[Joint House and Senate Hearing, 111 Congress]
[From the U.S. Government Publishing Office]
GREEN AND MEAN: CAN THE NEW U.S. ECONOMY BE BOTH CLIMATE-FRIENDLY AND
COMPETITIVE?
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HEARING
before the
COMMISSION ON SECURITY AND
COOPERATION IN EUROPE
ONE HUNDRED ELEVENTH CONGRESS
FIRST SESSION
__________
MARCH 10, 2009
__________
Printed for the use of the Commission on Security and Cooperation in
Europe
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Available via http://www.csce.gov
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COMMISSION ON SECURITY AND COOPERATION IN EUROPE
LEGISLATIVE BRANCH COMMISSIONERS
SENATE
HOUSE
BENJAMIN CARDIN, Maryland, ALCEE HASTINGS, Florida,
Chairman Co-Chairman
CHRISTOPHER DODD, Connecticut EDWARD MARKEY, Massachusetts
SAM BROWNBACK, Kansas LOUISE McINTOSH SLAUGHTER,
SAXBY CHAMBLISS, Georgia New York
RICHARD BURR, North Carolina MIKE McINTYRE, North Carolina
ROGER WICKER, Mississippi G.K. BUTTERFIELD, North Carolina
JEANNE SHAHEEN, New Hampshire JOSEPH PITTS, Pennsylvania
SHELDON WHITEHOUSE, Rhode Island ROBERT ADERHOLT, Alabama
TOM UDALL, New Mexico DARRELL ISSA, California
EXECUTIVE BRANCH COMMISSIONERS
Michael Posner, Department of State
Alexander Vershbow, Department of Defense
GREEN AND MEAN: CAN THE NEW U.S. ECONOMY BE BOTH CLIMATE-FRIENDLY AND
COMPETITIVE?
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MARCH 10, 2009
COMMISSIONERS
Page
Hon. Benjamin Cardin, Chairman, Commission on Security and
Cooperation in Europe.......................................... 01
Hon. Alcee Hastings, Co-Chairman, Commission on Security and
Cooperation in Europe.......................................... 03
Hon. Tom Udall, Commissioner, Commission on Security and
Cooperation in Europe.......................................... 12
Hon. Sheldon Whitehouse, Commissioner, Commission on Security and
Cooperation in Europe.......................................... 15
WITNESSES
Richard Morgenstern, Senior Fellow, Resources for the Future..... 03
Trevor Houser, Visiting Fellow, Peterson Institute for
International Economics........................................ 05
Robert Bradley, Director of International Climate Policy, World
Resources Institute............................................ 08
GREEN AND MEAN: CAN THE NEW U.S. ECONOMY BE BOTH CLIMATE-FRIENDLY AND
COMPETITIVE?
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MARCH 10, 2009
Commission on Security and Cooperation in Europe,
Washington, DC.
The hearing was held at 10:00 a.m. EST in 428A Russell
Senate Office Building, Washington, DC, Hon. Benjamin Cardin,
Chairman, Commission on Security and Cooperation in Europe,
presiding.
Commissioners present: Hon. Benjamin Cardin, Chairman,
Commission on Security and Cooperation in Europe; Hon. Alcee
Hastings, Co-Chairman, Commission on Security and Cooperation
in Europe; Hon. Sheldon Whitehouse, Commissioner, Commission on
Security and Cooperation in Europe; and Hon. Tom Udall,
Commissioner, Commission on Security and Cooperation in Europe.
Witnesses present: Robert Bradley, Director of
International Climate Policy, World Resources Institute; Trevor
Houser, Visiting Fellow, Peterson Institute for International
Economics; and Richard Morgenstern, Senior Fellow, Resources
for the Future.
HON. BENJAMIN CARDIN, CHAIRMAN, COMMISSION ON SECURITY AND
COOPERATION IN EUROPE
Mr. Cardin. Good morning, everyone, and welcome to this
hearing of the Commission on Security and Cooperation in
Europe. I'm very pleased that we are focusing our attention
today on climate change. Security, cooperation, these two words
are central to the commission's title and its mission, and they
are also two of the essential elements of dealing effectively
with climate change. Today America's security is undermined by
our dangerous reliance on foreign oil. Too much of our economy
is captive to uncertain supplies. Too much of our fortune goes
to parts of the world that harbor deep animosity towards our
nation and our values.
As analysts increasingly point out, climate change is real
and a present threat to world security. Dramatic shifts in
climate will likely lead to massive displacement of people who
are faced with flooding from rising oceans and extended
droughts that dry up their food supplies. Social unrest is
almost certain and international instability is likely to
follow. Europe faces many of the same issues and challenges,
and that brings us to cooperation.
The only effective way to address the global crisis of
climate change will be through unprecedented international
cooperation. The world has seen an unprecedented international
scientific collaboration under the auspices of the United
Nations Intergovernmental Panel on Climate Change, an effort
that culminated in a Nobel Peace Prize in 2007. We have seen
nation after nation take important steps to curb the greenhouse
gas emissions and plot a new carbon-friendly future. This
effort has been especially important in Europe. The European
Union has taken strong actions to address climate change. The
Union designed and implemented the first coordinated
international cap-and-trade program.
Although the initial effort was flawed, the entire world
looked to Europe because of its leadership role. The cap-and-
trade program that we will design in America will owe much to
the European experience. America has been on the sidelines. We
have had an administration that denied the reality of global
warming even as glaciers melted and sea levels rose and the
international scientific consensus became much more unified.
Today we have a new president and a new commitment to action.
This year the Congress and President Obama will work together
to enact climate change legislation. Based on sound science,
this legislation will rely on tough mandatory cap-and-trade
program.
The climate bill will harness market resources to bring
down greenhouse gas emissions, while simultaneously stimulating
investment in a clean, sustainable economy for the decades
ahead. We live in an interconnected world, where the decisions
we make here impact other countries and vice versa. Nowhere is
that clearer than on the issue of climate change. Our economy
and our environment depend on the commitment we make today to
retool our nation's economy for the future. Increasingly that
holds true for the rest of the world as well.
The time has come for America to do more than simply get
off the sidelines. The time has come for America to assert its
leadership in the world again. Taking action on climate change
legislation must be a top priority for Congress this year. The
time for action is long past. The time to catch up is now. Even
in the shadow of the most severe recession in a generation,
America's role in the world economy is unparalleled. Other
nations may have more consumers or greater portions of certain
market share, but it's clear that the world is looking to the
United States to lead us out of the economic wilderness, and we
will. It is also clear that the world needs America to exert
its leadership on climate change. Along with China, we are the
largest emitters of greenhouse gases in the world, but unlike
China America has the history of combining intellectual
resources, entrepreneurial spirit, market savvy and optimism
that can translate into an effective worldwide leadership on
this issue.
With the adoption of a tough cap-and-trade bill, America
will set on a path that will improve our national security by
reducing our reliance on foreign oil, stimulate our economy by
generating millions of new, clean, green jobs in energy
efficiency, solar wind, biomass, and more, and pull the world
back from the brink of catastrophic climate change.
Today the commission will address climate change. When the
commission goes to Vilnius later this year, we should be
bringing with us a message of change, hope, and renewed
commitment to common international actions, and by the time the
community of nations convenes in Copenhagen in December, all
should recognize that America is taking meaningful, effective
action in bringing a strong pragmatic and moral leadership back
to the world stage.
Today we will hear from a panel of witnesses who will
discuss some of the experiences in America and in Europe, some
of the difficult issues relating to international trade and
some of the promise that bold action on climate change can
yield. Before our witnesses start their testimony, I would like
to point out that in the spirit of today's hearing on climate
change and the recognition of the need for each of us to take
steps to combat global warming, the commission is reducing the
volume of paper that it uses at our hearings by making all
commissioner and witness statements available online instead of
distributing hard copy. You can visit our Web site,
www.csce.gov for all hearing material.
At this time let me recognize the co-chairman of the
Helsinki Commission, my friend, Congressman Hastings.
HON. ALCEE HASTINGS, CO-CHAIRMAN, COMMISSION ON SECURITY AND
COOPERATION IN EUROPE
Mr. Hastings. Thank you very much, Chairman Cardin. I echo
your sentiment, Senator. In light of the fact that I have to be
back over on the House side in about an hour I'm going to
forego any opening statement and ask unanimous consent that any
statement that I may make be placed in the record. I'm really
interested in being able to hear all of our witnesses before I
leave. Thank you, sir.
Mr. Cardin. Thank you, Mr. Chairman. We have a
distinguished panel of witnesses. Their bios have been
distributed so the bios are before all of us so we know them
very well, so let me get on by introducing them: Mr. Richard
Morgenstern, who's a senior fellow with Resources for the
Future; Mr. Trevor Houser, who is a visiting fellow with the
Peterson Institute for International Economics; Mr. Robert
Bradley is the director of international climate policy at the
World Resources Institute. We will begin with Mr. Morgenstern.
Let me also point out, as everyone here knows, that he was the
senior economic counsel to the undersecretary for global
affairs in the U.S. Department of State before taking on his
present assignment. Mr. Morgenstern, it's a pleasure to have
you before the committee.
RICHARD MORGENSTERN, SENIOR FELLOW, RESOURCES FOR THE FUTURE
Mr. Morgenstern. Mr. Chairman, thank you very much. I
appreciate the opportunity to appear today to discuss
competitiveness and trade impacts of domestic carbon action.
Resources for the Future is an independent, nonpartisan
research organization, and the views expressed today are those
of myself, strictly.
Broad market-based strategies of the type that you've
referred to, cap and trade, that attach a price to greenhouse
gas emissions have the potential to offer significant cost and
efficiency advantages to the United States as it seeks to
reduce its carbon emissions. At the same time, there is the
potential that this approach will impose significant costs on
particularly energy-intensive, import-sensitive industries. It
is these industries and this question of competitiveness that
is referred to as the subject of this hearing and which my
comments relate to.
I have been involved in some research activities with
several of my RFF colleagues and what I want to do today is
quickly review some of the key results of those studies that we
have conducted, and then talk about some of the options that
the United States might have in trying to deal with these
problems. The conclusions of our research can really be
succinctly stated in a couple of points.
Number one, measured by the reduction in output, a readily
identifiable set of industries is at the greatest risk of
contraction over both the short and long term as a result of
domestic action. Secondly, although the short run output
reductions may seem relatively large in these industries, these
reductions shrink over time as firms adjust inputs and adopt
new technologies to the changing environment. Third, the
largest cost increases are concentrated not in broad industry
categories as we commonly refer to them, but oftentimes in
industry sub-categories. For example, we may see impacts on
aluminum, which is a broad category. We may see impact on lime,
which is a somewhat smaller category. And it is this
combination of large and small industry sectors that we need to
understand.
In the non-manufacturing sector there are also some
declines that are seen, but a rather diverse pattern applies.
For example, you see that in the electric utility industry the
impact is relatively consistent over time, whereas you see in
something like mining there may be a continuing deterioration
as there is a substitution away from metals, to a substitute
for metals that may be attractive.
In terms of employment, the short-run impacts are roughly
proportional to the losses in output, but over the longer term
we tend to see other industries come in, pick up the slack, and
we do not see a net loss in employment.
Most experts agree that the best solution for addressing
this problem is to have an international agreement that in fact
binds all of our key trading partners to some relatively
comparable policy to the one the United States would undertake.
But in the interim, unilateral action should and must be taken,
in my view, to begin to address this problem. That leads to the
possibility, and in fact the likelihood that there will be some
emissions leakage, and that means that some of the domestic
reductions will be partially offset by increases abroad as
production increases outside the United States and energy-
intensive activities are relocated globally.
Importantly, displacement of production through lost
competitiveness is not the only source of carbon leakage. A
large scale withdrawal of demand for carbon-intensive energy in
the United States will drive down prices globally and expand
consumption elsewhere.
Turning, to the question of how do we address this problem,
there are really several different ways that we can go about
it. An efficient policy, a cap-and-trade policy of the type
that you've referred to and President Obama has endorsed is
certainly a first step in that direction. Several other
measures, for example the use of carbon offsets, either
domestic or international, are other ways of addressing the
competitiveness issue.
Thirdly, one can envision cost containment policies whereby
there's an attempt to prevent dramatic fluctuations in prices
which could in fact adversely affect competitiveness. Those are
the approaches that are commonly discussed.
Beyond those, pending legislation here in both the House
and the Senate is focused on two approaches. One is free
allowance allocation, and the other is trade-related border
adjustment type approaches. Speaking to the latter, import
adjustment proposals would require importers to purchase
allowances based on the embodied emissions in their products,
which would attempt to level the playing field. One can imagine
a broader border adjustment where you also dealt with exports.
However, I would point out that there are particular WTO
problems that may impede that action.
The other approach is to try to limit the increases in
domestic costs by using free allowance allocation, and
particularly a type of free allowance allocation that we have
some experience with, but somewhat limited experience with in
the United States, and that is in contrast to, say, the Clean
Air Act approach, where we grandfathered the allowances based
upon historic emissions, this would involve an updating of
allowances. That is to say, that the better performance that is
turned in by a firm, the more allowances it would receive. This
has the effect of lessening the burden of the cap-and-trade
system of the carbon price on that particular industry.
I would point out there are other approaches that have been
discussed. For example, people have talked about the
possibility of exempting certain industries from control, and I
would note that doing so removes any incentive that you would
normally want to place on these industries to reduce their
emissions, and it also raises the cost to all other industries,
every other individual in the United States, of reaching the
carbon goal.
In summary, Mr. Chairman, I would say that until we have a
truly global system in place where we would not need these
special provisions to deal with the problems imposed on energy-
intensive industries, I would personally advocate a free
allowance allocation via updating as a transitional measure for
the adversely affected industry. Thank you, Mr. Chairman.
Mr. Cardin. Thank you very much for your testimony. I
Appreciate it. Mr. Houser.
TREVOR HOUSER, VISITING FELLOW, PETERSON INSTITUTE FOR
INTERNATIONAL ECONOMICS
Mr. Houser. Thank you very much. My name is Trevor Houser.
I'm a visiting fellow with the Peterson Institute for
International Economics, and the director of the energy and
climate practice at RHG, which is a New York-based research
firm. The same disclaimers that Dick provided are all true for
me. Any comments that I have are mine and not the Peterson
Institute's.
The title of this panel is, ``Can a New U.S. Economy Be
Both Climate-Friendly and Competitive?'' I would urge us to
think about that question broadly. The transition to a low
carbon economy is going to affect U.S. competitiveness in many
ways, and the first is what Dick commented on, a need to create
a level carbon playing field for energy intensive industries
that might be put at a disadvantage. The second would be our
ability to capture opportunities in new low-carbon energy
technologies that will be required to make the transition.
Third is our ability to trim some of the $450 billion we spend
each year on imported oil would make the U.S. more competitive.
And then finally, as we make these new investments in energy
efficiency, to take that as an opportunity to invest in
increased U.S. productivity more broadly.
This panel is focused on the first of those, on creating a
level playing field, and that's where I'll focus my comments. I
wanted from the outset to put that in a broader context of how
we think about competitiveness.
This issue of the impact on energy-intensive industries,
it's critical that we get this piece right, and in doing so we
need to think about three things: first, dealing with the
impacts for domestic industry in a way that's equitable and
effective. Addressing climate change is going to be a multi-
decade process that's going to require continued political
support. And to draw a lesson from trade liberalization, the
need to up front make sure that folks who might be negatively
impacted are compensated or retrained is going to be critical
to maintaining a consensus surrounding climate policy going
forward.
Two, we need to make sure that we do that in a way that's
supportive of international climate negotiations. As the
chairman pointed out, this is a problem that no individual
country can solve and that we'll need a collective solution
for. And so we have to address this through the lens of the
multilateral approach. But finally, it's important that we do
this in a way that is compatible with the principles of the
world trading system because for us to capture that upside, the
clean revolution on which our ambitions lie, we're going to
need open markets to export low carbon goods to the rest of the
world, so we need to think about that inclusively.
In the 110th Congress, most of the energy and climate bills
that were introduced, cap-and-trade bills, took one primary
approach to addressing this issue of competitiveness, of
leakage, and that is to impose a comparability test, to look at
what other countries are doing to reduce emissions, and those
who are seen as not taking comparable action to the U.S. to
have the price for carbon on energy-intensive imports--on
steel, aluminum, and cement--adjusted at the border.
The goal here is to meet two objectives simultaneously. The
first is to address the leakage concern that Dick mentioned,
and the second is to try to provide a leverage on other
countries to help encourage them to join international climate
negotiations. And the authors of those provisions were pretty
thoughtful about trying to design them in a way that would be
consistent with the WTO.
I would argue, though, that by combining leakage and a
desire to address leakage with a need to create leverage, those
provisions fail at doing both. Let me point out why. On the
leakage front, an international agreement of the type that we
hope to get from Copenhagen is not going to yield the same
carbon price between countries that are part of that agreement.
We need to allow flexibility between developed and developing
countries in how they reduce emissions, and then within a
country we need to allow flexibility for what types of targets
and timetables we adopt.
For example, Europe is committed to reduce emissions 20
percent by 2020 off a 1990 baseline, 30 percent if we get an
international agreement. The Obama plan pledges to reduce
emissions 14 percent by 2020 from a 2005 baseline, which is a
slight increase over a 1990 baseline. That means there's going
to be different carbon prices between the U.S. and Europe, let
alone between the U.S. and China. And that's okay from an
environmental standpoint as long as the end of the day we get
to the numbers that we need for global emissions reductions. We
can't rely on a global agreement in the interim until we get to
a single global carbon price which is ultimately where we'll
try to go to address our concerns of leakage. We need to do
that in the way we design domestic policy.
The approach taken in the Boxer-Lieberman-Warner bill--
would impose trade measures on countries that stay outside of
an international agreement but doesn't look at how we can
adjust the prices between countries within a national
agreement. That's something we need to consider.
On the leverage front, if we look at imposing a tariff on
the carbon content of goods that come into the U.S. we don't
have sufficient leverage to force any country to the
negotiating table. While exports from China of textiles, T-
shirts and electronics are very important for economic
development, exports of carbon-intensive goods like steel,
aluminum, cement aren't, because most of the steel, aluminum
and cement that countries like China and India manufacture is
for domestic consumption to feed this massive urbanization
drive that's going on in those countries today. Exports of
energy-intensive goods of the type that RFF's work has
identified as being potentially vulnerable account for about
0.1 percent of Chinese GDP. That's fairly small in comparison
to the cost of climate policy.
The good news is that developing countries are in fact
willing to come to the negotiating table on their own and we
probably don't need that type of leverage. And that's something
that I think Rob's going to mention.
In a multilateral environment we could think about the role
of trade sanctions imposed on all goods as a way to enforce an
international agreement. But to be effective we'd have to do
that multilaterally. No individual country is going to have
enough leverage by denying market access to get any major
emitter into an international agreement. It'll have to be a
collaborative approach.
For addressing leakage, until we get to a harmonized global
carbon price--either a global cap and trade system or global
carbon tax--which is more than a decade off at least--we could
have a multilateral agreement on how to adjust border prices--
adjust carbon prices at the border between countries, in the
way that Europe does a value-added tax. Alternatively, we could
have an international sectoral agreement where within the
broader global agreement countries agree to a common price or a
common set of standards for internationally traded goods like
steel and cement. Both of those things would need to be
negotiated multilaterally.
In the interim, as Dick mentioned, we have a number of
options available to us in the way we design our allowance
system to offset costs to domestic industry, in particular of
the types of output-based rebating proposals that folks in the
House are working on today hold quite a bit of promise.
Thanks very much.
Mr. Cardin. Thank you very much for your testimony. Mr.
Bradley.
ROBERT BRADLEY, DIRECTOR OF INTERNATIONAL CLIMATE POLICY, WORLD
RESOURCES INSTITUTE
Mr. Bradley. Good morning, Mr. Chairman, Mr. Hastings, Mr.
Udall. Thank you very much for the opportunity to join you
today. My name's Robert Bradley and I direct the international
climate policy work for the World Resources Institute.
Both my companions here, Trevor and Dick, in their
testimonies have referred to the desirability of placing U.S.
climate policy in the context of a broader international
agreement. And so I wanted to step back and explore that
possibility a little bit.
I'd like to make three points, each of which I treat in
more detail in my written testimony which I hope can be
included in the record. First, success against climate change
will mean strong federal policy in the United States and action
from major developed and developing economies. Second, the
world has changed dramatically since the days of the Kyoto
Protocol. Major developing countries are ready to take
significant action on limiting emissions. And third, all
countries will seek to harness the benefits of growth and new
jobs from a switch to cleaner energy. Constructive
international policy on both trade and technology cooperation
can help build support for an effective climate regime.
The United States is an indispensable leader in the fight
against climate change. Without the world's largest economy and
biggest historical emitter other countries cannot fix the
problem. But nor can the U.S. do it alone. Almost 80 percent of
global emissions are produced by 15 counties, nine of which are
in the developing world. The Kyoto Protocol, the main climate
agreement to date, has been rejected by the United States in
particular because of the concern that without meaningful
participation from major developing countries it would be
ineffective and costly to the U.S. economy.
Developing countries have historically argued that with
their poverty and small historical contribution to the climate
problem they should not be responsible for curbing emissions.
But in recent years there's been a flood of developing country
climate plans. For example, Brazil announced that it would
reduce its deforestation rate over 50 percent from recent
levels by 2017, avoiding an estimated 4.8 billion tons of
carbon dioxide emissions. China committed to reducing national
energy intensity--that's energy per unit of gross domestic
product--by 20 percent by 2010 and looks on course to meet that
goal with programs expected to cut emissions by 550 million
tons of CO2. Investment in wind, hydro, nuclear and
biomass are expected to save an additional 640 million tons by
2010.
India has a number of states that are taking forward
aggressive renewable energy targets with renewable portfolio
standards. Mexico pledged to half its greenhouse gas emissions
by 2050 and is considering a cap and trade policy not
dissimilar to the one recently considered by U.S. Congress.
South Africa has presented a highly detailed and ambition plan
to peak its national emissions by 2020 and to bring them down
to low levels in 2050.
These policies will often not be of the same form as the
cap and trade approach favored in the United States and Europe,
but that need not make them any less ambitious. They are the
more impressive when we consider the poverty of many of these
countries. In India 550 million people still lack any access to
electricity and they, like Europeans and Americans in the last
century, legitimately aspire to get it, but they are seeking to
do so on a lower carbon pathway.
An international climate agreement can help reinforce these
actions. Many of these countries have a poor record of
implementing national plans. It will certainly not be enough
for countries to take each other's plans at face value. The
Bali Action Plan, which frames negotiations for a post-2012
climate agreement, provides for both developed and developing
countries to take mitigating actions that are, quote,
``measurable, reportable and verifiable.'' This language also
applies to finance technology and capacity building support for
developing countries.
One factor common to all countries taking action on climate
is the promise of new jobs and economic opportunity from the
switch to clean energy. Over 10 percent of the United States'
recent stimulus package was aimed at climate-friendly and
environmental objectives. In South Korea the corresponding
figure is 80 percent. China has also pledged to put hundreds of
billions of dollars from its stimulus package into projects
that cut greenhouse gas emissions. And rightly so. Research we
have undertaken recently with the Peterson Institute calculates
that green recovery programs generate 30,000 jobs on average
per $1 billion invested. They also reduce the cost of meeting
climate goals in the longer term.
All countries focus on generating jobs at home. But the
truth is that clean energy, like any high-tech industry, will
depend on inputs from around the world. A multilateral approach
to developing and deploying clean technologies can be enhanced
through cooperation on climate change and supported by freeing
up trade and environmental goods and services.
This body can shape the success of the international
process. An ambitious federal climate policy will unleash
action not only in the United States but also from countries
that have been waiting on the world's biggest economy.
International cooperation on technology programs can help build
on the push to cleaner energy through the stimulus. Finally,
U.S. policy should include provisions for financing
international action on adaptation, forest protection and clean
technologies to help ensure an inclusive climate deal.
I don't want to imply that this will be easy. Many
countries remain wary of commitments and their rhetoric will
stress these fears. But the world has moved on a lot in 10
years. There's a real willingness to tackle emissions and a
potential agreement that can turn this willingness into
verifiable action.
Thank you and I look forward to your questions.
Mr. Cardin. And, Mr. Bradley, thank you for your testimony.
We'll start with Congressman Hastings.
Mr. Hastings. Thank you very much, Mr. Chairman. And
gentlemen, thank you all for your testimonies. And I can assure
you your words resonate very strongly.
Mr. Chairman, I was thinking as our three presenters were
going forward that probably in other places around the world--
either today, yesterday or tomorrow--similar type discussion
are being had. One of the continuing problems it seems that we
have in trying to reach international agreement is the lack of
communication. I would emphasize at the outset you spoke about
our Web site and I would hope that the testimony of these
gentlemen will be appropriately diaried and disseminated to
other individuals in other countries that might very well find
their remarks useful. Mr. Morgenstern, how long were you
actually involved and to what degree were you involved in
Kyoto?
Mr. Morgenstern. I was working at the Environmental
Protection Agency throughout most of the '80s and in the '90s,
and then in the early 2000s. I worked on Kyoto pretty much from
the inception. I was at Rio in 1992. I attended a conference in
Toronto that was in the late '80s. I've been involved in this
issue for a long time. I guess you might say the short answer
is from the outset.
Mr. Hastings. All right. Now, taking from all of your
testimonies, and specifically from Mr. Bradley's, it appears
that for a variety of reasons the United States never became a
signatory to Kyoto. Is that correct?
Mr. Morgenstern. Technically we signed it but we didn't
ratify it.
Mr. Hastings. We've kind of like been missing in action on
the subject. Would you agree with me that those who would use
an argument that--to trust your partners for international
agreements would then turn around and argue, well, the United
States didn't go along with Kyoto. What makes us think that
they or Russia or China or India or any of the larger countries
are going to go along with some kind of carbon emission
international agreement?
Mr. Morgenstern. You raise a very important question, Mr.
Chairman. I guess I would say that looking back on the
situation with Kyoto that the fact that United States did not
take any domestic initiative at that time, perhaps the
negotiators got a little bit ahead of the political reality
back home.
That the current thinking now--certainly it's embodied by
President Obama's statements and by the actions in both houses
of Congress in the past several years in developing
legislation--is that the United States really needs to be a
leader and needs to take domestic action and that that's a way
of demonstrating to the world that we are serious and that
we're simply not showing up at the negotiating table,
participating in all the rhetoric and then failing to deliver.
That's probably the approach that makes most sense given
the way our system operates.
Mr. Hastings. But now we're in a climate of slumping
economic activity and the overall financial crisis globally.
And my read is that Europe's ambitious plans are now suspect
among themselves. Reading one statement from a European
negotiator whose name doesn't appear in the article, he says
the Germans are giving up and the Italians are getting ready to
follow. And then we know about President Chirac--Sarkozy's
forward-leaning discussions. Mr. Bradley talked about it, about
trying to come to some terms by the year 2020.
My overall concern is this: In any major change that
requires world agreement, it takes too much time. And how then
can we shorten that time and get to the business of collective
undertaking worldwide or the collaboration that's going to be
needed in order to do anything really substantial?
I hear you argue and I agree with you that unilateral
action is going to have to take place. But it seems in order
for us to be unilateral we need then to have widespread
understanding inside the United States and the various sections
that are likely to be affected from steel, petrochemicals, all
the way down the line, and try to get as many people on board
with the policy rather than coming up here and yakking it up.
That's, to my way of thinking, what needs to be done. You can't
have a one-day summit. You have to have an ongoing,
concentrated, hot effort to try and come to agreement from
within before we act unilaterally. Or am I making any sense?
Mr. Morgenstern. Definitely so, Mr. Chairman. I guess two
key elements of a domestic initiative that could pave the way
to a greater international cooperation. Number one is that the
domestic action be cost-effective; that is to say that it be
designed in a way that it is affordable and it is efficient and
it is getting the most possible reductions for the dollars that
we commit to it. Secondly is that we need to demonstrate to
ourselves and to the world that there are new technologies that
can come into play quickly and efficiently and that they can
lessen the burden for others as well as ourselves in trying to
meet these goals.
The United States' initial action is really a small down
payment to a global future here. Nobody is kidding themselves
to think that we can solve the problem. As we all know, we're a
fraction of the emissions and so on. But the fact is that we
need to demonstrate that this can be done efficiently and that
in fact new technologies can come into play and that they can
be effective and efficient.
Mr. Hastings. Right. Right here in our bicameral
legislature, Mr. Chairman, in my view it would be helpful if we
communicated better among ourselves. A lot of times the left
hand doesn't know what the right hand is doing. A hearing is
held over here in Commerce, another one's held over here in
Foreign Affairs and another one's held over here in financial.
All of this stuff needs to be coordinated, at least in my
opinion.
Thank you, Mr. Chairman.
Mr. Cardin. I think Mr. Bradley wanted to respond.
Mr. Bradley. Thank you with your indulgence. As the more
astute amongst you will have noticed, I am European and I was
actually closely involved in the design of the European
emissions trading system. And I wanted to pick up on a point
that Mr. Hastings made, that there is a very similar dialogue
going on in capitals around the world.
I would include in that Beijing, to a certain extent Delhi.
The countries are in fact saying to themselves, we get it;
climate change is a really big deal. China's national climate
change program goes a great length into just how badly China is
going to get hit by climate change. They say, we get it. We
have to do something. We're a really big emitter. It can't be
done without us. We have to still combine that with other
concerns we have: economic development, energy security and
things like that. But how can we move without the United
States?
So this comes to your second point, Mr. Hastings, about how
we can move forward urgently--because you're right;
international agreements themselves don't move particularly
fast. But I would argue that while an international agreement
is important in an ongoing confidence building, it's not the
thing that will trigger action. The thing that will trigger
action, the thing that can be done here that will be far more
important than any other single activity undertaken on climate
change in the world will be to implement and give a clear
signal about the implementation of U.S. climate policy.
The European Union has spent the last decade--you refer to
the divisions. Those divisions are rooted in in a reluctance to
move too far ahead without the United States. The Europeans
have actually put a lot on the line by saying we'll do--we'll
go for 20 percent below 1990 levels by the year 2020 in terms
in greenhouse gas emissions, regardless of what everybody else
does. But they've actually gone out and said if other major
emitters play then we can maybe get that down to 30 percent.
The Europeans are not the only ones but they're perhaps the
ones that have gone out most transparently in making that case.
The U.S. has it in its power not only to take action on
American emissions but to trigger action amongst others.
Mr. Cardin. Thank you. Senator Udall.
HON. TOM UDALL, COMMISSIONER, COMMISSION ON SECURITY AND
COOPERATION IN EUROPE
Mr. Udall. Thank you very much too both chairmen for doing
this hearing, and thank you for the witnesses for being here
today.
I'm of the belief that there will be a long-term
competitive advantage for those who embrace green technology
and infrastructure in a world moving towards a low carbon
economy. Mr. Bradley, it really goes to the heart of what you
were talking about there. I mean, we're in this situation where
we say, let's not move forward unless we have the rest of the
world--or many seem to be saying that. And if we don't move
forward, the rest of the world won't engage and won't continue
to push down the road of a low carbon future.
I would ask the panelists, how do you suggest we promote
green technology and infrastructure without saddling companies
with additional burdens and distorting global competitiveness?
Go ahead.
Mr. Bradley. Thank you. I very much agree with the premise
of the question you're articulating there. The World Resources
Institute, incidentally, together with several partner NGOs and
27 major U.S. corporations, in the form of the U.S. Climate
Action Partnership, has come out very strongly in a unified
voice over the last two years in making the case for the United
States moving forward with clear policy.
The economic advantage that American corporations are
seeing in that is that if you're playing in the power sector or
in heavy industry, the one thing you don't want is uncertainty.
They get it that climate change is going to be a problem. They
get it that sooner or later, public policy is going to have to
respond to that problem. Better that you know that sooner
before you start building your power plants and that you know
what that's going to be and that you have some clear forward
signal that allows you to adapt not only your investment
choices today but your research and development and the
business choices that you make looking into the future. So
while we can get lost in the weeds, That's a very strong early
signal.
Mr. Udall. What you're talking about there is really a
price signal in the market, isn't it? Having some kind of
consistent strong price signal to move us in a new direction in
terms of green technology and infrastructure and that kind of
thing?
Mr. Bradley. Absolutely. If you're managing a business unit
and you want to go to your executive board and ask for capital
this year, they're going to ask how you hedged against all of
the risks that they see against both the reality of climate
change and the reality of the potential policy coming down the
pipe. The sooner you can have a price that you can start
incorporating into the forward planning on that, the sooner
you're able to make smart decisions that help your growth and
your employment in the long run.
Mr. Udall. That's one of the first things we need to be
doing, isn't it? It's to put that price signal out there, to
get it in place, and then that will start driving where we want
to go.
Mr. Bradley. That's absolutely correct. There are a lot of
other very exciting things going on at the moment--certainly
spending through some of the stimulus and recovery measures in
new technologies. But without a long-term signal that allows
them to say, okay, not only do I develop this technology but
there is a market for it, the impact of those things is going
to be limited.
Mr. Udall. Current price signals right now aren't doing the
job, are they? I mean, when we have the drop in oil and gas
prices to where they are today, that's not sending a price
signal to move us in a low-carbon direction, is it?
Mr. Bradley. It's not providing the consistent enough
signal. We've certainly seen as oil prices went up over the
last year how the market can respond to those things. People
were buying different vehicles. People were making different
investment choices. But of course, then demand goes down. The
oil price drops. Instead of maintaining a longer-term signal
that can then help consistent investment, we're subject to the
vagaries of what happens in the oil market. Certainly a more
active price signal would allow us to take control of our
destiny a little bit more.
I would note that, again, this isn't the only country where
this discussion is taking place. In China, India, not to
mention Europe, other countries are also saying, hey, wow, if
we start moving early on this, we'll be the ones who are
leading this green technology revolution. The Chinese are
already making a third of the world's solar panels. And the
Indians have some of the world's leading wind energy companies.
This is not a static target. This is something that I would say
is very much an opportunity that others are starting to seize.
Mr. Morgenstern. If I could add perhaps one point of
emphasis, beyond the price signal, which will clearly stimulate
new technologies, most of the legislation that's been
introduced has a significant auctioning component for the
allowances. And that generates a significant revenue stream for
the federal government, which in most of the proposed bills is
channeled to some extent to new technologies. This provides an
additional mechanism whereby one can aid and facilitate
development and deployment of new technologies.
Mr. Udall. Richard, would you comment on the idea of having
a mandate in terms of renewable energy for electric power
companies? I mean the president has put out a proposal for 25
percent by 2025. Without picking technologies, you give a goal
and you give a mandate and you say that's the direction we want
to move in. Do you have any thoughts on whether that is a
helpful way to go?
Mr. Morgenstern. The question you're asking is whether the
focus on on renewables, in general--is the preferred way to go.
I guess my own sense is that we should probably have a little
more of a market focus by setting up a carbon pricing
mechanism, which allows all technologies to compete. Renewables
will do very well. But a renewable standard tends to
distinguish, focus on only those. If we're seeking to get the
most bang for the buck, the carbon price mechanism may be the
most effective way.
Mr. Udall. So you'd rather see a cap-and-trade than a
renewable standard? That first?
Mr. Morgenstern. If it was a choice, I would certainly
rather see that. I guess the question is whether one could
augment the other. And that gets into some complexities. But I
would probably favor the strong cap-and-trade.
Mr. Udall. Thank you, Chairman.
Mr. Cardin. Mr. Houser, did you have a point?
Mr. Houser. I just wanted to add one comment. I mean, we're
having this conversation in the midst of the worst economic
crisis in a generation. That's certainly coloring the politics
of this. And as Senator Udall pointed out, people are looking
to investment in green technology as a way to help us emerge
from this crisis, which is promising. It's important to think
about the timelines.
We're having the debate about a cap-and-trade program today
in the midst of a crisis. The costs wouldn't hit the economy
until 2012. That's when it would take effect at the earliest,
by which time we all hope that we're on a more stable economic
footing than we are today. But as Rob said, setting that price
signal now, even if the costs aren't going to take effect in
2012, is critical in giving companies certainty. I mean, part
of the reason that investment has dried up is about uncertainty
about the health of the financial system. For energy-sector
companies, that's coupled with uncertainty about the outcome of
environmental regulation, which they know is coming but don't
know what it looks like. Clarifying that uncertainty now will
help unlock investment in the energy system, which will have a
broader economic effect.
Now, until that price for carbon takes effect, there's
things we can do to help prime the pump and ensure that the
cost of carbon, once it's imposed, has as little impact on the
economy as possible. We did a decent amount of that with the
stimulus bill in investing in emerging technologies and
alleviating infrastructure bottlenecks. The benefits of those
programs, if properly implemented, is that not only will they
reduce the costs of a cap-and-trade program but the energy
savings that will come off of them will help offset the
budgetary impact of the stimulus efforts we're having now.
In the report that we did a couple months ago, we estimated
that of about the dozen green stimulus programs that were being
considered, on average for every billion dollars of government
investment, $450 million per year in energy cost savings were
returned to either the federal government or the economy as a
whole, which helps smooth the transition into both a cap-and-
trade system and eases the budgetary impacts.
Mr. Cardin. Senator Whitehouse.
HON. SHELDON WHITEHOUSE, COMMISSIONER, COMMISSION ON SECURITY
AND COOPERATION IN EUROPE
Mr. Whitehouse. Thank you, Mr. Chairman. Thank you to the
witnesses for being here. We describe the problem here as a
climate change problem. We describe it as a global warming
problem. We very rarely describe it as an ocean chemistry
problem. The fundamental problem is carbon loading of the
atmosphere that creates global warming; it creates climate
change. It also creates chemical changes in the ocean that can
lead to acidification of the ocean that could dramatically
change the ecosystem of the ocean. The little krill and algae
and things, the coral creatures that build nurseries in the
tropical waters, all of those things are very much at risk.
There is evidence yesterday out of, I believe, New Zealand
about a 30-percent reduction in the shells of these microscopic
creatures. We haven't seen these kinds of changes in the oceans
in certainly living memory. It could well be that ocean
acidification, the wipeout of the bottom of the food chain as a
result of the inability of these small creatures to make the
shells that are their structural frameworks and the consequent
collapse of the food chain that depends on that base could be
the worst outcome for humankind of our carbon loading. It could
be more significant, ultimately, than climate change or global
warming.
There seems to be very little discussion about that and I'm
interested in to what extent, as you look at this as an
international issue, this issue is cropping up in other
countries in their discussions? It seems to be the forgotten
issue in this case. In fact, the very name that we give to the
problem overlooks this dimension of it. Mr. Bradley.
Mr. Bradley. It's a very important point. The short answer
to the question that you ended with is that largely those two
areas are conflated. The countries are focused on the question
of bringing carbon emissions down, thus reducing the carbon
loading in the atmosphere.
It certainly lends color to the discussion that still
periodically takes place in climate circles: To what extent are
we trying to adapt to change as opposed to cutting the
emissions off at source? Certainly this lends color to the view
that our ability to adapt to those kinds of changes is likely
to be pretty small, not least of course because the oceans that
are getting hit by increased acidification and by warming at
the surface layers are simultaneously being hit by all kinds of
other human activity, whether it's nutrient runoff from our
farms, whether it's over-fishing, which has devastated most of
the world's fish stocks.
Certainly, we're seeing a combination of warmer waters and
higher acidity levels dealing death blows to a lot of coral
reefs. I'm a diver myself. I see a lot of the impact there in
ways that is extremely sad to see, but as you say has much
broader repercussions. That lends very much color to the idea
that, yes, we need to help poor and vulnerable people adapt
where we can. But we should not kid ourselves that we can adapt
our way out of this problem. Essentially, dealing with it at
source through urgently moving forward on mitigation is going
to be needed.
Mr. Whitehouse. Mr. Morgenstern.
Mr. Morgenstern. Yes, Senator. I guess I would just maybe
reinforce your point. I should say I'm an economist, not a
natural scientist, so take what I say with a grain of salt
perhaps. The impact on oceans is a very important issue. I
would note that the IPCC, the Intergovernmental Panel on
Climate Change, which has been examining and kind of
summarizing the literature in a number of different areas, has
studied the potential and the already-observed impacts--of
climate change. And they have identified ocean impacts as quite
significant.
They have also looked at other areas of great concern. I
would emphasize, for example, terrestrial ecosystems. And there
is a concern that in various parts of the United States, we
have vulnerabilities, for example, in mountain regions, that
are quite significant. We could see a rather significant
alteration of our ecosystems, which could impact, not
necessarily the food chain but could impact life as we know it
in the United States and around the world.
They've also looked at sea-level rise, infrastructure
impacts, agriculture impacts, health impacts and others. So I
would just emphasize that there's a whole range of concerns out
there that are, as you highlight, extremely important.
Mr. Whitehouse. The other question that I wanted to get
into with all of you, again from an international perspective--
we have not had very robust experience yet with the management
of a cap-and-trade system. There are issues about regulation.
There are issues about market manipulation. There are issues
about licensing. Who should be allowed to participate? There
are issues about the verifiability of offsets and whether
they're actually marginal offsets at all or just paying people
to do what they'd do anyway.
Around the world, are there good and more developed or
robust models for solving those market management problems? I'm
sold on the notion that a cap-and-trade system is necessary.
The market aspect of it is efficient. But we've seen even
developed and regulated aspects of our economy go completely
into the trash in the last couple of months, largely because of
failures of regulation, blind eyes--whether deliberate or not--
to exotic and bizarre products that nobody wanted to take a
look at. Are there models out there that can give assurance
that we can keep a cap-and-trade model running cleanly from
around the rest of the world?
Mr. Morgenstern.
Mr. Morgenstern. Thank you. I was trying to think of
examples in the environmental field which even come close to
paralleling the financial disasters and I can't think of any,
and I've been involved in this field for some time. And I look,
for example, at the Clean Air Act, where we've used a cap-and-
trade system in this country very successfully to control SO2
emissions and partially NOX emissions. And the EPA reports a
compliance rate of near 100 percent on their SO2 program.
Mr. Whitehouse. Although to jump in on you there, my
understanding is that that program deals specifically with a
narrow group of emitters and doesn't allow offsets. It gives
you credit for reducing and you buy back and forth. But you
don't go to the forest in Brazil and claim that you've saved on
sulfur dioxide emissions by going someplace else.
Mr. Morgenstern. Now, that is absolutely correct, Senator.
And that I was just trying to start off by saying that our
experience with environmental regulation, using cap and trade,
the notion of it, the principle of it, I think, has been well
established. And as you suggest, we probably all agree on that.
If you move to looking at non-traditional sources of
emissions and you move outside of highly regulated areas, there
is the potential for greater problems. I would put these in a
couple of categories. First of all, let's distinguish domestic
from international. The consideration is that the United States
might start off with its own system where we would have a lot
more control over all the issues that are kind of implied by
your question. That's the first point to make.
The second point to make is that we're looking largely at
an upstream system. You can think about how you would regulate
greenhouse gases. And one extreme would be all the way upstream
when the carbon essentially emerges into commerce. The other
would be a kind of downstream system. The Europeans, in fact,
have chosen somewhat more of a downstream system than the
United States has, if you look, at least as embodied in the
proposals that have been advanced.
As you think about an upstream system, you're more likely
to be able to have better information, better controls,
better--kind of two sets of books really, which kind of enable
you to have a better set of accounting of what's going on. So I
would say that the upstream system has a lot to recommend it in
terms of the credibility and the avoidance of problems.
Now, when you move into offsets, you do get into a softer
area. There's no question about that. That the notion would be
that here at home we would set up a system. It might well be
more stringent than the global system, than the international
system that is set up under Kyoto, to try to track and regulate
and monitor the use of these offsets. That there are issues
there.
But I guess perhaps the premise of your question was that
this is somehow like the financial system. While obviously, the
future is uncertain, I would say that we have enough experience
to give us reasonable confidence that we're not going down that
road. But let me turn to my colleagues.
Mr. Bradley. Clearly this is a bad time to be sort of
discussing a policy that puts its faith on the financial
markets. And the irony is lost on nobody. But, first of all,
Dick is right. The kind of markets that are being proposed here
are linked back to, particularly energy, commodity markets that
allow some sort of cross-checking. We're not quite disappearing
into the world of ultra-abstract, highfalutin derivatives
markets, although of course derivatives markets can spring up
around anything. Broader questions of financial regulation are
ones that are going to apply to any market. And maybe the
flipside of the financial crisis that we're in at the moment is
that this is a great time to be thinking about financial
regulation and how we structure it better in general. And
perhaps then an incipient carbon market can start off on the
right foot.
In addition to the Clean Air Act that Dick already talked
us through, I would say that the experience in the EU emissions
trading system to date is relatively robust on that score.
Certainly the system has had problems, but those have actually
been largely around the politics of allocating allowances in
the first place in ways that simply don't have an analogue in
the United States; essentially, Brussels doesn't have anything
like the power relative to London and Paris that Washington has
within the United States as a solid nation-state.
Countries essentially got a license to allocate to their
own industries and sort of competed to be overgenerous. That's
an approach, incidentally, that the Europeans have since
corrected. But certainly I don't think that any of the problems
that have arisen so far have been of a nature that questions
the sort of financial regulation around those areas, which
probably makes it one of the few markets that hasn't run into
those problems.
Financial regulation is going to be clearly very important,
but I don't think that we should necessarily think of a cap-
and-trade system as particularly vulnerable in that area. But
it is something that, as we reexamine the whole question of how
the financial sector is regulated, is a new ingredient that
needs to be there in our minds.
Mr. Houser. I guess I would think about that question in
three ways: We're concerned with possible systemic risk of
financial market regulation; we're worried about price
volatility; and then we're worried about the verifiability of
offsets. So, from a systemic-risk standpoint, the size of the
carbon markets that we're thinking about here is unlikely to be
at a point where the type of very real systemic risk we're
facing from things like collateralized debt obligations or
credit default swaps is creating.
If we're thinking about a 100-billion to $200-billion
carbon market, even if you had derivative products arise around
that that were leveraged five times you're not going to get to
the systemic risk point. You compare that to a corporate bond
market of $5 trillion that has derivatives on it of $60
trillion or a Forex market that has derivatives of hundreds of
trillions of dollars riding on it. And those are the systemic
risk challenges we're facing.
But a carbon market will be a commodity market. The good
news of that is that someone has to take delivery of the
product at the end of the day. There's a tangible asset that
guards against extraordinary bubbles. But it also means that
prices will be volatile like in commodity markets, like in oil
and gas markets.
I would say the difference of a carbon market, relative to
our experience with the SO2 program is that with SO2 we had
fairly clear backstop technology and a flue gas
desulphurization system. We don't as clearly have a backstop
technology on carbon. That's where the price uncertainty comes
from, is that we're not entirely clear on what the technology
solution will be. The way we address that is through
flexibility for firms, banking and borrowing allowances, giving
people flexibility in the timeframe that they meet compliance
costs.
People have talked about the possibilities of price
collars. There could potentially be value for that if the
ceiling was set high enough to only address those extraordinary
price spikes that might occur. On offsets, there are challenges
facing domestic offsets and challenges facing international
offsets. On the domestic side, offsets are likely to come from
places that aren't regulated, from non-regulated entities,
which means that that additionality test that you talked about,
which is so troublesome for international offsets, won't really
play a role as much because those non-regulated sectors will
have no compliance obligation.
On the international side, we have a lot of lessons to
learn from the clean development mechanism under Kyoto and how
exactly to measure what's additional. That's going to be a
major challenge in how we design policy here and how we design
policy internationally. The important thing to keep in mind is
that the use of offsets is going to play a valuable role in
keeping overall costs down. We're going to have to balance the
risk that those offsets are valid with the benefit it provides
as a cost-containment mechanism.
Mr. Cardin. One of the most difficult public-relations
problems we have in the United States in passing a strong
bill--and I am for unilateral action, I'm for us moving forward
and becoming a leader, it's going to be good for our economy.
Our economy will grow as a result of capping carbon emissions.
But the public is saying, why would the United States move
forward unless simultaneously there was action from China and
India and other emitters of major greenhouse gases--and that
the United States will put our industries at a disadvantage.
We've talked about that and your testimonies have dealt
with it. And you have pointed out the difficulties of enforcing
this through border adjustments, if we were trying to adjust
for the carbon content. And you raise a very valid point that
the specific product coming in from a country might be low-
carbon content compared to the total emissions of a particular
country.
If we're successful in Copenhagen and there is a regime
that is developed as to what is expected from nations like the
United States and developed nations, what is expected from
developing countries, and then if we can adjust our
international trade commitments under WTO to reflect that type
of commitment then it seems to me that we have a regime that
could enforce the reasonable expectations of the international
community, which could be enforced through the WTO for those
countries that are concerned that they might be disadvantaging
their own industries by allowing products from other countries
to come in that are not subject to the international regimes on
carbon reductions.
That seems to me to be a reasonable path. And when I ask my
European friends about it, they seemed like, gee, that's a
novel approach; why hasn't someone suggested that the WTO be
amended as we move forward with a Copenhagen-type of an
agreement. I'm wondering whether in your circles these
discussions have any traction, whether there could be an
expectation of a change in the WTO as it relates to
environmental issues if there's an international consensus
reached in Copenhagen.
Mr. Houser. Chairman, I would absolutely agree and my
colleague at the Peterson Institute, Gary Hufbauer, released a
book last week about how to make modifications to the WTO to
address the climate-change reality that we're going to be
facing. I think that those changes would come in two forms. The
first is the potential role of trade sanctions as a way to
enforce an international agreement. So the countries that are
party to a Copenhagen protocol, or whatever the emerging
climate agreement that we have, agree that if countries fail to
comply that trade sanctions can be used as an enforcement
mechanism. I think that there's promise there.
The other amendment that would need to be made is a
multilateral agreement on allowing within a global framework
individual countries to adjust carbon prices at the border to
allow them to take aggressive cuts. For Europe and the U.S. to
be able to take the type of aggressive emission-reductions
target that we're talking about, ultimately, we're going to
need to be able to ensure that our carbon price is consistent
at the border.
The key is that you have to negotiate that multilaterally
otherwise countries will have different opinions about what the
criteria used should be. And if we have a unilateral approach
that gets settled at a WTO dispute panel without a code
beforehand where we have multilateral agreement then we risk
undermining the credibility of both the WTO and creating
extraordinary tensions for climate negotiations.
Mr. Cardin. I agree with your point there. That's going to
be the challenge. But I just hope we put some energy into that
in addition to just trying to deal with Copenhagen.
Mr. Morgenstern, I appreciated your comments on that and I
also didn't quite understand your point about import-export
differential that you said in your original testimony. Maybe
you can help clarify that for me. It seems to me adjusting for
imports could have the same WTO problem as making a border
adjustment for exports.
Mr. Morgenstern. My understanding, Mr. Chairman, is the
prospect of dealing with an import adjustment, for example, as
embodied in the various legislative proposals that have been
advanced, has a pretty good chance, probably, to that being
accepted by the WTO whereas an export rebate, which is what it
would have to be in order to allow your domestic producers to
compete overseas, would face more difficulties internationally.
That there is a difference within the WTO lingo there.
But the reason why I actually asked to comment on this was
that your question, if I understood it, was really about the
public relations aspect. I presume that where you were going
with this, in part, was to suggest that if we act unilaterally
and we harm our domestic industry somehow, if we cause further
job losses, if we do things that are perceived as negative,
there's going to be a public outcry.
Mr. Cardin. I'm not sure we could pass the bill with the
public perception that we're putting U.S. industries at a
disadvantage. I personally believe the U.S. industries will
compete more effectively if we become a leader on greenhouse
gas emissions. But the political reality of trying to get a
bill passed in Congress is that this will disadvantage U.S.
industries if we act and China does not.
Mr. Morgenstern. I appreciate that point. And I guess what
I was going to say was that Trevor has spoken about the ways to
modify the WTO, which sound very promising and I want to
support those. But I want to come back to a point that I tried
to make earlier, which is that the use of an updating free
allocation system for these impacted industries, the use of a
mechanism which, essentially, provides a cushion to domestic
industries which are facing this increased competition is a way
of addressing the problem in the near term, at least as a
transitional measure. It's a way of providing protection, if
you will, of some sort without labeling it protectionism in WTO
terminology for our domestic industries.
That this approach, my own observation, has not gotten
adequately debated and I don't think that the public fully
understands that this is a way of helping domestic industry
and, in fact, offsetting--even offsetting by 100 percent--the
burdens that would be imposed by this system.
Mr. Cardin. Of course the cap-and-trade bill that was
considered last year in the Senate had significant transitional
assistance for carbon-intense industries. There was, in
reality, a rebate, whether it was labeled that or not, they did
get credits and those credits were worth money and they got
help, I think Mr. Bradley wanted to comment first and I have a
follow-up question on whether that should be done or not.
Mr. Bradley. Sure, thank you. I won't add to Trevor and
Dick's comments on the viability of the WTO approach. I would
endorse their comments.
I wanted to make a couple of notes to that. One is that the
tone in which this question is often posed certainly in some of
the debates in Washington--is, how do we coerce countries like
China to the negotiating table? Can we use trade measures to do
that?
I've tried to make the case in my testimony that the need
for coercion is not obvious. In fact, Trevor's made the point
that a trade measure may not be a very good--an effective
measure--to leverage that participation, and I would also make
the case that it's probably not necessary. The way that you
have framed this, in a way, of taking trade measures forward in
as multilateral a way as possible, is very promising and is a
welcome variant on the type of discussion that we've been
having.
Another area is also to focus on what might be done in the
WTO in a more positive sense around trying to move some of
these technologies forward. Periodically, we revisit this
question of liberalizing the trade in the environmental goods
and services. A lot of countries still maintain fairly high
tariff and non-tariff barriers to technologies that we actually
want to see widely deployed in the world. Disentangling that
from a broader trade agenda is not easy; a lot of developing
countries see that discussion largely as a self-serving one
from the rich economies. And frankly, it's been handled fairly
clumsily in the past. It's not that long since the EU and the
U.S. both brought forward a proposal, which didn't manage to
get a whole lot of buy-in from developing countries.
But if we're serious about trying to move technologies on a
global scale that are going to help us deal with this problem,
that is something positive and forward-looking that can be done
within the trade regime that goes beyond and is complementary
to the, perhaps, more defensive measures that help us with
these transitional arrangements around energy-intensive
industries.
Mr. Cardin. Thank you. Let me just bring up an issue, that
we're trying to get a greater consensus in Congress to pass a
strong bill and the suggestion has been made that gives me
heartache, but let me just bring it out. That is that the
concerns expressed by many of the colleagues on the other side
of the aisle is that there's too much money in a cap-and-trade
bill and that it establishes--it's really a tax and it
establishes all these new programs.
Why don't we consider putting in the cap--and to the extent
that there's revenues generated, that they be rebated to the
consumers of America or to the businesses of America that are
impacted, but without the revenue flow to government to deal
with investment issues, whether they are in developing a
reasonable flow of affordable alternative fuels or renewable
fuels, whether it's in public transportation, whether it's in
our international funds that are created to help Third World
countries or developing countries, that that be left to the
normal budget process rather than going through this
extraordinary revenue flow created through the cap-and-trade
system. I welcome your thoughts on that approach as a way of
trying to get a broader consensus in Congress to move forward
on a cap on our carbon emissions.
Mr. Houser. The first comment I would make is that a cap-
and-trade bill will have--the impacts will not be equitable,
either by region or by income group, and there are
redistribution impacts that will have to be addressed. Now,
that can be addressed by directly rebating the emission
allowances for free to affected industries and consumers or by
moving that revenue through the budgetary process.
But there's two issues, that will critical to maintain--not
just to generate, but maintain--public support for a cap-and-
trade bill that will deal with allowance revenue. The first is
what Dick talked about--providing some cost offsets to energy-
intensive industry to help them invest in new technologies to
reduce emissions so that they're competing on a level playing
field. That's a critical component. And that to be effective,
we'll have to be addressing it that way--that unilateral trade
measures won't be effective in protecting those industries.
The second is consumers in coal-rich parts of the country
that will see a higher increase in electricity prices than
consumers in less coal-rich parts of the country. To help those
utilities make the transition and offset the impacts of those
consumers that's going to be important. Taking the histories of
trade liberalization, coming from a trade and finance think
tank, to sustain political support for these types of policies
that have distributive impacts, like climate change and trade
do, it's important to be serious about those efforts.
Otherwise, you risk undermining support for a bill a couple
years down the road.
Mr. Morgenstern. I would just add one or two points. I
agree with Trevor's comments here. There are some, clearly,
particularly adversely affected segments of society. You
probably have to deal with those as we've been discussing and
as Trevor's indicated. But it's also true, as you indicated,
that there's a lot of money that's generated by either a cap-
and-trade or a carbon tax. Any of these is going to generate a
lot of money.
That it's really up to Congress to decide how they want to
allocate those dollars. Certainly, one can think of a long list
of activities that one can choose to support, either in the
normal federal budget process or, in some way, outside of it.
My answer is--it sounds like a bit of a cop-out--but maybe
that's why they pay the big bucks, okay? Essentially, it's a
political decision and it really there are some clear questions
of equity, okay. One can make a case that helping technologies,
advancing new technologies that are essential for the future
are critical.
Mr. Cardin. I agree with that, and I guess one of my
concerns is with how we do this; to me is critically important
that it's not just capping the carbon emissions, but if the
people of my state don't have better public transportation,
it's going to be an extraordinarily difficult change in
lifestyle that they shouldn't have to suffer. We should be
investing in public transportation. When else are we going to
get the revenues to really build the types of transit systems
that we need in this nation if we don't use the revenue flow
from a cap-and-trade system? I'm sure Senator Whitehouse in
Rhode Island has a different priority that he thinks is
important for his constituents, and I agree that we have to
make those decisions--but I think, though, it would be a
mistake if we just ignore the need for public investment.
Then our international commitments--there's going to be
serious issues that the international community needs to
address with developing countries, as a matter of fairness and
to get to the goals that we need to get to. We're going to have
to be prepared to make those investments. The United States is
going to have to put up the money to do that. To try to rely on
the normal budget process for that, it's going to be difficult
to see us meet those goals.
Mr. Morgenstern. The good news, Senator, is that you do
have a revenue stream here. You do have a fairly reliable
revenue stream that can support the types of initiatives that
you're talking about.
Mr. Cardin. That's the point. The point is, do we give up
that revenue stream? I think that was the compromise that was
suggested, that we give up that revenue stream.
Mr. Bradley. Picking up on that, I would agree with what
Trevor and Dick have said and I'm not even an American voter,
so I'm not going to take a stab at what is the appropriate
political, sort of, distribution between the various, important
priorities--dealing with consumers that are impacted by energy
prices, dealing with businesses that have competitiveness
concerns. I do want to speak briefly to this question of some
of the international priorities, though, that will be funded.
I tried to make the case in my testimony that there is a
significant national interest for the United States in seeing a
successful international climate deal. It helps bind
international partners into delivering on the things that they
said they were going to deliver. In the long run, it helps us
deal with a critically important problem that affects all of
us. It's not an exaggeration to say that if there is no finance
available for some issues within the international regime,
there will be no climate agreement.
It's important that we shouldn't have any illusions about
that. It's true that developing countries, as part of the
inevitable negotiating process, vastly overstate some of the,
sort of, bottom lines that they say they have in terms of what
they would need to see on the table. But it's important to
recognize--and it has been recognized, as bills have been
formulated in both houses during the last couple of years--that
there is a strong case for financing, in particular, I would
pick out adaptation, where, in part because of the lifestyles
that we've led and the prosperity that we enjoy, people around
the world are going to be suffering significant impacts, in
some cases--and I regularly meet with representatives of some
of the small island states--these are existential threats--
their countries will disappear.
But even on less dramatic scales, there are impacts around
the world. I think there's a strong sense amongst many U.S.
constituencies--and in particular, I point to the religious
community and the way that this unfolded over the last couple
of years--that, really want to take up that ethical challenge
that we all face to try and deal with some of those questions.
We all have an interest in seeing markets for clean technology
expand, and if we can be collaborating internationally around
technology and helping co-finance some of those things, that's
going to be really important to helping that process move
forward. It is important that that should be raised.
Now, does allowance revenue provide a sort of politics-free
or politics-light way of securing that revenue? That seems to
be what we were, in many cases, hoping in the last round of
bills--I wonder whether that dream is kind of evaporating but
whether we get around the politics or not, that argument needs
to be won. And I would argue that just as we have, from a U.S.
perspective, legitimate grounds to try and put an international
deal together that tries to hold our international partners to
some standard of, verifying and reporting that they're really
making progress, it may not be a bad idea to have a similar
structure in which commitments that the U.S. takes up to fund
things, whether adaptation or forest protection or technology,
also be subject to that verification.
When you're in an appropriations discussion, being able to
say this isn't something that we're arbitrarily throwing on the
table this year, this is part of an overall international
engagement that we've got, we know what we're getting in
exchange for it; we're getting the viability of this deal going
onwards. That seems to me something that can help us construct
what ultimately an international agreement is all about, which
is a greater level of trust that enables countries to move
forward more effectively together.
Mr. Cardin. Senator Whitehouse.
Mr. Whitehouse. I wanted to follow up on the chairman's
discussion about the local impacts and how you address them. We
touched on, for instance, the states where much of the
electricity is generated by coal. It's obvious that a great
deal of the revenue generated by a cap-and-trade program needs
to be returned to the people who will be paying for it--to
families. If you do it across the board, as many have
suggested, through reductions in the withholding tax, through
reductions in tax rates, through increases in EITC and things
like that, you spread it evenly across the country and you fail
at the goal of making region-specific adjustments.
If you go specifically to the cost centers in the region,
like the utilities, and you rebate back to them, you risk
either mitigating or even completely canceling the price signal
that it was the purpose of the legislation to achieve. If you
do it state-by-state and say, well, we're going to give Ohio,
West Virginia a slug of money to compensate for this and they
can figure out how they make that distribution, you get into
the problem of the state government becoming an agency for
itself and you see what we saw, for instance, with the tobacco
settlement, in which every dollar just disappeared into various
prerogatives and it did not get back to solving the smoking
problem that it was designed to address.
I don't see a ready way to transfer revenues back to
regular families on a regionally defined basis that doesn't
suffer from one infirmity or another. Am I missing a silver
bullet that solves this problem?
Mr. Morgenstern. I'm not sure I'd call it a silver bullet,
but I guess I would say that assuring that the program that's
put in place is gradual in nature and doesn't bring about very
abrupt changes--and Trevor mentioned the idea of a price collar
or some other cost-containment mechanism. This is a way of
preventing price shocks on the upside and, by the way, on the
downside, it would limit declines that could be a problem for
new technology developers who are concerned that they--if they
push forward a new product, the market collapses and somehow,
they can't sell their product. It actually is helpful on both
sides.
But something of that nature could prevent some of the
extreme price shocks, but the fact that there may be some--not
may be--that there will be some redistributive effect in ways
that cannot be readily compensated, that's, to some extent,
unavoidable, but if you can keep it small, that's probably the
best hope.
Mr. Whitehouse. How about in the area of conservation? It
would seem to go back to the coal-fired electricity example,
that if we wished to focus resources in areas that were
suffering particularly because of their dependence on this as a
result of the increased cost, that we could increase
conservation in those areas and, although the ultimate
consumer's per-kilowatt-hour rate might be higher, if their
ultimate electric bill is lower because they burn less of it
because we've funded conservation very aggressively in those
areas, we may have a situation in which the price signal has
not been reduced or mitigated or canceled and yet, they're not
harmed in the family pocketbook when they have that long, grim
night every month at the kitchen table trying to make sure that
the bills and the checkbook meet.
Mr. Houser. I work at the Institute for International
Economics so that I don't have to answer sticky questions like
this but I guess one thing that I could add is, you're right in
that the goal is not just to offset the cost of electricity
increases to coal-dependent parts of the country, it's to help
them transition to less coal-dependent sources of energy or
less energy consumption. And there's a couple of ways to do
that: If allocations are provided for free to utilities that
does provide the potential for revenue. The key is in ensuring
that if those allowance are provided for me, that that money
transitions into new investment and is not passed through into
price increases for consumers.
If utilities are going to finance their transition to a
low-carbon economy on the backs of consumer price increases,
then that's where the assistance needs to be transitioned to
offset that price increase as they make that technology
investment. Ultimately, you're right: However the assistance is
targeted, the price signal needs to be there and the incentives
need to be right for moving towards lower-carbon forms of
energy.
Mr. Cardin. Senator Whitehouse has really summarized the
dilemma we have rather effectively. It's interesting, if you
look at the Lieberman-Warner bill from last year, it was
developed in a very political environment. Senator Boxer was
very clear: She wanted to get the support to get the bill out
of committee and, hopefully, moving on the floor and she ended
up with 54 senators prepared to move forward on a pretty
controversial cap-and-trade bill. I would suggest she got it
right last year.
We were pretty close to the balance that Senator Whitehouse
was talking about of making sure that we deal with the adverse
impacts that we didn't want to see happen in our community, but
still allowing the market forces to operate in order to make
our economy function the best way with low-carbon emission. I'm
not saying we can't improve last year's bill; we can improve
last year's bill and it will be different as it moves through
this Congress, but I do think a lot of these are political
judgments that we have to make in order to try to balance the
competing interests.
Let me thank our witnesses for their testimony. What I
intend to do is to take this testimony and use it in developing
a position for the Helsinki Commission that we will move
forward in Vilnius when we have our parliamentary assembly
meetings this summer, hopefully working with our administration
as to the position that we will be taking moving towards
Copenhagen so that the United States plays a very constructive
role in the Copenhagen meetings. I know that the committees of
Congress intend to be very actively involved in work leading up
to Copenhagen, and I would like to see the Helsinki Commission
be part of that effort, recognizing that we're all going to
have to give a little bit to get us to an effective
international agreement.
I have very strong views about some of the international
enforcement issues under WTO and I'm always concerned that our
European partners are too timid in trying to use WTO to advance
legitimate international objectives. Hopefully, we'll be able
to work out those issues as we move forward. The bottom line is
that the United States cannot sit on the sidelines--that we
have to be the leader--and we have relinquished that role. I do
thank our European friends because that they have done some
really remarkable initiatives on dealing with carbon emissions.
That will help us a great deal in reaching, I hope, a
consensus in Copenhagen. Once again, let me thank our witnesses
for their participation. It was extremely helpful and we
particularly appreciate your frankness in the exchanges that
took place with the members of the commission. We'll stand
adjourned.
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