GREEN AND MEAN: CAN THE NEW U.S. ECONOMY BE BOTH CLIMATE-FRIENDLY AND
WELCOME AND MODERATOR:
SENATOR BENJAMIN L. CARDIN (D-MD),
CHAIRMAN, HELSINKI COMMISSION
REPRESENTATIVE ALCEE HASTINGS (D-FL),
CO-CHAIRMAN, HELSINKI COMMISSION
SENATOR SHELDON WHITEHOUSE (D-RI)
COMMISSIONER, HELSINKI COMMISSION
SENATOR TOM UDALL (D-NM)
COMMISSIONER, HELSINKI COMMISSION
DIRECTOR OF INTERNATIONAL CLIMATE POLICY,
WORLD RESOURCES INSTITUTE
PETERSON INSTITUTE FOR INTERNATIONAL ECONOMICS
RICHARD D. MORGENSTERN,
RESOURCES FOR THE FUTURE
TUESDAY, MARCH 10, 2009
428A RUSSELL SENATE OFFICE BUILDING
SENATOR BENJAMIN CARDIN (D-MD): Good morning, everyone, and welcome to this
hearing of the Commission on Security and Cooperation Europe. I’m very pleased
that we are focusing our attention today on climate change. Security,
cooperation, these two words are central to the commission’s title and its
mission, and they are also two of the essential elements of dealing effectively
with climate change. Today America’s security is undermined by our dangerous
reliance on foreign oil. Too much of our economy is captive to uncertain
supplies. Too much of our fortune goes to parts of the world that harbor deep
animosity towards our nation and our values.
As analysts increasingly point out, climate change is real and a present threat
to world security. Dramatic shifts in climate will likely lead to massive
displacement of people who are faced with flooding from rising oceans and
extended droughts that dry up their food supplies. Social unrest is almost
certain and international instability is likely to follow. Europe faces many
of the same issues and challenges, and that brings us to cooperation.
The only effective way to address the global crisis of climate change will be
through unprecedented international cooperation. The world has seen an
unprecedented international scientific collaboration under the auspices of the
United Nations Intergovernmental Panel on Climate Change, an effort that
culminated in a Nobel Peace Prize in 2007. We have seen nation after nation
take important steps to curb the greenhouse gas emissions and plot a new
carbon-friendly future. This effort has been especially important in Europe.
The European Union has taken strong actions to address climate change. The
Union designed and implemented the first coordinated international
Although the initial effort was flawed, the entire world looked to Europe
because of its leadership role. The cap-and-trade program that we will design
in America will owe much to the European experience. America has been on the
sidelines. We have had an administration that denied the reality of global
warming even as glaciers melted and sea levels rose and the international
scientific consensus became much more unified. Today we have a new president
and a new commitment to action. This year the Congress and President Obama
will work together to enact climate change legislation. Based on sound
science, this legislation will rely on tough mandatory cap-and-trade program.
The climate bill will harness market resources to bring down greenhouse gas
emissions, while simultaneously stimulating investment in a clean, sustainable
economy for the decades ahead. We live in an interconnected world, where the
decisions we make here impact other countries and vice versa. Nowhere is that
clearer than on the issue of climate change. Our economy and our environment
depend on the commitment we make today to retool our nation’s economy for the
future. Increasingly that holds true for the rest of the world as well.
The time has come for America to do more than simply get off the sidelines.
The time has come for America to assert its leadership in the world again.
Taking action on climate change legislation must be a top priority for Congress
this year. The time for action is long past. The time to catch up is now.
Even in the shadow of the most severe recession in a generation, America’s role
in the world economy is unparalleled. Other nations may have more consumers or
greater portions of certain market share, but it’s clear that the world is
looking to the United States to lead us out of the economic wilderness, and we
will. It is also clear that the world needs America to exert its leadership on
climate change. Along with China, we are the largest emitters of greenhouse
gases in the world, but unlike China America has the history of combining
intellectual resources, entrepreneurial spirit, market savvy and optimism that
can translate into an effective worldwide leadership on this issue.
With the adoption of a tough cap-and-trade bill, America will set on a path
that will improve our national security by reducing our reliance on foreign
oil, stimulate our economy by generating millions of new, clean, green jobs in
energy efficiency, solar wind, biomass, and more, and pull the world back from
the brink of catastrophic climate change.
So today the commission will address climate change. When the commission goes
to Vilnius later this year, we should be bringing with us a message of change,
hope, and renewed commitment to common international actions, and by the time
the community of nations convenes in Copenhagen in December, all should
recognize that America is taking meaningful, effective action in bringing a
strong pragmatic and moral leadership back to the world stage.
Today we will hear from a panel of witnesses who will discuss some of the
experiences in America and in Europe, some of the difficult issues relating to
international trade and some of the promise that bold action on climate change
can yield. Before our witnesses start their testimony, I would like to point
out that in the spirit of today’s hearing on climate change and the recognition
of the need for each of us to take steps to combat global warming, the
commission is reducing the volume of paper that it uses at our hearings by
making all commissioner and witness statements available online instead of
distributing hard copy. You can visit our Web site, www.csce.gov for all
At this time let me recognize the co-chairman of the Helsinki Commission, my
friend, Congressman Hastings.
REPRESENTATIVE ALCEE HASTINGS (D-FL): Thank you very much, Chairman Cardin.
And I echo your sentiment, Senator. In light of the fact that I have to be
back over on the House side in about an hour I’m going to forego any opening
statement and ask unanimous consent that any statement that I may make be
placed in the record. I’m really interested in being able to hear all of our
witnesses before I leave. Thank you, sir.
SEN. CARDIN: Thank you, Mr. Chairman. We have a distinguished panel of
witnesses. Their bios have been distributed so the bios I think are before all
of us so we know them very well, so let me get on by just introducing them: Mr.
Richard Morgenstern, who’s a senior fellow with Resources for the Future; Mr.
Trevor Houser, who is a visiting fellow with the Peterson Institute for
International Economics; And Mr. Robert Bradley is the director of
international climate policy at the World Resources Institute. So we will
begin with Mr. Morgenstern. Let me also point out, as I think everyone here
knows, that he was the senior economic counsel to the undersecretary for global
affairs in the U.S. Department of State before taking on his present
assignment. Mr. Morgenstern, it’s a pleasure to have you before the committee.
RICHARD MORGENSTERN: Mr. Chairman, thank you very much. I appreciate the
opportunity to appear today to discuss competitiveness and trade impacts of
domestic carbon action. Resources for the Future is an independent,
nonpartisan research organization, and the views expressed today are those of
Broad market-based strategies of the type that you’ve referred to, cap and
trade, that attach a price to greenhouse gas emissions have the potential to
offer significant cost and efficiency advantages to the United States as it
seeks to reduce its carbon emissions. At the same time, there is the potential
that this approach will impose significant costs on particularly
energy-intensive, import-sensitive industries. It is these industries and this
question of competitiveness that is referred to as the subject of this hearing
and which my comments relate to.
I have been involved in some research activities with several of my RFF
colleagues and what I want to do today is quickly review some of the key
results of those studies that we have conducted, and then talk about some of
the options that the United States might have in trying to deal with these
problems. The conclusions of our research can really be succinctly stated in a
couple of points.
Number one, measured by the reduction in output, a readily identifiable set of
industries is at the greatest risk of contraction over both the short and long
term as a result of domestic action. Secondly, although the short run output
reductions may seem relatively large in these industries, these reductions
shrink over time as firms adjust inputs and adopt new technologies to the
changing environment. Third, the largest cost increases are concentrated not
in broad industry categories as we commonly refer to them, but oftentimes in
industry sub-categories. For example, we may see impacts on aluminum, which is
a broad category. We may see impact on lime, which is a somewhat smaller
category. And it is this combination of large and small industry sectors that
we need to understand.
In the non-manufacturing sector there are also some declines that are seen, but
a rather diverse pattern applies. For example, you see that in the electric
utility industry the impact is relatively consistent over time, whereas you see
in something like mining there may be a continuing deterioration as there is a
substitution away from metals, for example, to a substitute for metals that may
In terms of employment, the short-run impacts are roughly proportional to the
losses in output, but over the longer term we tend to see other industries come
in, pick up the slack, and we do not see a net loss in employment over the long
Most experts agree that the best solution for addressing this problem is to
have an international agreement that in fact binds all of our key trading
partners to some relatively comparable policy to the one the United States
would undertake. But in the interim, unilateral action should and must be
taken, in my view, to begin to address this problem. That leads to the
possibility, and in fact the likelihood that there will be some emissions
leakage, and that means that some of the domestic reductions will be partially
offset by increases abroad as production increases outside the United States
and energy-intensive activities are relocated globally.
Importantly, displacement of production through lost competitiveness is not the
only source of carbon leakage. A large scale withdrawal of demand for
carbon-intensive energy in the United States will drive down prices globally
and expand consumption elsewhere.
Turning, if I might, to the question of how do we address this problem, there
are really several different ways that we can go about it. An efficient
policy, a cap-and-trade policy of the type that you’ve referred to and
President Obama has endorsed is certainly a first step in that direction.
Several other measures, for example the use of carbon offsets, either domestic
or international, are other ways of addressing the competitiveness issue.
Thirdly, one can envision cost containment policies whereby there’s an attempt
to prevent dramatic fluctuations in prices which could in fact adversely affect
competitiveness. So those are the approaches that are commonly discussed.
Beyond those, pending legislation here in both the House and the Senate is
focused on two approaches. One is free allowance allocation, and the other is
trade-related border adjustment type approaches. Now, speaking to the latter,
import adjustment proposals would require importers to purchase allowances
based on the embodied emissions in their products, which would attempt to level
the playing field. One can imagine a broader border adjustment where you also
dealt with exports. However, I would point out that there are particular WTO
problems that may impede that action.
The other approach is to try to limit the increases in domestic costs by using
free allowance allocation, and particularly a type of free allowance allocation
that we have some experience with, but somewhat limited experience with in the
United States, and that is in contrast to, say, the Clean Air Act approach,
where we grandfathered the allowances based upon historic emissions, this would
involve an updating of allowances. That is to say, that the better performance
that is turned in by a firm, the more allowances it would receive. This has
the effect of lessening the burden of the cap-and-trade system of the carbon
price on that particular industry.
I would point out there are other approaches that have been discussed. For
example, people have talked about the possibility of exempting certain
industries from control, and I would note that doing so removes any incentive
that you would normally want to place on these industries to reduce their
emissions, and it also raises the cost to all other industries, every other
individual in the United States, of reaching the carbon goal.
So in summary, Mr. Chairman, I would say that until we have a truly global
system in place where we would not need these special provisions to deal with
the problems imposed on energy-intensive industries, I would personally
advocate a free allowance allocation via updating as a transitional measure for
the adversely affected industry. Thank you, Mr. Chairman.
SEN. CARDIN: Thank you very much for your testimony. Appreciate it. Mr.
TREVOR HOUSER: Thank you very much. My name is Trevor Houser. I’m a visiting
fellow with the Peterson Institute for International Economics, and the
director of the energy and climate practice at RHG, which is a New York-based
research firm. The same disclaimers that Dick provided are all true for me.
Any comments that I have are mine and not the Peterson Institute’s
So the title of this panel is, “Can a New U.S. Economy Be Both Climate-Friendly
and Competitive?” I would urge us to think about that question broadly. The
transition to a low carbon economy is going to affect U.S. competitiveness in
many ways, and the first is what Dick commented on, a need to create a level
carbon playing field for energy intensive industries that might be put at a
disadvantage. The second would be our ability to capture opportunities in new
low-carbon energy technologies that will be required to make the transition.
Third is our ability to trim some of the $450 billion we spend each year on
imported oil would make the U.S. more competitive. And then finally, as we
make these new investments in energy efficiency, to take that as an opportunity
to invest in increased U.S. productivity more broadly.
This panel is focused on the first of those, on creating a level playing field,
and that’s where I’ll focus my comments. I just wanted from the outset to put
that in a broader context of how we think about competitiveness.
So this issue of the impact on energy-intensive industries, it’s critical that
we get this piece right, and in doing so we need to think about three things:
first, dealing with the impacts for domestic industry in a way that’s equitable
and effective. Addressing climate change is going to be a multi-decade process
that’s going to require continued political support. And to draw a lesson from
trade liberalization, the need to up front make sure that folks who might be
negatively impacted are compensated or retrained is going to be critical to
maintaining a consensus surrounding climate policy going forward.
Too, we need to make sure that we do that in a way that’s supportive of
international climate negotiations. As the chairman pointed out, this is a
problem that no individual country can solve and that we’ll need a collective
solution for. And so we have to address this through the lens of the
But finally, it’s important that we do this in a way that is compatible with
the principles of the world trading system because for us to capture that
upside, the clean revolution on which our ambitions lie, we’re going to need
open markets to export low carbon goods to the rest of the world, so we need to
think about that inclusively.
In the 110th Congress, most of the energy and climate bills that were
introduced, cap-and-trade bills, took one primary approach to addressing this
issue of competitiveness, of leakage, and that is to impose a comparability
test, to look at what other countries are doing to reduce emissions, and those
who are seen as not taking comparable action to the U.S. to have the price for
carbon on energy-intensive imports – on steel, aluminum, and cement – adjusted
at the border.
So the goal here is to meet two objectives simultaneously. The first is to
address the leakage concern that Dick mentioned, and the second is to try to
provide a leverage on other countries to help encourage them to join
international climate negotiations. And the authors of those provisions were
pretty thoughtful about trying to design them in a way that would be consistent
with the WTO.
I would argue, though, that by combining leakage and a desire to address
leakage with a need to create leverage, those provisions fail at doing both.
Let me point out why. On the leakage front, an international agreement of the
type that we hope to get from Copenhagen is not going to yield the same carbon
price between countries that are part of that agreement. We need to allow
flexibility between developed and developing countries in how they reduce
emissions, and then within a country we need to allow flexibility for what
types of targets and timetables we adopt.
So, for example, Europe is committed to reduce emissions 20 percent by 2020 off
a 1990 baseline, 30 percent if we get an international agreement. The Obama
plan pledges to reduce emissions 14 percent by 2020 from a 2005 baseline, which
is a slight increase over a 1990 baseline. So that means there’s going to be
different carbon prices between the U.S. and Europe, let alone between the U.S.
and China. And that’s okay from an environmental standpoint as long as the end
of the day we get to the numbers that we need for global emissions reductions.
So we can’t rely on a global agreement in the interim until we get to a single
global carbon price which is ultimately where we’ll try to go to address our
concerns of leakage. We need to do that in the way we design domestic policy.
The approach taken in the Boxerman-Lieberman-Warner bill –
Boxer-Lieberman-Warner bill – would impose trade measures on countries that
stay outside of an international agreement but doesn’t look at how we can
adjust the prices between countries within a national agreement. And that’s
something we need to consider.
On the leverage front, if we just look at imposing a tariff on the carbon
content of goods that come into the U.S. we don’t have sufficient leverage to
force any country to the negotiating table. So while exports from China of
textiles, T-shirts and electronics are very important for economic development,
exports of carbon-intensive goods like steel, aluminum, cement aren’t, because
most of the steel, aluminum and cement that countries like China and India
manufacture is for domestic consumption to feed this massive urbanization drive
that’s going on in those countries today. So exports of energy-intensive goods
of the type that RFF’s work has identified as being potentially vulnerable
account for about 0.1 percent of Chinese GDP. That’s fairly small in
comparison to the cost of climate policy.
Now, the good news is that developing countries are in fact willing to come to
the negotiating table on their own and we probably don’t need that type of
leverage. And that’s something that I think Rob’s going to mention.
Now, in a multilateral environment we could think about the role of trade
sanctions imposed on all goods as a way to enforce an international agreement.
But to be effective we’d have to do that multilaterally. No individual country
is going to have enough leverage by denying market access to get any major
emitter into an international agreement. It’ll have to be a collaborative
For addressing leakage, until we get to a harmonized global carbon price –
either a global cap and trade system or global carbon tax – which is more than
a decade off at least – we could have a multilateral agreement on how to adjust
border prices – adjust carbon prices at the border between countries, in the
way that Europe does a value-added tax. Alternatively, we could have an
international sectoral agreement where within the broader global agreement
countries agree to a common price or a common set of standards for
internationally traded goods like steel and cement. Both of those things would
need to be negotiated multilaterally.
In the interim, as Dick mentioned, we have a number of options available to us
in the way we design our allowance system to offset costs to domestic industry,
in particular of the types of output-based rebating proposals that folks in the
House are working on today hold quite a bit of promise.
Thanks very much.
SEN. CARDIN: Thank you very much for your testimony. Mr. Bradley?
ROBERT BRADLEY: Good morning, Mr. Chairman, Mr. Hastings, Mr. Udall. Thank
you very much for the opportunity to join you today. My name’s Robert Bradley
and I direct the international climate policy work for the World Resources
Both my companions here, Trevor and Dick, in their testimonies have referred to
the desirability of placing U.S. climate policy in the context of a broader
international agreement. And so I wanted to step back and explore that
possibility a little bit.
I’d like to make three points, each of which I treat in more detail in my
written testimony which I hope can be included in the record. First, success
against climate change will mean strong federal policy in the United States and
action from major developed and developing economies. Second, the world has
changed dramatically since the days of the Kyoto Protocol. Major developing
countries are ready to take significant action on limiting emissions. And
third, all countries will seek to harness the benefits of growth and new jobs
from a switch to cleaner energy. Constructive international policy on both
trade and technology cooperation can help build support for an effective
The United States is an indispensable leader in the fight against climate
change. Without the world’s largest economy and biggest historical emitter
other countries cannot fix the problem. But nor can the U.S. do it alone.
Almost 80 percent of global emissions are produced by 15 counties, nine of
which are in the developing world. The Kyoto Protocol, the main climate
agreement to date, has been rejected by the United States in particular because
of the concern that without meaningful participation from major developing
countries it would be ineffective and costly to the U.S. economy.
Developing countries have historically argued that with their poverty and small
historical contribution to the climate problem they should not be responsible
for curbing emissions. But in recent years there’s been a flood of developing
country climate plans. For example, Brazil announced that it would reduce its
deforestation rate over 50 percent from recent levels by 2017, avoiding an
estimated 4.8 billion tons of carbon dioxide emissions. China committed to
reducing national energy intensity – that’s energy per unit of gross domestic
product – by 20 percent by 2010 and looks on course to meet that goal with
programs expected to cut emissions by 550 million tons of CO2. Investment in
wind, hydro, nuclear and biomass are expected to save an additional 640 million
tons by 2010.
India has a number of states that are taking forward aggressive renewable
energy targets with renewable portfolio standards. Mexico pledged to half its
greenhouse gas emissions by 2050 and is considering a cap and trade policy not
dissimilar to the one recently considered by U.S. Congress. South Africa has
presented a highly detailed and ambition plan to peak its national emissions by
2020 and to bring them down to low levels in 2050 in accordance with –
These policies will often not be of the same form as the cap and trade approach
favored in the United States and Europe, but that need not make them any less
ambitious. They are the more impressive when we consider the poverty of many
of these countries. In India 550 million people still lack any access to
electricity and they, like Europeans and Americans in the last century,
legitimately aspire to get it, but they are seeking to do so on a lower carbon
An international climate agreement can help reinforce these actions. Many of
these countries have a poor record of implementing national plans. It will
certainly not be enough for countries to take each other’s plans at face value.
The Bali Action Plan, which frames negotiations for a post-2012 climate
agreement, provides for both developed and developing countries to take
mitigating actions that are, quote, “measurable, reportable and verifiable.”
And this language also applies to finance technology and capacity building
support for developing countries.
One factor common to all countries taking action on climate is the promise of
new jobs and economic opportunity from the switch to clean energy. Over 10
percent of the United States’ recent stimulus package was aimed at
climate-friendly and environmental objectives. In South Korea the
corresponding figure is 80 percent. China has also pledged to put hundreds of
billions of dollars from its stimulus package into projects that cut greenhouse
gas emissions. And rightly so. Research we have undertaken recently with the
Peterson Institute calculates that green recovery programs generate 30,000 jobs
on average per $1 billion invested. They also reduce the cost of meeting
climate goals in the longer term.
All countries focus on generating jobs at home. But the truth is that clean
energy, like any high-tech industry, will depend on inputs from around the
world. A multilateral approach to developing and deploying clean technologies
can be enhanced through cooperation on climate change and supported by freeing
up trade and environmental goods and services.
This body can shape the success of the international process. An ambitious
federal climate policy will unleash action not only in the United States but
also from countries that have been waiting on the world’s biggest economy.
International cooperation on technology programs can help build on the push to
cleaner energy through the stimulus. Finally, U.S. policy should include
provisions for financing international action on adaptation, forest protection
and clean technologies to help ensure an inclusive climate deal.
I don’t want to imply that this will be easy. Many countries remain wary of
commitments and their rhetoric will stress these fears. But the world has
moved on a lot in 10 years. There’s a real willingness to tackle emissions and
a potential agreement that can turn this willingness into verifiable action.
Thank you and I look forward to your questions.
SEN. CARDIN: And, Mr. Bradley, thank you for your testimony. We’ll start with
REP. HASTINGS: Thank you very much, Mr. Chairman. And gentlemen, thank you
all for your testimonies. And I can assure you your words resonate very
Mr. Chairman, I was thinking as our three presenters were going forward that
probably in other places around the world – either today, yesterday or tomorrow
– similar type discussion are being had. One of the continuing problems it
seems that we have in trying to reach international agreement is the lack of
communication. I would emphasize at the outset you spoke about our Web site
and I would hope that the testimony of these gentlemen will be appropriately
diaried and disseminated to other individuals in other countries that might
very well find their remarks useful.
Mr. Morgenstern, how long were you actually involved and to what degree were
you involved in Kyoto?
MR. MORGENSTERN: I was working at the Environmental Protection Agency
throughout most of the ’80s and then – in the ’90s, rather – and then in the
early 2000s. I worked on Kyoto pretty much from the inception. I was at Rio
in 1992 – actually, I attended a conference in Toronto that was in the late
’80s. So I’ve been involved in this issue for a long time. So I guess you
might say the short answer is from the outset.
REP. HASTINGS: All right. Now, taking from all of your testimonies, and
specifically from Mr. Bradley’s, it appears that for a variety of reasons the
United States never became a signatory to Kyoto. Is that correct?
MR. MORGENSTERN: Well, I guess technically we signed it –
REP. HASTINGS: Signed it –
MR. MORGENSTERN: – but we didn’t ratify it.
REP. HASTINGS: – but didn’t ratify it.
MR. MORGENSTERN: That’s correct.
REP. HASTINGS: So we’ve kind of like been missing in action on the subject.
And would you agree with me that those who would use an argument that – to
trust your partners for international agreements would then turn around and
argue, well, the United States didn’t go along with Kyoto. What makes us think
that they or Russia or China or India or any of the larger countries are going
to go along with some kind of carbon emission international agreement?
MR. MORGENSTERN: I think you raise a very important question, Mr. Chairman.
And I guess I would say that looking back on the situation with Kyoto I think
that the fact that United States did not take any domestic initiative at that
time, I think perhaps the negotiators got a little bit ahead of the political
reality back home.
And I think that the current thinking now – certainly it’s embodied by
President Obama’s statements and by the actions in both houses of Congress in
the past several years in developing legislation – is that the United States
really needs to be a leader and needs to take domestic action and that that’s a
way of demonstrating to the world that we are serious and that we’re simply not
showing up at the negotiating table, participating in all the rhetoric and then
failing to deliver.
So I think that that’s probably the approach that makes most sense given the
way our system operates.
REP. HASTINGS: But now we’re in a climate of slumping economic activity and
the overall financial crisis globally. And my read is that Europe’s ambitious
plans are now suspect among themselves. Reading one statement from a European
negotiator whose name doesn’t appear in the article, he says the Germans are
giving up and the Italians are getting ready to follow. And then we know about
President Chirac – Sarkozy’s forward-leaning discussions. Mr. Bradley talked
about it, about trying to come to some terms by the year 2020.
My overall concern is this: In any major change that requires world agreement,
it takes too much time. And how then can we shorten that time and get to the
business of collective undertaking worldwide or the collaboration that’s going
to be needed in order to do anything really substantial?
I hear you argue and I agree with you that unilateral action is going to have
to take place. But it seems in order for us to be unilateral we need then to
have widespread understanding inside the United States and the various sections
that are likely to be affected from steel, petrochemicals, all the way down the
line, and try to get as many people on board with the policy rather than coming
up here and yakking it up. And that’s, to my way of thinking, what needs to be
done. You can’t have a one-day summit. You have to have an ongoing,
concentrated, hot effort to try and come to agreement from within before we act
unilaterally. Or am I making any sense?
MR. MORGENSTERN: Well, I think definitely so, Mr. Chairman. And I guess I
would say that one of the elements – I guess maybe two key elements of a
domestic initiative that could pave the way to a greater international
cooperation. Number one is that the domestic action be cost-effective; that is
to say that it be designed in a way that it is affordable and it is efficient
and it is getting the most possible reductions for the dollars that we commit
to it. And secondly is that we need to demonstrate to ourselves and to the
world that there are new technologies that can come into play quickly and
efficiently and that they can lessen the burden for others as well as ourselves
in trying to meet these goals.
So the United States’ initial action is really a small down payment to a global
future here. Nobody is kidding themselves to think that we can solve the
problem. As we all know, we’re just a fraction of the emissions and so on.
But the fact is that we need to demonstrate that this can be done efficiently
and that in fact new technologies can come into play and that they can be
effective and efficient.
REP. HASTINGS: Right. And right here in our bicameral legislature, Mr.
Chairman, in my view it would be helpful if we communicated better among
ourselves. A lot of times the left hand doesn’t know what the right hand is
doing. A hearing is held over here in Commerce, another one’s held over here
in Foreign Affairs and another one’s held over here in financial. And all of
this stuff needs to be coordinated, at least in my opinion.
Thank you, Mr. Chairman.
SEN. CARDIN: I think Mr. Bradley wanted to respond.
MR. BRADLEY: Thank you with your indulgence. As the more astute amongst you
will have noticed, I am European and I was actually closely involved in the
design of the European emissions trading system. And I wanted to pick up on a
point that Mr. Hastings made, that there is a very similar dialogue going on in
capitals around the world.
I would include in that Beijing, to a certain extent Delhi. The countries are
in fact saying to themselves, we get it; climate change is a really big deal.
China’s national climate change program goes a great length into just how badly
China is going to get hit by climate change. They say, we get it. We have to
do something. We’re a really big emitter. It can’t be done without us. We
have to still combine that with other concerns we have: economic development,
energy security and things like that. But how can we move without the United
And so this comes to your second point, Mr. Hastings, about how we can move
forward urgently – because you’re right; international agreements themselves
don’t move particularly fast. But I would argue that while an international
agreement is important in an ongoing confidence building, it’s not the thing
that will trigger action. The thing that will trigger action, the thing that
can be done here that will be far more important than any other single activity
undertaken on climate change in the world will be to implement and give a clear
signal about the implementation of U.S. climate policy.
The European Union has spent the last decade – you refer to the divisions.
Those divisions are rooted in very large part of our – in a reluctance to move
too far ahead without the United States. The Europeans have actually put a lot
on the line by saying we’ll do – we’ll go for 20 percent below 1990 levels by
the year 2020 in terms in greenhouse gas emissions, regardless of what
everybody else does. But they’ve actually gone out and said if other major
emitters play then we can maybe get that down to 30 (percent).
The Europeans are not the only ones but they’re perhaps the ones that have gone
out most transparently in making that case. The U.S. has it in its power not
only to take action on American emissions but to trigger action amongst others.
SEN. CARDIN: Thank you. Senator Udall?
SENATOR TOM UDALL (D-NM): Thank you very much to both chairmen for doing this
hearing, and thank you for the witnesses for being here today.
I’m of the belief that there will be a long-term competitive advantage for
those who embrace green technology and infrastructure in a world moving towards
a low carbon economy. And, Mr. Bradley, it really goes to the heart of what
you were talking about there. I mean, we’re in this situation where we say,
well, let’s not move forward unless we have the rest of the world – or many
seem to be saying that. And if we don’t move forward, the rest of the world
won’t engage and won’t continue to push down the road of a low carbon future.
And so I would ask the panelists, how do you suggest we promote green
technology and infrastructure without saddling companies with additional
burdens and distorting global competitiveness? Go ahead. Why don’t you –
MR. BRADLEY: Thank you. I very much agree with the premise of the question
you’re articulating there. The World Resources Institute, incidentally,
together with several partner NGOs and 27 major U.S. corporations, in the form
of the U.S. Climate Action Partnership, has come out very strongly in a unified
voice over the last two years in making the case for the United States moving
forward with clear policy.
The economic advantage that American corporations are seeing in that is that if
you’re playing in the power sector or in heavy industry, the one thing you
don’t want is uncertainty. They get it that climate change is going to be a
problem. They get it that sooner or later, public policy is going to have to
respond to that problem. Better that you know that sooner before you start
building your power plants and that you know what that’s going to be and that
you have some clear forward signal that allows you to adapt not only your
investment choices today but your research and development and the business
choices that you make looking into the future. So while we can get lost in the
weeds, I think that that’s a very strong early signal.
I would also –
SEN. UDALL: And what you’re talking about there is really a price signal in
the market, isn’t it? Having some kind of consistent strong price signal to
move us in a new direction in terms of green technology and infrastructure and
that kind of thing?
MR. BRADLEY: Absolutely. If you’re managing a business unit and you want to
go to your executive board and ask for capital this year, they’re going to ask
how you hedged against all of the risks that they see against both the reality
of climate change and the reality of the potential policy coming down the pipe.
And the sooner you can have a price that you can start incorporating into the
forward planning on that, the sooner you’re able to make smart decisions that
help your growth and your employment in the long run.
SEN. UDALL: That’s one of the first things we need to be doing, isn’t it?
It’s to put that price signal out there, to get it in place, and then that will
start driving where we want to go.
MR. BRADLEY: That’s absolutely correct. There are a lot of other very
exciting things going on at the moment – certainly spending through some of the
stimulus and recovery measures in new technologies. But without a long-term
signal that allows them to say, okay, not only do I develop this technology but
there is a market for it, the impact of those things is going to be limited.
I would say that –
SEN. UDALL; Current price signals right now aren’t doing the job, are they? I
mean, when we have the drop in oil and gas prices to where they are today,
that’s not sending a price signal to move us in a low-carbon direction, is it?
MR. BRADLEY: It’s not providing the consistent enough signal. We’ve certainly
seen as oil prices went up over the last year how the market can respond to
those things. People were buying different vehicles. People were making
different investment choices. But of course, then demand goes down. The oil
price drops. Instead of maintaining a longer-term signal that can then help
consistent investment, we’re subject to the vagaries of what happens in the oil
market. Certainly a more active price signal would allow us to take control of
our destiny a little bit more.
I would note that, again, this isn’t the only country where this discussion is
taking place. In China, India, not to mention Europe, other countries are also
saying, hey, wow, if we start moving early on this, we’ll be the ones who are
leading this green technology revolution. The Chinese are already making a
third of the world’s solar panels. And the Indians have some of the world’s
leading wind energy companies. This is not a static target. This is something
that I would say is very much an opportunity that others are starting to seize.
MR. MORGENSTERN: If I could add perhaps one point of emphasis, beyond the
price signal, which will clearly stimulate new technologies, most of the
legislation that’s been introduced has a significant auctioning component for
the allowances. And that generates a significant revenue stream for the
federal government, which in most of the proposed bills is channeled to some
extent to new technologies. So this provides an additional mechanism whereby
one can aid and facilitate development and deployment of new technologies.
SEN. UDALL: Richard, would you comment on the idea of having a mandate in
terms of renewable energy for electric power companies? I mean the president
has put out a proposal for 25 percent by 2025. You know, without picking
technologies, you give a goal and you give a mandate and you say that’s the
direction we want to move in. Do you have any thoughts on whether that is a
helpful way to go?
MR. MORGENSTERN: Okay, the question you’re asking is whether the focus on
particular – on renewables, which is not a particular renewable, as you say;
but it is renewables in general – is the preferred way to go. I guess my own
sense is that we should probably have a little more of a market focus by
setting up a carbon pricing mechanism, which allows all technologies to
compete. Renewables, I suspect, will do very well. But a renewable standard
tends to distinguish, focus on only those. And I think if we’re seeking to get
the most bang for the buck, the carbon price mechanism may be the most
SEN. UDALL: So you’d rather see a cap-and-trade than a renewable standard?
MR. MORGENSTERN: Well, if it was a choice, I would certainly rather see that.
I guess the question is whether one could augment the other. And that gets
into some complexities. But I would probably favor the strong cap-and-trade.
SEN. UDALL: Thank you, Chairman.
SEN. CARDIN: Mr. Houser, did you have a point?
MR. HOUSER: I just wanted to add one comment. I mean, we’re having this
conversation in the midst of the worst economic crisis in a generation. That’s
certainly coloring the politics of this. And as Senator Udall pointed out,
people are looking to investment in green technology as a way to help us emerge
from this crisis, which I think is promising. It’s important to think about
So we’re having the debate about a cap-and-trade program today in the midst of
a crisis. The costs wouldn’t hit the economy until 2012. That’s when it would
take effect at the earliest, by which time we all hope that we’re on a more
stable economic footing than we are today. But as Rob said, setting that price
signal now, even if the costs aren’t going to take effect in 2012, is critical
in giving companies certainty. I mean, part of the reason that investment has
dried up is about uncertainty about the health of the financial system. For
energy-sector companies, that’s coupled with uncertainty about the outcome of
environmental regulation, which they know is coming but don’t know what it
looks like. Clarifying that uncertainty now will help unlock investment in the
energy system, which will have a broader economic effect.
Now, until that price for carbon takes effect, there’s things we can do to help
prime the pump and ensure that the cost of carbon, once it’s imposed, has as
little impact on the economy as possible. We did a decent amount of that with
the stimulus bill in investing in emerging technologies and alleviating
infrastructure bottlenecks. The benefits of those programs, if properly
implemented, is that not only will they reduce the costs of a cap-and-trade
program but the energy savings that will come off of them will help offset the
budgetary impact of the stimulus efforts we’re having now.
So in the report that we did a couple months ago, we estimated that of about
the dozen green stimulus programs that were being considered, on average for
every billion dollars of government investment, $450 million per year in energy
cost savings were returned to either the federal government or the economy as a
whole, which helps smoothes the transition into both a cap-and-trade system and
eases the budgetary impacts.
SEN. CARDIN: Senator Whitehouse?
SENATOR SHELTON WHITEHOUSE (D-RI): Thank you, Mr. Chairman. Thank you to the
witnesses for being here. We describe the problem here as a climate change
problem. We describe it as a global warming problem. We very rarely describe
it as an ocean chemistry problem. The fundamental problem is carbon loading of
the atmosphere that creates global warming; it creates climate change. It also
creates chemical changes in the ocean that can lead to acidification of the
ocean that could dramatically change the ecosystem of the ocean. The little
krill and algae and things, the coral creatures that build nurseries in the
tropical waters, all of those things are very much at risk.
There is evidence yesterday out of, I believe, New Zealand about a 30-percent
reduction in the shells of these microscopic creatures. We haven’t seen these
kinds of changes in the oceans in certainly living memory. And it could well
be that ocean acidification, the wipeout of the bottom of the food chain as a
result of the inability of these small creatures to make the shells that are
their structural frameworks and the consequent collapse of the food chain that
depends on that base could be the worst outcome for humankind of our carbon
loading. It could be more significant, ultimately, than climate change or
There seems to be very little discussion about that and I’m interested in to
what extent, as you look at this as an international issue, this issue is
cropping up in other countries in their discussions? It seems to be the
forgotten issue in this case. In fact, the very name that we give to the
problem overlooks this dimension of it. Mr. Bradley?
MR. BRADLEY: It’s a very important point. And I think the short answer to the
question that you ended with is that largely those two areas are conflated.
The countries are focused on the question of bringing carbon emissions down,
thus reducing the carbon loading in the atmosphere.
It certainly lends color to the discussion that still periodically takes place
in climate circles: To what extent are we trying to adapt to change as opposed
to cutting the emissions off at source? And certainly I think this lends color
to the view that our ability to adapt to those kinds of changes is likely to be
pretty small, not least of course because the oceans that are getting hit by
increased acidification and by warming at the surface layers are simultaneously
being hit by all kinds of other human activity, whether it’s nutrient runoff
from our farms, whether it’s over-fishing, which has devastated most of the
world’s fish stocks.
Certainly, we’re seeing a combination of warmer waters and higher acidity
levels dealing death blows to a lot of coral reefs. I’m a diver myself. And I
see a lot of the impact there in ways that is extremely sad to see, but as you
say has much broader repercussions. I think that lends very much color to the
idea that, yes, we need to help poor and vulnerable people adapt where we can.
But we should not kid ourselves that we can adapt our way out of this problem.
Essentially, dealing with it at source through urgently moving forward on
mitigation is going to be needed.
SEN. WHITEHOUSE: Mr. Morgenstern?
MR. MORGENSTERN: Yes, Senator. I guess I would just maybe reinforce your
point. I should say I’m an economist, not a natural scientist, so take what I
say with a grain of salt perhaps. But I think the impact on oceans is a very
important issue. I would note that the IPCC, the Intergovernmental Panel on
Climate Change, which has been examining and kind of summarizing the literature
in a number of different areas, has studied the impacts – the potential and the
already-observed impacts – of climate change. And they have identified ocean
impacts as quite significant.
They have also looked at other areas of great concern. I would emphasize, for
example, terrestrial ecosystems. And there is a concern that in various parts
of the United States, we have vulnerabilities, for example, in mountain
regions, that are quite significant. And we could see a rather significant
alteration of our ecosystems, which could impact, not necessarily the food
chain but could impact life as we know it in the United States and around the
They’ve also looked at sea-level rise, infrastructure impacts, agriculture
impacts, health impacts and others. So I would just emphasize that there’s a
whole range of concerns out there that are, as you highlight, extremely
SEN. WHITEHOUSE: The other question that I wanted to get into with all of you,
again from an international perspective – we have not had very robust
experience yet with the management of a cap-and-trade system. There are issues
about regulation. There are issues about market manipulation. There are
issues about licensing. Who should be allowed to participate? There are
issues about the verifiability of offsets and whether they’re actually marginal
offsets at all or just paying people to do what they’d do anyway.
Around the world, are there good and more developed or robust models for
solving those market management problems? I’m sold on the notion that a
cap-and-trade system is necessary. I think the market aspect of it is
efficient. But we’ve seen even very developed and regulated aspects of our
economy go completely into the trash in the last couple of months, largely
because of failures of regulation, blind eyes – whether deliberate or not – to
exotic and bizarre products that nobody wanted to take a look at. How do we
keep the – let me ask the question a different way. Are there models out there
that can give assurance that we can keep a cap-and-trade model running cleanly
from around the rest of the world?
MR. MORGENSTERN: If I could just start off – I’m sure we’re all going to have
comments to make on this point. I think we have seen the perils of financial
regulation, no question about it. As you were speaking, I was trying to think –
SEN. WHITEHOUSE: The perils of lousy financial regulation anyway.
MR. MORGENSTERN: Thank you. I was trying to think of examples in the
environmental field which even come close to paralleling the financial
disasters and I can’t thin of any, okay, and I’ve been involved in this field
for some time. And I look, for example, at the Clean Air Act, where we’ve used
a cap-and-trade system in this country very successfully to control SO2
emissions and partially NOX emissions. And the EPA reports a compliance rate
of near 100 percent on their SO2 program.
SEN. WHITEHOUSE: Although to jump in on you there, my understanding is that
that program deals specifically with a narrow group of emitters and doesn’t
allow offsets. It gives you credit for reducing and you buy back and forth.
But you don’t go to the forest in Brazil and claim that you’ve saved on sulfur
dioxide emissions by going someplace else.
MR. MORGENSTERN: Now, that is absolutely correct, Senator. And I think that I
was just trying to start off by saying that our experience with environmental
regulation, using cap and trade, the notion of it, the principle of it, I
think, has been well established. And as you suggest, I think we probably all
agree on that.
I think if you move to looking at non-traditional sources of emissions and you
move outside of highly regulated areas, there is the potential for greater
problems. I would put these in a couple of categories. First of all, let’s
distinguish domestic from international. The consideration is that the United
States might start off with its own system where we would have a lot more
control over all the issues that are kind of implied by your question. And so
I think that that’s the first point to make.
The second point to make is that we’re looking largely at an upstream system.
And you can think about how you would regulate greenhouse gases. And one
extreme would be all the way upstream when the carbon essentially emerges into
commerce. And the other would be a kind of downstream system. And the
Europeans, in fact, have chosen somewhat more of a downstream system than the
United States has, if you look, at least as embodied in the proposals that have
And as you think about an upstream system, you’re more likely to be able to
have better information, better controls, better – kind of two sets of books
really, which kind of enable you to have a better set of accounting of what’s
going on. So I would say that the upstream system has a lot to recommend it in
terms of the credibility and the avoidance of problems.
Now, when you move into offsets, you do get into a softer area. There’s no
question about that. And I think that the notion would be that here at home we
would set up a system. It might well be more stringent than the global system,
than the international system that is set up under Kyoto, to try to track and
regulate and monitor the use of these offsets. So I think that there are
But I guess perhaps the premise of you question was that this is somehow like
the financial system. And while obviously, the future is uncertain, I guess I
would say that we have enough experience to give us reasonable confidence that
we’re not going down that road. But let me turn to my colleagues.
MR. BRADLEY: Yeah, clearly this is a bad time to be sort of discussing a
policy that puts its faith on the financial markets. And the irony is lost on
nobody. But I think, first of all, Dick is right. The kind of markets that
are being proposed here are linked back to, particularly energy, commodity
markets that allow some sort of cross-checking. We’re not quite disappearing
into the world of ultra-abstract, highfalutin derivatives markets, although of
course derivatives markets can spring up around anything. And so broader
questions of financial regulation are ones that are going to apply to any
market. And maybe the flipside of the financial crisis that we’re in at the
moment is that this is a great time to be thinking about financial regulation
and how we structure it better in general. And perhaps then an incipient
carbon market can start off on the right foot.
In addition to the Clean Air Act that Dick already talked us through, I would
say that the experience in the EU emissions trading system to date is
relatively robust on that score. Certainly the system has had problems, but
those have actually been largely around the politics of allocating allowances
in the first place in ways that simply don’t have an analogue in the United
States; essentially, Brussels doesn’t have anything like the power relative to
London and Paris that Washington has within the United States as a solid
So countries essentially got a license to allocate to their own industries and
sort of competed to be overgenerous. That’s an approach, incidentally, that
the Europeans have since corrected. But certainly I don’t think that any of
the problems that have arisen so far have been of a nature that questions the
sort of financial regulation around those areas, which probably makes it one of
the few markets that hasn’t run into those problems.
So financial regulation is going to be clearly very important, but I don’t
think that we should necessarily think of a cap-and-trade system as
particularly vulnerable in that area. But it is something that, as we
reexamine the whole question of how the financial sector is regulated, is a new
ingredient that needs to be there in our minds.
MR. HOUSER: I guess I would think about that question in three ways: We’re
concerned with possible systemic risk of financial market regulation; we’re
worried about price volatility; and then we’re worried about the verifiability
of offsets. So, from a systemic-risk standpoint, the size of the carbon
markets that we’re thinking about here is unlikely to be at a point where the
type of very real systemic risk we’re facing from things like collateralized
debt obligations or credit default swaps is creating.
So if we’re thinking about, you know, a 100-billion to $200-billion carbon
market, even if you had derivative products arise around that that were
leveraged five times, let’s say, you’re not going to get to the systemic risk
point. I mean, you compare that to a corporate bond market of $5 trillion that
has derivatives on it of $60 trillion or a Forex market that has derivatives of
hundreds of trillions of dollars riding on it. And those are the systemic risk
challenges we’re facing.
But a carbon market will be a commodity market. Now, the good news of that is
that someone has to take delivery of the product at the end of the day. So
there’s a tangible asset that guards against extraordinary bubbles. But it
also means that prices will be volatile like in commodity markets, like in oil
and gas markets.
And I would say the difference of a carbon market, relative to our experience
with the SO2 program is that with SO2 we had fairly clear backstop technology
and a flue gas desulphurization system. We don’t as clearly have a backstop
technology on carbon. And that’s where the price uncertainty comes from, is
that we’re not entirely clear on what the technology solution will be. So I
think the way we address that is through flexibility for firms, banking and
borrowing allowances, giving people flexibility in the timeframe that they meet
I think people have talked about the possibilities of price collars. I think
there could potentially be value for that if the ceiling was set high enough to
only address those extraordinary price spikes that might occur. On offsets, I
think there are challenges facing domestic offsets and challenges facing
international offsets. On the domestic side, offsets are likely to come from
places that aren’t regulated, from non-regulated entities, which means that
that additionality test that you talked about, which is so troublesome for
international offsets, won’t really play a role as much because those
non-regulated sectors will have no compliance obligation.
On the international side, we have a lot of lessons to learn from the clean
development mechanism under Kyoto and how exactly to measure what’s additional.
I think that’s going to be a major challenge in how we design policy here and
how we design policy internationally. The important thing to keep in mind is
that the use of offsets is going to play a valuable role in keeping overall
costs down. And so we’re going to have to balance the risk that those offsets
are valid with the benefit it provides as a cost-containment mechanism.
SEN. CARDIN: One of the most difficult public-relations problems we have in
the United States in passing a strong bill – and I am for unilateral action,
I’m for us moving forward and becoming a leader, I think it’s going to be good
for our economy. I think our economy will grow as a result of capping carbon
emissions. But the public is saying, why would the United States move forward
unless simultaneously there was action from China and India and other emitters
of major greenhouse gasses – and that the United States will put our industries
at a disadvantage.
We’ve talked about that and your testimonies have dealt with it. And you have
pointed out the difficulties of enforcing this through border adjustments, if
we were trying to adjust for the carbon content. And you raise a very valid
point that the specific product coming in from a country might be low-carbon
content compared to the total emissions of a particular country.
The issue becomes whether – if we’re successful in Copenhagen and there is a
regime that is developed as to what is expected from nations like the United
States and developed nations, what is expected from developing countries, and
then if we can adjust our international trade commitments under WTO to reflect
that type of commitment then it seems to me that we have a regime that could
enforce the reasonable expectations of the international community, which could
be enforced through the WTO for those countries that are concerned that they
might be disadvantaging their own industries by allowing products from other
countries to come in that are not subject to the international regimes on
That seems to me to be a reasonable path. And when I ask my European friends
about it, they seemed like, gee, that’s a novel approach; why hasn’t someone
suggested that the WTO be amended as we move forward with a Copenhagen-type of
an agreement. And I’m just wondering whether in your circles these discussions
have any traction, whether there could be an expectation of a change in the WTO
as it relates to environmental issues if there’s an international consensus
reached in Copenhagen.
MR. HOUSER: Chairman, I would absolutely agree and my colleague at the
Peterson Institute, Gary Hufbauer, released a book last week about how to make
modifications to the WTO to address the climate-change reality that we’re going
to be facing. I think that those changes would come in two forms. The first
is the potential role of trade sanctions as a way to enforce an international
agreement. So the countries that are party to a Copenhagen protocol, or
whatever the emerging climate agreement that we have, agree that if countries
fail to comply that trade sanctions can be used as an enforcement mechanism. I
think that there’s promise there.
The other amendment that would need to be made is a multilateral agreement on
allowing within a global framework individual countries to adjust carbon prices
at the border to allow them to take aggressive cuts. So for Europe and the
U.S. to be able to take the type of aggressive emission-reductions target that
we’re talking about, ultimately, we’re going to need to be able to ensure that
our carbon price is consistent at the border.
The key is that you have to negotiate that multilaterally otherwise countries
will have very different opinions about what the criteria used should be. And
if we have a unilateral approach that gets settled at a WTO dispute panel
without a code beforehand where we have multilateral agreement than we risk
undermining the credibility of both the WTO and creating extraordinary tensions
for climate negotiations.
SEN. CARDIN: I agree with your point there. I think that’s going to be the
challenge. But I just hope we put some energy into that in addition to just
trying to deal with Copenhagen.
Mr. Morgenstern, I appreciated your comments on that and I also didn’t quite
understand your point about import-export differential that you said in your
original testimony. Maybe you can help clarify that for me. It seems to me
adjusting for imports could have the same WTO problem as making a border
adjustment for exports.
MR. MORGENSTERN: Okay. My understanding, Mr. Chairman, is that – and I’m not
a trade lawyer; let me stipulate that – but my understanding is that the
prospect of dealing with an import adjustment, for example, as embodied in the
various legislative proposals that have been advanced, has a pretty good
chance, probably, to that being accepted by the WTO whereas an export rebate,
which is what it would have to be in order to allow your domestic producers to
compete overseas, would face more difficulties internationally. So I think
that there is a difference within the WTO lingo there.
But the reason why I actually asked to comment on this was that your question,
if I understood it, was really about the public relations aspect. And I
presume that where you were going with this, in part, was to suggest that if we
act unilaterally and we harm our domestic industry somehow, if we cause further
job losses, if we do things that are perceived as negative, there’s going to be
a public outcry and I think that’s –
SEN. CARDIN: Well, I’m not sure we could pass the bill with the public
perception that we’re putting U.S. industries at a disadvantage. I personally
believe the U.S. industries will compete more effectively if we get – if we
become a leader on greenhouse gas emissions. But the political reality of
trying to get a bill passed in Congress is that this will disadvantage U.S.
industries if we act and China does not.
MR. MORGENSTERN: I appreciate that point. And I guess what I was going to say
was that Trevor has spoken about the ways to modify the WTO, which sound very
promising and I want to support those. But I want to come back to a point that
I tried to make earlier, which is that the use of an updating free allocation
system for these impacted industries, the use of a mechanism which,
essentially, provides a cushion to domestic industries which are facing this
increased competition is a way of addressing the problem in the near term, at
least as a transitional measure. And it’s a way of providing protection, if
you will, of some sort without labeling it protectionism in WTO terminology for
our domestic industries.
And I think that this approach, my own observation, has not gotten adequately
debated and I don’t think that the public fully understands that this is a way
of helping domestic industry and, in fact, offsetting – even offsetting by 100
percent – the burdens that would be imposed by this system.
And this is a way I would put forth of addressing the question you –
SEN. CARDIN: Of course the cap-and-trade bill that was considered last year in
the Senate had significant transitional assistance for carbon-intense
industries. So there was, in reality, a rebate, whether it was labeled that or
not, they did get credits and those credits were worth money and they got help,
which leads me to – I think Mr. Bradley wanted to comment first and I have a
follow-up question on whether that should be done or not. Let me give Mr.
Bradley a chance and I’ll come back.
MR. BRADLEY: Sure, thank you. I won’t add to Trevor and Dick’s comments on
the viability of the WTO approach. I think I would endorse their comments.
I just wanted to make a couple of notes to that. One is that the tone in which
this question is often posed – I think certainly in some of the debates in
Washington – is, how do we coerce countries like China to the negotiating
table? Can we use trade measures to do that?
I’ve tried to make the case in my testimony that the need for coercion is not
obvious. In fact, Trevor’s made the point that a trade measure may not be a
very good – an effective measure – to leverage that participation, and I would
also make the case that it’s probably not necessary. So the way that you have
framed this, in a way, of taking trade measures forward in as multilateral a
way as possible, I think, is very promising and is a welcome variant on the
type of discussion that we’ve been having.
Another area is also to focus on what might be done in the WTO in a more
positive sense around trying to move some of these technologies forward.
Periodically, we revisit this question of liberalizing the trade in the
environmental goods and services. A lot of countries still maintain fairly
high tariff and non-tariff barriers to technologies that we actually want to
see widely deployed in the world. Disentangling that from a broader trade
agenda is not easy; a lot of developing countries see that discussion largely
as a self-serving one from the rich economies. And frankly, it’s been handled
fairly clumsily in the past. You know, it’s not that long since the EU and the
U.S. both brought forward a proposal, which didn’t manage to get a whole lot of
buy-in from developing countries.
But if we’re serious about trying to move technologies on a global scale that
are going to help us deal with this problem, that is something positive and
forward-looking that can be done within the trade regime that goes beyond and
is complementary to the, perhaps, more defensive measures that help us with
these transitional arrangements around energy-intensive industries.
SEN. CARDIN: Thank you. Let me just bring up an issue, that we’re trying to
get a greater consensus in Congress to pass a strong bill and the suggestion
has been made that gives me heartache, but let me just bring it out. And that
is that the concerns expressed by many of the colleagues on the other side of
the aisle is that there’s too much money in a cap-and-trade bill and that it
establishes – it’s really a tax and it establishes all these new programs.
So why don’t we consider putting in the cap – and to the extent that there’s
revenues generated, that they be rebated to the consumers of America or to the
businesses of America that are impacted, but without the revenue flow to
government to deal with investment issues, whether they are in developing a
reasonable flow of affordable alternative fuels or renewable fuels, whether
it’s in public transportation, whether it’s in our international funds that are
created to help Third World countries or developing countries, that that be
left to the normal budget process rather than going through this extraordinary
revenue flow created through the cap-and-trade system. I just welcome your
thoughts on that approach as a way of trying to get a broader consensus in
Congress to move forward on a cap on our carbon emissions.
MR. HOUSER: I guess the first comment I would make is that a cap-and-trade
bill will have – the impacts will not be equitable, either by region or by
income group, and there are redistributional impacts that will have to be
addressed. Now, that can be addressed by directly rebating the emission
allowances for free to affected industries and consumers or by moving that
revenue through the budgetary process.
But there’s two issues, I think, that will critical to maintain – not just to
generate, but maintain – public support for a cap-and-trade bill that will deal
with allowance revenue. The first is what Dick talked about – providing some
cost offsets to energy-intensive industry to help them invest in new
technologies to reduce emissions so that they’re competing on a level playing
field. I think that’s a critical component. And I think that to be effective,
we’ll have to be addressing it that way – that unilateral trade measures won’t
be effective in protecting those industries.
And the second is consumers in coal-rich parts of the country that will see a
higher increase in electricity prices than consumers in less coal-rich parts of
the country. To help those utilities make the transition and offset the
impacts of those consumers – I think that’s going to be important. Taking the
histories of trade liberalization, coming from a trade and finance think tank,
to sustain political support for these types of policies that have distributive
impacts, like climate change and trade do, it’s important to be serious about
those efforts, I think. Otherwise, you risk undermining support for a bill a
couple years down the road.
MR. MORGENSTERN: I would just add one or two points. I agree with Trevor’s
comments here. I think there are some, clearly, particularly adversely
affected segments of society. And you probably have to deal with those as
we’ve been discussing and as Trevor’s indicated. But it’s also true, as you
indicated, that there’s a lot of money that’s generated by either a
cap-and-trade or a carbon tax. Any of these is going to generate a lot of
And I think that it’s really up to Congress to decide how they want to allocate
those dollars. Certainly, one can think of a long list of activities that one
can choose to support, either in the normal federal budget process or, in some
way, outside of it. And I guess my answer is – it sounds like a bit of a
cop-out – but maybe that’s why they pay the big bucks, okay? (Laughter.)
Essentially, it’s a political decision and it really – you know, there are some
clear questions of equity, okay. One can make a case that helping industries
which are – not industries – helping technologies, advancing new technologies
that are essential for the future are critical.
SEN. CARDIN: I agree with that, and I guess one of my concerns is with how we
do this; to me is critically important that it’s not just capping the carbon
emissions, but if the people of my state don’t have better public
transportation, it’s going to be an extraordinarily difficult change in
lifestyle that they shouldn’t have to suffer. We should be investing in public
transportation. When else are we going to get the revenues to really build the
types of transit systems that we need in this nation if we don’t use the
revenue flow from a cap-and-trade system? That’s just one – I’m sure Senator
Whitehouse in Rhode Island has a different priority that he thinks is important
for his constituents, and I agree that we have to make those decisions – but I
think, though, it would be a mistake if we just ignore the need for public
And then, our international commitments – there’s going to be serious issues
that the international community needs to address with developing countries, as
a matter of fairness and to get to the goals that we need to get to. We’re
going to have to be prepared to make those investments. And the United States
is going to have to put up the money to do that. And to try to rely on the
normal budget process for that, it’s going to be very difficult to see us meet
MR. MORGENSTERN: The good news, Senator, is that you do have a revenue stream
here. You do have a fairly reliable revenue stream that can support the types
of initiatives that you’re talking about.
SEN. CARDIN: That’s the point. The point is, do we give up that revenue
stream? I think that was the compromise that was suggested, that we give up
that revenue stream.
MR. BRADLEY: I would – excuse me.
SEN. UDALL: No, no, go ahead.
MR. BRADLEY: Just picking up on that, I would agree with what Trevor and Dick
have said and I’m not even an American voter, so I’m not going to take a stab
at what is the appropriate political, sort of, distribution between the
various, very important priorities – dealing with consumers that are impacted
by energy prices, dealing with businesses that have competitiveness concerns.
I do want to speak briefly to this question of some of the international
priorities, though, that will be funded.
I tried to make the case in my testimony that there is a significant national
interest for the United States in seeing a successful international climate
deal. It helps bind international partners into delivering on the things that
they said they were going to deliver. In the long run, it helps us deal with a
critically important problem that affects all of us. I think it’s not an
exaggeration to say that if there is no finance available for some issues
within the international regime, there will be no climate agreement.
And it’s important that we shouldn’t have any illusions about that. It’s true
that developing countries, as part of the inevitable negotiating process,
vastly overstate some of the, sort of, bottom lines that they say they have in
terms of what they would need to see on the table. But it’s very important to
recognize – and I think it has been recognized, as bills have been formulated
in both houses during the last couple of years – that there is a very strong
case for financing, in particular, I would pick out adaptation, where, in part
because of the lifestyles that we’ve led and the prosperity that we enjoy,
people around the world are going to be suffering significant impacts, in some
cases – and I regularly meet with representatives of some of the small island
states – these are existential threats – their countries will disappear.
But even on less dramatic scales, there are impacts around the world. I think
there’s a strong sense amongst many U.S. constituencies – and in particular, I
point to the religious community and the way that this unfolded over the last
couple of years – that, I think, really want to take up that ethical challenge
that we all face to try and deal with some of those questions. We all have an
interest in seeing markets for clean technology expand, and if we can be
collaborating internationally around technology and helping co-finance some of
those things, that’s going to be really important to helping that process move
forward. So it is important that that should be raised.
Now, does allowance revenue provide a sort of politics-free or politics-light
way of securing that revenue? That seems to be what we were, in many cases,
hoping in the last round of bills – I wonder whether that dream is kind of
evaporating – (chuckles) – but whether we get around the politics or not, that
argument needs to be won. And I would argue that just as we have, from a U.S.
perspective, legitimate grounds to try and put an international deal together
that tries to hold our international partners to some standard of, you know,
verifying and reporting that they’re really making progress, it may not be a
bad idea to have a similar structure in which commitments that the U.S. takes
up to fund things, whether adaptation or forest protection or technology, also
be subject to that verification.
When you’re in an appropriations discussion, being able to say this isn’t just
something that we’re arbitrarily throwing on the table this year, this is part
of an overall international engagement that we’ve got, we know what we’re
getting in exchange for it; we’re getting the viability of this deal going
onwards. That seems to me something that can help us construct what I think
ultimately an international agreement is all about, which is a greater level of
trust that enables countries to move forward more effectively together.
SEN. CARDIN: Senator Whitehouse?
SEN. WHITEHOUSE: I wanted to follow up on the chairman’s discussion about the
local impacts and how you address them. We touched on, for instance, the
states where much of the electricity is generated by coal. It’s obvious that a
great deal of the revenue generated by a cap-and-trade program needs to be
returned to the people who will be paying for it – to families. If you do it
across the board, as many have suggested, through reductions in the withholding
tax, through reductions in tax rates, through increases in EITC and things like
that, you spread it very evenly across the country and you fail at the goal of
making region-specific adjustments.
If you go specifically to the cost centers in the region, like the utilities,
and you rebate back to them, you risk either mitigating or even completely
canceling the price signal that it was the very purpose of the legislation to
achieve. If you do it state-by-state and say, well, we’re going to give Ohio,
West Virginia a slug of money to compensate for this and they can figure out
how they make that distribution, you get into the problem of the state
government becoming an agency for itself and you see what we saw, for instance,
with the tobacco settlement, in which every dollar just disappeared into
various prerogatives and it did not get back to solving the smoking problem
that it was designed to address.
So I don’t see a ready way to transfer revenues back to regular families on a
regionally defined basis that doesn’t suffer from one infirmity or another. Am
I missing a silver bullet that solves this problem?
MR. MORGENSTERN: I’m not sure I’d call it a silver bullet, but I guess I would
say that assuring that the program that’s put in place is gradual in nature and
doesn’t bring about very abrupt changes – and Trevor mentioned the idea of a
price collar or some other cost-containment mechanism. This is a way of
preventing price shocks on the upside and, by the way, on the downside, it
would limit declines that could be a problem for new technology developers who
are concerned that they – if they push forward a new product, the market
collapses and somehow, they can’t sell their product. So it actually is
helpful on both sides.
But something of that nature could prevent some of the extreme price shocks,
but the fact that there may be some – not may be – that there will be some
redistributive effect in ways that cannot be readily compensated, I think
that’s, to some extent, unavoidable, but if you can keep it small, that’s
probably the best hope.
MR. WHITEHOUSE: How about in the area of conservation? It would seem to go
back to the coal-fired electricity example, that if we wished to focus
resources in areas that were suffering particularly because of their dependence
on this as a result of the increased cost, that we could increase conservation
in those areas and, although the ultimate consumer’s per-kilowatt-hour rate
might be higher, if their ultimate electric bill is lower because they burn
less of it because we’ve funded conservation very aggressively in those areas,
we may have a situation in which the price signal has not been reduced or
mitigated or canceled and yet, they’re not harmed in the family pocketbook when
they have that long, grim night every month at the kitchen table trying to make
sure that the bills and the checkbook meet.
MR. HOUSER: I work at the Institute for International Economics so that I
don’t have to answer sticky questions like this – (laughter) – but I guess one
thing that I could add is, you’re right in that the goal is not just to offset
the cost of electricity increases to coal-dependent parts of the country, it’s
to help them transition to less coal-dependent sources of energy or less energy
consumption. And there’s a couple of ways to do that: If allocations are
provided for free to utilities, that does provide the potential for revenue.
The key is in ensuring that if those allowance are provided for me, that that
money transitions into new investment and is not passed through into price
increases for consumers.
If utilities are going to finance their transition to a low-carbon economy on
the backs of consumer price increases, then that’s where the assistance needs
to be transitioned to offset that price increase as they make that technology
investment. But ultimately, I think you’re right: However the assistance is
targeted, the price signal needs to be there and the incentives need to be
right for moving towards lower-carbon forms of energy.
SEN. CARDIN: I think Senator Whitehouse has really summarized the dilemma we
have rather effectively. It’s interesting, if you look at the Lieberman-Warner
bill from last year, it was developed in a very political environment. Senator
Boxer was very clear: She wanted to get the support to get the bill out of
committee and, hopefully, moving on the floor and she ended up with 54 senators
prepared to move forward on a pretty controversial cap-and-trade bill. And I
would suggest she got it right last year.
We were pretty close to the balance that Senator Whitehouse was talking about
of making sure that we deal with the adverse impacts that we didn’t want to see
happen in our community, but still allowing the market forces to operate in
order to make our economy function the best way with low-carbon emission. So
I’m not saying we can’t improve last year’s bill; we can improve last year’s
bill and it will be different as it moves through this Congress, but I do think
a lot of these are political judgments that we have to make in order to try to
balance the competing interests.
Let me thank our witnesses for their testimony. What I intend to do is to take
this testimony and use it in developing a position for the Helsinki Commission
that we will move forward in Vilnius when we have our parliamentary assembly
meetings this summer, hopefully working with our administration as to the
position that we will be taking moving towards Copenhagen so that the United
States plays a very constructive role in the Copenhagen meetings. I know that
the committees of Congress intend to be very actively involved in work leading
up to Copenhagen, and I would like to see the Helsinki Commission be part of
that effort, recognizing that we’re all going to have to give a little bit to
get us to an effective international agreement.
I have very strong views about some of the international enforcement issues
under WTO and I’m always concerned that our European partners are too timid in
trying to use WTO to advance legitimate international objectives. So
hopefully, we’ll be able to work out those issues as we move forward. The
bottom line is that the United States cannot sit on the sidelines – that we
have to be the leader – and we have relinquished that role. And I do thank our
European friends because I think that they have done some really remarkable
initiatives on dealing with carbon emissions.
And I think that will help us a great deal in reaching, I hope, a consensus in
Copenhagen. So once again, let me thank our witnesses for their participation.
It was extremely helpful and we particularly appreciate your frankness in the
exchanges that took place with the members of the commission. We’ll stand
(ENDED AT 11:30 A.M.)