[House Hearing, 107 Congress] [From the U.S. Government Publishing Office] NEW CONCEPTS IN ENVIRONMENTAL POLICY ======================================================================= HEARING before the SUBCOMMITTEE ON ENERGY POLICY, NATURAL RESOURCES AND REGULATORY AFFAIRS of the COMMITTEE ON GOVERNMENT REFORM HOUSE OF REPRESENTATIVES ONE HUNDRED SEVENTH CONGRESS SECOND SESSION __________ MAY 28, 2002 __________ Serial No. 107-197 __________ Printed for the use of the Committee on Government Reform Available via the World Wide Web: http://www.gpo.gov/congress/house http://www.house.gov/reform U.S. GOVERNMENT PRINTING OFFICE WASHINGTON : 2003 86-568 PDF For Sale by the Superintendent of Documents, U.S. Government Printing Office Internet: bookstore.gpr.gov Phone: toll free (866) 512-1800; (202) 512-1800 Fax: (202) 512-2250 Mail: Stop SSOP, Washington, DC 20402-0001 COMMITTEE ON GOVERNMENT REFORM DAN BURTON, Indiana, Chairman BENJAMIN A. GILMAN, New York HENRY A. WAXMAN, California CONSTANCE A. MORELLA, Maryland TOM LANTOS, California CHRISTOPHER SHAYS, Connecticut MAJOR R. OWENS, New York ILEANA ROS-LEHTINEN, Florida EDOLPHUS TOWNS, New York JOHN M. McHUGH, New York PAUL E. KANJORSKI, Pennsylvania STEPHEN HORN, California PATSY T. MINK, Hawaii JOHN L. MICA, Florida CAROLYN B. MALONEY, New York THOMAS M. DAVIS, Virginia ELEANOR HOLMES NORTON, Washington, MARK E. SOUDER, Indiana DC STEVEN C. LaTOURETTE, Ohio ELIJAH E. CUMMINGS, Maryland BOB BARR, Georgia DENNIS J. KUCINICH, Ohio DAN MILLER, Florida ROD R. BLAGOJEVICH, Illinois DOUG OSE, California DANNY K. DAVIS, Illinois RON LEWIS, Kentucky JOHN F. TIERNEY, Massachusetts JO ANN DAVIS, Virginia JIM TURNER, Texas TODD RUSSELL PLATTS, Pennsylvania THOMAS H. ALLEN, Maine DAVE WELDON, Florida JANICE D. SCHAKOWSKY, Illinois CHRIS CANNON, Utah WM. LACY CLAY, Missouri ADAM H. PUTNAM, Florida DIANE E. WATSON, California C.L. ``BUTCH'' OTTER, Idaho STEPHEN F. LYNCH, Massachusetts EDWARD L. SCHROCK, Virginia ------ JOHN J. DUNCAN, Jr., Tennessee BERNARD SANDERS, Vermont JOHN SULLIVAN, Oklahoma (Independent) Kevin Binger, Staff Director Daniel R. Moll, Deputy Staff Director James C. Wilson, Chief Counsel Robert A. Briggs, Chief Clerk Phil Schiliro, Minority Staff Director Subcommittee on Energy Policy, Natural Resources and Regulatory Affairs DOUG OSE, California, Chairman C.L. ``BUTCH'' OTTER, Idaho JOHN F. TIERNEY, Massachusetts CHRISTOPHER SHAYS, Connecticut TOM LANTOS, California JOHN M. McHUGH, New York EDOLPHUS TOWNS, New York STEVEN C. LaTOURETTE, Ohio PATSY T. MINK, Hawaii CHRIS CANNON, Utah DENNIS J. KUCINICH, Ohio JOHN J. DUNCAN, Jr., Tennessee ROD R. BLAGOJEVICH, Illinois JOHN SULLIVAN, Oklahoma Ex Officio DAN BURTON, Indiana HENRY A. WAXMAN, California Dan Skopec, Staff Director Jonathan Tolman, Professional Staff Member Allison Freeman, Clerk C O N T E N T S ---------- Page Hearing held on May 28, 2002..................................... 1 Statement of: Ellerman, A. Denny, senior lecturer, Sloan School of Management, Massachusetts Institute of Technology.......... 26 Green, Kenneth, chief scientist, Reason Public Policy Institute.................................................. 37 Nastri, Wayne, Regional Administrator, Environmental Protection Agency, Region IX............................... 6 Letters, statements, etc., submitted for the record by: Ellerman, A. Denny, senior lecturer, Sloan School of Management, Massachusetts Institute of Technology, prepared statement of............................................... 28 Green, Kenneth, chief scientist, Reason Public Policy Institute, prepared statement of........................... 40 Nastri, Wayne, Regional Administrator, Environmental Protection Agency, Region IX: Informtation concerning mercury offset pilot program..... 68 Informtation concerning 2002 proposed trading policy..... 73 Memorandum dated April 10, 1998.......................... 94 Prepared statement of.................................... 10 Ose, Hon. Doug, a Representative in Congress from the State of California, prepared statement of....................... 4 NEW CONCEPTS IN ENVIRONMENTAL POLICY ---------- TUESDAY, MAY 28, 2002 House of Representatives, Subcommittee on Energy Policy, Natural Resources and Regulatory Affairs, Committee on Government Reform, Orange, CA. The subcommittee met, pursuant to notice, at 9:30 a.m., in room 209, Argyros Forum, Chapman University, Orange, CA, Hon. Doug Ose (chairman of the subcommittee) presiding. Members present: Representative Ose. Staff present: Dan Skopec, staff director; Jonathan Tolman, professional staff member; Yier Shi, press secretary; and Allison Freeman, clerk. Mr. Ose. Welcome to this morning's hearing before the Subcommittee on Energy Policy, Natural Resources and Regulatory Affairs. We are today in Orange County for the purpose of taking testimony on the environmental issues before the country; in particular, how we can move to the next generation of environmental improvements. As a member of the Government Reform Committee, I have had an opportunity to see how the Government spends our tax dollars, manages our programs, and delivers its services to the American people. Like any good business, Government needs to continually evaluate its performance and make necessary changes when current policies are out-of-date. Government policies to protect the environment are no exception to this rule. In 1970, the U.S. EPA was established to address the massive pollution problems our country faced. Through laws, such as the Clean Air Act and the Clean Water Act, EPA has sought to reduce the bigger sources of pollution: industry and wastewater treatment emissions. EPA took a ``command and control'' approach to these problems, setting strict emission standards and proscribing the type of technology that industry could use to meet those standards. Although the compliance costs were high, these rules did succeed in reducing pollution from industrial sources. Today, as a result, we have cleaner water and cleaner air. But, as our society has evolved and our economy has moved away from its longstanding and traditional industrial base, we have reached the time when we must reevaluate our performance in protecting the environment. Despite efforts to clean our air, there are still 34 counties in California that fail to meet at least one of EPA's air standards. Three-fifths of smog-causing nitrogen oxides come from cars, trucks, railroads, and other non-industrial sources that are not directly regulated by the Clean Air Act. And, while industrial pollution has been virtually eliminated as a source of water pollution in California, 60 percent of the rivers and streams that EPA has assessed are not fully fishable or swimmable. Think about that, 60 percent--you can't go down there and just jump in the old water. The leading sources of degradation in California's rivers and streams are agriculture, forestry activities, urban runoff and storm sewers, and municipal point sources, which are not effectively managed under the Clean Water Act. By 2025, the population of California is expected to reach nearly 50 million people. This State will have to accommodate an additional 15 million people over the next 25 years. Think about the amount of food, water, housing, and energy consumed by an additional 15 million people. To say that's going to put a strain on our environment is to understate the obvious. If we are to prepare for these changes, we must begin to take a different approach to environmental regulation. The old ``command and control'' approach won't get us where we need to go. Today's environment is inflexible, and the compliance costs often are too high. The time has come for our government to seek innovative ways to manage our environment. High standards of environmental protection are a must. And, individuals must have the flexibility to meet those standards in new ways. Government functionaries should not be environmental bean counters but environmental managers. The goal should not be the number of permits issued or the amount of money spent, but, rather, do we clean up the environment. While we face some daunting problems, there are also some reasons to be hopeful--areas where environmental innovation and experimentation have, in fact, worked. For example, the 1990 Clean Air Act Amendments introduced a novel concept for controlling sulfur emissions from power plants. Instead of requiring specific clean technology at every plant, that is, the equipment, sulfur emissions in total were capped for the whole country. Power plants were then forced to either reduce their own emissions, or buy credits, or purchase credits from other plants that reduced emissions further than they were required. At the time, environmental economists predicted that this would be a more efficient way to reduce pollution. The program was even more successful than originally predicted, with power plants reducing sulfur pollution even more effectively than even the economists thought. Dr. Green, you are going to have something to say about that. EPA itself has attempted to adopt more flexible management techniques. Project XL, which began in 1995, was an effort by EPA to improve environmental performance while reducing regulatory burdens. The State of California, with the help of EPA's Region IX office whose director is here with us today, has also achieved some success in terms of adopting innovative and flexible environmental policies. The RECLAIM program and the Bay Area Emissions Trading Program are two good examples. But, such programs are few and far between. The purpose of today's hearing is to look for ways that we can increase the frequency of such programs. California is a perfect place to begin this search. We have the largest population in the United States, we have serious air pollution problems, we have a huge agricultural industry, we have sprawling suburbs, numerous river systems, we have the Bay Delta, which is, frankly, a very unique asset to the State, hundreds of miles of coastline, we have mountains, forests, and deserts. Frankly, California has a plethora of environmental challenges. Last summer, President Bush was in California and stood by the General Sherman Giant Sequoia and called for a ``new environmentalism'' that embraces ``a new spirit of respect and cooperation'' in which ``citizens and private groups play a crucial role.'' New approaches to environmental policy that complement or even replace the current command and control regulations will depend on government agencies fostering the creativity and ingenuity of private individuals, organizations, and associations. I want to welcome our witnesses today. They include: Wayne Nastri, the Regional Administrator for EPA Region IX, Professor A. Denny Ellerman, from the Center for Energy and Environmental Policy Research at MIT, and Dr. Kenneth Green, Director of Environmental Program for the Reason Public Policy Institute. [The prepared statement of Hon. Doug Ose follows:] [GRAPHIC] [TIFF OMITTED] T6568.001 [GRAPHIC] [TIFF OMITTED] T6568.002 Mr. Ose. Gentlemen, welcome. This committee, by practice, swears in every one of its witnesses, regardless of the hearing, so I'm going to ask each of you to rise. Thank you. Raise your right hands. [Witnesses sworn.] Mr. Ose. Let the record show that the witnesses answered in the affirmative. The way we work this is that you've all submitted written testimony--I've read the testimony, my staff has read the testimony, sometimes they have to read it a second time, but we have read the testimony. If you could go through maybe 5 or 7 minutes to summarize your respective testimonies that would expedite things. Since we don't have a lot of other Members, we are not going to have a lengthy debate here; it's only myself, and then we'll just go to questions. I do have a number of questions. So, Mr. Nastri. STATEMENT OF WAYNE NASTRI, REGIONAL ADMINISTRATOR, ENVIRONMENTAL PROTECTION AGENCY, REGION IX Mr. Nastri. Thank you, Chairman Ose. It's a pleasure to be here this morning in beautiful southern California, close to my home I might add. Since my arrival at EPA, I've had the opportunity to discuss priorities for the Agency on several occasions. I've consistently stressed my commitment for Region IX to be flexible, innovative, and to be results driven. As you've noted, we have prepared testimony. That testimony has been submitted, and as you request I will briefly summarize that testimony. When Governor Whitman came on board as the Administrator, she made very clear to us that we really had three goals that we had to achieve, that is that the air is cleaner, the water is purer, and the land is better protected at the end of our term. And, the manner in which we achieve that is really a lot up to our discretion, but clearly innovation has a big role in how we approach that. A number of programs that the President and Administrator Whitman have proposed have been based on voluntary measures, have been based on flexibility. They've been based on regional approaches, and are all approaches that, as you've noted, have been proven in the past and have been successful. We think that, as again you've noted, there's been tremendous success over the last few years, and let me restate that, over the last two decades there's been tremendous success. But, clearly, the low-hanging fruit of success is gone, and the question is how do we get to the next level of environmental clean-up? The ``command and control'' structure may not work, and so when we look in terms of flexibility we try to identify what are some of the most flexible means that we do have to achieve that. I think one of the most flexible means, when people think about flexibility, is a voluntary program, and in a voluntary program we are experimenting with industries and trying to get them to step up to the table to look at global climate change. I think that's a good example, where although the United States is not participating in the Kyoto protocol we are trying to reach many of the goals through voluntary means. And, so, can industries step up to the plate and meet some of those reductions? And, more importantly, in a manner that, should some future events allow us to be tied in on a more global basis, we can gain the advantages of some of the efforts we've done without losing the innovation and the timing from that perspective? I'd like to give an example of some of the successes that we've seen in some of the voluntary programs. One example that comes to my mind has to do with the mining industry in the State of Nevada. Mercury emissions were significant, through data that was brought to us through our toxic release inventory. We were able to go to the four largest gold mines and say, ``We believe there's a problem. Let's sit down together and discuss how we might be able to reduce these mercury emissions.'' Now, this was all done in the context of having a MACT, Maximum Achievable Control Technology, rule that was going to be developed in 2007, and the mines said to us, we'll be willing to work with you if you can put in abeyance the MACT rule. And, we said, well let's see what we can come up with. And, we were actually able to sit down with the mines, get them to achieve a 50 percent reduction in less than a few years time, and for that we then went to Headquarters and said, ``Look, we've gotten tremendous reductions, we saw that we don't need to move forward on this MACT rule, let's demonstrate the achievements.'' Now, the interesting thing was, in this voluntary program the mines in the State of Nevada said, look, we're willing to do this with you, but we want to keep this on the quiet for now. We don't want to be held up as the industry poster boy and have all our colleagues extremely upset at us. So, we said, fine, so in one sense we don't really talk much about it, but in another sense we talk about a voluntary program and success that can be achieved. This is an excellent example. So, from the voluntary aspect, we think there's a lot of opportunity. We think that we can achieve those measurable reductions and go ahead and continue to meet the next round of environmental goals. There are other issues, too, that we can talk about here in southern California. There's the Santa Anna Watershed Project. There we are looking at bringing in a number of different municipalities, agencies, and trying to look at water quality protection from a holistic basis, from a watershed basis, instead of each municipality trying to address the various concerns as the water comes into their jurisdiction. This is also exemplified, I think, in terms of our approach when we talk about the Watershed Pilot Program that the President and Administrator discussed, but we'll be looking at 21 pilots across the Nation and trying again to look at a holistic approach instead of the jurisdiction by municipality approach. So, those are two examples of the voluntary programs. The next approach that we are looking at in terms of innovation is market-based approach. You talked about the RECLAIM, the Regional Clean Air Incentives Market. You also talked about the Acid Rain Program, that program being over 90 percent effective, it is our most cost-effective program to administer, requiring less than 21 people across the Nation. It is a model for many of the programs that we are looking at, and so when we look at market-based approaches we can look at RECLAIM. RECLAIM, obviously, had some issues, I want to say last year or the year before, in terms of what happened when the credits became sparse. We are certainly looking at how that can be rectified and what can be traded. In terms of other market-based approaches, we are also looking at water quality trading. This, I think, is a unique concept. I think people are comfortable with the air quality trading concept, but on the water quality side it's something I think that we are going to have to take a closer look at. A third aspect in terms of innovation is really looking at new technologies, those technologies that exist. When you think about EPA and innovation I always think of Superfund, but in Superfund you have a number of technologies that are always brought to bear. You have the SITE program, the Superfund Innovative Technology Evaluation Program. These programs utilize new technologies that haven't generally been utilized or proven elsewhere before. And, given that technology, it's a chance to demonstrate whether or not this works. In supporting new technologies, and I will address that a little bit more shortly, you do have to address the concept of, not only addressing the technical aspect of innovativeness, but addressing the culture aspect, and that's something, again, that I want to talk about a little bit later. The fourth aspect is systems improvement. How can we improve our systems so that we are doing a better job in serving our stakeholders, whether that be the general public, whether that be the State government, tribal government, or local government? How can we make information that we have more readily available and, therefore, more readily usable to make timely decisions? I think given all the information, given all the happenings that have occurred since September 11th, that information is absolutely vital. We need to make sure that we can address the information needs, so by improving our systems technology, and not necessarily by simply replicating various systems, we need to really look at how can we effectively manage and access data. That really concludes the four programs that I talked about in terms of our strategic vision. We are focusing on greenhouse gases, reducing smog, improving water quality, and diversified environmental protection tools. That, I think summarizes the comments of the testimony that was submitted. Now, in terms of our outlook and what I see as the challenge of innovation, I'd like to give you my perspective. The key view, or the key challenge in my short tenure as the RA, is the culture within EPA. It's getting people to accept the fact that we have a challenge before us, and how can we meet that challenge aggressively and not be afraid of failure. No one wants to be on the receiving end of someone saying, why did we use this technology when it was experimental, it hadn't been proven across the Nation, and it didn't get us the results we wanted, in the timeframe that we wanted, or in the budget that we wanted. And, that fear is something that really tends to suppress innovation. And, so, what we've been trying to do is change the rewards, the recognition, the culture if you will, in terms of how can you get people to embrace change, to say we can become a champion and we can now move forward in this technology. And, it's interesting, because it's little things within the Agency that I think will go a long way. It's having management, it's having leadership, recognizing that everything is not going to go perfectly, and realizing that we're going to be there to support them. One of the things that I've instituted in Region IX, although it may sound trite, it's actually a big hit within the region, and that is, whenever there is a significant project that garners a lot of attention, we make very clear, we'll bring in the team, we'll say this is the goal, this is what we are trying to do, you tell us how can we do it, and we get them to lay out the specific timetables, the goals, the milestones, the objectives. And, when we meet those goals and objectives, and we make sure that they have all the resources that they need, I pull them into my office and we have a party, whether it's cookies and ice cream, and soda, or chips and what not, the staff really appreciates that, and they appreciate the recognition that they are getting for doing it. And, when things don't go right, we say we've learned a lot from this. How could we have done this thing differently? We cannot be afraid to embrace change, to embrace innovation, that is so important to us. Now, not only is that an issue within the Agency, it's really something that we need to look to for support from our political leadership, because I think--I could be the one saying, you know, we shouldn't have done this, or we should have done this, very easily I could be on the receiving end of the congressional hearing saying, ``Mr. Nastri, why did you go with this approach when you knew that, in fact, that technology wasn't necessarily proven?'' So, we certainly look to you, Chairman Ose, and to other congressional leaders, to have that faith and confidence and to instill in us to move forward, to take those chances, assuredly, minimizing every single potential risk possible, looking at all the potential up sides and down sides. And, that's something that we, obviously, take very seriously. From my perspective, I think that is the biggest challenge that we face. I think when you look at the plethora of ideas that people come up with, there's no shortage of ideas out there for us to embrace and to move forward on. The real challenge is making sure that we, as an Agency, and our States, and our Federal Government, supports us as we take those challenges and move forward. And, that concludes my remarks at this point. I'll be looking forward to answering any questions you may have later. [The prepared statement of Mr. Nastri follows:] [GRAPHIC] [TIFF OMITTED] T6568.003 [GRAPHIC] [TIFF OMITTED] T6568.004 [GRAPHIC] [TIFF OMITTED] T6568.005 [GRAPHIC] [TIFF OMITTED] T6568.006 [GRAPHIC] [TIFF OMITTED] T6568.007 [GRAPHIC] [TIFF OMITTED] T6568.008 [GRAPHIC] [TIFF OMITTED] T6568.009 [GRAPHIC] [TIFF OMITTED] T6568.010 [GRAPHIC] [TIFF OMITTED] T6568.011 [GRAPHIC] [TIFF OMITTED] T6568.012 [GRAPHIC] [TIFF OMITTED] T6568.013 [GRAPHIC] [TIFF OMITTED] T6568.014 [GRAPHIC] [TIFF OMITTED] T6568.015 [GRAPHIC] [TIFF OMITTED] T6568.016 [GRAPHIC] [TIFF OMITTED] T6568.017 [GRAPHIC] [TIFF OMITTED] T6568.018 Mr. Ose. Thank you, Mr. Nastri. We do appreciate you coming down. Mr. Nastri. Thank you. Mr. Ose. Our next witness is Dr. A. Denny Ellerman, who a Senior Lecturer, Sloan School of Management, at Massachusetts Institute of Technology, and the Executive Director of MIT's Center for Energy and Environmental Policy Research. Dr. Ellerman, welcome. STATEMENT OF A. DENNY ELLERMAN, SENIOR LECTURER, SLOAN SCHOOL OF MANAGEMENT, MASSACHUSETTS INSTITUTE OF TECHNOLOGY Dr. Ellerman. Thank you, Chairman Ose, and it's a pleasure to be here. I'm very grateful for this opportunity to discuss innovative approaches to environmental regulation, which is a field to which we've directed a lot of our research at MIT. I'm going to direct my remarks this morning to a particular innovation in regulation that's known as cap-and-trade systems, or tradeable permit systems. This is one form of market-based incentive programs, which are typically contrasted with command-and-control programs, such as you've already referred, and which have served us well up to the present. The essence of cap-and-trade programs is, as the name suggests, to cap the emissions, or to limit them in the aggregate, and distribute permits to emit, typically called allowances, and then to allow those permits to be traded among the entities that are regulated or that are subject to the cap. The most successful of these programs by far has been the SO2 emission trading program known as Title IV of the 1990 Clean Air Act Amendments, also known as the acid rain program. The concept, prior to this program going into effect, the concept of cap-and-trade programs, or tradeable permit programs, had been largely theoretical, and I think this program has put theory into practice and has demonstrated a lot of very attractive features. I would mention three lessons that stand out in particular, that we have learned from this experiment, and which have been repeated in other cap-and-trade programs, as well. The first, of course, is the reason that they were promoted in the first place, which was a cheaper way to achieve environmental goals, to be more efficient in an economic sense. All studies have been done of the SO2 trading program have shown that, in fact, the cost is less than if the same regulations had been imposed by more traditional command-and-control techniques. The second lesson is one now that appears almost commonplace, which is that markets in these permits will appear. When this legislation was initially passed in 1990, there were a lot of doubts as to whether markets would appear. I think we know now that they have, and that contributes to the success of it. We can take it largely for granted, that markets will appear if the permits are created and distributed so that they can be traded. The third lesson is the one that is a surprise to everyone, and it's one Administrator Nastri just referred to, which is environmental effectiveness. This program reduced emissions far more quickly and further than had been expected, I believe you said, even by the economists. It certainly was a large reduction and greater than we'd experienced in other types of programs, so I think we do observe that cap-and-trade programs can be very effective, and more effective than traditional forms of regulation. I'm often posed the question, well, why is this so? I attribute this to three elements of these programs, which if they are achieved I think means that they will be successful, and those three are simplicity, strict accountability, and flexibility. They are very simple programs, and the SO2 program is a classic in this sense. The requirement placed upon affected sources could not be more simple: to have a permit and to give up that permit for every ton that is emitted. There are no other side conditions, no technologies required, a facility is not even required to reduce emissions. It just has to have permits for every ton emitted. Since the total number of permits is limited, then, of course, that will require an aggregate reduction to be made. Now, with such a simple requirement, strict accountability is almost unavoidable. There's no other basis upon which to judge compliance other than whether there is a ticket corresponding to the ton. This is very different from command- and-control. The requirement may sound simple--install this piece of equipment, or adopt certain practices--except uniform rules are not always equally applicable upon all sources, and therefore various exceptions and relaxations are made in the process. So, that simplicity leads to strict accountability and makes it possible, because now there is only one criteria and, in fact, requires the strict accountability that contributes to the environmental success. With such strict accountability, from an environmental standpoint, or from a regulator's standpoint, one can allow complete flexibility, which is what we observe. We know the emissions will be reduced and, therefore, we can be much more relaxed if it's a well-designed system, concerning whether the reductions will, in fact, be made. Let me close briefly by saying that cap-and-trade had been largely a theoretical concept. It has now moved out of the text books and into practice. I would stress that it may not always be appropriate in all circumstances. There are cases where there is no alternative but to resort to command-and-control regulations. It depends upon the nature of the environmental problem. What we do know now is that these programs, the cap-and- trade programs, work well, and that where applicable--and I believe that will be in a vast number of circumstances, although each one will be different--that they are better for the environment and better for the economy than the conventional way of doing things, and they are an appropriate approach of environmental regulation for the next generation problems that the country now faces in the environment. Thank you, Mr. Chairman. [The prepared statement of Dr. Ellerman follows:] [GRAPHIC] [TIFF OMITTED] T6568.019 [GRAPHIC] [TIFF OMITTED] T6568.020 [GRAPHIC] [TIFF OMITTED] T6568.021 [GRAPHIC] [TIFF OMITTED] T6568.022 [GRAPHIC] [TIFF OMITTED] T6568.023 [GRAPHIC] [TIFF OMITTED] T6568.024 [GRAPHIC] [TIFF OMITTED] T6568.025 [GRAPHIC] [TIFF OMITTED] T6568.026 [GRAPHIC] [TIFF OMITTED] T6568.027 Mr. Ose. Thank you, Dr. Ellerman. The final today is Dr. Kenneth Green. Dr. Green joins us from the Reason Public Policy Institute, where he serves as an Environmental Scientist. Welcome. STATEMENT OF KENNETH GREEN, CHIEF SCIENTIST, REASON PUBLIC POLICY INSTITUTE Dr. Green. Thank you, Mr. Chairman. Given the comments of the previous witnesses and yourself, I will, indeed, skip ahead and try to focus my testimony on the parts that shed the most light. My own interest in environmental policy originates quite a ways back in this local area, 27 years ago. I grew up in the San Fernando Valley about an hour or so north of here, which I guess may get a new name in a few years, or it may not, but we'll still have the summertime air pollution problem. I discovered the hazards about environmental contamination the hard way when I was in junior high school and running the 600, and was coming around one of the last turns at the 450 yard line and had my lungs lock up completely and staggered across the finish line and couldn't breathe. That was when it was finally determined I had asthma, when it became somewhat less ambiguous, and I realized that air pollution was not just something that is irritating to the eye, it's actually quite devastating to people's lifestyles. That interest took me forward to study more about the environment, study more about biology and health, but also there were other experiences in my childhood that taught me that we need to find ways to solve environmental problems and still preserve people's ability to live their lives and pursue their dreams. In my case, I bounced from having asthma and being unable to basically hard-core exercise. About a year later I was Bar mitzvahed and took my Bar mitzvah money and bought a small motorcycle with it, which, of course, would horrify many people now, and sadly enough it's probably illegal for the rest. But with that I could go places that otherwise would never have been accessible to me in terms of going out and looking at nature. And, in fact, there were plenty of old mining trails that I could take on and go over anything pristine; in fact, the trails I was riding on had been packed down in the 1850's. It was unlikely I was adding to the damage there, but I realized at the time that we need to find ways to both protect the environment and protect people's ability to actually profit by it, to become better people because of their interaction with it. Now, I've spent the years since then looking for those approaches, primarily, in air quality, but also in water quality, and also in species preservation, and global warming, and other areas of endeavor. What I found in that research, and also at Reason, is that the approaches that rectify those two different interests, which is solving the problem, but also protecting people's ability to live their dreams, tend to focus on flexibility. They tend to focus, as you said, on results, not on the number of permits issued, not on the number of lawsuits brought, not on the number of fines levied, but on actually achieving environmental results. They tend to focus on cooperative approaches that tap people's ingenuity and entrepreneurialism. I think part of the reason they may have found that their expertise was very seeded in the Acid Rain Trading Program is because while they had accounted for the standard economic benefits of using individualized incentives, there also was a creation of entrepreneurial opportunity. And, so, you have, you tap a well of creativity that gets you more than simply the homo economic view of, well, people will reduce their emissions in order to reduce their operating costs. You create a whole new class of people who find an interest and find a benefit in making that more efficient and more effective, and that entrepreneurialism is probably that margin between what the economists said they would get and what they actually got. So, I want to actually spend most of my time today talking about examples of where things have worked, where we have solved environmental problems without the bitter and recriminatory legislative process, or regulatory process, or judicial battles that steer environmental resources more to advocates or attorneys than to problem solvers. And, I agree completely with Mr. Nastri that we have had great successes in the past, including some through regulatory approaches, but those problems really were a very unsubtle sort; those were burning rivers, and heavily contaminated air sheds, and heavily damaged open waste sites, and the low hanging fruit really has been plucked. If we're going to move forward successfully, we need to emulate these programs to show how greater cooperativity and greater creativity can solve problems more effectively. So, one example. Let's consider the air, which is still an issue here in California, as you pointed out. Under the traditional permit-based approach for cleaning the air, Massachusetts was using permits, issuing them. They had 10,000 businesses that they were regulating through 16,000 permits. But, almost 4,500 of those permits were for tiny mom-and-pop businesses that were only 5 percent of the State's total air pollution emissions. So, they looked for a more cooperative way. Under the Environmental Results Program, they instituted permit systems that were whole facility based, that is, a facility could agree to an industry-wide standard, but then how they achieved it, what equipment they used, was left up to them. And, signing on to that agreement got results. In the first few years, they knocked a 43 percent reduction in fugitive emissions from participating dry cleaners, and a 99 percent reduction in silver discharges by photo processors. Those are just two sectors that joined the pilot program. A similar program was implemented in New Jersey; they capped emissions on participating firms, but let them choose how to do it. For one firm alone they dropped from 80 single permits to a single permit. They reduced 8.5 million pounds of air emissions in a year because they could update their facilities more efficiently. There are still many opportunities for us to form or to improve some environmental rules that are still regrettably command-and-control oriented, and/or we still have serious environmental problems that are too tricky for the blunt objects approach. Several were named here. I know there are a couple that weren't named that I'd like to put on the record, including smog check, which is still done here in California. It's a program in which, despite our knowledge that 70 percent of the cars are not significantly contributing to the problem, we test 100 percent of all vehicles as if they were equally the same. And, down water protection, service water protection, which despite knowing that a great deal of our failure has been our focus on engineering nature, to channelize water flows and to use better and more hydraulically ambitious control systems, we have not looked at the question of how we can use market-based incentives to work with nature and to lead people to make less impervious surfacing that uses nature to actually prevent non- point sources from reaching water supplies in a concentrated peak flow way that is known to cause a large part of the problems we now face. So, on that note, I look forward to questions and talking to you more about it. Thank you for inviting me today. [The prepared statement of Dr. Green follows:] [GRAPHIC] [TIFF OMITTED] T6568.028 [GRAPHIC] [TIFF OMITTED] T6568.029 [GRAPHIC] [TIFF OMITTED] T6568.030 [GRAPHIC] [TIFF OMITTED] T6568.031 [GRAPHIC] [TIFF OMITTED] T6568.032 [GRAPHIC] [TIFF OMITTED] T6568.033 Mr. Ose. Thank you, Dr. Green. I want to thank each of our panelists, and I learned early on that when I decided to run for office the first thing I had to do every time I went out in public was introduce my wife. I commited a somewhat faux pas in not thanking Chapman University this morning for hosting us here, so I want to do that while I'm thinking of it. Gentlemen, each of your comments suggest that there are things that we are going to have to continue on with but we also have opportunities over here being under air and water, to take advantage of new technologies and what have you. Now, we had a hearing in Washington recently about elevation of the EPA to Cabinet-level status. One of the things that we talked about here was the data on which many decisions are made, that it's sparing at best, that there's a lack of a data collection system at EPA. I don't remember which of your testimonies--I think it was Dr. Ellerman, who said there seems to be more of a focus on process than there is on accounting, or having a numerical count, or a quantification of the impact. I guess my first question would be, when you look at command-and-control versus cap-and-trade are you actually measuring the impact on the environment, are you measuring reductions in actual pollution, or are you measuring number of permits issued? Dr. Ellerman. Dr. Ellerman. Let me respond to that. The number of permits should approximate what we believe would be the level of emissions that would avoid pollution or would mitigate the particular environmental problem. If you take the Acid Rain Program as an example, at the time it was passed the belief and the estimate was that a 50 percent reduction of sulfur oxide emission would be required to reduce deposition to a level where natural systems could recover from damages from acidification. That was the rationale for the cap, and so that then becomes a proxy for that environmental problem, for solving that environmental problem. Now, it may change over time. President Bush's proposal for the Clear Skies initiative, for instance, proposes a further reduction in that SO2 cap. When we talk about the environmental problem, there can be several steps. There's no question emissions have gone down. Deposition has gone down dramatically in the areas in the northeastern part of the country that was the main area of concern. The tests that have been taken of ecosystems, show, in fact, that the sulfur component of acidification has reduced. It takes a longer time for these systems to recover, and nitrogen oxides continue to be a problem in the acidification of these sensitive areas, but the sulfur component has definitely reduced. So, I think it can be said that we are not simply tracking permits. That is the regulatory tool, if you wish, that in some ways replaces the command. It's just this limit, and it has to be based upon environmental science, and assessments of technology, as to what's a level of emissions that will avoid unwarranted damages. Mr. Ose. All right. Give me an example of a command-and-control approach. Dr. Ellerman. The Acid Rain Program was before Congress for about 10 years before it was finally passed. The early 1980's legislative proposals were, in fact, command-and-control, and they would typically require that scrubbers would be mandated for a certain number of plants, and the number varied from proposal to proposal but the idea was that all the big plants will be required retrofit scrubbers in order to reduce the SO2 emissions. Mr. Ose. If you have a stack and you've got something coming out of the top of the stack, you've got to put a scrubber on it. Dr. Ellerman. Yes, that would have been the requirement. Now, that would have the same effect of reducing emissions, and I think we should not kid ourselves, command-and-control can be effective. As you've said in your opening statement, the command-and-control system has reduced the gross sources of environmental pollution. It's just that it's costly to start with. In some places scrubbers cost much more than they do in others, and as we have learned, that unequal incidence of cost leads to relaxations of requirements, which is---- Mr. Ose. Hardship reasons. Dr. Ellerman [continuing]. Yes, for equity reasons, which implies hardship. One of the beauties of the cap-and-trade system is that it allows parties to find an automatic offset. Mr. Ose. Now, you did some comparative analysis between a command-and-control approach versus a cap-and-trade approach. Dr. Ellerman. Yes. Mr. Ose. In terms of, not only its monetary efficiency, but also its net impact to the environment in terms of reductions in pollution. Did the cap-and-trade approach achieve the same goals as the command-and-control approach; was it less, greater? Dr. Ellerman. Yes, it did. It achieved the goal, and I would say more, it accelerated the goal, because of the banking provisions and allowing plants to reduce sooner, and to get credit for early reductions. Actually, not only did it achieve the same reductions, and I would argue more because there were no relaxations, but it moved the reductions forward in time. Mr. Ose. Your point being that the owner of that smokestack could buy something, buy a scrubber that, perhaps, exceeded the requirements, and then the incentive remained in that acquisition because you could then take those savings and apply them to future year testing. Dr. Ellerman. That's exactly correct. Mr. Ose. And, that's the acceleration you are talking about, you bring it up sooner. Dr. Ellerman. That's right. Mr. Ose. Now, Administrator Nastri, you have talked about a similar trading program here in southern California known as RECLAIM, and I want to make sure I understand how RECLAIM works. Can you just step us through that? Mr. Nastri. Having been on the board of the South Coast AQMD you would hope that I'd be able to give you a detailed explanation of RECLAIM. Mr. Ose. Generic is fine. Mr. Nastri. All right, generic. The concept was that industry knows what industry does best, and that as an environmental board or environmental agency we know what's best for the environment. How could we work with industry then to come up with a way to get the emissions that we wanted for them to get? And, RECLAIM is what came out of that. The Regional Clean Air Incentives Market identified a means by which companies could control their fate in terms of their operations, and they would create excess credits that would be then available on the market. A cap was established for the region, that was a declining cap over time. So, those companies that took the incentive to invest in pollution control equipment, and generated the credits, were then able to sell those credits to other companies that for whatever reasons felt it wasn't cost effective for them to invest in control technology, that it was more cost effective to buy those credits. They would, in turn, buy those credits. And, so, a market was created, NOx was a big component of that, and this is a really big issue here because of the type of fuels that we use compared to back East. The market or the program in the first few years, I think, worked very well. We were able to get those immediate reductions, and it was because companies could say, you know what, we don't have to operate all this time and we can generate credits. It created an incentive for them to be as efficient as possible to generate those credits, thereby accelerating the timeframe in reducing emissions, as Dr. Ellerman talked about, and creating more incentive to do that. Now, with the declining cap and the credits going, the market base--and I want to say it was a year and a half or so ago when we had the energy crunch in California, and in that particular case what happened was, we had a huge demand for credits that was caused by the utilities needing to increase their output for the energy demand situation. That, in turn, drove up the price of credits to the point that people who had been paying, you know, marginal amounts for credits were now faced with, literally paying thousands, tens of thousands of dollars, for these credits. And, they were in a position that they could not do that. The unfortunate thing is that in this market program many people would simply operate the way they would normally operate. Then at the end of the year, before their permits were renewed or their credits were settled, they would all of a sudden come on the market and realize, oh, my God, there's no way that we can afford these credits and now we are being faced with hefty penalties, or how do we get the credits. And, that was something that the board addressed in terms of their needs to be better equity between the larger companies that can afford whatever the cost was for those credits and the smaller companies. And, so, the South Coast then embarked on a program to sort of separate the market and to try to bring some sense of balance to the marketplace on the credits program. And, that's, basically, how the program operates. It lets the facility decide how best to operate. Mr. Ose. Let me try some examples here, and you correct me when I'm wrong. Mr. Nastri. OK. Mr. Ose. Let's say whatever the cap is, it has a numerical quantification of 1,000, and over time that 1,000 number is going to go down incrementally. So, like 3 years from now it might be 900, 3 years after that it might be 800, in terms of the total amount allowed. I'm a small business owner in the area. I have a dry cleaner or a printing business, so I've got to go out and get a permit for any volatile organic compounds that I emit. Based on my historical usage, I know I'm going to need a permit under the 1,000 scenario for X number of credits, and if I look out there in the future, 3, 5, 10 years, I know the availability of those permits is going down. So I have to change my manufacturing process over the 3, 5, or 10-year period, to reduce the amount of volatile organic compounds I emit, or I go in the marketplace and buy them from someone else who may have reduced them in their manufacturing process. And, the relative price of those credits at any given time goes up and down with demand, and the point you are making is that when the energy producing companies had to turn on all of their peaker plants that typically had run on the basis of hours per year in past years as opposed to days or weeks per year now, they exceeded their air quality emissions standards. Then they went out in the marketplace to buy permits, to buy credits, and drove the price up accordingly, and all the small businesses got shut down. Mr. Nastri. That's correct. Mr. Ose. Dr. Ellerman, are there substantial differences between the sulfur dioxide program that you are familiar with and the RECLAIM program that Mr. Nastri just described? Dr. Ellerman. Yes. In California, in late 2000 and early 2001, the critical issue is the absence of ability to trade over time. In the SO2 program, any credits not used in the current period can be banked and used in subsequent periods. The California RECLAIM program permits very limited banking and borrowing, essentially, a 6-month overlap between what are called cycles. Much of the early abatement that is often cited could not be used to help relieve the demand for the period of the critical demand. Mr. Ose. Because they were expired. Dr. Ellerman. Because they were expired, instead of being left to have an indefinite date of expiration. That created a great shortage. The number of permits available in 2000-2001, during this crisis, were very limited, and there was no flexibility over time. Mr. Ose. Is there a finite duration to the credits in the Federal program? Dr. Ellerman. In the Federal SO2 program, a permit is good from the year it is made valid, or the vintage, such as 1995, 1996, whatever, but it's good until used. So, it's indefinitely good in the future. Mr. Ose. It doesn't depreciate or discount over time. Dr. Ellerman. No. Mr. Ose. It's a fixed number for whatever. Dr. Ellerman. The ultimate cap is fixed over time, but any credits that are saved in one period that are not used can be used in any future period. Now, just the power of interest on money will cause one to want to use them sooner, rather than later. The key point and the lesson from the RECLAIM program is that, particularly when you have a program of limited geographic scope, temporal flexibility is needed. The SO2 program is national, so had there been sulfur emissions at generating plants in southern California, even if there had not been banking, or the same sort of limits on trading over adjacent periods of time, they'd have had a much larger area to draw on, and that would have affected the prices. But, some programs, of course, have to be local. Mr. Ose. So, under the Federal program, a coal electricity plant in Pennsylvania, just high sulfur coal, can come into the South Coast Air Quality Management District and buy credits to use against their emissions there. Dr. Ellerman. Yes, anywhere in the country. Mr. Ose. Across air basins, it doesn't matter. Dr. Ellerman. Because of the nature of the problem, and the acid rain case is one where there's much less spatial or geographic concern than there is in the Los Angeles Basin. You could not make the RECLAIM program a national trading program; it would make no sense to trade NOx emissions in New York with California. Mr. Ose. I saw that comment in the testimony, and I have to ask if you can trade sulfur dioxide credits across the air basin why not just align the duration of the credits so that you can trade across air basins for nitrous oxide? Dr. Ellerman. The origin goes back to the environmental problem, and what we are doing in cap-and-trade programs is creating a market to provide results and to solve an environmental problem. So, it starts, in each case, with what is the environmental problem. In the acid rain case, the concern is primarily deposition in the eastern part of the country. Sulfur dioxide emissions in the west do, in fact, arrive in the east, and so there is some trading. Now, the correspondence is not exact, but it's good enough. The NOx RECLAIM program is aimed at ozone problems in the Los Angeles Basin, which is by nature a more local problem, and, therefore, the geographic scope has to be more limited because emissions in other parts of the country don't affect ozone concentrations in the South Coast Air Basin. Mr. Ose. Mr. Nastri and I have been working on a problem having to due with air flows out of the Bay Area into the San Joaquin and Central Valley, which is the exact exchange of air that you are referring to on a national basis. Dr. Ellerman. Right. Mr. Ose. So, I might reverse the argument on you, at least as it relates to the Central Valley or the Bay Area air quality. Dr. Ellerman. Yes. I don't know whether in the RECLAIM case, it may have been possible to have a broader geographic scope. That is an issue for the scientists to deal with, in terms of the transport of the pollutants. All I'm saying is that some programs will be smaller geographically than other programs, depending on the nature of the problem. We can think of greenhouse gases as the ultimate. We know that the problem is global in scope and the effects of the emissions are the same because of atmospheric mixing. There may be other environmental problems that would be similar. I'm sure Administrator Nastri knows better, whether the Bay Area and the San Joaquin Valley may be, in fact, one air shed, but that is an empirical and a design issue. Mr. Ose. I'm not asking Mr. Nastri for a comment, but as a representative of the Central Valley I would argue that it does have an adverse impact to our ability to deal with our environmental problems, to have this inflow, and it's the cross basin flow, whether they are the Central Valley, Bay Area, or some other location in the country, that I think at least makes a case for some flexibility. Mr. Nastri, I think, has a comment. Mr. Nastri. Mr. Chairman, I'd just like to add that I think Dr. Ellerman hit it right on the head when he talked about the geographic impact and the nature of the pollutant and its effect. And, the NOx impact is very localized. The issue of NOx transport and impact within the Central Valley I think is real. You mentioned, can you look at this as one air shed. I think you can look at it as a contributing factor to the Central Valley airshed. When you look at the data that we do have, if you look at the northern part of the valley, you do see a contribution from the Bay Area of, I think, estimates are up to 20 percent. Now, that is less in the southern portions of the Central Valley, but there's still a contribution, it still leads to the ozone problem. So, when you talk about creating a market-type program, based on transport and based on impact, that might very well be a good candidate for it. Mr. Ose. OK. So, there are ways we might want to look at the RECLAIM program, particularly, as it relates to the duration or term of the credits. Dr. Ellerman. Yes. Mr. Ose. You would argue in favor of that, so far as the members of the South Coast board have not gotten to that point, but it's a suggestion. Dr. Ellerman. Yes, and I think there's one other aspect I take from the RECLAIM experience of general applicability, which is to consider borrowing as well. In fact, the cap, the NOx cap was busted in 2000. Mitigation fees are paid, the South Coast Air Quality District is taking measures to offset the exceedences, but, more was emitted in the current period and less will be emitted in the future, because of both command- and-control requirements being placed on the generators and other program offsets that do, in fact, pay the exceedences back. Now, I take one of the lessons from RECLAIM is that, when we have a more local program, having temporal flexibility is even more important, and not just banking, but also borrowing, because that, in fact, is what happens when a program breaks down in the manner exhibited by RECLAIM where the generators were taken out of the program and set aside. Mr. Ose. So, your point is not only, if you will, the excess reductions at any given point in time, but the ability to borrow prospectively against reductions you might achieve in the future. Dr. Ellerman. Yes. Mr. Ose. Dr. Green, I may have misspoke when I talked about my anecdotal proposal or any compounds, I'm not sure that RECLAIM covers that. Does the RECLAIM program target both nitrous oxide and VOCs? Dr. Green. Well, it was going to be expanded to cover VOCs, but I believe they decided not to. One of the things that wasn't raised in the previous discussions that I wanted to mention was that in looking at RECLAIM, one of the other problems with RECLAIM is that in the early days of the program the way credits were initially allocated often created very large surplus credit situations, where there was no bite from the market. You'd have long stretches where you did not have the actual ramping up, a transition phase, that would have let groups be at a point where they could have weathered the power crisis when it got there, because of the initial market allocation of permits. That's very important if they move to expand RECLAIM further, if they want to say use the RECLAIM model for trading particulate matter, or use the RECLAIM model for bringing in VOCs or other pollutants as pollutants become more evident; you wouldn't want to make that same mistake again. You'd want to make sure that you set up your credit allocations and your declining caps so that you have market signals from early on that move the situation along so that you don't have sticker shock, essentially, when you get to the point where the market suddenly starts to bite, and that it bites in a completely unsustainable way. So, that was the situation, I think, that makes RECLAIM somewhat unique, and RECLAIM is a fascinating case study because in a way it sort of shows what happens when you have rules of limited flexibility. You have RECLAIM which had a lot of flexibility, but then you have the other rules about power generation, which have led to higher cost power and generations from out of State and so forth. You wind up with a promising environmental rule, RECLAIM, being sort of suspended and/or weakened because of other decisions that were made. Mr. Ose. ``Overwhelmed'' is a good term. Dr. Green. Overwhelmed, because there are other decisions, other command-and-control decisions, that were made regarding how power could be generated. Mr. Ose. I don't want to leave that point by not noting that what the South Coast Air Quality Management District did, I thought, was pretty forward thinking and a step, definitely, in the right direction, at least, I mean, from a small business point of view, large business consumer. Dr. Green. Oh, definitely. Mr. Ose. It's a positive step. Dr. Green. Right, and, in fact, it was part of an overall movement at the time to find ways of allowing permit trading and credits to be traded between different forms of emissions. I was an intern at Hughes Aircraft at the time, and they were running a ride sharing program, and one of the things they were tending to do was to find ways to trade credits from being able to demonstrate emission reductions on their own. They had a fleet which they could monitor; they set up their own smog monitors. They demonstrated pound reductions in emissions, but there was no mechanism in the regulatory structure at the time to get credit for actual pounds of emissions reduced. All you could get credit for was compliance with regulations that said, well, here's a ride sharing rule, here's an equipment rule, here's, you know, at best we have a control technology. There was no way to step forward and say, ``We see an opportunity to reduce 300 tons, or however many tons, of emissions this year, we'd like to get credit for it against other things that we can't afford to do.'' That was part of the overall setting at the time; I think it was very forward looking. Mr. Ose. Transferability. Dr. Green. Right, you could transfer credits, that's right, you could trade more credits. Mr. Nastri. Mr. Chairman, I'd just like to add that I think the shortage of credits is something that's recognized as a problem, not just in RECLAIM, but certainly within the State of California. And, EPA Region IX and our Headquarters is working very closely with the South Coast Air Quality and with other air districts to identify what are some of the potential opportunities that may exist that we, in fact, can generate the type of credits that Dr. Green just talked about. A good example, I think, in your area, would be rice burning credits. We are going to be developing a pilot program to look at credits that could be generated. Mr. Ose. We're grateful for that. Mr. Nastri. And, we enjoy working with you on that. I think there are other areas, too. South Coast just passed a series of Mobile Source rules, and are looking at other incentives to generate credits. We are looking and working very closely with them, as well, on that matter. Mr. Ose. Let me go back now. The Acid Rain Program was sulfur dioxide. The RECLAIM program, because of the nature of the air basin, is nitrous oxides. Do we have anything that targets volatile organic compounds specifically? Dr. Green. On a trading aspect? Mr. Ose. No. Dr. Green. Well, I think there are still, perhaps, a few tradable credit systems within some specific rules of the district. Primarily, VOCs are controlled through elements of the State Limitation Plan, and the local air quality management plans of the various control emissions bases, or control districts here in California. Mr. Ose. OK. So, how much of our ozone problem is caused by VOCs? Dr. Green. That depends, really, it's a very location specific question, and it really depends---- Mr. Ose. Right here. Dr. Green [continuing]. This area, my understanding is we are NOx-limited, which means that there's enough VOC in the air that the chemical reactions that lead ozone are going to be much more controllable through changing the amount of nitrogen oxide than changing the amount of VOCs. In other words---- Mr. Ose. So, you are adjusting the mix accordingly. Dr. Green. Right, but we have so much VOCs that you are at saturation level, you would have to eliminate all the VOCs, or see a huge chunk of the VOCs, to have any impact on ozone formation, compared to the amount of NOx you'd have to use, and a much bigger proportion of the VOCs is biogenic, which means you have difficulties dealing with foliage and issues in the natural background levels of VOCs, whereas almost all the NOx are combustion byproducts. Mr. Ose. So, in the South Coast area you are saying that the amount of VOCs in the air, as a percentage of the whole, is so large that you might as well just go pick on another piece? Dr. Green. No, it's not necessarily the percentage of the whole, it's the necessary amount for the chemical reactions to go forward to produce ozone. The key question is, what do you get the benefit of reducing more, in terms of dropping ozone levels, do you get more of a benefit by using VOCs or more of a benefit by using NOx? Mr. Ose. So, you are actually measuring the net impact, you are modeling it anyway. Mr. Nastri. Yes, I agree, the modeling effect is being addressed, but in terms of the overall impact to smog formations in the basin, the relative contribution of both is such that they have to be addressed. There has been a lot of discussion in terms of, well, if you only regulated NOx you wouldn't have smog, because you wouldn't have the right type of reaction in the atmosphere, or if you only regulated VOCs that again you wouldn't have smog. And, so, there have been components of both industry and other groups that say, ``Do them, not us.'' But the fact of the matter is that there's so much in both that we have to do both. And the relative contribution, we are never going to get all of the VOC and we are never going to get all of the NOx but by reducing the total contribution of each we can reduce the amount of smog formed, and that's been the general strategy, go after what you can. Dr. Green. It's also very tricky, you can actually over- reduce one element to make the problem worse. You can actually, if you drop your NOx level too low you can shift the chemical reaction in favor of VOCs, which will actually move it faster. So, it's an equilibrium, you really are trying to---- Mr. Ose. Step it down. Dr. Green [continuing]. Step down equilibrium without actually shifting it out of balance. It's pretty tricky. Mr. Ose. And, that leads to something that was discussed earlier when you were talking about transport issues. I think we are just beginning to learn how much we have to learn about transport, not only between airsheds, but within States, between States, and now between countries. It's becoming more apparent that you have, actually, international transfer issues. So when trading programs are designed, I guess the lesson there would be to keep them open to expansion and to be prepared for the prospect that not all States' knowledge regarding the argument of the precursors and/or pollutants, that you are going to have to be able to evolve your trading program, and so evolvability is a key element to the program design. Right, so I just want to make sure I've got this in my head, so when I go back to Washington I'm not speaking too foolishly. The acid rain thing, that primarily was driven by high sulfur coal being burned at power generation in the East. Our problem out here is mobile sources, cars and the like, with nitrous oxide coming out of the tailpipe. What is the state of our understanding as to where all four organic compounds are coming from? Do you have a breakdown for that? Mr. Nastri. I don't have the exact breakdowns, but I just wanted to clarify that in terms of the nature of the problem-- yes, NOx and its source from mobile sources is a significant contributing factor to the ozone problems we have. But if you look within the Central Valley and other areas, in terms of VOCs, if you look at some of the ammonia emissions, they have a big effect on our PM problem, and VOCs also contribute to the smog aspect. So, we have NOx and we have PM resulting in terms of the ammonia emission. Then we have VOC which also contributes to some of the smog issues. So, it's not just one, there's a plethora. Mr. Ose. So, where are the volatile organic compounds coming from? Mr. Nastri. VOCs come from biogenic sources. VOCs come from various compounds. I think architectural coatings and paints are a big source. Mr. Ose. Solvents. Mr. Nastri. Solvents, which are moving away from those types of VOC compounds, ammonia. Dr. Green. Also, unburned hydrocarbon coming out of tailpipes contributes to VOC problem, as an evaporative source off of the vehicles and off of ancient technology. As Mr. Nastri was pointing out, though, these problems are sort of interwoven, and your VOCs are precursors for particulates, as are your NOx emissions. A lot of these pollutants actually form outside of the tailpipe, they form in sort of an atmospheric soup from the precursors. So, the exact relationship and the chemistry that you get at times is not always clear. Mr. Ose. Well, that begs the question--and this is directed at Dr. Ellerman--just from a market science perspective, can you create a cap-and-trade program for any of these products similar to the one for sulfur dioxide? Dr. Ellerman. There are two prerequisites to a cap-and- trade program that I ask people to keep in mind. Mr. Ose. Accountability, flexibility, and simplicity. Dr. Ellerman. Well, those are the reasons for success, let's go back to the prerequisites, which are in my written testimony. The first of those is measurability, ability to measure the emissions. If you can't measure the emissions you can't have a cap-and-trade program. And, in many of our early environmental regulations we did not have the ability to measure, or it was very expensive, so you just said put this piece of equipment on and then you went out to inspect it. In fact, the equipment was there and it was operating, and that was the best you could do. We can do much better now. So, measurability is the first issue. If you can't measure it, you can't have a cap-and-trade program. The second issue, and it's the one we discussed earlier, is approximate equal environmental effect. You have to consider the environmental problem, it's going to be different for every program. You have to believe the emissions have an approximately equal effect, and I would stress approximately equal. A colleague of mine comments about the SO2 program that the enabling myth of Title IV is that location doesn't count. We all know from an atmospheric standpoint that certain emissions count a lot more in creating the acidification in the northeast than others, but the program treats as if they are all equally culpable. Now, you know, as a Congressman, that all legislation needs enabling myths, that's part of how things happen. Mr. Ose. Dr. Ellerman, I'm shocked. Dr. Ellerman. But, I think there's an irony in this, which is that we would not have had the reductions we've had without that enabling myth, which I think, again, is a more general political principle as well. Mr. Ose. So, what enabling myth should we use? Dr. Ellerman. Each problem has its own. Dr. Green. If I can intrude, I would have to say that last statement is dangerous--it's not dangerous, it's tricky, because it assumes that progress only comes from a regulatory standpoint. In fact, if you look back at the early history of the United States, the movement, in terms of the decarbonization of fuels, the reduction of mass use in manufacturing, the, in fact, decreased environmental footprint of industrial endeavor has preceded, in very many cases, any regulatory approach whatsoever. This is including here in California where, in fact, there's a very good example, which is that the regulations here were local before they were made State, and before they became Federal. If you look at the improvement curves for air quality, what you find is that the trends were well established before the next level of Government enshrined them into law beyond the local level. So, I think one has to tread carefully on the assumption that without what we have we wouldn't have seen improvement. One of the things that was mentioned earlier is that there are benefits of command-and-control. We also need to keep track of the fact that they also provide inferences as well, which is, you have situations like New Source Review where if a company wants to change a piece of equipment to gain an environmental benefit, it may face a regulatory hurdle in doing so because it's unwilling to go through the permitting process in order to create environmental improvement. While we tend to track environmental improvements, we don't track opportunity costs. There's no way to actually capture the opportunity costs of something that doesn't happen as a result of resources being diverted in a direction due to regulations that were overly specific. Mr. Ose. Now, this is an interesting area too, the kind of law of unintended consequence. One of you talked about an example of a company that had cleaned its emissions and then took the residue from the cleaning and created a new business line using that chemical that they had extracted from the emission. I can't remember the name of the chemical. They, basically, take lemons and make lemonade. Dr. Green. Would this be in the publications submitted, because one of the things they discussed there is how several companies under toxic waste actually have taken waste products and then turned them into beneficial products. Mr. Ose. I don't remember the---- Dr. Green. There was a case in which--it's an interesting story, because the company was more or less villainized under TRI--there's a situation in which a company that generated something called pickle liquor, which is a spent sulfuric acid remnant of manufacture, and under TRI that pickle liquor is considered a discharge to the environment. Yet, it's used in water purification, it's a water purification input. So, the company took the pickle liquor and sold it, actually, below cost to the local municipal water treatment provider, as a community benefit. And yet, it was considered again as a TRI released to the environment. Mr. Ose. Wastewater treatment. Dr. Green. That's right, I should specify, it's used in wastewater treatment. But, you do have situations of that sort, where you have an unintended consequence of something being defined as a waste, which can also be a useful product in some sort of process that has environmental benefits as well. Mr. Nastri. I was going to say, I am with the Environmental Protection Agency. We do pass a lot of rules and regulations. I think that if you look at the history of environmental gains made over the last 30 years or so, significant gains have been made as a direct result of command-and-control. And, I firmly believe that those gains remain on a much more accelerated schedule had they not been implemented. I think when you look at regulations, you might experience, both as a government official and as a business person, those regulations are what keep things going. They are the ones that often times develop that innovation, because a challenge will come up and they say, ``Alright, how can I do better than that, how can I do it without necessarily having to have this come down on us?'' Mr. Ose. You must be reading my script up here. Speaking of regulatory hurdles, in terms of the RECLAIM program, what do we need to, at least at the Federal level, what would we need to consider in terms of expanding RECLAIM to include more of these pollutants? First, is it possible? Dr. Ellerman, you indicate that it is, as long as you have measurability and approximately equal impact. Mr. Nastri, how do we help expand this? Our objective is to lower the amount of pollution in the environment, how do we expand this? Mr. Nastri. Well, let me ask the question to make sure that I understand it. Is the goal to expand RECLAIM to a national basis then, or is it to expand RECLAIM within the Los Angeles Basin, or to take RECLAIM and transfer it somewhere else? Mr. Ose. My objective is to find a way where we rationalize and provide certainty for businesses and the jobs that they bring to the table, and we have a measurable positive impact on the environment. That's what I'm after. And, I mean, it's kind of like stepping down between nitrous oxide--I don't know which comes first, I mean they are both equally important. Mr. Nastri. I guess thinking out loud, Mr. Chairman, the goal of RECLAIM was to address, again, on a very regionalized basis, a very impacted airshed. And, so, to take that model nationally you would almost have to say on impacted airsheds this model can be applied. Now---- Mr. Ose. And, we could tweak it, of course. Mr. Nastri. Oh, absolutely, but as a basic framework of establishing caps, establishing credits, establishing a trading program, letting companies have the flexibility of changing fuels, or installing control equipment, or a whole host of other options that are available to them, we let them make that option. But, you do set up the basic framework. And, it would have to be set up in a way that would be conducive to achieving real benefits for that particular market. You know, as we talked about here, there's an aggressive strategy to go after VOC, NOx, and PM. That strategy may not be necessary, nor effective, for instance, on the East Coast, where their contaminants are different because of the fuels that they use. But, the basic framework could apply, and I would leave it to the experts in the particular areas to assess what would be the actual benefit in terms of, do we go after VOCs, do we go after NOx. But clearly the framework, I think, tweaked, taking into account some of the long-term variability, although I did want to point out that when you talk about the temporal aspect of banking and borrowing you do tend to impact the immediate quality aspect. And, when you are in an extreme situation, you are being forced to go down, down, down. You do not want to have that variability, where all of a sudden you are having blips and you go back up. Mr. Ose. Well, the borrowing aspect would be particularly conducive to deterioration. I don't know how the credit is--I mean, the fact of the matter is that you've accelerated the positive impact onto the environment. Dr. Green. Well, that can be accounted for, though, in the definition of non-attainment. You are saying you are right there up against your non-attainment cap, you can't afford, even if you have a certain period of crisis and you have a bunch of people borrowing credits, you could blow your non- attainable level by having your emissions go up a few times in a row. That could take you from being an attainment area to being a non-attainment area, or prevent you from going out. But, in terms of the way that could be dealt with, it doesn't have to be dealt with in the structure of a trading program. It can be dealt with in the structure of defining non- attainment areas. Mr. Ose. But, that's my point, it's the borrowing aspect, and it goes to the banking aspect. They have two different impacts, in terms of taking an attainment area that's right at the margin into a non-attainment area. Dr. Ellerman. Dr. Ellerman. I would argue that for any specific extreme event that causes non-attainment, banking and borrowing would have equal effect. It would be true only when one reduced more than required in this earlier period and if the nature of the problem is such that has no effect upon the air quality two periods later, then one would say that's without effect. In the acid rain program, it's deposition or an cumulative pollutant; it's a different type of a problem, so the banking is OK. My argument for considering banking and borrowing in RECLAIM is that we don't shut down sources when an extreme event occurs, we have non-attainment. The question is, when we have the non-attainment event, and then we adopt various measures to try to deal with it, and make up for it whether it is better to let people anticipate the possible event and let them take the actions. If that extreme event happens, I would argue typically we don't end up shutting down the sources, as was the case in southern California. Mr. Ose. Now, in your testimony, you indicated that the banking of credits created a predictable response---- Dr. Ellerman. Yes. Mr. Ose [continuing]. In terms of the attainment versus non-attainment, two, or three, or four increments of time in the future. But, at the end of the day, after you got through that temporary, I'm going to call it the notch issue---- Dr. Ellerman. Right. Mr. Ose [continuing]. After you got through that temporary notch you ended up with a much better impact. Would it not be the same here? Dr. Ellerman. It's different in acid rain, because it is a cumulative pollutant. In other words, what matters at the end of the day is the total deposition over some period of time, where the argument on NOx and ozone each summer is different, or each period is independent of the other. Now, I think there is some effect, that if you do have a tight enough requirement that it leads to the type of measures--let's say putting SCRs on the utility--that you bring the average level down sufficiently. Then that, of course, brings the exceedences down as well, so it can have those effects. That's a more complicated argument. I think one has to think that in acid rain, and in global warming type issues, between periods it's all cumulative, so if you reduce in this period it's just as good as reducing in the next period. And, in ozone, it's a much trickier proposition. Dr. Green. It's what they call a ``stock versus flow problem,'' and in global warming and acid rain you buildup a long-term stock. It's not the daily flow of pollutant up and down that matters, it's the long-term shifting of the total stock of pollutant that's circulating through the environment. And, with long-lived pollutants that are broad disposition, it's much easier to set up a predictable trading system and have predictable effects with it. That's not to say it can't be done, and I think, in fact, in RECLAIM it can be expanded. One of the things I was going to ask Mr. Nastri about is, my understanding is that the delegation of authority for air quality into the basin structure we have now is an element of the Clean Air Act, is a Federal regulatory approach, that might create parochial interests, which would prevent what you are talking about which would be a statewide limitation of RECLAIM between the basins. That may be an area where what you have is a law defining the actual boundaries of an air basin with regard to an individual pollutant. That may not be applicable, or may not be most logical, from a scientific standpoint in managing that pollutant. Mr. Ose. Well, I will tell you that parochial interests manifest themselves in my political world, on a State-to-State basis, and that's a reality. So, I would commend you for making that observation. Dr. Green or Dr. Ellerman, are there other areas, say outside South Coast, or the L.A. Basin, where it might make sense to try and implement cap-and-trade programs for air pollution--the Bay Area, the Central Valley, what have you? Dr. Green. Within California specifically? Mr. Ose. My interest is California, today. Dr. Green. My feeling would be that anywhere you have non- attainment areas with transport going on, that it's that transport and non-attainment element that would define where you draw the circle and institute a trading program inside the circle. Mr. Ose. Can I explore something here, before we leave that thought? You know, we tend to focus on non-attainment areas, but it seems to me we ought to focus on both non-attainment and attainment areas, as a means in preventing the attainment areas from becoming non-attainment areas. Do you understand that logic? So, I'm not jealously guarding this or that area, this is an open book for me. Dr. Green. And, they do, near non-attainment areas are areas that are close to getting into non-attainment, have a unique status under the Clean Air Act. They submit plans, generally, more voluntary approaches that are designed to keep them from becoming non-attainment areas. But, I think you are absolutely correct, and that's what I was getting at, which is that the decision as to whether an area, or whether emissions from an area need to be included in some sort of a cap-and- trade scheme has to transcend whether or not they reside in a non-attainment area. It has to move to whether or not they contribute to a problem, to an exposure. But, by the same token, we also need to define non- attainment areas and look at the question of exposure, because even within a non-attainment area you may have a situation where 90 percent of your public is not exposed, actually ever exposed, to the level of pollution that would be harmful, and yet, you have certain sensors in certain areas that are putting an area in non-attainment, even though most of the population is not exposed, and that's an issue which needs exploration. On the one hand, you'll hear people say, well, air pollution moves around. But the answer to that is, well, but if it moves around that freely all the sensors would read the same thing all the time, and clearly they don't. So, some of these issues need further unpacking; I think that goes without argument. Mr. Ose. So, are there other areas besides South Coast or the L.A. Basin where it makes sense to try and implement a cap- and-trade program? Mr. Nastri. Let me answer first, Chairman Ose. I think that there are; I think that wherever you have exceedances of standards there's a good opportunity. I think the Central Valley is a great opportunity for establishing cap-and-trade programs. You have that area which is currently severe, almost requesting a bump up to go extreme. That in and of itself, I think, lends itself to saying, alright, we know we've got an extreme problem here. How can we now address emissions in this basin? And, there are a number of things that we know we have to go after. We know that CAFOs are a big source of PM. We know that AG is a big source of NOx from the AG pumps. We know that petroleum production is a big issue. We need to establish the framework that says, in order to get to clean air by 2010, these are the type of emission reductions that we are going to have to see. Then, let's let industry step up to the plate and say, this is how we think we can achieve it. Working together through a partnership, and this is something that we in Region IX are doing very closely with the San Joaquin Air Pollution Control District, and a number of the other stakeholders, a big part of AG--I mean, actually are very optimistic that the farm bill is going to provide us with some of the conservation funds to go after some of those AG problems, and to look into the development of best management practices that will reduce PM releases from AG operations. So, I think it's an excellent opportunity to look at establishing this type of area. Now, the question will be, as Dr. Green pointed out, within the political structure of the Central Basin and the Bay Area can we establish a common framework that they'll all agree to and move forward, or will we have to tip them? Mr. Ose. Dr. Ellerman. Dr. Ellerman. Yes. Mr. Ose. You are the scientist. Dr. Ellerman. Well, I was hesitant to respond to your question because of my lack of familiarity with the specifics in California. Mr. Ose. Well, let me invite you to the Central Valley. Dr. Ellerman. But, I would endorse what I understand both the other panelists to have argued and I'd like to reinforce the point that the notion of a cap is implicit all through the Clean Air Act. Attainment is the perfect example. Attainment suggests a cap, and, in fact, in the offset program and in the process of bringing new sources into non-attainment areas, there is a cap and trading process that is extremely inefficient and very costly. What are called DERCs, and ERCs, emission reduction credits, and discrete emission reduction credits are traded. It's very costly, slow, and difficult; and it creates problems for new entrants into a market. One of the challenges, and the cutting edge of research in tradable permit systems, is not the new areas, like CO2 and mercury but actually going back into the guts of the Clean Air Act to transform some of these requirements, which are not working quite as well as they may have in the past, or, perhaps, they never did, by making the various types of offsets and trading more feasible and easier to take place. Mr. Ose. Is that statutory or regulatory? I'm hoping you can tell me regulatory. Dr. Ellerman. I think that is going to depend on each case, I don't know, that's a legal issue. I think the approach of having the local regulators and industry come together to try to suggest ways out of this is in everybody's interest. Maybe it does require some statutory fixes; I don't know. To the extent it does, I will suggest that there is going to be a need for some enabling myths to be embraced, to permit this to take place. Mr. Ose. That's a great phrase. The reason I'm bringing it up, obviously, is I'm from the Central Valley, I'm very close to agriculture. Dr. Ellerman. Right. Mr. Ose. I know that EPA Region IX is working with the San Joaquin Valley about a number of things, including the diesel water pumps and the like. One question I had in reading this article in the Freseno Bee, the credit that a farmer would receive from taking the old diesel water pump off, I mean the number quoted in here for the pollution reduction credits is up to 40,000 per ton. Is that an annual payment? Is it a one-time payment? It's unclear in this document. For instance, the credits that are purchased here, they are issued annually? In other words, if I have a dry cleaning business, I go get a permit, every year, or I just get it once? How do I get credits here, if I'm a polluter, how am I getting credits? How are you factoring in the award of credits to me? Mr. Nastri. I am going to take a venture. But we do have an expert on RECLAIM in the audience and I'd also like to ask her, but it's my understanding that, every year, if you are going to have to go for credits you do that every year. But, Dr. Coy, no? One time? I'm talking about VOC credits. On the VOC aspect, Dr. Coy, who is the Deputy Executive Officer of the South Coast Air Quality Management District, suggested, or stated, that you would purchase your first several years of VOC credits, and after that there would be a reconciliation. Mr. Ose. So, if I have a process, manufacturing or otherwise, and submitting all organic compounds into the atmosphere, I'd go down to South Coast Air Quality Management District and I write a check for the estimated amount of emissions? You are saying yes, and she's shaking her head no. Why don't the two of you talk about this. Mr. Nastri. OK. Mr. Ose. And, I'll ask these guys some other questions while you resolve that. We'll get to the bottom of this. Now, Dr. Green, speaking of watershed-based trading, we are going to come back to Mr. Nastri on these other things, but speaking in terms of the watershed-based cap-and-trade stuff, is it harder or easier to do with water than with air? I'll tell you why this is so important, California just has a water problem. Dr. Green. Sure. Mr. Ose. And, it always has. Dr. Green. I think it would be easier with water than with air, in fact. Mr. Ose. Why? Dr. Green. Part of it is water is more easily monitored. Its flows are better defined. You have a two-dimensional problem with water and a three-dimensional problem with air. And, so, I would think that from the standpoint of monitoring, tracing upstream origins or up-flow origins of pollutant problems you would have--and this is purely theoretical--you would have an easier time of it with water than with air. In fact, early on in the earlier history of market maintenance, and purely environmental protection, and environmental security, and environmental quality--I would say from the standpoint of if you are going after point source water problems, or point source water contamination problems, it would be easier to use trading with those than it is with air. Non-point source water pollution problems, on the other hand, would probably yield to an entirely different approach, or a third approach. They would be looked at as the concept of groundwater or surface water utility, which for a non-point source the key issue is preventing surface concentrations of pollutants, which then run off in spikes and are channelized through engineering approaches and cause mainly damage to surface water. They also lead to the kind of pollutant spikes that contaminate aquifers, because it hits all at one time and overwhelms the ability of the natural bacterial and biological mediators to prevent that from happening. Mr. Ose. OK. We are going to come back to the watershed thing. Mr. Nastri, on the permits, my question was, how do I get the permits as a small business in the first place? Mr. Nastri. For VOC, you would buy these credits on the market through a broker or some other means. You would then go to South Coast and you would apply for a permit with the actual credits in hand. Mr. Ose. OK. Mr. Nastri. And then, South Coast would grant the permits to construct, you'd begin your operations. Mr. Ose. And, those credits have a term. Mr. Nastri. Yes. Mr. Ose. OK. Mr. Nastri. Well, let me restate that. The credits for VOCs would be in perpetuity. It's the RECLAIM that has the term. RECLAIM is on an annual basis. Mr. Ose. OK. You are buying capacity first. Do they discount or depreciate, or do the VOC credits decline over time, or is it a fixed number? Mr. Nastri. The VOC credits themselves are fixed. Mr. Ose. OK. Mr. Nastri. You can go out on the market and buy more credits if you have to. Mr. Ose. OK. So, if your manufacturing process exceeds your expectations in terms of emissions, you've got to go back out in the marketplace and buy more? Mr. Nastri. Correct. And then conversely, if you are short you can sell them. Mr. Ose. Is there a maintenance to prevent the same thing from happening that happened with NOx with regard to if you have a sudden huge demand for VOC emission, capability for price spike prevention? Mr. Nastri. I'm not aware if the South Coast has addressed VOCs within that framework or not. Mr. Ose. OK. Let me go to the Fresno and San Joaquin Valley example. A farmer takes his diesel pump off and replaces it with an electric pump. He's going to get some quantification of credit for the emissions that were coming off that diesel pump. Mr. Nastri. Right. Mr. Ose. And, he's going to be able to sell those credits. In the case of a diesel pump, those would be nitrous oxide, and the term of those credits is a 1-year window? Mr. Nastri. It's over the life of the equipment, I believe. Mr. Ose. OK. Mr. Nastri. Yes. Mr. Ose. So, it's a one-time sale. Mr. Nastri. Right. Mr. Ose. So, if the pump--let's say the guy has got an old pump out there on the canal lifting water out of the irrigation canal and out onto the fields, he can continue to run that pump or he can change it, swap out, buy an electric pump, and sell the credits. Mr. Nastri. Yes. Mr. Ose. And, an electric pump, do the electric pumps cost the same as the diesel pumps? Mr. Nastri. The electric pumps, I believe, are actually less expensive. Mr. Ose. To operate or to acquire? Mr. Nastri. I think both. Mr. Ose. OK. You see where I'm trying to get to, I'm trying to figure out what's the incentive, how does the farmer get an incentive to take those diesel pumps out? The diesel pump he already has, it's not costing him anything other than operating costs. You take that off, you've got to get an electric pump that costs presumably less to run, as it would be more efficient lifting water and pumping it out. What's this electric pump cost? Mr. Nastri. That I don't know, but I can find out for you. Mr. Ose. And, how does that cost compare with the value of the credits that he'd get by shutting down his diesel pump? That's the essential question right there. But, Mr. Nastri, your office is working on this plan? Mr. Nastri. Yes. Mr. Ose. In the Central Valley? Mr. Nastri. Yes. Mr. Ose. Or, the San Joaquin? Mr. Nastri. Yes. Mr. Ose. Thank you. Dr. Ellerman, you had something you wanted to say? Dr. Ellerman. Yes, let's take that case. I think you can provide that incentive. Let's imagine this farmer and that Region IX actually creates a cap over these SO2 emissions, or whatever the relevant emissions are from this pump, and over all of them in the area, and at the same time gives that farmer the rights to continue using that pump, or to sell those rights. They have a value in the market. They are now given the value of the market, and if he has the opportunity, and he can calculate very easily--this pump will have another 20 years of life, or 10 years of life, or whatever it happens to be, and it's going to emit so much. I have these permits that have been given to me from the Government, and I can go ahead and continue using them, but I can also sell them and I'll make so much. And, I can buy this electric pump and I don't need those permits, so I, in fact, will make that calculation; that's exactly the calculation. What's new here is that now he can actually sell those credits, because that cap has been set up including that, even though that does not cost him anything, and that's what Congress called---- Mr. Ose. But, he can only sell them in that air basin. Dr. Ellerman. That's right, to other sources for whom it may be more expensive to reduce emissions. And, the assumption here is that the electric pump is cheaper, in fact, and he now has the incentive that command-and-control would not provide. It might allow the farmer to emit more, but if the farmer emits less it's nice, it's thank you for doing it, but the farmer doesn't get any money. Mr. Ose. So, the farmer is going to look at the financial impact of keeping them or switching out the pumps. The buyer of the credit is going to look at the financial impact of, what's it cost me to abate my pollution now, what would it cost me to buy the equipment to make the impact I need, what are the cost of credits compared to the cost of the new equipment? Mr. Nastri. And, I'd just like to add, there's another factor to consider. That is the avoidance cost of permitting. By that, within the Central Valley, a big factor, as you may recall, the Title V settlement that we had with the State of California will identify major farms that have a lot of these pumps as major sources. So, they'll now have to apply for a permit. Part of our goal is, if we can trade out enough of these pumps they no longer trigger the Title V threshold. Therefore, they don't have to sign up for permits, which, as you know, these farmers don't want to be permitted, regulated, or anything else. So, we think we can avoid that by coming in with a program that would reduce their emissions. Now, whether they go electric or whether they go with new reduced diesel, because the problem is, unfortunately, that with many of the Ag operations these diesel units run literally, you know, 50 to 100 years. You've got pumps, engines, that are out there that are unregulated that have been operating for the last 50 years. You guys aren't going to change it unless there's some incentive for that. And, so, I think the avoidance aspect of being permitted is a big factor as well. Mr. Ose. I would encourage you to work on the incentive side of things, rather than the threshold of the paying side of things. Mr. Nastri. It all works together. Mr. Ose. OK. Now, we've covered that pretty well, and I do appreciate the fact that Region IX is trying to make this happen. I think you are on the right track, but I would just say that you need to lean more toward the incentive side than the paying side. Dr. Green. Dr. Green. I was going to say, I think the way you cast that question, actually, is fantastic, in that you really have boiled the question down to the absolute nub, and that is, if a person has a piece of equipment that is functional and will continue to be useful, and some costs have been recouped, it's purely a matter of operating costs. How do we tie the amount of money it will take to cross the threshold to a different technology into the overall process of determining allowances, credits and value given for a given piece of equipment over a certain length of time and life expectancy. And, I think you really have nailed that down. I would say that again, you really have to look at your initial permit allocation with great care, when you start on a trading system, because these are the kind of questions that are really very hard to get at in the aggregate level. Only the individual farmer knows how much it costs him to fix that piece of equipment. It may be 50 years old, that means a new part for it is going to be hand made, not off the shelf, and so those questions are the key. Mr. Ose. Is there availability of new technologies that are somewhere reasonably within the realm of making that transition? It's fine to say, well, we'd like everybody to go straight to fuel cells. I mean, it wouldn't be fine to say that, but if you could say there are alternatives available if you have a fuel cell line? Dr. Green. Well, but the transition error would be so huge you could never really functionally tie it into a meaningful permit value to achieve an emission reduction. So, the technology alternatives also have to be considered at the time, and be considered from a fully holistic standpoint, which is, if the diesel pump has been there 50 years, how are they getting the diesel to it? Do they run it out every day on a tractor or do they already have a small diesel line that runs from a central repository? Can they get electricity out there? Mr. Ose. It sounds like decisions that every business person up and down the State makes every day in their respective enterprises. Dr. Green. That's right, they each have the fine level of knowledge necessary to make it work, and that's the really tricky part when someone say we want to move from diesel to electric, or move from diesel to something else; that's the problem, is that decisionmaking can really only be made at the level of the individual who knows best where they are in the life cycle. Mr. Ose. My only point is, I prefer the incentive side to the paying side. Dr. Green. And, I would actually say one other thing, which is, I think we actually take avoidance, the avoidance factor should really be completely off the table, because so long as there's an avoidance factor there is no market. You cannot have an incentive-based program if on the other hand the agent is going to say, well, command-and-control works even when it doesn't, because it poses an alternative that drives you to do something different. That's not a great dynamic. Mr. Ose. That's a different philosophical argument we are not going to have today. I want to go back now to the watershed thing. I do appreciate your comments on the market structure, because the design of the market does matter. Mr. Nastri, we've talked about, primarily, air so far. I want to talk about watersheds at this point. Mr. Ose. Mr. Nastri, you talked about a pilot project on watershed-based trading for water, and water pollution. Now, is this similar in concept to the cap-and-trade program on the air that we've been talking about, or is it still under development? Mr. Nastri. I think it's still under development. We actually just came out with the Water Quality Trading Program, which is actually out for draft comments. So, at this point I don't have a good enough base I think to really comment on where it stands. It is very conceptual. [The information referred to follows:] [GRAPHIC] [TIFF OMITTED] T6568.034 [GRAPHIC] [TIFF OMITTED] T6568.035 Mr. Ose. And, it is a pilot project? Mr. Nastri. Yes. Mr. Ose. So, it's just this single watershed that we are talking about for the moment? Mr. Nastri. Right, and we are actually looking to expand, as I mentioned earlier, to 21 pilots across the Nation. But again, those haven't been implemented. They'll be coming up. They'll be nominated by the Governors, I think, this fall. Mr. Ose. And again, you are working on the market design at this point? Mr. Nastri. Yes. Mr. Ose. There's a fellow sitting next to you that might have some suggestions on market structure. Mr. Nastri. We'll be sure to consult with Dr. Ellerman. Mr. Ose. All right. Now, Dr. Ellerman, you've talked about the few basic conditions that need to be in place for markets to work, the prerequisites you cited, and the characteristics we've cited. Now, do you think it's possible on water and watersheds to create a cap-and-trade program similar to the one we have on the air side of things? Dr. Ellerman. The experience has not been as encouraging. There hasn't been as much experience, and the experiences of some of the early experiments were not particularly encouraging, but there is the Tar-Pamlico case in North Carolina that from what I understand has been successful. I don't remember the details enough to comment on it. In general, in watersheds, we are dealing with small markets. We have the same problem again of the small markets. Airsheds are in some ways easier, because you've got large areas that you can trade over, and for watersheds or water systems that could be less, but I think that's, again, a matter of the specific problem we are trying to deal with, defining what would be that market, and whether you can organize and create a market for it. I think we should be encouraging, we should attempt to do so, and I think to the extent we can do so we can expect to have the same success we've seen in air systems. Mr. Ose. Would you expect the same constraints on a watershed trading system to exist as exist on the air basin, that is, you can't trade your credits outside your watershed? Dr. Ellerman. I would think that off hand, it seems to me absolutely yes, that it would be tighter. Air moves around in all sorts of different directions, I'm not aware of any argument that water in one watershed actually moves over to other watersheds. The lines are much clearer. I note Dr. Green made a very interesting comment, that actually it's easier to measure the water than it is the air. That's really quite an interesting comment, and I think that's right. You've got fewer dimensions, it's much more contained, so it might be easier to work out these problems. In air, where the meteorology is changing all the time, there's a chaotic element that makes it harder to deal with. Dr. Green. We also have a lot of new technology available in geographic information systems, mapping systems, that give even greater detail with regard to water flows. One thing that I think does need to be considered, and we're getting at it, which is, would this be only within watersheds? We do have situations of nesting watersheds. You may not have a situation where a downstream watershed contaminates an upstream one; you certainly have the reverse. And, so, again, in the initial conditions of establishing the market, you are going to have to pay close attention to what you define as the unit of trading or as the market unit, so that you have the ability for upstream or downstream trading between watersheds that are nested. Because few watersheds exist in isolation, anymore than air basins exist in isolation. It's not usually a case where you have just this whole area of water that discharges purely to the ocean that takes no water from the surrounding areas. So, you are going to have to look at the nesting and interweaving nature of watersheds. But, nonetheless, it's a physical resource for which we have more technology. Mr. Nastri. I think, from my perspective, my concern over watersheds is that, as Dr. Ellerman mentioned, in airsheds you have fairly significant dispersal, and often times it's fairly rapid. In a watershed, in a stream, you don't have that significant dispersal immediately. You may have it over time, but when you look at the localized effects of pollution in that one particular area you may have a fish kill in one particular area that by the time it was downstream it wouldn't affect the overall quality. But because it is such a localized impact, that's where I sort of have trouble understanding how the water quality trading would work, unless you were only moving toward a reduction from existing standards and not allowing exceedances, because to allow exceedances would, I think, potentially cause an increase in harm to human health and the environment. So, that aspect of developing the program, itself, would have to be addressed. I also agree with Dr. Green in the sense of nested watersheds. I think within California we all tend to think of CALFED, and the number of watersheds that feed into this overall watershed aspect. I think that if you do take into account the cumulative aspect of the loads within streams, and the relative value when you are creating your market, in essence, you'd almost have to create a series of impacted zones along your entire market that would thereby set the value of the credits that you would generate. Dr. Green. We've also actually stepped straight into another subtle distinction, which is what Mr. Nastri is pointing out about surface water spikes and fish kills, and the cap being set with regard to current standards of peak loading for surface waters. It's different than what your goal is going to be if you are trying to protect sub-surface waters. And, so, from the standpoint that within a watershed only a small amount of water at any given time is moving in the watershed, it's actually moving through surface water structures. You have to look beyond simply the question. That's one question that would trigger setting a cap, another question that would set a cap is going to be the capability of the local environment to filter, percolate, and protect the ground sub- surface water as well as the surface waters. Mr. Ose. I think this is a fascinating issue, because I was born and raised in Sacramento, a large urban area, on the Sacramento River, on the American tributary to the Sacramento. You go upstream from Sacramento, you've got the Feather, the Bear, and a host of other smaller creeks and what have you. You've got Cottonwood Creek, which is a tremendous creek when the rains hit. Can you take credits purchased off Cottonwood Creek to address a problem in Sacramento, or can you take credits purchased in Feather River to address an issue, for instance, with the regional sewer plant on the Sacramento River downstream to Sacramento? Mr. Nastri. You'd have to look at the load, what's the potential load in that particular area, and the contribution to Sacramento. Mr. Ose. You are almost creating a property right. Mr. Nastri. Yes. Dr. Green. That's why the industry flow right model is vaguely related. This is a directional question, as to where you can trade a credit in the market. There's a directional component to where you can trade, where in theory you can trade the credits. Mr. Ose. Do you measure your impact on the watershed at the point at which the watershed empties into the ocean, or do you measure it at spots along the path, or how do you quantify the impact you are looking for? Mr. Nastri. You actually measure it at spots along the path. That's actually what EPA is trying to do with the development of the Total Maximum Daily Load, which assesses the ability of any particular water body stream to carry any particular pollutant. Mr. Ose. If that's the case, why wouldn't you be able to trade those credits across watersheds? Dr. Green. Why wouldn't you? Mr. Ose. Why wouldn't you? Mr. Nastri. Only insofar as they are nested and impacted. Mr. Ose. A TMDL is a TMDL, though. I mean, this is the part---- Mr. Nastri. Well, then it gets to the localized impact, though. Why should somebody in southern California, that's paying to clear up their creek, be able to provide any offset or relief to somebody up in Sacramento? They are two totally disjointed watersheds, one having no impact on the other. But, the Cottonwood does have a direct impact on the Sacramento and, therefore, that should be allowed. Mr. Ose. That's an interesting question. I'll be curious to see the comments on your draft notice there. Mr. Nastri. I'll make sure we forward them to you. [The information referred to follows:] [GRAPHIC] [TIFF OMITTED] T6568.036 [GRAPHIC] [TIFF OMITTED] T6568.037 [GRAPHIC] [TIFF OMITTED] T6568.038 [GRAPHIC] [TIFF OMITTED] T6568.039 [GRAPHIC] [TIFF OMITTED] T6568.040 [GRAPHIC] [TIFF OMITTED] T6568.041 [GRAPHIC] [TIFF OMITTED] T6568.042 [GRAPHIC] [TIFF OMITTED] T6568.043 [GRAPHIC] [TIFF OMITTED] T6568.044 [GRAPHIC] [TIFF OMITTED] T6568.045 [GRAPHIC] [TIFF OMITTED] T6568.046 [GRAPHIC] [TIFF OMITTED] T6568.047 [GRAPHIC] [TIFF OMITTED] T6568.048 [GRAPHIC] [TIFF OMITTED] T6568.049 [GRAPHIC] [TIFF OMITTED] T6568.050 Mr. Ose. Dr. Green, do you know of any watershed trading programs, and then secondarily, do you know of any successful ones, and what are the characteristics of successful versus unsuccessful, that you've been able to discern, if any? Dr. Green. I'm not aware of any watershed trading programs, specifically, where what they are looking at is trading pollutants within a watershed under a cap. I'm not aware of any cap-and-trade systems that exist for watershed protection. There's an analogous process for protecting sub-surface water, which is more or less a cap-and-trade process on imperious surfaces, and a watershed utility embodies something like a cap-and-trade approach to impervious surfacing in that you pay a certain amount based on how much impervious surfacing you really do and the way you develop facilities, there's a price signal to control how much you do. But, I'm not aware of any specific watershed trading programs around the country that have worked or that are implemented. Mr. Ose. OK. Let me go on to the information and data issue, which I talked about in my opening remarks. At the national level we are having a problem, in terms of gathering and analyzing the data that we do have. Do we have that same problem at a regional level? Mr. Nastri. Mr. Nastri. Yes. The data collection costs, the analytical costs, are extremely expensive, and we rely to a great extent on States and local agencies to collect that data. We are trying to find the resources to increase the data, and I agree that without that type of data it's difficult to set TMDLs and some of the other issues, but it is a problem. Mr. Ose. One of the things that occurs to me is between Federal, State, and local--the Federal EPA, and Cal EPA, and say the local health departments--we ought to have a significant body of data somewhere, in terms of what the air quality algorithms are, or what the water TMDLs are. Are we spending resources at the Federal level that repeat the tasks that are being done at the State level, or local level? In other words, are we presently using our resources efficiently, in terms of the collection of data? Are we doing it once? Are we doing it two or three times, depending on whether you are Federal, State, or local, or do you know? Mr. Nastri. I don't think I know well enough to answer your question 100 percent, because there's a couple of different facets that I can answer your question. The actual data collection itself, and by that I mean the water sampling events and the analytical costs, I think that there isn't much duplicity going on. There aren't enough resources for that. So, the question becomes, the data that is generated, is that being managed efficiently? And, on that I would probably say I think there's alot of room for improvement, because when I talk about the data management I think that what we found in the past is that you are getting data bases established at the local level, and then you are finding another data base that's been established at the State level, and then you are finding another data base that was established at the Federal level. Is that effective use of funds? I don't think so. Is there a way that we can create a single data repository and have individual agencies access that data without necessarily repeating the data base itself? Yes, that's what we are trying to work on with all the States right now, in establishing a common language so that we can actually manipulate, utilize, and access the data efficiently, instead of simply recreating it. And, that's something that we are working on. Mr. Ose. Dr. Green, you talked in your written testimony about the local partnership issue, where often times the local non-profit or NGO's would be in the field working on something, and while they wouldn't have all the information, all of the empirical data, perhaps, that a governmental agency did, they had an intuitive understanding of a system and how it worked. How do we get local folks involved that have this intuitive understanding of how an ecosystem operates? How do we get them meaningfully involved in this process? They might know intuitively that the wind blows from the east on most days, or when the wind blows you get a tide of this nature or that nature. How do we get this involvement, how do we do this? Dr. Green. I think a key element is in creating awareness of the fact that there's a prospect for these processes to work, that is, there's enough flexibility within the regulatory process. I think there are things like Excel and agency efforts where the agencies make an effort to alert the local leaders to the fact that they are open to alternative solutions to that which is laid out in the specifically defined regulatory structure, that they want to tap that local knowledge and be at the table. The local examples that I talked about in the testimony, the Feather River Alliance and so forth, they do have a component of the Government, whether it's State and local or Federal, at the table saying, ``We are interested in finding a way to solve this problem other than the one you may have codified in a particular regulation. We can find ways to work with that regulatory framework to enable innovation and creativity in the use of your local knowledge of State, and place, and economy, and balance interests within districts, in a way that produces environmental improvement and still maximizes your abilities to run your community the way you want to run it.'' So, I think a key element is that active outreach by the agency that says, ``We are interested in this kind of innovation.'' Mr. Ose. If I can make one observation on that. One of the first things I did upon becoming a Member of Congress was, I went over to the nearby high school, where they had an international baccalaureate program, and in the science section of that baccalaureate program there were like six or eight kids--I think actually one of them is now at MIT--and, I mean, these kids were up here and I'm kind of down here in the lower gene pool. They are actually the team that goes into the nearby creeks and collects the empirical data that then the local, State, and Federal agencies base their decisions on. Is that the kind of partnership you are talking about? Dr. Green. Well, that's certainly one of them. The people who use the local watershed are going to have better knowledge about the condition of that watershed, and that's going to include the people who are based locally at universities. My own university, UCLA, which isn't getting enough air time here, had an environmental program in which researchers went out and actually monitored airsheds here, in fact. At UCLA, we are responsible for a lot of the South Coast Air Quality Management District, resolving questions of inventory and emissions and so forth. But, that is clearly a part, tapping your local university knowledge base to gather the data. One of the things that Mr. Nastri was talking about is the reason you don't have a lot of duplicative nature in water quality collection readings is that they tend to roll up. The data that they hold at the State level they hold because it was gathered at a local level for a local program. The information that the Federal Government has is because the State governments turn over their water quality data to the Federal Government. The problem you have is that, between the States and between the localities they haven't really defined their water quality indicators in ways that are planned to make them interchangeably usable, and to draw the good ones. That's one of the reasons why you really need to drive down to that local level, because those indicators aren't necessarily going to be the same, and will, in fact, be an arbitrary and, perhaps, an unscientifically arbitrary way of saying, well, we are going to establish national indicators of quality. It's not always that easy. Mr. Nastri. Mr. Chairman, if I could add to that. Within California, the State has primacy for the safe water and clean water implementation. The issue of how do we get the local organizations, local stakeholders, local public, to become engaged is really something that's very important to me. It's important to me because a lot of these groups come to EPA saying, why isn't EPA doing something about the State, and why is EPA being forced to develop this or that various type of program? And so, the key is to develop stakeholder outreach programs. The key is to meet with these groups in their areas, with our State partners, and say--what are your concerns, what is the program that's being done to address that, and what, if any, improvements need to be made to that. There are a number of programs here in southern California where locals have brought information up to the regional board. They weren't satisfied with the response that they were getting at the regional board and, therefore, they brought it up to us at EPA. We at EPA are doing a number of different outreach efforts. In fact, for some of the programs, we actually do the analytical work for samples that are collected by some of these organizations. We also provide funding for them to continue some of their work. So, I think we are actively engaged. Can we do more? Absolutely, and we're going to be making a significant effort to do that. In fact, this afternoon I'm meeting with, I hate to say this, but about 60 representatives from cities all interested in various aspects of the TMDL development, and EPA's role as it passes off to the State the whole process. So, we are making that outreach. Mr. Ose. I want to applaud you for doing that, because I know the cities and counties in my district, and I presume they are reflective of everybody's district, they are all terribly concerned about what the TMDL thing means to them from an on- the-ground viewpoint. Frankly, I live across the street from the creek that this team from the high school monitors and now my 9 and 7 year-old are starting to say, ``Well, I want to go with the team today.'' So, I mean, this is coming, and I do want to applaud your trying to press forward on this. I'm sensitive to each of your time; I said we'd be done around noon, and it's 11:40 now. I want to go to the particular issue here, and that's the Supplemental Environmental Projects process where Region IX is using these as an alternative to the assessment of a cash penalty. Keep in mind our objective is to improve the environment, rather than generate cash. I think this is a very appealing concept. I'm curious how frequently, and I'm going to refer to them by their acronym, SEPs, how frequently are SEPs being used in Region IX, generically? I mean, three dozen, five? Mr. Nastri. Well, I'll give you just a ball park number; in the 7-months that I've been on the job we've probably done about 10 SEPs. A lot of times they'll relate to companies--the SEPs that we try to look at. We try, and we are actually constrained by the SEP requirements. And the actual money that's being spent goes into that area that's been impacted. So, for instance, in Hawaii, there were a number of discharges that were made. What we were able to do there was get the company that was responsible for those discharges to buy emergency response equipment for the local responders. We were able to do the same thing here in Torrance, where emergency response was provided to local emergency responders. There have been other SEPs that we've looked at. They are related, again, to water-type issues, where we are looking at providing water infrastructure to that local area--funds for improvement to the infrastructure. Mr. Ose. How does Region IX assure itself that the SEP adequately addresses the problem that's on the table, so to speak? Mr. Nastri. Well, the SEP is almost a side bar to the problem that's on the table, because until the problem is solved we don't even get to the SEP. So, once the problem is solved then it becomes an issue of, do we want to push for penalties or do we want to push for some other creative mechanism that we think benefits everyone? No one likes to pay penalties. We like to see the benefit sort of spread around, so we always push for SEPs. Now, in instances where we believe there was an egregious action by a party, we'll try to go for both penalties and SEPs. So, we used the SEP as the preferred method, but again, a lot will depend on the intent of the party. Mr. Ose. Let me reverse that, let me reverse the question. Under a SEP, in a business where somebody has a problem, they enter into the SEP; what kind of assurance do they have that's a safe harbor? Mr. Nastri. Well again, the company would have to have settled with us, and the SEP is just a portion of that. Simply by offering themselves up to engage in a SEP doesn't provide them any relief. Mr. Ose. So, if they've engaged in a SEP, I mean they don't get to the SEP until they get through this other thing. Mr. Nastri. Correct. Mr. Ose. OK. So then, my second question is, having gotten through the other thing, and done the SEP, are they now in a safe harbor position? Mr. Nastri. No. Mr. Ose. I'm trying to get into the certainty thing, are they still subject to challenge on their original thing or their SEP? Mr. Nastri. They would not be subject to challenge on the original item that brought the SEP about. If there were a new action that was a violation, then we would go after them for that. Mr. Ose. Outside the constraints of the program. Mr. Nastri. Outside, correct. Mr. Ose. OK. I do think that if people violate the law, they ought to be held accountable, but if our choice is to collect a cash penalty and turn it over to the Treasury, or have them spend the same amount of money on fixing a problem, or two or three similar problems, I'm in favor of that. You have, say, 10 SEPs in operation now. How do we go about expanding those? Is it a case-by-case basis? Mr. Nastri. It really is a case-by-case basis. In those instances where an honest mistake was made, we are not looking to impose penalties. I mean, I very much agree with your philosophy, and if we think that we can simply correct a problem so that it's not an ongoing issue, and if the company's willing, and we think that there's a good opportunity to do it, we would go through the SEP process. The way that we go through the SEP process, I think, is important to understand, because, you know, we want to use this as a tool. We can use SEPs for outreach to other companies to say, look, by doing this you can benefit in this particular way. And so, we really look at it as something positive, and we really tout that the company came forward, did the right thing, is helping the community. I mean, they get a lot of, I think, positive benefit out of that, as opposed to, you know, these guys are bad actors and we are going after them. Mr. Ose. Well, maybe they were. Mr. Nastri. Well, if they were, we would go after them. Mr. Ose. Dr. Green. Dr. Green. I think the key point, which is how do you institutionalize the favoring of environmental improvement over fines and/or paperwork compliance values, and perhaps some of what Wayne is getting at here is that perhaps one answer is to find ways to constrain fines only to situations of bad intent. You don't simply say, well, we favor it where we don't have a bad actor, but somebody had an accidental paperwork non- compliance, so we don't want to fine them. On the other hand, you may not even want them to have to deal with the SEP either, but one thing to consider is that question of how do you institutionalize a system that would say, if we have a problem, how do we first look at getting an improvement, and how do we make sure that we're only using punitive approaches against bad actors? We maybe need to look at it from that standpoint, of constraining punitivity and expanding the SEP approach, because you achieve the same end. Mr. Ose. Well, I will tell you, if there's egregious behavior I don't have a problem with---- Dr. Green. No, I don't either. I don't think anybody does. Mr. Ose [continuing]. But going back to my comment about incentives versus paying, if there's somebody out there considering X, Y, or Z, and X is clearly illegal, and Y is on the border, and Z is no problem, if I could get them to go to Z through a SEP or some other incentive, that's what I'm trying to get to. Dr. Green. It won't be through a SEP unless they've already gone through the Y or the illegal thing. Mr. Nastri. Yes, they have to get to the legal aspect before we get to the SEP. But there is a policy, Mr. Chairman, that sort of outlines the penalties, and when SEPs are appropriate. I can forward that to you and your committee for review, if you'd like. 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I would appreciate that, because if you have been an egregious violator, and you are found accountable, and you are held accountable for that, and then you mend your ways, and you enter into a SEP of one sort or another, I would hope that it's got a certainty to it, in other words, a safe harbor provision of some sort or another if you comply with the SEP. You might get visited to make sure you are complying with the SEP, but once you've complied with the SEP you have that certainty. Mr. Nastri. Yes. I think that the certainty in this case is the remedy. The SEP is the benefit, so to speak, so there would be no compliance with the SEP, other than the fact that they provided the funds, or they did whatever it was that they committed to do, as part of the SEP. But, if they met their legal obligation to stop emissions, or stop discharges, or---- Mr. Ose. Or, give back in compliance. Mr. Nastri [continuing]. Exactly. Mr. Ose. I find this a very appealing concept. I think it's very creative, and I want to compliment you on that. Mr. Nastri. Thank you, we appreciate that. Mr. Ose. Now, I have about 170 more questions here. We can stay for the rest of the afternoon, or I can send them to you in writing. I'm going to opt for sending them to you in writing, again, because I know your time is valuable and I want to respect it. So, we are going to go ahead and wrap up. I do want to say that I have appreciated you coming down here and testifying today. California, has so many different opportunities, but it also has a similar number of challenges. What I've heard today from Mr. Nastri, from the Federal side, Dr. Ellerman on the market side, Dr. Green from the research side, frankly, I think your made some pretty good progress toward coming up with some solutions. And, interestingly enough, they are not the--in business we always called it the cram-down solution, you might use command-and-control in this instance. They are incentive based, instead of pushing people into something we are kind of bargaining with them, and I find that particularly attractive. These concepts of tradable credits, I think offer real promise. Granted, we've refined it on acid rain, we've still got to work on it here on water. RECLAIM is at least a measurable success, even if it still needs some tweaks, in people's opinions. But out of that, we get less pollution, and we get lower compliance costs. I don't know of a better epithet, if you will; those are positive, both of them, less pollution, lower compliance costs, those are positives. Now, Congress, I think, is interested in both. Out of 435 of us, I will tell you, I don't know of anyone who says, ``I'm for more pollution,'' or ``I'm for higher costs.'' There's nobody in Congress who says that; we all want less pollution and lower compliance costs. So, I applaud the three of you for your efforts. We'll leave the record open for 10 days for the purpose of other Members submitting comments from across the country. This subcommittee and this chairman look forward to working closely with Mr. Nastri, and welcome any input you have Dr. Ellerman and Dr. Green. We intend to make this a success. Less pollution, lower compliance costs. We are adjourned. Thank you, gentlemen. 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