[House Hearing, 110 Congress]
[From the U.S. Government Publishing Office]
CLIMATE CHANGE: COMPETITIVENESS CONCERNS AND PROSPECTS FOR
ENGAGING DEVELOPING COUNTRIES
=======================================================================
HEARING
BEFORE THE
SUBCOMMITTEE ON ENERGY AND AIR QUALITY
OF THE
COMMITTEE ON ENERGY AND COMMERCE
HOUSE OF REPRESENTATIVES
ONE HUNDRED TENTH CONGRESS
SECOND SESSION
__________
MARCH 5, 2008
__________
Serial No. 110-97
Printed for the use of the Committee on Energy and Commerce
energycommerce.house.gov
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COMMITTEE ON ENERGY AND COMMERCE
JOHN D. DINGELL, Michigan, Chairman
HENRY A. WAXMAN, California JOE BARTON, Texas
EDWARD J. MARKEY, Massachusetts Ranking Member
RICK BOUCHER, Virginia RALPH M. HALL, Texas
EDOLPHUS TOWNS, New York J. DENNIS HASTERT, Illinois
FRANK PALLONE, Jr., New Jersey FRED UPTON, Michigan
BART GORDON, Tennessee CLIFF STEARNS, Florida
BOBBY L. RUSH, Illinois NATHAN DEAL, Georgia
ANNA G. ESHOO, California ED WHITFIELD, Kentucky
BART STUPAK, Michigan BARBARA CUBIN, Wyoming
ELIOT L. ENGEL, New York JOHN SHIMKUS, Illinois
ALBERT R. WYNN, Maryland HEATHER WILSON, New Mexico
GENE GREEN, Texas JOHN B. SHADEGG, Arizona
DIANA DeGETTE, Colorado CHARLES W. ``CHIP'' PICKERING,
Vice Chairman Mississippi
LOIS CAPPS, California VITO FOSSELLA, New York
MIKE DOYLE, Pennsylvania STEVE BUYER, Indiana
JANE HARMAN, California GEORGE RADANOVICH, California
TOM ALLEN, Maine JOSEPH R. PITTS, Pennsylvania
JAN SCHAKOWSKY, Illinois MARY BONO, California
HILDA L. SOLIS, California GREG WALDEN, Oregon
CHARLES A. GONZALEZ, Texas LEE TERRY, Nebraska
JAY INSLEE, Washington MIKE FERGUSON, New Jersey
TAMMY BALDWIN, Wisconsin MIKE ROGERS, Michigan
MIKE ROSS, Arkansas SUE WILKINS MYRICK, North Carolina
DARLENE HOOLEY, Oregon JOHN SULLIVAN, Oklahoma
ANTHONY D. WEINER, New York TIM MURPHY, Pennsylvania
JIM MATHESON, Utah MICHAEL C. BURGESS, Texas
G.K. BUTTERFIELD, North Carolina MARSHA BLACKBURN, Tennessee
CHARLIE MELANCON, Louisiana
JOHN BARROW, Georgia
BARON P. HILL, Indiana
______
Professional Staff
Dennis B. Fitzgibbons, Chief of Staff
Gregg A. Rothschild, Chief Counsel
Sharon E. Davis, Chief Clerk
Bud Albright, Minority Staff Director
(ii)
Subcommittee on Energy and Air Quality
RICK BOUCHER, Virginia, Chairman
G.K. BUTTERFIELD, North Carolina, FRED UPTON, Michigan
Vice Chairman Ranking Member
CHARLIE MELANCON, Louisiana RALPH M. HALL, Texas
JOHN BARROW, Georgia ED WHITFIELD, Kentucky
HENRY A. WAXMAN, California JOHN SHIMKUS, Illinois
EDWARD J. MARKEY, Massachusetts JOHN B. SHADEGG, Arizona
ALBERT R. WYNN, Maryland CHARLES W. ``CHIP'' PICKERING,
MIKE DOYLE, Pennsylvania Mississippi
JANE HARMAN, California ROY BLUNT, Missouri
TOM ALLEN, Maine STEVE BUYER, Indiana
CHARLES A. GONZALEZ, Texas MARY BONO, California
JAY INSLEE, Washington GREG WALDEN, Oregon
TAMMY BALDWIN, Wisconsin MIKE ROGERS, Michigan
MIKE ROSS, Arkansas SUE WILKINS MYRICK, North Carolina
DARLENE HOOLEY, Oregon JOHN SULLIVAN, Oklahoma
ANTHONY D. WEINER, New York MICHAEL C. BURGESS, Texas
JIM MATHESON, Utah JOE BARTON, Texas (ex officio)
JOHN D. DINGELL, Michigan (ex
officio)
------
Professional Staff
Sue D. Sheridan, Chief Counsel
John W. Jimison, Counsel
Rachel Bleshman, Legislative Clerk
David McCarthy, Minority Counsel
C O N T E N T S
----------
Page
Hon. Rick Boucher, a Representative in Congress from the
Commonwealth of Virginia, opening statement.................... 1
Hon. Fred Upton, a Representative in Congress from the State of
Michigan, opening statement.................................... 3
Hon. John D. Dingell, a Representative in Congress from the State
of Michigan, opening statement................................. 5
Prepared statement........................................... 6
Hon. Joe Barton, a Representative in Congress from the State of
Texas, opening statement....................................... 7
Hon. Charlie Melancon, a Representative in Congress from the
State of Louisiana, opening statement.......................... 8
Hon. Ed Whitfield, a Representative in Congress from the
Commonwealth of Kentucky, opening statement.................... 9
Hon. Tammy Baldwin, a Representative in Congress from the State
of Wisconsin, opening statement................................ 10
Hon. Michael C. Burgess, a Representative in Congress from the
State of Texas, opening statement.............................. 11
Hon. Mike Doyle, a Representative in Congress from the
Commonwealth of Pennsylvania, opening statement................ 12
Hon. John B. Shadegg, a Representative in Congress from the State
of Arizona, opening statement.................................. 13
Hon. Jane Harman, a Representative in Congress from the State of
California, opening statement.................................. 14
Hon. John Shimkus, a Representative in Congress from the State of
Illinois, opening statement.................................... 14
Hon. G.K. Butterfield, a Representative in Congress from the
State of North Carolina, opening statement..................... 15
Witnesses
Michael G. Morris, Chairman, President, Chief Executive Officer,
American Electric Power........................................ 16
Prepared statement........................................... 19
Answers to submitted questions............................... 245
Jim Slattery, Nucor Steel Corporation............................ 58
Prepared statement........................................... 61
Answers to submitted questions............................... 246
Richard Morgenstern, Senior Fellow, Resources for the Future..... 118
Prepared statement........................................... 120
Answers to submitted questions............................... 248
David Doniger, Policy Director, Climate Center, Natural Resources
Defense Council................................................ 140
Prepared statement........................................... 142
Answers to submitted questions............................... 250
Gary Hufbauer, Peterson Institute for International Economics.... 163
Prepared statement........................................... 164
Christopher Wenk, Senior Director, International Policy, U.S.
Chamber of Commerce............................................ 194
Prepared statement........................................... 196
Answers to submitted questions............................... 260
Submitted Material
Susan C. Schwab, United States Trade Representative, letter of
March 4, 2008, submitted by Mr. Upton.......................... 233
Committee letter, dated March 6, 2007, to His Excellency Vaclav
Klaus, President of the Czech Republic, submitted by Mr. Upton. 236
President Klaus response, submitted by Mr. Upton............. 238
CLIMATE CHANGE: COMPETITIVENESS CONCERNS AND PROSPECTS FOR ENGAGING
DEVELOPING COUNTRIES
----------
WEDNESDAY, MARCH 5, 2008
House of Representatives,
Subcommittee on Energy and Air Quality,
Committee on Energy and Commerce,
Washington, DC.
The subcommittee met, pursuant to call, at 10:40 a.m., in
room 2322 of the Rayburn House Office Building, Hon. Rick
Boucher (chairman) presiding.
Members present: Representatives Boucher, Butterfield,
Melancon, Barrow, Markey, Wynn, Doyle, Harman, Inslee, Baldwin,
Matheson, Dingell (ex officio), Upton, Hall, Whitfield,
Shimkus, Shadegg, Bono Mack, Walden, Burgess, and Barton (ex
officio).
Staff present: Sue Sheridan, Bruce Harris, Laura Vaught,
Chris Treanor, Rachel Bleshman, Alex Haurek, Erin Bzymek, David
McCarthy, Kurt Bilas, Tom Hassenboehler, Garrett Golding, and
Michael Beckerman.
OPENING STATEMENT OF HON. RICK BOUCHER, A REPRESENTATIVE IN
CONGRESS FROM THE COMMONWEALTH OF VIRGINIA
Mr. Boucher [presiding]. The subcommittee will come to
order. In preparation for the drafting in the coming months of
a mandatory control program for greenhouse gases, Chairman
Dingell and I have been posting on the Committee's Web site a
series of position papers. These papers address in detail the
essential elements of a cap-and-trade control program.
Our purpose in exploring these issues in depth is to
stimulate discussion and responses from interested parties as a
key step in a consensus building for the legislation to come.
Our goal is to develop a measure that will enjoy bi-partisan
support, that industry will support, and that will enjoy
support from environmental advocates.
In my view, the only legislation which can pass the
Congress and be signed into law will be a measure that enjoys
such a broad consensus.
And in determining to construct a consensus-supported
measure, let me note that this Committee is following its time-
honored and successful tradition of drafting and passing clean
air legislation. The three major clean air enactments passed in
1970, in 1977, and in 1990, originated in this committee, were
bipartisan, were supported both by industry and by
environmental advocates, and passed both Houses of Congress
with large, bi-partisan majorities. Two of those bills were
signed into law by Republican presidents. One of those bills
was signed into law by a Democratic president.
In view of the reality that an economy-wide cap-and-trade
program for greenhouse gas control will be far more complex
than any of the three preceding major clean air enactments and
potentially have significant implications for the economy
beyond any of those three previous enactments, there is an even
greater need to take our time, to build consensus, and to
ensure that our measure will not cause economic disruption. And
that is what we intend to do.
That said, it is our goal to move a cap-and-trade measure
through the Subcommittee, through the Full Committee, to have
it be considered by and pass the House in time to be
conferenced with the Senate and presented to the President
prior to the close of congressional session, and we are working
to meet that timetable.
The discussions which our position papers are stimulating
will help to build the essential consensus that is necessary in
order to achieve that result.
Before we turn our attention to bill drafting, we will
release additional position papers, and the Subcommittee will
conduct additional hearings on some of them, focusing on the
alternatives before us that address key elements of a cap-and-
trade control measure.
This morning's hearing focuses on the competitiveness of
American industry following the adoption of a U.S. greenhouse
gas control program. It explores ways that our legislation
imposing controls can ensure maximum participation from
developing countries in a global effort to address greenhouse
gas emissions.
In my view, the inclusion of a provision in our legislation
which ensures developing country participation is essential to
achieving that goal. We are all mindful of the 98 to 0 advisory
vote in the U.S. Senate by which the Senate expressed
disapproval of the Kyoto Treaty in the 1990s, and the primary
reason that was announced by Senators for casting that rare,
unanimous vote on a key, controversial measure was the absence
of any imposition of responsibility in Kyoto Treaty on
developing countries to reduce greenhouse gas emissions. We
will not have such an omission in the legislation we move
through this Subcommittee.
Three leading proposals have been advanced in order to
achieve our goals, each of which has been examined in our
position paper on the subject; and this morning I want to say
thank you to American Electric Power and the IBEW, the steel
industry, Environmental Defense, and others for advancing these
proposals for public discussion. They are thoughtful
suggestions, and we will focus on those during our hearing
today.
As we examine these alternative approaches in today's
hearing, we hope to focus on these core questions, and I hope
that our witnesses in their prepared testimony and their oral
statements perhaps in answer to questions will perhaps
enlighten us on these measures. First of all, which proposal is
more likely to lead to developing country emission reduction
for greenhouse gases? Secondly, which is more likely to level
the playing field and neutralize any competitive advantage the
legislation might unintentionally create for industry in
developing countries? And third, which is more likely to
withstand scrutiny under trade treaties to which the U.S. is a
party? These are the core concerns that we hope to address
during today's hearing.
I want to say thank you to each of our witnesses for taking
some time to join us here. We will turn to their testimony
shortly, but before doing that, we will welcome statements from
other members of the Subcommittee.
Mr. Boucher. I would first like to recognize the ranking
Republican member of our Subcommittee, the gentleman from
Michigan, Mr. Upton.
OPENING STATEMENT OF HON. FRED UPTON, A REPRESENTATIVE IN
CONGRESS FROM THE STATE OF MICHIGAN
Mr. Upton. Well, I would like to thank you and Chairman
Dingell, my friends, certainly for holding this hearing on your
second climate change white paper, Competitiveness Concerns and
Prospects for Engaging Developing Countries. This white paper
does indeed hit a critical aspect of the climate change debate,
and it will have a substantial impact on how we proceed with
legislation. I welcome all of the witnesses, and look forward
to their testimony this morning.
Before we begin, I would like to submit for the record a
letter from Ranking Member Barton and then Ranking Member
Hastert to Vatslav Kalus along with his reply regarding global
warming, and I would like to quote President Kalus' response to
the question of the moral obligation of the developing
countries to the developing countries, and this is what he
said. ``The moral obligation of the developing countries to the
developing countries is to create such an environment which
guarantees free exchange of goods, services, and capital flows,
enables utilization of comparative advantages of individual
countries and thus stimulates economic development of the less-
developed countries. Artificial administration barriers limits
and regulations imposed by developed countries, discriminating
against the developing world, affects its economic growth and
prolonged poverty in underdevelopment.'' Climate change is
indeed a serious issue and one that this Congress must address.
But climate policy must also mirror sound, responsible energy
policy because it is technology rather than government mandates
that foster environment benefit.
I said that I am not a fan of cap-and-trade schemes
currently being circulated because they could indeed harm the
economy and send jobs overseas, and I would like to take this
opportunity to associate myself with the Chamber of Commerce's
Six Core Climate Change Principles outlined in their testimony
today. One, preservation of American jobs in a competitiveness
of U.S. industry. Second, promotion of accelerated development
and deployment of greenhouse gas reduction technology. Third,
the reduction of barriers to the development of climate-
friendly energy sources. Four, maximum flexibility. Five,
international economy-wide solutions with minimal impact on
industry and regional economies which developing nations, and
last, promotion of energy conservation and efficiency.
Unlike other environmental issues that we have tackled over
the years, climate change is global and requires a totally new
playbook. Even if the U.S. devised the strictest regime to
reduce greenhouse gases, these reductions could be dwarfed and
negated by emission increases coming from the developing world.
We cannot place enough emphasis on the fact that this is a
global issue requiring a global solution. Energy demand is
going to increase rapidly in the next couple of decades. In
fact, 74 percent of the increase in global energy use will come
from developing countries. According to a 2007 report by the
International Energy Agency, developing countries will account
for more than three-quarters of the increase in global
CO2 emissions between 2005 and 2030.
I am pleased that this white paper recognizes that we
cannot act without China and India's full support and their
participation. China and India have hundreds of millions of
citizens living in abject poverty, getting by day-to-day
without electricity. We have heard testimony before this
Committee that China and India's first priority will be to
raise the standard of living for their people. When you are
talking about populations living on less than $1 a day, burning
cow dung for heat, reducing CO2 emissions perhaps is
not their top priority. How can we force action on a developing
country that is still generations away perhaps from reaching
the standards of living that we have enjoyed for many years?
The proposal outlined in this white paper will have real
consequences on American jobs and industry. Trade sanctions are
not always the best tool to compel greenhouse gas reductions,
and even if these proposals prove to be WTO compliant, they
could prove detrimental to our already battered manufacturing
sector. WTO compliance is important certainly, but retaliation
will occur before even the WTO has a chance to rule on climate-
related trade sanctions. No matter how well we write the
regulations or how clever we are within the WTO framework,
unwilling partners will often find some ways around those
requirements. According to the World Bank, by removing tariffs
and other barriers to green technologies, trade could increase
by an additional 7 to 14 percent annually. Increasing our green
technology expertise will also significantly reduce greenhouse
gas emissions in the developing world.
Complicating matters, many of my colleagues on both sides
of the aisle view climate change and energy policies as two
separate issues. Well, I do not believe they are. I believe we
must address climate change through a global framework that
focuses on innovation and technology and efficiency, rather
than a government mandate. We should pay more attention to
exporting American ingenuity and green technologies to
developing the world rather than perhaps setting up a
regulatory framework that will only increase trade barriers.
I look forward to this ongoing discussion and working in a
constructive manner with members on both sides of the aisle,
and I yield back my time.
Mr. Boucher. Thank you very much, Mr. Upton. I am pleased
at this time to recognize for 5 minutes the Chairman of the
Full Committee, the gentleman from Michigan, Mr. Dingell.
OPENING STATEMENT OF HON. JOHN D. DINGELL, A REPRESENTATIVE IN
CONGRESS FROM THE STATE OF MICHIGAN
Mr. Dingell. Mr. Chairman, I thank you for the recognition.
I want to commend you for the superb leadership you have been
showing in leading us forward to a resolution of the problems
we confront on climate change and global warming. I
particularly want to commend you for this hearing, and I look
forward to working with you and the other outstanding members
of this Subcommittee on both sides of the aisle on drafting
legislation limiting the U.S. emissions of greenhouse gases
through an economy-wide cap-and-trade system.
I am pleased to welcome Mr. Morris and our old friend, Jim
Slattery, as a part of the distinguished panel before us. Mr.
Slattery, as you will recall, was a distinguished member of
this Committee and a friend of many of us here in this room,
and I would like to welcome him back. I also am pleased to note
that this Subcommittee and Committee have now issued three
white papers that focus on design of a cap-and-trade program
on, among other things, international competitiveness, which is
most important here. I would note why these white papers are
issued, which some of the folks around here seem to have a
misunderstanding of our purposes--to see to it that we elicit
comments and responsible discussion of the issues associated
with cap-and-trade and the other questions that this Committee
must address with regard to global warming and climate change,
I would note that these papers have most recently focused on
the roles of different levels of government in carrying out
such programs. Today's hearing is the first on these white
papers which are intended to lay out our initial conclusions on
various topics and, as importantly, to solicit comments from
other members and from stakeholders and ordinary citizens who
might be concerned.
The subject of today's hearing is two-pronged. First, how
does the adoption of cap-and-trade legislation to limit U.S.
emissions of greenhouse gases affect the competitiveness of
U.S. goods sold at international trade? Second, what are the
best legislative alternatives or combination of tools for
mitigating negative effects? We look forward to the views of
the witnesses on these important matters. In the white paper on
international competitiveness released in late January, three
main concerns were raised. First, absent corresponding action
by developing countries, the adoption of limits on greenhouse
gas emissions by the U.S. and other developed countries will
not achieve the goal of protecting the global environment.
Second, if the U.S. were to cap its own emissions without
corresponding actions by developing actions with whom we
compete internationally, the relative cost to American products
would increase and would cause U.S. jobs and industry to
migrate to other nations that do not limit their emissions.
Third, past debate on climate change suggests that the Congress
would be unlikely to adopt legislation committing the United
States to limiting its own greenhouse gas emissions in the
absence of assurances that developing countries will take
similar action. And I would note that the rejection of the
Kyoto Treaty in the Senate and in popular acceptance tends to
support that statement very strongly. Of course, crafting
legislation to address these concerns presents Congress with a
unique challenge since its actions cannot unilaterally bind
other countries. Like the underlying U.N. Framework Convention
on Climate Change, the recent Bali roadmap for negotiating a
post-Kyoto international agreement reflects differing roles and
intentions between developed and developing nations in
fulfilling the 1992 Rio Treaty's goals. With this in mind, the
white paper outlines several options suggested in prior
testimony before this Subcommittee, some of which have been
incorporated into legislation under consideration in the
Senate. The white paper also solicits comments on different
approaches. I am interested to learn whether our witnesses
believe a hybrid approach that combines both carrots and sticks
with respect to developing countries could best achieve the
goal of limiting carbon emissions without harming the U.S.
economy. I would note that this is one of the most difficult
issues the Congress faces in crafting climate change
legislation and that we welcome not only the ideas that will be
presented by today's witnesses but also the views of others who
might wish to comment on the questions raised in the white
paper.
Finally, I would offer three observations about this aspect
of the legislation which we intend to draft. First, the bill
should include provisions to induce developing countries to
limit their emissions growth on a timetable that meets both
environmental and trade competitiveness concerns. Second, the
bill must be crafted in a manner that is reasonably certain to
withstand a challenge before the World Trade Organization, the
WTO, which realistically we must expect to be filed. And three,
we must be clear-eyed in understanding that success in any such
WTO proceeding is not assured and to craft legislation so that
in that event the risks to the United States' economy are
minimized and are held to acceptable levels.
With that, Mr. Chairman, I thank you for holding this
hearing, and I look forward to the testimony and the comments
of my colleagues. Thank you, Mr. Chairman.
[The prepared statement of Mr. Dingell follows:]
Statement of Hon. John D. Dingell
Chairman Boucher, thank you for holding this hearing. I
want to commend you for your leadership on the critical issue
of addressing climate change, and I look forward to working
with you and other members of the Subcommittee in drafting
legislation limiting U.S. emissions of greenhouse gases through
an economy wide cap-and-trade system.
I am pleased to note that we have now issued three White
Papers that focus on the design of a cap-and-trade program, on
international competitiveness, and most recently on the roles
of different levels of government in carrying out such a
program.
Today's hearing is the first of the White Papers, which are
intended to lay out our initial conclusions on various topics
and, as importantly, to solicit comment from other Members and
stakeholders.
The subject of today's hearing is two pronged. First, how
does the adoption of cap-and-trade legislation to limit U.S.
emissions of greenhouse gases affect the competitiveness of
U.S. goods sold in international trade? Second, what are the
best legislative alternatives--or combination of tools--for
mitigating any negative effects? We look forward to the views
of our witnesses on both of these matters.
In the White Paper on international competitiveness
released in late January, three main concerns were raised:
First, absent corresponding action by developing countries,
the adoption of limits on greenhouse gas emissions by the U.S.
and other developed countries will not achieve the goal of
protecting the global environment;
Second, if the U.S. were to cap its own emissions without
corresponding action by developing countries with whom we
compete internationally, the relative cost of American products
could increase and cause U.S. industry and jobs to migrate to
nations that do not limit their emissions;
Third, past debate on climate change suggests that Congress
would be unlikely to adopt legislation committing the U.S. to
limiting its greenhouse gas emissions in the absence of
assurances that developing countries will take similar action.
Of course, crafting legislation to address these concerns
presents Congress with a unique challenge, since its actions
cannot unilaterally bind other countries. Like the underlying
U.N. Framework Convention on Climate Change, the recent ``Bali
road map'' for negotiating a post-Kyoto international agreement
reflects differing roles and inherent tensions between
developed and developing nations in fulfilling the 1992 Rio
Treaty's goals.
With this in mind, the White Paper outlines several options
suggested in prior testimony before this Subcommittee, some of
which have been incorporated in legislation under consideration
in the Senate. The White Paper also solicits comments on
different approaches. I am interested if our witnesses believe
a hybrid approach that combines both ``carrots'' and ``sticks''
with respect to developing countries could best achieve the
goal of limiting carbon emissions without harming the U.S.
economy.
I would note that this is one of the most difficult issues
Congress faces in crafting climate change legislation, and that
we welcome not only the ideas that will be presented by today's
witnesses, but also those views of others who wish to comment
on the questions posed in the White Paper.
Finally, I would offer three additional observations about
this aspect of the legislation we intend to draft:
(1) The bill should include provisions to induce developing
countries to limit their emissions growth on a timetable that
meets both environmental and trade competitiveness concerns;
(2) The bill must be crafted in a manner that is reasonably
certain to withstand a challenge before the World Trade
Organization (WTO), which realistically we must expect to be
filed; and
(3) We must be clear-eyed in understanding that success in
any such WTO proceeding is not assured; and to craft the
legislation so that, in that event, the risks to the U.S.
economy are acceptable.
With that, I thank the Chairman for holding this hearing
and look forward to the testimony.
----------
Mr. Boucher. Thank you very much, Chairman Dingell. At this
time, I am pleased to recognize the Ranking Republican Member
of the Full Committee, the gentleman from Texas, Mr. Barton,
for 5 minutes.
OPENING STATEMENT OF HON. JOE BARTON, A REPRESENTATIVE IN
CONGRESS FROM THE STATE OF TEXAS
Mr. Barton. Thank you, Mr. Chairman. It is a little before
11:00. This is my third Energy and Commerce Subcommittee
hearing of the day, so what a joy it is to be on a committee
that is engaged in trying to find solutions to our Nation's
problems. The O&I Subcommittee issued a subpoena on unanimous
vote to compel testimony of the president of the company that
just had the largest meat recall in our Nation's history. Mr.
Markey's TelCo Subcommittee is wrestling with the vexatious
problem of whether we should mandate more sports programming on
the basic tier, and up here, we are holding a hearing on a
white paper about climate change and whether we should force
the rest of the world to do as we say they should, whether we
do it ourselves or not. And of course, we haven't even firmly
established that there is a problem we can do something about.
So we are at solution stages when I still think we ought to be
in the fact finding. I will say this, and it is only my
opinion, but it is based on a fair number of hearings and quite
a bit of reading of the literature, the probability that
mankind through its emissions is significantly affecting the
temperature of the earth is much closer to zero than it is to
100 percent. And I mean, I would almost say it is less than 1
percent, but that is just my opinion.
Having said that, I want to commend you and the staff for
the white papers. They are thoughtful. A lot of effort has gone
into developing them, and I do agree with you, Mr. Chairman,
that if we are going to attempt to do something legislatively,
we need to be very, very careful how we do it because this is
not a video game, and we can literally wreck the world's
dominant economy with all the best intentions for protecting
our environment and our climate; and then we will look back 20
or 30 or 40 years from now when we are, you know, last year's
great power and say, what happened?
I agree with the Chamber representative whose testimony I
have reviewed that if we do anything at all, it ought to be
within a framework on working on an international voluntary
basis to do things that have technological relevance and also
help in terms of reducing the so-called greenhouse gas
emissions. I am not at all opposed to doing things that make
economic sense and also have an environmental positive impact.
I can say with all honesty that the U.S. economy is doing that.
Our energy intensity, our carbon intensity, all the metrics
that actually have a component that has an output variable show
that we are leading the world and have been for the last 10 to
15 years. I do not think that we can force the developing
nations to limit their emissions on a purely emotional appeal.
You know, if the choice is running water and heated homes or
air-conditioned homes and mobility versus none of the above,
they are going to choose the former, and all the environmental
emotionalism in the world is not going to change that basic
decision. I have had numerous conversations on-camera and off-
camera with my friends on the majority, and I am sincere in
saying that I know that you folks are sincere in trying to do
things that are better for our country. I just hope that before
we act, we do begin the process of making sure that it does not
wreck our economy and have no measurable environmental benefit
as a consequence of that.
With that, Mr. Chairman, I yield back.
Mr. Boucher. Thank you very much, Mr. Barton. Any member
who decides to waive an opening statement under the rules of
the Committee will have 3 minutes of questioning time added to
the questioning of witnesses, and the Chair would like to
encourage members to keep that rule in mind as we go through
the process this morning.
That said, I am pleased at this time to recognize the
gentleman from Louisiana, Mr. Melancon, for 3 minutes.
OPENING STATEMENT OF HON. CHARLIE MELANCON, A REPRESENTATIVE IN
CONGRESS FROM THE STATE OF LOUISIANA
Mr. Melancon. Thank you, Mr. Chairman. I do not think I
will use my whole 3 minutes, but let me start off with Budrow
Joe. Budrow was standing on his front porch when the levees
broke and a boat came by and said, get in the boat, we will
save you, Budrow. And he says, no, do not worry about me. The
Lord will take care of me. Second boat came by when he was up
on the second floor, and they said, come on, Budrow, get in the
boat. He said, nope. Do not worry about me. The Lord will save
me. The next time the boat came by, he was on the roof and he
told the people in the boat the same thing, do not worry about
me, the Lord will save me. When the helicopter came by to pick
him off the chimney, he said the same thing, do not worry about
me, I will be just fine. The Lord will save me. Well, Budrow
met the Lord face to face at the Pearly Gates, and he was mad
as hell. And he says, Lord, what the hell are you doing? He
says, you left me down there. The Lord looked at him and said,
for heaven's sakes, Budrow. I sent three boats and a
helicopter. What are you thinking?
I guess my point is that the indicators are out there. The
Great Barrier Reef is dying, the ice shelf is melting, we have
got these extreme weather conditions, and I am sure there are a
lot of other things that scientists can tell us about. If the
scientists are 90 percent wrong, we still need to act. I would
like to think that when I leave this earth, that it will be a
place that my grandchildren and future generations will have a
place to live and breathe and enjoy. So I think it is inherent
upon us to illustrate to the world that we are willing to
participate in trying to make the changes, and I agree with Mr.
Barton on the fact that I do not want to wreck the economy of
this world or this country particularly, but we need to 'fess
up to regardless of who we work for, that we all have an
obligation to the next generations. And with that, I yield back
my time.
Mr. Boucher. Thank you, Mr. Melancon. The gentleman from
Kentucky, Mr. Whitfield, is recognized for 3 minutes.
OPENING STATEMENT OF HON. ED WHITFIELD, A REPRESENTATIVE IN
CONGRESS FROM THE COMMONWEALTH OF KENTUCKY
Mr. Whitfield. Thank you, Chairman Boucher, and we look
forward to this hearing. We all know that Washington is a town
that reacts to whatever the current issue is, and certainly
global warming is that issue today. But I think we recognize
that there are significant questions, for example, about the
effectiveness of the cap-and-trade system operating in Europe
today. I for one am quite concerned that we might adopt a cap-
and-trade system when we do not have the technology available
to achieve the targets that we hear about, and if we proceed,
then we definitely will place a great disadvantage the
industries in our country that would jeopardize our jobs,
jeopardize our economy, and I think create more unemployment.
So I think it is imperative that we move cautiously and as
one of our witnesses, Mr. Slatterly, in his testimony says
today, we must have a program with a truly global approach
involving major greenhouse gas emitting countries and must be
verifiable and enforceable; and to ensure a global approach and
to protect the competitiveness of domestic products, we must
include legislation that would require maybe products sold in
the United States, whether domestic or imported, that they meet
a carbon-intensity performance standard.
So we have to move cautiously. I think we have to be very
careful on what we do here because the impact will be quite
dramatic on our economy. I yield back.
Mr. Boucher. Thank you very much, Mr. Whitfield. The
gentlelady from Wisconsin, Ms. Baldwin, is recognized for 3
minutes.
OPENING STATEMENT OF HON. TAMMY BALDWIN, A REPRESENTATIVE IN
CONGRESS FROM THE STATE OF WISCONSIN
Ms. Baldwin. Thank you, Mr. Chairman. I am really pleased
to be here today to kick off our Subcommittee's series of
hearings on legislation to address climate change. The
information garnered from our sessions over the coming weeks
and months will help us formulate what I hope will be a sound
cap-and-trade program that will allow us to reduce our
greenhouse gas emissions and preserve our planet for future
generations. Our nation is the lone superpower in an
increasingly interconnected and interdependent world, and with
this stature comes unique responsibilities to set an example
and to model behaviors as we would like other nations to
emulate. Unfortunately, when it comes to reducing greenhouse
gas emissions, we have not set much of an example until quite
recently. With only 5 percent of the world's population, the
United States is responsible for almost 25 percent of
greenhouse gas emissions, and our emissions are projected to
rise at at least 8 percent above 2004 levels by the year 2010
and by 28 percent in 2025. Now it is true that emissions are
rising fastest in developing countries and developing
economies. China's emissions are projected to continue rising
rapidly, another 65 percent to 80 percent by the year 2020.
India is in a similar situation. But these are not the
countries that put a man on the moon like we did or ushered in
the Marshall Plan to rebuild Europe like we did. These are not
the countries that the world looks to for leadership. We cannot
use the behavior of developing economies as an excuse to defer
action. Rather, we must demonstrate that it is possible to rise
to this challenge, to enact meaningful legislation creating
efficient, effective, and environmentally friendly climate
change programs.
That said, we also have a responsibility to our Nation, our
businesses, our workers, and our consumers to ensure that
American industries remain competitive, that good jobs remain
right here in this country, and that prices and costs are
reasonable and affordable. To ensure this, I agree that we must
include a provision in our cap-and-trade bill designed to
encourage developing countries to curb their greenhouse gas
emissions. Such a provision can and should coincide with bold
efforts to reduce our own emissions. And while, yes, the policy
options that have been presented and are going to be presented
are highly complex, I think we all look forward to that
challenge, and I am hopeful that between the white papers and
the hearings we will really shine a light on the appropriate
way to address these issues.
Again, thank you, Mr. Chairman. I look forward to this
hearing and hearing from our witnesses.
Mr. Boucher. Thank you, Ms. Baldwin. The gentleman from
Texas, Mr. Burgess, is recognized for 3 minutes.
OPENING STATEMENT OF HON. MICHAEL C. BURGESS, A REPRESENTATIVE
IN CONGRESS FROM THE STATE OF TEXAS
Mr. Burgess. Thank you, Mr. Chairman, and thank you for
holding this hearing today. I want to commend the Committee for
taking the time to support the white papers, to allow members,
industry, and environmental consumer advocates the opportunity
to evaluate any broad climate change policy. Now, according to
the second white paper, our Committee has reached a consensus
that efforts to reduce greenhouse gas emissions will be
fruitless if we do not engage developing countries in the
process. It is reported that China and India are expected to
account for 56 percent of the projected increase in emissions
between 2005 and 2030. So if these emissions are a cause of
global climate change, then logically, should not China and
India take some responsibility for a similar percentage of any
efforts to limit the effects of climate change in the future?
China and India are not likely to sacrifice manufacturing jobs
nor needed economic development in their society in exchange
for new regulations. Why would China or India want to comply
with the U.S. Congress in its attempts to handcuff their
progress? Instead of investing in global climate change
initiatives this week, China reportedly increased their yearly
defense budget by 20 percent. Clearly China's concerns as far
as global climate change is concerned, is not on their to-do
list.
Newton's Third Law: for every action there is an equal and
opposite reaction. Well, we need to make certain that any
action we take here does not spark unforeseen and unfortunate
consequences. For example, the 36 billion gallon alternative
fuel mandate has had unintended consequences on the developing
world. Saturday morning's Washington Post: Soaring food prices
putting U.S. emergency aid in peril. The USAID officials said
that a 41 percent surge in prices for wheat, corn, rice, and
other cereals over the past 6 months has generated a $120
billion budget shortfall that will force the agency to reduce
international efforts to end hunger. According to the article,
prices have increased as more grains go to biofuel production
or are consumed by fast-emerging markets as China and India.
Deeper into the body of the article, look at what has happened
to wheat prices alone, up 25 percent in one day last week, said
Josette Sheeran, Executive Director of the World Food Program.
``This is really the first emergency that we faced without a
drought, war, or natural disaster. We will have to cut the
amount of people being served or the amount of food being
served if we do not get more funds.'' I will submit that
disaster has been brought to them courtesy of the U.S. Congress
and its energy policy over the past year.
Capital is a wonderful thing. It is powerful, but it is not
necessarily courageous. Capital, if you mistreat it, will go
someplace where it thinks it will be treated better; and I am
concerned, Mr. Chairman, if we continue on this path of cap-
and-trade, we are going to drive the equation of unintended
consequences much further than we already have. I think that
will be deleterious for our country and the world at large.
I will yield back.
Mr. Boucher. Thank you, Mr. Burgess. The gentleman from
Utah, Mr. Matheson, is recognized for 3 minutes.
Mr. Matheson. Mr. Chairman, I thought your opening
statement was more than adequate, and I will associate myself
with that and waive my time.
Mr. Boucher. Thank you so much, Mr. Matheson. The gentleman
from Illinois, Mr. Shimkus, is recognized for 3 minutes. Mr.
Shimkus is not here at the moment. The gentleman from
Pennsylvania, Mr. Doyle, is recognized for 3 minutes.
OPENING STATEMENT OF HON. MIKE DOYLE, A REPRESENTATIVE IN
CONGRESS FROM THE COMMONWEALTH OF PENNSYLVANIA
Mr. Doyle. Thank you, Mr. Chairman. Mr. Chairman, as we
continue our debate on global warming legislation, we need to
keep remembering this important fact, that it is global warming
that we are talking about, not just United States warming. This
is not a problem that this Congress or this government can
unilaterally address. We are going to need the cooperation of
the world community, and it is imperative that any bill we pass
recognizes this fundamental point.
While it is true that the rest of the world and certainly
developing nations will not do anything if we do not act first,
we must be sure that by acting first we do not put our economy
at an undue risk. We need to find a balance, where we can lead
the world's efforts to combat global warming but also
simultaneously strengthen American industry to deal with the
challenges of a carbon constrained world. I think it is
important to recognize the magnitude of the challenge if we are
ever going to be able to adequately address it. China is now
arguably the world's number one emitter of greenhouse gases. It
is adding to its economy every 2 years the equivalent of the
entire U.S. steel production while opening a new coal-fired
plant, most with little environmental controls, every 2 weeks.
It is critical that our policies at home address those
environmental challenges abroad.
I believe the question of how to best structure incentives,
mandates, standards, or fees designed to bring about
international acceptance of U.S. environmental benchmarks is
one of the most fundamental questions before us as we craft
this bill. With an eye to the limits on our options due to the
World Trade Organization compliance standards, I think it is
critical that we explore every option available because much
like the greater bill, there is no silver bullet to address
this question.
Now, let me be clear. I am in no way referring to the WTO,
but I am stating that compliance with the WTO will be critical
in giving industry the tools they need to compete. I think the
performance standard idea that we will see proposed by our
witnesses today is an innovative idea that should be examined
further, as are the options presented from using our tax code
or trade policies to put a real cost on carbon. These new
innovative ways of thinking outside the box are going to be
crucial to moving this debate forward, and I look forward to
hearing the thoughts of our witnesses on this matter.
In conclusion, Mr. Chairman, today we are really getting
into the real meat of this global warming debate. I hope all my
colleagues will use this opportunity to learn more about the
very real consequences of the policies we will be writing so
that together we can put the best possible bill forward. As
always, Mr. Chairman, I stand ready to work with you and any
member of this Committee who is serious about addressing this
challenge before us, and with that, I yield back the balance of
my time.
Mr. Boucher. Thank you, Mr. Doyle. The gentleman from
Oregon, Mr. Walden, is recognized for 3 minutes.
Mr. Walden. Thank you, Mr. Chairman. I am going to waive my
opening statement and have to step out for a few minutes but
will be back.
Mr. Boucher. Thank you, Mr. Walden. The gentleman from
Maryland, Mr. Wynn, is recognized for 3 minutes. Not here? The
gentleman from Georgia, Mr. Barrow, is recognized for 3
minutes.
Mr. Barrow. Thank you, Mr. Chairman. Like Mr. Matheson, I
cannot improve on the comprehensiveness of the Chairman's
statement or on the eloquence of Budrow, so I, too, will yield
the balance of my time.
Mr. Boucher. Thank you, Mr. Barrow. The gentleman from
Arizona, Mr. Shadegg, is recognized for 3 minutes.
OPENING STATEMENT OF HON. JOHN B. SHADEGG, A REPRESENTATIVE IN
CONGRESS FROM THE STATE OF ARIZONA
Mr. Shadegg. Thank you, Mr. Chairman, and I want to echo
the concerns of my colleagues on this Committee who have
already spoken of the need to proceed cautiously. As you know,
Mr. Chairman, I have repeatedly complimented you for your
conduct of this Subcommittee and for the thoughtful hearings we
have had on the issue of climate change. One option before us
clearly is the issue of a cap-and-trade program. However, the
evidence on the viability of a cap-and-trade program and its
usefulness and success is extremely mixed. The experiment
performed in Europe has not led to single-sided evidence of
success. Having watched them implement a cap-and-trade program,
it is fairly clear that two things have occurred. One, the cost
of energy has unquestionably gone up in certain countries, and
two, it is fairly clear that there has not been a reduction in
greenhouse gases. I think we are all aware of the testimony
regarding industries that cannot operate in portions of the
European Union because they cannot get reliable energy to
operate, even though those companies are extremely
environmentally sensitive. And we are aware of the testimony
with regard to, for example, companies that have left, some
companies that manufacture or previously manufactured cement,
for example, in Europe now moving manufacturing operations to,
for example, Morocco. I would simply suggest that it is
important that we proceed with caution. If the U.S. Congress
pursues the same remedy with the same result, I believe the
American electorate will not be happy and will not reward us.
In regard to that, I want to note that in this very
Committee at prior hearings we heard testimony from a
representative of the government in India who made it very
clear that the struggling or developing economy of India and of
other countries in a similar economic position simply cannot
adopt a greenhouse gas emissions program until they improve the
standard of living in those countries and that to expect them
to do so is unrealistic. I believe it is not in our interests
to punish the people in those countries or the people in
emerging economies and that we need to proceed with great
caution; and while the discussion here is that we are going to
help them, I believe they will perceive it not so much as help.
I think it is important that we proceed with caution. I
would echo the remarks of the Ranking Member of the Full
Committee that we look at those places where we can improve
efficiency and also limit greenhouse gases at least at this
stage of the operation. With that, I yield back.
Mr. Boucher. Thank you, Mr. Shadegg. The gentlelady from
California, Ms. Harman, is recognized for 3 minutes.
OPENING STATEMENT OF HON. JANE HARMAN, A REPRESENTATIVE IN
CONGRESS FROM THE STATE OF CALIFORNIA
Ms. Harman. Thank you, Mr. Chairman. I apologize for my
late arrival, but I had a competing hearing. I apologize in
advance for my early departure but I have a competing hearing.
I would like to echo or endorse some of the things Mr.
Shadegg just said and make an additional point or a related
point. Climate change, as everyone has said, is a world-wide
problem, but the United States is still today the world's
number one emitter of greenhouse gases, and we must lead. We
must not use the problems of the developing world as an excuse
to avoid leading. Let me just quote from the Papua New Guinea
representative who said, ``We seek your leadership, but if for
some reason you are not willing to lead, leave it to the rest
of us. Please get out of the way.'' Imagine this statement
coming from a small Pacific island nation which cares about
this issue.
So my bottom line is that leadership includes helping
others to cooperate with us, and that is what we should be
doing. If we can help others to cooperate with us, we can slow
down and hopefully turn back the emission of greenhouse gases
and save our planet, and if we do not, we will not. I think the
United States is tested. I think this Committee is tested. We
have to be courageous. We have to figure out how to get this
right in the first place, and I applaud the fact that we are
having this careful series of hearings to explore that.
Thank you, Mr. Chairman.
Mr. Boucher. Thank you very much, Ms. Harman. The
gentlelady from California, Ms. Bono Mack, is recognized for 3
minutes. Well, she was here and is no longer. The gentleman
from Illinois, Mr. Shimkus, is here and is recognized for 3
minutes.
OPENING STATEMENT OF HON. JOHN SHIMKUS, A REPRESENTATIVE IN
CONGRESS FROM THE STATE OF ILLINOIS
Mr. Shimkus. Thank you, Chairman. I would like to help you
out with the time but we did not even get a chance to talk and
debate and get on record on this issue. Really, it is a
national media debate now, and so this is one of a few times
that we can actually go on record on some of the issues.
Facts, as we say here, are very stubborn things. The
electricity generation in this country, we are close to
capacity now, and the Energy Information Services says we will
need 35 percent more electricity by 2030. Thirty-five percent
more. Think about that, folks. We have all supported bills on
efficiency, on renewable, solar, wind, but this is 35 percent
increase over what is being generated today and that is all
talking about base load generation. And look at our own houses.
Look at the electricity consumption in our own houses.
I just also went to the competing hearing. Talked about
buying my wife a laptop for Christmas. You know, a very
emotional Christmas present. It was not a toaster, it was not a
coffee maker. We also made it so that it is portable around the
house so she can carry it around and get on the Internet. It is
more energy. Because of our ability to have all these great
advances, we as individuals are consuming more electricity use.
So you take where we are at today, and we meet our demands.
I love the energy debate, and everybody knows who has served
with me on this Committee, the folks get it confused. We got
electricity and then we got fuels, a liquid fuel debate. And
this is electricity. And we are for the most part independent.
We are not importing a lot of electricity generation for use.
My fear is some day we may be based upon this. Today our
portfolio is 50 percent coal. We know what the climate change
debate will do to coal. It stops it. In fact, last year 30
coal-fired plants went off the drawing board. And we have got
states and governors saying no more, not even when we talk
about capture and sequestering. So how do you meet this 35
percent increase in demand without the lowest, cheapest, most
cost-effective use? And what does that do for the individual
consumer? You talk about prices going up today. Across the
board, electricity, liquid fuels, in this economy,
manufacturing, I just hope the manufacturing sector and
organized labor, they had better link arms on this because this
is a job killer if done improperly. I have got great respect
for the Chairman of this Committee. Our districts are very
similar, and he has promised me that we are going to do no
harm. I am a trust but verify guy in this debate because I fear
there will be great harm done.
I yield back my time, Mr. Chairman. Thank you.
Mr. Boucher. I am happy about the trust part. That is a
good place to begin. Thank you very much, Mr. Shimkus. The
gentleman from Maryland, Mr. Wynn, is recognized for 3 minutes.
Mr. Wynn. Thank you, Mr. Chairman. I will waive my opening.
Mr. Boucher. The gentleman waives his opening statement.
The gentleman from North Carolina, Mr. Butterfield, is
recognized for 3 minutes.
OPENING STATEMENT OF HON. G.K. BUTTERFIELD, A REPRESENTATIVE IN
CONGRESS FROM THE STATE OF NORTH CAROLINA
Mr. Butterfield. Thank you very much, Mr. Chairman, for
yielding this time. Thank you for your leadership on this
Committee. You have tireless energy, and I thank you for all
that you do.
I am looking forward, Mr. Chairman, to this discussion
about how we can achieve what I call the concurrent objectives
of lowering America's greenhouse gas output while at the same
time protecting America's industry and jobs. And I would like
to welcome and to thank former Congressman Jim Slattery for
coming today and for testifying on behalf of the U.S. steel
industry and Nucor. Nucor is very special to me. It is located
in my district in North Carolina, and I thank them for all that
they do on a day-to-day basis.
I want to commend all of you for your constructive
suggestions. I am sure that they will come. I am ready to hear
from each one of you about how we can approach the three
legislative approaches that have been offered in the second
white paper that I just got a copy of a few days ago and what
suggestions the industry may have in this relation. And so
thank you for coming, thank you for convening this hearing.
I yield back.
Mr. Boucher. Thank you very much, Mr. Butterfield.
Seeing no additional members who have not been recognized
for opening statements, we at this time will receive statements
from our panel of witnesses. And without objection, your
prepared written statement will be made part of the record. We
would welcome your oral summary of approximately 3 minutes. I
will just say a brief word of introduction about each of our
witnesses.
Mr. Mike Morris is the Chairman, President, and Chief
Executive Officer of American Electric Power, and it is
noteworthy on the topic of today's hearing, that in
coordination with the International Brotherhood of Electrical
Workers, AEP has made a proposal with regard to engaging
developing countries, and that is one of the three alternative
proposals that have been made to this subcommittee with regard
to addressing that critical element of cap-and-trade
legislation.
The Honorable Jim Slattery is a former colleague of ours
and former member of this Committee who served with
distinction. Jim and I were elected the same year and began our
service on this Committee at approximately the same time. I
think Jim may have preceded me on this Committee by 2 years. He
was a better lobbyist for that assignment at the time than I
was. He served with distinction here, and we welcome him back
today. He is speaking today on behalf of a proposal made by the
Nucor Steel Corporation.
Mr. Richard Morgenstern is a Senior Fellow at Resources for
the Future. Mr. David Doniger is the Policy Director for
Climate Change for the National Resources Defense Council. Mr.
Gary Hufbauer is with the Peterson Institute for International
Economics. And Mr. Christopher Wenk is the Senior Director for
International Policy of the U.S. Chamber of Commerce.
We welcome each of you, and Mr. Morris, we will begin with
your oral statement and would ask that each of our panel
members try to keep their statements to approximately 5
minutes. Mr. Morris?
STATEMENT OF MICHAEL G. MORRIS, CHAIRMAN, PRESIDENT, CHIEF
EXECUTIVE OFFICER, AMERICAN ELECTRIC POWER
Mr. Morris. Thank you very much Chairman Boucher and
Ranking Member Upton. Thanks much for being here. I really
appreciate the opportunity to address this sub-issue of a very
large challenge, and I must admit, I was quite impressed by all
of the comments that were offered by your colleagues on this
Subcommittee because it is clear that there is a great
appreciation of the magnitude of the potential trade impact of
a misinformed and misapplied global warming plan.
To your opening comments you mentioned that the
International Brotherhood of Electrical Workers and American
Electric Power have brought forth what we obviously believe is
an appropriate way to address that issue. President Ed Hill of
the IBEW was instrumental in putting together the concepts that
we have developed and surely have submitted to your Committee,
and we know and we are pleased that, along with other ideas, it
will be given great consideration. The whole notion of putting
an impact on the U.S. economy in the manufacturing sense,
without giving those other competing manufacturing countries an
opportunity to join us, and if they choose not to join us, then
an opportunity to pay an international credit allowance before
they can import products into this country we think is well-
balanced. We have spent a great deal of time trying to think
through the concept of how one would put something like that
together and answer the question that was asked by the Chair of
the overall Committee, as well as the questions that you asked
of us. We think in fact that it is WTO-compliant. When we went
to the professionals who do that work, then I can assure you
that is way above my pay grade, they said to us, no one has
ever come and asked for how would you do something WTO-
compliant. Most clients come and say, I have a problem or I
think somebody is violating WTO, would you help me figure that
out? We went in and said, here is the issue. This is a global
environmental issue that needs to be addressed globally or the
environmental calamity, whatever it is and whenever it is, will
continue to come our way. And we need to be fair and balanced
in trying to find a way to go about doing that.
In its simplest of terms, the IBEW-AEP approach addresses
the issue on an economy-wide basis of carbon intensive products
that would be manufactured in our country or in other
countries, the programs would be the same, the International
Reserve Allowance would be very similar to one of our carbon
credits, and if your country did not have a comparable program
and it is easy to poke holes in that and say, well, how would
you ever determine that, we will leave that to the work of the
Committee. But nonetheless, if they have no program, then
before that product could be imported into our country, it
would have to purchase one of those International Reserve
Allowances. And that would be set at the same price as the
carbon credit is set to the U.S. manufacturer. We think that
goes a long way to try and make certain that there is balance
to the question that you asked. We believe as I said before
that it is in fact WTO-compliant. We know as the Chairman said
that would be challenge. We think the timeline when one could
go about doing that could sink in with the actual
implementation of a cap-and-trade program developed not only by
the House but the Senate, then coming out of conference,
hopefully signed into law by the President. So we feel very
strongly about the notion of addressing this issue because I
join my colleague from Louisiana. There is something going on
here. There is technology that we can employ to help the
performance of the power plants. I surely agree with your
colleague from Illinois. We need to build additional base load
power plants. They need to be fired by coal. We need to do that
in the most environmentally responsible way that we can. A cap-
and-trade bill that has a timeline that allows that technology
to be developed, that has some type of price coordination in it
so that we don't have a negative effect right off the bat on
the U.S. economy and that addresses the global nature that
almost every one of your colleagues mentioned in their comments
is the answer, and we can develop that and we would be in
strong support of that.
I thank you very much for the chance to be here. I look
forward to the questions and answers.
[The prepared statement of Mr. Morris follows:]
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Mr. Boucher. Thank you very much, Mr. Morris. Mr. Slattery,
we will be pleased to hear from you.
STATEMENT OF JIM SLATTERY, NUCOR STEEL CORPORATION
Mr. Slattery. Well, Mr. Chairman and members of the
Committee, it is as you might imagine a pleasure for me to come
back and see so many friends. Thank you for the opportunity to
appear here today.
My name is Jim Slattery, and I am a partner at Wiley Rein
LLP, and as counsel to Nucor Corporation, I am appearing on
behalf of the American Iron and Steel Institute and the Steel
Manufacturers Association. American steel companies make the
girders and beams in our bridges, the steel in our pipelines,
the rebar in our roads, the plate in our ships, the steel in
our windmills, and the corrosion-resistant metal in our cars.
The steel industry directly employs 150,000 people and hundreds
of thousands more indirectly. Our national defense depends on a
reliable source of steel. The loss of manufacturing industries
like steel due to the climate change legislation without global
reach would cost millions of Americans their jobs, damage our
economy, and threaten our national security. Even worse, from a
climate perspective, the loss of American steelmakers would
result in increased global emissions of greenhouse gases,
exactly the opposite the intended result.
My testimony focuses on how to prevent climate change
legislation from putting our industry at a competitive
disadvantage and how to encourage foreign firms serving U.S.
markets to lower their carbon footprint. Mr. Chairman, if we
cannot encourage developing nations like China, India, Russia,
and Brazil to act, what we do in the United States will matter
little. Carbon intensity standards would limit how much carbon
dioxide and other greenhouse gases could be emitted from a
given steel product sold in the United States. These standards
would apply to both domestic and imported products. While we
cannot force other countries to control their emissions, carbon
intensity standards would encourage both domestic and foreign
producers to do so by conditioning access to the U.S. market on
compliance with the standards.
The American steel industry is part of the solution in the
climate change debate, not the problem. Why do I say this? We
beat Kyoto targets 11 years early and are among the most
efficient in the world in terms of greenhouse gas emissions.
For every ton of domestic steel that is replaced by imports,
greenhouse gas emissions increase by a half-a-ton or more. For
imports from China, the world's largest producer, the
difference is double or triple U.S. emissions. According to the
EPA, U.S. steel producers cut their process emissions from
around 85 million metric tons to 45 million metric tons while
actually increasing production from 1990 to 2005. Iron and
steel accounts for only 1 percent of direct U.S. greenhouse gas
emissions. It is vitally important for Congress to appreciate a
few fundamentals of steel production. Steel is a manmade alloy
of iron and carbon. Carbon dioxide is an unavoidable process
emission of iron production at integrated steel mills. Once
steel is produced, it can be recycled virtually without end by
using electric arc furnaces that they rely heavily on
electricity and natural gas but produce fewer process
emissions. The domestic steel industry recycles its product at
a higher rate than aluminum, paper, glass, and plastic
combined, including 100 percent of the steel in automobiles.
Steel is a highly competitive, globally traded commodity, and
energy is one of the largest input costs. Due to major
achievements in efficiency and recycling, U.S. steel producers
have survived massive onslaughts of imports and are finally
recovering from years of losses. However, the competitiveness
of U.S. steel is always under pressure, particularly from
developing country producers who face far less environmental or
labor regulations and often benefit from large government
subsidies. Our customers make buying decisions based on a few
dollars per ton, as hard as that is to believe. If cost makes
either portion of the U.S. steel industry less competitive,
then the balance that created our phenomenal environmental
achievements will be lost. Under a poorly conceived U.S.
greenhouse gas regime, global market pressures will work, and I
regret to say that the inevitable result will be to off-shore
production and increase global emissions at great cost to U.S.
jobs and the world environment.
Carbon intensity standards would limit greenhouse gas
emissions per ton of steel for steel consumed in the United
States, whether domestic or imported. These standards would be
analogous to car and truck fuel economy standards and appliance
energy efficiency standards. Whether Congress creates a cap-
and-trade system, carbon taxes, or carbon intensity standards,
the only metric to achieve global reach is carbon intensity.
Congress has no ability to impose carbon caps on the total
emissions from economies like China, Russia, India, and Brazil.
To determine carbon intensity, a steel producer would one,
identify the quantity of each input; two, multiply the quantity
by the greenhouse gas factor identified by the EPA; and three,
add up the total emissions; and four, divide the total
emissions by the total tons of steel produced. Congress would
direct the EPA to set the standard so that a predetermined
percentage of U.S. production would meet the standard. Any
producer, foreign or domestic, that failed to comply within a
fixed amount of time could not sell their products in the
United States. The key is that these standards would apply to
domestically produced and imported products equally.
Our firm has conducted an intensive analysis and concluded
that such standards would be consistent with U.S. obligations
under GATT.
I would be remiss if I did not tell you that the U.S. steel
industry still has grave doubts about a cap-and-trade regime.
We think the American Electric Power approach is inadequate as
currently drafted in S. 2191. Our competitors producing steel
in countries like China, India, and Brazil do not need handouts
from the U.S. Government to reduce emissions when they have
equal access to capital and technology in this global
marketplace.
The American steel industry has led the world in reducing
greenhouse gas emissions, but legislation that fails to achieve
global reach will push production off-shore and produce greater
greenhouse gas emissions. Carbon intensity standards for
products such as steel offer a straightforward, GATT-consistent
method of reducing domestic emissions while helping to preserve
American competitiveness. Other steps will also be needed as
detailed in my written testimony.
And in conclusion, Mr. Chairman, I would just like to
recognize a colleague of mine, Jim Bruce, a former staffer in
the Senate Energy Committee that did a remarkable amount of
work on this and is one of the fathers of this idea. So thank
you very much, and I look forward to your questions.
[The prepared statement of Mr. Slattery follows:]
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Mr. Boucher. Thank you, Mr. Slattery. Mr. Morgenstern.
STATEMENT OF RICHARD MORGENSTERN, SENIOR FELLOW, RESOURCES FOR
THE FUTURE
Mr. Morgenstern. Thank you, Mr. Chairman. I appreciate the
opportunity to appear here to consider how to achieve domestic
emission reductions of CO2 and other greenhouse
gases without placing undue burdens on any one sector and
without shifting production and the corresponding emissions to
other countries.
Today I will briefly report on some recent research by
myself and some colleagues, and I will discuss several options
to alleviate the impacts.
As is widely understood, the impact of a carbon price is
fundamentally tied to the carbon intensity of individual
industries and to the ability of firms to pass on the higher
costs to their customers. We estimate that energy costs in most
manufacturing industries as broadly defined at what the
Commerce Department calls the two-digit level, are less than 2
percent of total costs. However, they are more than 3 percent
in energy-intensive industries such as refining, non-metal
mineral products, primary metals, and paper and printing.
Larger impacts, in fact, considerably larger impacts are seen
when more narrowly defined industrial categories are
considered. For example, for the aluminum and chlorine
industries, costs are about 10 times higher.
We generally find adverse effects on domestic production of
less than 1 percent for every $10 per ton of CO2
charge. There are exceptions. Motor vehicle manufacturing and
chemicals and plastics are about 1 percent and primary metals
are about 1\1/2\ percent. Of course, if we looked at narrower
industrial categories, we would inevitably see larger impacts.
Turning to the options for lessening these impacts, I would
note at the outset the difficulty of achieving this without
some cost either to the environment in the form of higher
emissions or to the overall economy, largely because we would
be substituting more expensive abatement options that would
have to be undertaken by other industries or other individuals
throughout the country. Trade-related actions are not costless,
either. They might raise legality concerns as we have heard,
and they risk provoking countervailing actions. Further, they
can also drive up domestic product prices for key materials
which will itself threaten other industries in our country.
I focus here on three options today, performance standards
instead of a market-based or cap-and-trade approach, free
allowance allocation under a cap-and-trade system, and the
trade-related policies which have been alluded to.
The first option, performance standards, comes in many
varieties, for example, tradable emission standards. The
particular version discussed in the white paper and discussed
by Mr. Slattery moments ago includes embodied emissions. This
is a considerably more complex approach than is used for
example in CAFE standards or other product standards that we
have commonly used in this country. However, well-crafted
performance standards of any type definitely have the potential
to encourage efficiency improvements without putting as much
upward pressure on production costs. In doing so, they may
reduce the shift of production to other countries. At the same
time, because performance standards do not encourage end users
to reduce their consumption of carbon-intensive goods, they
will leave behind some low-cost abatement opportunities,
thereby raising the overall cost to all the rest of us of
achieving a particular emissions target.
The second option concerns the free allocation of
allowances under a cap-and-trade system, and there are two
important points to make here. The first concerns how many
allowances will be given away free, and the second concerns the
methodology, how the allowances will be given away. In most
existing programs such as the acid rain program for example,
virtually all the allowances have been given away for free
based upon historical emissions, known as grandfathering. More
recent proposals in the climate field, in addition to providing
for a larger auction, have proposed to allocate free allowances
in a way that recognizes firm level changes in output over
time. Certain Senate proposals tie this directly to employment.
This latter approach is known as updating. Compared with an
allocation based on grandfathering, an updating allocation can
have important differences by creating incentives to maintain
or even expand domestic production and it can thereby reduce
the potential for emission leakage. The principal advantage of
using free allocation is that it can compensate firms for
losses resulting from the new policy without excluding those
firms' emissions from the cap. Traditional grandfathering can
compensate owners for losses in value, but it does not
necessarily discourage firms from shutting down production and
moving abroad. In contrast, updating allows firms to gain
larger allocation allowances if they expand their production or
if they expand their employment, for example. Although
incentives of this type are----
Mr. Boucher. Mr. Morgenstern, if I could ask you to wrap
up. Your time has expired----
Mr. Morgenstern. Sure.
Mr. Boucher [continuing]. And we are now getting recorded
votes on the floor. I would like to get at least one more
statement in before we have to recess.
Mr. Morgenstern. OK. Let me cut to the chase here, Mr.
Chairman. I will skip over my discussion of trade-related
policies. I think the Committee is well-versed on that. Let me
close by noting that one can mix and match these options. For
example, one might consider starting out with a generous
allocation for the most severely affected industries, perhaps
one based on updating free allocations tied to current output
or employment. This free allocation could then be phased out or
phased down, either at a date certain or once trade-related
measures were in place or major trading partners had adopted
comparable measures.
Thank you, Mr. Chairman.
[The prepared statement of Mr. Morgenstern follows:]
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Mr. Boucher. Thank you, Mr. Morgenstern. We have three
recorded votes pending on the floor, and it is our intention to
recess the Subcommittee in about another 8 minutes, and what I
am hoping is that potentially within 8 minutes, we can have two
statements of approximately 4 minutes each.
So, Mr. Doniger, that is your challenge, 4 minutes if you
can do it.
Mr. Doniger. We could go at the same time.
Mr. Boucher. Let us try it one at a time and see how we do.
STATEMENT OF DAVID DONIGER, POLICY DIRECTOR, CLIMATE CENTER,
NATURAL RESOURCES DEFENSE COUNCIL
Mr. Doniger. Thank you, Mr. Chairman. I am happy to be here
on behalf of Natural Resources Defense Council's 1.2 million
members and activists.
What this Committee does has to be framed above all by the
science. Global warming has started. The time for effective
action is very short. We are looking at catastrophe if we let
global average temperatures rise by more than another 2 degrees
Fahrenheit. To avoid this we have to cut emissions in half by
2050 and that means that the leadership has to come from the
industrial countries, to cut their emissions by as much as 80
percent over that time period. Delay makes everything harder.
Wait 10 years, and the necessary rate of emission reductions
doubles. In short, a slow start means a crash finish.
The task is very challenging. It cannot be done without
cooperation of both north and south, but it can be done. The
United States, if it has a claim to leadership in the 21st
Century, has to be instrumental in forging that coalition
between north and south. Above all, early enactment of a U.S.
cap-and-trade program is the single-most important step that we
can take to unlock the global negotiating gridlock. We will
also need a totally different foreign policy from the next
president that places global warming in the top tier.
At Bali, the big emerging economies showed unprecedented
willingness to negotiate real actions. This is a big change
from their prior stance against any new commitments. Some big
developing countries are already taking significant domestic
measures to reduce their own domestic energy use and pollution.
For example, the Chinese are improving industrial and vehicle
efficiency and more rapidly deploying renewables. China has
even established special tariffs to discourage exports of
cement, iron, and steel. The export tariff on steel equates to
about $50 a ton.
To be sure, solving the climate problem means that they
have to do more. We cannot get their agreement to do more
unless we in the U.S. show our willingness to join other
industrial countries in reducing emissions.
Some manufacturing industries and their unions are
understandably concerned about potential competitiveness
impacts in the first few years of a U.S. program. In our view,
Congress can address those potential impacts with two tools.
One of them, the IBEW-AEP trade proposal, is before you in the
white paper. The other, a limited use of free allocations for
the years before the trade proposal takes effect has not yet
been considered by the white paper.
To me, the importance of the IBEW-AEP proposal is that it
would give the executive branch additional diplomatic leverage
in negotiations with other countries for agreement on
comparable actions, and it would also provide an equalizer
later on if for one or more of those countries the negotiations
do not succeed.
Some want an earlier start date for the trade proposal. I
would caution against that because there are dangers in putting
the import proposal into effect too quickly. Brandishing the
trade stick before 2020 would, in my judgment, inflame the
climate treaty talks and pose more WTO risks.
Fortunately, there is another tool that I mentioned that
you could use: to allocate for a limited time a small number of
allowances--it would not take more than 10 percent of the
allowance pool--to specific industries that demonstrate their
competitive disadvantage from domestic carbon control
requirements. Any such free allocations should be conditioned
on the recipient firms' maintaining domestic employment, and
they should be phased out by the time the trade provision
starts in. Free allocations will not be needed beyond that
point because competitiveness issues will be resolved either by
success in the negotiations or by the triggering of the trade
provision.
In short, we can solve the competitiveness concerns and go
ahead with cap-and-trade with these two tools. Thank you, Mr.
Chairman.
[The prepared statement of Mr. Doniger follows:]
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Mr. Boucher. Very good, Mr. Doniger. You were just a little
over 4 minutes. Mr. Hufbauer, we will be glad to hear from you.
STATEMENT OF GARY HUFBAUER, PETERSON INSTITUTE FOR
INTERNATIONAL ECONOMICS
Mr. Hufbauer. Thanks very much, Chairman Boucher, and
members of the Committee. I want to commend the well-drafted
white paper. I need to mention that a representative of the
National Foreign Trade Council was originally going to speak
where I am speaking. I have appended his statement written
independently of my own, but the conclusions are quite similar.
The Peterson Institute is working with the World Resources
Institute on these issues, and a book titled Leveling the
Carbon Playing Field will soon be published. I commend it to
you.
Now quickly turning to the questions, the first point I
would make is that any meaningful cap-and-trade or other carbon
limitation system will impose very large costs on this economy
and other economies. To dodge that fact, I think, is to dodge
reality.
Second, the control systems adopted by different countries
will differ. There is not going to be a uniform system, and the
fact of differences and the possibility of various hybrid
systems means that there will be enormous pressure in this
country and elsewhere both for lobbying for free allowances and
other preferences, and also for straight import protection.
Sauce for the goose is sauce for the gander. Any import
limitations we impose--citing carbon problems--can be imposed
on us. This is going to be a two-way street. So if we go ahead
and start imposing restrictions willy-nilly, we can expect
return payment.
Next, I think that the legislation would be vastly improved
if the Committee would call for WTO discussion on an
appropriate code that would identify permissible emission
measures. That is in addition to Kyoto II or the Bali roadmap.
The Bali roadmap at most will set targets and time paths but it
will not address the details of permissible emission measures.
I would caution this Committee against taking at face value
assurances from brave lawyers that such-and-such a proposal is
immune from WTO attack. I go into this subject in some detail
in the testimony. There is hardly any trade restrictive measure
that would not invite WTO attack, but we do not need to trash
the world trading system, as Mr. Upton has noted, to get
meaningful carbon emissions. What we need to do is have a WTO
negotiation ahead of time--a good-faith negotiation led by the
United States.
So let me just stop there and say that global cooperation
started early by the United States will achieve a lot more than
a heavy-stick, unilateral approach. Thank you very much.
[The prepared statement of Mr. Hufbauer follows:]
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Mr. Boucher. Thank you very much, Mr. Hufbauer. We are
going to recess the Subcommittee at this point and return
following the last of the three recorded votes. I appreciate
the patience of our witnesses, and we will be back with you in
approximately 25 minutes.
With that, the Subcommittee stands in recess.
[Recess.]
Mr. Boucher. We would ask our witnesses if they could
resume their seats at the table.
When we recessed, we had completed the statements of
witnesses through Mr. Hufbauer, and Mr. Wenk, we have yet to
receive your statement. So at this time, we will be happy to
hear from you.
STATEMENT OF CHRISTOPHER WENK, SENIOR DIRECTOR, INTERNATIONAL
POLICY, U.S. CHAMBER OF COMMERCE
Mr. Wenk. Thank you very much, Chairman Boucher, Ranking
Member Upton, and members of the Subcommittee for inviting the
Chamber of Commerce to testify today on this very important
issue.
My name is Christopher Wenk, and I serve as the Senior
Director of International Policy at the Chamber, the world's
largest business federation. My background is in trade policy.
Rather than the science of climate change and the state of
research and development, I will confine my testimony to the
international aspects of this issue.
Without question, there are serious trade implications to
the current debate over the various climate change proposals on
the table that should give everybody pause. Let us consider the
following facts. America's international trade in goods and
services accounts for roughly 27 percent of our country's GDP.
Nationwide our exports directly support 12 million good-paying
jobs and indirectly support millions of other jobs. More than
57 million Americans are employed by businesses that engage in
international trade, and the benefits reach every state in our
Nation. The combined effects of trade agreements over the past
half-century have raised the annual income of an American
household by $10,000. In 2007, the United States exported a
record $1.6 trillion in goods and services and continues to be
the world's largest exporter. These facts cannot be overlooked.
Further, one should not also overlook the fact that the climate
change discussion involves trading relationships that the
United States has with countries around the world.
A key focus of today's hearing is engaging developing
countries on climate change. The Chamber believes that neither
least-developed nor developing countries can be forced to
comply with the domestic greenhouse gas emission regulatory
regime without possible significant risk to not only U.S.
exporters and workers but also to the economies of developing
countries.
For example, S. 2191, legislation to cap greenhouse gas
emissions sponsored by Senators Lieberman and Warner, exempts
countries that are de minimus emitters from having to buy
import allowances. However, several developing countries
besides China and India could possibly be considered
significant emitters. These countries include Nigeria, Ecuador,
Indonesia, Malaysia, and South Africa to name a few. These
countries also export to the United States raw and intermediate
products like oil and minerals that require them to purchase
import allowances. One could argue that the imposition of the
import allowance requirement on these countries would have a
negative impact on their economic development. There is also
the question of whether climate change legislation would make
the United States vulnerable to a challenge under the WTO or
NAFTA, for that matter. As noted on page 13 of the white paper,
there is a general expectation that a WTO challenge is likely
regardless of what approach Congress takes. However, I think it
is safe to assume that we could screw up trading relationships
around the world before we even got to a possible WTO dispute
settlement proceeding. In this time of economic uncertainty,
the Chamber urges Congress to not risk provoking a trade war
with countries like China or India where the United States
exported almost $83 billion worth of goods combined in 2007.
Most recently, Brazil scored a big victory at the WTO over
America's cotton subsidies. Brazil has reserved the right to
impose annual sanctions of up to $4 billion on the United
States. If the United States fails to comply with this ruling,
Brazil has said that it would target American goods as well as
trademarks, patents, and commercial services for retaliation.
The bottom line is that there is no guarantee that our
trading partners will not retaliate against us in the WTO or
otherwise based on actions by Congress. Further, according to
the U.S. Commerce Department, in 2007, the United States
imported almost $113 billion in energy products like oil,
gasoline, and natural gas from Canada and Mexico. Wouldn't
border measures require our two largest trading partners to buy
massive amounts of import allowances? Just imagine the impact
that would have on the economies of these two important allies
and possibly on our NAFTA obligations.
Finally, the Chamber believes that trade policy can
contribute in a meaningful way in efforts to reduce climate
change through trade liberalization and not trade restrictions.
Last fall the United States and the European Union submitted a
proposal as part of the ongoing Doha round of WTO negotiations
to increase global trade in and the use of environmental goods
and services. It would place priority action on technologies
directly linked to addressing climate change and energy
security. Significantly, WTO members currently charge duties as
high as 70 percent on certain environmental goods, impeding
access to and use of these important technologies.
Once again, the Chamber is grateful for the opportunity to
provide testimony today. However, I believe that this hearing
today will raise many more questions than it will answer. I
would also urge the leadership of this Subcommittee and the
full Energy and Commerce Committee to work with your colleagues
on the Ways and Means Committee which has jurisdiction over
international trade issues to explore the issues not only that
were raised in the white paper but also addressed at this
hearing.
Thank you very much.
[The prepared statement of Mr. Wenk follows:]
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Mr. Boucher. Thank you very much, Mr. Wenk. Let me
recognize myself for a round of questions, and I will address
my first question jointly to Mr. Morris and Mr. Slattery.
You are the authors or the co-authors of the two competing
leading proposals that we have before us for protecting
American industry and assuring the participation of developing
countries when greenhouse gas controls are adopted in this
country, and what I would like to ask you to do is to put on
the table before you both of your proposals and critique those,
one against the other, against these three questions and tell
me which of your proposals in your opinion is superior on each
of these three points. So I guess what I am asking you to do is
advocate for your respective position on these three points,
but to some extent, critique the other party's proposal as
well. This is not an invitation for a negative campaign, but
you can choose to be a little bit negative if you desire.
So the three questions are these. Looking at your two
proposals together, which of them is the most likely to achieve
the following: One, reducing greenhouse gas emissions in
developing countries; two, protecting the American industry
that is exposed to trade at a time when we have carbon dioxide
constraints domestically in the United States; and number
three, passing muster under WTO and potentially other trade
agreements to which the United States is a party. And so that
is the challenge, and we will look forward to your answers. Mr.
Morris, would you like to go first?
Mr. Morris. Certainly. Thank you, Mr. Chairman. Let me try
to frame as best I can what I think are some differences, and I
must admit that I do not know that we are that widely apart on
this issue. I think we are both trying as constructively as we
can to come up with a program that would satisfy the issue at
hand. It would seem to me, however, if you are looking at the
overall reduction of greenhouse gases in a developing country
that the IBEW-AEP proposal surely would be more attuned to that
because it is predicated on your opening comments about a cap-
and-trade program. If you use carbon intensity or form of
production as your measure, you would be lowering carbon output
by that ton of product, whatever it is; but at the same time,
if it is not a hard cap that steps down over time, you would be
at best lowering then maybe flattening out. I do not know that
you would ever get on the other side of the curve.
Mr. Boucher. And you are suggesting that Mr. Slattery's
proposal does not contain the hard cap but instead----
Mr. Morris. I believe that to be the case.
Mr. Boucher [continuing]. Is a carbon intensity
measurement?
Mr. Morris. Exactly. At least that is as I heard the
comments and have had an opportunity to look at the program.
As to your second undertaking, as I tried to say in my
opening comment, the IBEW-AEP proposal is really directed at a
very limited group of carbon-intensive manufacturing processes
in a definable group of countries with which one would deal and
have bilateral discussions and negotiations with the intent of
having them join us in a constructive, opportunistic way or if
not, then actually have them join in a protective way in that
before their manufactured product could actually be imported
into this country, they would have to pay for the International
Reserve Allowance, which would put us on what I think is an
absolutely equal footing.
So wrapped in the second question in our answer, I think it
probably more appropriately addresses itself to the multitude
where clearly Congressman Slattery's approach is very limited
as to the steel industry that he is here to represent. Rest
assured, the last thing that IBEW or American Electric Power
want to do is have a negative impact on the steel industries.
They are big companies of ours, customers of ours, big
employers in this country, a very important business for this
country to have.
As to your last question, as again I mentioned in my
opening comments, we took a great deal of time, energy, and
effort to try to create what we thought would be a WTO-
compliant approach to this issue. I surely agree with the
professor when he said it would be folly to believe that it
will not be challenged. We believe that it will be. To the
extent that the WTO in Geneva in fact offers opinions to
questions asked before you bring in front of them a challenge,
that is a great idea. There is no unending pride of authorship
of what we have done. If someone can come forward and say, we
think IBEW-AEP is missing WTO-compliance at this particular
point, I would hope the Committee would change it as they
implement it. We are impressed and pleased that both Lieberman,
Warner, and--had included that concept, and it will be
developed over time; and clearly, we believe ours is a superior
proposal and we would hope that you include it in the House
materials as well.
Mr. Boucher. Thank you, Mr. Morris. I think you would make
an excellent candidate, by the way. You couched your negative
remarks in a positive context just the way a good candidate
should.
Mr. Slattery?
Mr. Slattery. Mr. Chairman, first of all, your question
contemplates that there is a conflict between the AEP concept
and the performance-standard concept. And that is not
necessarily the truth. I mean, that is not the fact. You could
do the AEP concept, you could also do performance-standards we
envision. So there is not necessarily an inherent conflict.
With respect to which----
Mr. Boucher. Let me just interject. If you are suggesting
that we can meld these two proposals and take the best aspects
of both, you might elaborate on that potential and tell us the
mechanics of how that would work and which particular pieces of
the two proposals should be selected----
Mr. Slattery. Sure.
Mr. Boucher [continuing]. For that unified approach as you
answer the question.
Mr. Slattery. OK. First of all, the only specific AEP
proposal that I am aware of that has been out there is the
language contained in Senate 2191, and there are specific
provisions in that particular proposal that in our judgment are
terribly inadequate and very specifically the whole notion of
having a base year established in the 2012, 2014 time period in
effect tells the Chinese, do everything you can to ramp up your
emissions between now and 2014. Be as dirty as possible because
after all, in 2014, that will be the base year from which
future emission reductions will be computed. And then to
suggest the Chinese have nothing to do, or others, not just the
Chinese, but other global competitors do not have to do
anything until 2020 as the Senate language contemplates in our
judgment is really unworkable and is inefficient and is
terribly inadequate. So we have some very serious base year
issues.
Now, beyond that, the other thing that troubles us, and I
trust that you can understand our reticence on this point, and
that is given the Administration's current reluctance to
currently address the currency issues with countries like
China, for example, we are in this situation where when we look
at the AEP proposal, for it to be effective will require in the
future an administration to aggressively assert to the Chinese
or others that your climate change and climate legislation is
inadequate. It is not comparable to ours. That is going to be a
tough call for some future administration to make. And then
after making that determination, we are into this question of
what kind of allowances then are going to be required of the
Chinese, for example, when they enter our market? Now, I would
ask you, who is going to buy those allowances for a Chinese
competitor of a U.S. steelmaker, for example? I can show you
that, for example, a company like Shanghai Bow Steel, state-
owned. It is a company as large as the largest U.S.-based
companies. It is larger than Nucor. It is larger than U.S.
Steel. And they are state-owned. There are several other
Chinese companies that are state-owned. So they come to our
marketplace with allowances, presumably provided by their
government. Today's news as was just handed to me when I walked
in here today, China has ruled out increases in state set gas,
power, and oil prices. They have ruled out any market
adjustment for their cost of energy. These are our competitors.
As you can see, you have state-owned energy sources, state-
owned steel makers, competing directly with U.S. industry.
Mr. Boucher. OK.
Mr. Slattery. And how is that going to unfold? So let me
also respond to the question about----
Mr. Boucher. Very briefly because our time has expired.
Mr. Slattery. OK. As far as the WTO issue is concerned,
bottom line is, we are both I think in the same position on
this that you will find trade lawyers on both sides saying that
the proposals are permissible under GATT, and we strongly
believe that. We have done a lot of legal analysis on it, and
we believe that the proposal that we are talking about is
permissible.
So the last point I want to make is that with the
performance standard, this should not be viewed as some sort of
border measure necessarily, and it should not be viewed as a
protectionist type measure. We are not seeking protection. We
are seeking equal treatment. We are saying to domestic
producers, we are saying to foreign competitors, if you want to
sell into this market, produce a product that meets a certain
standard, a certain performance standard with respect to your
carbon intensity. That is similar to what we say with appliance
energy standards, it is similar to what we say with respect to
toy manufacturers in China that want to ship products into the
United States. We do not permit them to ship products here with
lead paint. They do it, but it is against our regulations. So
my point----
Mr. Boucher. I thank you, Mr. Slattery, and thank you, Mr.
Morris. I will have some follow-up questions as I know other
members will on precisely this set of issues. And let me
announce that we are going to have a second round of questions
so that we can get to some of those matters, and yes, we are
going to be here a little while.
Mr. Upton is recognized for 5 minutes.
Mr. Upton. Well, thank you, Mr. Chairman. I just want to
say that I appreciate everyone's testimony. This morning I
received a letter, and I am going to ask unanimous consent to
put it into the record.
Mr. Boucher. Without objection.
Mr. Upton. I have actually not studied it yet. I just
skimmed it briefly, but it is from Susan Schwab, our U.S. Trade
Rep, Executive Office of the President, so it was cleared
obviously by the Administration, and she says this just to lift
a sentence or two from this 3-page letter, ``We have serious
concerns with some ideas that are currently circulating,
particularly the enthusiasm for using import provisions. It
might be perceived as unilateral trade restrictions directed
against other countries to push them to move rapidly to reduce
their emissions of greenhouse gases. We believe this approach
could be a blunt and imprecise instrument of fear, rather than
one of persuasion that will take us down a dangerous path and
adversely affect U.S. manufacturers, farmers, and consumers. It
is no accident that trade ministers in Bali unanimously agreed
that trade restrictions run the risk of tit-for-tat retaliation
and even an all-out trade war where no one wins and everyone
loses. My trade counterpart in Europe, Commissioner Peter
Mendelssohn, strongly cautioned against including trade
restrictions in the European Commission's recent package of
proposals setting out the second phase of emissions cap-and-
trade system, resulting in the omission of these measures.'' To
me, that seems a pretty blunt warning that in fact trying to
use the WTO or trying to influence the WTO. I think all of us
agree that we should not proceed unless China and India are on
board, and there are just enormous questions as to how that
happens. But the idea that maybe the WTO is our escape valve or
our safety valve to make sure that they are on board, at least
does not seem like it fits with what the Administration is
saying based on this letter, again, dated yesterday but I just
received it this morning or what happened with the--or Bali,
and Noel will have the report from the meeting in Hawaii at
some point that happened just a couple weeks ago.
What is your reaction to this? I have not seen it and you
have not seen it, either. What are your thoughts as it relates
to this passage?
Mr. Slattery. Well, if I could just respond briefly, the
bottom line is----
Mr. Upton. It is like it undercuts any argument here.
Mr. Slattery. Yes, well, it is extremely difficult for our
industry to understand how in the world you can characterize a
measure that we are proposing as being a trade barrier if we
are saying to the domestic producers and international
competitors that you must meet a certain standard. We do not
see that as a trade barrier. We are not desiring it to be a
trade barrier. We believe that to put that in place, it is
going to hopefully encourage a race to the top, so to speak, a
race to better performance for steel makers and other energy-
intensive manufacturers all over the world. So as long as we
are committed to equal treatment, which we are, it is hard for
us to see that as being a trade barrier.
Mr. Upton. Well, you made the point in your testimony of
the real positives that the U.S. industry has made.
Mr. Slattery. Yes.
Mr. Upton. 1.2 tons of carbon emitted for every ton of
steel produced.
Mr. Slattery. That is correct. On average.
Mr. Upton. On average. And in China, it is about, you
thought, about 2\1/2\ but it could be as much as 4\1/2\ tons of
carbon produced for every ton of steel produced. So there is
quite a difference in terms of efficiency.
So you could look at something like, well, both countries
are going to reduce by 80 percent. Fifty percent, let us say.
Just pull a number out of the air. That would mean that they
would go to 2\1/2\ tons and we would go to .6 tons of carbon,
still quite a wide discrepancy. But then what if the Chinese
say, or the Indians, they decide that they would go at a per-
capita basis based on the populations of the two countries.
That is how they want to comply. So they have a whole different
standard, and under that, I think we are about 22 times worse
at 1 ton per carbon emitted for 1.2 tons versus even 2\1/2\ or
3 tons that they have now. So I mean, we are not in the same
playbook.
Mr. Slattery. Well, if I could, let us look at what is
going on out in the real marketplace right now, the Chinese and
others, but let us look at China. They are bringing on line
every 2 years a steel production capacity that exceeds the
current U.S. capacity.
Mr. Upton. Right.
Mr. Slattery. This whole notion of saying to those new
entities out there coming into the marketplace, in a global
economy, competing with us for global capital, competing with
us for global technology. This is not a mom-and-pop, backwoods
operation. We are talking state-of-the art steel production
capabilities. And the question is, what can we do here to
encourage them as they bring all this capacity on line to bring
it on line with clean, good, new state-of-the art technology;
and we contend the best way to do that is to say to them, if
you want access to our market, we are going to require a
carbon-intensity standard here, and the technology is available
with your new operations to employ that in the marketplace
right now. And if they do that, which we expect them to do by
the way, then no problem.
Mr. Upton. I know I have exceeded my time, so I am going to
follow up on the second round, but I want to ask the same type
question as it relates to coal. Two plants, again, they are
expanding tremendously, the Chinese. My sense is they have
nowhere near the type of emissions that we have in this
country, so again, they are running away at breakneck speed
compared to what we have already.
I yield back, and I look forward to the second round.
Mr. Boucher. Thank you very much, Mr. Upton. The gentleman
from Louisiana, Mr. Melancon, is recognized for 5 minutes.
Mr. Melancon. I would like to pass at this time, Mr.
Chairman.
Mr. Boucher. Thank you, Mr. Melancon. The gentlelady from
Wisconsin. Ms. Baldwin is recognized for 5 minutes.
Ms. Baldwin. Thank you, Mr. Chairman. The proposals
presented today generally focus on ways to ensure American
companies do not go overseas or go out of business, both of
which are extremely important. But there is the other prong to
this discussion as we develop this legislation over the weeks
and months to come and that is encouraging developing nations'
emerging economies to decrease their greenhouse gas emissions.
So I am sort of wanting to tease out a little bit more of
whether the proposals presented here today are going to have a
real difference in China or India or other nations' emission
levels, and I guess I want to start with Mr. Doniger for your
response to that.
Mr. Doniger. Well, thank you, Congresswoman. The agreement
in Bali is really a breakthrough because as I said the
developing countries moved off their position that they are not
willing to take on any new actions or commitments. What they
are saying is we need to see the industrial countries--which
have had the longest run on putting carbon in the atmosphere
and which have the highest per capita emissions and have a lot
of technological and economic capabilities--take responsibility
for our emissions. That is why I think the cap-and-trade
legislation that you are working on, to show that we are ready
to take our place in this, is so important. That is one of the
key elements of getting an international agreement. We have to
have a foreign policy which puts global warming at the top of
the list, not at the bottom of the list, so that it becomes
important in the overall picture of things the United States
wants to get from China and India, Mexico, Africa, South
Africa, Brazil. It has to be important. It has not been
important. And we have to, in my opinion, be willing to meet
their needs for technological assistance in certain areas. By
all means, they have lots of resources. But they can't be
expected to entirely self-finance the big jump to clean
technologies that we want to be taking here and we want them to
be taking. In the Bali agreement the Administration agreed to
three topics to discuss in the way of financing. One is clean
technology deployment. The second is help with countries whose
emissions are primarily in deforestation, to cut that
deforestation. And the third area is in countries such as in
Africa and some of the small island states, which are being
overwhelmed by impacts, to help them cope with the impacts. It
will not take a lot of money. We can build into the cap-and-
trade allocation system funding that would help on a
sustainable, stable way to create those incentives for
cooperation with other countries.
If you do those things, then the trade measure will become
a last resort for the recalcitrant. But I think we do not have
recalcitrants across the board. We have countries which
recognize global warming as a severe problem for them as well
as us, and they are indicating that if we act, they will act,
too.
Ms. Baldwin. In follow up, in your testimony both on page 7
in your written testimony and also as you were here speaking
earlier, described some of the actions that China is taking.
And you know, it is something clearly not enough in my mind;
but I was particularly interested in your mention of the
special export tariffs to discourage export of I think it was
cement, iron, and steel. And I am wondering if you could tell
us a little bit more about your knowledge of these tariffs and
the effect that they will have in your opinion on the global
market and prices.
Mr. Doniger. Well, China is concerned that they have become
the dirty manufacturing place for products that go to other
countries. Of course, they are building their steel industry
and cement and so on for their own domestic consumption. But
with respect to the exports, they are putting on these tariffs
to discourage excessive exports. The motivation is that the
overly high levels of production for export are stressing their
energy supplies and are creating a lot of pollution. So this is
an indication that China takes their energy and pollution
problems with increasing seriousness. Now, they have got a lot
to do, and we have a lot to do here. We need to put this higher
on the to-do list with them than we have before.
Ms. Baldwin. And I want Mr. Slattery----
Mr. Boucher. The gentlelady's time has expired.
Ms. Baldwin. Oh, I am sorry.
Mr. Boucher. We are going to do----
Ms. Baldwin. I was looking at the one up there.
Mr. Boucher. We are going to do a second round and so----
Ms. Baldwin. OK.
Mr. Boucher [continuing]. We will come back. The gentleman
from Illinois, Mr. Shimkus, is recognized for 5 minutes.
Mr. Shimkus. Thank you, Mr. Chairman. I appreciate the
panelists and their answers to the questions because it just
gives us more comments based on the experience dealing with
this, Mr. Doniger, and I am going to just respond to your last
comment. I just disagree. We had a senior trade rep from China
that Chairman Boucher sat with. Twice he was asked, and never
really answered the question, would the Chinese go into a
mandatory international cap-and-trade program. Chairman Boucher
asked it, another member from the other side of the aisle asked
it. He basically said no. So the country that sends us tainted
toys, we have problems with intellectual property,
disagreement, I think we are kidding ourselves if we think they
are going to all of a sudden say yes because their basic
response is, hey, listen, you had 200 years to develop--this
was his response. You had 200 years of using a carbon-based
system to become the major power in the world today, and now it
is our turn. I am going to have some questions for some other
folks. There are some points I want to make.
The second to Mr. Slattery, and I appreciate that part of
this was notes based upon your testimony. I mean, I just want
to respond to the--but the question was, having heard that from
the Chinese official, what is your response based upon your
proposal that says, hey, you know, we can have these
performance standards.
Mr. Slattery. Several things. First of all, you know, I am
one of these trust-but-verify people, and you know, when I look
at this whole situation, there has been talk here, for example,
about clean technology. How can we incentivize the Chinese, the
largest steel producers in the world, the second-largest
importer of steel into the United States, to responsibly
address this problem? I would suggest to you that with
performance standards and telling them if you want access to
this market, then you are going to produce a product with a
certain carbon footprint that is going to be applied uniformly
to domestic and all foreign competitors. If we say that to the
Chinese and tell them right now that this is coming in a few
years, whatever you all ultimately decide to do, then what will
the Chinese response be? I would suggest to you that we have
incentivized them to install the best technology available and
not the cheapest and the dirtiest that can, you know, maybe
meet their urgent demand for supply, but rather to put in place
the cleanest and the best so that the products produced there
will have access to the U.S. market.
Mr. Shimkus. If I can, I think that is a good summation. I
want to move to Mr. Wenk for a second because of his testimony
because you also talked about other provisions especially with
our obligations under NAFTA, of current political debate these
days. And I would say that that even makes a more interesting
question with the trade issues based upon this proposal and the
other issues of whatever the carbon regime we put in. Can you
talk about trade aspects?
Mr. Wenk. Thank you, Congressman. You know, there obviously
has been a lot of focus on the white paper and in this hearing
today about the WTO aspects of any possible climate change
legislation, but you know, there are trade implications across
the board here, Congressman. I think very close to home here
are two of our biggest trading partners, Canada and Mexico, our
NAFTA trading partners. And you know, in 2007, they exported
$113 billion of raw materials to the United States. And I think
a real fundamental question of any cap-and-trade program is how
this would impact possibly our NAFTA obligations, and I think
that these are things that need to be looked into a little bit
more. But I think we cannot overlook the fact that, sure, there
are WTO obligations that we need to be certain cognizant of,
but there are also NAFTA obligations. And if there were some
sort of cap-and-trade program, there may be give a special pass
to Canada because they signed onto Kyoto and they maybe met
some of their commitments. But then the question becomes about
Mexico perhaps. So I think there are some real questions even
closer to home here with Mexico and Canada and our NAFTA
obligations.
Mr. Shimkus. And let me just finish and go across to the
whole board, and if you want to add, depending on the
Chairman's discretion, we have got two proposals. We have got a
cap-and-trade, we have got this performance standard. Chairman
Dingell had mentioned earlier in this Congress last year about
not fooling the public that there would be no cost to be paid,
based upon whatever regime we go. Why not be just clear and
above-board that we are going to enact a carbon tax?
Mr. Morris. Gosh, I have got so many great answers for all
these other questions. To the last question that you asked
before that and I will try to get to that issue, the IBEW-AEP
proposal would work perfectly for the Chinese, even if they do
not want to participate. We would find out that they do not
have a comparable program, and a ton of steel would have a
carbon allocation cost to it; and if that were $10 a ton, the
importer would pay it. So if Ford Motors is buying steel from
them, Ford would pay $10 and put them on exactly the same
footing as Nucor selling steel to Ford.
But to your question, if we have a tax, China surely is not
going to put a tax on their people; and that would just simply
add cost to the U.S. market price. Chairman Dingell is exactly
right, and you addressed the same question. There is a societal
cost associated with CO2 capture, storage, control,
whether you go to natural gas as your fuel source, whether you
go to solar or wind, however we address this issue, there is a
cost. And we as an industry, we as a company, have been trying
to be extremely honest about that. And the more we understand
that, society will make a decision whether they believe that
cost is acceptable versus the cost of the potential long-term
impact on the environment. But we should never be blind to the
notion that these are all free goods. They are not.
Mr. Shimkus. Mr. Chairman, I know my time has expired. It
is a big panel. I will just yield back and we will follow up
with the next round.
Mr. Boucher. Thank you very much, Mr. Shimkus. Let me
apologize to the gentlelady from Wisconsin for shortening her
time. There was in fact time remaining on the clock, although
from the vantage point of the Chair, it appeared that the light
was red. And there was considerable discussion behind this dais
about whether the problem was a clock malfunction or a Chairman
malfunction. However it was, there was a malfunction. And we
will add to the gentlelady's time for the next round, the time
by which her questioning was foreshortened.
The gentleman from Utah, Mr. Matheson, is recognized for a
total of 8 minutes.
Mr. Matheson. Well, thank you, Mr. Chairman. I appreciate
the witnesses' testimony. I think this is a very complicated
issue of which I think we are all still trying to get our arms
around. I have a series of questions that I want to ask the
panel.
Mr. Slattery, in your testimony, you state the products of
energy-intensive industries like steel, whether domestically
produced or imported, must be subject to the same requirements
starting at the same time with no exceptions and no discretion.
If Congress adopts a mandatory cap-and-trade program, do you
support having that mandatory cap applied to all sectors of the
economy? Does your proposal exempt steel from what would be an
economy-wide cap or is the steel industry willing to live with
the domestic cap-and-trade system in addition to the
performance standard for goods manufactured overseas?
Mr. Slattery. Congressman, first of all, as I indicated in
my oral testimony, the industry as you might imagine has some
serious concerns about how a cap-and-trade system would be
implemented; and the devil is in the details, to make a long
story real short. Now, very specifically, as I tried to
indicate earlier, the steel industry is sort of two-pronged, it
is the EAF, electric arc furnace operation, and the BOF
integrated operation. They are interdependent. The EAFs cannot
exist without the BOFs, and they each have unique problems. So
for example, on the BOF side, you have process gas problems
that have to be addressed. It is an unavoidable emission. On
the electric arc furnace operation, we have a horrible upstream
indirect emission problem related to the cost of electricity.
And you know, if you put this operation under a cap, you have
to make sure that there is adequate allowances for, and I will
just speak specifically about the electric arc furnace side of
it because if you do not have adequate allowances, then what
happens is in some cases you may have electricity rates going
up by maybe 50 percent if you are to believe what has been said
by the president of Duke Energy. Then how does our industry
respond to that when 10 to 20 percent of our inputs are
electricity.
Mr. Matheson. So you are saying----
Mr. Slattery. So give us adequate allowances----
Mr. Matheson. So you are not categorically saying no to the
cap, you want to know how it is structured?
Mr. Slattery. We want to know how it is structured and we
want to be a participant in solving this problem is what I am
here to say.
Mr. Matheson. Under your proposal, would we need to have
domestic performance standard as well to make it work? Because
we have heard some interested parties believe that you would
need to have a domestic standard and that such a process would
be duplicative. Can you comment on that?
Mr. Slattery. The way we see this, the performance standard
is the part of it that is designed to achieve what we call
global reach. In other words, how do we incentivize our global
competitors to get in the game and help us solve a global
problem. How do we do that? And we contend that with
performance standards that are enforceable by American industry
that you will have in place the tools that you need to most
strongly incentivize the kind of activity that you want.
Mr. Matheson. It would be the same whether it was foreign
or domestic?
Mr. Slattery. That is correct. That is correct.
Mr. Matheson. Let me ask you----
Mr. Slattery. All of the players have to be treated the
same.
Mr. Matheson. Does your proposal apply to unfinished
commodities such as cement and aluminum and steel? Is that a
correct statement?
Mr. Slattery. I am not here representing those industries,
but the concept of performance standards in our opinion----
Mr. Matheson. Is for unfinished commodities?
Mr. Slattery [continuing]. Would be applicable to other
energy-intensive business products.
Mr. Matheson. So how do we do with having imports of
finished products that could come in? Would that avoid carbon
restrictions if I am bringing in a finished product as opposed
to just raw steel or how would we deal with that?
Mr. Slattery. In the first instance we would be dealing
with the raw material, but ultimately it would be applied to
the finished products, too.
Mr. Matheson. Let me shift to the boarder adjustment
proposal, Mr. Morris. Your proposal would require countries
that are large emitters of greenhouse gases to purchase enough
international allowances to cover the emissions producer and
manufacturing. In order to meet fairness concerns that may be
raised by the WTO, should this proposal apply to all greenhouse
gas emitters that fail to take comparable action to reduce
greenhouse gases as the United States has done as opposed to
just being applied to large emitters?
Mr. Morris. There is a de minimus exclusion that is
required under the WTO, so you would be going after the large
manufacturing competing countries that have industries that
have large carbon footprints associated with them. So that
would be the target of what you would do.
Mr. Matheson. I am sure you know that in some countries
that are developing where we import products that are energy-
intensive, their manufacturing sectors are receiving subsidies
from the government. How does your proposal prevent or stop
other nations from subsidizing the cost of these international
carbon allowances?
Mr. Morris. The importing agent would pay the carbon
allowance. So again, if the buyer of the product manufactured
were Mike's Concrete Company, I would have paid the cement
manufacturer to import that cement into the country before I
turn the cement into concrete. So whether or not they then
would lower the price, there is no way for us to control that.
Mr. Matheson. And you are talking about these allowances,
there is an unlimited capacity for allowances for employment--
--
Mr. Morris. They would be created by the office of the
president or the independent agency which you would write into
the law that would be responsible for determining the
comparability of another country's program and the actual
process that one would go through to do that.
Mr. Matheson. Since the ultimate goal is to reduce global
greenhouse gas emissions, what I am hearing is your proposal
helps create a leveling of the economics of this if we place
restrictions on this country, making higher cost to produce
something to meet carbon restrictions. We are going to say, OK,
if you are importing something, you have got to buy allowances.
The importer does so on an equal playing field. I am trying to
get my arms around how that is going to result in other
countries actually lowering actual greenhouse gas emissions.
Mr. Morris. The hope would be that they would implement a
comparable cap-and-trade program in the housed country so that
they would not have to pay the import allowance as they came
into this country. That is the notion of our carrot side of our
program because to the point that was made by Mr. Doniger, if
in fact from Bali we get the impression, and I am not certain I
buy that yet, but we at least heard some very different
statements by a number of countries, it would encourage them to
do that. They have an opportunity to join in this addressing of
a global issue. Should they choose not to do that, then they
are going to have to pay an allowance, and it will have an
impact on their cost production.
Mr. Matheson. If I can restate that to make sure I
understand, your proposal is assuming that there is going to be
an effort to get a cap-and-trade type program in these other
countries?
Mr. Morris. That would surely be our hope. I mean, if we
are going to handle this in a global sense, we have to have
global partners. We constantly hear those kinds of
conversations, but yet we have not seen that kind of action.
Mr. Matheson. I got less than a minute. Let me ask a
broader question for this round. It seems like a lot of this is
predicated on the notion that the United States is the great
consumer in the world and that we consume so much, we can help
drive policies elsewhere because we are the market where
everyone wants to sell their goods, and yet we are basing a
global economic circumstance where greater consumption is
taking place elsewhere. We were told the new steel production
and cement production in China is really for internal
consumption. So at the end of the day, is the access to U.S.
markets the great carrot if you will that we hope it is that we
hope to influence all these other countries to do this? I
question if these other countries are going to feel motivated
by that or if they are just going to go sell their products
elsewhere.
Mr. Morris. They might well do that, but what we are trying
to say is we are creating a law in the United States that will
affect the United States manufacturing cost in the United
States companies and jobs. We are only trying to create
something that tries to put some equality and balance in it.
Mr. Matheson. Mr. Doniger, do you have a----
Mr. Doniger. Thanks, Congressman, good question. We cannot
get there if the Chinese, the Indians, the South Africans, and
so on do not want to get there. They are coming to want to get
there because they are seeing impacts in their own countries,
they are seeing how it all knits together, the same as we are.
And I do not think we are going to get the economy-wide cap-
and-trade programs in those countries in one fell swoop. But we
could get to agreements for their electricity sectors,
agreements for their steel sectors, agreements for cement. We
have a 150-year head start on developing the information
systems to know the emissions of Mr. Morris' company and Mr.
Slattery's clients every day. The Chinese do not have that yet.
They are building that. They can move forward in these key
sectors, and that is where most of the emissions problems are
and that is where most of the competitive problems are.
Mr. Matheson. Thank you, Mr. Chairman.
Mr. Boucher. Thank you very much, Mr. Matheson. The
gentleman from Pennsylvania, Mr. Doyle, is recognized for 5
minutes.
Mr. Doyle. Thank you, Mr. Chairman. Mr. Morris, in your
testimony you stated that there should be an appropriate
allocation of allowances at no cost to the electric power
sector in order to blunt the otherwise inevitable electricity
price spikes. In your estimate, what do you believe the range
will be in your territory and how long do you estimate you will
need these no-cost allowances in order to prevent these spikes?
Mr. Morris. The contemplation on an allocation of
allowances to the electric industry is really a mirrored image
of what this Committee did in 1970, 1977, and 1990 and the
socks and knocks undertaking. The contemplation is that those
allowances would be monetized and that that capital would be
used to add the equipment or build the new power production
facility that our colleague from Illinois clearly pointed out
needed to be done in the future. So just as we have done in the
Clean Air Acts before, you would step those allowances down
over time.
If you simply do not do that and you have an auction, and
who really are the proponents of an auction, Goldman-Sachs, all
the New York banks, if you buy them for $20, I submit they do
not intend to sell them for $5. So you know, that to me is just
a profit motive, where ours is an implementation of technology
to make certain that we in fact do respond to the cap-and-trade
program that we feel strongly ought to be implemented.
To your specific question, American Electric and Power is
the lowest cost energy provider in the 11 states where we do
business with our 5.1 million customers. I would expect this
could have an impact of 20 to 30 percent on that rate
structure; but again, as I said to the Congressman from
Illinois, this is a societal decision that needs to be made by
the voters of this country, and you are in the process of doing
that now. And if this country decides that these are acceptable
costs, then that is exactly the way it will unfold. So I do not
think we should run from this because we think it is costly,
but I surely do not think we should live in a make-believe
world that this is a free move.
Mr. Doyle. Thank you, and I want to compliment you and your
company for taking a stand in support of a cap-and-trade
system. You know, one of the concerns we have heard about your
proposal is that other nations can get around it due to the
fact that these countries simply do not follow fair trade
practices. An example, in China where the steel companies there
produce steel at an artificial price because the government,
you know, supports it. How can we add to your proposal in order
to address some of the concerns that people have in that
regard?
Mr. Morris. At the point of importation to the United
States, the importer is going to pay that fee. And that will
equalize to a producer of steel or a producer of cement or a
producer of aluminum at least this one subset of what is going
on. There is no way in the world a cap-and-trade law passed by
this Congress and signed by this President will be able to
affect the safety programs in China, the wages that are paid in
India, the overall cleanliness of how they go about doing those
issues; but as to this subissue, we think what we have put
together here is a very appropriate way to do it. And again, as
I said before, if someone has a great idea to add to that
value, we would be the first to support it. We are only trying
to address the issue. It is mobile and we want to be sure that
in the implementation of a cap-and-trade program in this
country, we do not inadvertently put a huge burden on our
manufacturing customers when the companies that they compete
with worldwide do not have that same point.
Mr. Doyle. Thank you.
Mr. Morris. So as to that subissue, I think we have
addressed it as to the larger issue. We cannot make them pay
$80 an hour for labor. We just cannot.
Mr. Doyle. Thank you. Mr. Doniger, one of the thoughts I
have been sharing with the environmental community that most of
us, and I believe the majority in Congress, agree with this
goal of reducing emissions 60 to 80 percent by the year 2050.
The argument now is how do we get there? And I do not think
there is any silver bullet. I think we need to put everything
on the table.
In your viewpoint, are the performance standards that you
heard outlined today by Mr. Slattery, is this something we
should consider as long as they are under the tent of an
economy-wide cap-and-trade system or is this something that you
are just dismissing outright and what other aspects of the
proposal could you and others in the environmental community
support?
Mr. Doniger. Mr. Doyle, we do support performance
standards, as you said, under the tent of the cap. It is very
important to have performance standards, especially where
through them you can achieve cost-effective reductions even
faster, or with a lower carbon price signal than you would have
to have without the performance standard. So they complement
each other, and they are very important.
I do think you have to allow for the fact in any of these
proposals that developing countries are going to come along,
but they are not going to do the same thing at the same time we
do. And so it is a relationship that we need to develop.
I will give you the example of the phase-out of ozone-
depleting chemicals, the most effective international agreement
we ever had, the Montreal Protocol. The developed countries
went first, the developed countries offered some assistance to
developing countries, and the developing countries are phasing
out on a 10 year delayed timeline. The whole thing is working.
We have eliminated more than 85 percent, 90 percent of the
ozone-depleting chemicals all around the world in developed and
developing countries. And China and India are full parties to
that, and they have binding limits on their fluorocarbon
industries, just like we do here, it is just staged a bit in
time. And that I think is a model that can work, and it is a
model that they have played as full partners in for 20 years.
Mr. Doyle. Mr. Chairman, if my color vision is correct, I
think I am in the red, so I will yield back.
Mr. Boucher. Thank you very much, Mr. Doyle. Let me pursue
some additional inquiries with our panel this afternoon. Mr.
Morris, your proposal has received probably the most commentary
since it was announced earlier, at an early point last year in
fact; and one of the comments that has been made about it is
that in order to obtain the maximum potential for WTO-
compliance, there would be a lag time required of maybe as much
as 8 years during which time there would be an effort made to
enter into agreements among a number of nations, multilateral
agreements, that could lead to a finding of WTO-compliance. And
a critique of your proposal is that that is a pretty long time,
and I think in fact some of the members on this panel raised
that issue when they were making comments about that approach.
So my question to you is, is there some way that that long
period of as much as 8 years could be lessened and still not
weaken the potential that your proposal would pass WTO muster?
Mr. Morris. Clearly as this contemplation went through the
process of trying to pick a timeline that you would have to be
out in the world negotiating to be WTO-compliant, it was the
contemplation that a law, if passed in 2009, would not be
through the regulatory process until maybe 2013, and then you
would have 3 or 4 years to work this out which would take you
out to 2017 or 2018. Inadvertently, someone said, well, let us
then pick 2020. So the timeline could easily be collapsed. And
to my friend, I think Mr. Slattery said that is the one thing
that is unacceptable about the AEP program is the timeline, and
China would do whatever they would do during the period. That
simply is fixable, and you could begin the bilateral
negotiations while the EPA or DOE or whomever would have the
responsibility of crafting the program. Remember, there is no
way to pass legislation tomorrow and have implementation 2 days
later. It will take some time to get that done. It would be
during that period that you would do it. And again, I think
there was a proposal down the table that you might see WTO
clearance, and I do not know whether or not the WTO court in
Geneva offers opinions of a design as to being compliant or
not. It may well be, but they only react to complaints and that
is something obviously we can submit to you in a written
answer. But you could easily collapse the timeline. And if that
is the only deficiency in our concept, we could fix that
without much difficulty.
Mr. Boucher. You are saying the WTO might not render
declaratory judgments.
Mr. Morris. That is true.
Mr. Boucher. Mr. Hufbauer, your hand is raised. Do you have
a comment?
Mr. Hufbauer. Mr. Chairman, yes, the WTO does not render
declaratory judgments but what I had in mind was that the
United States should start now, not in 3 years, not in 5 years,
but now, under this Administration, to begin to negotiate a WTO
code which clarifies the green space for GHG measures--
including cap-and-trade, performance standards, and so forth--
that can be imposed. I do not think those clarifications will
come out of Kyoto II, which will not take effect until 2012. So
we should start in the WTO right now. Maybe no one is willing
to negotiate with us, but we should go forward and make the
effort.
If you have a chance, or your staff has a chance, to read
the testimony I submitted--which just scratches the surface--
you will find a lot of ambiguity in the current WTO articles
and decisions. If we decide as a nation, and if other nations
do the same, that what we are going to do is just litigate
differences over the next years, that means 10 years at least
of litigation. Great for the lawyers, but not so great for the
carbon control system. So we should go forward sooner with a
new WTO code that designs some space for the kinds of systems
which are being advocated and discussed today and including
other systems because other countries will have different
approaches.
Now, if I could just borrow on your forgiveness for about
30 seconds more, one problem that I have--which has not been
discussed today--with both the performance and the cap-and-
trade systems is that the promoters of these have not
specifically said that a firm based in India or based in China
which meets our standards should not be penalized. In other
words, we should not attribute that firm with country averages
which are very poorly calculated and might be inappropriate for
individual firms in those countries.
Mr. Boucher. Well, that is an excellent point. My sense was
that that concept was inherent essentially in both proposals.
Mr. Slattery, would you care to comment----
Mr. Slattery. Very specifically. We clearly contemplate
facility type performance standards, and that is possible.
Mr. Boucher. Mr. Slattery, let me ask you. I was pleased to
hear you say that your proposal could be modified to convert
what is a carbon intensity standard into a firm cap, and you
said you would like to obviously be a part of the discussion in
which that modification is made, but you held open the
possibility that could happen. I think that is an important
statement and an important step. In the initial question that I
asked you some time ago, I suggested that you might want to
consider some way to meld the AEP IBEW proposal to your
manufacturing standard proposal and had asked if you had some
suggestions on how that might be done. Would you like to
elaborate on that at this point or is that something you would
like to give extended consideration to and supply a written
document to us?
Mr. Slattery. I would be happy to accommodate the Chairman
and the Committee in any way possible, and let me just say that
I can comment briefly right now on that point. Mr. Morris and I
have already discussed the idea of us getting together and
visiting extensively about this and understanding precisely how
we might be able to come to the Committee with a proposal that
would achieve what you have just asked.
As I said earlier, I do not see anything inconsistent with
performance standards and the vision that Mr. Morris has
outlined with respect to what we call the AEP IBEW proposal. It
is not inconsistent. And we believe that the performance
standards are sort of in addition to, if you will. And again, I
have already elaborated on why we believe these performance
standards are important. In our judgment, you can clearly do
both. Again, our major concern about the IBEW-AEP proposal is
that it does not go far enough. We are very concerned about a
future administration vigorously enforcing it, making the
judgments that have to be made to trigger it, and we are also,
as a very practical matter, very troubled by the fact that our
competitors, for example in China, are state-owned, they have
access to state-owned energy that is subsidized; and when you
talk about them being required to pony up allowances to access
our market, the immediate question is, who is going to buy
those allowances----
Mr. Boucher. Well, with all due respect, you are going to
have that problem with your standard approach also. I mean,
that is a condition that we face, and it is going to have to be
a part of every consideration we make concerning participation
by China and other developing countries.
Well, my time has expired. Let me simply encourage the two
of you perhaps to have the conversation that you mentioned and
to the extent that you can make a proposal to us, that marries
the better aspects of both your proposals. That would be very
welcome.
Mr. Upton for 5 minutes.
Mr. Upton. Thank you, Mr. Chairman. I want to follow up
with Mr. Morris as I did with Jim on the last round. We know
that China's use of coal, and the world has grown from 20
percent to about 30 percent now and it is expected to get to
use 40 percent of the world's coal in the next 15 years or so,
we know that China's emissions have grown by 80 percent since
1990 and they are expected to grow another 65 percent by the
year 2020. You were quoted in last week's National Journal as
saying China is going to keep building coal plants, India is
going to keep building coal plants, the United States is going
to keep building coal plants, this is an electrified world and
I do not see it de-electrify. I have been to U.S. coal plants.
I have not been to any of China's. My sense is that our
emissions work and certainly the money that the utilities have
spent on it is far greater than what we see in China. You will
know that answer better than me, but I hope to some time see
that answer myself, along with Chairman Boucher. But my
question to you is as we look to last year, 2007, utility
companies have abandoned plans to build at least 30 new coal
plants. I read this weekend that I guess the Sierra Club has
announced that they are going to fight every single coal plant
anywhere in the United States to stop it from happening. So
would you say that the cutback in coal generation which is
happening now as it relates to this last year will result in
higher costs for consumers here, possible electric shortages in
the near future. I think I saw in that same article in National
Journal you thought we would have real severe energy shortages
as early as 2012, 2015, and does that put us at a real
competitive disadvantage for the U.S. industry, and then how
does that all relate to what may happen under a cap-and-trade,
knowing full well that again, like we have seen with the steel
industry where they emit so much more carbon per ton of steel
produced, my sense is that they are way ahead in terms of
carbon emissions as it relates to their coal production, too.
Mr. Morris. That is a far- and wide-ranging question----
Mr. Upton. I know.
Mr. Morris [continuing]. And I will do my best to answer it
in the time allotted to you and me. The fact of the matter is
it is very difficult to gather information on what China is or
is not doing. I am led to believe by some of the suppliers that
last year they added 70,000 megawatts of coal-fired generation
to their fleet of production, and they are using what we call
super-critical technology which is one notch below what
American Electric and Power is proposing in our newest stations
which would be ultra-super-critical, something that the Germans
and the Japanese are also working on. And again, the concept
there, Congressman, there is higher pressure, higher steam,
less coal consumed for more megawatts out-reduces the carbon
footprint. So they are moving in the right direction and in
fact retiring some of their oldest and dirtiest plants in that
process. So I think some of that is good news. But the fact of
the matter is what I said before, particularly as to your
question about the Sierra Club, is that we as a nation, to the
comments made by Mr. Shimkus of Illinois, need to build some
new power plants that operate 24 hours a day, 7 days a week.
And those really do need to be fueled by either clean coal
technology, and I do not agree with Mr. Reid of the Senate that
there is no such phraseology. There is improved coal
technology, and we will bring that forward as a company and as
an industry, or new nuclear which I think is another perfect
answer to that question. And so the point of coal plants
falling off-line today may well lead us to a South African
challenge, and I think we are all aware that South Africa has
run out of base load capacity. They shut down various
industries 2 or 3 days a week. Their 2008 financial forecast
has gone from a 6 percent GDP to about a 1\1/2\ GDP. That is
the future I am afraid we are looking at.
Now, you have asked a very important question on top of
that. If we were to do a cap-and-trade program and we implement
it over a series of years, I have said this now about seven
times, it will only be if society realizes that those costs are
equal to the challenge of leaving behind a planet for our
children and grandchildren that we as a nation and we as
generations can be proud of. I think that this country is
moving in that direction. And in this industry, my company in
particular, there is not among the investor in utilities anyone
who is saying just say no. What we are all saying is let us be
honest about the timeline, let us be honest about the costs,
let us be honest about the technology that will need to be
developed. It is there in the lab and it is being upgraded to
field conditions, but let us be realistic about what we are
facing here.
Mr. Upton. My time has expired so I will yield back to the
Madam Chair.
Ms. Baldwin [presiding]. Thank you. I think in our second
round it comes to me now, so I will recognize myself for some
follow up.
As I was last questioning Mr. Doniger, I did want to give
Mr. Slattery a brief chance to respond. You did already address
some of the issues with the discussion of performance
standards, but in your testimony, you indicate that China,
India, Brazil have huge incentives not to limit their
greenhouse gas emissions because it gives their products a
powerful competitive edge in international commerce. And it is
kind of interesting that China has indeed imposed the export
tariff. I wonder if you want to comment on that in light of
your testimony on page 13 but also what is the expected effect
in the international steel industry of this tariff and
hopefully briefly because I do have some questions for Mr.
Morgenstern who I think has been eager to talk. Mr. Slattery
first.
Mr. Slattery. The long and short of it is that the Chinese
are currently the largest exporter in the world. The tariff
that they have put in place really does not have any effect on
this question that we are talking about here today. And my
comments were really more focused on the domestic reality. In
other words, if we impose additional cost on the domestic
industry, either direct cost or indirect cost, with the
increase in the cost of electricity that Mr. Morris has
referred to, that profoundly affects the competitive position
of the U.S. industry globally. And I just want the Committee to
be aware of that. We cannot ignore that. If the Chinese and
others, but particularly the Chinese, are in a position where
as I have already indicated to you they have state-owned energy
sources available to them at below market prices, subsidized
energy available to them, they have state ownership, and you
can imagine if you are in the United States trying to compete
with this when you realize that they also have access to global
capital, the same global capital that we struggle for and they
have access to state-of-the-art new technology that we are all
struggling for, and I would say in that context, if we say to
the Chinese, put in place state-of-the-art technology that is
going to get the carbon intensity, the carbon content of the
products that you wish to ship to the United States at the
lowest possible level, then we will encourage them to employ
that state-of-the-art technology.
Ms. Baldwin. According to your testimony, Mr. Morgenstern,
obviously cap-and-trade systems are broad, market based
strategies that offer significant cost and efficiency
advantages, but you seem to say that those advantages are
eroded with every carve out exemption or special treatment
Congress might offer to a particular industry or constituency.
And your testimony describes that protecting these vulnerable
firms could result in weaker program targets or partial or full
exemptions from carbon policy among others. I know that you
have mentioned some of the industries that we might expect to
hear from in terms of asserting that they are vulnerable and
asking for particular consideration as we put this legislation
together. So I would just ask you what other industries are
going to be coming to Congress claiming that we must ease the
burden because they are vulnerable, and if we do, what is the
total result going to be of industry after industry coming to
us in terms of an effective program for greenhouse gas
emissions? Your testimony sort of talks about all the things
that might be done starting on page 5, but I would like to hear
a little bit more about what the consequence will be.
Mr. Morgenstern. Thank you, Madam Chairman, for the
question. I had the opportunity to serve in the Clinton
Administration as a lead official at the EPA at the time on the
BTU tax, and frankly, it was a horrible experience because
every industry that you can imagine came knocking on our door
and every industry made claims. Many of them were clearly valid
claims but for others it was not so clear, and frankly, at that
time, the government had very little capacity to distinguish
the valid from the not-so-valid claims. This is potentially a
huge problem. Once you start walking down this road, the
potential for a lot of special provisions and a lot of special
hardships to come to you or to an agency that you would
delegate to make these decisions is enormous. So I think you
have to be very careful about it. Part of the answer to your
question is that you would need to establish a fairly rigorous
process which, I presume, would be delegated to an executive
branch agency. EPA or DOE have been mentioned as obvious
candidates. You would also need to establish some criteria for
the agency to follow, ideally criteria that could be tied to
transparent, readily measurable factors. With such a process,
there is a high potential for the system to fail.
Another point I was going to make is that the process of
setting the standards that are being discussed by Mr. Morris
and Mr. Slattery is probably going to be pretty difficult for
the government to do because they have to obtain credible
information not just from the domestic industries, but also
from foreign companies operating abroad. And I think that would
be quite difficult. To expect that to happen very quickly is
unrealistic. That is why I brought up the idea of a transition
period wherein you allow some accommodation for the affected
industries which would phase out once other countries acted to
reduce their emissions or trade sanctions were in fact imposed.
Ms. Baldwin. Next I would recognize Mr. Matheson.
Mr. Matheson. Well, thank you, Madam Chair. I think an
issue that is going to have to be addressed regardless of any
of these options that is pursued is going to be how we can
ensure that, whether it is in either Mr. Slattery's or Mr.
Morris' proposal, how do we ensure that performance standards
are being met or how do we account for this and have an
accountable system where one is really playing by the rules?
Mr. Slattery. That is a very, very important question, and
we contend that the best way to do that is to permit individual
companies in this country to have an actionable cause of action
and do it several ways. I mean, you could do it from RICO, you
could do it through trade law provisions, but the important
thing is to empower U.S. industry, U.S. injured parties to
enforce the standards and do what you do now with a
countervailing duty case or anti-dumping case. I mean, that is
a model, that is a way, maybe not the only way but it is
certainly a way.
Mr. Morris. And again, I think that is why the IBEW-AEP
proposal is a little more robust because the contemplation
would be the creation of either the president having the
responsibility and obviously with some delegation or the EPA or
someone else would make an evaluation government-to-government
of whether or not they have a comparable program; and if in
fact they did, then they would not--and this is not to be
confused with the border techs. I know we keep calling that but
it really is an international reserve allowance that is paid by
the importer of the product that did not have a comparable
program. And that really I think is the better way to go about
doing it because then you get it above an industry. I would be
the first one to complain that country X is making a megawatt
hour of electricity in a different form than I am, and that is
wrong. But that would take me forever. And I need to be back
home making the most cost-effective electricity I can for my
customers. However, if the government were deciding whether or
not Brazil's program was up to the standards that were
required, I think that would be a very important way to do it.
Mr. Slattery. This is a very, very important issue that you
are targeting on here because, you know, It is a little bit
like in the trade world, if you bring what we call a safeguard
action, a Section 201 case, and if you pursue that through the
International Trade Commission, the International Trade
Commission might conclude, yes, you have sustained serious
injury as a result of these imports. And then you go to the
White House, and the White House ultimately makes the
determination as to what remedy is going to be employed to
correct the serious injury. The President only has broad
authority, can do zero, nothing. And I can tell you that for
those individuals that have pursued a remedy and got to the
White House and incurred the horrible cost involved in
litigating something like this and then to have no remedy
available, it is enormously frustrating. And that is why there
needs to be real, tough measures available to injured
individuals in this country who are complying with the
standards you put in place and doing it at great cost and then
to permit others to not comply with the standard is totally
unacceptable. You have to have real enforcement mechanisms.
Mr. Matheson. And I would suggest that applies to any
effort we are going to do, any international agreement or
whatnot. I mean, the ultimate goal is to reduce greenhouse gas
emissions. Again, there is this accountability component we all
have to----
Mr. Slattery. Absolutely. Huge.
Mr. Matheson [continuing]. Get our arms around. OK.
Mr. Slattery. Thank you for raising it.
Mr. Matheson. Thanks, Madam Chair. I yield back.
Ms. Baldwin. Mr. Doyle is recognized for the second round.
Mr. Doyle. Thank you very much. I wasn't going to stay for
a second round but my friend, Ed Markey, came in the room and
made a statement that he was here to add balance to the hearing
which I wonder what that comment was about the rest of us
sitting up here. And now he is sitting next to Mr. Inslee, so I
think I better stay anyway before I yield to those two.
I just have a quick question. It is more of a curiosity for
Mr. Wenk from the Chamber. Does the U.S. Chamber of Commerce
have an official stated position on global warming? Do you guys
believe it exists or what is your position on that?
Mr. Wenk. Thank you very much, Congressman. You know, as I
said in my testimony, I am providing a trade perspective on
this issue so I am not the energy and environment guy that we
have at the Chamber, but you know, the Chamber has provided all
sorts of correspondence to the hill last year, March 19th, to
Mr. Dingell and Mr. Boucher, last April to Mr. Barton and Mr.
Hastert, outlining our concerns and priorities with the
legislation that was about to----
Mr. Doyle. I know that. I am just curious. Does the Chamber
have a position on whether or not global warming is a problem?
I mean, do you think it is a problem you think we should be
doing something about? Yes or no.
Mr. Wenk. We absolutely do, Congressman----
Mr. Doyle. Oh, good.
Mr. Wenk [continuing]. And as Mr. Upton actually said in
his opening statement, we have set some guidelines that we
think should be looked at in terms of putting together any
legislation on this issue, preserving American jobs and the
economy; be international in scope; incentivize and accelerate
technology research, development, and employment; reduce
barriers to the introduction of that technology to all nations;
and promote energy efficiency.
Mr. Doyle. OK. My curiosity has been satisfied. With that I
will yield to my good friends, Mr. Markey and Mr. Inslee, for
their thought-provoking questions.
Ms. Baldwin. The Chair recognizes Mr. Markey for 5 minutes.
Mr. Markey. I thank the Chair, and I thank the gentleman
from Pennsylvania. There is a natural, psychological adjustment
all of us are going to have to make after last night as
Pennsylvania now becomes the center of the political universe
for the next several weeks. And I appreciate the slight
adjustment that we all have to make now to Secretary Doyle. So
I do not know which agency it will be, so we are all going to
have to be much more deferential at least for 7 weeks. I thank
you for yielding.
Mr. Morgenstern, there is much talk about cost containment.
Will regulating some sectors through performance standards
rather than including them in a cap-and-trade system as Nucor
is proposing increase or decrease the total cost to society of
reaching a concrete emissions target?
Mr. Morgenstern. Increase.
Mr. Markey. Increase. Thank you. Does anyone disagree with
that? Thank you. Mr. Morgenstern, I agree with many of the----
Mr. Slattery. Would you mind reasking that question?
Mr. Markey. It is great to have you back. It is like hall
of fame weekend having you. Second, I agree with many of the
witnesses today that the United States must create incentives
for global warming and encourage other countries to follow our
footsteps. In the meantime, we can and should also develop
provisions to prevent the leakage of jobs or emissions before
international action is assured.
Many industries, Mr. Morgenstern, are going to come to us
and say that they are going to be severely impacted through
this climate legislation. Can you help us sort out who will be
industries most and least impacted?
Mr. Morgenstern. Mr. Chairman, I have been working on that
problem, and in my submission I listed a number of them. I also
have some papers that I would be happy to----
Mr. Markey. Can you give us like a top five in each
category?
Mr. Morgenstern. Sure, top five. Let me read from my
testimony, Mr. Chairman, so I do not misstate it. The top five
that are likely to be impacted in terms of the cost impact are
going to be refining, non-metal mineral products, primary
metals, and paper and printing. Of course some of these
industries are going to be able to pass forward the added costs
onto their customers, and so you really have to think about two
components, the added energy costs along with their ability to
pass it along.
Mr. Markey. And which industries will not be impacted,
although they are protesting they will be impacted?
Mr. Morgenstern. Well, there is a long list that will not
be. Something like 80 percent will not be impacted in any
significant way. But these tend to be very small industries and
not really the ones that are in discussion on this hearing. But
energy-intensive industries are at risk, particularly the ones
that face tough import markets.
Mr. Markey. And I have to save a question for you, Jim, so
we have a balanced questioning period here. You mentioned that
you believe an intensity standard should be implemented company
by company, rather than based upon a country's average
emissions rate. Would we not risk then that a country would
sell its units, for instance to us, and sell its dirtiest steel
to other countries without performance standards, thus
resulting in no real change in their performance?
Mr. Slattery. Very good question and clearly we anticipate
that if you put in place tough performance standards
establishing very tough carbon intensity standards that it will
do several things. First, it will incentivize the Chinese and
others to employ as quickly as possible state-of-the-art
technology producing the cleanest steel as possible that will
hopefully meet the standard in the United States. Now, you are
correct they will, in all probability, internally use the
product that is needed there that may not meet the standard
that we set for export to our country. But what are we doing?
We are encouraging and incentivizing the utilization of the
best technology and we are saying to world, and hopefully the
world, and there are some indications that Europeans for
example are very interested in this idea also. So maybe we can
be a global leader in establishing this kind of a concept in
saying to the world this is the standard.
Mr. Markey. Mr. Morgenstern, can you comment on that what
the likely effect is?
Mr. Morgenstern. I am sorry, can you repeat the question
again?
Mr. Markey. I have to in balance not repeat the question
because I did not do so earlier. So I thank the Chair, and I
yield back the balance of my time.
Ms. Baldwin. The gentleman from Washington, Mr. Inslee is
recognized for 5 minutes.
Mr. Inslee. Thank you. Jim, I think you wanted to ask the
question. Mr. Markey asked the question about if anybody
disagreed with the proposition that a performance standard
would effectively cost the rest of society, and Mr. Morgenstern
said it would. Do you have a different perspective on that?
Mr. Slattery. Well, to the extent that you increase the
cost of the product because you are requiring it to meet a
certain standard, there may be some short-term increase in the
cost of the product. But over the long term, it would be
probably de minimus. But you know, in terms of any sort of
great societal cost, you know, hopefully it won't be that
great. It certainly is not going to be near the kind of cost
that one would incur in our industry, at least in a portion of
our industry that relies so heavily on electricity. Jack the
electricity cost up 50 percent and you have dealt a competitive
devastating blow to that sector of the industry.
Mr. Doniger. Congressman, the question in my view is a
little broad because there are performance standards that are
able to capture cost-effective, cost-saving measures that are
not being done through normal market signals because of
barriers. And those are the kinds of performance standards we
want. We might not want performance standards that just plain
raise costs. So you have got to sort them out. I would like to
submit for the record a McKinsey & Company report that was done
for a number of companies and for environmental groups that
shows that between now and 2030, if we capture all the cost-
saving measures that are out there with effective policies, the
cost savings will cover the cost of the things that cost money.
In other words, the net cost of making reductions that we need
to make between now and 2030 could be near zero.
Mr. Inslee. Yeah, I think they concluded that of all the
things we need to do, 40 percent of all those things would
actually be net gains economically. Pretty impressive. Mr.
Morgenstern?
Mr. Morgenstern. Mr. Inslee, the issue is that if we let
some companies or industries reduce fewer emissions, we ignore
certain opportunities for cost-effective mitigation, then
someone else is going to have to mitigate more, at higher
overall cost. The reason I answered Mr. Markey's question the
way I did was that by adopting a two-step approach, we are
foregoing some of these low-cost emission reduction options and
they are going to be made up by someone else at higher cost.
Hence, the overall cost will be higher.
Mr. Inslee. I may misunderstand this. I thought I
understood it but maybe I do not, but if you go to a
performance standard, that would not necessarily excuse an
industry, it may increase a burden of compliance with that
industry but it would simply say competitors off-shore would
have to meet that same level of performance. So that would not
be excusing them, would it? Am I missing something?
Mr. Morgenstern. I am sorry if I used the term excused, but
I think a more precise way to say it would be that if we
allowed a standard that was not as stringent as would have been
imposed by the cap-and-trade which would presumably be the
direction that the standard would take, then the outcome that I
indicated I think would be the one.
Mr. Inslee. OK.
Mr. Slattery. If I could just insert that the U.S. steel
industry, between 1990 and 2005, has already mitigated
dramatically emissions. So in 1990, the U.S. steel industry was
responsible for 85 million metric tons of greenhouse gas
emissions. That number was dropped to 45 million metric tons in
2005. Dramatic progress, dramatic reduction in greenhouse gas
emissions on the part of this industry that today accounts for
approximately 1 percent of direct CO2 emissions in
the United States. So we contend that the steel industry today
is part of the solution and a big driver in this, even as
production was going up, I would point out, a big driver has
been the need to reduce energy consumption.
Mr. Inslee. I just got to see Mr. Morgenstern's proposal
about, I would consider, mitigation costs where if you have an
auction and then a rebate to an industry that might face
mobility issues for higher costs, and I just had the scantiest
review of it, but Jim, is there any qualitative reason why that
would not work relative as opposed to a performance standard,
or anyone who has a response to that?
Mr. Morris. Yucca Mountain.
Mr. Inslee. Pardon?
Mr. Morris. Yucca Mountain, a federal fund that would then
be reallocated out to the industry to implement technology. It
was a grand idea. We tried it once. It hasn't worked and I do
not think it would work here, either.
Mr. Inslee. Because you just don't think it would get
allocated?
Mr. Morris. Well, I think it would get into the general
fund. It would be looked at against the large balance of trade
or the large deficit in the government, and it just simply
would not come back in an appropriate way. If it did, if you
could assure that was going to happen, that might be a good way
to do it. But that is why companies like ours and many others
stand for the concept of allocating to those of us who are
going to make capital improvements, rather than waiting for the
government to get the money and then reallocate it. And I would
offer FutureGen as another perfect example of that.
Ms. Baldwin. The gentleman's time for questions has
expired. All time for questions have expired. I want to once
again thank our panel of witnesses for their opinions, their
expertise, and their generous allocation of valuable time. And
with that, this hearing is adjourned.
[Whereupon, at 2:00 p.m., the subcommittee was adjourned.]
[Material submitted for inclusion in the record follows:]
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Michael G. Morris, Answers to Submitted Questions
Question Submitted by Hon. John D. Dingell
Question 1. Your testimony of March 5, 2008, points out
that several elements of the IBEW-AEP proposal, such as which
developing nations are covered by an international allowance
requirement and how to define "comparability" of other nations'
climate regimes, could be assigned either to an independent
agency or to the President.
There are significant differences between those two
options. With an agency determination, Congress can specify
that decisions fulfilling statutory intent be made on the
record by rule. The rules for judicial review in that context
are clear. If the President, however, were given responsibility
for making such findings, the nature of any public
participation is less obvious.
Which option do you favor, why, and how do you assess the
tradeoffs?
Response: AEP assesses the tradeoffs between the two
approaches precisely as you have laid them out in your
question. However, on balance, AEP has come to believe the
preferable option of the two is to place the decision-making
authority in an independent agency or commission that is
specifically charged with the responsibility of making the
"comparable action" determinations under the international
program.
The establishment of an independent agency represents a
change of view. Since APE's appearance during the March 5
hearing of the Subcommittee on Energy and Air Quality, AEP has
continued to consult with various stakeholders, many of whom
expressed a strong preference to have the decision-making
authority for the international allowance program vested in an
independent entity whose decisions would be subject to
transparency and public participation, as well as judicial
review.
Accordingly, AEP has been persuaded that it would be
preferable to vest the decision-making authority in an
independent U.S. agency, to capture all the benefits of
transparency, public participation and judicial review, without
sacrificing efficiency and a comprehensive perspective on
global climate change. To achieve these ends, the Congress
would need to create a new independent agency that would have
the requisite expertise to handle the tasks identified in the
international allowance program.
In sum, AEP has been convinced that an independent U.S.
agency would best serve the interests of U.S. climate change
legislation in the operation of the international allowance
program. We would be pleased to work with the Committee to
develop these ideas further.
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Richard D. Morgenstern, Answers to Submitted Questions
Questions Submitted by Hon. Jay Inslee
1. If the U.S. enacts a climate policy that adds GHG
pollution to the costs of energy-intensive industries,
international competition would drive some to relocate to a
different country with a weaker climate policy. To prevent
those jobs and emissions from "leaking" out of our economy,
what criteria would you use to specifically identify the set of
firms that should receive compensation as part of the policy?
Response: The likelihood that significant segments of
energy intensive manufacturing industries would relocate abroad
in response to a price based domestic climate policy depends on
a number of factors including the carbon price itself, the
carbon intensity of the industry, the cost/feasibility of
changing production processes, and the ability to pass along
the added costs in the form of higher product prices. Of
course, the time dimension is also relevant: in the short term
there may be more limited opportunities to modify production
processes, while more options may be available over the longer
term.
Unfortunately, it is not practical for the government to
estimate precisely the vulnerability of individual industries
to these different factors, especially for narrowly defined
industrial categories. At best, we can use rough proxies such
as the industries' energy intensity and the extent of
competition it faces in international markets. In research I
have done with several of my colleagues at Resources for the
Future, we have used U.S. Commerce Department data (at the two
digit NAICS level) to identify the most energy-intensive,
trade-sensitive sectors. \1\ It is also possible to develop
some more detailed information at the more precise 6-digit
level. A careful evaluation of such information, presumably by
a federal agency with relevant technical expertise, could be
used to develop a more refined analysis of the most vulnerable
sectors.
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\1\ Morgenstern, Richard D., Joseph E. Aldy, Evan M. Herrnstadt,
Mun Ho, and William A. Pizer. 2007. "Competitiveness Impacts of Carbon
Dioxide Pricing Policies on Manufacturing, in Assessing U.S. Climate
Policy Options, (Raymond J. Kopp and William A. Pizer, editors),
Resources for the Future, Washington, D.C.
---------------------------------------------------------------------------
In carrying out such an analysis, two factors are most
critical: 1) energy costs as a percent of the industry's total
costs, and 2) the extent of international competition faced by
the industry. Since the measurement of international
competition is not always straightforward, a suitable,
transparent indicator would need to be developed. One candidate
indicator would be the value of imports from unregulated
countries (i.e., those without comparable climate policies) as
a percent of domestic production. A more comprehensive measure
would also include exports, which compete with products from
unregulated countries.
2. Can you estimate the total emissions from these sub-
sectors?
Response: Once the most vulnerable industry segments are
identified, direct CO2 emissions can be readily calculated
based on their combustion of fossil fuels. Indirect CO2
emissions from electricity use can be approximated by various
methods, depending on the fuel use by regional utilities.
(These need not be calculated for compliance, of course, as
long as the electricity sector is covered, but they can provide
a useful metric of the energy cost burden to the sector of the
climate policy, to the extent that the electricity sector is
able to fully pass its own costs.) If desired, CO2 emissions
associated with the use of non fossil fuel inputs, or the
emissions of nonCO2 gases, can also be estimated at the
facility or industry level.
3. How would you decide how much to compensate each firm?
Response: Ideally, compensation to adversely affected firms
would be sufficient to discourage the firms from moving to
nations that do not have comparable climate policies. In
practice, it is more difficult to determine the "optimal"
amount of compensation at a sector level, much less a firm
level. One approach, focusing only on firms in the most energy-
intensive, import-sensitive industries, would be to cover most
or all of the added costs associated with the new policy, at
least at the outset. These added costs should be evaluated
based on sector-specific averages or reasonable technology
benchmarks, as opposed to a firm-specific basis, to ensure a
level playing field among competitors at home. Over time, the
compensation amount could decline to reflect the opportunities
the firms would have to make new investments to lower their net
costs and/or to reflect the increased burdens on their foreign
competitors as other nations embrace comparable climate
policies.
4. Would that compensation be based on their updated
current output or their past emissions?
Response: In order to minimize windfalls and provide
incentives for firms to maintain or expand their output, a
system based on updated current output would be vastly
preferred. While such a scheme would create incentives to
expand production of carbon intensive outputs, in this case
that may be an acceptable trade-off, since foreign production
may well be more carbon intensive than the domestic production
it replaces. Basing compensation on past emissions does not
provide an incentive to maintain or expand domestic output and
it may generate windfalls to firms that reduce production but
still receive free allowances.
5. How would that compensation be delivered?
Response: In the context of a cap and trade system, the
compensation could be delivered in the form of free allocation
of allowances during a transition period. As provided in S.
2191, for example, allocations of allowances for individual
firms are updated annually on the basis of a three year moving
average of a firm's proportion of production employees within a
given industrial sector. Other metrics would also be possible,
for example, the dollar value of output or value added in the
sector. Alternatively, using similar metrics but in a system
without free allocation, one could offer rebates for
maintaining or expanding employment or output in lieu of
additional free allowances. The economic effect is basically
the same.
6. Would your proposal require a border tax adjustment in
addition to direct compensation?
Response: With the updating allocation mechanism in place
in S. 2191 energy intensive firms are receiving valuable
allowances to offset the higher costs associated with the
climate policy. Starting in 2017 there is a gradual reduction
in the allowances received, declining to zero in 2030. One
could envision a comparable phasing out of rebates in a system
without free allocation. Since in all likelihood a WTO-legal
border-tax adjustment would have to recognize the extent of the
free allocation or rebates, the size of any border tax
adjustment would likely be zero or minimal in the early years.
More generally, the larger the amount of free allocation or
rebates, the lower the allowable border-tax adjustment.
At the same time, the updated allocation or rebate performs
the function of mitigating the competitiveness impacts of a
climate policy. Thus, border adjustment is less necessary from
a carbon leakage standpoint to the extent that the updating or
rebate mechanism is in place. The trade-off between updated
allocation or rebates on the one hand and border adjustment on
the other involves several factors. One is compatibility with
WTO obligations. To what extent can WTO-compatible border-
adjustment taxes on imports fully account for the embodied
emissions? Can relief for exports be incorporated in a WTO-
compatible way, without undoing incentives to reduce the carbon
intensity of production processes? If border adjustment
policies must assume a weaker metric to be WTO-compatible,
implying weaker protection against carbon leakage, updated
allocation or rebates may be a more effective alternative. The
second has to do with revenue implications: more government
revenues are foregone with updated allocations or rebates than
with border adjustment. All these policies, when associated
with triggers that provide for their reduction or removal as
major trading partners take on comparable climate policies, can
help incentivize international action. Arguably, border-tax
adjustment may be seen as a red flag to free trade advocates,
but it can also more directly target those trade partners
lagging in terms of climate policy action.
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