs to our economy and giving 

them a huge additional competitive advantage in terms of their 

economy and hoping they follow when they will be doing quite well 

economically because of our actions, even better competitively than 

now, or whether in fact that would be throwing all the leverage we 

have in international discussion away. 

Seems to me the huge leverage we have on this topic in the 

international arena is the ability to tie our actions with requirements of other countries and other peoples, and we would basically 

be throwing that out the window. I don’t know what leverage we 

would have left. So there is just a fundamental issue and disagreement there. 

With that, Madam Chairman, I will end and look forward to the 

testimony of all our witnesses and I thank them all for being here. 

[The prepared statement of Senator Vitter follows:] 

STATEMENT OF HON. DAVID VITTER, U.S. SENATOR FROM THE STATE OF LOUISIANA

Madame Chairman, thank you for agreeing to hold this hearing today on S. 2191, 

America’s Climate Security Act. 
356 

This bill has been the focus of attention for thousands of my constituents. I’ve met 

people and industries who have come out of the woodwork to express their grave 

concern with this bill. 

The more time I spend focusing on this bill, the more I’m concerned about two 

things the proponents of this legislation tout. 

The Environment: supporters of this bill claim that this legislation will improve 

the environment and reduce greenhouse gas concentrations in the environment. 

Those sound like laudable goals; however, will that be the outcome? Imposing mandatory reductions in greenhouse gas emissions will increase the cost of doing business in the United States. There is no question. The bill’s sponsors have admitted 

this fact. 

Keep in mind that the United States already has some of the most stringent environmental and labor standards. The United States is already in the world one of 

the most expensive places to do business. So, what happens when U.S. manufacturers decide that due to this additional regulation—that the majority of other nations 

do not have to deal with—to move their operations to China, Mexico or India? How 

stringent are the environmental standards in these countries? How can our labor 

unions compete? 

What is the net effect on the environment? I can tell you that the greenhouse gas 

emissions per kilo-watt hour in the United States is much lower than that of those 

other nations such as China and India. This bill has just increased pollution, lost 

American jobs and left an abandoned factory in the United States. 

The Economy: How does the economy respond to this bill? Well, as all of these 

American manufacturers move to China, Mexico or India, our unemployment increases, our tax base decreases, our economy slumps. It is very simple, increasing 

the cost of doing business and regulation in an already expensive business climate, 

decreases employment opportunities, income and economic activity. The United 

States will lose its leverage and global competitiveness unless we have these other 

nations at the table. 

The proponents of this bill will argue that this bill will benefit the economy and 

environment. To those claims I respond, then let the Energy Information Administration and others fully evaluate the bill. We need a clear analysis of how this bill 

will impact energy prices, natural gas prices, prices at the gas pump and how it will 

impact ratepayers and consumers. Driving blind like what is being proposed in this 

bill could have dire consequences. I want to thank our witnesses today and look forward to hearing from you. 

Senator BOXER. Senator, thank you very much. 

I am compiling the list of hearings we have had on global warming since January and the hearings we have had on this bill and 

the briefings we have had on this bill and the daily briefings staff 

has given. Look, I have been here for 25 years in the Congress. I 

wasn’t born yesterday, that is obvious. The fact is, I know when 

there is a sincere call for more information and when it is just 

delay. 

You could just see it, because every time we have a hearing, 

every comment from the other side, who all want, they want more 

time, it is the same comment all the time. It is, this is the worst 

thing since sliced bread, this is the worst thing, this is horrible. 

Now, either we are going to have a do something committee, or a 

do nothing committee. If I felt that we couldn’t move on anything, 

if I felt that we couldn’t do any good, I would just hand over the 

gavel. I would hand it back—well, no, not that direction, hand it 

in this direction. 

[Laughter.] 

Senator BOXER. I knew that would get your attention. But the 

bottom line is, we need to do something. The people want us to do 

something and they want us to do something good. And they want 

us to do something relevant. 

When you have three Governors chastising the Congress, they all 

have credibility, two Republicans, one Democrat. They are saying, 

Congress, do something. We have the States acting. We have the 
357 

cities acting. We have the world acting. We have individuals acting. 

And for us to be so late to this issue is a real stain, I think, on 

this Congress. 

So I have done everything that I can do to give you the time, give 

you the information. We are going to take every amendment that 

you may offer in the markup, we will stay here through the night, 

into the morning and days and we will get it done. 

But I will just say now, because there is this constant ask for 

more time, I would be so bold as to say we could take another year 

and I don’t think I would pick up another vote from the people who 

do not really want to move on this. And I think then that is a 

sham. 

So the bottom line is, I would say to any of you who feel you need 

more information, I will sit with you one on one and give you every 

piece of information. This model that was done is an up to date 

model. And it is done with the Department of Energy’s computer 

model program. We will give you everything that you need. Then 

if you feel that it is still not a good idea to vote for that legislation, 

I totally understand and respect that point of view. 

But let’s not make a false argument that we need more time, because we all know around here what that means. That means 

doing nothing. And I would rather take this as far as we can. If 

we don’t have it at the end of the day, we don’t have it at the end 

of the day. But I feel I need to move this now, because the window 

is closing. And I feel very, very strongly about that. 

Senator Cardin. 

STATEMENT OF HON. BENJAMIN L. CARDIN, U.S. SENATOR 

FROM THE STATE OF MARYLAND 

Senator CARDIN. Thank you, Madam Chair. I agree with your 

comments. I have only been a Senator since January, but I can tell 

you, we have been talking about this legislation and this issue 

since my arrival in the United States Senate. I have been in the 

Congress for 20 years. And we have been talking about this issue 

during my 20 years in the U.S. Congress. So this is not a new subject. And there has been a great deal of debate within the Congress 

as to what to do about the problems of global climate change. 

Legislation was introduced earlier in this Congress by many 

members. And I applaud the efforts, as I have said before, of Senator Lieberman and Senator Warner and the Chairman of our 

Committee, for bringing together a bill that we can move forward. 

It won’t be a perfect bill, but it will be a credible bill. I think that 

is our challenge, to be a player not only in the United States on 

global climate change, but to be an international leader, so that we 

can do what we need to do as a responsible player internationally.s 

So I applaud your efforts, Madam Chair, and I hope we will be 

able to move a bill shortly. I thank you for having another hearing 

with experts who I think can add to the record of our Committee, 

which is very, very important. 

Just yesterday, the President’s science advisor, Dr. John 

Marburger, testified before the Senate Commerce Committee on 

the state of climate science. In his testimony, Dr. Marburger acknowledged that climate change is occurring and that there is a 

level of urgency to begin reducing greenhouse gas emissions. It is 
358 

refreshing and timely to hear a representative of the Administration make these statements as we consider America’s Climate Security Act of 2007. 

As I have noted in the past, this legislation provides a solid 

framework to address the most compelling environmental energy 

independent and national security issues facing our Nation. I believe that there are particular ways that this legislation can be 

strengthened. I talked to my colleagues about that. I believe we 

need to tighten the emission caps and be more rapid transition to 

full auction of emission allowances. In addition, as I said at Tuesday’s hearing, we need to be more fully engaged in providing solutions to the transportation sector. 

We also need to include provisions in this legislation to enhance 

the scientific community’s ability to monitor the evolving state of 

our climate system. Let me just focus on this area for one moment. 

The transportation sector is responsible for 28 percent of the total 

U.S. greenhouse gas emissions. Any effective climate policy must 

address the mitigation of emissions from this sector. We indirectly 

consider emissions from this sector in terms of fuel, but we could 

do more. 

We will hear today from Washington State King County Executive Ron Sims. I look forward to Mr. Sims’ testimony on the use 

of new fuel technologies, particularly biofuels, and how his county 

has purchased hybrid vehicles as part of their fleet. These are examples of the sort of direction we should be heading nationally to 

reduce our carbon emissions in the transportation sector. 

Madam Chair, I want to mention one additional point that I 

think is important, and that is for years, we have been degrading 

the ability of our Nation to use scientific information to help us in 

these areas. There have been funding cuts to NASA and NOAA’s 

capabilities to monitor Earth climate systems, particularly satellite 

platforms. This legislation that we are considering requires reviews 

by the National Academy of Sciences to assess the effectiveness of 

the law in reducing greenhouse emissions and how the climate has 

been impacted by these efforts. But we don’t provide any resources 

to conduct this vital science. 

I hope that we will look at strengthening the capacity to monitor 

the state of global climate, including atmosphere and oceans. These 

science observations are vital to our understanding of climate 

change decades out. They will also serve much shorter term needs, 

including daily weather predictions and the associated issuance of 

timely warnings to protect lives and property. 

I have heard my colleagues talk that we want to make sciencebased judgments, so let’s give capacity to our agencies to provide 

that information to us. Climate change will likely lead to more 

high-impact weather events like stronger hurricanes and heat 

waves. An enhanced environmental monitoring system is essential 

for us to provide the information necessary for emergency managers and longer term decision makers to deal with the impacts of 

these changes. 

Madam Chair, I look forward to hearing from our witnesses 

today and the continuation of our efforts to try to produce the best 

possible bill to further the policy of our Country to deal with global 

climate change. Thank you, Madam Chair. 
359 

[The prepared statement of Senator Cardin follows:] 

STATEMENT OF HON. BENJAMIN L. CARDIN, U.S. SENATOR FROM THE

STATE OF MARYLAND

Madame Chairman, thank you. 

Just yesterday, the President’s science advisor Dr. John Marburger testified before the Senate Committee on Commerce, Science, and Transportation on the state 

of climate science. In his testimony, Dr. Marburger acknowledged that: 

(1) climate change is occurring and 

(2) that there is a level of urgency to begin reducing greenhouse gas emissions 

It is refreshing and timely to hear a representative of the Administration make 

these statements as we consider America’s Climate Security Act of 2007. 

As I have noted in the past, this legislation provides a solid framework to address 

the most compelling environmental, energy independence and national security 

issue facing our nation. 

I believe that there are particular ways that this legislation could be strengthened. 

Among them are: tightening of the emission caps, a more rapid transition to full 

auction of emission allowances, inclusion of the transportation sector more fully, and 

including provisions in this legislation to enhance the scientific and decision making 

communities’ ability to monitor the evolving state of our climate system. 

I’ll focus on these last two areas for strengthening ACSA in my remaining time. 

As we learned on Tuesday from Dr. David Greene of the Oak Ridge National Laboratory, in 2005, the transportation sector was responsible for 28% of total U.S. 

greenhouse gas emissions. Any effective climate policy must address the mitigation 

of emissions from this sector. While we indirectly consider emissions from this sector in terms of fuel, we can do more. 

As Dr. Greene stated on Tuesday, we should be considering how we develop are 

pubic areas so as to make public transportation more desirable. We should be making improvements to our transportation infrastructure by encouraging the use of 

low-carbon fuels and moving toward greater mass transit vehicle fuel economy. We 

should be encouraging more people to use public transportation. The rising costs of 

fuel and the desire of some mass transit systems to consider upgrades of their vehicles to those that are more fuel efficient add further urgency to this issue. People 

want safe, reliable mass transit without burdensome costs. 

We can and should be able to meet this need. 

We’ll hear today from Washington State’s King County Executive, Mr. Ron Sims, 

who has taken a leadership role in promoting increased ridership of public transportation systems in King County and thereby reducing traffic congestion. I look forward to hearing more about King County’s use of new fuel technologies, particularly 

biofuels and how his county has purchased hybrid vehicles as part of their fleet. 

These are examples of the sorts of directions we should be heading nationally to reduce our carbon emissions in the transportation sector. 

Madame Chairman, I believe that an additional issue that ACSA could address 

is the degradation of our climate monitoring system. There have been funding cuts 

in NASA’s and NOAA’s capabilities to monitor the Earth’s climate system—particularly satellite platforms. Given that ACSA requires a periodic review by the National Academy of Sciences of how effective ACSA has been in reducing greenhouse 

emissions and how the climate has been impacted by these efforts, provisions should 

be included in this bill to upgrade and maintain an effective system to monitor the 

state of the global climate including the atmosphere and oceans. Additionally, funding should be available to not only take these observations, but to ensure that the 

data provided from these observations is put to greatest use in operational weather 

and climate prediction. 

A suite of observations ranging from surface- based measurements to satellites 

are required to assess the state of Earth’s climate systems so that we can not only 

reduce uncertainties in our climate projections, but also enhance our abilities to better to understand what will be necessary to mitigate and adapt to changing conditions. 

These observations are not only vital to our understanding of climatic changes 

decades out, but are also important for much shorter-term needs including daily 

weather prediction and the associated issuance of timely warnings to protect lives 

and property. Climate scientists project that climate changes will be potentially associated with increasing variability in weather, including perhaps more high-impact 

weather events like stronger hurricanes and heat waves. An enhanced global environmental monitoring system is essential for us to provide the information nec-
360 

essary for emergency managers and longer-term decision makers to deal with the 

impacts of these phenomena. 

Further strengthening this bill in the areas of climate monitoring and more fully 

engaging the transportation sector in emissions reductions by promoting public 

transportation systems are among a number issues of considerable interest to me. 

I look forward to hearing from all of today’s witnesses, and working to not only 

strengthen this already strong bill, but also move it quickly and thoughtfully 

through the full Committee and on to the floor of the Senate. 

Thank you to Madame Chairman. 

Senator BOXER. Thank you, Senator Cardin. 

Senator Isakson. 

Senator ISAKSON. Madam Chair, in the interest of expediting the 

testimony, I will yield back my time. 

Senator BOXER. That was nice. 

Senator Bond. 

STATEMENT OF HON. CHRISTOPHER S. BOND, U.S. SENATOR 

FROM THE STATE OF MISSOURI 

Senator BOND. Thank you very much, Madam Chair. 

Senator BOXER. It is always good to see you, sir. 

Senator BOND. I apologize for the delay. I had to appear on the 

Floor. But I didn’t want to pass up the opportunity to join with you 

and the members of the Committee as we talk about this very, very 

important subject. 

I do want to associate myself with the very significant remarks 

of my colleague from Louisiana, Senator Vitter, who I had an opportunity to hear when I arrived. But Madam Chair, I am not 

pushing for delay. I am not pushing for more time. I know what 

we have in this bill. I would agree with you, we need to do something. 

But for heaven’s sakes, let’s not do harm. Carbon caps have not 

worked and they are not going to work, and they are going to impose tremendous hardships on many sectors of our economy, and 

probably do very little in the overall world-wide problems. 

Now, I will lay out some of the things that I think we should do 

now, we should have done earlier and that we could agree on. But 

I think it is important today to describe how carbon auctions are 

unfairly expensive for millions of consumers. Some may wonder 

how this bill will cost families and workers up to $1 trillion per 

year, according to one estimate, and at least hundreds of billions 

of dollars according to the bill’s sponsors. Energy prices will rise, 

because families and workers will pay multiple times for what they 

pay once for now. Consumers will first pay higher power costs from 

the production costs from higher natural gas prices. Then they will 

pay for expensive new carbon controls or alternative energy 

sources, such as wind. 

Then this bill will force them to pay still more for the cost of auctioned carbon allowances. Producers are forced to buy at auction 

the carbon allowances they need to operate. They will then pass 

those costs on to customers. Families and workers will end up paying $50 billion more a year, rising to $150 billion per year by 2030. 

Consumers did not suffer this auction surcharge under the successful acid rain cap and trade program, which I co-sponsored with 

Senator Byrd. Its SO2 allowances were allocated to generators at 

no cost. 
361 

However, environmental groups concerned with how European 

companies earn windfall profits in its failed carbon trading scheme 

suggest auctions as the answer. It is a bad idea. Nevertheless, a 

report by a Clean Air Watch by the head of the National Wildlife 

Foundation claims that we must institute a multi-billion carbon 

auction to avoid corporate windfall profits. That report, as do those 

of many environmental groups, insist that no-cost allocations create 

windfall profits. They cite in their footnotes a CBO study from 

April 2007 which seems to agree, at least until one reads further, 

its footnote reveals that an exception to the ability to reap windfall 

profits is where consumer rates are set by regulators. 

What is the meaning of this footnote to a footnote? It admits the 

reality that windfall profits are prohibited by law in the 36 States 

with regulated power markets. A State which regulates its power 

markets, caps profits that generators may collect. Additional profits 

must be refunded back to consumers. Windfall profits are prohibited by law. That means 36 States in the United States do not 

share Europe’s windfall profit problem. 

And yet, the nationwide carbon auction in this bill will require 

families and workers in the Midwest, South and Mountain West to 

pay billions extra for a problem they did not create. States in New 

England, Montana, California and others made the decision to deregulate their power markets. It was their choice to make themselves vulnerable to windfall profits. But we should not punish 

families and workers in the Midwest, Mountain West and South to 

solve the problems of 14 States. 

Those 36 States together add up to over 130 million Americans 

who will suffer needlessly and thus unfairly under carbon auctions. 

Amendments to require auctions for all 100 percent of allowances 

would also hurt millions of Americans. I too oppose Governmentsponsored windfall profits, but we should find a way to do so without punishing 130 million in 36 States and the best way to do it 

is to oppose carbon caps totally. 

Some will say that the auctions are an effective way to collect 

money. That is true, if you want the highest price regardless of 

fairness. Others will say auctions are needed to raise funds to pay 

for environmental mitigation, a scheme to rob Peter to pay Paul. 

We need to pour more money into clean energy technology. I support environmental mitigation, I supported it in the WRDA bill. We 

can cut carbon emissions by aggressive achievable CAFE standards, a clean portfolio stand for wind, solar, nuclear and hydro, 

biofuels and a Marshall Plan for clean energy technology. This, 

Madam Chair, this is the clean energy future with the widest support, and I urge you to embrace it. I thank the Chair. 

[The prepared statement of Senator Bond follows:] 

STATEMENT OF HON. CHRISTOPHER S. BOND, U.S. SENATOR FROM THE

STATE OF MISSOURI

Madame Chairman, thank you for holding this hearing on the carbon cap and 

trade bill we are considering. Today, I want to describe how its carbon auctions are 

unfairly expensive for millions of consumers. 

Some may wonder how this bill will cost families and workers up to $1 trillion 

dollars per year according to one estimate, and at least ‘‘hundreds of billions of dollars’’ according to the bill’s sponsors. 

Energy prices will rise because families and workers will pay multiple times for 

what they pay once for now. Consumers will first pay for higher power production 
362 

costs from higher natural gas prices. Then they will pay for expensive new carbon 

controls or alternative energy sources such as wind. 

Then, this bill will force them to pay still more for the cost of auctioned carbon 

allowances. Producers are forced to buy at auction the carbon allowances they need 

to operate. They will then pass those costs on to consumers. Families and workers 

will end up paying $50 billion more a year, rising to $150 billion per year by 2030. 

Consumers did not suffer this auction surcharge under the successful acid rain 

cap and trade program. Its SO2 allowances were allocated to generators at no cost. 

However, environmental groups concerned with how European companies earned 

windfall profits in its failed carbon trading scheme suggest auctions as the answer. 

A report by Clean Air Watch with a forward by the head of the National Wildlife 

Federation claims that we must institute a multi-billion dollar carbon auction to 

avoid corporate windfall profits. 

That report, as do many environmental groups, insists that no-cost allocations create windfall profits. They cite in their footnotes a CBO study from April, 2007. The 

CBO study seems to agree—at least until one reads further. Its footnote reveals that 

an exception to the ability of reap windfall profits is where consumer rates are set 

by regulators. 

What is the meaning of this footnote to a footnote? It admits the reality that 

windfall profits are prohibited by law in the 36 states with regulated power markets. A state that regulates its power markets caps profits that generators may collect. Additional profits must be refunded back to consumers. Windfall profits are 

prevented by law. 

That means 36 states in the U.S. do not share Europe’s windfall profit problem. 

And yet, the nationwide carbon auction in this bill will require families and workers 

in the Midwest, South, and Mountain West to pay billions extra for a problem they 

did not create. 

States in New England, Montana, California and others made the decision to deregulate their power markets. It was their choice to make themselves vulnerable to 

windfall profits. But we should not punish families and workers in the Midwest, 

Mountain West and South to solve the problem of 14 states. 

Those 36 states together add up to over 130 million Americans who would suffer 

needlessly, and thus unfairly, under carbon auctions. Amendments to require auctions for all 100% of allowances would also hurt millions of Americans. 

I too oppose government sponsored windfall profits, but we should find a way to 

do so without punishing 130 million people in 36 states. 

Some will still say that auctions are the most effective way to collect money. That 

is true if you want the highest price regardless of fairness. Others will say that auctions are needed to raise funds to pay for environmental mitigation, clean technology and low-income protection programs. That may get us closest to the real motives of this bill—a scheme to ‘‘rob Peter to pay Paul.’’ 

I agree that we need to pour billions into clean energy technology. We need to 

spend more on environmental mitigation. I supported spending billions more for environmental mitigation in the WRDA bill. 

We can also cut carbon emissions, but we should do it without cutting family 

budgets or worker payrolls. I support aggressive but achievable CAFE standards, 

a clean portfolio standard for wind, solar, nuclear, and hydro, biofuels and a Marshall Plan for clean energy technology. This is the clean energy future with widest 

support. I urge us to embrace it. Thank you. 

Senator BOXER. Senator Bond, thank you. I am going to put into 

the record that page that deals with electricity prices. This is the 

modeling that was done based on the Department of Energy’s computer model. And it shows, because of energy efficiency and so on, 

that at the end of the day, the average price, typical residential 

bill, will go down eventually by 2030. 

I also think it would be a good time, since Senator Bond brings 

up a number of these issues, and he has been very sure-footed on 

his concern for consumers, I think it is important to know that the 

religious community has been very involved with us in trying to 

draft provisions to protect the vulnerable people that you talk 

about, Senator. 

I would ask unanimous consent to place into the record a letter 

where they have discussed, and I think some of them are here now, 

and the groups are the National Association of Evangelicals, the 
363 

National Council of Churches, the United States Conference of 

Catholic Bishops and the Union for Reformed Judaism. They have 

gotten together and they have taken those concerns that you have 

eloquently stated since we have started this debate, and they have 

laid out some principles that they are looking for in the bill. 

If I might finish, and then I will allow you to respond. I think 

what is important to note is that Senators Lieberman and Warner 

have been meeting with a lot of stakeholders. I just wanted you to 

know, Senator Bond, that your concern for consumers is their concern, and the vulnerable people, and that we are working with 

them. We have made some progress on this, but we have a way to 

go. I hope you will work with us as we try to strengthen these provisions in the bill. 

Senator BOND. Madam Chair, I thank you. You have been most 

kind in hearing my concerns. We would like also to be able to put 

in the record some of the footnotes and questions which I mentioned. I turn to the religious community for my spiritual guidance. 

They know far more about theology and spiritual matters than I 

do. But I trust our economics better. They got into theology, not 

economy. We are going to continue to work with what I think are 

the overwhelming economic concerns of consumers. 

Senator BOXER. Right. I would just point out, if I might respond, 

that their concerns have nothing to do with theology. Their concerns emanate from a deep feeling that they don’t want people to 

suffer needlessly, nor do you, nor do I. I just want you to know that 

we welcome everybody to the table. We certainly welcome them to 

the table, as well as all the other voices. 

Senator Inhofe, did you want to say something? 

Senator INHOFE. Madam Chairman, I have a unanimous consent 

request to include in the record from three groups with major concerns: the American Chemistry Council, the Fertilizer Institute and 

the International Brotherhood of Boiler Makers. 

[The referenced material follows on page 427.] 

Senator INHOFE. Then I would say also, in reference to what you 

refer to as the religious community, if you really want to pursue 

this, then I would be requesting that we have a hearing. Because 

I can assure you that this would be a subject that would be of great 

interest to a lot of people. 

Senator BOXER. Yes. We did have a hearing from the religious 

community—— 

Senator INHOFE. No, I am talking about just on—— 

Senator BOXER.——and we did have your witnesses at that hearing. We can give you the transcripts. 

All right. We are going to get to the panel now. I am just very 

pleased that you are all here for this last hearing before the markup. Fred Krupp, President of Environmental Defense, we welcome 

you, sir. 

STATEMENT OF FRED KRUPP, PRESIDENT, ENVIRONMENTAL 

DEFENSE 

Mr. KRUPP. Thank you, Madam Chair. It is an honor to be here 

with you today as the Committee deliberates America’s Climate Security Act. It is indeed a front row seat in history. 
364 

Across the globe, countries and corporations are changing, adapting to a new world of energy and innovation to meet the crisis of 

climate change. With America’s Climate Security Act, the United 

States can now join this movement toward a cleaner, more stable 

and more prosperous future. 

Discussion and debate on the issue of climate change has finally 

come to the halls of Congress, and the members of this Committee 

deserve great credit for bringing us to this point. But the scientific 

realities of global warming mean that only action, fast, decisive 

bold action will be a satisfactory outcome. If the members of this 

Committee remember one thing from my testimony today, it should 

be this: we must pass comprehensive climate change legislation 

now. Our economy, our environment and our national interest compel it. 

Consider this. If the legislation is enacted and takes effect in 

2012, the emissions cap would result in an annual reduction of 

emissions just under 2 percent per year for covered sources arriving at a reduction of 15 percent below current levels by 2020. But 

what happens if we delay the legislation by just two years? Just 

two years of delay, holding everything else constant, has major consequences. As you can see in the diagram behind me, in order to 

result in the same amount of cumulative emissions by 2020, and 

with the climate change, it is the cumulative emissions that matter, a two year delay will require that emissions fall by 4.3 percent 

every year. We would be demanding over twice the rate of reduction if we delay two years. 

Instead of a reduction of 15 percent in the annual emissions for 

the year 2020, two years of delay means 2020 emissions have to 

be reduced by 23 percent just to get to the same place. The worst 

thing we can do for our economy and our environment is to do 

nothing at all. But the second worst thing we can do is delay. And 

as this chart shows, even by just two years. 

We believe that this legislation not only provides the fastest 

route to reduced emissions, but has the right framework to address 

the challenge of climate change in a way that makes sense for the 

environment, entrepreneurs and the economy. The Act sets strong, 

early targets which would jump start the entrepreneurial energy 

we need to employ current technology and develop even better technology. In addition to safeguarding the environment, the Act protects our economy. First, it uses the time proven mechanism, cap 

and trade, that allows regulated entities access to the lowest cost 

emissions reductions. 

Among the other important cost containment options is the ability by companies to purchase offsets from American farmers or 

earn credits by reducing international forest destruction. The bill’s 

authors have wisely recognized that we cannot solve climate 

change alone, and the Act includes an innovative system of carrots 

and sticks to prompt action from major emitting developing economies. 

One carrot is the opportunity to participate in the U.S. greenhouse gas emissions market. If emitters in other countries would 

like to sell allowances they earn in their home countries into the 

United States emissions market, then those countries will have to 

meet the practices and standards called for by this Act. A stick 
365 

would prompt action to ensure that the emissions reductions of the 

America’s Climate Security Act are not undone by emissions associated with imported products manufactured in major emitting uncapped nations. 

The bill has recognized that our domestic greenhouse gas reduction program will move forward in a world grappling with the realities of globalization and its impact on the United States. This approach makes economic and environmental sense. In order to avoid 

the consequences of delay I spoke of earlier, it is imperative for this 

legislation to reach the Floor as soon as possible. That includes preserving the delicate political balance that Chairman Boxer spoke of 

in a previous hearing, while adding new support in Committee and 

on the Floor. 

There are improvements to the legislation that we would support 

as the bill moves through the legislative process. For instance, we 

have steadily supported Senator Carper’s efforts to not only reduce 

emissions of greenhouse gases but also mercury, SOx and NOx. But 

I also have to say, we see time running out now on this Congress. 

Therefore, we strongly support moving the bill out of Committee in 

its current form, even if the Committee has not yet resolved some 

of these issues. 

We will oppose amendments that would weaken the targets and 

time lines or any price cap, the so-called safety valve. A safety 

valve would mean abandoning the cap. 

Thank you for the opportunity to offer our thoughts. I don’t think 

there is a higher priority for Congress as a whole than speedy 

adoption of effective and efficient measures to address this crisis. 

[The prepared statement of Mr. Krupp follows:] 

STATEMENT BY FRED KRUPP, ENVIRONMENTAL DEFENSE

I am honored to be here with you today as this Committee deliberates America’s 

Climate Security Act. There is no more important legislation that this Committee 

will ever consider than comprehensive climate change policy. 

Environmental Defense is a leading national nonprofit organization representing 

more than 500,000 members. Since 1967, we have linked science, economics and law 

to create innovative, equitable and cost-effective solutions to society’s most urgent 

environmental problems. Environmental Defense is dedicated to protecting the environmental rights of all people, including future generations. Among these rights are 

clean air, clean water, healthy food and flourishing ecosystems. We are guided by 

scientific evaluation of environmental problems, and the solutions we advocate will 

be based on science, even when it leads in unfamiliar directions. 

America’s Climate Security Act contains all of the essential elements needed in 

legislation for the U.S. to begin to tackle the problem of global climate change. If 

the members of this committee remember one thing from my testimony today—it 

should be this—we must pass comprehensive climate legislation now. Our economy, 

our environment, and our morality compels it—and if I am back here three years 

from now—still calling on this Committee to pass legislation—then all who are in 

this room today will have failed. We would have lessened our chances of preventing 

the most dangerous consequences of climate change and we would have raised the 

costs to the economy of meeting the challenge. 

In my testimony today, I want to make 5 points: (1) why time is of the essence, 

(2) that America’s Climate Security Act has the right framework to tackle climate 

change, (3) that we have the technology we need to get started, (4) that the carrots 

and sticks in America’s Climate Security Act will prompt international action, and 

finally, (5) I will comment on a couple of amendments that I believe are worth special notice. 

1. There is no time for delay. 

If the legislation is enacted and takes effect in 2012, the emissions caps would 

result in an annual reduction of emissions of just under 2% per year and, for covered sources, arrive at a reduction of 15% below current levels by 2020. But what 
366 

1The data used to derive this chart is the national allowance account for the years 2012–2020 

from the introduced version of S. 2191. The emissions growth from 2005 to 2013 is assumed 

to be 1.1% (which is and average of the 2004 and 2005 rate http://www.epa.gov/climatechange/ 

emissions/downloads06/07ES.pdf) 

happens if we delay enacting legislation by two years? Just two years of delay— 

holding everything else constant—has major consequences. As you can see in the 

diagram behind me, in order to result in the same amount of cumulative emissions 

by 2020 (and with climate change, it is the cumulative emissions that matter), a 

two-year delay will require that emissions fall by 4.3% every year—over twice as 

quickly! Instead of a reduction of 15% in the annual emissions for the year 2020, 

two years of delay means 2020 emissions have to be reduced by 23%—just to get 

to the same place. The worst thing we can do for our economy and our environment 

is to do nothing at all, the second worst thing we can do is to delay—and as this 

chart shows, even by just two years.1

2. America’s Climate Security Act has the right framework to address the challenge of climate change in a way that makes sense for the environment, entrepreneurs, and the economy. 

The Act sets strong early targets. As I have mentioned earlier, these targets are 

important to the environment and the economy. Aggressive early year targets increase our ability to avoid a greater than 2° increase in warming and the consequences that would bring. The early targets will jump start the entrepreneurial 

energy we need to deploy current technology and develop even better technology. 

The Act contains long-term targets that provide assurance to our grandchildren and 

our financial markets that we will stay committed to the task. 

A recent report by the University of Maryland reviewed data and studies on the 

economic impacts of climate change and the costs of inaction. The review finds that 

economic impacts of climate change will ‘‘occur throughout the country, [and] economic impacts will be unevenly distributed across regions and within the economy 

and society.’’ Just to highlight one finding of the report, it ‘‘found that negative climate impacts will outweigh benefits for most sectors that provide essential goods 

and services to society.’’ The review finds that 

New York State’s agricultural yield may be reduced by as much as 40%, resulting in $1.2 billion in annual damages. Expected water shortages in California’s 

Central Valley are likely to affect the agricultural sector in the area. Agriculture around the San Antonio Texas Edwards Aquifer region is likely to suffer 

a similar fate. The regional impact may reach losses of $3.6–6.5 billion by 2030 

and $6.75–10.13 billion by 2090. Even those farms and regions that temporarily 

benefit from altered environmental conditions (e.g., carbon fertilization and extended growing season) risk economic losses if temperatures exceed those pre-
367 

2M. Ruthe, D. Coehlo, D. Karetnikov, ‘‘The U.S. Economic Impacts of Climate Change and 

the Costs of Inaction’’ A review and Assessment by the Center for Integrative Environmental 

Research (CIER) at the University of Maryland, October 2007.) http://www.cier.umd.edu/ 

climateadaptation/index.html. 3 Ellerman, et al. (2003), p. 34) 

4 National Action Plan for Energy Efficiency. July 2006. Chapter 1, p. 1 8 http:// 

www.epa.gov/solar/pdf/napee/napee—report.pdf. 5 Environmental Protection Agency, ‘‘Greenhouse Gas Mitigation Potential in U.S. Forestry 

and Agriculture.’’ November 2005,—Appendix 4.A 

ferred by the crops they currently produce. Climate change will also trigger increases in energy demand for cooling and will outpace declines in heating requirements. For example, electricity demand in Massachusetts may increase by 

40% in 2030 because of climate change alone, most of which will occur in summer months and require significant investment in peak load capacity and energy efficiency measures. Nationwide, the required investment may exceed $300 

billion by the middle of this century. Given the long lead times of capacity expansion in the energy sector, little time remains to act on anticipated warming 

trends.2

In addition to safeguarding the environment, the Act protects the economy in 

many ways. First, it uses the time-proven mechanism, cap-and-trade, that allows 

regulated entities access to the lowest cost emissions reductions possible. Cap-andtrade provides a whole range of cost management mechanisms that allow companies 

a wide choice in managing their compliance with emissions limits. Companies can 

• make emissions reductions at their own facilities, 

• purchase allowances from other facilities whose cost of reductions are even 

lower (so much so that they can ‘‘over-comply’’ and sell their excess allowances to 

others), and 

• optimize plant development schedules and maintenance and can ‘‘bank’’ and 

‘‘borrow’’ emissions allowances to fit into those schedules. 

As experts have written ‘‘enhanced environmental performance can be attributed 

to the increased flexibility associated with emissions trading. Where emission reduction requirements are phased in and firms can bank emission reductions—as was 

the case in the Lead Trading, Acid Rain, ABT, and Northeast NOx Budget Programs—the achievement of the required emission reduction has been accelerated.’’3

(See Attachment 1 for more information on cap and trade programs.) 

Companies can also purchase offsets from American farmers. They can earn credits by reducing international forest destruction. The ability to sell excess allowances 

creates an incentive for inventors and entrepreneurs to develop and deploy new 

technologies. All of these processes work together to allow us to meet our challenge 

at the lowest possible cost. 

3. Some question whether we have the technology to meet the emission requirements of the Act. It is natural to ask: How will we get there?— How can we accomplish the deep reductions in global warming pollution that science tells us we must 

achieve, and that this bill would require? 

The good news is that we know how to cut emissions today, with proven technologies. 

• Energy efficiency.—Based on programs already in place at the state level, the 

National Action Plan for Energy Efficiency has estimated that by 2025 we will be 

able to reduce carbon dioxide emissions by over 400 million tons a year simply by 

using energy more wisely. [And in many cases, conserving energy ends up saving 

consumers money.]4

•Farms and forests.—The U.S. EPA estimates that activities such as improved 

forest management, agricultural soil carbon sequestration, and methane and nitrous 

oxide mitigation could cut emissions by 620 million metric tons a year by 2015 at 

a cost of under $15 per ton—and that figure would double at prices of $30 a ton. 

(See Attachment 2 for a summary of EPA’s findings.)5

Just putting those numbers together yields over one billion tons of reductions a 

year. This is more than a third of the way (or more precisely 35%) to the abatement 

required in the year 2025. 

And that is just the tip of the iceberg. The next generation of coal-fired power 

plants will have ‘‘carbon capture and sequestration’’ technology available to them. 

While that may sound far off, in fact all of the components have been tested and 

are in place. Gasification technology has been available for decades. And oil and gas 

companies are already—pumping CO2 into geologic reservoirs as part of enhanced 

oil recovery. The only reason we have not deployed these technologies widely for 
368 

electric power generation is that there has been no financial incentive to do so. Placing a cap on carbon will change all that. 

I could list all of technologies available today from wind power—which is exploding across the Plains and the West—to more efficient vehicles like the hybrid diesel 

vehicles being built in Ohio—to low carbon fuels being developed in Tennessee and 

other states—to the substitution of chemical processes at plants in Delaware—to 

methane management for farms all across America. The list goes on and on. And 

putting a cap on carbon will bring even more technologies to market. 

4. America’s Climate Security Act has a system of carrots and sticks to prompt 

action from major emitting developing countries. 

The first carrot is the opportunity for participation in the U.S. greenhouse gas 

emissions market. If emitters in other countries would like to sell allowances that 

they earn in their home countries into the United States emissions market, then 

those countries will have to meet the practices and standards called for in this Act. 

Another important carrot is the International Forest Carbon provision. Every year, 

the cutting and burning of the world’s tropical forests causes 20% of greenhouse gas 

pollution world-wide, irrevocably destroying the richest repositories of biological diversity on the planet, and impoverishing the hundreds of millions of people who depend on forests for their livelihoods—all because the forest is worth less alive than 

it is dead. This Congress can change all of this and, for the first time, give living 

forest economic value for tropical nations and forest peoples, by allowing tropical 

countries that make real, verifiable reductions of their national deforestation emissions to sell those reductions in our carbon market. 

A stick is present in what is commonly referred to as the Bingaman-Specter provision because it mirrors what is in the Low Carbon Economy Act of 2007 (S. 1766). 

This provision would prompt action to ensure that the emission reductions of ACSA 

are not undone by emissions associated with imported products manufactured in 

major emitting uncapped nations. The bill’s authors recognize that our domestic 

greenhouse gas reduction program will move forward in a world grappling with the 

realities of globalization and its impacts on the U.S. As the USCAP Call for Action 

states: ‘‘[C]are should be taken that policies do not merely push emissions from U.S. 

facilities to overseas plants, ultimately there must be an international program for 

addressing climate change and its impacts. U.S. action to implement mandatory 

measures and incentives for reducing emissions should not be contingent on simultaneous action by other countries. Rather, we believe that U.S. leadership is essential for establishing an equitable and effective international policy framework for robust action by all major emitting countries.’’ 

Recognizing that poorer nations might not be able to cap and cut emissions as 

quickly as the United States, but that we cannot address the global warming problem effectively unless all major emitting nations do cut emissions, the bill first calls 

for new international agreements engaging all major emitting nations in cutting 

their emissions. If negotiation of these new agreements proves unsuccessful, the bill 

would, after a certain time period, level the environmental and competitiveness 

playing field by requiring that imports of products produced in uncapped nations 

submit emissions allowances sufficient to cover the emissions incurred by the production of those products abroad. 

As part of a comprehensive framework, a combination of these kinds of carrots 

and sticks makes sense. However, if we want nations with less capacity, fewer resources, and more problems to take serious action to cut GHG emissions, then we 

as a nation must act forcefully and without equivocation. Let’s show them how to 

do it credibly and effectively and set a reasonable timeframe for their comparable 

action. 

5. We strongly support moving the bill forward in its current form and will oppose 

amendments that would weaken the bill. 

As the bill moves forward to Senate floor and through the legislative process, 

there are issues that we hope Senators will continue to work on: 

(1) The best science we have today indicates that we will need to make economywide emissions reductions of 80% by 2050. The bill’s science review (sometimes 

called ‘‘lookback’’) provisions, can be amended to ensure that new scientific information generated in the future is not only evaluated but also leads directly to action 

with minimal delay. The EPA should be given the authority to take additional actions if the science reviews mandated by the bill demonstrate that the bill’s emissions targets will not be met. 

(2) Senator Whitehouse has discussed an amendment to establish an Ocean Trust 

as part of the adaptation assistance provisions in the bill. Elevated CO2 levels are 

projected to profoundly impact the health of the oceans, which provides about 20% 

of the world’s protein, and the coasts, where over half the U.S. population now lives. 

The bill amendment will help our fisheries and oceans adapt to ocean acidification, 
369 

increasing water temperatures, and rising sea levels, by establishing a dedicated 

funding mechanism for on-the-ground efforts to protect and restore ocean and coastal ecosystems. Establishing such an oceans trust was a priority recommendation of 

the U.S. Commission on Ocean Policy created by Congress—and I thank Senator 

Whitehouse for his efforts here. 

(3) International-adaptation provisions should not be limited solely to national-security considerations and resources provided international adaptation should be increased. Currently, ACSA would provide international adaptation funding only 

where such expenditures are deemed ‘‘necessary to enhance the national security of 

the United States,’’ specifically to ‘‘assist in avoiding the politically destabilizing impacts of climate change in volatile regions of the world.’’ While national security is 

one appropriate consideration in this context, it is not the only one. Many of the 

world’s poorest peoples will be adversely affected by climate change that is, to a significant degree, of America’s making. 

We will oppose amendments that would: 

(1) Weaken the targets and timelines of the bill. 

(2) Include any price cap (or so-called ‘‘safety-valve’’). A safety-valve set at any 

price would gut the environmental targets in the bill and would prevent investors 

from making the commitments needed to develop and deploy needed technology. 

(3) Further restrict the use of offsets. We believe high-quality offsets can play an 

important role in reducing emissions quickly, providing new revenue streams for 

farmers, and lowering costs for regulated entities and yield important environmental benefits. 
370 

ATIACHMENT 1: WHY CAP-AND-TRADE IS THE PREFERRED POLICY 

TO ADDRESS CLIMATE CHANGE 

The Cap-and-Trade Experience 

WHY IT IS THE PREFERRED POLICY TO ADDRESS CLIMATE CHANGE. 

All serious climate change policy proposals have identified cap-and-trade as the 

regulatory mechanism of choice. As Congress begins to craft its climate change policy, it 

is imperative to revisit the reasons why cap-and-trade is the best regulatory mechanism to 

address the challenge of climate change. 

Numerous reports (both federal and state), academic articles, and other publications 

analyze cap-and-trade policies - past, present and future - and articulate clearly the 

benefits of such policies. Relevant excerpts from five select sources have been compiled 

here to exemplify how a well-designed cap-and-trade policy can deliver superior 

environmental performance and significantly reduce economic costs when compared to 

conventional regulatory mechanisms. These excerpts also highlight other benefits of capand-trade policies, including: how they spur innovation, improve and accelerate 

compliance, and provide emitters with considerable flexibility. 

Cap-and-trade policies differ from other regulatory systems. Cap-and-trade is 

not a three syllable word - it identifies two different components of a policy that, 

working together, achieve results. The cap limits emissions and trading lowers 

compliance costs. 

• Cap-and-trade is recommended due to its putting "a clear and specific limit on 

aggregate emissions and its potential to achieve the emissions-reduction target at 

lower cost than would otherwise be possible." (MAC (2007), p. 5) 

• Cap-and-trade "provides a framework to meet emissions reduction goals at the 

lowest possible cost ... by giving emissions sources the flexibility to find and apply 

the lowest-cost methods for reducing pollution. Emission sources with low-cost 

compliance options have an incentive to reduce emissions more than they would 

under command-and-control regulation." (Ellerman, et al. (2003), p. iii, 

Executive Summary) 

Cap-and-trade achieves results at lower costs. Experience shows that, when 

compared to command-and-control policies, cap-and-trade is more environmentally 

effective and economically efficient. Cap-and-trade also reduces the informational burden 

on regulators, lowering administrative costs. 
371 

• "Savings under the trading program amounted to 43-55% of expected compliance 

costs under an alternative regulatory program that imposed a uniform emission 

standard." (MAC (2007), p. 7) 

• The Acid Rain Program, achieved" ... savings of over 65% compared to a policy 

that might have forced post-combustion controls (scrubbers) to achieve the same 

level of emissions." (MAC (2007), p. 7) 

• "In the long run, allowance trading may achieve cost savings of $700-$800 million 

per year compared to an 'enlightened' command and control program 

characterized by a uniform emission rate standard. The cost savings would be 

twice as great if the alternative to trading where forced scrubbing." (referring here 

to the Acid Rain Program, Carlson, et al. (2000), p. 12) 

• Over the first 13 years of the Acid Rain Program, the ability to trade allowances 

nationwide across affected units and through time is estimated to reduce 

compliance costs by a total of$20 billion, a cost reduction of about 57% from the 

assumed command-and-control alternative. (Ellerman, et al. (2003), p. 16) 

• "Administrative costs can be lower because regulators are relieved of responsibility 

for establishing specific targets on a facility-by-facility basis." (MAC (2007), p. 5) 

Cap-and-trade provides firms flexibility in meeting environmental goals. Capand-trade policies offer businesses flexibility for compliance; this is a key source of cost 

reductions. Firms can choose how, when, and where they meet the program's 

requirements. These choices are created through several policy components including 

trading, rewards for early action, and banking. 

• "Offsets bring in less expensive emission reductions from uncapped sources and 

thereby allow compliance at a lower cost than could be achieved by the covered 

sectors acting alone." (RTIlNicholas (2007), p. 4-5) 

• "The flexibility of the trading program has encouraged utilities to capitalize on 

advantageous trends, such as changing fuel prices and technological innovation 

that might have been delayed or discouraged by traditional regulatory 

approaches." (Carlson, et al. (2000), p. 25-26) 

• McCain-Lieberman 2003 (S.139) "provides some measures that give entities a 

certain amount of flexibility in complying with the emissions limits. These 

provisions include early action credits, allowance trading and banking, and a 

mechanism to allow participation from non-covered sources. These flexibility 

measures are expected to result in a relatively smooth transition through the first 

and second compliance periods. As a result, the economic burden of controlling 

emissions is rolled in gradually over time." (EIA (2003), p. 64) 

Trading 

• "By giving firms the flexibility to reallocate (trade) emissions credits or allowances 

among themselves, trading can reduce the compliance costs of achieving the 

emissions target." (Ellerman, et al. (2003), p. 1) "Differences in emission control 
372 

costs across emissions sources create the opportunity to reduce costs through 

trading." (Ellerman, et al. (2003), p. 5) 

• "Enhanced environmental performance can be attributed to the increased 

flexibility associated with emissions trading. Where emission reduction 

requirements are phased in and firms can bank emission reductions - as was the 

case in the Lead Trading, Acid Rain, ABT, and Northeast NOx Budget 

Programs - the achievement of the required emission reduction has been 

accelerated." (Ellerman, et al. (2003), p. 34) 

• "Spatial trading has allowed sources with high abatement costs to reduce 

emissions less-and those with low abatement costs to reduce emissions morethan under a command-and-control mechanism requiring uniform emissions 

rates, and thus has reduced the overall cost of the mandated emissions reduction." 

(Ellerman, et al. (2003), p. 14) 

• "The available evidence suggests that the increased compliance flexibility of 

emissions trading yields costs savings of as much as 50 percent." (Ellerman, et al. 

(2003), p. iv, Executive Summary) 

Banking 

• "The reason for the remarkable reduction in [S02J emissions in 1995 .. .is the 

availability of 'inter-temporal trading' in the form of banking. The prospect of 

higher marginal abatement costs after 2000 made abating more than required in 

Phase I an appealing option for smoothing the transition to the more demanding 

Phase II cap. As a result, the reduction in emissions experienced in Phase I was 

about twice what would have been required to bring emissions below the level 

allowed in these years." (Ellerman, et al. (2003), p. 14) 

• "Because allowance can be sold or held for future use, covered entities will have an 

incentive to reduce emissions under the bill even if they are allocated sufficient 

allowances to cover their annual emissions." (EIA (2003), p. 5) 

Cap-and-trade policies encourage continuous technological innovation. Because 

every incremental reduction in emissions has value in a cap-and-trade market, cap-andtrade encourages continuous innovation. Money can be made and competitive advantage 

can be gained through innovations that reduce emissions at a lower cost. 

• "The actual realized cost of the policy will depend significantly on the 

development and deployment of low-carbon technologies that are not widely in 

use today. Indeed, it may involve deployment of technologies not yet on the 

drawing board." (RTIlNicholas (2007), p. 7) 

• "The cap not only limits emissions, it creates a market for emissions allowances 

where every ton of emissions has a price. This price provides sustained incentives 

for developing new technologies that can reduce GHG emissions" (MAC (2007), 

p.14) 

• " ... since allowances are valuable, cap-and-trade programs give firms continuing 

incentives to identify low-cost reduction opportunities: additional reductions are 
373 

attractive because they allow firms to either sell more allowances or to reduce the 

number of allowances they must purchase." (MAC (2007), p. 7) 

• "The incentive to abate in cap-and-trade programs, where there is no specific 

standard for any single plant, is continuous and any improvements in abatement 

technology will result in allowance savings." (Ellerman, et al. (2003), p. 35) 

Cap-and-trade policies have high compliance rates. This is because of two factors: 

1) cap-and trade's inherent ability to avoid differing hardship for particular sectors, and 2) 

clear and automatic penalty provisions. Under cap-and-trade, fair treatment, clear 

penalties, flexibility and incentives make it cheaper for firms to comply than to seek the 

relaxation of the cap. 

• "Four features describe the environmental performance of the Acid Rain 

Program. First, a large reduction of emissions was accomplished relatively 

quickly-in the fifth year following passage of the enabling legislation. Second, 

the schedule of emission reduction was accelerated significantly as a result of 

banking. Third, no exemptions, exceptions, or relaxations from the program's 

requirements were granted. Four, the 'hot spots' that were feared to result from 

emissions trading have not appeared." (Ellerman (2003), p. 3) 

• " ... jt becomes cheaper for these firms to comply than to seek some relaxation of 

the standard. Moreover, the existence of a market removes the primary reason for 

seeking relaxation: unique hardship due to the uniform application of a rule to 

source-specific circumstances. No one is uniquely disadvantaged in a market with 

many buyers and the highest cost is that of a permit. The happy result is a 

regulatory system in which compliance has been made cheaper than seeking some 

type of relaxation." (Ellerman (2003), p. 7) 

• The S02 "program was implemented without the granting of the exemptions, 

exceptions, or relaxations of the regulatory requirement that are typically issued to 

avoid the undue hardship that can result when a more or less uniform mandate is 

imposed on sources exhibiting cost heterogeneity." (Ellerman (2003), p. 4) 

• "Allowing firms that face high marginal costs of abatement, or even technical 

infeasibility, to comply with environmental requirements by buying allowanceseffectively paying others to reduce more on their behalf-has eliminated one of 

the features of command-and-control programs that diminishes environmental 

effectiveness. In a command-and-control program, economic hardship or 

technical barriers can be dealt with only by relaxing the emissions standard in 

some way. While often justified, these exceptions reduce the regulation's 

environmental effectiveness because they are one-sided: standards are relaxed to 

avoid "hardships" for some facilities, but increased emissions cannot be offset by 

increasing standards at facilities for which abatement is less expensive or easier 

technologically." (Ellerman, et al. (2003), p. 34) 
374 

References 

Carlson, et al. (2000): Carlson, Curtis, Dallas Burtraw, Maureen Cropper, and Karen Palmer, "Sulfur 

Dioxide Control by Electric Utilities: What Are the Gains from Trade?" Resources for the Future, April 

2000. 

Ellerman (2003): Ellerman, Denny A, "Are Cap-and-Trade Programs More Environmentally Effective 

than Conventional Regulation?" Center for Energy and Environmental Policy Research, Massachusetts 

Institute of Technology, October 2003. 

Ellerman, et al. (2003): Ellerman, A. Denny, Paul L. Joskow, and David Harrison, Jr., Emissions Trading 

in the U.S. - Experience, Lessons, and Considerations for Greenhouse Gases, Pew Center on Global 

Climate Change, May 2003. 

EIA (2003): Energy Information Administration, Analysis ofS.139, the Climate Stewardship Act of2003, 

June 2003. 

MAC (2007): Market Advisory Committee, "Recommendations for Designing a Greenhouse Gas Capand-Trade System for California," recommendations to the California Air Resources Board, June 30, 2007. 

RTIlNicholas Institute (2007): Murray, Brian and Martin Ross, "The Lieberman-Warner America's 

Climate Security Act: A Preliminary Assessment of Potential Economic Impacts," Policy Brief, October 

2007. 
375 

ATTACHMENT 2: SUMMARY OF EPA'S FINDINGS OF POTENTIAL 

EMISSION REDUCTIONS IN AGRICULTURE AND FORESTRY SECTORS 

Table 4.A.1: Key Results at the National Level by Activity, Time Period, and Constant·Prlce Scenarios 

Quantities are Tg CO, Eq. per year net emissions reduction below baseline for 

representative years 2015. 2025, and 2055. 

From Greenhouse Gas Mitigation Potential in U.S. Forestry and Agriculture, November 

2005, EPA 430-R-OS-006, 

(http://ww\¥.epa.gov/scquestratioIl/pdflgrecnhousegas2OOS.pdf), 
376 

ATTACHMENT 3: COMPENSATED REDUCTION 

Compensated Reduction 

A POSITIVE INCENTIVE FOR TACKLING THE LARGEST SOURCE OF GREENHOUSE 

GAS EMISSIONS IN THE DEVELOPING WORLD 

Compensated Reduction (CR) is an innovative proposal that provides positive incentives for developing 

countries to reduce deforestation rates on a voluntary basis and strengthen the global effort to mitigate 

climate change. 

According to the Intergovernmental Panel on Climate Change (IPCC, 2001) and the 2006 

Stem Review, tropical deforestation accounts for approximately 20% of annual GHG 

emissions and is the largest source of emissions in the developing world. 

If current rates of deforestation in Brazil and Indonesia alone remained the same through 

2012, the emissions from this deforestation would offset nearly 80% of the emission 

reductions of the Kyoto Protocol. (Santilli et al, Climatic Change (2005) 71: 267-276). 

Compensated Reduction would reward countries that demonstrate a real decrease in deforestation. The 

concept is simple: Any nation that reduces national deforestation below a baseline (based on average 

historical deforestation rates) would be eligible for compensation, receiving emissions allowances 

tradable in the global carbon market. 

The compensation would be post facto. Successful countries would receive compensation 

after 2012 after real reductions were concretely measured; a portion of the tradable 

allowances would be held in an insurance reserve. 

To determine if real reductions occurred, a country's forests would be monitored by robust, 

reliable satellite imagery, supplemented by ground-truthing. 

At least one nation, Brazil, has already begun to demonstrate that it is possible, with serious 

and committed effort, to reduce deforestation. 

Compensated Reduction involves a nation's entire forest system, not just individual projects, thereby 

avoiding problems that have hindered consensus on forest issues. 

CR addresses key flaws in the Kyoto Protocol, enabling those developing nations that 

choose to do so to receive compensation - through the global carbon market - for reducing 

emissions. 
377 

By harnessing market forces in favor of forest protection, building capacity and enhancing 

community involvement, and providing incentives for better monitoring, CR has the 

potential to engage orders of magnitude more fmancial support than even the most optimistic 

estimates of official development assistance (ODA) that could reasonably be expected from 

foreign aid. CR therefore supports both President Bush's Initiative Against Illegal Logging 

(see http://www.whitehouse.govlinfocus/illegal-Iogging/piail.html) and the U.S. Senate's 

2005 Resolution stating that it is time for Congress to enact mandatory, market-based limits 

and incentives to slow, stop, and reverse greenhouse gas emissions growth in a manner that 

will not significantly harm the U.S. economy; and will encourage comparable action by other 

nations that are major trading partners and key contributors to global emissions. 

A coalition of developing nations has formally asked to have the issue of reducing emissions 

from deforestation placed on the agenda for the Twelfth Conference of the Parties the UN 

Framework Convention on Climate Change. 

Compensated Reduction of Deforestation: ReductloJlj, lOO8--2Ul2 would bi' coolpmSIli(>t1 in tlle Post· 2012 Curhon Market 

Any nation that reduces national deforestation 

below a baseline (based on average historical 

deforestation rates) would be eligible for 

compensation, receiving emissions allowances 

tradable in the global carbon market. 

30000 

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20000 

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Reflll~tlnnslndefurC$W:hm2Offi<!o12wwl.dbe 

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Fossil Fuell: :;;i,;;;i.;;;;:; ro:,.;:" ~h;l':":';':::! ;::';',;;::1 ~.=;: II 'i:l;:n ,·'·',·i:'::;:iUNFCCC The largest share of developing country 

emissions is from the deforestation sector, an 

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emissions. 

Environmental Defense, 257 Park Avenue South, New York, NY 10010 1·800·684·3322' 

members@environmenta!defense.org • W'MV.environmentalderense.org Austin ~ Boston· 

Boulder· New York· Oakland • Raleigh· Washington Project offices: Los Angeles e 

Sacramento· Beijing 
378 

RESPONSES BY FRED KRUPP TO ADDITIONAL QUESTIONS FROM SENATOR INHOFE

Question 1. I assume you are familiar with the EU cap and trade regime. While 

most of the EU countries will not meet their target, Great Britain made significant 

reductions. Isn’t it true, however, that GB will only meet its target because it 

switched from coal to natural gas, and that over the last 9 years since that shift, 

its emissions have climbed again? 

Response. It is important to note that the United Nations reported this week that 

the EU as a whole is likely to meet its ¥8% Kyoto commitment. (See press release 

here: http://unfccc.int/files/press/news—room/press—releases—and—advisories/ 

application/pdf/20071120—emissions—of—industrialized—countries—english.pdf.) 

The time period you refer to was a pilot phase, a learning opportunity for the EU, 

who has not had the benefit of our acid rain program to gain experience. That phase 

is over, and lessons have been learned. 

It is correct that the bulk of the recent emissions reductions in the United Kingdom (UK) during the initial period of the EU–ETS pilot phase are due to fuel 

switching. This shift in the UK seems to have slowed down. It is also correct that 

UK emissions have increased in recent years. Robust economic growth, combined 

with increasing natural gas prices and relatively low coal prices, led to an annual 

increase of C02 emissions of 3% during the current pilot phase of the EU Emissions 

Trading System (ETS), which runs from 2005–2007. It is important to note this current ETS pilot phase lasts only 3 years, affording little time for emitters to introduce major capital stock changes to harvest significant C02 emission reductions. The 

next EU–ETS phases of 2008–2012 (5 years) and 2013–2020 (8 years) give more 

time for a wide variety of C02 emission reduction investments to be made. 

The U.S. can benefit from the UK experience. For industries with long lead times 

for investment and building capital stock, the sooner Congress sets the rules for 5, 

10, 15 and 20 years from now, the sooner these industries can invest in the needed 

technology, such as carbon capture and storage. Delaying action could inadvertently 

lead to the level of fuel switching that Senator Inhofe so correctly wishes to avoid 

happening in the future. 

Question 2. China is now the leading emitter of Carbon Dioxide. Many argue that 

the industrialized countries benefited, and their economies benefited, from their excessive emissions from many years, and they should repay those past excesses. Do 

you agree with that? 

Response. No, Environmental Defense does not agree with that. Environmental 

Defense is most concerned with what our actions will be going forward—both domestically and internationally—to have the best chances of avoiding dangerous consequences of climate change. It is unreasonable to expect that all nations will 

achieve the same percent reduction in greenhouse gases. There are many justifications why developed and developing nations may have different rates of reductions, 

including: 

• most of the GHG in the atmosphere today are from the developed nations, 

• and the per capita emissions from the developed nations are on average about 

three times larger than those of the developing nations, and 

• developing nations are much more dependent on increasing energy production 

to provide an acceptable standard of living for their peoples. 

Question 3. Mr. Krupp, I, as well as many of my colleagues were concerned with 

the attacks directed at TXU after they announced plans to invest in coal. Those attacks, I believe, weakened the value of their stock making them a prime target for 

a takeover. Were you or anyone in your organization involved in any discussions 

with KKR during the takeover of TXU, especially regarding any advice on alternatives to the cancelled coal plants? 

Response. When we were informed of the proposal by TXU to build 11 new powerplants, we began to investigate the proposal. We found that TXU was planning to 

build such plants without utilizing available technology to capture and store the 

greenhouse gas emissions from such plants. Because of that, and the impact the 

plants would have on air quality in the Dallas-Ft. Worth region (which has yet to 

achieve federal health standards for air quality), we opposed the proposal. We then 

initiated discussions with TXU, offering TXU ideas (including the use of cleaner coal 

technologies such as IGCC, ultrasupercritical, and carbon capture and storage) on 

how to meet electricity needs without increasing emissions. We had no contact with 

KKR about TXU until after they had reached an agreement on the price for the acquisition of the company in February 2007. Since February of 2007, we have had 

discussions with KKR and the new TXU management about power alternatives that 

would be more profitable in the long term for TXU and less environmentally harmful than conventional coal plants. 
379 

The best thing that we all can do to help the financial outlook of electric utilities 

and coal-fired generation is pass comprehensive climate change legislation. Right 

now, utilities and regulatory commissions are caught in a bind—they expect future 

regulation but the rules of the road have not been established. This uncertainty 

plays havoc with planning, investment and regulatory approval. This situation is 

one of the reasons that the National Association of Regulatory Utility Commissioners adopted a resolution this month in support of federal climate legislation. In 

the resolution, NARUC states: ‘‘the existence of uncertainty about the nature and 

extent to which [greenhouse gas] emissions will be subject to future federal regulation makes it difficult for State regulators, regulated utilities, and others to appropriately plan for needed investments in electric transmission and generation infrastructure.’’ 

RESPONSE BY FRED KRUPP TO AN ADDITIONAL QUESTION FROM SENATOR VITTER

Question. One compliance strategy could be switching from coal to natural gas. 

If fuel switching occurs significantly during the initial phase of [the] program and 

natural gas prices increase dramatically, how would residential natural gas customers cope? 

Response. One of the advantages of a cap-and-trade system to reduce greenhouse 

gas emissions is that it allows a wide variety of emission reduction technologies to 

be deployed. A catalyst to the development of those technologies is a predictable 

long-term emissions path. Under such a program, we would expect to see a range 

of market responses to a cap on carbon emissions. In the early years, energy efficiency and offsets are but two strategies that are far more cost effective than increased combustion of natural gas. Other cost management characteristics of a capand-trade system are the ability to bank and borrow allowances. As adopted by the 

subcommittee, America’s Climate Security Act also contains additional cost management provisions originated by Senators Landrieu, Graham, Lincoln and Alexander. 

Beyond these provisions, there are other provisions in ACSA targeted to low income 

home energy assistance that we support. 

Senator BOXER. Thank you so much, Mr. Krupp. And thanks to 

your organization. I think you have been a very positive part of our 

discussions. Thank you. 

Mr. KRUPP. Thank you, Senator. 

Senator BOXER. Our next speaker is Hon. Eileen Claussen, President, Pew Center on Global Climate Change. Welcome. 

STATEMENT OF HON. EILEEN CLAUSSEN, PRESIDENT, PEW 

CENTER ON GLOBAL CLIMATE CHANGE 

Ms. CLAUSSEN. Thank you, Senator Boxer, Ranking Member 

Inhofe and members of the Committee. Thank you for the opportunity to testify on the most cost-effective means of reducing U.S. 

greenhouse gas emissions. 

The Pew Center strongly supports reporting the America’s Climate Security Act of 2007 from the Committee on the schedule that 

you have announced, and looks forward to working with you and 

the rest of the Congress as the bill goes through the legislative 

process. 

Senators, the bad news is that climate change poses real risks 

to our Nation’s security, economy and environment, and that these 

risks will grow dramatically if we do not begin to reduce our greenhouse gases now. The good news is that the market-based mechanisms found in the ASCA will allow us to address this problem cost 

effectively and in a way that enhances U.S. competitiveness. 

Through the cap and trade program created by the bill, Congress 

can set the overall greenhouse gas reduction goals and let the 

emitters decide for themselves how to achieve the environmental 

goals of the program, at least cost. This does not mean that achiev-
380 

ing our climate security goals will be cost free, just that the costs 

can be kept as low as possible and far lower than the costs of not 

acting. 

We favor the economy-wide approach taken by the bill. Certainly 

sector by sector approaches can work, but the most cost-effective 

approach for the economy as a whole is to bring power plants, factories and transportation together in one market. An economy-wide 

trading program will draw key technologies into the marketplace 

when they are ready, diminish the burden on any one sector, reduce the cost to the economy as a whole and provide the broadest 

incentives possible for early emission reductions and technology innovation. 

As a result, America’s Climate Security Act will enhance U.S. 

competitiveness. Given what the peer-reviewed science tells us 

about climate change, we must move quickly to an economy in 

which our greenhouse gas footprint shrinks, even as our standard 

of living increases. This will require a profound world-wide technological revolution. The United States should be leading that revolution, but we currently are not. An appropriate price on greenhouse 

gas emissions, combined with incentives, will push technology into 

the marketplace and ensure that we meet our environmental goals 

at the lowest possible costs. 

I would like to mention briefly three other important issues before I conclude: how to deal with transportation, the use of allowance allocation as a tool, and the need for cost certainty and reliability. First, transportation. Transportation emissions account for 

roughly one quarter of total U.S. emission and are growing rapidly. 

Reversing that trend is essential and can only be done by increasing vehicle efficiency, reducing vehicle miles traveled and reducing 

the carbon footprint of transportation fuels. The bill would include 

transportation fuels in the cap and trade program, providing a 

price signal that would promote all three. 

Second, allowance allocation. While the use of a well-designed 

cap and trade program ensures the lowest overall cost, many important sectors of the economy will face real transition costs that 

can and should be dealt with through the allowance allocation process. Allocation has no effect on the greenhouse gas reductions mandated by the cap. 

Given this, we should use the allocation process to address the 

legitimate transition costs some sectors will face as we move to a 

low greenhouse gas economy. Take coal-based electricity, for example. Coal is cheap and plentiful, and the United States is going to 

use it for the foreseeable future. And even if we did not, as was 

pointed out, China and India would. So rapid deployment of climate-friendly technologies is essential. 

The best hope seems to lie with carbon capture and sequestration, which will likely take at least a decade to deploy widely. 

While we need not wait until then to begin cost-effective deductions, it would be appropriate to allocate initially a significant 

amount of allowances to this sector to help with the transition. As 

the need for transition assistance diminishes, the allocation of free 

allowances should phase out, which the bill does as well. 

Finally, cost containment. Some stakeholders fear that in the 

early years of the program, the market price of an allowance might 
381 

1For more on the Pew Center, see www.pewclimate.org. 2For more on the science of climate change and the threat to our environment and economy, 

see the Pew Center’s extensive body of reports available at www.pewclimate.org/global-warming-in-depth and the most recent findings of the Intergovernmental Panel on Climate Change 

at http://www.ipcc.ch/ 

be volatile, might swing too high too rapidly. Similarly, concerns 

have been raised about market liquidity, hoarding of allowances, 

manipulation of the market and exceptionally high costs. ACSA includes powerful cost containment mechanisms, including banking, 

borrowing and the use of offsets. In addition, the bill draws from 

the excellent work of Senators Warner, Landrieu, Graham and Lincoln in establishing a Carbon Market Efficiency Board which can 

step in should unexpected problems arise. 

We look forward to working with the authors of the bill, Chairman Boxer and others as the bill moves forward to refine measures 

to provide additional assurances of a smoothly functioning market, 

so long as they do not undermine the integrity of the greenhouse 

gas emissions cap. 

In conclusion, the America’s Climate Security Act of 2007 is an 

excellent foundation. We applaud the Committee’s work to date 

and urge the Committee to report the bill. Thank you. 

[The prepared statement of Ms. Claussen follows:] 

STATEMENT OF EILEEN CLAUSSEN, PEW CENTER ON GLOBAL CLIMATE CHANGE

Chairman Boxer, Ranking Member Inhofe, and members of the committee, thank 

you for the opportunity to testify on the most cost-effective means of reducing U.S. 

greenhouse gas emissions. My name is Eileen Claussen, and I am the President of 

the Pew Center on Global Climate Change. 

The Pew Center on Global Climate Change is a non-profit, non-partisan and independent organization dedicated to providing credible information, straight answers 

and innovative solutions in the effort to address global climate change. Forty-five 

major companies in the Pew Center’s Business Environmental Leadership Council 

(BELC), most included in the Fortune 500, work with the Center in these efforts.1

The Pew Center strongly supports reporting the America’s Climate Security Act 

of 2007 from the committee on the schedule that you have announced, and looks 

forward to working with you and the rest of the Congress as the bill goes through 

the process. I would like to discuss several reasons for recommending that you move 

forward with this bill. 

CAP-AND-TRADE IS THE MOST COST-EFFECTIVE WAY OF REDUCING GREENHOUSE GAS

EMISSIONS

Senators, the bad news is that climate change poses real risks to our nation’s security, economy and environment, and that these risks will grow dramatically if we 

do not begin to reduce our greenhouse gas emissions now.2 The good news is that 

the market-based mechanisms found in the America’s Climate Security Act of 2007 

will allow us to address this problem cost effectively and in a way that enhances 

U.S. competitiveness. 

Unlike most emissions this committee deals with, greenhouse gas emissions are 

essentially fungible. Greenhouse gases mix quickly throughout the atmosphere, 

which means that wherever you can reduce a ton of greenhouse gas emissions— 

whether from a car, a factory, or a power plant; whether in Los Angeles, London, 

or Lagos—the benefit to the climate is the same. 

In most of our other environmental laws, Congress directs EPA to dictate how 

much of a given pollutant a facility can emit or which pollution control technology 

to use. We do not have to take that approach with greenhouse gas emissions. Instead, by using a cap-and-trade program, Congress can set the overall greenhouse 

gas reduction goals and let the emitters decide for themselves how to achieve the 

environmental goals of the program at least cost. When we used a market-driven 

approach in the acid rain program, it provided the best environmental result at the 
382 

3For more on our experience with emissions trading programs and on the design of a greenhouse gas reduction program, see Ellerman, Denny A., Emissions Trading in the U.S.: Experience, Lessons, and Considerations for Greenhouse Gases, Pew Center on Global Climate Change, 

May 2003, and Nordhaus, R., Designing a Greenhouse Gas Reduction Program for the U.S., Pew 

Center on Global Climate Change, May 2003. 4The benefits of a wider trading program have been repeatedly demonstrated in all of the 

credible economic models—including the large number which participate in Stanford’s Energy 

Modeling Forum. See www.stanford.edu/group/EMF/ 5For more on the Pew Center’s work with companies on strategies to address climate changes, see http://www. pewclimate.org/companies—leading—the—way—belc 6For example, 37 of the 45 companies in the Pew Center’s Business Environmental Leadership Council have set voluntary targets, 22 have achieved those targets, and all have done so 

from a combination of efficiency improvements and process changes. DuPont, for example, has 

reduced its emissions 65% through a combination of energy efficiency and process change and 

has saved over $2 billion. See also the proceedings from a workshop co-sponsored by the Pew 

Center on Global Climate Change and the National Commission on Energy Policy, The 10–50 

Solution: Technologies and Policies for a Low-Carbon Future, found at http://www. 

pewclimate.org/global-warming-in-depth/workshops and—conferences/tenfifty/proceedings.cfm 

and Reilly, John M., Multi-gas Contributors to Global Climate Change: Climate Impacts and 

Mitigation Costs of Non-CO2 Gases, Pew Center on Global Climate Change, February 2003. 

lowest overall cost to our economy.3 This does not mean that achieving our climate 

security goals will be cost-free, just that the cost can be kept as low as possible— 

and far less than the cost of not acting. 

AN ECONOMY-WIDE PROGRAM WILL BE MORE COST-EFFECTIVE THAN SECTOR-BY-SECTOR

PROGRAMS

The Pew Center supports the proposal to apply the cap-and-trade program to all 

large sources of greenhouse gas emissions simultaneously. Congress has seen several proposals to cap and trade emissions from power plants only. Similarly, Congress has seen several proposals that address the transportation sector only, for example, by reducing the carbon footprint of transportation fuels. Certainly, such a 

sector-by-sector approach can work, but it will be more expensive and slower than 

an economy-wide approach.4

The most cost-effective approach is to bring power plants, factories and transportation together in one market, where all can benefit from the efficiencies and technological breakthroughs available in any sector at a given time. With an economywide program, we do not have to await the deployment of a single solution—such 

as carbon capture and sequestration, for example—to begin cost-effective reductions. 

The Pew Center’s research with leading companies demonstrates that there are numerous cost-effective and even cost-saving reductions available now from off-theshelf technologies and fuels.5 This is especially true in reducing non-CO2 emissions 

from industrial processes, increasing industrial and building energy efficiency, increasing the use of low-carbon fuels, and improving vehicle efficiency.6 In the medium and longer term, steeper reductions will be made possible through deployment 

of more advanced technologies, such as highly efficient vehicles, improved nuclear 

power plants, renewable energy combined with enhanced electricity storage capacity, and carbon capture and storage (CCS). An economy wide trading program will 

draw these technologies into the marketplace when they are ready, reducing the 

burden on any one sector, reducing the cost to the economy as a whole, and providing the broadest incentive possible for early emission reductions and technology 

innovation. 

The America’s Climate Security Act uses other important measures to lower the 

cost of greenhouse gas reductions as well. The bill allows companies to offset some 

of their emissions with reductions from sources not covered by the program. Allowing the use of offsets motivates emission reductions throughout the economy from 

sources too small or dispersed to be specifically targeted by the program. Companies 

would also be allowed to use credits from the markets of other countries, thus making use of the global fungibility of greenhouse gases and expanding the scope of the 

program. Again, the larger the program, the lower the cost. We see opportunities 

to increase the use of these measures even beyond what is already in the bill. 

A GREENHOUSE GAS CAP-AND-TRADE PROGRAM WILL ENHANCE U.S. COMPETITIVENESS

The America’s Climate Security Act will enhance U.S. competitiveness. Given 

what the peer-reviewed science tells us about climate change, we must move quickly 

from our current economy to one in which our greenhouse gas footprint shrinks even 

as our standard of living increases. That will require a profound worldwide technological revolution. The United States can and should be leading that revolution, and 

positioning itself to reap the economic benefits associated with decreased depend-
383 

7For more on the benefits of combining R&D and a carbon constraint, see Goulder, L., Induced Technological Change and Climate Policy, Pew Center on Global Climate Change, October 

2004. 8For more on policies to reduce emissions in the transportation sector, see Green, David L., 

Reducing Greenhouse Gas Emissions from U.S. Transportation, Pew Center on Global Climate 

Change, May 2003. 9For more on the policy and technology options to deal with GHG emissions from coal see 

the Pew Center’s new Coal Initiative series found at http://www.pewclimate.org/ 

white—papers/coal—initiative 10For more on on community adjustment and worker transition to climate change policy, see 

Greenwald, Judith M.; Roberts, Brandon; Reamer, Andrew D.; Community Adjustment to Climate Change Policy, Pew Center on Global Climate Change, December 2001, and Barrett, Jim, 

Continued 

ence on foreign oil and increased export potential of low carbon technology. We currently are not leading, however, and federal R&D subsidies alone will not change 

that. An appropriate price on greenhouse gas emissions, in combination with ‘‘technology push’’ policies, will. 

Some have asserted a false dichotomy between the need for mandatory climate 

policy on the one hand and support for climate-friendly technology on the other. In 

fact, a well-designed mandatory climate policy that leverages the power of the market is essential for driving deployment of climate-friendly technology. When combined with subsidies for specific technologies, it is the most cost-effective method of 

driving deployment. Government would have to spend roughly ten times the amount 

in incentives alone in order to achieve the same environmental result as a price signal coupled with incentives.7 The America’s Climate Security Act wisely combines 

mandatory greenhouse gas constraints and technology subsidies. 

I would like to mention three other important issues before I conclude: how to 

deal with transportation, the use of allowance allocation as a tool, and the need for 

cost certainty and reliability. 

REDUCING EMISSIONS FROM THE TRANSPORTATION SECTOR

Transportation emissions account for roughly one-quarter of total U.S. emissions 

and are growing rapidly. Reversing that trend is essential, and can only be done 

by (1) increasing vehicle efficiency, (2) reducing vehicle miles traveled (VMT), and 

(3) reducing the carbon footprint of transportation fuels. The America’s Climate Security Act would include transportation fuels in the cap-and-trade program, providing a price signal that would promote all three—especially if complemented by 

the other measures currently being proposed by the White House and Congress to 

increase vehicle efficiency and promote low carbon fuels, and with VMT-reduction 

measures, such as those in the Transportation Equity Act.8

USING THE ALLOCATION PROCESS TO AID TRANSITION

While the use of a well-designed cap-and-trade program ensures the lowest overall 

cost, many important sectors of the economy will face real transition costs that can 

and should be dealt with through the allowance allocation process. Allocation, contrary to the impression some stakeholders may be creating, has no effect on the 

greenhouse gas reductions mandated by the cap. Given this, we should use the allocation process, in the early years of the program, to address the legitimate transition costs some sectors will face as we move to a low-greenhouse gas economy. 

Take coal-based electricity, for example. Coal is cheap and plentiful, and the 

United States is going to use it for the foreseeable future. Even if we did not, China 

and India would, so rapid development and deployment of climate-friendly technologies is essential. The best hope, at the moment, lies with carbon capture and 

sequestration, which most experts believe will take at least a decade to deploy 

throughout the power sector. While we need not wait until then to begin cost-effective reductions, it would be appropriate to allocate initially a significant amount of 

allowances to this sector to help with transition.9 The bill does this and also appropriately uses bonus allowances and a clean coal technology program funded out of 

auction proceeds to accelerate CCS deployment and speed and smooth the transition. There is is a similar need for transition assistance in other sectors of the economy, most particularly energy-intensive industries that face significant foreign competition. As the need for transition assistance diminishes, the allocation of free allowances should phase out, which the bill does as well. 

In addition, the bill includes provisions to mitigate any effect the program may 

have in increasing energy prices, especially for low- and middle-income Americans. 

A significant percentage of the proceeds from the auction have been dedicated to 

help these consumers and to help states assist their residents.10
384 

Worker Transition and Global Climate Change, Pew Center on Global Climate Change, December 2001. 

ADDRESSING PRICE VOLATILITY AND COST CONTAINMENT

Some stakeholders fear that, in the early years of the program, the market price 

of an allowance might be volatile and might swing too high too rapidly. Similarly, 

concerns have been raised about market liquidity, hoarding of allowances, and manipulations of the market. 

In addition to the cap-and-trade itself, which provides for flexibility in meeting 

the environmental target, this legislation includes powerful cost containment mechanisms, including banking and borrowing. Allowing firms the ability to bank excess 

allowances or credits for future use helps firms manage the normal swings of the 

market. Allowing firms access to offset credits further lessens the danger of supply 

shortages, which in part create this price volatility. The bill also draws from the excellent work of Senators Warner, Landrieu, Graham and Lincoln and the Nicholas 

Institute at Duke University in establishing a Carbon Market Efficiency Board, 

which can gauge market activity and step in should unexpected problems arise. We 

look forward to working with the authors of this bill, Chairman Boxer, and others 

as the bill moves forward to refine measures to provide additional assurances of a 

smoothly functioning market, so long as they do not undermine the integrity of the 

greenhouse gas emissions cap. 

CONCLUSION

In conclusion, the America’s Climate Security Act of 2007 is an excellent foundation for an environmentally effective, cost-effective greenhouse gas reduction program. Continuing to move it through the legislative process will engage important 

stakeholders whose contributions will improve the bill. We applaud the committee’s 

work to date, and urge the committee to report the bill. 

RESPONSES BY EILEEN CLAUSSEN TO ADDITIONAL QUESTIONS FROM SENATOR INHOFE

Question 1. Do you support not allowing any more coal plants to be built until 

the future date when carbon capture and storage technology is available? 

Response. The Pew Center supports a greenhouse gas (GHG) emissions cap-andtrade program which increases in stringency over time, as well as a large-scale carbon capture and storage (CCS) demonstration program. In the early years of the 

program, coal plants could be constructed, but these facilities would need to purchase GHG emission allowances or offset their emissions. These new plants could 

be CCS demonstration sites and would be eligible for CCS incentives such as bonus 

allowances. 

Question 2. In your written testimony, you say that ‘‘we should use the allocation 

process, in the early years of the program, to address the legitimate transition costs 

some sectors will face as we move to a low-greenhouse gas economy.’’ Are you saying 

you support reducing the number of ‘‘free’’ allowances further than provided in S. 

2191? 

Response. The Pew Center believes there are sound policy reasons for providing 

covered entities with a high level of free allowances initially to account for their 

transition costs—even at levels higher than in the current version of S. 2191—and 

phasing them out over a reasonable period of time. 

RESPONSES BY EILEEN CLAUSSEN TO ADDITIONAL QUESTIONS FROM SENATOR VITTER

Question 1. You suggest that an economy-wide approach to emissions reductions 

is preferable and more efficient because it provides flexibility and diversity of reduction sources. If this is true, why stop at just domestic industries? This bill does very 

little in terms of reducing global emissions. Would it not be even more efficient to 

have emission sources from all nations on the table? 

Response. The Pew Center believes that to address global climate change all 

major greenhouse gas (GHG) emitting nations must enter into binding agreements 

that require mitigation commitments of them. The Pew Center also supports, however, the statement of the U.S.-ratified U.N. Framework Convention on Climate 

Change (UNFCCC) that nations hold ‘‘common, but differentiated responsibilities’’ 

in addressing climate change. In other words, the commitments which we may expect of a developing country might be different from those expected of the United 

States or any other developed country. While we hope ultimately to see an international emissions trading system implemented under such agreements, we do not 
385 

anticipate that it would initially cover developing countries. Industrial GHG emissions in such countries could instead be addressed through sector-specific policies 

and measures or through international sectoral agreements. 

If the U.S. is willing to make a commitment to reduce its emissions—as the leading contributor to current concentrations—it will be in a better position to work 

with other countries to do the same. Enactment and implementation of S. 2191, 

while on its own will not completely solve the global warming problem, would (a) 

send a price signal throughout the U.S. economy that would turn our unrivaled innovative capacity towards the problem of reducing GHG emissions while increasing 

standards of living, and (b) allow the United States to credibly begin negotiations 

with the other emitting nations in securing agreements that bind them to mitigation 

commitments, both of which will be essential in reducing global emissions to the 

necessary level. Without enactment of mandatory U.S. GHG reductions, neither of 

these essential steps will be possible. 

Question 2. Considering that this bill will have virtually zero impact on greenhouse gas concentrations in our atmosphere, doesn’t working within the UN Framework Convention on Climate Change make more sense and allow the U.S. to compete on a level playing field rather than taking unilateral action on a emissions regime that may or may not comport with future international programs? 

Response. The Pew Center does not agree that the proposed 70% cut in emissions 

below 2005 levels will have a negligible impact on atmospheric concentrations of 

greenhouse gases, especially when compared to business-as-usual emissions. Further, the Center supports the rapid enactment of a U.S. domestic program to reduce 

GHG emissions precisely so that the United States can credibly negotiate with the 

other major emitting nations to secure mitigation commitments under the UNFCCC 

that will allow the United States to compete on a level playing field. 

Question 3. This bill does not include providing any allowances to refiners for the 

petroleum transportation fuels that they produce. How would refiners comply with 

this bill in 2012 to cover the greenhouse gas emissions from petroleum transportation fuels? 

Response. The Pew Center would not object to providing some free allowances to 

refineries for the transportation fuels they produce. That said, however, refiners 

could certainly comply with the current version of the bill by purchasing allowances 

on behalf of their customers either through the auction or from other covered entities. Economic analysis suggests that this sector can pass on the costs of purchasing 

allowances to their customers more readily than other sectors of the economy. 

Question 4. This bill explicitly does not preclude or abrogate the right of a state 

to adopt or enforce a standard, cap, limitation, or prohibition relating to greenhouse 

gas emissions. We could end up with a national cap-and-trade program and different 

state controls. Shouldn’t states be preempted to prevent duplicative and possibly 

conflicting environmental controls? 

Response. In order to solve the climate change problem, action will be needed by 

all levels of government. For example, land use planning and building codes have 

an important influence on greenhouse gas emissions, and these policies are primarily the responsibility of local governments. Electric utility regulation also strongly influences greenhouse gas emissions and the costs to consumers of greenhouse 

gas reductions, and that is the purview of state public utility commissions. The federal government has a key role to play in ensuring that our nation overall takes 

the most efficient and effective approaches to reducing greenhouse gas emissions, 

and that the costs and benefits of the program are fairly distributed nationally. The 

federal government also has a key role to play in ensuring that the United States 

participates in global efforts to address climate change. 

Senator BOXER. Thank you so much. We really appreciate that. 

Ron Sims, we are very happy to have you here. You are King 

County Executive, State of Washington. Welcome, sir. 

STATEMENT OF RON SIMS, COUNTY EXECUTIVE OF KING 

COUNTY, WASHINGTON 

Mr. SIMS. Madam Chairman, Senator Inhofe—I am nervous, and 

I can’t believe this after being in office for 22 years. 

[Laughter.] 

Mr. SIMS. Members of the distinguished Committee, I want to 

thank you for inviting me to testify today about the importance of 
386 

investments, particularly in public transportation and other strategies to reduce driving in order to cut emissions of greenhouse 

gases. 

I am the King County Executive and I am proud to serve as its 

elected leader of the 14th largest regional government in the 

United States. I am also Board Member of the Center for Clean Air 

Policy, a leading think tank crafting cost-effective climate policy solutions. King County stretches from the Puget Sound shores to the 

snow-crested peaks of the Cascade Mountains. It is the best place 

in the world to live. In between are 2,000 square miles containing 

vibrant urban centers, four major river systems, 760 lakes, 3,000 

miles of streams and 1,000 square miles of forest. It is a wonderful 

community and home to 1.8 million people and businesses such as 

Boeing, Microsoft, Amazon.com and Starbucks. 

With regard to transportation, King County also owns and operates Metro Transit, one of the ten largest bus transit systems in 

North America, with an annual ridership of over 100 million. Recently King County secured designation as a U.S. Department of 

Transportation Urban Partnership, which provides significant Federal funding to pursue a range of congestion pricing measures, reduction measures, including major new transit improvements as 

well as new technologies and incentives for changing commuting 

behaviors. 

King County was also the first county and transit agency to join 

the Chicago Climate Exchange in part to help ensure that regional 

transit agencies have a voice during the creation of national cap 

and trade rules and legislation. Our region is growing extremely 

fast, both in our economy and our population. But our global warming challenges are also fast-growing. There will be two and a half 

million more people in the Puget Sound by 2050. So I think about 

how much decisions today as an elected official will shape what the 

region looks like then and whether those people, including my children and my grandchildren, will enjoy the well-being and prosperity that I have enjoyed. 

That is why I am proud to speak before you today on the critical 

issues of America’s response to global warming. King County appreciates the comprehensive approach of this bill. We support creating a market cap that sends a consistent economy-wide carbon 

price signal to all sectors. As Congress now examines how to reduce 

the emissions of greenhouses through national legislation, I urge 

you to consider that capping carbon emissions and promoting investments in clean energy and fuels alone will not solve this national and global crisis. 

In King County, as in so many regions in the United States, especially the west coast, greenhouse gas emissions from the transportation sector are the single biggest source of global warming pollution. Additionally, the single largest contributor to transportation 

pollution are cars driving on our roads and our highways. Simply 

put, we cannot solve the problem of greenhouse gas emissions unless we create ways for people to drive less. 

Not surprisingly, King County, as the regional transit agency, is 

confronted each day with the challenges of moving people out of 

their cars and into cleaner transportation alternatives. Therefore, 

a critical step in addressing the vehicle miles traveled problem lies 
387 

in assuring that the scope of this legislation fully recognizes and 

rewards those governments and institutions that are implementing 

policies right now to increase transportation choices and reduce the 

need for driving. Examples of such policies include smart growth 

planning, expanded transit, bolstering alternatives modes, such as 

biking, walking, tele-commuting and promoting density and transit-oriented development. 

The research shows that if one solo commuter of a household 

switches from driving to transit for their commute to work, he or 

she can reduce their carbon footprint by 10 percent, the equivalent 

of more than 4,800 pounds of CO2 for an average commuter each 

year. If that same commuter rides transit to work and their household gives up a second car, that family can reduce their carbon 

emission of up to 30 percent. 

The comprehensive approach you are now taking also should provide incentives for those communities that are not currently engaged in those strategies. These include direct allocation of allowances to localities and regions engaged in policies to make significant investments in public transit, such as allowances or revenues, 

will make it easier for refiners to meet their greenhouse goals. 

This can be done. In King County, we are either doing or promoting each of these policies. And we have gone one step further. 

We have said in response to our own environmental policy act that 

we are going to look at carbon emissions as one of the standards. 

Rewarding local governments engaged in comprehensive approaches that address all sectors of the economy and all three legs 

of that stool of transportation will be an essential element in the 

national fight against global warming. 

Madam Chairman, Senator Inhofe and members of this Committee, thank you again for the opportunity to speak with you 

today to advocate for Federal Government action on global warming. I look forward to continuing to work with you to pass this very 

important and critical legislation. Thank you. 

[The prepared statement of Mr. Sims follows:] 

STATEMENT OF RON SIMS, COUNTY EXECUTIVE OF KING COUNTY, WASHINGTON

Madam Chairman, Senator Inhofe, and members of the Committee, thank you for 

inviting me to testify today about the importance of investment in public transportation and other strategies to reduce driving in order to cut the emission of greenhouse gases. 

I am King County Executive Ron Sims, and I am proud to serve as the elected 

leader of the nation’s fourteenth largest county government in the country. I am 

also a board member of the Center for Clean Air Policy, a leading think tank 

crafting cost-effective climate policy solutions. King County stretches from the Puget 

Sound shores to the snow-crested peaks of the Cascade Mountains. Between are 

2,000 square miles with vibrant urban centers, four major river systems, 760 lakes, 

3,000 miles of streams, and 1,000 square miles of forest. Our county is home to 1.8 

million people. 

With regard to transportation, King County also owns and operates Metro Transit, one of the ten largest bus transit systems in the nation, with an annual ridership of more than 100 million. Recently, King County was a lead in securing designation as a U.S. Department of Transportation ‘‘Urban Partnership,’’ which provides significant federal funding to pursue a range of congestion reduction measures, including major new transit improvements, as well as technologies and incentives for changing commuting behaviors. King County was also the first county to 

join the Chicago Climate Exchange in part to help ensure that regional transit agencies have a voice during the creation of national cap and trade rules and legislation. 

My region is growing extremely fast, both in our economy and our population. And 

our global warming problem also is fast-growing. I know that I will not be in the 
388 

Puget Sound region in 2050, but 2.5 million people will live there. And I think about 

how my decisions as an elected official today will shape what our region looks like 

then, and whether those people—including my children and grandchildren—will 

enjoy well being and prosperity. That is why I am pleased to speak before you today 

on the critical issue of America’s response to global warming. 

King County appreciates the comprehensive approach of S. 2191. We support creating a market cap that sends a consistent economy-wide carbon price signal to all 

sectors. As Congress now examines how to reduce the emission of greenhouse gases 

through national legislation, I urge you to consider that capping carbon emissions 

and promoting investment in clean energy and fuels alone will not solve this national crisis. It is my hope that you take this opportunity to build on the existing 

provisions in S. 2191 to prioritize and ensure investments will be made in policies 

designed to reduce vehicle miles traveled (VMT). That may require being more explicit about the types of VMT reduction activities eligible for funding beyond transit 

(which is already specifically noted in the bill), increasing available funding dedicated to those purposes, and considering funding VMT reductions from both the allowance and auction sources. 

In King County and so many regions in the United States, especially on the west 

coast, greenhouse gas emissions from the transportation sector are the single biggest source of global warming pollution. Additionally, the single biggest factor in the 

amount of transportation pollution is the number of vehicle miles traveled. Not surprisingly King County, as the regional transit agency, is confronted each day with 

the challenge of moving people out of their cars and into cleaner transportation alternatives. 

Nationally, the transportation sector is responsible for 33 percent of CO2 emissions, and those emissions are projected to increase rapidly. Passenger vehicles (cars 

and light trucks) are responsible for more than three-fifths of transportation sector 

CO2 emissions. With the significant reductions in CO2 emissions needed to protect 

the climate (e.g., 60 to 80 percent below 1990 levels), the continuing growth of emissions from transportation will undoubtedly put more pressure on other sectors (including refining, manufacturing and electricity) to reduce their emissions. 

The transportation sector’s CO2 emissions are a function of vehicle fuel efficiency, 

fuel carbon content, and VMT (vehicle miles traveled), factors we refer to as a 

‘‘three-legged stool’’ (Figure 1). Energy and climate policy initiatives at the federal 

and state levels (including S. 2191) have focused almost exclusively on technological 

advances in vehicles and fuels, the first two legs. Yet, there is a growing recognition 

that managing VMT has to be part of the solution—this third leg is needed to support the stool and should complement vehicle technology and fuels policy. 

In fact, expected growth in our driving habits will overwhelm planned reductions 

in CO2 emissions from even the most aggressive proposed improvements in vehicle 

and fuel efficiency. As discussed below, an analysis by the Center for Clean Air Policy (CCAP) finds that current policy proposals on vehicle technology and fuels would 

leave passenger vehicle CO2 emissions well above 1990 levels in 2030, significantly 

off-course for meeting the bill’s 2050 target. Reduction in travel demand will be an 

important element of effective climate policy. 
389 

1 In this scenario, VMT growth increases by 2 percentage points (61 percent growth by 2030) 

due to the ‘‘rebound effect’’ whereby driving increases as fuel economy increases (10 percent 

short-run elasticity). 

According to forecasts of the U.S. Department of Energy’s Energy Information Administration (EIA) VMT already is expected to increase by 59 percent from 2005 to 

2030 (the red line in Figure 2), outpacing projected population growth of 23 percent. 

This growth in VMT is due in large part to sprawling development patterns that 

require Americans to drive long distances as well as limited transportation alternatives (transit, walk, bike). Over this time period, the EIA projects fuel economy 

for new passenger vehicles to increase by 16 percent (from 25 to 29 mpg) and the 

fuel economy of the full stock of vehicles (the green line in Figure 2) to increase by 

13 percent, as more efficient vehicles penetrate the fleet. CO2 emissions would increase by 40 percent over the same time frame (the dark blue line in Figure 2). In 

this case, transportation CO2 emissions in 2030 would be 75 percent above 1990 levels (the turquoise line in Figure 2). 

The more important question is what would happen to CO2 growth even if we implemented CAFE increases and a low carbon fuel standard. In June 2007, the U.S. 

Senate passed new CAFE standards that would increase new passenger vehicle fuel 

economy (cars and light trucks combined) to 35 mpg by 2020. California is implementing a low carbon standard for transportation fuels that calls for a 10 percent 

reduction in fuel carbon intensity by 2020. If California’s low carbon fuel standard 

were applied at the national level (the purple line in Figure 3), in conjunction with 

the Senate’s CAFE standard of 35 mpg by 2020 (the green line in Figure 3), passenger vehicle CO2 emissions in 2030 would be 12 percent above 2005 levels, or 40 

percent above 1990 levels. In other words, projected growth of VMT would still overwhelm the CO2 savings from vehicle and fuel regulations.1
390 

2 R. Ewing, Keith Bartholomew, S. Winkelman, J. Walters, and D. Chen, Growing Cooler: The 

Evidence on Urban Development and Climate Change, Urban Land Institute, in press. Final 

draft available here: http://www.ccap.org/transportation/smart.htm. 

Clearly, lowering transportation CO2 emissions to 60 to 80 percent below 1990 

levels by 2050 would require even greater improvements in vehicles, fuels and, almost certainly, reductions in VMT per capita. 

Therefore, a critical first step in addressing the VMT problem lies in assuring that 

the scope of this legislation fully recognizes and rewards those governments and institutions that are implementing polices right now to increase transportation choices 

and reduce the need for driving. Examples of such policies include, rewarding those 

communities engaged in regional smart growth planning, expanding transit networks, bolstering alternative transportation modes (bike, walk), and promoting infill 

and transit-oriented development around compact mixed use communities. 

The comprehensive approach you are taking now also should provide incentives 

for those communities that are not currently engaged in regional smart growth 

planning to adopt these strategies to slow growth in VMT. As the recent legal settlement in California surrounding the land use practices of San Bernardino County exemplifies, local land use decisions can and must be part of the solution to achieve 

the greenhouse gas reduction goals articulated in this legislation. Now is the time 

to seize upon the opportunity to craft incentives and develop resources that will enable local governments to find effective solutions to VMT growth. 

There are a number of options for providing such incentives to the transportation 

sector beyond the price signal sent by a cap on refiners in this bill. These include 

direct allocation of allowances to localities and regions engaged in policies to reduce 

VMT such as making significant investment in public transit, or use of auction revenues through a competitive process to communities that reduce VMT. Such use of 

allowances or revenues to reduce VMT will also make it easier for refiners to meet 

their GHG target. 

The research shows that if one solo commuter of a household switches from driving to transit for their commute to work, he or she can reduce their household carbon footprint by 10 percent, the equivalent of more than 4,800 pounds of CO2 for 

an average commute each year. If the same commuter rides transit to work and 

their household can give up a second car, a family can reduce its total carbon emissions up to 30 percent. 

According to a new report, compact development alone could reduce VMT by 20– 

40% as compared to typical suburban development.2 Shifting 60 percent of new 

growth to compact patterns could reduce transportation CO2 emissions by 85 

MMTCO2 in 2030. This is equivalent to the savings from a 28 percent increase in 

CAFE standards (to 32 mpg) or half the GHG savings from the Senate’s 35 mpg 

CAFE bill. These savings do not include strategic investments in transit or pricing 

policies such as congestion pricing, pay-as-you-drive insurance, commute trip reduction and alternative work schedule programs, which could potentially double these 

savings. 

In King County we are either doing or promoting each of those local policy options. And we have gone even one step further, requiring through our State Envi-
391 

ronmental Policy Act that new projects being built where the County is the local 

government authority account for greenhouse gas emissions prior to being approved. 

Rewarding local governments engaged in comprehensive approaches that address all 

sectors of the economy and all three legs of the transportation stool will be an essential element in the national fight against global warming. 

Madam Chairman, Senator Inhofe, and members of the Committee, thank you 

again for the opportunity to speak with you today and play a role in advocating for 

meaningful federal government action on global warming. We look forward to working with you in the future on the important issue of VMT and climate change. 

RESPONSES BY RON SIMS TO ADDITIONAL QUESTIONS FROM SENATOR VITTER

Question 1. You suggest that an economy-wide approach to emissions reductions 

is preferable and more efficient because it provides flexibility and diversity of reduction sources. If this is true, why stop at just domestic industries? This bill does very 

little in terms of reducing global emissions. Would it not be even more efficient to 

have emission sources from all nations on the table? 

Response. No, this domestic economy-wide bill positions the United States to have 

a significant impact on greenhouse gas concentrations in our atmosphere. Furthermore, it is not dependent on but remains consistent with development of a future 

international treaty to reduce global greenhouse gas emissions, which I strongly 

support. 

The United States has an unrivaled capacity to innovate and invest in new emissions reduction strategies at the local and regional level, with important co-benefits. 

In King County, for instance, our research has shown that compact development not 

only reduces our greenhouse gas emissions but also improves our air quality and 

public health, by making our communities more appealing for alternative transportation choices, such as walking, biking and riding public transit. Other local and regional strategies to reduce vehicle miles traveled (e.g., congestion pricing, pay-asyou-drive insurance, commute trip reduction and alternative work schedule programs) are also very important to reducing greenhouse gas emissions, increasing 

our workforce productivity, and improving our public health. These strategies are 

best recognized and rewarded by a domestic, economy-wide approach. 

In turn, we leaders of large urban regions such as King County can position our 

business communities and regions to be important world exporters of related green 

expertise, in areas ranging from walkable community design and transit-oriented 

development to clean technologies and fuels. 

Economy-wide national climate policy should recognize and reward local and regional strategies to expand policies such as these, which we already know to be effective in reducing greenhouse gas emissions. 

Question 2. Considering that this bill will have virtually zero impact on greenhouse gas concentrations in our atmosphere, doesn’t working within the UN Framework Convention on Climate Change make more sense and allow the U.S. to compete on a level playing field rather than taking unilateral action on a emissions regime that may or may not comport with future international programs? 

Response. No, this bill positions the United States to have significant impact on 

greenhouse gas concentrations in our atmosphere. Please see response to Q1. 

Question 3. This bill does not include providing any allowances to refiners for the 

petroleum transport ration fuels that they produce. How would refiners comply with 

this bill in 2012 to cover the greenhouse gas emissions from petroleum transportation fuels? 

Response. The Executive prefers to defer to those panelists with expertise in this 

area. 

Question 4. This bill explicitly does not preclude or abrogate the right of a state 

to adopt or enforce a standard, cap, limitation or prohibition relating to greenhouse 

gas emissions. We could end up with a national cap-and-trade program and different 

state controls. Shouldn’t states be preempted to prevent duplicative and possibly 

conflicting environmental controls? 

No, state and local governments should not be pre-empted on a de facto basis. If 

federal policies are more stringent than state and local requirements, a good argument could be made for preemption, as long as such a measure is consistent with 

science, legislative and legal history. 
392 

Senator BOXER. Thank you very much, County Executive Sims, 

for your statement. We thank you for coming such a big distance 

to help us shed some light on the bill. Thank you. 

Our next speaker is Kevin Book, Senior Analyst and Vice President, Friedman Billings Ramsey and Company, Inc. 

STATEMENT OF KEVIN BOOK, SENIOR ANALYST AND VICE 

PRESIDENT, FRIEDMAN BILLINGS RAMSEY AND COMPANY, 

INC. 

Mr. BOOK. Thank you, Madam Chairman, Ranking Member 

Inhofe and distinguished members of this Committee for the opportunity to contribute to the vital work you are doing to safeguard 

climate security. 

The views I will present today are my own and do not necessarily 

represent those of my employer. My name is Kevin Book, I am an 

energy research analyst for Investment Bank, FPR Capital Markets Corporation, which is headquartered in Arlington, Virginia. I 

serve the Wall Street institutional investors who manage the assets of individuals, private trusts, charitable organizations, pension 

funds and other capital sources very likely to play central roles in 

the implementation of the national policy goals that will be established by this Committee. I consider it an honor to have the privilege of service to this whole Committee, to offer my observations 

about this matter. 

My wife this morning said, if you really want to be of service, try 

to translate this time from economist to English. So my best effort 

follows. 

My overarching point is the need to balance action with caution. 

The world is indeed looking to this Nation and all developed economies for leadership. All year, even as oil prices have risen and the 

U.S. dollar has fallen, the leaders of developed economies have debated, as this Committee has, how to apportion responsibility for 

greenhouse gas emissions. 

By contrast, the leaders of emerging economies have continued to 

comb the world in a no-holds barred pursuit of the cheapest fossil 

energy sources, primarily oil and coal. This is because billions of 

impoverished men and women world-wide regard hydrocarbon fuels 

as the shortest path to basic amenities. For fast-growing populations in China, India and in the oil-producing States of the Middle East, the freedom to make environmental responsibility a national priority remains a far-distant dream. Thus, our Nation must 

demonstrate not only a commitment to environmental stewardship 

but also that needed controls retain sound economic fundamentals 

before the developing world would be likely to consider enacting 

controls of its own. That is the core challenge, wealth, energy demand and environmental externalities all tend to rise and fall together. At the extreme, nothing cleans the air like an economic 

slowdown. 

Inventions born of necessity may be ingenious, but it is far better 

to have them born of rich capital markets and a stable society. Basically, innovation and profligacy often live in the same zip code, 

if not under the same roof. Better technologies will require more 

wealth for investment, not less. 
393 

The irony here, the fossil energy linked to climate change also 

fuels economic growth, social freedom and the engines of Western 

innovation. Thus a small first step is less likely to be a mis-step. 

Let me give you a couple of recent economic data points. Home 

loan defaults during the third quarter of 2007 rose to a decade high 

of approximately 0.85 percent of residential mortgage debt. This 

same third quarter was the epicenter of sub-prime mortgage rate 

increase. Further defaults may lie ahead in the not too distant future, particularly given high energy prices. 

As my written testimony discusses at length, Sates with lower 

average incomes tend to also have coal-fired power and to drive 

longer distances. Nobody wants to see this happen, but consumption patterns underlying the emissions from some sectors of our 

economy may potentially shift during the next six months because 

of these economic factors. 

In light of that, a sequenced approach may actually give the U.S. 

economy a chance to respond before introducing systemic risk. I am 

saying essentially, change one thing, watch the results and if it is 

okay, keep going. I am not saying pick one thing over any other, 

I am just offering that as a suggestion. 

As I suggested during my February 2007 testimony, the power 

generation sector is already regulated under the acid rain program, 

which is very successful and could be a starting point. But markets, as they say, have their ups and downs. Taxation may be a 

more efficient and flexible way to set a carbon price. Because even 

though markets are efficient distribution pricing mechanisms for 

commerce, they can inject unanticipated volatility into regulation. 

Because scarcity can distort price when commercial buyers, whose 

businesses cannot operate without the commodity in question, are 

forced to bid against non-commercial traders who generate profits, 

as they should, through scarcity and who may be reluctant to sell. 

Price can move down in this context as fast as it moves up. But 

volatility can make it difficult for commercial buyers to efficiently 

deploy capital. 

So to ensure stability, commercial buyers often purchase options 

to buy or sell in the future. But options do not reduce CO2 levels 

in the atmosphere. And the costs of hedging are not available necessarily for investment in cleaner energy. Neither are the frictional 

transaction costs associated with markets, which includes service 

fees associated with brokerage and the fees of moving in and out 

of a proxy currency like a carbon allowance. Again, in sort of the 

English my wife asked for, the more complicated a system becomes, 

the more you are going to need skilled intermediaries to get you 

through it. The more you spend on commissions and payments to 

those intermediaries, the less you are going to have available to 

spend on new technologies. 

One final point. However one sets price, visibility and direct accountability into how the proceeds are spent is vital. The Crude Oil 

Windfall Profits Tax Act and the Synthetic Fuels Corporation it 

was intended to finance might have survived longer had Congress 

stuck with President Carter’s original design, which was the allocation of proceeds to a separate account devoted to energy security 

investments. At the end of this process, the retention of the separate accounts and the laudable reporting requirements already es-
394 

tablished in the America’s Climate Security Act of 2007 are likely 

to go further toward the program goals than putting the money 

into the general fund. 

Madam Chairman, that concludes my prepared testimony. I look 

forward to answering any questions you might have. 

[The prepared statement of Mr. Book follows:] 

STATEMENT OF KEVIN BOOK, SENIOR VICE PRESIDENT, ENERGY POLICY, OIL & 

ALTERNATIVE ENERGY FBR CAPITAL MARKETS CORPORATION

Thank you, Madam Chairman, Ranking Member Inhofe and distinguished members of this Committee, for the opportunity to contribute to the vital work you are 

doing to safeguard climate security. The views I will present today are my own, and 

do not necessarily represent those of my employer. 

WALL STREET IS WATCHING

As an energy research analyst for an investment bank, I serve the Wall Street 

institutional investors who manage the assets of individuals, private trusts, charitable organizations, pension funds and other capital sources likely to play essential 

roles in the implementation of national policy goals that will be established by this 

Committee. 

This year, from my perspective, the stewards of U.S. and international financial 

assets appear to be taking an unprecedented interest in how you, the stewards of 

U.S. environmental policy, will structure a national regulatory framework to reduce 

anthropogenic greenhouse gas (GHG) emissions. Given the diverse set of views expressed by the Members of this Committee, I doubt any of you will be surprised that 

I have encountered a broad range of investor perspectives. Some investors have 

shared their optimism for a cleaner, more efficient energy future and, quite frankly, 

their curiosity about how the America’s Climate Security Act of 2007 (ACSA) and 

similar legislation might allow them to participate in capital formation and value 

creation. Others have shared their concerns that efforts to internalize the cost of 

GHG emissions could seriously disrupt one or several economic sectors, particularly 

power generation, heavy industry and fossil energy production. In essence, investors 

at both ideological extremes are wrestling with the policy challenge that has long 

confronted governments hoping to attenuate the effects of global climate change: 

wealth, energy demand and externalities all tend to rise and fall together. 

Three energy crises, two recessions and one very successful Clean Air Act during 

the last four decades of U.S. history suggest that, while well-considered policies may 

motivate stakeholders to diminish the externalities associated with their energy use 

and increase the energy efficiency of their domestic output, nothing cleans the air 

better or faster than an economic slowdown. Of course, every Congress during the 

decade since the Byrd-Hagel Resolution has rightly rejected economic contraction as 

a climate policy lever, because the short-term social costs and political consequences 

are obvious. While slowdowns caused by natural disasters and other external events 

may soon be followed by recoveries, an imprecise rebalancing of the economy-energyenvironment relationship could potentially deter necessary investment and lead to 

longer-lasting economic underperformance. Because it is not just Wall Street, but 

the entire world, that is watching U.S. steps towards climate change regulation, a 

misstep could bring undesirable global consequences. 

Inventions born of necessity may be ingenious, but they are likely to be undercapitalized. By contrast, innovation and profligacy often live in the same zip code, 

if not necessarily under the same roof. New technologies to address global climate 

change are going to require more investment dollars, not less. Stable economies encourage wealthy enterprises to invest in research and development towards new 

transformational technologies, as well as evolutionary improvements to existing 

processes. This may explain past U.S. leadership in energy and environmental technologies: not just because laws established new pollution controls, but also because, 

once rules were in place, the nation’s rare, if not unique, combination of efficient 

markets, open society and economic prowess enabled new pollution control technologies to emerge from corporate laboratories and basement inventors alike. 

It is possible that plain old Yankee ingenuity might really be a lucky accident, 

but I believe it comes from a synergy among related and supporting industries that 

form what Harvard business scholar Michael Porter would call our ‘‘national advantage’’. This means that policies that raise the operating costs of industrial 

innovators enough to cause a recession could deprive the U.S. and the world of emis-
395 

sions control technologies made possible, ironically, by the same wealth and stability 

that inure energy end-users to the price signals that encourage conservation. 

THE PRICE-SENSITIVE CONSUMER AND PRICE SIGNALS

Relying solely on scientific data reported here through U.S. and international governmental channels, and having no academic background in the natural sciences 

that would lead me to reach any other conclusion, I am inclined to share the consensus view that U.S. policymakers should act quickly to lead the world towards an 

effective strategy to minimize the long-term risks associated with global climate 

change. 

I would submit, however, that recent economic data associated with the collapse 

of the sub-prime mortgage sector may reasonably raise the question whether the 

present moment in time calls for an economy-wide system of regulation, given that 

the consumption patterns underlying the emissions from some sectors of our economy may potentially shift during the next 6-12 months. Home loan defaults rose 

during the third quarter of 2007 to a decade high of approximately 0.85% of residential mortgage debt. The third quarter also represented the epicenter of ‘‘resets’’ (interest rate increases) for sub-prime adjustable rate mortgages, suggesting that further defaults may lie ahead in the not-too-distant future, particularly given the lagging, but significant price increases associated with record nominal high oil prices. 

If there is to be a shift in driving behavior and aggregate energy use patterns, 

it might be easiest to see on the road. According to a study released in October 2006 

by the Institute for Transportation Studies at the University of California, Davis, 

short-run price elasticity of gasoline demand was an order of magnitude less during 

the 2001–2006 timeframe (¥0.034 to ¥0.077) than it was during the 1975–1980 

timeframe (¥0.21 ¥0.34). Many of my clients and colleagues have hypothesized 

that this difference reflects the newfound wealth many urban drivers attained by 

refinancing their homes, as well as a new inflexibility derived from home ownership 

in suburbs and rural areas. In effect, one major reason why U.S. households did not 

demonstrate price-responsiveness in recent years may have been that they were 

‘‘driving their homes’’. 

The possibility that consumption behaviors could change in response to fiscal 

strictures underscores the precariousness of the current economic situation, particularly as consumer responsiveness to price signals occurs at the margin. That implies 

that any effort to trigger conservation or environmental stewardship, even if price 

hikes are mediated through larger enterprises before they reach consumers, will affect the poorest Americans first. The regressive effect may be enhanced by the fact 

that, consumers at the lowest income levels may have less working capital with 

which to avail themselves of conservation behaviors like efficiency improvements to 

their homes and purchasing higher fuel economy cars. 

The distribution of income and natural resources throughout the United States 

has set up regional economic advantages for certain power generation fuels, a fact 

reinforced by the graphic in Figure 1, below, which depicts the primary power generation fuel on a statewide average basis. 
396 

It is no secret that coal-fired generation enables lower average power generation 

prices, but it may not be clear how closely correlated the primary generation fuel 

is to average income distribution. Table 1 presents the ten highest and ten lowest 

statewide average levels of disposable personal income (DPI), as estimated by the 

Bureau of Economic Advisors, as well as those states’ primary power generation 

fuels and average power prices using July 2007 (latest) EIA data. Because coal-fired 

generation, on a national average basis, is approximately twice as carbon-inefficient 

per kilowatt-hour (kWh) generated, at any carbon price whatsoever, statewide averages imply significantly disparate consumer wealth effects. Eight out of the ten 

poorest states on an average DPI basis rely primarily on coal-fired power. Eight out 

of the ten richest states on an average DPI basis rely primarily on carbon-efficient 

nuclear power or natural gas. The practical effect of a significant carbon surcharge 

to coal-fired generation would probably provoke a fairly dramatic shift to natural 

gas-fired generation where it is available, as this Committee has heard many times 

during the year. Thus, even without a surcharge imposed directly on coal-fired 

power, the poorest states would be likely to face higher average residential power 

prices one way or another. 
397 

Table 2 addresses transportation fuels needs. Examining the vehicle miles traveled per disposable personal income dollar standardizes consumer wealth exposure 

to existing driving behaviors. Applying a standard fuel economy (mathematically, 

any number will do, but I used a national light-duty average of 20.5 miles per gallon 

for this calculation) and latest available gasoline prices creates a percentage of average disposable income allocated to driving behaviors at current gasoline prices. Last, 

Table 2 incorporates a pro-rata surcharge of $0.34/gallon for carbon, which reflects 

the $39 per metric ton carbon market premium when the European Emissions Trading Scheme peaked in April 2006, adjusted for currency effects at the time, applied 

to the gasoline-powered fleet on a national average basis. This presents potentially 

stark regional effects under an economy-wide cap-and-trade scheme. 
398 

These data enhance my already profound appreciation for the enormity and complexity of the task ahead for this Committee and the whole U.S. Congress in structuring an economy-wide GHG emissions reduction strategy. These also suggest that 

the most prudent approach may be to outline a phased strategy to regulate emissions from the whole economy on a sector-by-sector, sequential basis. 

THE UNITED STATES AS A GLOBAL LEADER

As I suggested during my February 2007 testimony before this Committee, the 

power generation sector could represent a natural starting point for sequenced controls as it is already regulated under the existing framework of the Acid Rain program. In light of uncertain economic conditions, a sequenced approach might also 

give the U.S. economy a chance to respond to changing price dynamics across regions and industrial sectors before injecting further systemic risk. This could be an 

alternative to the two-year economic review anticipated by ACSA. A rush out of the 

gate to sudden economic consequences could potentially undermine the Act’s stated 

goal of providing leadership to the developing world. 

After all, there is a natural reason why the U.S. and the developed economies of 

the world must lead the global climate change debate: developing economies have 

explicitly refused to pay. In fact, the energy use patterns of the developing world 

make it less likely that the Kyoto Protocol will result in much more than a wealth 

transfer out of OECD economies, and certainly not an abatement of global climate 

change. All year, even as oil prices have risen and the U.S. dollar has fallen, the 

leaders of developed economies have debated how to apportion responsibility for 

GHG emissions across industrial sectors and national boundaries. By contrast, the 

leaders of emerging economies have continued to comb the world in a no-holdsbarred pursuit of the cheapest fossil energy sources, primarily oil and coal. Wealthy, 

oil-consuming nations turn to environmental stewardship to incrementally improve 

an already-high quality of life, while billions of impoverished men and women 

worldwide regard hydrocarbon fuels as the shortest path to basic amenities. For the 

fast-growing populations of China and India, but also the oil producing states of the 
399 

Middle East, the freedom to make environmental responsibility a national priority 

remains a far-distant dream. 

The bottom line is that the U.S. must be able to demonstrate not only its commitment to environmental stewardship, but its ability to undertake needed controls 

while retaining sound economic fundamentals before the developing world will be 

likely to consider enacting controls of its own. 

THE VICISSITUDES OF MARKETS

It is in this context that I would suggest that setting carbon price through taxation rather than market pricing may improve prospects that U.S. climate security 

policies will be both effective and commercially viable. While markets tend to be efficient distribution and pricing mechanisms for commerce, they also possess characteristics that can inject unanticipated volatility into regulation, particularly when 

the governance structure encourages noncommercial traders to enter the market to 

provide necessary liquidity. 

The challenges arrive under conditions of scarcity, a predicament best exemplified 

by the current price of crude oil. No fundamental analysis or rational assessment 

of currency and risk effects can account for $95 crude, and my models suggest an 

upper-bound risk and currency-effect-adjusted price should be no higher than $80 

per barrel, particularly with troubling economic indicators overhanging demand. But 

refineries are still buying oil at a premium due to market dynamics, not fundamentals. Commodity markets frequently distort price under conditions of scarcity because commercial buyers, whose businesses cannot operate without the commodity 

in question, are forced to bid up for it at the same time that noncommercial traders, 

who generate profits through scarcity, may be reluctant to sell. Ultimately these 

pricing dynamics normalize, sometimes with startling downward pressure on price, 

but the volatility can make it difficult for commercial buyers to efficiently deploy 

investment capital. Over the long term, all businesses can respond to price changes, 

but short-term price volatility ultimately forces commercial buyers to look for ways 

to ensure price stability, usually by purchasing the option to buy or sell at a range 

of prices in the future. 

Commercial enterprises pay for these options as a cost of doing business, but the 

costs of managing potentially volatile carbon prices might well undermine the public 

interest goal of reducing emissions at the lowest economic cost to regulated entities 

and ratepayers. An emissions option is not an emissions reduction and it provides 

revenue to its seller whether or not the buyer exercises it; unlike an allowance or 

an offset, the option itself does nothing to reduce the carbon dioxide levels in the 

Earth’s atmosphere. Nor can emitters devote the cost of hedging to needed investment in next-generation technologies. Even when emitters can achieve financial 

gains through hedging activities, they still bear the ‘‘frictional’’ costs of commissions 

and service fees, and businesses that can generate returns on capital through financial engineering are unlikely to undertake investments in sustainable energy production. 

The challenges facing the Kyoto Protocol, where 65% of today’s global GHG emissions are not governed by mandatory caps, derive in part from its market pricing 

architecture. The use of emissions credits as a proxy currency requires emitters who 

would be governed by the caps to value that currency, which is not the case for 

China, India, Australia or the United States. As unappealing as carbon taxation 

may seem from a political standpoint, one of its greatest virtues may stem from the 

fact that taxes can be assessed in any reference currency or exchange-adjusted foreign denomination at the moment of any intra- or international commercial transaction. Governments may also tailor tax regimes to respond to economic conditions 

faster than they can retire allowances, offsets or any carbon proxy currency. 

SEPARATE ACCOUNTING MAY IMPROVE PROGRAM DURABILITY

This is not to say that carbon taxation does not also present risks. For example, 

it might be best to avoid any structure that permits climate-related taxation without 

accountability for financial and environmental yield, and ACSA’s performance reporting structure certainly addresses part of this requirement. Accountability for the 

use of proceeds may also help to ensure optimal outcomes. 

The history of the Crude Oil Windfall Profits Tax Act and the Synthetic Fuels 

Corporation it was intended to finance may have continued far longer, or been subject to early modification that could have improved the financial durability of the 

program, had Congress stuck with President Carter’s original design: the allocation 

of proceeds to a separate account devoted to energy security investments. Whether 

the pricing mechanism for U.S. carbon standards operates through full auction, 

phased auction or direct taxation, it may be worthwhile to consider structuring a 
400 

set-aside account in addition to the laudable reporting requirements already established. 

Madam Chairman, this concludes my prepared testimony. I will look forward to 

answering any questions you or other Committee members may have. 

RESPONSES BY KEVIN BOOK TO ADDITIONAL QUESTIONS FROM SENATOR INHOFE

Question 1. What do you think would be the impact on the economy of the 

Lieberman-Warner bill after it is implemented, say in 2014, if the U.S. economy 

dives into a recession? Would it worsen a recession? 

Response. Senator Inhofe, even since the testimony I offered before the Committee, several potential signals of economic hardship have continued to surface. 

The November 26, 2007 Wall Street Journal suggests that Citigroup, one of the nation’s leading financial institutions, may face as much as $41 billion in subprime 

mortgage exposure. Reverberations have shown up within financial sectors outside 

of home lending, including bond insurance and student loans. 

As I stated in my testimony, economic growth is proportional to environmental 

consequence. Prosperous economies emit more greenhouse (and other) gases, although they tend to demonstrate diminishing marginal emissions per unit of economic growth, and OECD economies are far more energy efficient than developing 

nations. On the other hand, any mechanism that assigns a cost to currently costless 

energy-related externalities is likely to slow economic growth if the regulated economy does not have adequate time to retool. America’s energy and industrial infrastructure was, in many cases, built to last: useful capital life often exceeds 30 or 

even 50 years. While this has proven to be a source of enduring competitive advantage, it also creates risk when the rules of the game change. 

One consequence of any economy-wide greenhouse gas regulation could be factor 

cost inflation at every link of the U.S. industrial value chain. In general, the most 

GHG-emitting industries are also the most fundamental to economic recovery (because fossil fuels produce output at lowest economic cost), most notably manufacturing, homebuilding and construction. If the economy were in a sustained recession, the traditional engines of economic growth—consumer spending and business 

investment—could be further constrained by small, but potentially cumulative and 

disruptive surcharges on all economic activity. Without mechanisms to alleviate 

these financial risks, any mandatory limit on emissions would be likely to prolong 

a recession and could even discourage the necessary research and development 

spending that might yield new, higher-efficiency energy production technologies and 

innovative climate change mitigation practices. 

Question 2. If we moved to full auction as a way to allocate allowances, is that 

approach closer to straightforward taxation than the bill as currently written? 

Response. Auctioning emissions allowances on an annual basis to all industrial 

and non-commercial bidders would eliminate the perceptions of ‘‘unfairness’’ or 

‘‘windfall gains’’ associated with government allocations to one or several industrial 

sectors, but the price of carbon set by an open-ended auction process in the absence 

of any control mechanism could easily result in prices that far exceed the targets 

that could be established under a well-defined system of taxation. This could have 

the effect of penalizing fuels and processes that are (a) the most carbon-inefficient 

per unit of output; (b) the least able to switch quickly or to source at effective cost 

the working capital necessary to effectuate change. A likely result would be a premium for more highly carbon-efficient or more readily adaptable fuels or processes, 

but no conventional or alternative fuels are sufficient to sustain even a portion of 

American primary energy demand currently satisfied by coal and oil. This raises the 

specter of uncontrolled fuel switching that could further provoke price inflation. A 

tax would designate a specific surcharge for a given fuel or process, and government-defined deductions could minimize the transitional costs to less adaptable industrial sectors or processes characterized by higher capital intensity. 

Question 3. Would you contrast some of the economic impact differences between 

a tax-based program and S. 2191, a cap-and-trade program without a fixed safety 

valve mechanism? 

Response. The idea of a ‘‘safety valve’’ price for GHG emissions offers price certainty for emitters, but EIA forecasts of likely behavior under a market-based carbon pricing with a designated maximum price suggest that most emitters will opt 

to pay the safety valve price in the long run. This raises a few obvious but important points. 
401 

First, to extend the metaphor, if an industrial process perpetually triggers its 

safety valve, it suggests that the process itself may be fundamentally unsafe. There 

is nothing valve-like about a valve that is always on; it is better known as a conduit. 

Second, creating a safety valve at a price point that exceeds emitters’ economic 

tolerances offers no safety, because it will be out of reach. Conversely, setting the 

price below likely market-clearing prices for carbon undermines the purported value 

of establishing a market as a price-setting mechanism. Regulatory efficiency may be 

improved by choosing a single, transparent pricing mechanism rather than trying 

to circumscribe a market or add flexibility to a tax. 

Third, the idea of creating an entity charged with carbon market oversight responsibility similar to the monetary policy role played by the Federal Reserve Board 

of Governors creates a new source of bias, namely the risk that emitters may see 

through an overly-transparent carbon policy and ignore price signals in anticipation 

of future events or, alternatively, make inefficient economic choices as a result of 

misreading a more inscrutable, Greenspan-like ‘‘Carbon Fed.’’ 

In my view, the best-cost, most transparent implementation would make use of 

the existing taxation (and tax rebating) powers of the Federal Government. 

RESPONSES BY KEVIN BOOK TO ADDITIONAL QUESTIONS FROM SENATOR VITTER

Question 1. I share your conclusion that this bill will cause a massive demand for 

natural gas in the United States. My state is responsible for providing over 20 percent of the natural gas we consume in America. You would think that my representation of a top natural gas producing state would be supportive of increasing demand of a ‘‘state product’’. In most cases I would; however, in the case of natural 

gas we are already in a supply crunch. Do you have an assessment of natural gas 

prices resulting from this bill? 

Response. Senator Vitter, I do not have forward-looking gas price projections 

based on the specifics of S. 2191, but the experience of the sulfur dioxide credit market in the wake of Hurricane Katrina illustrates how fuel-based climate change surcharges could motivate flexible electric generators to choose natural gas as the marginal source of power until the price of natural gas rises to set a new ‘‘floor’’ on the 

cost of generation. After Katrina struck, sulfur credits rose on speculation that impaired natural gas production in the Gulf of Mexico would drive generators to coal; 

despite the abundance of spare import capacity for LNG and the strong price signals 

generated by the rise in natural gas prices, natural gas could not come to our shores 

or your coastline overnight, and the entire ‘‘Btu complex’’ faced upward pressure 

until gas supplies normalized. 

The nation’s increasing reliance on natural gas as a home heating fuel, industrial 

feedstock and marginal power generation source diminishes the flexibility of current 

energy use patterns. Ultimately, this forces tough questions regarding natural gas 

access and the build-out of re-gasification facilities on the U.S. coastline. Imposing 

any surcharge on coal at the same time as natural gas, as S. 2191 would do, would 

likely raise the floor price for the entire Btu complex in much the same fashion, 

crowding out the most price sensitive industrial and residential consumers. 

Question 2. You cite the regressive nature of this bill in your testimony—the poorest Americans will be the first hit and the hardest hit with the compliance cost of 

the proposed bill. Have you done an analysis on environmental stewardship when 

families and companies are forced into tighter margins? For example, would this 

cause them to be better or worse stewards of the environment? 

Response. The Organization for Economic Cooperation and Development (OECD) 

reported in September 2007 on the per capita environmental expenditures by emerging economies within the former Soviet Union and Eastern Europe as compared to 

their wealthier European and former Soviet neighbors. OECD’s data showed that 

wealthier economies devoted between 1.2% and 1.6% of GDP to environmental 

funds, more than twice the spending exhibited by less-developed, neighboring states. 

At the core of this macroeconomic phenomenon lies the same logic that defines 

household discretionary spending habits: mandatory outlays towards national security and economic stability are likely to take precedence over spending on environmental stewardship. Moreover, cleaner infrastructure comes at additional cost. In 

the consumer sector, better-performing goods often derive their efficiency from better design, longer product cycles and higher development costs that require firms 

to recapture greater outlays through premium pricing. An easy example is the ‘‘rich 

man’s rebate’’ for well-engineered gas-electric hybrid automobiles. The cost of engineering cleaner cars requires automakers to demand higher sticker prices to justify 

the magnitude and risk of greater spending, but ultimately the high price sets a 

barrier to entry that locks out the price-sensitive consumers who would derive the 
402 

greatest proportional economic benefits from owning a hybrid, even with federal 

subsidies. 

Senator BOXER. Thank you very much, sir. We really appreciate 

it. 

Our last speaker is Christopher Berendt, Director, Environmental Markets and Policy, Pace Global Energy Services. Welcome, 

sir. 

STATEMENT OF CHRISTOPHER BERENDT, DIRECTOR OF 

ENVIRONMENTAL MARKETS AND POLICY, PACE 

Mr. BERENDT. Good morning. On behalf of Pace, a global energy 

and carbon management consultancy, I wish to thank Madam 

Chair, the Ranking Member and the Committee for this opportunity to testify. 

The Nation’s need for new power generation is colliding with the 

uncertainty created by the Supreme Court’s decision in Massachusetts v. EPA. The need for an intelligent, comprehensive national 

energy policy has never been greater. Without a clear Federal response to the global climate change issue, the United States is now 

running headlong into decreased energy security, higher prices for 

the U.S. consumer and more CO2 emissions on a global basis. 

Under the Supreme Court’s decision, CO2 is now deemed a pollutant, thereby creating a regulatory void all the way down to the 

local level. The impact of this void was evidenced this year by the 

TXU agreement to cancel coal plant investment, and more recently 

in Kansas, where for the first time CO2 emissions were cited as the 

reason for rejecting an air permit, bringing an end to the Holcomb 

plant expansion. 

Our clients are increasingly telling us that they cannot build any 

coal plants, no matter how clean the technology, and that the only 

generation options in the near term are renewables and natural 

gas, forsaking our most abundant domestic energy resource. While 

renewables will be an important part of a diverse portfolio approach to generation, alone they will not be able to meet the 

120,000 megawatts of incremental generation capacity required 

over the next ten years. Further, there is no clear road map for increased nuclear generation within the same time period. 

Therefore, should this carbon uncertainty persist, the near-term 

options for electricity generation in the United States will likely remain highly reliant on natural gas. We at Pace have estimated that 

if natural gas-fired generation is tapped to fill the entire gap left 

by coal, our Nation will require substantial incremental natural 

gas supply, about 6 percent above current projections by 2017. Contrast that the last six years when gas demand was flat and prices 

nearly tripled. 

Further, the United States has become a natural gas importer in 

recent years. While most of these imports used to come from Canada, future imports of liquified natural gas are expected to come 

from less stable overseas supplies. Pace expects that an increase in 

natural gas demand of 6 percent by 2017 could increase imports by 

33 percent. That increase will come from foreign sources of LNG. 

This would expose our economy to greater prospects of natural gas 

price volatility and less certainty of supply. 
403 

With these concerns in mind, I would like to offer the following 

comments about carbon market mechanisms. Should this Committee choose to enact a market mechanism to clarify the carbon 

price signal, it is important to ensure that U.S. carbon markets will 

have the functionality and liquidity to establish a forward curve for 

carbon and encourage investments in new low-carbon technologies, 

especially clean coal, with carbon capture and sequestration. 

Stimulating the creation of a vibrant offset market is also important. Innovation in carbon offsets may be one of the cost-effective 

means of making a real difference, especially if the non-covered 

and covered entities that deploy select low-carbon technologies are 

allowed to generate offsets. The creation of a consolidated national 

carbon market is a must to avoid State by State vagaries. 

The present new build environment does not have clear carbon 

price signals nor the incentives required to develop high capital 

cost clean energy technologies. Until these issues are dealt with, 

new technologies will not be able to be deployed and natural gas 

imports will be required to meet a large share with 120,000 

megawatts of new generating capacity needed over the next ten 

years. This could negatively impact our energy security and the economics of power generation for the U.S. consumer. 

The Supreme Court in its decision has created a situation of 

stark uncertainty for the U.S. power generators and a likely overreliance on natural gas. Should this Committee chose to implement 

market-based mechanisms, the resulting carbon price signals must 

be clear and provide long-term price transparency so that we can 

retain the U.S. tradition of advanced technology development and 

adoption. 

Thank you. 

[The prepared statement of Mr. Berendt follows:] 

STATEMENT OF CHRISTOPHER BERENDT, DIRECTOR OF ENVIRONMENTAL MARKETS AND

POLICY, PACE

Good morning, my name is Christopher Berendt. I am the Director of Environmental Markets & Policy for Pace, which is a global energy & carbon management 

consulting firm. Pace has experience in all types of energy throughout the entire energy value chain from exploration, production & generation, to the transmission and 

distribution to the individual U.S. energy consumer. Pace’s clients include energy 

companies, electric utilities, financial institutions, energy project developers, and energy-intensive industrial companies. 

My company and I appreciate the opportunity to come before this committee to 

provide our perspectives and recommendations regarding this important environmental and economic legislation—America’s Climate Security Act of 2007 (S. 2191). 

The Nation’s need for new power generation is colliding with the uncertainty created by the Supreme Court’s decision in Mass v. EPA. Without a clear federal response to the global climate change issue the U.S. is now running headlong into decreased energy security, higher prices for the U.S. consumer, and more carbon dioxide, CO2, emissions on a global basis. 

Under the Supreme Court’s April decision, CO2 is now deemed a ‘‘pollutant’’ by 

the highest court in the land, thereby creating a regulatory void all the way down 

to the local level. The impact of this void is evidenced this year by the TXU agreement to cancel coal plant investment and more recently in Kansas where for the 

first time CO2 emissions were cited as the reason for rejecting an air permit bringing an end to the Holcomb plant expansion. 

Our clients increasingly advise us that they cannot build any coal plants, no matter how clean the technology, and that the only generation options in the near-term 

are renewables and natural gas. 

While renewables will be an important part of a diverse portfolio approach to generation, alone, they will not be able to meet the 120,000 MW of incremental generation capacity needed over the next 10 years, even under the most optimistic expecta-
404 

tions. Further, there is no clear roadmap for increased nuclear generation within 

this same time period. 

Therefore, should this carbon uncertainty persist, the near-term options for electricity generation in the U.S. will likely be highly reliant on natural gas. We at Pace 

have estimated that if natural gas-fired generation is tapped to fill the entire gap 

left by coal—our nation will require substantial incremental natural gas supply, 

about 6% above current projections by 2017. 

The U.S. has become a natural gas importer in recent years. While most of these 

imports have come from Canada, growth in deliveries of liquefied natural gas, or 

LNG, in the past two years have become important. Pace expects that an increase 

in natural gas demand of 6% by 2017 could increase imports by 33% and that increase will come from foreign sources of LNG. This would expose our economy to 

the prospects of greater natural gas price volatility. 

With that in mind, I would like to offer the following comments about carbon market mechanisms. 

Should this Committee choose to enact a market mechanism to clarify the carbon 

price signal, it is important to ensure the U.S. carbon markets will have the 

functionality and liquidity to establish a forward curve for carbon and encourage the 

financial community to outlay capital for the development of new clean energy technologies. 

Stimulating the creation of a vibrant offset market is also important. Innovation 

in carbon offsets may be the most cost-effective means of making a real difference, 

especially if both non-covered and covered entities that deploy advanced low carbon 

technologies are allowed to generate offsets. Further, a healthy supply side market 

mechanism for carbon is also one of the best ways to control price. 

The creation of a consolidated national carbon market is a ‘‘must’’ such that generators are not forced to deal with state-by-state vagaries. A national market will 

provide a more efficient design versus balkanized efforts at the state and regional 

levels. 

The present new build environment does not have clear carbon price signals nor 

the incentives required to develop high capital cost, clean energy technologies. Until 

these issues are dealt with, new technologies will not be able to be deployed and 

natural gas imports will be required to meet a large share of the 120,000 MW of 

new generating capacity needed over the next ten years—this could negatively impact our energy security and the economics of power generation for the U.S. consumer. 

The Supreme Court decision has created a situation of stark uncertainty for U.S. 

power generators. We laud this Committee’s efforts to utilize market based mechanisms to ensure that the energy markets operate efficiently and we retain the U.S. 

tradition of advanced technology development & adoption. 

Thank you. 

Senator BOXER. Thank you very much, Mr. Berendt. And thank 

you to the entire panel. 

What I will do, because Senators Alexander and Klobuchar 

weren’t here, I am going to give you instead of five minutes seven 

minutes, so that you can do a little bit of your opening statement. 

Is that all right with both of you? 

Senator ALEXANDER. Thank you, Madam Chair. I really came to 

listen to the witnesses, but thank you very much. 

Senator BOXER. OK, we are done with the witnesses and we are 

on to the questions. 

I am going to start with you, Mr. Book, because I was an economics major and a stock broker. I think the advice of your wife 

vis-a`-vis turning economics language into English was very good 

and you did very well on that point. What I wanted to say is, I took 

away from your testimony some great encouragement for this bill. 

Because you said we need to balance, I wrote down action with 

caution. I hope you will take a look at the parts of the LiebermanWarner bill that really heard what you are saying. 

One thing is, we have these transitional free allowances allocated 

to emitters. So we don’t just say, you are on your own. That is one 

thing. 
405 

Secondly, the availability of domestic offsets. Thirdly, a Carbon 

Market Efficiency Board that Senator Warner really was very involved in crafting with some Democratic colleagues who are not on 

this Committee, interestingly, and Senator Lieberman thought this 

was an excellent idea and put it in the bill. They put it in the bill. 

That Carbon Market Efficiency Board is the caution part of your 

statement. Because they will be looking every year to see if this 

thing is working. And they are authorized to loosen a year’s cap by 

as much as 5 percent in the event of economic dislocation. And finally, we have constant look-backs by the National Academy of 

Sciences. 

So I really found your testimony to be very compelling. It underscored my support for this legislation. I think that we can in fact 

use some more caution and I think that we are working to make 

these look-backs even better. So I think that the words that you 

said today are very, very important. 

Mr. Krupp, in your testimony, you discuss how the LiebermanWarner bill has a system of carrots and sticks to encourage international involvement on addressing this issue through the protection of tropical forests and the provisions requiring nations that 

wish to export goods to the United States to hold allowances for 

their emissions. Would you also agree that as the largest historical 

emitter of greenhouse gases, when the United States takes action 

it will help spur other nations, including China and India? 

One of the things that really has surprised me coming from the 

opponents of this legislation and coming from the opponents of 

doing anything is their statement, China and India should go first. 

I have never seen America sit back and wait for China and India 

to do anything. We are the ones who set the pace. 

So because Senator Warner has come, think upon your answer. 

I am going to turn the floor over to Senator Warner for his statement, and then I am going to turn to Senator Lieberman and then 

we will get back to the questions. 

Senator WARNER. Madam Chairman, I am sorry to be a little 

late. We have another hearing of the Armed Services going on. 

I would like to just sequence in, following the distinguished 

Ranking Member perhaps, in my regular order. Thank you very 

much for the courtesy, though. 

Senator BOXER. Absolutely. Senator Lieberman, did you want to 

put an opening statement in? 

Senator LIEBERMAN. I thank you, Madam Chair, and apologize 

also. I am just going to put a statement in the record. I am sorry 

to be here late. I thank those on the panel, some of whom I have 

seen quite a lot before in this pursuit. I just want to thank Fred 

Krupp and Eileen Claussen for the really pioneering work they 

have done, not only intellectually, but tactically and strategically, 

dare I elevate the term and say even politically, to get us to where 

we are now, which is in reach of doing something constructive 

about global warming together. Thank you. 

[The prepared statement of Senator Lieberman follows:] 

STATEMENT OF HON. JOSEPH LIEBERMAN, U.S. SENATOR FROM THE

STATE OF CONNECTICUT

Thank you, Chairman Boxer. 
406 

I thought I might describe where we now appear to be in this process from my 

perspective. 

At the subcommittee business meeting on November 1, the second highest ranking Republican on this committee and the second highest ranking Democrat, each 

of whom hails from a coal-producing state, voted in favor of a mandatory, economywide, cap-and-trade climate bill. 

On Tuesday of this week, the Natural Resources Defense Council testified that 

the emissions reductions mandated by that bill are stringent enough to warrant a 

‘‘yes’’ vote from every member of this committee. 

If, on December 5, at least nine of the ten majority members of this committee 

join Senator Warner in voting in favor of the bill, then, for the first time in U.S. 

history, legislation mandating reductions in U.S. greenhouse gas emissions will be 

reported to the full Senate. 

We will have made history. We will have convinced any remaining doubters in 

the private sector that this legislation is coming, that it will be strong, and that 

they had better come to the table. We will have reassured the American public that 

this institution is capable of legislating on this surpassingly important topic. And 

we will have signaled to the rest of the world that the United States government 

is finally removing its head from the sand. 

So I believe that if, on December 5, at least nine of the ten majority members 

of this committee vote in favor of America’s Climate Security Act, it will be a tremendous accomplishment and victory for all of us who want to protect our children 

and grandchildren from growing up in a world diminished by global warming. 

I do not believe I need to describe the disappointment we will cause if we, the 

advocates of strong climate legislation, stumble in this committee and fail to report 

the bill to the floor. 

Of course this bill can be improved. If, at full committee business meeting on December 5, improvements can be made that would help earn the support of additional 

members of this committee—without jettisoning the support of any of the four members who already voted in favor of it on November 1—then by all means those 

changes should be made. But I will do everything in my power to ensure that we 

do not forfeit any of the ‘‘yes’’ votes that we won on November 1. 

Chairman Boxer, I know that you share my views in this regard. You have been 

tremendously effective in using your power as chairman to strengthen this bill even 

as you perform the delicate balancing function necessary to move big legislation 

through a committee. We would not have gotten this far without your expert, guiding hand. And I know that, with you sitting in that chair, we will succeed in this 

committee. 

Thank you, Chairman Boxer. 

Senator BOXER. Senator, thank you. So we will go back to the 

question, this whole notion of not doing anything until China and 

India act is something that I have always taken issue with as an 

American who has always seen America on the cutting edge of all 

these things, and as a Californian. 

So I wonder if you could respond. Do you think that when we act, 

it is going to help world-wide? 

Mr. KRUPP. Yes, Madam Chairman, I don’t think there is any 

question in my mind and from all the evidence that we have gathered, and we have been working in China now for 17 years, that 

our acting will inspire action by China, India and the other developing countries. This is the way it has always been on environmental policy. America has always gone first. In this case, we are 

behind every other developed nation with the exception of Australia. Every other developed nation has already done what you are 

deliberating about doing today. 

As a matter of fact, I talked about this chart in my testimony, 

about how a two year delay, just a two year delay means to achieve 

the same reductions by 2020, instead of having a 2 percent average 

reduction per year, you would need a 4 percent. But in fact, this 

chart ignores the fact that the faster we act, the faster China will 

act. So the stakes of us acting now in this Congress are enormous. 

Not only will it ease the burden on the American economy if we 
407 

act sooner, but it will also in the negotiating process lead the other 

countries to act faster. 

Senator BOXER. Mr. Krupp, just for the sake of Senator 

Lieberman, and I guess Senator Warner had to step out, for my 

last question, could you just repeat what you said, a delay in two 

years, what that means to trying to reach any kind of goal to avert 

catastrophic global warming? Repeat what you had said in your 

testimony. 

Mr. KRUPP. Sure, and thank you, Senator Lieberman, for your 

kind remarks when you opened. 

In my testimony, the principal point of this chart is that to 

achieve a cumulative emissions budget in the United States between now and 2020, if we act now, as you have proposed in your 

legislation, we would need to average about a 2 percent reduction 

per year. But if we wait two years, and try to get down to the same 

level of total emissions cuts by 2020, we would need to instead of 

having 15 percent reduction level for covered sources, we would 

need to have a 23 percent level. We would be starting at a higher 

level because emissions will go up for the next couple of years 

while Congress delays. And then we would have to start from a 

higher level, cut to a lower level just to get the same emissions reductions. That will be harder for the economy. 

So I would say to all the Senators concerned about costs, there 

is enormous benefit in reducing the costs by acting early. 

Senator BOXER. Thank you. 

Senator Inhofe. 

Senator INHOFE. Thank you, Madam Chairman. 

Let me first of all compliment you, Mr. Berendt, in the way that 

you very succinctly articulated the problem in near-term when you 

talk about renewables and natural gas, and the fact that, I think 

you said by 2017, our imports could increase by 33 percent. We 

know what countries we would be dependent upon, and that is 

something that concerns every member of the United States Senate. 

Mr. Krupp, let me just ask you one question that would be a yes 

or no. Would you support more LNG terminals in the States on the 

West Cost and upper East Coast, number one; and number two, 

new nuclear plants? 

Mr. KRUPP. Under the right safeguards, we do need to increase 

our supply of natural gas. So I don’t think it is a yes or no question, but yes, we have to do what we need to do to expand supply. 

As to the nuclear question, Senator, I think we have a number 

of concerns with nuclear power. We would support increased funding by Congress to resolve those concerns about waste security. I 

don’t think any option that is a low-carbon option should be taken 

off the table. 

Senator INHOFE. All right, thank you very much. 

Ms. Claussen, do you generally agree with that? 

Ms. CLAUSSEN. Yes. 

Senator INHOFE. Good. 

Mr. Book, I have said that a tax is a more straightforward, a little more honest way to go. People realize what the cost is going to 

be, it can’t be masqueraded as it can in a cap and trade. But you 

have said that taxation is more effective than a cap and trade, and 
408 

some of the other members disagree with you. Why do you believe 

you are right in this statement? 

Mr. BOOK. Senator, I think it is more a question of first recognizing that the controls that have been erected seem to be somewhat redundant, given what we already have. There is already a 

Securities and Exchange Commission, there is already an IRS, 

there is already an EPA. Of course, if you don’t let the whole world 

play and the market isn’t a completely open market, then market 

dynamics don’t always work the way you want them to work. 

So you can use a tax, because we have a tax system, and you can 

use tax deductions, because we have those, too, and get a lot of the 

same things done. 

Senator INHOFE. It has been discussed several times by other 

witnesses, not just in this hearing but in previous hearings, and I 

would ask the question, do you think that an aggressive, unilateral 

greenhouse gas reductions in the United States, without participation by China, India and other developing countries, would lead to 

lower global concentrations of greenhouse gases? In other words, as 

the job flight, in my opinion, goes to these countries where they 

have less controls, less technology, could this end up in increasing 

the amount of greenhouse gases? 

Mr. BOOK. I think that any aggressive stance taken that does not 

take into account the growth rate of the developing world is probably either a wealth transfer or a loss of value. That said, there 

is a value in showing that it can be done economically. And if we 

keep our own economy running smoothly, then we have a right to 

hold them accountable too, through duties and some of the trade 

recourse. 

Again, why recreate the wheel? We already have it. 

Senator INHOFE. All right. Mr. Book, in your written testimony 

you elaborated a little bit more on how the costs associated with 

S. 2191 would hurt disproportionately lower income people, but you 

didn’t have time to get to that in your opening remarks. Do you 

want to elaborate on that? 

Mr. BOOK. It is just a consequence of America’s natural resource 

distribution and the beautiful expanse of the Midwest, as well as 

the population concentrations in the coastal areas and their tendency to be innovation clusters that you have essentially the poorest 

people in America driving the longest distances using predominantly coal-fired power and living very frequently in the seasons 

that give them the greatest extreme temperature changes. 

That means that on a State-wide national average basis, some 

folks are going to suffer more than others. 

Senator INHOFE. And would you expect increased dependency on 

politically unstable regions to exacerbate the price volatility you 

highlighted in your testimony? 

Mr. BOOK. The instability in the oil market is a function of the 

fact that the oil market is very close to full capacity in the perception of traders. Anything scares them now. The greatest thing we 

can show the oil market for stability is that there is more oil. Of 

course, that is proving harder to do, given the political change. 

Senator INHOFE. It is, you are right. 

I want to thank all the witnesses for their excellent testimony. 

Thank you, Madam Chairman. 
409 

Senator BOXER. Senator Inhofe, I know you need to go to another 

meeting. Before you leave, I just thought we could start a little interesting debate. Just think about what I am going to say. 

When you say you think a carbon tax is more honest, I just disagree. Because a carbon tax is something we, the politicians, would 

set. And cap and trade is the free market that picks the price. So 

it is interesting, as an old stock broker, I just believe in the free 

market, and I think the cap and trade that Senators Lieberman 

and Warner have come up with is the fair way, whereas a tax is, 

you know, Government in a little smoke-filled room deciding what 

the price of carbon is. So maybe you should think about it and we 

could have a good debate. 

Senator INHOFE. Well, let me respond to that. 

Senator BOXER. Please. 

Senator INHOFE. I think back during the time that we were looking at Kyoto, when the Wharton Econometrics Survey first came in 

with the estimates of that, it was $300 billion a year. They translated that into what it would cost a family of four, which was 

$2,700 a year. Now, CRA International, as we learned from our 

last witnesses in the last hearing we had, said that this number 

would be much greater on this bill, because it is a more aggressive 

reduction. That being the case, the statement I made is I think the 

tax approach is a more honest approach, because people would be 

in a position to know what they are paying and not have it 

masqueraded in something that is more difficult to translate into 

how it affects the people around the kitchen table. 

Senator BOXER. All right. It will be a very interesting switch, you 

supporting a tax and me supporting the free market. 

[Laughter.] 

Senator INHOFE. Let me also say I like your idea on switching 

the gavel. 

Senator BOXER. Oh, I know, I know. 

[Laughter.] 

Senator BOXER. I think I am moving it to this side right now. 

Thank you, Senator Inhofe. 

Now, in terms of who I am calling on next, I want to lay it out 

and see if people think it is fair. Senator Lieberman, do you mind 

if the other two—— 

Senator LIEBERMAN. Not at all. 

Senator BOXER. And on your side, could we go with Senator Warner? OK. 

Senator WARNER. [Remarks made off microphone.] 

Senator BOXER. Senator Carper, go ahead, please. 

Senator CARPER. Thank you, Madam Chair. 

My first question is of Eileen Claussen. I understand that you 

spoke at a forum in Washington early this week that focused on 

nuclear energy, is that correct? 

Ms. CLAUSSEN. Yes, with you. 

Senator CARPER. I had to leave before you spoke. Could you give 

us a takeaway or two from your comments, please? 

Ms. CLAUSSEN. Yes. I believe that nuclear has to be a part of the 

solution to dealing with the climate issue. And I think the best 

thing for nuclear is for us, for the Congress to pass a cap and trade 
410 

program to put a price on carbon, because that would make nuclear 

more competitive. 

That said, I also indicated that there are some problems that nuclear has to solve, particularly the issue of waste, and suggested 

that instead of the current station or possibly Yucca Mountain, 

there might be some interim solutions that actually could move us 

along the path here. I think that is something that the Congress 

should think about. But that is sort of the bottom line of what I 

said. 

Senator CARPER. All right, thanks very much. 

Let me ask a question of Mr. Book if I could. Again, our thanks 

to each of you for being here. Madam Chair, you put together just 

a terrific panel, and we are grateful not just for your testimony 

today but for the work that you have done in helping us to craft 

this legislation and other pieces of legislation that some of us have 

been involved in. We are grateful for that. 

For Mr. Book, I believe one of the primary goals of climate legislation is to incentivize the deployment of new, clean forms of energy like renewables and like nuclear. Along with a couple of my 

colleagues, I am interested in maybe adding some provisions to this 

global warming bill, such as providing allocations to incentivize renewables and nuclear. My question is, put your economist hat back 

on again if your wife will let you and tell us what are some of your 

thoughts, and maybe some thoughts from the financial community 

on ways to incentivize renewables and new nuclear as we go 

through this legislative process? 

Mr. BOOK. Thank you, Senator. The world needs more BTUs, the 

British Thermal Unit, the common denominator of all of this. Nuclear power is one of those sources that can give and keep on giving 

at a low marginal cost. 

It has, however, a very high startup cost and it has increased as 

more of the world has started to want nuclear power for themselves. When I look at the incentives that this Congress has produced for nuclear power, they are considerable. There are loan 

guarantees, there are production tax credits, there are insurance 

policies. It is clear that letting the free market work isn’t exactly 

what the policy stance has been, because these are designed to promote nuclear power. 

If as this panel, the fellow to my left has pointed out, we aren’t 

going to build any more coal plants, we are going to need more nuclear. And if we are not going to solve our power generation needs 

by renewables, as sort of a small but essential tail to the problem 

in the near years, then probably whatever you can do to get it built 

is in the best national interest. 

Senator CARPER. Thank you. 

Mr. Sims, have you ever run for State-wide office? 

Mr. SIMS. Yes. 

Senator CARPER. Did you ever run for the United States Senate? 

Mr. SIMS. Yes, I did. 

Senator CARPER. So if things had worked out a little differently, 

colleagues, he could be sitting over here—— 

[Laughter.] 

Senator CARPER. And maybe we could be sitting out there. When 

I was Governor, I used to get to testify on behalf of the National 
411 

Governors Association, which I loved to do. You said earlier that 

you were nervous, but it didn’t show. But I used to say to people 

that I would give good money just to have the chance to come down 

and testify about once a week. It never happened that often, but 

I always enjoyed doing it. 

I want to ask you some questions about transportation and the 

role that transportation plays in what we are trying to accomplish 

here. I think you mentioned in your testimony that even if California’s low carbon fuel standard were implemented nationwide, and 

if our CAFE standards were raised to 35 miles per gallon, which 

I think we are going to do that, emissions from the transportation 

sector would still be about 40 percent above 1990 levels by 2030. 

And I have a three part question, I probably will not have time to 

ask all those parts, but let me just ask one part. If you want to 

answer that, great, if not, I will go to part two. 

Part one is, how can we ensure that investments in transit and 

in other policies that reduce greenhouse gas emissions from driving 

generate credits or funding under this bill? 

Mr. SIMS. Within your bill, you have vehicle miles traveled reductions. What I am urging is that you in fact make those as bold 

a commitment as you have for your CAFE standards, as well as 

your alternative energy standards. Because if you look at all the 

data, if we don’t reduce vehicle miles traveled and that continues 

to grow, our carbon emissions, we can’t achieve our reductions if 

we still don’t address the issues of vehicle miles traveled, which is 

what I would urge us to do and make those kinds of investments. 

We have done that in our county by buying hybrid buses, converting them to biofuel buses. We have had an incredible reduction, 

27 percent reduction in fuels, 30 percent reduction in carbon emissions. It is our key strategy to becoming a very viable economic 

community in this 21st century. 

But our goal is to, what I love about this bill is the market you 

can build. But I think having measurable, quantifiable results that 

we think we can achieve by vehicle miles reduced and the kinds 

of technologies you use in terms of public transportation are key. 

There need to be incentives. They just can’t be left. That third leg 

of the stool, as we call it, just can’t be ignored. Because what will 

happen in 10 to 15 years is we will find out that all the other 

things we endeavored to do, the CAFE standards, alternative energy standards, didn’t allow us to achieve our reductions as to vehicle miles traveled that is the key to being able to achieve our reduction goals. 

Senator CARPER. I would just say to my colleagues, Madam 

Chair, I think Mr. Sims has said a great truth. I am hopeful that 

we will pass a strong CAFE bill, I hope it will include a 35 mile 

per gallon standard by 2020 or thereabouts. 

But unless we also incentivize people to drive less, whether it is 

by transit, inter-city passenger rail, making sure that we have 

other options that are available to them, we are not going to be as 

successful as we otherwise would be. So I applaud you, and I know 

there is an effort in the Lieberman-Warner bill that try to ensure 

that we do incentivize. People encourage people to get outside of 

our cars, trucks and vans, and have options other than those to get 

places we need to go. We need to make sure at the end of the day 
412 

that the bill includes those provisions and maybe improves on 

them. 

Senator BOXER. Yes, I want to say, Senator, we look forward to 

having your input on this, as well as Senator Cardin is very interested in this, and working with us as well. I would say zero emission vehicles can’t be forgotten, too, because that is a real possibility. 

Senator Warner, you have 7 minutes. 

Senator WARNER. Thank you, Madam Chairman. 

I would like to follow on that important colloquy of our colleague 

from Delaware and Mr. Sims. You talked in your direct testimony, 

Mr. Sims, about the need to reduce vehicle miles traveled. This 

comes back to this time-honored sort of concept that we I think fortunately follow here in Congress. That is pretty much sort of a 

State issue, because it is the States that deal with the highway 

modernization and one thing and another to help work on this 

BMT issue. 

But I have drawn the colleagues, the Chair and the Senator from 

Delaware talk about incentives to individuals. Maybe we ought to 

put in some incentives to the States to step up and address this 

issue as part of their overall annual highway budget and review 

program. Again, observing States’ rights. 

Mr. SIMS. I would be overjoyed to have States have to make a 

commitment to reducing vehicle miles traveled. I also think there 

is a strong Federal role for that, because the tone will be set by 

the Federal Government. So it is the incentives that can be provided for congestion pricing, incentives provided through tele-commuting, as we have in the Urban Partnership Grants that just 

came out to many of our communities. But having the States do 

that would be an extraordinary step as well, and a very welcome 

one. 

Senator WARNER. I agree with that. 

I also would like to, the question of nuclear power will eventually 

be addressed in the context of our Committee deliberations. I speak 

with some background in this area, having been a part of the Navy 

Department for many, many years. Today’s domestic infrastructure 

to respond to what I perceive is to be the correct and laudable desire to move more and more into nuclear power, there is a choke 

point. And that is, the infrastructure today, the complexity of metallurgy alone, the craftsmanship, the ability to machine the extraordinarily complex components of the nuclear power systems, 

that infrastructure in America has simply dwindled over the years, 

as a consequence of our looking away from nuclear power as a resource. 

It is really there now to support the continued modernization and 

safety requirements of existing plants and the good old United 

States Navy, which has continuously never lost a heartbeat going 

forward in devising new nuclear power systems and ships, primarily submarines, carriers coming on. Even in this provision of a 

bill that we are working on in another hearing room, not distant 

from here, is for the next class of nuclear cruisers, possibly, some 

units to have nuclear power. 

But where is the infrastructure? What do we do to help that infrastructure recognize that they may be called upon, to use the 
413 

word, surge in their ability to help meet domestic needs? Does anyone have a background that wishes to address that issue? Or I 

have made it all into a speech? 

[Laughter.] 

Senator WARNER. Yes? 

Ms. CLAUSSEN. I will try, but my background is that my very 

first job after graduating was working with submarines, including 

nuclear submarines. 

Senator WARNER. But you were under the tutelage of one of the 

most brilliant men I ever knew, Admiral Rickover, I presume? 

Ms. CLAUSSEN. Right. 

Senator WARNER. That was a rare experience for both of us. 

Ms. CLAUSSEN. But that was a long time ago. 

Senator WARNER. Well, I date back a few years myself. 

[Laughter.] 

Ms. CLAUSSEN. One of the things I can say is, Senator Carper 

and I were both speaking at the annual meeting of the American 

and European Nuclear Societies on Monday of this week. We both 

talked about climate change and how we see nuclear as part of the 

solution. 

There was a lot of discussion at that meeting about education 

and the need for increased education, the very point that you make 

about our infrastructure and our ability to respond. The only thing 

that strikes me is that if there is a demand for nuclear, we will 

actually figure out how to do all of that. And the best way to get 

that demand, I think, is to pass a bill like this that puts a price 

on carbon, so that we actually have nuclear playing a significant 

role and having that ability to move nuclear I think will mean that 

we start to rebuild what we once had in terms of infrastructure. 

Senator WARNER. Well, it will take some time. 

To Ms. Claussen, I would like to address another question here. 

You have addressed pretty well the positive impacts of the cap and 

trade legislation and the prospect for creating new green collar 

jobs. Do you look upon that as a positive contribution to the American economy? 

Ms. CLAUSSEN. Yes, but, is the way I would like to put it. I think 

there is no question that as we move to a carbon-constrained world, 

we will create a lot of jobs. But, and I think this is quite important, 

we also have to have a system that minimizes any job loss in existing employment. We also need to make sure that we take care of 

those who might be faced with a difficult situation. 

So I think that, for example, making sure that energy-intensive 

industries, coal-burning power plants, are afforded some ability to 

make that transition as inexpensively as possible through the allocation process is very important. I think in the end, that will also 

mean that consumers in those areas might have increased energy 

costs, and we should, through the allocation process, try to deal 

with them. 

But I think on that, we will probably create more jobs than we 

lose. But that doesn’t mean that there aren’t some distributional effects that I think we need to deal with. 

Senator WARNER. Well, I thank the panel. It has made a valuable contribution to this very, very important challenge to this 
414 

Committee. I once again commend our Chairman and indeed, our 

Ranking Member and others. Clearly, my colleague from—yes? 

Senator CARPER. Would you yield to me just for a moment? I 

would just say, Senator Voinovich is not here, but he and I convened a week or two ago a roundtable here, with the acquiescence 

of our Chair, where we had folks to come in from organized labor, 

John Sweeney was there, a number of folks from organized labor, 

different building and construction trades, folks from the nuclear 

industry were there, and we spent about two hours just focusing 

on how we were going to have the human resources to build these 

nuclear plants, to operate these nuclear plants. I hope as we go 

through this process and figure out what to do with some of the 

money we are going to incent things for that we consider incenting 

the education of people to build these plants and to operate these 

plants. Because frankly, the folks with those skills, whether they 

are electricians, whether they are pipefitters, plumbers, sheet 

metal workers, they are not there in great abundance these days, 

as you know. 

Senator WARNER. You are quite right. The essence of all nuclear 

power is absolute quality control. That takes time. 

Senator BOXER. Well, Senator Warner, I just want to say how 

thrilled I am that you could sit for a little bit longer today as your 

leg heals. 

Senator WARNER. I will be back with a clap of thunder after the 

Thanksgiving break. For the markup I will be here in full power. 

[Laughter.] 

Senator BOXER. I cannot wait for that. Believe me, we need you 

here for sure. Thank you so very much. 

Senator Klobuchar, I am giving you 7 minutes. 

Senator KLOBUCHAR. Thank you very much. Thank you, Senator 

Warner and Senator Lieberman, for your good work on this bill. 

Thank you, Chairman, for holding this hearing. 

On Tuesday we talked a lot about the importance of other policies working in concert with this climate change bill, including electricity standards, which I have mentioned here many times. We 

have an aggressive one in Minnesota, of 25 percent by 2025 and 

30 percent for Excel Energy by 2025, for renewable electricity 

standards. And also the gas mileage standard that we are pushing 

to get through and successfully pass through the Senate. 

I am also glad as we continue the discussion of these compatible 

policies that Mr. Sims is here. We are aggressively pursuing—finally—in Minnesota some of the things you have been doing in Seattle with light rail. We have a very successful light rail line now 

out to the airport and the Mall of America, not to give a pitch for 

our mall during the holiday season. 

[Laughter.] 

Senator KLOBUCHAR. The Mall of America—OK. 

Senator BOXER. Did you say the Hall of America? 

Senator KLOBUCHAR. No, I would say the Mall—— 

[Laughter.] 

Senator KLOBUCHAR. I guess you have never been there, Senator 

Boxer. 

Senator BOXER. I will go with you. 

Senator KLOBUCHAR. Very good. 
415 

Then we also are pursuing a rail line to St. Cloud, where we 

have a lot of traffic on a major interstate. So I am looking forward 

to hearing more on these issues. 

I think one of the most important parts of this bill is as was earlier related in this discussion with Senator Inhofe and Senator 

Boxer, the Carbon Market Efficiency Board and the cap and trade. 

I believe that this provision helps prevent volatility and provides 

the underpinnings of a strong emissions trading market. At this 

moment, we have the opportunity to learn from the mistakes made 

in Europe. They had some, there is no doubt. We have met with 

some of the people involved in that and we can learn from their 

mistakes. 

Minnesota is also the home, in addition to the Mall of America, 

of Tom Friedman, who as you know has been doing a lot in this 

area and wrote a very good piece for the New York Times Magazine about the power of green. In that, he asked, how do our kids 

compete in a flatter world, how do they thrive in a warmer world 

and how do they survive in a more dangerous world. The answer 

to me which would make the most sense is to try to encourage 

these economic and technological opportunities to reduce our dependency on fossil fuels and to encourage the next great global industry. 

So I am curious, Ms. Claussen, to pursue some of the discussion, 

I think it was Senator Bond, before I got here, who talked about 

how you can’t really make this comparison to the acid rain market. 

But we know that we had success with sulfur dioxide and the nitrogen oxide emission trading systems here in the United States. 

We also have the European system to look at. 

As more and more countries accept the need to address climate 

change emission trading I believe will play an increasingly significant role. This is because it not only creates incentives for firms 

to cut greenhouse gas emissions, but I think we also have to remember, as Senator Boxer reminded us, that it creates incentives 

to spur technology innovation that further reduce emissions. I have 

told our Committee members that I come from a State that believes 

in science. We brought the world everything from the Post–It note 

to the pacemaker. We really see this opportunity in our State with 

the technological know-how we have and the great universities and 

a lot of the companies that we have there, that there could be some 

opportunities for us, as there would be for the rest of the Country. 

So I guess my first questions would be of you, Ms. Claussen, 

along the lines of the issue raised by Senator Bond about, and the 

debate that we have had about whether or not the success of the 

past years of the acid rain program is applicable to America’s Climate Security Act. Some argue it is inapplicable because that only 

involved one sector of our economy. The Pew Center is widely recognized as giving some unbiased advice, and I would like to hear 

what you say about that. 

Ms. CLAUSSEN. Thank you very much, Senator. Yes, I am a big 

believer in Minnesota’s innovation and everything else. My son 

went to college there, and it was a great experience for him. 

But let me sort of try to answer your question this way. We 

learned a great deal in the course of putting the acid rain program 

into place about what is important in a cap and trade system. One 
416 

of the things that is most important, and I think we learned this, 

is that you have to make sure that a ton is a ton. In other words, 

that everything you do is verifiable and that you know that it is 

real. Because otherwise, the gold standard of the program becomes 

debased. And then you don’t have a good program. 

So I think it is very important that we make sure that what we 

do here has integrity. That is something we learned. 

I think we also can learn from some of the mistakes that were 

made in Europe. Europe did not have a very good data base that 

would tell them where the emissions were coming from and what 

those amounts were. So when they decided to make their initial allocations, they made ones that were too large, given what turned 

out to be the actual case. I think we did learn this in the acid rain 

program, too, you need a really good data base. You have to make 

sure that you have good numbers, and then you have to make sure 

that what you do makes some sense. 

So I actually think there are lots of lessons to be learned both 

from the acid rain program and from the European experience. I 

think Europe has learned a great deal from their phase of experimenting. And it looks like they are going to correct a lot of those 

mistakes. They are going to have targets that are much more stringent in the next phase, which is the real phase. Don’t forget, the 

Kyoto targets don’t actually take effect until 2008 to 2012. So what 

they were doing here was really going through a period of learning. 

From everything that we have learned from them, and you probably learned much of this when you were there, they actually have 

learned a great deal and I think they will have a system that 

works. If we also have a system that works, this will be so much 

better in terms of achieving environmental results and keeping the 

costs as low as possible. 

Senator KLOBUCHAR. Have you done any research about how you 

would intertwine our program with these other countries’ programs 

so we can trade internationally? 

Ms. CLAUSSEN. I think if we on a national level have a cap and 

trade program with a real cap we will in fact be able to do that. 

The best way to assure that is to have a global agreement that allows for that kind of trading. Don’t forget, the United States is not 

a party to Kyoto. So while we can do some things between States 

and countries, and the International Climate Action Partnership, 

which was just announced, is going to try to see what can be done 

on an interim basis until we have a national law. I think once we 

have a national law and an international agreement, we will in fact 

be able to trade. 

So the job is not done when legislation is passed in the United 

States, because we do need a global agreement. But I don’t think 

we will get that until we pass something here. So the urgency of 

actually getting a bill out of this Committee and through the Congress is, that is number one. 

Senator KLOBUCHAR. So Mr. Krupp had talked about the need to 

move things along quickly, that we can’t wait. I obviously agree 

with this, but I was thinking more in terms of after seeing Greenland the melting of the icebergs, what is going on in our own State. 

But you see it not only for getting quick action, it is also to urge 

other countries to act. 
417 

Ms. CLAUSSEN. Yes. I spent a number of years negotiating internationally on behalf of the United States in earlier lives of mine. 

Nothing works better than to actually be able to say that we are 

doing something, and let’s figure out a way to do it together. 

Now, I don’t think it is all being nice. Sometimes it is important 

also to say, and you have to do something. But we aren’t able to 

do that now, when we ourselves are not doing something. So the 

first step has to be that we do something here domestically. 

Senator KLOBUCHAR. One last question. Mr. Sims, I had mentioned you were doing and how we have to view this not just as 

a burden on us but also an opportunity. Could you just go through 

quickly the economic gains from having this public transit that you 

have seen? I know that Senator Carper talked to you about how 

it fits in with the carbon system. But just the straight economic 

gains that you have seen from having your public transit system 

in Seattle. 

Mr. SIMS. Senator, we have had a 14 percent increase in our ridership, 7 percent this last year. People are opting to use it because 

the buses are both cleaner, more efficient. We work with General 

Motors, we bought 274 buses. The demand is so great, we are buying 500 more. Because people are now beginning to rely on that 

bus system as a method of commuting. The interesting thing is 

Microsoft just put together its own bus system because we weren’t 

moving fast enough, because they are growing very, very rapidly. 

So we hope over the next several years to be able to catch up, 

so we can have Microsoft believe that they can actually move more 

of their people on our bus system. So we are trying to catch up 

with the companies that are growing very rapidly and wishing to 

compete. It is very clear in our environment that public transportation is an absolute key to moving people throughout our county. 

We can’t grow without it, we know we can’t grow without it. 

All the data that we have available regarding our economic capacity in our region, the growth and where it should occur, is going 

to require us to have more substantial investments in public transportation. We are going to make them. We would again believe that 

we are no different than any other community, that public transportation works as it does, and we are trying to keep up with Minneapolis and St. Paul in Minnesota. 

But to us, we are having sustained growth now, as you know, in 

our region. We believe that can be maintained. But the key is the 

efficiency of the dollar spent. We are a very conservative county. 

We are AAA rated and we tend to be very conservative, looking at 

return on investments. We believe that public transportation is our 

best return on investment for moving people in a globally warmed 

world, but also in an area that is growing very rapidly. We can’t 

build out, it is too costly. 

Senator KLOBUCHAR. Thank you very much. 

Senator BOXER. Thank you, Senator. 

Senator Lieberman, I think it is very appropriate that you be the 

last questioner here. 

Senator LIEBERMAN. Thank you very much, Senator Boxer. 

Thanks to the panel. I regret that I didn’t hear the opening statements, but I did get to read them last night. And they are excellent. I mentioned my thanks previously to Fred Krupp and Eileen 
418 

Claussen. Ron Sims, it is good to see you again. Thank you for your 

practical and productive leadership. Mr. Book, Mr. Berendt, thanks 

for your testimony. 

I thought I would start briefly, because we have heard so much, 

the very good exchange at these hearings, to say probably what is 

obvious, but two things. We are operating now in a context, thanks 

to a lot of people who are in the room, and thanks to the science, 

most of all, where John Warner says, when you ask him quickly, 

why did you decide to play a leadership role in this fight to do 

something about global warming, he says two things: science and 

my grandchildren. And that is exactly, that sums it up. 

The science has really put most members of Congress, it has 

ended a debate that went on for a long time here about global 

warming: is it real, is it caused by us, people. Now pretty much everybody agrees it is real. Now the question is, what to do about it. 

And the grandchildren part of it, of course, is another way and a 

most human and personal way, of saying, are we going to assume 

our responsibility here. I will go so far to say, because I think it 

is fitting, our moral responsibility. But certainly our practical responsibility to, as leaders, to avert a problem that could be disastrous for our grandchildren and those that follow them. 

So in that context, the bill that Senator Warner and I have put 

together, with a lot of help from a lot of people and a lot of input 

from a lot of people, has attempted to, I would say, to phrase it 

simplistically, do a couple of things. The first is to really do something to reduce greenhouse gas emissions in the United States. But 

to do it in a way that is not disruptive of our economy. In fact, we 

think it will ultimately have a positive effect, in addition to the fact 

that it is averting this potentially disastrous situation. 

So we have crafted a balance which doesn’t please everybody. Or 

let’s put it this way. It is not the idea of the perfect for everybody. 

Part of what we are struggling with now, Senator Warner and I, 

Chairman Boxer, is to keep people together for this without sort of 

walking away. Because that one additional thing they wanted to do 

to make it better is not in there. And because if I didn’t feel this 

bill really made a difference, I couldn’t make that case if it was enacted. But I think all the evidence is that it does. 

This leads me to ask you, Fred Krupp, this first question. I 

thought that part of what you said, as I came in, in answer to Senator Boxer’s question, was very powerful and not really thought 

about enough in this debate, which is that we are not dealing here 

with a static situation, an environment, using the word broadly, a 

reality that is constant. This problem is getting worse every day. 

Therefore every day and every month and every year we wait to 

do something about it, it is not only harder, but it is more costly. 

And it is particularly harder, as you said, to do something quickly and early enough. It is very important to remember that particularly for people, I will be blunt, who will say, hey, let’s wait until 

2009, the political context will be different, we will have more people here, we will really want to pass a perfect bill. But who knows, 

really, who will be here in 2009. And if we can do it now, as best 

we can, of course we should do it now. Nobody thinks that we are 

not going to come back and look at this. In fact, our bill requires 
419 

that we come back and look at it regularly in the years, in the 45 

or so years to follow. 

My question to you, Fred, is this. Talk a little bit more about 

why the early goals for greenhouse gas reduction, the caps, for instance. In 2020, you focus a lot on that. Why is that so important 

as compared—I know everything is important longer term. But 

why is that so important? Why is the loss of two years here in 

terms of that 2020 goal so important? 

Mr. KRUPP. First of all, Senator, the loss of two years of actions 

means that it is very, very hard to then recover those two years 

of cuts by 2020. And the atmosphere cares a lot about how soon 

these cuts are. If we want to avert the worst catastrophic damages, 

the sooner we make cuts, the better. So you would have to be living 

on another planet to believe that any different political situation in 

2009 was going to so change the politics that we could achieve the 

same goal by 2020, because inevitably, it is only going to be fair 

to provide industry with a certain number of years before they are 

required to begin to make cuts. So there is a huge atmospheric benefit from acting now. 

Second, the signal it sends internationally, when I go to China, 

the question I get asked and that our staff there every day gets 

asked is, America is a very smart country, America is a very 

wealthy country, you are so smart, you are so wealthy, you haven’t 

taken a cap. How can you even discuss that with us? So the sooner 

we take a cap, the sooner we have every reason to believe in the 

moral standing to ask China to control its greenhouse gas emissions even more so than their attempts to date. 

Finally, Senator, the last thing that is so important, I spent the 

last year researching all the different technologies that I could find 

that would reduce greenhouse gases. I have interviewed dozens of 

people. I have talked to an Israeli engineer named Eli Gaul who 

worked for GE when the sulfur law, the Clean Air Act Amendments in 1990 were put in place. At the time, scrubbers didn’t work 

too well. But as soon as there was a profit motive, GE figured out 

how, instead of having to have two scrubbers on every plant, because one kept clogging up, they made the scrubbers so efficient 

that that redundancy was no longer necessary, it became a profit 

center. 

As a result of this year-long survey of technologies and talking 

to entrepreneurs of all stripes, I can tell you there is a burst of entrepreneurial energy out there. But that doesn’t really flower until 

we give them the certainty of a carbon cap. So doing this two years 

early will support a revolution in technology that John Dorr, perhaps the most famous venture capitalist in America says, could 

very well be way, way larger than the information technology revolution and the web. 

Senator LIEBERMAN. That was a great answer. Thank you. 

My time is running out, but I want to ask a somewhat related 

question of Mr. Berendt. In your testimony, you said that the uncertainty created by Congressional inaction on climate change is 

creating problems for the development of new power infrastructure 

in the Country. Of course, this says to me that, based on what you 

said, that Congress should set up a carbon price signal—of course, 

I favor cap and trade—as soon as possible to avoid keeping power 
420 

producers and the people they have to go to for money in limbo, 

and that to choose not to do so would actually expose the economy 

to what an economist might call inappropriate choices about power 

development, because they are made in the context of uncertainty, 

which soon may become a certain context and change the playing 

field. 

I think you followed that long question. I am over my time, so 

the quickest answer you can give, the better. 

[Laughter.] 

Mr. BERENDT. That is correct, Senator. 

[Laughter.] 

Mr. BERENDT. And I would simply add that to develop a forward 

curve for carbon requires a market that is liquid and functional, so 

that derivatives can begin to operate. Therefore, while it is very important that we help to recognize and engage the stilling that we 

are seeing right now current in the new build environment for high 

fixed cost technologies, it is very important that we move forward, 

and if we do decide to implement a market-based mechanism, that 

it is functional and liquid in how it operates so that it does send 

a clear price signal. So that when project developers go in front of 

the credit committees and investment banks, those investment 

banks can rely on the line items and the liability side of the column 

for the assets and avoidance of liability as created by the market. 

Senator LIEBERMAN. Those are important points, I appreciate it. 

So I want to say, and I know you have different points of view on 

some things, but Mr. Krupp and you, Mr. Berendt, are saying to 

us that the sooner we send a signal of some clarity to both the 

power producing sector of our economy and the financing sector, 

the better we are going to be. 

Mr. BERENDT. The one thing that all low-carbon advanced technologies have in common, whether it is clean coal, carbon capture 

and sequestration, renewable energy, nuclear energy, advanced energy efficiency, is that they all share a high fixed capital cost. It 

is very difficult to outlay that capital, especially on the time frame 

that the energy industry operates on, which tends to be a 30 year, 

without that clear pricing. 

Senator LIEBERMAN. Yes. That is of course why we put various 

other forms of assistance to the power sector into our proposal to 

try to ease that very costly transition to acquire the fixed cost technologies. 

Thank you very much. 

Senator BOXER. Thank you, Senator. 

Senator Voinovich. 

Senator VOINOVICH. This last discussion has been really interesting. I have been on this Committee, I think since my ninth year 

or eighth year. You have this difference of opinion, you have your 

environmental groups, then you have your business groups. Ms. 

Claussen, you were talking about the fact that you thought this 

would enhance America’s competitiveness. We had the AFL–CIO in 

here and said, we have some real problems with this in terms of 

what impact it is going to have on jobs. We have had, I mentioned 

Duke Energy today coming back and saying that the electric costs 

would go up 53 percent for their customers. So there are a lot of 
421 

concerns about the impact this is going to have on our economy and 

our competitiveness. 

It appears to me that the thinking is that by going through cap 

and trade that somehow we are going to jump start the technology 

that we need to deal with this. I have always said that the technology should drive the cap and trade, not the cap and trade drive 

the technology. I think you believe that the cap and trade will drive 

the technology. 

I have also, Mr. Krupp, looked at and tried to make a list of all 

the technology available. I have had people come in and say, we 

have just the right thing. But you talk about being commercially 

viable, particularly for older power plants and putting them on, 

they come back and say, no, it is not commercially viable. We have 

some good ideas and we think we could do it, but it is going to take 

us, the Energy Department has this FutureGen project, and they 

are going to have those things built in 2012. But the whole idea 

of FutureGen is can we do NOx, SOx, mercury and take care of carbon. That is a question mark. In terms of sequestering, the Department of Energy has three outfits that are doing some experimentation and sequestering. The geology, does it migrate, getting into 

the questions of liability and the rest of it. 

For the life of me, I can’t believe that there is some other way 

besides this gigantic new regime that we could go to that would get 

us to the goal that we have sooner than what we are doing here, 

and that is what is the Federal Government doing in terms of tax 

incentive, in terms of grants, perhaps maybe we need to collect a 

major new tax that wouldn’t be that very much, but for the American people that would be earmarked to say, we are going to put 

this money into making sure that we are number one in terms of 

the technology we need to really reduce greenhouse gases, and by 

the way, once we do that, we are going to be able to say to these 

other countries, we have it, you guys have to do it and if you don’t 

do it, then you are going to have to pay for it. 

What is your response to that? Is there some other way that we 

could get to the goal of reducing greenhouse gases quicker than 

going into this, I think, unbelievable new program that is, I mean, 

we talk about the acid rain provisions of the Clean Air Act, I know 

about them because I dealt with them when I was Governor. But 

I have to tell you, the acid rain provisions are like a wart on the 

back end of an elephant compared to this thing that we are talking 

about. Is there an easier way to do this? 

Ms. CLAUSSEN. You are asking me? 

Senator VOINOVICH. I am asking both of you. 

Mr. KRUPP. Senator, I would just say a couple of things. First of 

all, I know that you care about this problem from our previous discussions. You were telling me how the water has warmed in the 

Gulf and you do have an appreciation of the problem, and I appreciate that. I want you to know that I completely share your concern 

about costs. I absolutely think we need to approach this in the 

least cost way. 

Is there another way? I have looked around the world at ways 

that countries have gone about solving air pollution problems, 

which this is, in essence. We are throwing something into the air 

that shouldn’t be there. I have yet to find a single example of an 
422 

air pollution problem being solved other than putting a mandatory 

limit on how much can be emitted. 

I am reminded, Senator, of what Jim Imholt of General Electric 

has said often, that to him this is kind of a chicken and egg problem. While he makes many technologies, GE does, that are low carbon, wind turbines, nuclear, carbon capture systems that would be 

associated with their IGCC technology, because of the capital cost 

problem that has been referred to earlier, no one is going to order 

these machines until there is this mandatory limit. That was one 

of the reasons that the 27 companies that now are in U.S. CAP, 

including Jim Rogers in his most recent press statement, he continues to be a strong supporter of a mandatory cap, the same system. He has differences in some of the details in his proposal. But 

he supports the same mandatory cap system because it is the only 

way that gets you out of the chicken and egg problem that no one 

is going to order the technology and you won’t go to scale and reduce the costs until there is a limit. It provides this massive influx 

of private capital into the technologies that need to go to scale and 

need to be deployed. 

The last thing I would say, Senator, is that you are absolutely 

right in your noting that this is a much bigger thing than sulfur 

dioxide. That is one of the reasons I am so optimistic, because by 

having this wide hunt in many sectors for low-cost technologies, we 

open up a myriad of opportunities for ingenuity. If there is one 

thing that America has always led the world in, it is American ingenuity, inventiveness. This hunt, this carbon cap that will create 

and inspire this hunt will be a wonderful thing for anyone who believes in the entrepreneurs that this Country has always been so 

proud of. 

Senator VOINOVICH. The reaction that you get, though, from a lot 

of people that you talk to, is that the fact of the matter is that we 

are going to see people trying, because of the status of where the 

technology, and it is not there yet, that they are going to move toward a lot more natural gas, which can exacerbate a problem. I 

have to tell you, every four months I have people come into my office and say, you have to do something about natural gas costs. 

And they are not kidding. One company, I will not mention it, had 

22,000 employees in the United States, now they have 16. And he 

said, we are going to have a lot less unless you do something about 

your natural gas costs. 

So what I am concerned about is, in spite of the fact that we believe that the caps and people are going to do certain things, the 

issue is, is it going to result in the behavior that you think is going 

to occur, or are we just going to see a tremendous increase in the 

costs for everybody in this Country, and then a lot of people deciding, you know what? We are in a global marketplace, we are going 

to get the heck out of here, we will go to China or we will go to 

India. And the Chinese have said, pretty authoritatively, that they 

are not going to sign up on any kind of Kyoto protocol. That doesn’t 

mean down the road we can’t get them to do something. But I can 

tell you from dealing with the Chinese that I have seen on intellectual property, even the environmental thing, if it is jobs, and the 

environment or jobs and intellectual property, jobs trump the environment and jobs trump intellectual property. So that is going to 
423 

be a big effort for us to get them into the net and say, you guys 

have to do what you are supposed to do. 

Mr. KRUPP. There are many options, other than natural gas. The 

beauty of the way the bill was designed is it allows offsets to come 

from paying American farmers to sequester carbon in their soil, or 

even from tropical deforestation, from avoiding tropical deforestation. 

Senator VOINOVICH. I know, I hear what you say. But we probably have the expert, Dr. Loo, at Ohio State University, in sequestration. There is no question that we can do a whole lot better job 

in that area. But in terms of what it is going to contribute to reducing greenhouse gases is somewhat speculative. 

Ms. CLAUSSEN. I would like to try to answer your questions in 

a slightly different way. You asked whether we should do a cap or 

whether there isn’t another way, a way with incentives. I think the 

issue is that you need both. I think one without the other does not 

work well. 

You raised the issue of the status of carbon capture and sequestration, and I agree with you, we actually think you need a much 

larger effort than the one in FutureGen to actually look at different 

geologies and different kinds of combustion technologies and make 

sure that you have a system that works. 

So then I think you asked the question about, in the early stages, 

before that technology is commercially available or will be deployed, what happens with the caps. And I think I would draw on 

the experience in the private sector already. We work with a large 

group, 45 companies, it includes Duke Energy and American Electric Power, but also a lot of energy-intensive manufacturers. Of 

these 45 companies, 37 have already set targets to reduce their 

emissions and 22 have already met those targets. 

The obvious question is, how have they done that, what is it that 

made them able to do it. And actually, some of these targets are 

very ambitious. Almost all of them have done it through efficiency 

improvements, things that are actually helpful in the bottom line. 

So from my perspective, one of the things that is really important 

in this bill, because it is economy-wide, it is not only the power sector, is that you actually will get reductions taking place across the 

economy in places where we can do it most cheaply. 

I don’t think in the power sector it is necessarily going to be sort 

of the number one case. I think there will be some time here to actually get carbon capture and sequestration going, to get more nuclear bills, because I think we are going to need that, to get an improvement in the amount of renewables that we use. Because we 

need all of these technologies, it is not just one, we need all of 

them. 

So I just think you need both the carrots and the sticks, and they 

ought to work together, so that we can actually meet these kinds 

of objectives. 

Senator LIEBERMAN [Presiding]. Thanks. Thanks, Senator 

Voinovich, and both of you for your answers. 

Senator Craig, thank you for your patience, and that is rewarded 

with an extra two minutes. You can have a seven minute round. 

You can even go over a little. 
424 

Senator CRAIG. Well, I do appreciate that. I also recognize the 

tolerance of the posterior of those sitting. 

[Laughter.] 

Senator CRAIG. I will be brief. I do want to say, the reason for 

my early absence and I missed your testimony, as did Joe, we were 

down at the White House. Joe and I were celebrating arts and humanities with some awards that were going on down there, so we 

don’t apologize. But I will read all of your testimony. I do want the 

record to show, especially for the benefit of the Chairman, that my 

presence here represents here a perfect attendance record and a 

full Republican complement, understanding her earlier comments 

during the hearing. 

Obviously, there was criticism brought by the Chairman and I 

don’t question is, when CRA did an analysis. Now Clean Air Task 

Force has a modeling analysis. Because oftentimes this great debate does spiral around philosophical lines and out of those philosophies grow approaches toward policy, and that is not an unusual 

model, I think it is critically important for us, Senator Lieberman, 

and for your bill, to have an EIA, EPA, full analysis. Neutrality is 

critical if we are going to send this 90 percent of our economy on 

a journey that is without question valuable, but without question, 

very, very expensive. 

I don’t disagree that there may be great new economies generated. But I also recognize that our whole philosophical drive as 

a Country today is toward cleanliness. You have spoken to it, as 

it relates to what companies are doing today. It isn’t out of a fixed 

cap. It is out of a very new, real philosophy in this Country that 

if we are going to do it, it has to be clean. And we are doing that 

more and more and more. 

That is why nearly every economic unit of growth in our Country 

today is cleaner than any other country’s, or nearly any other country’s. And it is certainly much cleaner than it has been and much 

cleaner than China’s and much cleaner than India’s. I have always 

believed that technology will take us there, in a much more realistic way beyond philosophies and beyond command and controls of 

government. Reasonable approaches by government can in fact direct economies. We have seen that with CAFE standards. And I 

have broken my mold this year by asking for mandatory CAFE 

standards. 

I want to do what is real. I want to do what creates greater independence and greater wealth in this Country: independence in energy forms and wealth in ingenuity and creativity. So I think it is 

important for us, if we are going to get into a command and control 

policy in this Country that we must, before we go, have absolute 

certainty for the Craigs and the Voinovichs of this world and others 

that it is the right one. Because when you are talking about hundreds of billions of dollars out there in play and huge investments 

on the part of the consumer, we had better have it as close to right 

to begin with, because this is really not just an effort in, well, let’s 

try this, because we have really studied it all and it is the only 

thing out there that can possibly work. 

Well, while you are studying, the world gets cleaner from our 

standpoint and technology takes us there, old and new. That is 

why I have always been a bit frustrated by this. I accept the 
425 

science of warming, or the studies of that. But I also know that 

philosophy drives science sometimes more than it should. I am trying to sort that out right now. 

So I will read your testimony with due diligence, because we 

have a very important decision to make in this Congress, whether 

it be this year or next, as to where we go. I recognize our position 

as a world leader. I think on this issue we should lead. 

But in leading, we need to offer the rest of the world a place to 

go. And I thank you all very much. 

Thank you, Mr. Chairman. 

Senator LIEBERMAN. Thank you, Senator Craig. I appreciate the 

statement. I think you know that Senator Warner and I have asked 

for an estimate by EIA and EPA of the proposal we have made. 

There are now, as you know, the Clean Air Task Force has taken 

our proposal and used the EIA model to project. So there is some 

basis for us going forward. But I think it is important that we have 

asked for that and we get it as soon as we can. 

Incidentally, on the whole question of the use of natural gas, the 

Clean Air Task Force does actually come to the conclusion that 

under our bill there will be less use of natural gas than if we don’t 

pass it and not switching to natural gas. The reason is one, that 

we have included natural gas in the cap, but two, I think most significantly, that the Climate Change Credit Corporation, selling 

these, auctioning the credits, will have an enormous amount of 

money, and the language of the bill commits a very substantial 

amount of money, in fact, over $300 billion over the course of the 

life of the bill, to coal and how we can use this most abundant 

American natural energy resource in a way that is consistent with 

the purposes of the bill and a clean environment. In other words, 

carbon sequestration and carbon recapture and the rest. I think if 

you fit that in, that is a good perspective. 

Senator CRAIG. Mr. Chairman? 

Senator LIEBERMAN. Yes. 

Senator CRAIG. My only reaction to that is that in the interim, 

whether it is 10 years or 20 years, as technology catches up, I 

think fuel switching will occur, it has to occur if we are going to 

meet baseloads out there, and if we are going to keep our economy 

vibrant. And that is gas. I don’t think any of us dispute the fact 

that that is probably gas, and as quickly as we can bring nukes online and yes, there is without question, the Clean Air Task Force, 

I am pro-nuclear, so when they come out saying X number of reactors, I am saying, yes, that is good stuff. 

But I also look at the downstream reality of technology and the 

capability of producing them, and gearing this world up for what 

we want to do, because we are not the ones that are going to want 

to build them out there, as we know that. So that is a problem. 

But something rings in my ear as it relates to transportation 

that also puts a burden on gas in a way that we haven’t anticipated until the day comes when we do high temperature gas reactors and we can start producing processed heat for the chemical industry and take gas out of the equation, and we can produce hydrogen by continuous operation of high temperature gas reactors, 

which we hope to do some day. That reality is the head engineer 

at GM says, come on, Congress, we are going to have an operating 
426 

fuel cell vehicle in the market in 2009 or 2010. And they have 

three models out on the street today and they already have one in 

the market, a modified SUV. That hydrogen for that fuel cell comes 

from gas. 

If we head this economy toward gas and gas alone in the next 

decade, it is going to cost a heck of a lot more. Because nobody 

wants to site a terminal. We will put these huge LNG boats on the 

oceanfront. And those are the realities of what we are about here. 

We have to shape it in a way that doesn’t create the crash. Because 

remember, $2.50 gas versus $3.00 gas and sustained above $3.00 

for a family of four, commuting 26 miles a day, is an $800 hit a 

year after taxes. That doesn’t include their gas bill, that doesn’t include their electric bill. That doesn’t include anything else. 

What are we bumping up here? Two thousand, three thousand 

dollars a year for an average consumer? You and I might be able 

to afford that. There are a great deal many people in my State who 

can’t. Those are the steps along the way that we must get right. 

And fuel switching, in the absence of new technologies, frustrates 

me a great deal, because I think we put a lot of burdens on it. 

Senator LIEBERMAN. I appreciate the statement. 

As you can see, what has happened as we have gone along here 

in these hearings and considerations, every member of the Committee is grappling with this, the reality of the problem. There is 

a lot of good faith exchanges that are going on like this. Also, the 

conversations are now going beyond the sort of warring camps to 

what is the most practical, effective way to solve this problem, and 

getting more into details. I think we are all coming to understand 

both the immensity of the challenge, the urgency of the problem 

and how important it is for us to meet the challenges. 

These witnesses have been excellent. You have helped to educate 

us. You have answered the questions well. I can’t thank you 

enough for your time and your contribution. 

The record of the hearing will be held open for a week if any of 

you want to submit additional testimony. Others may want to submit statements for the record, or members may want to ask additional questions. 

With that, the hearing is adjourned. 

[Whereupon, at 12:30 p.m., the committee was adjourned.] 

[Additional statements submitted for the record follow.] 

STATEMENT OF HON. JOHN WARNER, U.S. SENATOR FROM THE

COMMONWEALTH OF VIRGINIA

Madam Chairman, I thank you for honoring the request from members of this 

committee for more time to examine the impacts of this bill. We have a great line 

up today, for the fourth hearing specifically on America’s Climate Security Act. 

Overall, I must say that I have been quite pleased with the quality of the hearings 

we have had on this bill. 

In addition, I am pleased that my colleagues on the Committee are taking advantage of the member briefings, and our staffs continue to meet as well. 

I believe it is critical that we balance the sense of urgency global climate change 

poses with the responsibilities of this Committee to perform its legislative duties. 

We are doing that, Madam Chairman, and I look forward to continuing this process 

with a spirit of cooperation. 

I thank my colleagues and welcome today’s witnesses. 
427 

merltan" Chemistry Council 

The Honorable Barbara Boxer. Chainnan 

Senate Committee on Environment and Public Works 

456 Dirksen Senate Office Building 

Wa&bington, D.C. 20510 

Dear Chairman Boxer: 

November 9,2007 

The American Chemistry Council welcomes the committee's deliberations on 

climate policy. We believe that !be August outline of "America's Climate Security Act of 

2007" showed real promise as a framework for an effective national climate policy. 

However, S. 2191, as reported from the subcommittee, contains a number of provisions 

that we believe move the bill in me wrong direction. S. 2191 remains a work in progress, 

it needs sweeping changes, and we hope to continue working with the bill's aulhors to 

develop climate policy that will provide real environmental benefit while balancing 

economic considerations. 

Amecican chemistry brings a unique perspective to the climate debate: we use 

energy to save energy. More specifically, we use energy inputs to make energy-saving 

materials. For example. our industry makes building insulation materials that save 300 to 

1000 BTUs of energy over a 3O-year period for every BTU of energy consumed to make 

the material. Energy saved equals lower greenhouse gas emissions, as much as 3 tons of 

C~ per year per house. While providing energy efficient products. American chemistry 

has made unprecedented strides in reducing greenhouse gas emissions at its own 

operations. Since 1990. the chemical industry's greenhouse gas emissions intensity is 

down by 38 percent. Absolute GHO emissions, in that time period, are down by 12.5 

percent. putting American chemistry ahead of the targets set in the Kyoto Protocol. 

To continue to supply the nation with energy efficient materials. American 

chemistry must have access to an adequate and affordable supply of Low-carbon natural 

gas. Climate policies that have the effect of increasing demand for natural gas - in the 

absence of new sources of supply - could have significant ramifications, not only in our 

sector, but throughout the economy. Over the past decade, the competition for scarce 

supplies of natural gas drove the price of natural gas to record levels. Those high prices 

imposed $425 billion in added costs to consumers and contributed to the loss of 3 million 

jobs in me manufacturing economy. In our view, it is critical that climate policies 

address the potential impact on U.S. energy demand. The Energy Information 

Administration (EIA) has reported that even with increased renewable sources, oW' 

growing economy will need an estimated 28% more oil and 19% more natural gas in year 

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2030 than in 2005. Any climate change policy must begin with improving our domestic 

sources of energy, including natural gas, which bas the lowest emissions per BTU of any 

fossil fuel. 

ACC evaluates climate legislation based on three criteria: (1) the ability of the 

domestic chemical industry to remain competitive in the global marketplace; (2) the 

commitment to research. development. and deployment of enabling technologies; and (3) 

the degree to which the legislation takes into account the global nature of climate change. 

ACC bas examined the chemical industry's ability to remain economically competitive 

based on a number of provisions in the bill. including emissions reduction targets and 

timelines. allowance allocation and trading, credit for early action, offsets. the potential 

for fuel switching to natural gas. federal preemption. point of regulation. and the scope of 

coverage. The US industrial sector must be able to successfully compete in a global 

market under any carbon program that is implemented. 

S. 2191, in its present form could inhibit industry's ability to operate and remain 

profitable in the US by increasing our costs of doing business in five distinct ways: (1) 

the price we pay for fossil fuel-based feedstocks; (2) the cost of natural gas and other 

fuels we use to heat and power our plants; (3) the price of electricity; (4) the cost of 

transportation fuels we need to ship our products; and (5) the cost of regulatory 

compliance. Provisions which place US industry at a competitive disadvantage to global 

competition without compensating features lead to an inability both to adapt and support 

the US economy. 

Emission Reduction Targets and Timelines 

America's Climate Security Act of 2007 (S. 2191) contains a number of emission 

reduction targets and timelincs. The earliest target is to cap emissions at 2005 levels in 

2012. a reduction of 10 percent from business as usual. The next target is to reduce 

emissions by 15% below the 2005 level by 2020. which is equal to 1990 emission levels. 

niese two earliest targets and timelines would result in large increases in natural gas 

consumption (up to 3 TCF) by the power sector. In the absence of corresponding 

increases in access to natural gas supplies, increased demand for natural gas in the power 

sector will come at the expense of the indusllial sector. Thus it is important that 

Congress ensure that action on greenbouse gases includes energy and technology policies 

that provide the needed energy "tools" to address the climate challenge. 

One recent study by the Nicholas Institute 1 estimates that in order to return 

emissions to 1990 levels by 2020, the US would have to reduce coal's market share in the 

power sector by more than half, boost natural gas consumption by 50 % and achieve a 

270 % increase in renewable enm'gy's contribution to power supply. Nicbolas assumes 

that advanced nuclear power systems and carbon capture and storage technologies (CCS) 

will not be commercially available at scale before 2020. Other studies have reached 

I Murray, Brian; Ross. Martin; and Gwnerman. Elan. "A Path 10 Greenhouse Gas Reductions in the Uniled 

Slate..: Economic Modeling of Inlerim aational Targals." Pte!)l!l'!ld by the Nichol •• Institule far 

Environmental Po!jcy Sglutions Duke llDiversitv Septembez 2007. 

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similar conclusions. If these studies are accurate, then it may be impossible to reach the 

specified short-tenn targets without disproportionately impacting US manufacturers. 

A better approach is to develop targets and timelines based around the 

development and deployment of enabling technologies and actions to increase supplies of 

natural gas. This is a realistic and achievable approach for reducing greenhouse gas 

emissions while enabling the industrial sector to remain economically competitive. 

Allowance Allocation 

Section 3901 in the bill would put industry on the same allowance schedule as the 

utility sector by distributing 20% of allowances to industry and utilities beginning in 

2012 with decreases to zero by 2036. This is in conttast to the August outline, which 

suggested that globally competitive industries should get a full ration of allowances for 

the full length of the program. Free allowances should be made available to sectors that 

cannot easily pass through their regulatory costs, face stiff international competition, and 

are energy-intensive. These characteristics describe the US industrial sector much better 

than the power sector. The customer base and globally competitive nature of the 

industtial sector is fundamentally different from the customer base for the utility sector. 

The utility industry does not compete globally. A utility has an established base of 

customers, with limited competition that allows the utilities to pass any carbon costs onto 

the customer. Based on this difference. industry should not be on the same allocation 

schedule as the utility sector. Any industtial allocation schedule should be uniquely 

tailored to account for industry'S global competition. 

In order to keep the industtial sector economically competitive in the global 

market, the legislation should not transition the industtial sector to an allowance auction, 

certainly not at the same pace as the utility sector. An auction will result in inflated 

allowance prices that will hit the industrial sector especially hard and result in damaging 

economic consequences. Companies with domestic facilities will be forced to export 

jobs, invest in new facilities in other countties. and eventually transfer operations to other 

parts of the world where carbon regulations will not affect their bottom line. 

Offsets 

Offsets can be a valuable tool in helping to control the costs of the program while 

achieving adequate reductions. The bill should greatly eltpand: (a) the scope of 

qualifying offsets; and (b) the amount of emissions that can be satisfIed with offsets. 

Section 2402 in the bill would require that offset projects represent real •. verifiable. 

additional. permanent aDd enforceable reductions in greenhouse gas omissions. This is a 

rigorous standard to evaluate offsets and is sufficient to ensure reductions. The bill as 

written needlessly restricts the use of a broad range of domestic and international offsets 

beyond agriculture. forestry, and other land-use related projects. The bill also needlessly 

restticts the use of offsets to 15% of a facility's emissions. The standard that the drafters 

incorporated for reviewing offsets would result in actual emissions reductions. Since the 

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bill's overall goal is to reduce emissions, the offset program should not limit the number 

of emissions that can be satisfied with offsets. 

Fuel Switching 

The aggressive targets and timelines required in the legislation would cause fuel 

switching from coal to natural gas. The EIA analysis of S. 280, the Lieberman-McCain 

climate bill introduced early this year discounts the coal-ta-natural gas fuel switching 

scenario. lustead, using the National Energy Modeling System (NEMS), EIA assumes 

that emissions reductions will be achieved by building 145 OW of new nuclear 

generating capacity and 110 OW of new biomass capacity by 2030. We have reviewed a 

number of other economic analyses of how energy markets would respond to new 

constraints on OHO emissions, and no one else believes that nuclear and biomass will 

make such large contributions to the nation's energy portfolio over this time period. 

Rather, most believe that the legislation's 2012 target to cap emissions at 2005 levels is 

so aggressive that utilities would have no realistic choice other than to switch their 

generating capacity to use as much lower-carbon emitting natural gas as possible. This 

added demand to natural gas will result in higher prices to the industrial sector, making it 

more difficult to compete in a global market and American consumers will experience 

higher electricity and home heating costs. Higher energy and feedstock costs can be 

moderated. Policymakers should take measures to increase supplies of natural gas. 

EnerllY sURPly and climate policies must bedevelgped in tandem. 

The Role of State Programs 

The legislation does not preempt states from enacting OHO reduction pI'OgraID$ 

that are more stringent than this legislation's program. To the contrary, the legislation 

sends a strong signal to the states to quickly adopt more stringent emissions programs by 

giving them additional free allocations. American companies with facilities in multiple 

states will be raced with an administrative burden of complying with multiple programs, 

and possibly purchasing both state and federal allowances for the same ton of emissions. 

Encouraging state-by-state regulatory programs presents regulated. parties with a great 

deal of regulatory uncertainty, making strategic planning and capital investment decisions 

far more difficult. 

Traditionally, Congress does not preempt more stringent state environmental laws 

where there are local impacts. This recognizes that the citizens of one state may desire a 

more stringent standard than the citizens of another state, and, importantly, that they can 

achieve the more stringent standard by controlling actions within that state. However, 

unlike the pollutants presently regulated under the Clean Air Act which have local and 

regional impacts, greenhouse gas emissions do not respect state or national boundaries. 

A more effective climate policy is a national program with a single set of rules. 

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Allowance trading 

Section 2101 would allow anyone to buy. hold. sell. trade or retire allowances. 

This arrangement could cause carbon dioxide allowances to quickly become the most 

heavily traded commodity in the WOl'Id, resulting in a highly volatile market. with 

"considerable monetary value, perhaps $100 billion or more annually."l The way the 

provision is CWTeIltly structured, it creates the potential for market speculation, 

manipulation. volatility and high prices. These market conditions would put the 

industrial sector at a competitive disadvantage in the global marketplace. Commodity 

traders would likely be the big winners. The result of this provision is higher allowance 

prices, which ultimately would be passed on to the American consumer in the form of 

higher electricity and beating costs. 

A thorough oversight program or board needs to be established to p"ovide 

oversight of the market and to institute rules as may be required to maintain the integrity, 

openness, and effectiveness of the markets and minimize price volatility while allowing 

the most effective program to proceed. This is a very 10Dg term issue with major 

economic implications and potentially massive wealth transfers; programs managing the 

market need to be appropriately robust. We urge Congress to carefully consider how 

non-emitters would and should interact with the carbon market in general and the auction 

process in particular, especially during the price discovery phase of the markets 

development. 

Point of regulation 

The substitute bill, which was introduced the day of mark-up. contains a new 

upstream point of regulation for natural gas. In crafting this new point of regulation, the 

drafters have retained the downstream approach included in the bill as it was originally 

introduced. The effect is that the bill in its current form would regulate natural gas, both 

upstream at the point of sale or import, and downstream at the point of emissions. This 

approach is unfair to the industrial sector and must be corrected. Regulating fossil fuel 

emissions downstream targets carbon intensive sectors of the US economy. 

A bettel' altemative is to regulate hydrocarbons at the point of production or 

import. Regulating upstream would expand coverage to a greate:r amount of emissions 

and would lower the transaction costs of the program because one would reduce the 

number of entities having to adbe:re to a cap. This is how the bill regulates transportation 

fuels. Regulating upstream at the point of production or import would spread the carbon 

costs associated with natural gas to a broader portion of the US economy. This approach 

would assist domestic industries in their quest to compete in a global market. 

Any bill that includes an upstream point of regulation must include a feedstock 

exemption. Industry uses fossil fuels such as natural gas as raw mat6l'ials or feedstocks 

for its products. In fact. the chemical industry uses hydrocarbon feedstocks to make 

energy-saving products that reduce GHG emissions, e.g., building insulation. These 

z Resoun:es for the Future. September 2007: B8CkgIouoder. Allowance Allocarimt [RaYpiond J. KoppJ._ 

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feedstocks are not combusted and therefore do not release greenhouse gases. A feed 

stock exemption is needed to avoid regulating a fossil fuel that will not result in carbon 

emissions. In 2005, the US chemical industry spent more than $63 billion on energy 

inputs - two-thirds of that total was spent on feedstock purchases. A feedstock exemption 

is a vital feature of any legislation that regulates natural gas at the point of production or 

impon. 

Scope of Coverage 

The bill would cover "any facility that in any year produces, or any entity that in 

any year produces, non-fuel chemicals that will emit more than 10,000 CO2 equivalents 

of GHG, assuming no capture and destruction or permanent sequestration of the gas." It 

appears that the term 'non-fuel chemicals' is intended to cover some of the non-COz 

Kyoto gases. If so, the bill should make this clear. As currently written, section 1202 

could be intetpreted to require manufacturers to submit allowances to cover possible 

future emissions of C02 resulting from combustion of any product throughout the value 

chain containing any organic chemical. 

Enabling Technologies 

ACC also evaluates climate legislation on its dedication to research, development, 

and deployment of enabling technologies. Wbile we applaud the bill's dedication to 

enabling carbon capture and sequestration, it is diffkult to determine the exact funding 

that would be applied to this technology. The legislation would require that as much as 

40% of the Climate Change Credit Corporation auction funds would be used for 

developing CQz caprure from electric generation from coal and sequestration of CO2. 

The Electric Power Resean:h Institute (EPRI) estimates that S17 billion is needed over 

the next 25 years in order to undenake the necessary RD&D that would avoid a $1 

trillion reduction in economic growth by 2050 with additional funds needed for 

deployment of CCS. Due to the uncertainty in allowance price, it is not known what 

quantity of funding would result from 40% of the auction funds. For this reason, it is 

difficult to determine whether the legislation is sufficiently enabling CCS technology 

development. 

This provision should not be limited to electric generation units. Industrial 

facilities are also capable of capturing and storing carbon emissions and should be 

eligible for this program. Industrial facilities that compete in a global market must be 

included in a technology program that could help reduce emissions costs. 

Linkage to International Emitters 

The legislation is insufficiently linked to large international emitters. After 

approximately 8 years, the legislation could require importers of GHG-intensive 

manufactured products to submit allowances of a value equivalent to the allowances in 

the US system if those exporting countries were not acting to reduce emissions. This 

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provision is insufficient because American industry needs to produce globally 

competitive products at the onset of any carbon regulating program. To "level the 

playing field". CongJ'CSs should carefully consider requiring importers of GHG-intensive 

manufactured products to submit allowances from the beginning of the program. 

American chemistry wants to support a national climate policy that protects the 

environment and protects the economy. We believe that the energy efficient materials 

that we make are a vital component of climate protection solutions. We bave and 

continue to do our part to reduce our own GHG footprint. Due to the bill's potential 

impact on energy markets, the economy. our ability to compete in global markets, the 

uncertainty associated with dedication to enabling technologies and the weak links to 

actions by other high-emitting nations, we believe modifications to the provisions in this 

legislation are required. We hope to continue working with the committee to develop 

effective and workable climate policies and thank the bill's authors for advancing this 

important debate. 

Sincerely. 

:~:.~·1:::~:.:~· ... ,.. .. ·::::: . . ' . . . - ,~.. 

. ," .. :.:;.: ...... . 

I ack N. Gerard 

President and CEO 

Cc: Members of the Senate Committee on Environment and Public Works 

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~ The Fertilizer Institute 

Nourish. Replenish. Grow 

S. 2191, the LiebermanfWarner Climate Security Act 

Would cause: 

I) Closure of remaining U.S. fertilizer production facilities; 

2) Dramatically higher fertilizer costs for U.S. farmers; 

3) U.S. farmers to be even more dependent on fertilizer products from overseas sources. 

Fertilizer is the 'food' that plants need to produce a healthy and bountiful crop. Experts estimate 

that without commercial fertilizers, the world would be without one-third of its food supply. 

U.S. Farmers Already Paying Record High Fertilizer Prices 

Testifying before the U.S. House of Representatives Agriculture Committee on Oct. 18, U.S. 

Department of Agriculture Chief Economist Dr. Keith Collins stated "prices of nat ural gas, the 

major component of nitrogen, rose more in the United States than in other key regions causing a 

shift in both ammonia and urea nitrogen production to overseas suppliers. Nitrogen imports 

now account for more than 50 percent of available US. supplies, compared with only 21 percent 

of available supplies in 1996197. 

Nutrient demand by US. and foreign farmers is expected to remain strong over the next several 

years reflecting high global commodify prices and expanding crop production. Thus fertilizer 

prices, and nitrogen in particular. are expected to remain at or near record-high levels. 

For the past 3 years, farmers have paid record prices for fertilizer materials. " 

S. 2191 Would Cripple the Already Struggling U.S. Fertilizer Industry 

America's Climate Security Act, S. 2191 presents a grave threat to the domestic fertilizer 

industry._First, the Act would cause a dramatic increase in the price of natural gas, as users of 

coal and oil rush to shift away from those fuels in order to reduce their greenhouse gas 

emissions. Second, the Act would require fertilizer manufacturers, retailers that mix and blend 

products and fertilizer importers to purchase a huge number of emissions allowances, sufficient 

to cover not just the emissions from their own facilities, but also the emissions that release from 

farmers' fields when the fertilizers are eventually used. The total cost of these two impacts could 

cripple what remains of the U.S. fertilizer industry and would lead to significantly higher 

fertilizer prices for U.S. farmers. 

Natural Gas Prices 

Unlike virtually all other industries addressed in S. 2191, nitrogen fertilizer manufacturers do not 

utilize gas as a fossil fuel used to produce steam or heat for their industrial processes. Rather, 

they use the vast majority of their natural gas as a chemical feedstock, taking hydrogen from the 

methane molecule and reacting it with nitrogen from the atmosphere to produce ammonia (NH3). 

Union C~nter Phw.D. 

820 First SlTCt"t, NE Suite 430 

Washington. DC 20002 

202.962.0490 

202.962.0:"7713X 

w\\"\\I,tfi . .org 
435 

Because natural gas serves as the basic chemical feedstock in their production process, it 

comprises the largest single component of their production costs. When gas prices reach the $7 

per MMBtu level, natural gas costs can represent over 90 percent of the total cost of production 

of ammonia. This means that nitrogen fertilizer manufacturers not only use natural gas in a 

unique way (as compared to other industries), but that they have a unique interest in its cost. 

Because ammonia is a commodity product that is traded in the world market, domestic fertilizer 

manufacturers cannot simply "pass-along" the cost increases that result from rising gas prices. 

Instead, as domestic natural gas prices rise, imported ammonia from countries with lower natural 

gas prices (Russia, Trinidad, Saudi Arabia) has begun to displace domestic production. This 

development has accelerated dramatically in recent years. There were 58 domestic ammonia 

plants in 1998, but there are a total of only 33 today and four of these are temporarily idle due 

to their inability to compete with foreign producers who have access to dramatically cheaper 

natural gas. Meanwhile, the volume of imports has continued to grow increasing by 80 percent 

in just the past five years - and today more than half of the nation's nitrogen supplies are 

imported. 

During calendar year 2005, the domestic nitrogen fertilizer industry spent $246 on natural gas for 

each ton of ammonia produced - or a total of $2.75 billion for the 11.18 I million short tons of 

ammonia produced in that year. If natural gas prices were to increase by 25 percent - as they are 

widely expected to do under the proposed legislation - then the total natural gas cost to the 

industry would increase from $2.75 billion to $3.44 billion, an annual increase of $688 million. 

Because domestic manufacturers could not hope to pass along this increase, U.S. farmers would 

be forced to buy even more of their fertilizer products from overseas sources - driving up U.S. 

and world fertilizer prices and jeopardizing domestic fertilizer availability in the future. 

Emission Allowances 

In addition to its impact on natural gas prices, S. 2191 would also impose a number of direct 

requirements on U.S. fertilizer producers, retailers that mix and blend products and fertilizer 

importers. Domestic manufacturers would need to submit allowances covering both the 

emissions from their own facilities and the emissions from any "nonfuel chemical" they either 

produce or import at the facility. 

If this is the case, fertilizer manufacturers would be forced to purchase an extraordinary number 

of allowances. Producing a ton of ammonia generates approximately 0.66 of a ton of greenhouse 

gas, but when the farmer later uses that ton of ammonia to fertilize and grow his crops, 

approximately 2.46 tons of greenhouse gas eventually will leave the farmer's fields. The bill 

would make the fertilizer manufacturer responsible for these "emissions" - in addition to the 

0.66 of a ton from their own facilities. The legislation would require him to buy allowances for 

3.32 tons of emissions for each ton of ammonia produced. 

A similar situation applies in the case of urea. The production of ammonia is a necessary first 

step in producing urea. Producing a ton of urea generates (we need to account for the ammonia 

production too) .18 of a ton of additional greenhouse gas, but the farmer's field eventually will 

release 2.62 tons of greenhouse gas for each ton that the farmer chooses to apply. If the fertilizer 
436 

manufacturer becomes responsible for these "emissions," he will need to purchase allowances 

for 2.80 tons of emissions for each ton of urea produced. 

If S. 2191 were to become law, much of our nation's coal fired power generation would switch 

from coal as a fuel to natural gas, increasing natural gas demand and prices - as much as 25 

percent or more. A 25 percent increase in the price of natural gas increases the cost of nitrogen 

fertilizer production by over $60 a ton. 

Additionally, it is difficult to know the price that an emission allowance will carry in the year 

2012. Some say $5 per ton, others say $12 per ton, others say more. But regardless of where the 

price eventually lands, it is clear that domestic manufacturers, retailers and importers are being 

asked to bear an extraordinary burden. The entire invoice of additional costs for the agricultural 

sector is being laid at their doorstep. 

Assuming the price of an allowance is $5 per ton (a conservative assumption); each ton of 

ammonia would carry an allowance "tax" of $16.60 ($5 x 3.32). The total tax for the 11.181 

million tons produced by the domestic industry would come to $185.6 million per year. In 

addition, the domestic industry would owe an additional $81.2 million per year in allowance fees 

for the 5.8 million tons of urea produced each year ($5 x 2.80 x 5.8 million). 

The industry would also bear significant costs on nitrogen fertilizer imports. The 8.4 million 

tons of ammonia imported into the U.S. annually would be imposed a cost of $139.4 million. In 

addition, the 6.3 million tons of urea would be made to pay $88.2 million. Therefore, a 

conservative estimate of the total cost of the legislation to domestically produced and imported 

ammonia and urea, on which U.S. farmers are highly dependent, comes to a staggering $494 

million. 

When combined with the likely increase in natural gas prices, these costs to our industry would 

be well in excess of $1 billion annually and are simply more than the U.S. fertilizer industry can 

bear. When domestic fertilizer manufacturers close their doors, the issue goes beyond the job 

losses and community hardships that are associated with all factory closures. In addition to these 

very serious problems, the nation also would need to increase its dependence on foreign fertilizer 

imports, much of that product will come from countries with unstable governments with all of 

the risks that this dependence entails. A disruption would endanger both the U.S. domestic food 

supply and the entire agricultural sector. This, of course, is the one sector that the U.S. needs to 

protect, with products that are far more essential than those of any other. 

The Fertilizer Institute (TFI) strongly opposes S. 2191, the Lieberman/Warner Climate Security 

Act and similar legislation that would result in the closure of domestic fertilizer manufacturing 

facilities, higher fertilizer prices for U.S. farmers, an increase in imports of fertilizer products 

from overseas by imposing a federal mandatory greenhouse gas cap-and-trade system enforced 

by the Environmental Protection Agency. 
437 

InImI<ZdarIaIBro#tlll'hood of 

IIIUIIlUIIS • Inl IIIP •• LlEn 

•

.. IIJCUIIt11IS • RBIOI • IElPIBS 

... ...-. ------- .. _.- ....... ~------... - November 12, 2007 

Ron. Sabara Boxer, Chair 

Committee on Envirorutte:Dt and Public Worka 

United Stales Senate 

Washington. DC 20510 

Hon. Jamcs Inhofe, RankinS Member 

Committee on EnviromneDllQd Public Works 

United State, Senate 

Washington, DC 205}0 

Dear Sonator Boxer and Seaater Jnhofe~ 

The International prolherhood ofBoilermake:s.1ron Ship BuildcB. 81aclamith!, Forgers 

and RolpctI ia committed to woOOna; constnu;tively will!. )'Ou toward the adoption of 

fedcrallcgislation to cap greeahouse gas (GHO) emissions. We look forward to 

providing our natioI1 with the ,killed workforce noceuary 10 deploy the tecbnology 

necessary to reduce emissions linked to global warming. However, we maintain IlOUIC 

concern regarding S. 2191. America's Climate SecuritY Act. 

We appreciate that S. 2191 incozporatcs some provisions oCme S. 1766. legislation 

introduced by Serwors: Binpmm arut!Spector, and endorsed by our union. We strongly 

suppon provisions to provide bonus emission allowances for reductions achieved throu8h 

Cllbon caprurc and sequestration (CCS). The inclusion of bonus allowances will provide 

the economic incentives neceaary for private inVestmCflt to develop technology [or 

responsible usc oCour nation', abundant COli resources. In addition, the ASCA makes 

.ignlftelnt investment in the ckvelopmeot and 4cploymcm ofjotM::reaq lechnology, 

including zero or low-carbon energy technology, advanced coal and sequesuation 

teclmology, and ce:llulosic: biomass c:thanol. 

We appreciat& that Senators Wamu and Lie:bennan have: recognized the need to provide 

ajust transition for those who might suffer job ditloeations as a rasult of this legislation 

and included an assistance program for workers, includina job training, temporary wage 

coverage, and helJ.th care assistance. However, w& hope the Committee will COlI&ider O\!r 

suggestions 10 avoid the siarrifiC:lIDt worker disp1accmc:nt audjob 10$s thaI eould mull 

from some of the approaches currently propotcd. 

The inclusion of international provisiOlU jc an import step ftnward to engap the 

developing world in sc:cki.ng I salution 10 global warming and enswc that responsible 

action by !be United States does not threaten our economic: c:ompet.itivene:ss. Modest 

modifications to the limelinc and implementation process will strerlgthcn fhis section, 
438 

However, other provisions of ACSA could have a negative impact on our members and a 

Chilling effect on necessary investments in our nation's energy infrastructure. We have 

significant concern regarding an overly aggressive Phase I emission reduction target, now 

increased to a nearly 20% reduction below 200S levels by 2020, before the anticipated 

commercial availability of carbon capture and storage technologies. Such an approach 

will result in widespread :fuel switching for power generation from affordable and 

abundant coal resources to more expensive natural gas. 

We are also concerned about the potential cost of carbon allowances and the impact on our economy should the technology necessary for reducing emissions not develop fast 

enough. or within the timeframes required to meet legislative targets. Therefore, we are 

disappointed the ACSA does not include a "safety valve" provision. The economic 

impact on workers could be seriously detrimental should the development of carbon 

capture and sequestration tecbnology lag behind mandated reduction levels and targeted 

dates. driving up the cost of compliance - costs that will ultimately be borne by 

consumers. 

Inclusion ofan allowance price "safety-valve" would ensure the maximum costs oethe 

program are known in advance, and provides the long-tenu certainty needed for the 

capital investments that will result in cleaner, more efficient energy production. 

Ultimately, we must recognize that the technology necessary for carbon emissions 

reductions - particularly in the utility sector - on the scale recognized as necessary to 

mitigBte the worst effects of climate change are DOt yet commercially available. We are 

hopefUl those technologies will develop quickly. and we look forward to providing the 

bighly sIdlled workers that will be needed for widespread deployment. However, we 

believe the policy framework for reducing carooa emissions should provide the flexibility 

necessary to avoid the worst consequences for workers and consumers. 

We also believe that provisions must be included to ensure that investments resulting 

from the allocation of free allowances promote domestic invesnncnt and job creation. 

Similarly, proceeds from the allowance auction that result in energy infrastructure 

development, adaptation activities. and natural resource protection must be tied to basic 

labor standards and protections, consistent with a vision of the future that values both 

environmental protection and good jobs for American workCtS. 

Thank you for your comideration of our views on this imponanr matter. 

cc: Scmator Joseph Liebennan 

Senator John Warner 

Sincerely. 

~ --:p. J{. ...... -'-.~ 

Bridget P. Martin 

Assistant to the International President 

Director of Govenunent Affairs 
439 

I ETA 

November 15,2007 

The Honorable Barbara Boxer, Chainnan 

The Honorable Jim Inhofe, Ranking Member 

Environment and Public Works Committee 

The United States Senate 

Washington, DC 20510 

Dear Chainnan Boxer and Ranking Member Inhofe, 

I am writing to express the views of the International Emissions Trading Association 

(lETA) on an issue of great importance to our members: cost control in the design of a 

greenhouse gas reduction program. 

lETA's 175 member companies include some of America's and the world's largest 

industrial and financial corporations, including global leaders in oil, electricity, cement, 

aluminum, chemical, paper, and banking; as well as leading finns in data verification and 

certification, brokering and trading, legal, and consulting industries. lETA member 

companies represent emissions greater than the carbon emissions from Gennany and the 

UK combined. IET A and its member companies are committed to reducing greenhouse 

gas emissions in a way that maximizes climate protection at the lowest possible cost. 

Controlling costs is important not just to lETA member companies, but to all Americans. 

Americans care deeply about their environment and their climate, and want to take strong 

actions to protect it. At the same time, however, Americans are concerned about their 

pocketbooks, their electricity bills, and the price of gasoline, and do not want to pay more 

than necessary to protect the climate. For both Americans and IET A member companies, 

controlling costs while protecting the climate is critical. 

Lieberman-Warner is an important step, but improvements are necessary 

IETA would like to thank you, in addition to Senators Liebennan and Warner, for your 

leadership in working to develop a cap-and-trade approach to addressing climate change. 

America's Climate Security Act includes many provisions that would help to create a 

market capable of maximizing climate benefits. It would create a national cap-and-trade 

system covering a large portion of national emissions and allowing for domestic trading. 

This structure would provide incentives for both consumers and industry to take actions 

that will reduce emissions and achieve a degree of cost control. We support the 

provisions that authorize regulated finns to purchase emission reductions or offsets from 

sectors outside the cap, and allowances from other nations, for a portion of their 

compliance obligations. 

24, Rue Mene d'Aubigne 

Geneva. 1207. Switzenand 

Tel: ->41 (22) 737 0500 

Fax: ->41 (22) 737 0508 

\WiW.ieta.org 

info@ieta.org 

4th Floor. office n. 412 

Rond-Point Schuman 11 

Brussels, 1040. Belgium 

Tel: +32 (2) 256 7535 

Fax: +32 (2) 256 7503 

Reg. 0889.071.702 

1850 M Stree, NW, Suite 600 

Washington, DC 20036 

USA 

Tel: +1 (202) 629 5981 

Fax: +1 (202) 3319588 

350 Sparks Street. Suite 809 

Ottawa, Ontario 

Canada. K1R 7S8 

Tel: +1 (613)5943911 

Fax: +1 (613) 748 9078 
440 

Cost-controll November 15,20071 page 2 

Nevertheless, IET A believes that the legislation needs to be improved. This letter 

addresses an issue of critical importance to IET A in any climate program: cost control. 

Robust markets, international linkage, and offsets are the most effective means of 

controlling cost 

Fundamentally, IETA believes that a robust domestic emissions trading market, with 

strong links to international markets and ready access to offsets across broad geographic 

boundaries, is the most effective method to protect the climate while controlling costs. 

America's Climate Security Act limits regulated firms use of domestic offsets for 

compliance with emissions targets to 15% of required allowances while prohibiting the 

use of offsets created outside of the US. Experience gained by our members in these 

markets, and the research that has been undertaken for many years, demonstrates that 

quantitative and qualitative limits imposed on the use of offsets for compliance will 

significantly increase program costs. Offsets can play an important role in a climate 

protection program and provide significant benefits. They stimulate investment in 

environmentally beneficial activities in sectors outside the emissions cap that would not 

occur in the absence of a financial incentive, and allow regulated firms to hedge existing 

assets and maintain them until the end of their useful lives. In addition, the use of offsets, 

particularly in the early years of a climate control program, enables the development of 

key technOlogies that will be required to achieve the more stringent reductions that will 

be required during the 21st century to stabilize the climate system. While IETA strongly 

supports a rigorous approval process ensuring the environmental integrity of the activities 

creating the offsets, we believe limits imposed on the use of domestic and international 

offsets for compliance should be eliminated from the legislation. 

The legislation includes a provision requiring that 2.5% of the allowances be allocated to 

international forest protection. IET A notes that this provision is neither an offset nor a 

cost-control provision. Offsets tap the power of the market to protect the environment 

while reducing costs. The Lieberman-Warner provision, in contrast, would decrease 

flexibility and drive up costs to American consumers and households, and at the same 

time is limited in its ability to protect international forests. We recommend you convert 

this provision to an offset program that would give American businesses an incentive to 

protect international forests while at the same time reducing costs to American consumers 

and households. 

IET A also encourages you to include provisions in the legislation that provide stronger 

mechanisms for the US to link with international markets. Larger markets are inherently 

more efficient, liquid, and competitive. As such they will achieve levels of climate 

protection at the lowest cost. We recommend the 15% restriction on international 

allowances for compliance be eliminated. 

In addition, in order to best achieve the powerful benefits that result from markets, the 

market design should avoid mechanisms seeking to directly manage the price of carbon. 

Caution should also be exercised with respect to provisions seeking to manage the 
441 

Cost-controll November 15,20071 page 3 

associated supply and demand of allowances with a view to indirectly managing the 

price. While IETA does not necessarily oppose all such provisions, if done improperly, 

such measures increase the risk for new investments and risk undercutting the value of a 

market-based program. 

Finally, IETA notes that one of the most significant issues with respect to cost is the issue 

of allocation. While experience in other jurisdictions has clearly demonstrated that no 

single mechanism--auctioning, benchmarking, or grandfathering--can produce universally 

satisfactory results, IET A believes the initial high level of auctioning in LiebermanWarner, in combination with the allocation to non-emitters, is cause for concern. We 

would suggest that a more gradual approach be utilized, with a careful consideration both 

of means of minimizing consumer costs and of the capacity of covered entities to recover 

allowance costs. 

Opportunity for global leadership 

The world is moving towards the creation of a global carbon market. Several regions and 

countries have either developed or are in the process of developing carbon markets and 

linking these to broader markets to achieve their goal of protecting the climate. More 

than 175 countries have participated in the development of a means for trading carbon 

offset credits, through the Clean Development Mechanism. In October of this year, 

California, along with the other member states of the Western Climate Initiative and the 

Regional Greenhouse Gas Initiative, joined the International Carbon Action Partnership, 

an intergovernmental alliance dedicated to linking regional carbon markets to help 

mobilize capital for the necessary transition to a global low-carbon economy. 

Ultimately, protecting the climate is a global responsibility that will require a global 

solution. The Senate Environment and Public Works Committee has a unique 

opportunity to provide intemationalleadership and reduce the risk to America's security 

by developing legislation that includes mechanisms that will move the world closer to 

addressing climate change through powerful market mechanisms. Ifthe United States 

does not engage countries seeking to use offsets to reduce greenhouse gas emissions, 

either other countries will step in to provide this leadership and reap the economic 

benefits of an active offset sector, or an important opportunity to begin the process of 

mitigating climate change will be lost. IET A stands ready to work with you and all the 

members of the committee to develop the market-based solutions that are necessary to 

protect the climate at the lowest possible cost. 

Yours truly, 

Andrei Marcu 

President and CEO 

International Emissions Trading Association 
442 

Testimony of 

John D. Porcari, Secretary 

Maryland Department of Transportation 

Submitted to the 

U.S. Senate Environment and Public Works Committee 

Legislative Hearing on America's Climate Security Act of 2007, S. 2191 

Thursday November 15,2007 

Chairwoman Boxer, Ranking Member Inhofe, and members of the Committee, I 

respectfulIy submit the following comments on the important subject of climate security 

and transportation. Maryland's Governor, Martin O'Malley, wants to bring balance to 

our transportation program with a renewed emphasis on transit, and we are mOving 

aggressively to deliver a system that is effective and environmentally responsive. 

Although we are taking steps to deal with increasing capacity and congestion along the 

Baltimore/Washington corridor in order to reduce our state's contribution to emissions, 

significant action to address climate change must also happen at the federal leveL 

In September, Governor O'Malley testified before your Committee on the need for more 

aggressive leadership from Washington and the steps the State is taking to lessen the 

impacts of climate change. Governor O'Malley has backcd up his words with actions. 

He fought for, and signed into law, a Clean Car bill during his first legislative session; 

spearheaded efforts to improvc the Chesapeake Bay, stop sprawl and support renewable 

energy; and earlier this year, he created a Commission on Climate Change. 

In addition, Maryland has joined the Regional Greenhouse Gas Initiative (RGGI). The 

RGGI is a coalition of Northeast and Mid-Atlantic States that developed a multi-state 

cap-and-trade program covering grcenhouse gas (GHG) emissions. The program is 

initialIy aimcd at the reduction carbon dioxide emissions from power plants in 

participating states but could expand to consider other kinds of sources, like 

transportation. As a result of the Governor's leadership, the Maryland Department of 

Transportation (MOOT) is making transportation decisions with the environment and 

climate change in mind. 

As Secretary of Transportation, not a day goes by that I am not faced with issues 

stemming from the environmental impact of our congestion issues. It is no secret that 

transportation is a major factor affecting climate change. In the BaltimorelWashington 

region, Vehicle Miles Traveled (VMT) have increased 135 percent since 1982, while-new 

lane miles on roads have increased only 35 percent. In 2003, peak hour commuters 

wasted over 130 million gallons of gas sitting in traffic. 

In the past, like many states, Maryland's transportation decisions were focused on roads. 

But as we seck additional transportation capacity, wc know our vision must encompass a 

modally diverse transportation system capable of moving greater numbers of people 

while reducing transportation's impact on the environment. 
443 

This is particularly critical in Smart Growth areas like the BaitimoreiWashington 

corridor, where one of our key transit assets is our MARC commuter rail system. It is 

efficient, popular, and at full capacity. We have developed a growth and investment plan 

with the goal of tripling MARC capacity by 2035. We also have a strong Transit 

Oriented Development program underway at several of our major transit hubs. These 

mixed-use development projects are aimed at increasing transit ridership, creating 

walkable communities and reducing the dependence on cars, resulting in better land use. 

These are only a few ofthe examples of what Maryland is doing at the local level. In 

addition, we arc looking at expanding our commuter bus system; carpool, vanpool and 

telework programs; implementing Express Toll Lanes (ETL); and providing additional 

transit rail and bus services in the region. 

States depend on the transportation funding partnership with the federal government. 

Apportioned funds come with varying degrees of flexibility in how states may spend 

them. A more effective shifting of funds toward transit investments in this country can 

happen if Congress would change the way the federal dollars are allocated. For example, 

in Maryland, we have a Transportation Trust Fund (TTF) structure that contains all 

transportation-generated revenues in single fund. This TIF is used to support the 

issuance of a consolidated bonded indebtedness which allows Maryland to make multimodal transportation funding decisions based on need, not solely on mode. Maryland 

looks first to create a balanced system which promotes mobility, consistent with our 

commitment to environmental stewardship. Unfortunately, lack of flexibility in federal 

funding makes it difficult to carry out the most effective and efficient local project 

decision-making and service delivery. We need a new Federal-State partnership that 

promotes greater programmatic flexibility in how states are allowed to administer funds. 

MDOT supports congestion relief initiatives as an important part of a cleaner 

environmental future. Give us the tools to manage our emissions, such as cap-and-trade 

programs, and the flexibility decide the best way to utilize federal formula dollars. 

Continue to fund and expand programs for transit and intercity passenger rail, and 

encourage the development and use of new technologies to increase the efficiency of our 

roads and the scope of our transit systems. 

We must have change in our federal policies if we are to deal effectively with 

transportation's impact on climate change. You can catalyze that change with federal 

money for reducing congestion, research and development of cleaner fuels, and improved 

vehicle technology. 1 applaud this Committee's desire to address this issue, and look 

forward to working with you. 
444 

TESTIMONY OF 

PAUL WILKINSON 

VICE PRESIDENT, POLICY ANALYSIS 

AMERICAN GAS ASSOCIATION 

ON BEHALF OF 

THE AMERICAN GAS ASSOCIATION 

BEFORE THE 

ENVIRONMENT AND PUBLIC WORKS COMMITTEE 

UNITED STATES SENATE 

POTENTIAL IMPACT OF S. 2191 ON NATURAL GAS UTILITIES AND 

THEIR CUSTOMERS 

American Gas Association 

400 N. Capitol Street, NW 

Washington, DC 20001 

NOVEMBER 15, 2007 

This testimony is available on the AGA website. volww.aga.org 
445 

Paul Wilkinson 

American Gas Association 

11116107 

Executive Summary 

• S. 2191 will dramatically increase the cost of natural gas to consumers due to the cost of 

emission allowances and because the demand for natural gas will increase. Electricity 

generators will shift to natural gas because most other carbon reduction options will not 

be available at the outset of the program. 

• Under the proposed legislation, homes, small retail establishments, schools and hospitals 

will have to compete with electricity generators and factories to purchase emission 

allowances. 

• There are no fuel substitution options or appliance efficiency options for small volume 

natural gas consumers that would allow them to meet the requirements of S. 2191. The 

legislation imposes a cost on consumers who have no alternative means to reduce 

emissions. 

• Natural gas provides for the essential human needs only of small volume consumersheat, hot water, cooking and clothes drying. 

• The total greenhouse gas emissions from residential natural gas consumers have declined 

since the 1970's, even though the number ofresidential consumers served with natural 

gas has increased by 50 percent; from 40 million homes to 60 million. 

• Natural gas homes have become more efficient. The average natural gas use per home 

has declined by 31 percent since 1980. These homes can continue to reduce emission 

gradually by tighter standards, but cannot reduce emissions by an additional 70 percent. 

• Over one-third of all residential natural gas consumers are served under decoupled rate 

structures which allow for efficiency and conservation promotion by local gas utilities. 

Similar rate proceedings are underway in several states. 

• Natural gas can, and should, provide greenhouse gas benefits now while other 

technologies are being developed. Public policy should steer consumers to the direct use 

of natural gas, rather than increase its cost. 
446 

Paul Wilkinson 

American Gas Association 

11116/07 

Introduction 

The American Gas Association, founded in 1918, represents 200 local energy utility 

companies that deliver natural gas to more than 64 million homes and businesses throughout the 

United States. A total of 69 million residential, commercial and industrial customers receive 

natural gas in the US, and AGA's members' deliver 92 percent of all natural gas provided by the 

nation's natural gas utilities. 

We believe that the low greenhouse gas emissions of natural gas relative to other fuels, 

combined with the efficiency of the natural gas system and the appliances that use natural gas, 

make it an extremely valuable energy source for reaching national environmental goals, 

particularly as we await the commercialization of other low-carbon or no-carbon options. We do 

not believe, however, that the inclusion of small volume natural gas consumers in a cap and trade 

program as suggested in the most recent version ofS. 2191 will aid in meeting our climate 

change objectives. In fact, we believe this inclusion will increase the complexity and uncertainty 

ofthe program, and it may, in fact, be counter-productive to our climate change objectives. 

Natural gas utilities are committed to assisting their customers in continuing their trend of 

reducing greenhouse gas emissions. Including them in the cap and trade program will not alter 

this commitment or enhance the ultimate environmental outcome. 

Statement 

Natural gas is used to meet the essential human needs of small volume consumers. The 

majority of the homes in this country use natural gas, and in the residential sector 98 percent of 

all gas is used for space heating, water heating and cooking, while the remaining 2 percent is 

used for clothes drying and other purposes. It is not used for the plasma televisions, video 

games, cell phones and other battery operated devices that account for about one-third of the 

residential electricity market. It is not good public policy to put the health and safety of these 

people at risk by subjecting them to an uncertain and unproven allowance market. This is 

especially true given that small volume natural gas consumers account for only about 8 percent 

of overall U.S. greenhouse gas emissions, and emissions from these consumers have been 

steadily declining for several decades. 

The combination oftighter homes, more efficient appliances and various conservation 

measures has resulted in a dramatic increase in the efficiency of small volume natural gas 

customer consumption for more than three decades. In fact, greenhouse gas emissions from 

the residential use of natural gas from 2000 through 2006 are below 1970's levels, despite 

the fact that the number of natural gas households increased from 40 million to over 60 

million in that timeframe. 

A portion of the success realized in terms of small volume customer efficiency gains is 

attributable to the aggressive promotion of conservation and efficiency by local natural gas 

utilities. A strong movement towards decoupled rates has enhanced this promotion. Natural gas 

2 
447 

Paul Wilkinson 

American Gas Association 

11116107 

utilities make no profit on higher gas prices - they are fundamentally a delivery service that 

traditionally profited by moving more natural gas through their system. Decoupled rates 

essentially make the utility indifferent to the volume of gas delivered and they therefore allow 

the utility to be a stronger proponent of conservation and efficiency. Nearly 40 percent of all 

residential natural gas consumers are served by gas utilities that have decoupled rates or that are 

engaged in state proceedings that are considering decoupled rates. There was almost no 

decoupling prior to 2002. 

As noted above, small volume natural gas consumers are effectively reducing their 

greenhouse gas emissions. Placing them under a cap as suggested in the most recent version of 

S. 2191 would place a burden on these consumers not faced by consumers served by other less 

efficient and higher emitting energy forms. For example, home heating oil, the majority of 

which is imported and which emits about 30 percent more CO2 per MMBtu than does natural 

gas, is not covered under the proposed legislation. Further, natural gas consumers unlike 

electricity consumers, cannot meet the ultimate 70 percent reduction target by substituting 

energy sources. That is, there are low-carbon or no-carbon generating options available today or 

in the foreseeable future for electricity customers. Natural gas is clean and efficient, and there 

is no substitute fuel available for natural gas to meet the reduction requirements of S. 2191. 

Also, natural gas appliances are already very efficient and there are not, in most cases, 

technologies available or under consideration that would be able to meet the reductions being 

considered. For example, natural gas heating equipment being sold today is commonly in the 

range of 82 percent to 94 percent efficient. Improving the efficiency of these units cannot meet 

the reduction mandates ofS. 2191. 

Changing the fuel input or the equipment efficiency is not a viable option for small 

volume natural gas consumers to meet the proposed reduction targets. Thus, allowances would 

have to be purchased in the market to cover the shortfall. It is not good public policy to set up 

a system where residences, schools, hospitals and small retail establishments would 

compete in an allowance market with industrial facilities and electricity generators in order 

to have the fuel necessary for heat, hot water and cooking. Although this competition for 

allowances would likely be through some agent for the small volume consumers, the effect is the 

same. The allowance market will be tight, competitive and expensive, and the needs of small 

volume natural gas consumers would have to be fulfilled in that market. Particularly over the 

next 10 to 20 years, when technologies for low carbon electricity generation are expected to be 

limited, it is unwise to increase the number of players in the allowance market. 

An argument for including small volume natural gas consumers under the cap ofS. 2191 

is that everyone should contribute to reducing greenhouse gas emissions and everyone should 

share in the pain of the reduction effort. It is a gross oversimplification and incorrect to 

assume that if small volume natural gas consumers are not subject to a cap they will not be 

affected by this legislation. We are convinced that natural gas will be a primary compliance 

3 
448 

Paul Wilkinson 

American Gas Association 

11116107 

tool for electricity generators to meet their reduction targets, particularly over the next 10 to 20 

years as coal with carbon capture and storage, nuclear, solar and wind and other control 

technologies are being developed and deployed. As a result, natural gas prices to all customers 

will go up - probably significantly. This expected increase in price should be viewed in the 

context of a natural gas market that has gone from $2.00 per MMBtu in the 1980's and 1990's to 

$6.00 to $8.00 per MMBtu today (and, at times, more). 

Multiple surveys of electric company CEOs and a study prepared for the Natural Gas 

Council (Greenhouse Gas Initiatives Analysis Using the National Energy Modeling System, 

prepared by SAIC for the Natural Gas Council, Oct. 2007) agree that natural gas will be a 

principal means of compliance for electricity generators in the near term. For example, the NGC 

study, using the NEMS model of the Energy Information Administration (EIA), found that by 

reducing EIA's projected construction of new nuclear facilities from 145 plants to a more 

reasonable 25 plants (by 2030) projected natural gas demand increased by 3.6 trillion cubic feet 

per year from 2020-2029 - equal to roughly 16 percent of current annual consumption. 

Increasing natural gas demand by 16 percent, especially when most potential natural gas supplies 

remain severely constrained, would cause dramatically higher prices for all natural gas 

consumers in an already tight and high-priced market. 

In addition to higher natural gas prices, small volume natural gas consumers will also be 

affected by climate change legislation due to inevitable higher prices for electricity and gasoline. 

It should be noted that roughly 60 percent of residential electricity is used for purposes common 

to all customers lighting, refrigeration, televisions, computers, and similar devices. All 

electricity customers, regardless of the energy source used to heat their home, heat their water 

and cook their food, will share in the cost of reducing emissions from electricity generators. 

Additionally, small volume natural gas consumers will be affected by the tighter building codes 

and standards of S. 2191 as well as higher appliance efficiency standards. 

Rather than discourage the use of natural gas by small volume consumers, as we 

believe S. 2191 does, effective climate change legislation should promote the use of gas in 

residential and commercial applications where it is most efficient and where greenhouse 

gas reduction benefits are most achievable. For example, converting residential water heaters 

from electricity to natural gas can often reduce greenhouse gas emissions by one-half to twothirds. Such conversions not only reduce emissions, but they also reduce the need to build new 

generating plants for electricity. One of the most difficult issues in terms of reducing greenhouse 

gas emissions will be meeting a growing demand for electricity when options such as solar, 

wind, coal with carbon capture and nuclear power face severe constraints, particularly in the 

near- to mid-term. Natural gas can provide reduction benefits now, and there should be 

encouragement to do so. 

4 
449 

Paul Wilkinson 

American Gas Association 

11116/07 

Conclusion 

We strongly believe that the last minute revision ofS. 2191 that inserted Section 1204 

without discussion, debate or input from the millions who would be adversely affected was a 

mistake. Not only will the current version prevent natural gas from contributing to the program 

as it should, but it also puts nearly 70 million homes and small businesses at risk. We believe 

that small volume natural gas consumers can, and should, playa role in reducing greenhouse gas 

emissions. We also believe that local natural gas utilities can, and should, assist their customers 

in achieving meaningful reductions. They have served this role in the past. This role has 

significantly increased over the past 5 years, in part as a result of the proliferation of revenue 

decoupling. This role will become even more predominant in the future. However, the inclusion 

of small volume natural gas consumers under the cap ofS.2191 will not help local natural gas 

utilities and their customers fulfill their potential in terms of reducing greenhouse gas emissions. 

In fact, it is likely to have the opposite effect. 

5 
America's Climate Security Act of 

2007-Modeling Results from the 

National Energy Modeling System 

.. -Preliminary Results ..... 

-

,CLEAN AIR TASK FORce; 

.. " 

Jonathan Banks 

Clean Air Task Force 

November 14, 2007 
y CATF, working through its consultant OnLocation, has 

modeled several scenarios of ACSA at the request of Sens. 

Lieberman and Warner. 

y The model runs simulate most but not all of the provisions 

of ACSA. 

y The following slides summarize our latest run which looks 

at the version of ACSA that was passed by the 

subcommittee. 

y Some of the data in this presentation is based on 

calculations done after the model run, but using modeled 

outputs. 

CLEAN AIR TASK FORCE 
);> The National Energy Modeling System (NEMS) is a detailed 

computer-based, energy-economic modeling system of 

U.S. energy markets. NEMS projects energy supply, 

demand, imports, conversion, and prices to the year 2030, 

subject to market assumptions such as macroeconomic 

and investment factors, world energy markets, fuel availability, technology cost and performance 

characteristics of energy technologies, and more. 

);> The model was developed and is maintained by the Energy 

Information Administration (EIA) for use in developing 

annual projections (in particular the "Annual Energy 

Outlook") and for evaluating energy policies. 

CLEAN AIR TASK FORCE! 
'r OnLocation, Inc.lEnergy Systems Consulting, 

founded in 1984, is a consulting firm specializing 

in energy and environmental policy analysis. 

Their analysis supports government, nongovernmental organizations, and corporate 

decision makers. OnLocation has been involved 

in the development and maintenance of NEMS 

since its inception and assists multiple clients by 

using the tool to examine proposed government 

policies and their associated impacts on the 

energy system. 

CLEAN AIR TASK FORCE 
" Covered sector emissions include: power sector, industry, transportation 

(upstream), residential and commercial natural gas and petroleum use. 

Offsets are allowed up to 30% (the 15-15 split is not possible in NEMS, but the 

resulting output is close). 

Unlimited banking. 

" We did not model the Carbon Market Efficiency Board. 

;.- We did not change any technology assumptions in NEMS, except to constrain the 

deployment of biomass power. 

To simulate the use of auction revenue and direct allocation of allowances for low 

and no carbon power technologies, we used a production tax credit for CCS power 

and extended the wind production tax credit to 2030. 

,. To simulate ACSA's technology and efficiency provisions, we used EIA's "Best 

Available Technology" case. 

'" We have not yet analyzed the impact of the 5% allowance allocation to agricultural 

sequestration. 

iCLEAN 

_ 

AIR TASK FORCE! 

.. 
:;. EIA's Best Available Technology (BAT) case assumes that 

consumers choose the most efficient equipment (from light 

bulbs to boilers) available, regardless of costs within 

residential and commercial buildings, when replacing enduse energy equipment in residential and commercial 

buildings. 

:;. EIA's BAT scenario was used as a for ACSA's 

massive energy efficiency investment provisions, as well 

as ACSA's new building and energy equipment efficiency 

regulations. 

:;. Through 2030, ACSA directs approximately $290 billion to 

energy efficiency and new product development, and sets efficiency standards for buildings and residential boilers. 

CLEAN AIR TASK FORCE 

- 
456 

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2005 

2006 

2007 

2008 

2009 

2010 

2011 

2012 

2013 

2014 

2015 

2016 

2017 

2018 

2019 

2020 

2021 

2022 

2023 

2024 

2025 

2026 

2027 

2028 

2029 

2030 

Allowance Prices in $/MTC02 (2004$) .....It. N W "f!:!. o 000 0 

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c: 

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0.. 

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104%in the Reference 

Case, and 102% 

5,0001 1 Under Ueberman- Warner. 

° 

8 t> gs 'r" o 0 0 0 0 0 0 0 

N N N N N N N N 

CLEAN AIR TASK FORCE! 

c") " a ;; N N LO CD I'- OJ o 0 a ;; N N N N (J) 0 N o 0 N N 'r" N (1) ""t LO N N N N N 00000 N N N N N CD I'- OJ (J) 0 N N N N c") 00000 N N N N N 
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CLEAN AIR TASK FORCE, 

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N N N N N N 

Per Capita GDP Under Ueberman-Warner is 

$417l.ess Than in the 

Reference Case in 2030 

Out of More Than 

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energy efficiency provisions and price response. 

» This drop in energy consumption results in lower monthly 

electrical bills for residential and commercial customers 

relative to the reference case. 

>- Roughly similar impacts on industrial energy bills would 

likely occur due to ACSA's energy efficiency investment 

provisions - but these reductions do not show up in our 

analysis, as EIA's BAT scenario does not include industrial 

energy equipment efficiency. 

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EIA Reference!7 -2007 Lieberman-WarnerISub-Corn 

;CLEAN AIR TASK FORCE 

-- 
"r Even though monthly energy bill impacts are expected to 

be less than BAU for residential customers, ACSA creates 

a safety net to protect low and middle income consumers. 

"r Sec. 3501 sets aside 10% of the total allowance pool to be 

used as rebates to low and middle income energy 

consumers and to promote energy efficiency_ 

"r Sec. 4302 and 4501 establishes the Energy Assistance 

Fund that provides additional funding to UHEAP, the 

Weatherization Assistance Program, and a new Rural 

Energy Assistance Program. 

over 

CLEAN AIR TASK FORCE 

... 
" The average price per MMBTU of natural gas increases from $9.64 

per MMBTU in 2005 to $10.10 per MMBTU in 2030. 

}- However, due to ACSA's energy efficiency provisions measures 

in the bill and price response, energy usage drops considerably. 

" This drop in actual energy needed, reduces price impacts on 

monthly natural gas bills for residential and commercial 

customers. 

}- Roughly similar impacts on industrial energy bills would likely 

occur due to ACSA's energy efficiency investment provisions -

but these reductions do not show up in our analysis, as EIA's 

BAT scenario does not include industrial energy equipment 

efficiency. 

!CLEAN AIR TASK FORCE' 

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$8.00 $6.00 $4.00 

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Natural Gas Prices 

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--EIAReference Case (7-2007) 

--Lieberman-Warner Sub-Com 

CLEAN AIR TASK FORCe: 
$80 

I 

$70 $60 

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(Based on 2030 Rates and Adjusted Usage) 

$72 $74 

Reference Case Lieberman-Warner Sub-Com 

,CLEAN AIR TASK FORCE 
y Even though monthly natural gas bill impacts for 

residential customers are expected to be quite small when 

compared to BAU, ACSA creates a safety net to protect low 

and middle income consumers. 

, Sec. 4302 and 4501 establishes the Energy Assistance 

Fund that provides additional funding to LlHEAP, the 

Weatherization Assistance Program, and a new Rural 

Energy Assistance Program. 

y this over 

> LlHEAP funds, as well as the Rural Energy Assistance 

Funds could be used to offset any price impacts that low 

and middle income natural gas customers might see. 

CLEAN AIR TASK FORCE 

- 
);> Gasoline prices gradually go up over next 23 years by 42 

cents by 2030. 

'r In just this year alone prices have increased by @ $1.00. 

);> While EIA's projection for gas prices, even for the AEO 

2007 case may look optimistic, the incremental that 

ACSA will have on actual future gasoline prices would be 

similar to that projected in this analysis. 

);> Gasoline prices under ACSA, reflect almost 100% passthrough cost of the C02 allowance price. 

--

,CLEAN AIR TASK FORCE 
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standards in the bill, overall electricity generation declines 

by 20% as compared to projected 2030 growth in BAU 

generation. 

>- not 1 1 

>- This combined with the GHG cap reduces the role that 

traditional fossil fuels play in the power sector. 

» However, new low carbon fossil technologies and 

renewable technologies, spurred by the incentives in 

ACSA, along with nuclear increase dramatically. 

CLEAN AIR TASK FORCE' 

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cents/KWh for coal generation with carbon capture and 

storage. 

y This was used to mimic in part the many incentives for 

promoting CCS technologies in the bill. 

y ACSA contains a 4% bonus allowance for CCS (the 

production tax credit most closely resembles this), a fund 

for deploying 20GWs of new IGCC/CCS, a fund for 

deploying new fossil and retrofit technologies with CCS, a 

fund for demonstrating geologic carbon storage, and the 

zero and low carbon generation fund which CCS power 

plants could qualify for. 

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interim power source prior to C02 allowance prices 

reaching the point where carbon capture and sequestration becomes economic. 

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overall energy use, natural gas generation does not show 

up as a "bridge" fuel. 

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expansion levels in the real world, gas generation would 

likely fill the gap_ 
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power generation choice, and thus builds large 

amounts of new nuclear generation- 117GWs by 

2030. 

? We chose not to artificially constrain nuclear 

power within the model. 

CLEAN AIR TASK FORCE 

-- 
-" As of late 2006, 27 GW of new plants were on 

order or proposed in the US, according to the 

World Nuclear Association. 

-" While building a further 90GWs would be an 

aggressive build rate, it is entirely plausible. 

;.. Between 1971-1990, the US built approximately 

5GWs a year. 

'CLEAN AIR TASK FORCE 

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The large expansion of renewable generation is due to both the GHG cap 

as well as the incentives in ACSA for low and no carbon technologies. 

Sec. 4401 and 4402 dedicate approximately $125 billion to zero and low 

carbon power generation. 

We extended the production tax credit for wind power to 2030 within the 

model to mimic the benefit of these funds. 

In addition, we suppressed the amount of biomass power due to the many 

competing uses that biomass faces (Le. ethanol and other biofue!s), as 

well as questions about net climate impacts and costs. 

Between 2012-2030, nearly 70GWs of new wind generation is deployed. 

,CLEAN AIR TASK FORCE 

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481 

Summary for Policymakers of the Synthesis Report of the [pee Fourth Assessment Report 

DRAFT COPY 16 NOVEMBER 2007 23:04 Subject 10 final copyedil 

Introduction 

This Synthesis Report is based on the assessment carried out by the three Working Groups of the TPCC. It provides 

an integrated view of climate change as the final part of the TPCC's Fourth Assessment Report. 

A complete elaboration of the topics covered in this summary can be found in this Synthesis Report and in the 

underlying reports of the three Working Groups. 

1. Obsen>ed changes in climate and their effects 

Warming of the climate system is unequivocal, as is now evident from observations of increases in global 

average air and ocean temperatures, widespread melting of snow and ice, and rising global average sea level 

(Figure SPM.I). II.I} 

Eleven of the last twelve years (1995-2006) rank among the twelve warmest years in the instrumental record of 

global surface temperature (since 1850). The 100·year linear trend (1906-2005) of 0.74 [0.56 to O.92rC I is larger 

than the corresponding trend of 0.6 [0.4 to 0.8]'C (1901-2000) given in the Third Assessment Report (TAR) 

(Figure SPM.l). The temperature increase is widespread over the globe, and is greater at higher northern latitudes. 

Land regions have warmed faster than the oceans (Figures SPM.2, SPMA). {1.I, 1.2} 

Rising sea level is consistent with warming (Figure SPM.1). Global average sea level has risen since 1961 at an 

average rate of 1.8 [1.3 to 2.3]mrn/yr and since 1993 at 3.1 [2.4 to 3.8]mm/yr, with contributions from thermal 

expansion, melting glaciers and ice caps, and the polar ice sheets. Whether the faster rate for 1993 to 2003 reflects 

decadal variation or an increase in the longer-term trend is unclear. {I.l} 

Observed decreases in snow and ice extent are also consistent with warming (Figure SPM. I). Satellite data since 

1978 show that annual average Arctic sea ice extent has shrunk by 2.7 [2.1 to 3.3]% per decade, with larger 

decreases in summer of 7.4 [5.0 to 9.8]% per decade. Mountain glaciers and snow cover on average have declined 

in both hemispheres. {1.1) 

From 1900 to 2005, precipitation increased significantly in eastern parts of North and South America, northern 

Europe and northern and central Asia but declined in the Sahel, the Mediterranean, southern Africa and parts of 

southern Asia. Globally, the area affected by drought has likely' increased since the 19705. {1.l} 

It is very likely that over the past 50 years: cold days, cold nights and frosts have become less frequent over most 

land areas, and hot days and hot nights have become more frequent. It is likely that: heat waves have become more 

frequent over most land areas, the frequency of heavy precipitation events has increased oyer most areas, and since 

1975 the incidence of extreme high sea level) has increased worldwide. {I.I} 

There is observational evidence of an increase in intense tropical cyclone activity in the North Atlantic since about 

1970, with limited evidence of increases elsewhere. There is no clear trend in the annual numbers of tropical 

cyclones. It is difficult to ascertain longer term trends in cyclone activity, particularly prior to 1970. 

Average Northern Hemisphere temperatures during the second half of the 20'" century were very likely higher than 

during any other 50-year period in the last 500 years and likely the highest in at least the past 1300 years. {l.l} 

1 Numbers in square brackets indicate a 90% uncertainty interval around a best estimate, i.e., there is an estimated 5%, likelihood that the value 

could be above the range given in square brackets and 5% likelihood that the value could be below that range_ Uncertainty intervals are not 

necessarily symmetric around the corresponding best estimate. 

2 Words in Italics represent calibrated expressions of uncertamty and confidence. Relevant terms are explained in the Box 'Treatment of 

uncertainty' in the Introduction of this Synthesis Report. 

3 Excluding tsunamis, which are not due to dimate change. Extreme high sea level depends on average sea level and on regional weather 

systems It is defined here as the highest 111/0 of hourly values of observed sea level at a station far a given reference period 
482 

Summary for Policymakers of the Synthesis Report of the IPCC Fourth Assessment Report 

DRAFT COPY 16 NOVEMBER 200723:04 Subject {ofinal copyedit 

Changes in temperature, sea level and Northern Hemisphere snow cover 

a 

a> 

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CD 

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g 

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Figure SPM.1. Observed changes in (a) global average surface temperature; (b) global average sea level from tide gauge 

(blue) and satellite (red) data and (c) Northern Hemisphere snow cover for March-April. All differences are relative to 

corresponding averages for the period 1961~1990. Smoothed curves represent decadal averaged values while circles show 

yearly values. The shaded areas are the uncertainty intervals estimated from a comprehensive analysis of known uncertainties 

(a and b) and from the time series (c). (Figure 1.1) 

Observational evidence4 from all continents and most oceans shows that many natural systems are being 

affected by regional climate changes, particularly temperature increases. {1.2} 

Changes in snow, ice and frozen ground have with high confidence increased the number and size of glacial takes, 

in<::reased ground instability in mountain and other permafrost regions, and led to changes in some Arctic and 

Antarctic ecosystems. {L2} 

There is high confidence that some hydrological systems have also been affected through increased runoff and 

earlier spring peak discharge in many glacier- and snow-fed rivers, and effects on thennal structure and water 

quality of wanning rivers and lakes. {1.2} 

In terrestrial ecosystems, earlier timing of spring events and poleward and upward shifts in plant and animal ranges 

are with very high confidence linked to recent wanning. In some marine and freshwater systems, shifts in ranges 

and changes in algal, plankton and fish abundance are with high confidence associated with rising water 

temperatures, as well as related changes in ice cover, salinity, oxygen levels and circulation. {L2} 

4 Based largely on data sets that cover the period since 1970. 
483 

;Yummary Jor f'Ollcymal<ers OJ the Synthesis Beport oj the If'CC i"ourlh Assessment Beport 

DRAFT COPY 16 NOVEMBER 2007 23:04 -Subject tojinal copyedit 

Of the more than 29,000 observational data series, from 75 studies, that show significant change in many physical 

and biological systems) more than 89% are consistent with the direction of change expected as a response to 

warming (Figure SPM.2). However, there is a notable lack of geographic balance in data and literature on observed 

changes, with marked scarcity in developing countries. (1.3) 

Changes in physical and biological systems and surface temperature 1970·2004 

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Figure SPM.2. Locations of signtficant changes in data series of physical systems (snow, rce and frozen ground; hydrology; and 

coastal processes) and biologica! systems (terrestrial, marine, and freshwater biological systems), are shown together with 

surface air temperature changes over the period 1970-2004. A subset of about 29,000 data series was selected from about 

80,000 data series from 577 studies. These met the following criteria; (1) ending in 1990 or later; (2) spanning a period of at 

least 20 years; and (3) showing a significant change in either direction, as assessed in individual studies. These data series are 

from about 75 studies (of which about 70 are new since the Third Assessment) and contain about 29,000 data series, of which 

about 28,000 are from European studies. White areas do not contain sufficient observational climate data to estimate a 

temperature trend. The 2 x 2 boxes show the total number of data series with significant changes (top row) and the percentage 

of those consistent with warming (bottom row) for (l) continental regions: North America (NAM), Latin America (LA), Europe 

(EUR), Africa (AFR), Asia (AS), Australia and New Zealand (ANZ), and Polar Regions (PR) and (ii) global-scale: Terrestrial 

(TER), Marine and Freshwater (MFW), and Global (GLO). The numbers of studies from the seven regional boxes (NAM, EUR, 

AFR, AS, ANZ, PR) do not add up to the global (GLO) totals because numbers from regions except Polar do not indude the 

numbers related to Marine and Freshwater (MFW) systems. Locations of large-area marine changes are not shown on the map. 

{Figure 1.2} 

There is medium cOllfidellce that other effects of regional climate change on natural and human 

environments are emerging, although many are difficult to discern due 10 adaptation and non-climatie 

drivers. 

They include effects of temperature increases on {I.2} 

agricultural and forestry management at Northern Hemisphere higher latitudes, such as earlier spring 

planting of crops, and alterations in disturbance regimes of forests due to fires and pests 
484 

some aspects of human health, such as heat-related mortality in Europe, changes in infectious disease 

vectors in some areas, and allergenic pollen in Northern Hemisphere high and mid-latitudes 

some human activities in the Arctic (e.g, hunting and travel over snow and ice) and in lower-elevation 

alpine areas (such as mountain sports). 

2. Causes of change 

Changes in atmospheric concentrations of greenhouse gases (GHGs) and aerosols, land-cover and solar radiation 

alter the energy balance of the climate system. 

Global GHG emissions due to human activities have grown since pre~industrial times, with an increase of 

70% between 1970 and 2004 (Figure SPM.3).' {l.11 

Carbon dioxide (C02) is the most important anthropogenic GHG. Its annual emissions grew by about 80% between 

1970 and 2004. The long-term trend of declining CO, emissions per unit of energy supplied reversed after 2000. 

{2.ll 

Global anthropogenic GHG emissions 

Figure SPM.3. (a) Global annual emissions of anthropogenic GHGs from 1970 to 2004.5 (b) Share of different anthropogenic 

GHGs in total emissions in 2004 in terms of C02~eq. (c) Share of different sectors in total anthropogenic GHG emissions in 

2004 in terms of CO,-eq. (Forestry includes deforestation). {Figure 2.1} 

Global atmospheric concenlralions of CO" methane (CH,) and nitrous oxide (N,O) have increased 

markedly as. result of human activities since 1750 and now far exceed pre-industrial values determined 

from ice cores spanning many thousands of years. {l.ll 

Atmospheric concentrations of CO2 (379ppm) and Cf]4 (1774 ppb) in 2005 exceed by far the natural range over the 

last 650,000 years. Global increases in CO, concentrations are due primarily to fossil fuel use, with land-use 

change providing another significant but smaller contribution. It is vel)' likely that the observed increase in CH, 

concentration is predominantly due to agriculture and fossil fuel use. Methane growth rates have declined since the 

early 1990s, consistent with total emission (sum of anthropogenic and natural sources) being nearly constant 

during this period. The increase in N20 concentration is primarily due to agriculture. {2.2) 

There is very high confidence that the net effecl of human activities since 1750 has been one of warming.' {2.21 

5 Includes only CO2 • CH4, N20, HFCs, PFCs and SFf; whose emissions are covered by the UNFCCC, These GHGs are weighted by their 100-

year Global Warming Potentials, using values consistent with reporting under the UNFCCC 
485 

Summary for Policymakers of the Synthesis Report of the IPCC Fourth Assessment Report 

DRAFT COPY 16 NOVEMBER 2007 23:04 - Subject to final copyedit 

Most ofthe observed increase in globally-averaged temperatures since the mid_20th century is very likely due 

to the observed incre.se in anthropogenic GHG concentrations.' It is likely there has been significant 

anthropogenic warming over the past 50 ye.rs averaged over each continent (except Antarctica) (Figure 

SPM.4). (2.4) 

During the past 50 years, the sum of solar and volcanic forcings would likely have produced cooling. Observed 

patterns ofwarrning and their changes are simulated only by models that include anthropogenic forcings. 

Difficulties remain in simulating and attributing observed temperature changes at smaller than continental scales. 

{2.4) 

Global and continental temperature change 

l11DdeIsuslngor1\ll"lEitlmlllft::ltt3'lgs 

~uslngl;Jollh~andanlhroj::loganlcrota1QS --- Figure SPM.4. Comparison of observed continental· and g!oba!~sca!e changes in surface temperature with results simulated by 

climate models using either natura! or both natural and anthropogenic forcings. Decadal averages of observations are shown for 

the period 1906~2005 (black line) plotted against the centre of the decade and relative to the corresponding average for the 

period 1901~1950. Lines are dashed where spatia! coverage is less than 50%. Blue shaded bands show the 5-95% range for 19 

simulations from 5 climate models using only the natura! forcings due to solar activity and volcanoes. Red shaded bands show 

the 5-95% range for 58 simulations from 14 climate mOdels using both natural and anthropogenic forcings. {Figure 2.5} 

6 Increases in GHGs tend to warm the surface while the net effect of increases in aerosols tends to cool it. The net effect due to human activities 

since tile pre-industrial era is one of warming (+1.6 [+0.6 to +2.4JWlm\ In comparison, changes in solar irradiance are estimated to have 

caused a small warmmg effect (+0.12 [+0,06 to +0,30jW/m2

) 

7 Consideration of remaining uncertainty is based on current methodologies. 
486 

Summary Jor Policymakers oJthe Synthesis Report oJthe IPCC Fourth Assessment Report 

DRAFT COpy 16 NOVEMBER 2007 23:04 Subject to final copyedit 

Advances since the TAR show that discernible human influences extend beyond average temperature to 

other aspects of climate. {2.4} 

Human influences have: {2.4} 

very likely contributed to sea level rise during the latter half of the 20" century 

likely contributed to changes in wind patterns, affecting extra-tropical storm tracks and temperature 

patterns 

likely increased temperatures of extreme hot nights, cold nights and cold days 

more likely than not increased risk of heat waves, area affected by drought since the 1970s and frequency 

of heavy precipitation events. 

Anthropogenic warming over the last three decades has like(v had a discernible influence at the global scale 

on observed changes in many physical and biological systems. {l.4} 

Spatial agreement between regions of significant wamling across the globe and 1ocations of significant observed 

changes in many systems consistent with warming is very unlikely to be due solely to natural variability, Several 

modelling studies have linked some specific responses in physical and biological systems to anthropogenic 

warming. {2.4} 

More complete attribution of observed natural system responses to anthropogenic wanning is currently prevented 

by the short time scales of many impact studies, greater natural climate variability at regional scales, contributions 

of non-climate factors and limited spatial coverage of studies. {2.4} 

3. Projected climate cbange and its impacts 

There is high agreement and much evidence that with current climate change mitigation policies and related 

sustainable development practices, global GHG emissions will continue to grow over the next rew decades. 

p.I} 

The IPeC Special Report on Emission Scenarios (SRES, 2000) projects an increase of global GI-IG emissions by 

25-90% (CO,.eq) between 2000 and 2030 (Figure SPM.5), with fossil fuels maintaining their dominant position in 

the global energy mix to 2030 and beyond. More recent scenarios without additional emissions mitigation are 

comparable in range. 8.9 {3.l} 

Continued GHG emissions at or above current rates would cause further warming and induce many 

changes in the global climate system during the 21 st century that would very likely be larger than those 

observed during the 20th century (Table SPM.l, Figure SPM.5). p.l.I} 

For the next two decades a warming of about 0.2cC per decade is projected for a range of SRES cmissions 

scenarios. Even if the concentrations of all greenhouse gases and aerosols had been kept constant at year 2000 

levels, a further warming of about 0.1 'e per decade would be expected. Afterwards, temperature projections 

increasingly depend on specific emission scenarios. {3.2) 

a For an explanation of SRES emission scenarios, see Box 'SRES scenarios' of tills Synthesis Report. These scenarios do not include 

additional climate policy above current ones; more recent studies differ with respect to UNFCCC and Kyoto Protocol inclusion 

S Emission pathways of mitigation scenarios are discussed in Section 5 
487 

Summary for Policymakers of the Synthesis Report of lite [PCC Fourtlt Assessment Report 

DRAFT COPY 16 NOVEMBER 2007 23:04 - Subject to final copyedit 

Scenarios for GHG emissions from 2000 to 2100 (in the absence of additional climate 

policies) and projections of surface temperatures 

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~120 1 -,. ~ ;: 3.0 

.~ 100 B 

.~ i 2.0 

!j! 110 " i5 ;;; 

11 a 

" -1.0 

2000 2100 1900 

'rear \'bar 

Figure SPft/l-S. Left Pane!: Global GHG emissions (in COreq) in the absence of climate policies: six illustrative SRES marker 

scenarios (coloured lines) and the 80th percentile range of recent scenarios published since SRES (post-SRES) (gray shaded 

area). Dashed lines show the full range of post-SRES scenarios. The emissions cover CO2, CH4, N20, and F-gases. Right 

Panel: SaHd lines are multi-mode! global averages of surface warming for scenarios A2, A1B and 81, shown as continuations of 

the 20111 century simulations. These projections a!so take into account emissions of short-lived GHGs and aerosols. The pink Une 

is not a scenario, but is for AOGCM simulations where atmospheric concentrations are held constant at year 2000 values. The 

bars at the right of the figure indicate the best estimate (solid line within each bar) and the likely range assessed for the six 

SRES marker scenarios at 2090-2099. AU temperatures are relative to the period 1980-1999. {Figure 3.1, Figure 3.2} 

Table SPM.1. Projected global averaged surface warming and sea !evel rise at the end of the 21st century. {Table 3.1} 

Notes: 

2.8 

3.4 

0.20 - 0.43 

0.21 -0.48 

0.23 - 0.51 

-0.59 

a) Temperatures are assessed best estimates and likely uncertainty ranges from a hierarchy of models of varying complexity as well as 

obseNational constraints. 

b) Year 2000 constant composition is derived from Atmosphere-Ocean General Circulation Models (AOGCMs) only 

c) All scenan'os above are six SRES marker scenarios. Approximate carbon dioxide equivalent concentrations corresponding to the computed 

radiative forcing due to anthropogenic GHGs and aerosols in 2100 (see p. 8230fthe TAR) for the SRES B1, AfT, B2. A1B, A2 and A1F/ 

Illustrative marker scenanos are about 600, 700, 800, 850, 1250 and 1550 ppm, respectively. 

d) Temperature changes are expressed as the difference from the period 198fJ..1999. To express the change relative to the period 1850-1899 

add 0.5"C, 

The range of projections (Table SPM.I) is broadly consistent with the TAR, but uncertainties and upper ranges for 

temperature are larger mainly because the broader range of available models suggests stronger climate-carbon 

cycle feedbacks. Wanning reduces terrestrial and ocean uptake of atmospheric CO" increasing the fraction of 

anthropogenic emissions remaining in the atmosphere. The strength of this feedback effect varies markedly among 

models. (2.3, 3.2.1} 
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Because understanding of some important effects driving sea level rise is too limited, this report does not assess the 

likelihood. nor provide a best estimate or an upper bound for sea level rise. Table SPM.l shows model-based 

projections of global average sea level rise for 2090-2099.'0 The projections do not include uncertainties in 

climate-carbon cycle feedbacks nor the full effects of changes in ice sheet flow, therefore the upper values of the 

ranges are not to be considered upper bounds for sea level risco They include a contribution from increased 

Greenland and Antarctic ice flow at the rates observed for 1993-2003, but this could increase or decrease in the 

future." {3.2.1} 

There is now higher confidence than in the TAR in projected patterns of warming and other regional-scale 

features, including changes in wind patterns, precipitation, and some aspects of extremes and sea ice. {3.2.2} 

Regional-scale changes include: {3.2.2} 

warming greatest over land and at most high northern latitudes and least over Southern Ocean and parts of 

the North Atlantic Ocean, continuing recent observed trends (Figure SPM.6) in contraction of snow cover 

area, increases in thaw depth over most pennafrost regions, and decrease in sea ice extent; in some 

projections using SRES scenarios, Arctic late~summer sea ice disappears almost entirely by the latter part 

of the 21" century 

very likely increase in frequency of hot extremes, heat waves, and heav)' precipitation 

likely increase in tropical cyclone intensity; less confidence in global decrease of tropical cyclone numbers 

poleward shift of extra-tropical storm tracks with consequent changes in wind, precipitation, and 

temperature patterns 

vet}' likely precipitation increases in high latitudes and likely decreases in most subtropical land regions, 

continuing observed recent trends 

There is high confidence that by mid-century, annual river runoff and water availability are projected to increase at 

high latitudes (and in some tropical wet areas) and decrease in some dry regions in the mid-latitudes and tropics. 

There is also high confidence that many semi~arid areas (e.g. Mediterranean basin, western United States, southern 

Africa and northeast Brazil) will suffer a decrease in water resources due to climate change. {3.2; Figure 3.4} 

Geographical pattern of surface warming 

Figure SPM. 6. Projected surface temperature changes for the iate 21 st century (2090~2099). The map shows the mu1ti~ 

AOGCM average projection for the A18 SRES scenario. All temperatures are relative to the period 1980-1999. {Figure 3.2} 

10 TAR projections were made for 2100, whereas the projections for this report are for 2090~2099. The TAR would have had similar ranges to 

those in Table SPM.1 if it had treated uncertainties in the same way 

11 For discussion of the longer term see material below. 
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Studies since the TAR have enabled more systematic understanding of the timing and magnitude of impacts 

related to differing am ounts and rates of clim ate change. {3.3.1, 3.3.2} 

Figure SPM.7 presents examples of this new information for systems and sectors. The top panel shows impacts 

increasing with increasing temperature change. Their estimated magnitude and timing is also affected by 

development pathway (lower panel). {3.3. I, 3.3.2} 

Examples of impacts associated with global average temperature change 

(Impacts will vary by ""tent of adaptation, rate of temperature change, and socio-economic pathway) 

Global mean annuallemperah"" change relati"" to 19130-1999 ("C) 

f 2 3 4 5"C 

FOOD 

Figure SPM.7. Examples of lmpacts associated with projected global average surface warming. Upper panel: Illustrative 

examples of global impacts projected for climate changes (and sea leve! and atmospheric CO2 where relevant) associated with 

different amounts of increase in global average surface temperature in the 21 st century. The black lines link impacts; broken-line 

arrows indicate impacts continuing with increasing temperature. Entries are placed so that the left hand side of text indicates the 

approximate level of warming that is associated with the onset of a gillen impact. Quantitative entries for water scarcity and 

flooding represent the additional impacts of climate change relative to the conditions projected across the range of SRES 

scenarios A1FI, A2, B1 and B2. Adaptation to climate change is not included in these estimations. Confidence levels for aU 

statements are high. Lower panel: Dots and bars indicate the best estimate and likely ranges of warming assessed for the six 

SRES marker scenarios for 2090-2099 relative to 1980-1999. (Figure 3.5) 

Examples of some projected impacts for different regions are given in Table SPM.2. 

Pa;'8 9 of?3 
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Table SPM.2. Examples of some projected regional impacts'" 

Africa 

Asia 

A ... m(IIa~nd 

No..,rZoaland 

Europe 

Latin America 

By 2020, between 75 and 250 million of people are projected to be exposed to increased water stress due to climate 

change; 

By 2020, in some countries, yields from rain-fed agriculture could be reduced by up to 50%. Agricultural production, 

including access to food, in many African countries is projected to be severely compromised. This would further 

adversely affect food security and exacerbate malnutrition; 

Towards the end of the 21st century, projected sea~level rise wH! affect !ow-Iying coastal areas with large 

populations. The cost of adaptation could amount to at least 5~10% of Gross Domestic Product (GOP); 

By 2080, an increase of 5~8% of arid and semi-arid !and in Africa is projected under a range of dimate scenarios 

(TS) 

By the 2050s, freshwater availability m Central, South, East and South-EastAsia, particularly in large river baSinS, is 

projected to decrease; 

Coastal areas, especially heavily-populated megadelta regions in South, East and South~East Asia, will be at 

greatest risk due to increased flooding from the sea and, in some megadeltas, flooding from the rivers; 

Climate change is projected to compound the pressures on natural resources and the environment, associated with 

rapid urbanization, industrialization and economic development; 

Endemic morbidity and mortality due to diarrhoeal disease primarily associated with floods and droughts are 

expected to rise in East, South and South~East Asia due to projected changes In the hydrological cycle 

By 2020, significant loss of biodiversity is projected to occur in some ecologically rich Sites mc!uding the Great 

Barrier Reef and Queensland Wet Tropics; 

By 2030, water security problems are projected to intensify in southern and eastern Australia and, in New Zealand, in 

Northland and some eastem regions; 

By 2030, production from agriculture and forestry is projected to decline over much of southem and eastern 

Australia, and over parts of eastern New Zealand, due to increased drought and fire. However, in New Zealand, 

initial benefits are projected in some other regions~; 

By 2050, ongoing coastal development and population growth in some areas of Australia and New Zealand are 

projected to exacerbate risks from sea level rise and increases in the severity and frequency of stonns and 

coastal floOding, 

Climate change IS expected to magnify regIonal differences in Europe's natural resources and assets. Negative 

impacts will include increased risk of inland flash floods, and more frequent coastal flooding and increased erosion 

(due to storminess and sea-!evel rise); 

Mountainous afeas wi!! face glacier retreat, reduced snow cover and winter tourism, and extensive species losses (in 

some areas up to 60% under high emissions scenarios by 2080); 

In Southern Europe, climate change is projected to worsen conditions (high temperatures and drought) in a region 

already vulnerable to climate variability, and to reduce water availability, hydropower potential, summer tourism 

and, in general, crop productivity; 

Climate change is also projected to increase the health risks due to heat-waves, and the frequency of wildfires, 

By mid century, increases in temperature and associated decreases in soil water are projected to lead to gradual 

replacement of tropical forest by savanna in eastern Amazonia. Semi-arid vegetation will tend to be replaced by 

arid-land vegetation 

There is a fisk of Significant biodiversity loss through species extmctlOn in many areas of tropical Latin America; 

Productivity of some important crops is projected to decrease and livestock productivity to decline, with adverse 

consequences for food security. In temperate zones soybean yields are projected to Increase. Overall, the number 

of people at risk of hunger is projected to increase (TS; medium confidence) 

Changes in precipitation pattems and the disappearance of glaciers are projected to significantly affect water 

availability for human consumption, agriculture and energy generation, 

Warming in western mountains is projected to cause decreased snowpack, more winter flooding, and reduced 

summer flows, exacerbating competition for over~a!!ocated water resources; 

In the early decades of the century, moderate climate change is projected to increase aggregate yields of rain~fed 

agriculture by 5~20%, but with important variability among regions, Major challenges are projected for crops that 

are near the warm end of their suitable range or which depend on highly utilized water resources; 

During the course of this century, cities that currently experience heatwaves are expected to be further chaHenged by 

an increased number, intenSity and duration of heatwaves during the course of the century, with potential for 

adverse health impacts; 

Coastal communities and habitats will be increasingly stressed by climate change impacts interacting with 

development and pollution 

The main projected biophysical effects are reductions in thickness and extent of glaciers and ice sheets and sea ice, 

and changes in natural ecosystems with detrimental effects on many organisms including migratory birds, 

mammals and higher predators: 

For human communities in the Arctic, impacts, particularly those resulting from changing snow and ice conditions are 

projected to be mixed; 

Detrimental impacts would include those on infrastructure and traditional indigenous ways of life; 

In both pdar regions, specific ecosystems and habitats .are projected to be vulnerable, as climatic barriers to species 

invasions are lowered, 
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Table SPM.2. (cont.) 

Smail 

lohind" 

.. ' 

.... 

Sea-level nse is expected to exacerbate inundation, storm surge, erosion and other coastal hazards, thus 

threatening vital infrastructure, settlements and facilities that support the livelihood of island communities; 

Deterioration in coastal conditions. for example through erosion of beaches and coral bleaching IS expected to affect 

local resources; 

By mid-century, climate change is expected to reduce water resources in many sma!! islands, e.g., in the Caribbean 

and Pacific, to the point where they become insufficient to meet demand during low-rainfall periods 

With higher temperatures, increased invasion by non-native species is expected to occur, particularly on mid- and 

high-latitude islands 

"Unless stated explicitly, all entdes are from WGIf SPM text, and are either very high confidence or high confidsnce statements, ref/ecting 

different sectors (Agriculture, Ecosystems, Water, Coasts, Health, Industry and Settlements). The WGI! SPM refers to the source of the 

statements, timefines and temperatures, The magnitude and timing of impacts that will ultimately be realized will vary with the amount and 

rats of climate change, emission scenarios, development pathways and adaptation. 

Some systems. sectors and regions are likely to be especially affected by climate change. 12 

Systems and sectors: {3.3.4} 

particular ecosystems: 

terrestrial: tundra, boreal forest and mountain regions because of sensitivity to wanning; 

meditcrranean~type ecosystems because of reduction in rainfall; and tropical rainforests where 

precipitation declines 

coastal: mangroves and salt marshes, due to multiple stresses 

• marine: coral reefs due to multiple stresses; the sea ice biome because of sensitivity to warming 

water resources in some dry regions at midw latitudes 13 and in the dry tropics, due to changes in rainfall and 

evapotranspiration, and in areas dependent on snow and ice melt 

agriculture in low, latitudes , due to reduced water availability 

low-lying coastal systems, due to threat of sea level rise and increased risk from extreme weather events 

human health in populations with low adaptive capacity. 

Regions: {3.3.4} 

the Arctic, because of the impacts of high rates of projected wanning on natural systems and human 

communities 

Africa. because of low adaptive capacity and projected climate change impacts 

small islands, where there is high exposure of population and infrastructure to projected climate change 

impacts 

Asian and African megadeltas, due to large populations and high exposure to sea level rise, stonn surges 

and river flooding. 

Within other areas, even those with high incomes, some people (such as the poor, young children, and the elderly) 

can be particularly at risk, and also some areas and some activities. {3.3.4} 

Ocean Acidification 

The uptake of anthropogenic carbon since 1750 has led to the ocean becoming more acidic with an average 

decrease in pH of 0.1 units, Increasing atmospheric CO2 concentrations lead to further acidification, Projections 

based on SRES scenarios give a reduction in average global surface ocean pH of between 0.14 and 0.35 units over 

the 21 st century, While the effects of observed ocean acidification on the marine biosphere are as yet 

undocumented, the progressive acidification of oceans is expected to have negative impacts on marine shel1-

fonning organisms (e.g. corals) and their dependent species. {3.3.1} 

12 Identified on the basis of expert judgement of the assessed literature and considering the magnitude, timing and projected rate of climate 

change, sensitivity and adaptive capacity 

13 Including arid and semI-arid regions 

Page! i 
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Altered frequencies and intensities of extreme weather, together with sea level rise, are expected to have 

mostly adverse effects on natural and human systems. {3.3.3) 

Examples for selected extremes and sectors are shown in Table SPM.3. {Table 3.2) 

Table SPM.3. Examples of possible impacts of climate change due to changes in extreme weather and climate events, based 

on projections to the mid- to late 21 s1 century. These do not take into account any changes or developments in adaptive 

capacity, The likelihood estimates in column 2 relate to the phenomena listed in column 1. {\NGI! Table SPM.1} 

Phenomenon- and 

direction of trend 

Over most land 

areas, warmer 

and fewer cold 

dayS and nights, 

warmer and more 

freqU&nt hot days 

and nights 

Warm spells/heat 

waves. Frequency 

increased over 

most land areas 

Heavy 

precIpitation 

events. Frequency 

increases over 

most areas 

Area affected by 

drought Increases 

Intense tropical 

cyclone actMty increases 

Increased 

incidence of 

extreme hfgh sea 

level (excludes 

tsunamist 

Veryfik.ely 

Very likely 

Likely 

Likely 

Likely' 

Increased yields in 

colder envtronments; 

decreased yields in 

warmer environments; 

increased insect 

outbreaks 

Reduced yields In 

warmer regions due to 

heat stress; increased 

danger of w!ldfire 

Damage to crops; soil 

erOSion, inability to 

cultivate land due to 

waterlO{jging of soils 

Land degradation; lower 

yields/crop damage and 

failure; increased 

livestock deaths; 

increased risk of wildlire 

Damage to crops; 

windtllrow (uprooting) of 

trees; damage to coral 

reefs 

Salinisation of irrigation 

water, estuaries and 

freshwater systems 

a) See WG! Table 3,7 for further details regarding definitions 

b) Warming of the most extreme days and nights each year, 

Effects on water 

resources relying on 

snowmelt; effects on 

some water supplies 

Increased water 

demand; water quality 

problems, e,g. algal 

blooms 

Adverse effects on 

quality of surface and 

groundwater; 

contamination of water 

suppty; water scarcity 

may be relieved 

More widespread water 

stress 

Power Qutag-es causing 

disruption of public 

water supply 

Decreased freshwater 

availability due to 

saltwater intrUSion 

Reduced human 

mortality from 

decreased cold 

exposure 

Increased risk of heatrelated mortality, 

especially for the 

elderly, chronicaHy sick, 

very young and socially 

isolated 

Increased risk of 

deaths, injuries and 

infectious, respiratory 

and skin diseases 

Increased risk of food 

and water shortage; 

mcreased risk of 

malnutrition; increased 

fisk of water-and foodborne diseases 

Increased risk of 

deaths, injuries, waterand food- borne 

diseases; post· 

traumatic stress 

disorders 

Increased risk of deaths 

and injuries by 

drowning in floods; 

migration-reiated health 

effects 

Reduced energy 

demand for heating; 

increased demand for 

cooling; declining air 

quality in cities: reduced 

disruption to transport 

due to snow, ice; effects 

on 'Winter tourism 

Reduction in quality of 

life for people in warm 

areas without 

appropriate housing; 

impacts on the e/derty, 

very young and poor 

Disruption of 

settlements, commerce, 

transport and societies 

due to nooding 

pressures on urban and 

rural infrastructures; 

loss of property 

Water shortage for 

settlements, industry 

and societies; reduced 

hydropower generation 

potentials; potential for 

population migration 

Disruption by flood and 

high 'Winds; withdrawal 

of risk coverage in 

vulnerable areas by 

private insurers, 

potentia! for population 

migrations, loss of 

property 

Costs of coastal 

protaction versus costs 

of land-use relocation; 

potential for movement 

of populations and 

infrastructure; also see 

tropical cyclones above 

c) Extreme high sea level depends on average sea level and on regional weather systems. It is defined as the highest 1% of hourly values of 

observed sea level at a station for a given reference pen"od 

d) In all scenan"os, the projected global average sea level at 2100 is higher than in the reference pen'od {WGI 10.6}. The effect of changes in 

regional weather systems on sea level extremes has not been assessed. 
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Anthropogenic warming and sea level rise would continue for centuries due to the times cales associated with 

climate processes and feedbacks, even if GHG concentrations were to be stabilised. {3.2.3} 

Estimated long term (multi-century) warming corresponding to the six AR4 WG III stabilisation categories is 

shown in Figure SPM.8. 

Estimated multi-century warming relative to 1980·1999 for AR4 stabilisation categories 

2 3 

Global average temperature change relative to 1980-1999 

Figure SPM.B. Estimated long term (multj.c.entury) warming corresponding to the six AR4 WGIII stabHlsation categories (Table 

SPM,3). Temperature scale has been shifted by -O.soC compared to Table SPM.3 to account approximately for the warming 

bel'Neen pre-industria! and 1980-1999. For most stabilisation levels global average temperature is approaching the equilibrium 

level over a few centuries. For GHG emission scenarios that lead to stabilisation by 2100 at levels comparable to SRES 81 and 

A18 (600 and 850 CO2-eq. ppm; category IV and V) assessed models project that about 65-70% of the estimated global 

equilibrium temperature increase assuming a climate sensitivity of 3°C would be realised at the time of stabillsation (WG! 

10.7.2). For the much !ower stabilisation scenarios (category I and II), the equiHbrium temperature may be reached earlier 

(Figure SPM.ll). 

Contraction of the Greenland ice sheet is projected to continue to contribute to sea level rise after 2100. Current 

models suggest virtually complete elimination of the Greenland ice sheet and a resulting contribution to sea level 

rise of about 7 m if global average warming were sustained for millennia in excess of 1.9 to 4.6'C relative to preindustrial values, The corresponding future temperatures in Greenland are comparable to those inferred for the last 

interglacial period 125,000 years ago, when paleoclimatic information suggests reductions of polar land ice extent 

and 4 to 6 m of sea level rise. {3.2.3} 

Current global model studies project that the Antarctic ice sheet will remain too cold for widespread surface 

melting and gain mass due to increased snowfall. However, net loss of ice mass could occur if dynamical ice 

discharge dominates the ice sheet mass balance. (3.2.3} 

Anthropogenic warming could lead to some impacts that are abrupt or irreversible, depending upon the rate 

and magnitude of the climate change. {3.4} 

Partial loss of ice sheets on polar land could imply metres of sea level rise, major changes in coastlines and 

inundation oflow-Iying areas, with greatest effects in river deltas and low-lying islands. Such changes are 

projected to occur over millennial time scales, but more rapid sea level rise on century time scales cannot be 

excluded. {3.4} 

Climate change is likely to lead to some irreversible impacts. There is medium confidence that approximately 20-

30% of species assessed so far are likely to be at increased risk of extinction if increases in global average wanning 

exceed 1.5-2.5"C (relative to 1980-1999). As global average temperature increase exceeds about 3.5'C, model 

projections suggest significant extinctions (40-70% of species assessed) around the globe. {3.4} 

Based on current model simulations, the meridional overturning circulation (MOC) of the Atlantic Ocean will very 

likely slow down during the 21" century; nevertheless temperatures over the Atlantic and Europe are projected to 

increase. The MOC is very unlikely to undergo a large abrupt transition during the 21 "century. Longer-term MOC 

changes cannot be assessed with confidence. Impacts of large-scale and persistent changes in the MOC are likely to 

include changes in marine ecosystem productivity, fisheries, ocean CO2 uptake, oceanic oxygen concentrations and 

terrestrial vegetation. Changes in terrestrial and ocean CO, uptake may feed back on the climate system. {3.4} 
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4. Adaptation and mitigation optionsl4 

A wide array of adaptation options is available, but more extensive adaptation than is currently occurring is 

required to reduce vulnerability to climate change. There are barriers, limits and costs, which are not fully 

understood. {4.2) 

Societies have a long record of managing the impacts of weather- and climate-related events. Nevertheless, 

additional adaptation measures will be required to reduce the adverse impacts of projected climate change and 

variability, regardless of the scale of mitigation undertaken over the next two to three decades, Moreover, 

vulnerability to climate change can be exacerbated by other stresses. These arise from, for example, current climate 

hazards, poverty and unequal access to resources, food insecurity, trends in economic globalisation, conflict and 

incidence of discases such as HIVI AlDS. (4.2) 

Some planned adaptation to climate change is already occurring on a limited basis. Adaptation can reduce 

vulnerability especially when it is embedded within broader sectoral initiatives (Table SPM.4). There is high 

confidence that there are viable adaptation options that can be implemented in some sectors at low cost, and/or with 

high benefit-cost ratios. However, comprehensive estimates of global costs and benefits of adaptation are limited. 

{4.2, Tablc4.1} 

Adaptive capacity is intimately connected to social and economic development but is unevenly distributed 

across and within societies. (4.2) 

A range of barriers limit both the implementation and effectiveness of adaptation measures. The capacity to adapt 

is dynamic and is influenced by a society's productive base including: natural and man-made capital assets, social 

networks and entitlements, human capital and institutions, governance, national income, health and technology. 

Even societies with high adaptive capacity remain vulnerable to climate change, variability and extremes. (4.2} 

Both bottom-up and top-down studies indicate that there is /tig/! agreemelll and much evidence of SUbstantial 

economic potential for the mitigation of global GHG emissions over the coming decades that could offset the 

projected growth of global emissions or reduce emissions below current levels (Figure SPM.9, SPM.IO)". 

While top-down and bottom-up studies are in line at the global level (Figure SPM.9) there are considerable 

differences at the sectoral level. (4.3} 

No single technology can provide all of the mitigation potential in any sector. The economic mitigation potential, 

which is generally greater than the market mitigation potential, can only be achieved when adequate policies are in 

place and barriers removed (Table SPM.S). 

Bottom-up studies suggest that mitigation opportunities with net negative costs have the potential to reduce 

emissions by around 6 GtCOz·eq/yr in 2030. realizing which requires dealing with implementation barriers. {4.3) 

14 While this section deals with adaptatton and mitigation separately, these responses can be complementary. This theme is discussed in 

sectlon 5 

15 The concept of "mitigation potential~ has been developed to assess the scale of GHG reductions that could be made, relat!ve to emission 

baselines, for a given leve! of carbon price (expressed in cost per unit of carbon dioxide equivalent emissions avoided or reduced). Mitigation 

potential is further differenbated in terms of "market mitigation potential" and "economic mitigation potential" 

Market mitigation potential is the mitigation potentia! based on private costs and private discount rates (reflecting the perspective of 

pri>.{ate consumers and companies ), which might be expected to occur under forecast market conditions, including poliCies and measures 

currently in place, noting that barriers limit actual uptake 

Economic mitigation potential is the mitigation potential. which takes into account socia! costs and benefits and socia! discount rates 

(reflecting the perspective of society, socia! discount rates are lower than those used by private investors ), assuming that market efficiency 

is improved by policies and measures and barriers are removed 

Mitigation potentia! is estimated usmg different types of approaches. Bottom-up studies are based on assessment of mitigation options. 

emphasizing specific technologies and regulations. They are typically sectoral studies taking the macro-economy as unchanged. Top-down 

studies assess the economy-wide potential of mitigation options. They use globally consistent frameworks and aggregated mformation 

about mitigation options and capture macro-economic and market feedbacks 
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Table SPM-4. Selected examples of planned adaptation by sector. 

Agriculture 

Infrastructurelsettloament 

(including coastal zones) 

Human health 

Tourism 

Transport 

Energy 

Adjustment of planting dates and 

crop variety; crop relocation; 

improved land management, e.g, 

erosion control and soil protection 

through tree planting 

Relocation; seawa!ls and storm 

surge barriers; dune reinforcement; 

land acquisition and creation of 

marshlandslwetlands as buffer 

against sea level rise and flooding; 

protection of existing natural 

Heat·health action plans; 

emergency medical services; 

improved climate-sensitive disease 

surveillance and control; safe water 

Diversification of tourism attractions 

& revenues; shifting ski slopes to 

higher altitudes and glaCiers; 

artificial snow-making 

Realignment/relocation; design 

standards and planning for roads, 

rail, and other infrastructure to 

cope with warming and drainage 

Strengthening of overhead 

transmission and distribution 

infrastructure; underground cabling 

for utilities; energy efficiency; use of 

renewable sources; reduced 

dependence on single sources of 

R&D polides; institutional 

reform; land tenure and 

land reform; training; 

capacity building; crop 

insurance; financial 

subsidies 

Standards and regulations 

that integrate climate 

change considerations into 

design; land use policies; 

buHding codes; insurance 

Public health policies that 

recognise climate risk; 

strengthened health 

I and 

Integrated planning (e.g. 

carrying capacity; linkages 

with other sectors); financial 

incentives, e.g. subsidies 

and tax credits 

Integratmg climate change 

considerations into national 

transport policy; investment 

in R&D for special 

situations, e.g. permafrost 

National energy policies, 

regulations, and fiscal and 

financial incentives to 

Technological & financial constraints; 

access to new varieties; markets; 

longer growing season in higher 

latitudes; reVenues from 'new' 

products 

Financial and technological barriers; 

availability of relocation space; 

integrated poliCies and 

managements; synergies with 

sustainable development goals 

Limits to human tolerance 

(vulnerable groups); knov.1edga 

limitations; financial capacity; 

health seNices; improved 

Appeal/marketing of new attractions; 

financial and logistical chaHenges; 

potential adverse impact on other 

sectors (e.g, artificial snow-making 

may increase energy use); revenues 

from 'new' attractions; involvement of 

Financial & technological barriers; 

availability of less vulnerable routes; 

improved technologies end 

integration with key sectors (e.g. 

energy) 

Access to viable alternatives; 

financial and technological barriers; 

acceptance of new technologies; 

stimulation of new technologies; use 

of local resources 

Pago 
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Comparison between global economic mitigation potential and 

projected emissions increase in 2030 

Bottom-up 

[<0 0<20 [hl<50 1<1001.JS$11C(h.eq 

Gco,., 

" 

a) 

Top-down 

0<20 lil'<50 19< toolJS$llCOre:i 

"'co,., 

" 

Increase ill GHG emissions _ year 2000 levels 

gGtoo,,-.,q 

1: 

~,. 

~ r 0" 

.-

!" 

§ , 

i 

f' 

c) 

Figure SPM.9. Global economic mitigation potential in 2030 estimated from bottom~up (Panel a) and top-down (Panel b) 

studies, compared with the projected emission increases from SRES scenarios relative to 2000 GHG emissions of 40,8 GtC02-

eq (Panel c), Note: GHG emissions in 2000 are exclusive of emissions of decay of above ground biomass that remains after 

logging and deforestation and from peat fires and drained peat soils, to ensure consistency with the SRES emission results. 

Economic mitigation potential by sector in 2030 estimated from bottom-up studies 

EneIlr; supply T~ Buildings 1"""slly I\g!iculture Forestry Waste 

1ataI 00d0ral potential at <USS1001C0,~aq: In Gt~-eqlyr: 

2.4-4.7 1.6-2.5 5.3-6.1 2..5-5.5 2.3-6..4 1.3-42 Q.4-1 

Figure SPM.1Q. Estimated economic mitigation potential by sector in 2030 from bottom-up studies, compared to the respective 

baselines assumed in the sector assessments. The potentials do not include non~technica! options such as lifestyle changes. 

{Figure 4.1} 

Notes: 

a) The ranges for global econom1c potentials as assessed in each sector are shown by vertical lines. The ranges are based on 

end-use allocations of emissions, meaning that emissions of electricity use are counted towards the end-use sectors and not to 

the energy supply sector. 

b) The estimated potentials have been constrained by the availability of studies particularly at high carbon pr1ce levels. 

c) Sectors used different baselines. For industry the SRES 82 baseline was taken, for energy supply and transport the WEO 

2004 baseline was used; the building sector is based on a baseline in between SRES 82 and A 18; for waste, SRES A 1 B driving 

forces were used to construct a waste specific baseline; agriculture and forestry used baselines that mostly used 82 driving 

forces. 

d) Only globa! totals for transport are shown because international aviation is included. 

e) Categories excluded are: non-C02 emissions in buildings and transport, part of material efficiency options, heat production 

and cogeneration in energy supply, heavy duty vehicles, shipping and high-occupancy passenger transport, most high-cost 

options for buildings, wastewater treatment, emission reduction from coal mines and gas pipelines, fluorinated gases from 

energy supply and transport. The underestimation of the total economic potentia! from these emissions is of the order of 10-

15%. 
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Table SPM~5. Selected examples of key sectoral mitigation technologies, policies and measures, constraints and opportunities. 

{WGIII, Tables SPM.3, SPM.7) 

Transport 

Buildings 

Industry 

Agriculture 

Improved supply and distribution efficiency; fuel 

switching from coaJ to gas; nuclear power; 

renewable heat and power (hydropower, solar, 

wind, geothermal and bioenergy); combined heat 

and power; early applications of Carbon Dioxide 

Capture and Storage (CCS) (e.g. storage of 

removed CO2 from natural gas); CCS for gas, 

biomass and coal~fjred electricity generating 

facilities; advanced nuclear power; advanced 

renewable energy, including tidal and wave 

energy, concentrating solar, and sofar 

photovoftaics 

Feed-in tariffs for renewable energy 

technologies; Renewable energy 

obligations; Producer subsidies 

More fuel effiClent vehicles; hybrid vehicles; Mandatory fue! economy, biofue! 

cleaner diesel vehicles; biofuels; modal shifts from blending and CO2 standards for 

May be appropn'ate to creatf: 

markets for low emissions 

technologies 

P artia! coverage of vehicle fleet 

may limit effectiveness 

road transport to rail and public transport systems; road transport 

non~motorised transport (cycling, walking); land~ [----'--------1-1----------1 use and transport planning·; Second generation Taxes on vehicle purchase, Effectiveness may drop with 

biofuefs; higher efficiency aircraft; advanced registration, use and motor fuels, higher incomes 

electnc and hybrid vehicles with more powerful road and parking pricing 

and reliable batten'es Influence mobility needs through 

land use regulations, and 

infrastructure planning; Investment 

in attractive public transport facilities 

and non-motorised forms of 

Efficient Ilghting and dayHghting; more efficient 

electrical appliances and heating and cooling 

devices; improved cook stoves, improved 

insulation; passive and active solar design for 

heating and cooling; altemative refrigeration 

fluids, recovery and recycling of fluorinated gases; 

Integrated design of commercial buifdings 

incfuding tf:chnologies, such as intelligent meters 

that provide feedback and control; solar 

photovoftaics integrated in buifdings 

More efficient end-use electrical equipment; heat 

and power recovery, material recycling and 

substitution; control of non-C02 gas emissions: 

and a wide array of process-specific technologies; 

Advanced energy efficiency: CCS for cement, 

ammonia, and iron manufacture; inert electrodes 

for aluminium manufacture 

Improved crop and grazing land management to increase soil carbon storage; restoration of 

cultivated peaty soils and degraded lands; 

improved rice cultivation techniques and livestock 

and manure management to reduce CH4 

emissions; improved nitrogen fertiliser application 

techniques to reduce N20 emissions; dedicated 

energy crops to replace fossil fuel use; improved 

energy efficiency; Improvements of crop Yields 

transport 

Appliance standards and labelling 

BuHding codes and certification 

Demand-side management 

programmes 

Public sector leadership 

programmes, including procurement 

Incentives for energy service 

companies (ESCOs) 

Provision of benchmark information; 

Performance standards; Subsidies, 

tax credits 

Tradab!e permits 

Voluntary agreements 

Financial incentives and regulations 

for improved land management, 

maintaining soil carbon content, 

efficient use of fertilisers and 

irrigation 

Particularly appropriate for 

countries that are building up 

their transportation systems 

Periodic revision of standards 

needed 

Attractive for new buildings" 

Enforcement can be difficult 

Need for regulations so that 

utilities may profit 

Government purchasing can 

expand demand for energyefficient products 

SUCCf:SS factor: Access to third 

party finanCing 

May be appropn"ate to stimulate 

technology uptake" Stability of 

national policy important in view 

of intemational competitiveness 

Predictable allocation 

mechanisms and stable price 

signals important for investments 

Success factors Include: clear 

targets, a baseline scenario, third 

party Involvement in design and 

review and forma! provisions of 

monitoring, close cooperation 

between government and 

industry 

May encourage synergy with 

sustainable development and 

with reducing vulnerability to 

climate change, thereby 

overcoming barriers to 

implementation 
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Table SPM-S. (cont.) 

Forestryl 

forests 

Waste 

Afforestation; reforestation: forest management; 

reduced deforestation; harvested wood product 

management; use of forestry products for 

bioenergy to replace fossll fuel use; Tree species 

improvement to increase biomass productivity and 

carbon sequestration. Improved remote sensing 

technologies for analysis of vegetation! soil 

carbon sequestration potentia! and mapping land 

use change 

landfill CH4 recovery; waste incineration wIth 

energy recovery; composting of organic waste; 

controlled waste water treatment; recycling and 

waste minimisation; biocovers and biofilters to 

optimise CH4 oxidation 

Financial incentives (national and 

international) to increase forest 

area, to reduce deforestation, and 

to maintain and manage forests, 

land~use regulation and 

enforcement 

Financial incentives for improved 

waste and wastewater management 

Renewable energy incentives or 

obligations 

Waste management regulations 

Constraints include lack of 

investment capital and land 

tenure issues. Can help poverty 

alleviation 

May stimulate technology 

diffusion 

local availabIlity of low-cost fuel 

Most effectively applied at 

national level with enforcement 

strategies 

Future energy infrastructure investment decisions, expected to exceed 20 trillion US$16 between 2005 and 2030, 

will have long-tenn impacts on GHG emissions, because oflhe long life-times of energy plant' and other 

infrastructure capital stock. The widespread diffusion of low-carbon technologies may take many decades, even if 

early investments in these technologies are made attractive. Initial estimates show that returning global energyrelated CO, emissions to 2005 levels by 2030 would require a large shift in investment patterns, although the net 

additional investment required ranges from negligible to 5-10%. {4.3) 

A wide variety of policies and instruments are available to governments to create the incentives for 

mitigation action, Their applicability depends on national circumstances and secloral context (Table SPM5). 

{4.3} 

They include integrating climate policies in wider development policies, regulations and standards, taxes and 

charges, tradable pennits, financial incentives, voluntary agreements, infonnation instruments, and research, 

development and demonstration (RD&D). {4.3} 

An effective carbon-price signal could realise significant mitigation potential in all sectors. Modelling studies show 

global carbon prices rising to 20-80 US$/tCO,.eq by 2030 are consistent with stabilisation at around SSO ppm CO,-

eq by 2100, For the same stabilisation level, induced technological change may lower these price ranges to 5-65 

US$/tCO,.eq in 2030." {4.3) 

There is high agreement and much evidence that mitigation actions can result in near-tenn co-benefits (e.g. 

improved health due to reduced air pollution) that may offset a substantial fraction of mitigation costs. (4.3) 

There is high agreement and medium evidence that Annex I countries' actions may affect the global economy and 

global emissions, although the scale of carbon leakage remains uncertain." (4.3) 

111 20 trjJIion::: 20,000 billion::: 20)(1012 

11 Studies on mitigation portfolios and macro-economic costs assessed in this report are based on top-down modelling. Most models use a 

global least cost approach to mitigation portfolios, with universal emiSSions trading, assuming transparent markets, no transaction cost, and thus 

perfect implementation of mitigation measures throughout the 21 st century. Costs are given for a specific point in time. Global modelled costs 

wi!! Increase if some regions, sectors (e.g. land~use), options or gases are excluded. Global modelled costs will decrease with lower baseilnes, 

use of revenues from carbon taxes and auctioned permits, and if Induced technological learning is included. These models do not consider 

climate benefits and generally also co-benefits of mitigation measures, or equity issues. Significant progress has been achieved In applying 

approaches based on induced technological change to stabilisation studies; however, conceptual issues remain. In the models that consider 

induced technological change, prOjected costs for a given stabilisation level are reduced; the reductions are greater at lower stabilisation level. 

18 Further details may be found in Topic 4 of the Synthesis Report 
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Fossil fuel exporting nations (in both Annex I and non-Annex I countries) may expect, as indicated in the TAR, 

lower demand and prices and lower GDP growth due to mitigation policies, The extent of this spill over depends 

strongly on assumptions rclated to policy decisions and oil market conditions, 

There is also high agreement and medium evidence that changes in lifestyle, behaviour patterns and management 

practices can contribute to climate change mitigation across all sectors. {4.3} 

Many options for reducing global GRG emissions through international cooperation exist, There is high 

agreement and much evidence that notable achievements of the UNFCCC and its Kyoto Protocol are the 

establishment of. global response to climate change, stimulation of an array of nation a' policies, and the 

creation of an international carbon market and new institutional mechanisms that may provide the 

foundation for future mitigation efforts, Progress has also been made in addressing adaptation within the 

UNFCCC and additional international initiatives have been suggested, {4,5) 

Greater cooperative efforts and expansion of market mechanisms will help to reduce global costs for achieving a 

given level of mitigation, or will improve environmental effectiveness. Efforts can include diverse elements such as 

emissions targets; sectoral, local, sub-national and regional actions; RD&D programmes; adopting common 

policies; implementing development oriented actions; or expanding financing instruments. {4.5l 

In several sectors, climate response options can be implemented to realise synergies and avoid conflicts with 

other dimensions of sustainable development. Decisions about macroeconomic and other non-climate 

policies can significantly affect emissions, adaptive capacity and vulnerability, {4.4, 5,B} 

Making development more sustainable can enhance mitigative and adaptive capacities, reduce emissions, and 

reduce vulnerability, but there may be barriers to implementation. On the other hand, it is vel)' likely that climate 

change can slow the pace of progress towards sustainable development. Over the next half-century, climate change 

could impede achievement of the Millennium Development Goals. {5.8} 

5, The long-term perspective 

Determining what constitutes '~dangerous anthropogenic interference with the climate system" in relation to 

Article 2 of the UNFCCC involves value judgements, Science can support informed decisions on this issue, 

including by providing criteria for judging which vulnerabilities might be labelled "key". {Box 'Key 

Vulnerabilities and Article 2 of the UNFCCC', topic 5) 

Key vuJnerabilitiesl9 may be associated with many climate sensitive systems including food supply, infrastructure, 

health, water resources, coastal systems, ecosystems, global biogeochemical cycles, ice sheets, and modes of 

oceanic and atmospheric circulation. {Box 'Key Vulnerabilities and Article 2 of the UNFCCC', topic 5} 

The five "reasons for con.,;crn" identified in the TAR remain a viable framework to consider key 

vulnerabilities. These "reasons" are assessed here to be stronger than in the TAR. Many risks are identified 

with higher confidence. Some risks are projected to be larger or to occur at lower increases in temperature. 

Understanding about the relationship between impacts (the basis for "reasons for concern" in the TAR) and 

vulnerability (that includes the ability to adapt to impacts) has improved, {5,2} 

This is due to more precise identification of the circumstances that make systems, sectors and regions especially 

vulnerable, and growing evidence of the risks of very large impacts on mUltiple century time scales. {5.2} 

19 Key Vu!nerablllties can be identified based on a number of criteria in the literature, including magnitude, timing, persistence/re ..... ersibility, the 

potentia! for adaptation, distributional aspects, likelihood and 'importance' of the impacts, 

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Risks to unique and threatened systems. There is new and stronger evidence of observed impacts of climate 

change on unique and vulnerable systems (such as polar and high mountain communities and ecosystems), 

with increasing levels of adverse impacts as temperatures increase further. An increasing risk of species 

extinction and coral reef damage is projected with higher confidence than in the TAR as wanning proceeds. 

There is medium cmifidence that approximately 20-30% of plant and animal species assessed so far are liIu!ly to 

be at increased risk of extinction if increases in global average temperature exceed LS-2.SoC over 1980-1999 

levels. Confidence has increased that a 1-2'C increase in global mean temperature above 1990 levels (about 

I.S-2.S'C above pre-industrial) poses significant risks to many unique and threatened systems including many 

biodiversity hotspots. Corals are vulnerable to thennal stress and have low adaptive capacity. Increases in sea 

surface temperature of about I ~3°C are projected to result in more frequent coral bleaching events and 

widespread mortality, unless there is thermal adaptation or acclimatization by corals. Increasing vulnerability 

of indigenous communities in the Arctic and small island communities to warming is projected. 

Risks of extreme weather events. Responses to some recent extreme events reveal higher levels of 

vulnerability than the TAR. There is now higher confidence in the projected increases in droughts, heatwaves, 

and floods as well as their adverse impacts. 

Distribution of im pacts and vulnerabilities. There are sharp differences across regions and those in the 

weakest economic position are often the most vulnerable to climate change. There is increasing evidence of 

greater vulnerability of specific groups such as the poor and elderly in not only developing but also developed 

countries. Moreover, there is increased evidence that low-latitude and less-developed areas generally face 

greater risk, for example in dry areas and mega-deltas. 

Aggregate impacts. Compared to the TAR, initial net market-based benefits from climate change are 

projected to peak at a lower magnitude of warming, while damages would be higher for larger magnitUdes of 

wanning. The net costs of impacts of increased warming are projected to increase over time. 

Risks of large-scale singularities. There is high confidence that global warming over many centuries would 

lead to a sea level rise contribution from thermal expansion alone which is projected to be much larger than 

observed over the 20th century, with loss of coastal area and associated impacts. There is better understanding 

than in the TAR that the risk of additional contributions to sea level rise from both the Greenland and possibly 

Antarctic ice sheets may be larger than projected by ice sheet models and could occur on century time scales. 

This is because ice dynamical processes seen in recent observations but not fully included in ice sheet models 

assessed in AR4 could increase the rate of ice loss. 

There is /liglJ confidence that neither adaptation nor mitigation alone can avoid all climate change impacts; 

however, they can complement each other and together can significantly reduce the risks of climate change. 

{5.3) 

Adaptation is necessary in the short and longer term to address impacts resulting from the warming that would 

occur even for the lowest stabilisation scenarios assessed. There are barriers, limits and costs, but these are not 

fully understood. Unmitigated climate change would, in the long tenn, be likely to exceed the capacity of natural, 

managed and human systems to adapt The time at which such limits could be reached will vary between sectors 

and regions. Early mitigation actions would avoid further locking in carbon intensive infrastructure and reduce 

climate change and associated adaptation needs. {52,5.3) 

Many impacts can be reduced, delayed or avoided by mitigation. Mitigation efforts and investments over the 

next two to three decades will have a large impact on opportunities to achieve lower stabilisation levels. 

Delayed emission reductions significantly constrain the opportunities to achieve lower stabilisation levels 

and increase the risk of more severe climate change impacts. {5.3, 5.4, 5.7} 

In order to stabilise the concentration of GHGs in the atmosphere, emissions would need to peak and decline 

thereafter. The lower the stabilisation level, the more quickly this peak and decline would need to occur.'o (SA) 

10 For the lowest mitigation scenario category assessed, emissions would need to peak by 2015 and for the higllest by 2090 (see Tab!e SPM.3). 

Scenarios that use alternative emiSSion pathways show substantia! differences in the rate of global climate change 
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Table SPM.6 and Figure SPM.l1 summarise the required emission levels for different groups of stabilisation 

concentrations and the resulting equilibrium global wanning and long-term sea level rise due to thermal expansion 

only.21 The timing and level of mitigation to reach a given temperature stabilisation level is earlier and more 

stringent if climate sensitivity is high than ifit is low. {5A, 5.?} 

Sea level rise under warming is inevitable. Thermal expansion would continue for many centuries after GHG 

concentrations have stabilised, for any of the stabilisation levels assessed, causing an eventual sea level rise much 

larger than projected for the 21" century. The eventual contributions from Greenland ice sheet loss could be several 

metres, and larger than from thermal expansion, should warming in excess of 1.9-4.6°C above pre-industrial be 

sustained over many centuries. The long time scales ofthennal expansion and ice sheet response to wanning imply 

that stabilisation of GHG concentrations at or above present levels would not stabilise sea level for many centuries. 

{5.3, SA} 

Table SPM.5. Characteristics of post-TAR stabilisation scenarios and resulting long-term equilibrium global average 

temperature and the sea level rise component from thermal expansion only. {Table 5.1}a 

350 - 400 445 - 490 2000 - 2015 -85 to -50 2.0 -2.4 0.4-1.4 

400 - 440 490 - 535 2000 - 2020 -60 to -30 2.4 -2.8 0.5-1.7 

III 440 - 485 535 - 590 2010 - 2030 -30 to +5 2.8 - 3.2 0.6-1.9 

IV 485 - 570 590-710 2020 - 2060 +10 to +60 3.2 - 4.0 0.6 -2.4 

V 570 - 660 710-855 2050 - 2080 +25 to +85 4.0-4.9 0.8 - 2.9 

VI 660 - 790 855-1130 2060- 2090 +90 to +140 4.9-6.1 1.0-3.7 

Notes: 

18 

21 

118 

a) The emission reductions to meet a parlicular stabilization level reported in the mitigation studies assessed here might be underestimated due 

to missing carbon cycle feedbacks (see also Topic 2J- b) Atmospheric CO~ concentrations were 379 ppm in 2005. The best estimate of total COreq concentration in 2005 for alf long-lived GHGs is 

about 455 ppm, while the corresponding value including the net effect of ali anthropogenic forcing agents is 375 ppm COreq. 

c) Ranges correspond to the 15th to 85th percentile of the post-TAR scenario distribution. CO2 emissions are shown so multi-gas scenarios can 

be compared with COronly scenan'os (see Figure SPM.3). d) The best estimate of climate sensitivity is 3°e. 

e) Note that global average temperature at equilibrium is different from expected global average temperature at the time of stabilization of GHG 

concentrations due to the inertia of the climate system. For the majority of scenarios assessed, stabilisation of GHG concentrations occurs 

between 2100 and 2150 (see also Footnote 9). 

f) Equilibrium sea level rise is for the contribution from ocean thermal expansion only and does not reach equilibrium for at leDst many 

centuries. These values have been estimated using relatively simple climate mode's (one low resolution AOGCM and several EMfCs based 

on the best estimate of 3°C climate sensitivity) and do not include contn'butions from melting ice sheets, glaciers and ice caps. Long~term 

thermal expansion is projected to result in 0.2 to 0.6 m per degree Celsius of global average warming above preindustrial. (AOGCM refers 

to Atmosphere Ocean General Circulation Models and EMICs to Earth System Models of Intermediate Complexity) 

21 Estimates for the evolution of temperature over the course of tllis century are not avallab!e in the AR4 for the stabilisation scenarios. For most 

stabilisation levels global average temperature is approaching the equiHbnum level over a few centuries. For the much lower stabilisation 

scenarios (category I and Il, Figure SPM.11), the equilibrium temperature may be reached earlier 
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CO2 emissions and equilibrium temperature increases for a range of stabilisation levels 

Figure SPM.11. Global CO2 emissions for 1940 to 2000 and emissions ranges for categories of stabilisation scenarios from 

2000 to 2100 (left-hand panel); and the corresponding relationship between the stabilisation target and the likely equilibrium 

global average temperature increase above pre-industrial (right-hand panel). Approaching equilibrium can take severa! 

centuries, especially for scenarios with higher levels of stabWsatlon. Coloured shadings show stabilisation scenarios grouped 

according to different targets (stabilisation category I to VI). Right-hand panel shows ranges of global average temperature 

change above pre·jndustrial, using (i) "best estimate" climate sensitivity of 3"C (black line in middle of shaded area), (II) upper 

bound of likely range of climate sensitivity of 4.S"C (red line at top of shaded area) (iii) !ower bound of likely range of climate 

sensitivity of 2°C (blue line at bottom of shaded area), Black dashed lines in the left panel give the emissions range of recent 

baseline scenarios published since the SRES (2000}, Emissions ranges of the stabilisation scenarios comprise CO2-only and 

multigas scenarios and correspond to the 10th·90th percentile of the full scenario distribution. Note: CO2 emissions in most 

models do not include emissions from decay of above ground biomass that remains after logging and deforestation, and from 

peat fires and drained peat soils. {Figure 5,1} 

There is high agreement and much evidence that all stabilisation levels assessed can be achieved by 

deployment of a portfolio of technologies that are either currently available or expected to be 

commercialised in coming decades, assuming appropriate and effective incentives are in place for their 

development, acquisition, deployment and diffusion and addressing related barriers. (5.S) 

All assessed stabilisation scenarios indicate that 60-80% of the reductions would come from energy supply and 

use. and industrial processes, with energy efficiency playing a key role in many scenarios. Including non-C02 and 

C02 land~use and forestry mitigation options provides greater flexibility and cost·effectiveness. Low stabilisation 

levels require early investments and substantially more rapid diffusion and commercialisation of advanced lowemissions technologies. 

Without substantial investment flows and effective technology transfer, it may be difficult to achieve emission 

reduction at a significant scale. Mobilizing financing of incremental costs of low-carbon technologies is important. 

(5.5) 

The macro-economic costs of mitigation generally rise with the stringency ofthe stabilisation target (Table 

SPM.7). For specific countries and sectors, costs vary considerably from the global average.'2 (5.6) 

In 2050, global average macro-economic costs for mitigation towards stabilisation between 710 and 445ppm CO2-

eq are between a 1 % gain and 5.5% decrease of global GDP (Table SPM.7). This corresponds to slowing average 

annual global GDP growth by less than 0.12 percentage points. (5.6} 

22 See footnote 17 for more detail on cost estimates and model assumptions. 
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Table SPM.7. Estimated global macro-economic costs in 2030 and 2050. Costs are relative to the baseline for least-cost 

trajectories towards different long-term stabilisation levels. {Table 5.2} 

Notes: Values given in this table correspond to the full literature across af! baselines and mitigation scenan'os that provide GOP numbers 

a) Global GOP based on market exchange rates 

b) The 10th and 90th percentile range of the analysed data are given where applicable. Negative values indicate GOP gain. The first row (445-

535 ppm COreq) gives the upper bound estimate of the literature only. 

c) The calculation of the reduction of the annual growth rate is based on the average reduction dun'ng the assessed period that would result in 

the indicated GOP decrease by 2030 and 2050 respectively 

d) The number of studies is relatively small and they generally use low baselines. High emissions baselines generally lead to higher costs 

e) The values correspond to the highest estimate for GOP reduction shown in column three 

Responding to climate change involves an iterative risk management process that includes both adaptati,," 

and mitigation and takes into account climate change damages, co~benefits, sustainabiJity, equity, and 

attitudes to risk. {5.1) 

Impacts of climate change are very likely to impose net annual costs which will increase over time as global 

temperatures increase. Peer-reviewed estimates of the social cost of carbon2

] in 2005 average US$12 per tonne of 

CO2, but the range from 100 estimates is large (-$3 to $95/tCOz). This is due in large part to differences in 

assumptions regarding climate sensitivity, response lags, the treatment of risk and equity, economic and noneconomic impacts, the inclusion of potentially catastrophic losses, and discount rates. Aggregate estimates of costs 

mask significant differences in impacts across sectors, regions and populations and very likely underestimate 

damage costs because they cannot include many non-quantifiable impacts. {5. 7) 

Limited and early analytical results from integrated analyses of the costs and benefits of mitigation indicate that 

they are broadly comparable in magnitude, but do not as yet pennit an unambiguous detennination of an emissions 

pathway or stabilisation level where benefits exceed costs. {5.7} 

Climate sensitivity is a key uncertainty for mitigation scenarios for specific temperature levels. 

Choices about the scale and timing of GHG mitigation involve balancing the economic costs of more rapid 

emission reductions now against the corresponding medium-term and long-term climate risks of delay. {SA} 

23 Net economic costs of damages from climate change aggregated across the globe and discounted to the specified year.