Hearing :: Green and Mean: Can the New U.S. Economy be both Climate-Friendly and Competitive?

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HEARING

GREEN AND MEAN: CAN THE NEW U.S. ECONOMY BE BOTH CLIMATE-FRIENDLY AND 
COMPETITIVE?

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

SPEAKERS:
ROBERT BRADLEY,
DIRECTOR OF INTERNATIONAL CLIMATE POLICY,
WORLD RESOURCES INSTITUTE

TREVOR HOUSER,
VISITING FELLOW,
PETERSON INSTITUTE FOR INTERNATIONAL ECONOMICS

RICHARD D. MORGENSTERN,
SENIOR FELLOW,
RESOURCES FOR THE FUTURE

TUESDAY, MARCH 10, 2009
428A RUSSELL SENATE OFFICE BUILDING
10:00 A.M.



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 
cap-and-trade program.

Although the initial effort was flawed, the entire world looked to Europe 
because of its leadership role.  The cap-and-trade program that we will design 
in America will owe much to the European experience.  America has been on the 
sidelines.  We have had an administration that denied the reality of global 
warming even as glaciers melted and sea levels rose and the international 
scientific consensus became much more unified.  Today we have a new president 
and a new commitment to action.  This year the Congress and President Obama 
will work together to enact climate change legislation.  Based on sound 
science, this legislation will rely on tough mandatory cap-and-trade program.

The climate bill will harness market resources to bring down greenhouse gas 
emissions, while simultaneously stimulating investment in a clean, sustainable 
economy for the decades ahead.  We live in an interconnected world, where the 
decisions we make here impact other countries and vice versa.  Nowhere is that 
clearer than on the issue of climate change.  Our economy and our environment 
depend on the commitment we make today to retool our nation’s economy for the 
future.  Increasingly that holds true for the rest of the world as well.

The time has come for America to do more than simply get off the sidelines.  
The time has come for America to assert its leadership in the world again.  
Taking action on climate change legislation must be a top priority for Congress 
this year.  The time for action is long past.  The time to catch up is now.  
Even in the shadow of the most severe recession in a generation, America’s role 
in the world economy is unparalleled.  Other nations may have more consumers or 
greater portions of certain market share, but it’s clear that the world is 
looking to the United States to lead us out of the economic wilderness, and we 
will.  It is also clear that the world needs America to exert its leadership on 
climate change.  Along with China, we are the largest emitters of greenhouse 
gases in the world, but unlike China America has the history of combining 
intellectual resources, entrepreneurial spirit, market savvy and optimism that 
can translate into an effective worldwide leadership on this issue.

With the adoption of a tough cap-and-trade bill, America will set on a path 
that will improve our national security by reducing our reliance on foreign 
oil, stimulate our economy by generating millions of new, clean, green jobs in 
energy efficiency, solar wind, biomass, and more, and pull the world back from 
the brink of catastrophic climate change.

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 
hearing material.

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 
myself, strictly.  

Broad market-based strategies of the type that you’ve referred to, cap and 
trade, that attach a price to greenhouse gas emissions have the potential to 
offer significant cost and efficiency advantages to the United States as it 
seeks to reduce its carbon emissions.  At the same time, there is the potential 
that this approach will impose significant costs on particularly 
energy-intensive, import-sensitive industries.  It is these industries and this 
question of competitiveness that is referred to as the subject of this hearing 
and which my comments relate to.

I have been involved in some research activities with several of my RFF 
colleagues and what I want to do today is quickly review some of the key 
results of those studies that we have conducted, and then talk about some of 
the options that the United States might have in trying to deal with these 
problems.  The conclusions of our research can really be succinctly stated in a 
couple of points.

Number one, measured by the reduction in output, a readily identifiable set of 
industries is at the greatest risk of contraction over both the short and long 
term as a result of domestic action.  Secondly, although the short run output 
reductions may seem relatively large in these industries, these reductions 
shrink over time as firms adjust inputs and adopt new technologies to the 
changing environment.  Third, the largest cost increases are concentrated not 
in broad industry categories as we commonly refer to them, but oftentimes in 
industry sub-categories.  For example, we may see impacts on aluminum, which is 
a broad category.  We may see impact on lime, which is a somewhat smaller 
category.  And it is this combination of large and small industry sectors that 
we need to understand.

In the non-manufacturing sector there are also some declines that are seen, but 
a rather diverse pattern applies.  For example, you see that in the electric 
utility industry the impact is relatively consistent over time, whereas you see 
in something like mining there may be a continuing deterioration as there is a 
substitution away from metals, for example, to a substitute for metals that may 
be attractive.

In terms of employment, the short-run impacts are roughly proportional to the 
losses in output, but over the longer term we tend to see other industries come 
in, pick up the slack, and we do not see a net loss in employment over the long 
term.  

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. 
Houser?

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 
multilateral approach.

But finally, it’s important that we do this in a way that is compatible with 
the principles of the world trading system because for us to capture that 
upside, the clean revolution on which our ambitions lie, we’re going to need 
open markets to export low carbon goods to the rest of the world, so we need to 
think about that inclusively.

In the 110th Congress, most of the energy and climate bills that were 
introduced, cap-and-trade bills, took one primary approach to addressing this 
issue of competitiveness, of leakage, and that is to impose a comparability 
test, to look at what other countries are doing to reduce emissions, and those 
who are seen as not taking comparable action to the U.S. to have the price for 
carbon on energy-intensive imports – on steel, aluminum, and cement – adjusted 
at the border.  

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 
approach.  

For addressing leakage, until we get to a harmonized global carbon price – 
either a global cap and trade system or global carbon tax – which is more than 
a decade off at least – we could have a multilateral agreement on how to adjust 
border prices – adjust carbon prices at the border between countries, in the 
way that Europe does a value-added tax.  Alternatively, we could have an 
international sectoral agreement where within the broader global agreement 
countries agree to a common price or a common set of standards for 
internationally traded goods like steel and cement.  Both of those things would 
need to be negotiated multilaterally.  

In the interim, as Dick mentioned, we have a number of options available to us 
in the way we design our allowance system to offset costs to domestic industry, 
in particular of the types of output-based rebating proposals that folks in the 
House are working on today hold quite a bit of promise.

Thanks very much.

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 
Institute.

Both my companions here, Trevor and Dick, in their testimonies have referred to 
the desirability of placing U.S. climate policy in the context of a broader 
international agreement.  And so I wanted to step back and explore that 
possibility a little bit.  

I’d like to make three points, each of which I treat in more detail in my 
written testimony which I hope can be included in the record.  First, success 
against climate change will mean strong federal policy in the United States and 
action from major developed and developing economies.  Second, the world has 
changed dramatically since the days of the Kyoto Protocol.  Major developing 
countries are ready to take significant action on limiting emissions.  And 
third, all countries will seek to harness the benefits of growth and new jobs 
from a switch to cleaner energy.  Constructive international policy on both 
trade and technology cooperation can help build support for an effective 
climate regime.

The United States is an indispensable leader in the fight against climate 
change.  Without the world’s largest economy and biggest historical emitter 
other countries cannot fix the problem.  But nor can the U.S. do it alone.  
Almost 80 percent of global emissions are produced by 15 counties, nine of 
which are in the developing world.  The Kyoto Protocol, the main climate 
agreement to date, has been rejected by the United States in particular because 
of the concern that without meaningful participation from major developing 
countries it would be ineffective and costly to the U.S. economy.  

Developing countries have historically argued that with their poverty and small 
historical contribution to the climate problem they should not be responsible 
for curbing emissions.  But in recent years there’s been a flood of developing 
country climate plans.  For example, Brazil announced that it would reduce its 
deforestation rate over 50 percent from recent levels by 2017, avoiding an 
estimated 4.8 billion tons of carbon dioxide emissions.  China committed to 
reducing national energy intensity – that’s energy per unit of gross domestic 
product – by 20 percent by 2010 and looks on course to meet that goal with 
programs expected to cut emissions by 550 million tons of CO2.  Investment in 
wind, hydro, nuclear and biomass are expected to save an additional 640 million 
tons by 2010.  

India has a number of states that are taking forward aggressive renewable 
energy targets with renewable portfolio standards.  Mexico pledged to half its 
greenhouse gas emissions by 2050 and is considering a cap and trade policy not 
dissimilar to the one recently considered by U.S. Congress.  South Africa has 
presented a highly detailed and ambition plan to peak its national emissions by 
2020 and to bring them down to low levels in 2050 in accordance with – 
(inaudible).  

These policies will often not be of the same form as the cap and trade approach 
favored in the United States and Europe, but that need not make them any less 
ambitious.  They are the more impressive when we consider the poverty of many 
of these countries.  In India 550 million people still lack any access to 
electricity and they, like Europeans and Americans in the last century, 
legitimately aspire to get it, but they are seeking to do so on a lower carbon 
pathway.  

An international climate agreement can help reinforce these actions.  Many of 
these countries have a poor record of implementing national plans.  It will 
certainly not be enough for countries to take each other’s plans at face value. 
 

The Bali Action Plan, which frames negotiations for a post-2012 climate 
agreement, provides for both developed and developing countries to take 
mitigating actions that are, quote, “measurable, reportable and verifiable.” 
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 
Congressman Hastings.  

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 
strongly.  

Mr. Chairman, I was thinking as our three presenters were going forward that 
probably in other places around the world – either today, yesterday or tomorrow 
– similar type discussion are being had.  One of the continuing problems it 
seems that we have in trying to reach international agreement is the lack of 
communication.  I would emphasize at the outset you spoke about our Web site 
and I would hope that the testimony of these gentlemen will be appropriately 
diaried and disseminated to other individuals in other countries that might 
very well find their remarks useful.

Mr. Morgenstern, how long were you actually involved and to what degree were 
you involved in Kyoto? 

MR. MORGENSTERN:  I was working at the Environmental Protection Agency 
throughout most of the ’80s and 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 
States?

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 
effective way.

SEN. UDALL:  So you’d rather see a cap-and-trade than a renewable standard?  
That first?

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 
the timelines.

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 
global warming.

There seems to be very little discussion about that and I’m interested in to 
what extent, as you look at this as an international issue, this issue is 
cropping up in other countries in their discussions?  It seems to be the 
forgotten issue in this case.  In fact, the very name that we give to the 
problem overlooks this dimension of it.  Mr. Bradley?

MR. BRADLEY:  It’s a very important point.  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 
world.

They’ve also looked at sea-level rise, infrastructure impacts, agriculture 
impacts, health impacts and others.  So I would just emphasize that there’s a 
whole range of concerns out there that are, as you highlight, extremely 
important.

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?

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 
been advanced.

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 
issues there.

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 
nation-state.  

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 
compliance costs.

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 
carbon reductions.

That seems to me to be a reasonable path.  And when I ask my European friends 
about it, they seemed like, gee, that’s a novel approach; why hasn’t someone 
suggested that the WTO be amended as we move forward with a Copenhagen-type of 
an agreement.  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 
money.

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 
investment.

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 
those goals.

MR. MORGENSTERN:  The good news, Senator, is that you do have a revenue stream 
here.  You do have a fairly reliable revenue stream that can support the types 
of initiatives that you’re talking about.

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 
adjourned.

(ENDED AT 11:30 A.M.)