Hill Heat

Full committee hearing on Lieberman-Warner cap-and-trade legislation.

Witnesses

• Peter A. Darbee, Chairman of the Board, CEO, and President, PG&E Corporation
• Jonathan C. Pershing, Director, Climate, Energy and Pollution Program Climate and Energy, World Resources Institute
• Anne E. Smith, Vice President, CRA International
• Dr. Margo Thorning, Senior Vice President and Chief Economist, American Council for Capital Formation
• Wiley Barbour, Executive Director, Environmental Resources Trust

PG&E and WRI are members of US-CAP. The Environmental Resources Trust is connected to Environmental Defense, another US-CAP member.

Thorning has appeared regularly as a minority witness challenging cap-and-trade in previous hearings. Anne Smith also has appeared as a minority witness challenging cap-and-trade in a recent House hearing.

9:44 Boxer I believe we have the momentum, the wind at our back. Sens. Inhofe and Barrasso could have thrown a monkey wrench into the process. They did not do that. I want to tell you publicly how much it meant to me and I want to thank you so much.

9:45 Inhofe I want everyone to be aware that we’ll be working together at 10:45 this morning. I think we need the administrative analysis of the costs of this bill. I think we have some excellent witnesses today. The cap-and-trade concept has been a total failure. Even the European environmentalists say it’s been a failure. If you want to address this thing there are other ways to do it. The supporters of putting brakes on our economy support going going down this path of self-destruction. Costs of up to a trillion dollars a year.

9:48 Lieberman Thanks Chairwoman Boxer for your leadership. We’ve got a problem. I think that the bill we brought forward gets the job done and does it in a way that will ultimately help our economy. There are costs but they’re worth it. Are the American people willing to pay an extra penny over twenty-five years to do something about global warming? Absolutely. These reports don’t take into account the staggering costs if we fail to do something about global warming.

9:55 Voinovich The abbreviated process by which this legislation is moving is not conducive to good legislation. There should be full vetting by the Committee on Jurisdiction. There was only one subcommittee hearing and a hurried up markup. I’m told we’ll only have one more hearing on Tuesday before a markup, and a floor vote on December 5th. At this point it’s not possible to assess the costs and benefits of this bill. We have heard from no witnesses on the efficacy of the Carbon Board. In fact, until being provided with today’s testimony, we’ve been provided with no analyses. Sufficient time has not been provided to members. Multiple analyses were run in 2003-2005 for Clear Skies when I ran the committee. I know Bali is coming up in December, and I know some people would like a scalp in their hand, but this is too important.

10:00 Boxer I don’t think Clear Skies ever became law. I think some people want to get things done. I don’t need to be told this is important. We have held twenty hearings on the various aspects of global warming. The fact is that we have state and local leaders already acting. I take issue to the fact this is being rushed. We may not go to Bali. The fact is that we have a subcommittee bill already. We have planned two legislative hearings. My staff is available. I am personally meeting with every Senator on this committee who wishes to meet. I welcome amendments. I disagree with what you’re saying. We are not rushing this through. If you don’t want to have a bill, I respect that. But I don’t think you should criticize the process. If you want more briefings, we’ll brief every day. You want to debate whether not we should have legislation, but don’t bring up Clear Skies, that’s a failure. The people are tired of partisan bickering. I want to take the strongest objection to what you’re saying.

10:04 Inhofe Our staff has been requesting meetings with your staff and it’s been denied.

Boxer I’d sure like to see evidence of that.

10:05 Klobuchar We have hunters, ski resort owners seeing the effects. I went to Greenland watching the water come out like spigots. With all due respect to Sen. Voinovich, my fellow Slovenian, we have waited too long. We let states be the laboratories of democracy. Now it’s our time. The rhetoric is over and it’s time for action. I know the bill isn’t perfect. I would like the bill to specifically mention cellulosic ethanol and wind. It gives some direction to business to invest. I know there’s issues we should address, to look at the proper incentives for clean energy. I don’t think we should wait until after the presidential election.

10:08 Bond I support cutting carbon emissions but without cutting household budgets. CAFE standards. Wind, solar, zero-carbon nuclear. This is a very problematic bill, among others, for farmers. This is a very complicated bill. Whether the consequences of the bill are deliberate or not, households will feel real pain. We have a farm bill on the floor today. I hope noone thinks this won’t have impacts on farmers. The farm costs of L-W far outweigh the benefits. Fertilizer costs will go way up. I buy a little bit of fertilizer for my operations. I’ve seen the costs go way up. How are we going to get our food supplies? Farmers will deluged with higher fertilizer, transportation, heating costs. I think is just one of the many problems.

10:13 Carper Anyone who might wonder why we haven’t made more progress can just listen to this. There’s a lot of disagreement. It’s not entirely partisan but it’s definitely strong. I want to thank Sens. Lieberman, Warner, Boxer for having the temerity, the strength of will, to forge a compromise. I’m deeply concerned with how we allocate credits in this proposal. I think we should allocate to clean energy. I come from a small state on the coast. We find ourselves on the end of the tailpipe. As governor of Delaware, we could almost close down our state and we’d still not be in attainment for ozone. The people of W. Virginia where I was born, Virginia where I grew up, Ohio where I went to school, Kentucky where my sister and her family live, are producing the pollution. Delaware has the highest rate of child asthma. 24,000 Americans will die from sulfur dioxide emissions this year, over 400 this week.

I eat a lot of fish, maybe you do to. If you happen to be a woman who’s pregnant, your child might not be so lucky. We know that 6000 children will be born this year with high levels of mercury.

I want to support this legislation. I appreciate we’ve tried to address the transportation sector. I would have us focus on three things: clean fuels, clean cars, other options than cars. I think nuclear is part of the solution. We need to come up with a compromise that actually gets the job done.

10:19 Vitter I certainly agree with you that this is an extremely important issue. I also agree that the stakes are very very high. I agree with Sen. Voinovich and others who have expressed grave concern with the accelerated process. Yes, there have been hearings for years on global warming. But I would urge the committee to have more hearings on this voluminous bill. I don’t think there’s any state who has more at stake, frankly, than Louisiana. Sea level changes could have an enormous impact on Louisiana. At the same time if we act unwisely and do things with our present fuels that aren’t justified, Louisiana will be among the first hit. We need to find out what the impacts are, what the science supports. I am very very concerned that we are taking as complex a bill as we’ve ever seen in the Senate and moving forward with sound bites and not sound policy. I’m eager to hear from more witnesses on this very complex bill. I think we need more hearings.

10:22 Lautenberg Thank you for holding this hearing. Our children and grandchildren will never understand if we don’t take action. We improved the bill in subcommittee. We expanded the bill to include natural gas, created a process for scientists to evaluate if we need stronger laws, protects states’ rights to do more, increased the 2020 target from 10% to 15%. UCS has said we need to get to 80% by 2050. There’s an endangered species here: us! There will be plenty of jobs out there, just not enough people.

The bill gives away cost-free permits to polluters. We need to move to a polluter-pay system much faster. We should think twice before giving out the majority of free permits to the biggest polluters. Some of the permits should be given to clean producers like solar. I am hopeful this bill can be improved as we go forward. I want to respond to our friend Sen. Inhofe who said cap-and-trade doesn’t work it’s done a heck of a job.

Inhofe Cap-and-trade on acid rain is not the same animal.

Lautenberg I said what I said.

Inhofe And I said what I* said.

Lieberman* This reminds me of Popeye, I am what I am.

Barrasso A number of us had the chance to sit down with Thomas Friedman this morning. I don’t think we can shut off our traditional sources. But we also have a lot of renewable sources. China and India. I think it’s important for we in America to invest in the technology. A world that by 2030 by 50% more energy because of soaring demand in China and India. I have concerns with requiring coal plants capture 85% of their emissions. I’m glad Sen. Lieberman is interested with working with me to stair-step to that requirement. I do worry about unintended consequences that energy limitations will have on our economy. I do want to reiterate that I want to address the problem of global warming. We have to show China and India that we can address emissions, create jobs, and develop the necessary technology.

10:31 Cardin ACSA gives us the best hope to pass meaningful climate legislation. I’m proud to be an original cosponsor. I think this more than an issue of climate change. It’s a matter of national security to use less fossil fuels. It’s in our economic interest. It’s a win-win-win issue. ACSA is based on two important pillars. By establishing a declining cap it reduces emissions. As we go through the process it keeps getting better. I hope it continues to get better.

It’s clear to me from the scientific information available we should strive for 80% reduction. It seems to me that from the inception of the cap we do a 100% auction. It gives us the financial wherewithal to help low-income consumers, create jobs, develop technology.

I think this bill is a great start and restores American leadership.

10:35 Craig I don’t fear this process as long as it is fair, open and transparent. My position has been consisent—cap-and-trade is obsolete. I wish Sen. Clinton was here today. She did something in Iowa last week that I was impressed by. She supported a number of incentives that are in line with what the administration supports. I would request of you, madam chair, a thorough analysis by IEA. None of us dispute the magnitude of the effort. None of us dispute the magnitude of impact. The rest of the world is frustrated. They’ve tried and they’re failing. We need new technology. I request the markup be postponed until we have the analyses of shall we say impartial observers.

10:40 Boxer We haven’t even announced when the markup is. We’re going to have so many briefings here. Sen. Clinton’s also on Sanders-Boxer. Let’s not distort her views. I just wanted to set the record straight on that. I went back and looked at the record. We all know what a slow dance is, we weren’t born yesterday. We think the time is now to act.

10:42 Sanders We have come a long way in a year. You deserve a lot of credit. All over the world people are wondering what we’re doing. I believe this legislation does not go far enough. I don’t think it is asking to much of the American people to listen to the scientific community. What the scientific community is saying is “We made a mistake! We underestimated the problem.” We’ve got to be more aggressive, not less aggressive. The time is too late for politics as usual. The world cannot wait. We need to reduce greenhouse gas emissions by 80% by 2050. The 63% at most that L-W gets is just not enough.

There are number of other issues with the auction. We can’t say to polluters you have twenty to thirty more years to destroy the environment. I also am unhappy with the new entrant provisions.

The good news is that we know how to stop global warming. One of the major concerns that I have about this legislation is that there is not one nickel specific to energy efficiency which everyone knows is the low-hanging fruit. With solar, PG&E has signed with an Israeli company to build a solar plant at the scale of a small nuclear plant, producing electricity at 10 cents a kilowatt hour, competitive today. If we put 20 billion of dollars into solar we can produce gigawatts of electricity. A $10,000 small wind turbine can supply 40% of a house’s electricity need. We are not taking advantage of the technologies we already have. I don’t know what the future of clean coal is. But we don’t have to spend hundreds of billions of dollars to find out the future of solar and wind.

10:47 Boxer I ask unanimous consent to place Sen. Isakson’s statement on the record. Here’s a statement from Sen. Warner: “This committee had the chance to hold hearings on Lieberman-McCain and it did not.”

10:49 Whitehouse Nothing in the focus on the parts where we disagree should detract from the accomplishments you, Sen. Lieberman and Sen. Warner have achieved. Our targets for greenhouse gas need to be adequate and enforceable. The auction needs to be adequate and needs to have integrity. The process isn’t even subject to the Open Records Act and other oversight mechanisms. I think it’s important to focus on the impact on low-income folks. I am very pleased that the wildlife and conservation issues I’ve introduced are being addressed. I’m looking forward to looking at the role of the distribution utilities. I salute you for what has been accomplished.

10:51 Boxer This issue is fraught with a lot of concern, emotion, and we appreciate your patience. Sen. Inhofe and I need to get to the floor to make closing statements on the water bill override. Welcome to our first panelist, Peter Darbee.

10:53 Peter A. Darbee, PG&E Global warming is a global problem unsolvable without our national commitment. This will be a 1000 mile journey and I believe the world is watching for us to make the first step. In our opinion, ACSA makes that responsible first step. It would benefit from improvements in some key areas. But we believe this bill with a package of complementary measures will set us on the path of racheting down emissions. The cost of energy efficiency is about half that of a new natural gas plant. Policies and incentives should maximize efficiency. One important example is its support for decoupling, a proven strategy.

The bill could give more support for early action to increase efficiency, rather than based on historical emissions.

The sooner we take action, the smaller will be the impact on our economy.

10:58 Jonathan Pershing I’m the director of the climate program at the World Resources Institute. The problem is one of enormous urgency. The science is clear. If the US does not act quickly and aggressively, the world will lag. If we don’t act, the costs will be great. California wildfires will increase. The drought in the Southeast. Hurricanes projected to increase. The cap-and-trade system and the complementary elements in this act provide a clear market signal for investment and action. The WRI has conducted a preliminary analysis. It would cover 82% of the economy in the act. It would reduce 17% by 2020 and 71% in 2050 of covered sectors. There’s a huge range of technology options. There’s less than one percent difference in 25 year GDP growth with the implementation of these policies. The bill sends a strong international signal. There will be three issues on the table: mitigation, forestry, and help for adaptation. The bill addresses the problem of forestry, but it does not address adaptation.

11:04 Anne Smith CRA International. My testimony is my own. By 2015 S 2191 would result in the net loss of 1-2 million jobs, despite the creation of green jobs. Initial compliance requires a disruptive switch to natural gas. But then by 2025 the natural gas infrastructure will become obsolete. S 2191 sets ambitious caps but its near-term targets are overly ambitious.

11:09 Margo Thorning From 1990-2000 we reduced per capita emissions by 0.8 percent. By 2030 we need per capita reductions by 50%. A cap-and-trade system may not be the most appropriate way. Most economists think a carbon tax is preferable. The EU is not on track to meet its emission reduction targets. I think we all agree this is an important problem. I think it requires new technologies. If we look at where the emissions growth is coming from, it’s the developing countries. They’re getting more efficient but still much less efficient than US and Japan. Getting our technology them would help. Our tax code: changing depreciation. Economic growth can be a driver.

11:14 Wiley Barbour Director of Environmental Resources Trust. I’m a licensed engineer. Our expertise is in the monitoring and measurement of emissions. We are an implementation shop, if you will, working with companies who are serious about measuring and reducing their footprint. Some are interested in purchasing emission reductions. These companies want a clear signal from Washington. The exchanges are working to establish a set of contracts that companies need. I chair an environmental committee for NYSE. For the last twenty years we’ve tried voluntary programs. A mandatory cap is necessary. We’ve found the market-based approach works.

11:20 Boxer Is OPEC one of CRA International’s clients? Is ARCO? Is American Petroleum Institute, Chevron, ExxonMobil? The Natural Gas Supply Association? I want everyone to know who your clients are. Did you look at what goings on in California?

Smith I said the caps in the near term are too tight. I’m aware that California has achieved large reductions in energy intensity and I’m aware that it’s in large part energy-intensive industry has moved to other parts of the country.

Boxer I’m going to hand over the gavel to Sen. Lieberman.

11:24 Inhofe Let me ask two yes or no questions. Mr. Darbee, would you still support the bill if you did not receive free allowances?

Darbee Probably not.

Inhofe Would WRI support incentives for nuclear power?

Pershing We’d have to look at it but we’re open to considering it.

Thorning I think people need to be aware that the average production facility last 20-25 years, power plants maybe 60 years. More time to meet tight targets would substantially reduce the costs of these targets.

Inhofe We shouldn’t expect fuel switching until prices of allowances hit $50 a ton.

Smith The costs are lower with a looser cap.

Inhofe What would happen to industries like steel and cement?

Smith I was mentioning leakage when I had to end my testimony. Energy-intensive industries are extremely exposed. Some are so far on the edge that if there are not tax incentives they will like suffer huge losses.

Thorning Autos last 7-8 years, appliances 10-15, production facility last 20-25 years, power plants maybe 60 years.

Inhofe I’ve commented several times that I think a carbon tax would be more honest.

Smith I believe it’s far more suited to this climate policy.

11:29 Lieberman I’m going to ask questions on behalf of Sen. Warner as well. To PG&E, you said you’d probably not support the bill without free allowances. Where else would you get money without raising rates? Which is why you’re getting free allowances and some of the proceeds of the auctions.

Darbee We thought it would be better if the board had more transparency, a ceiling for the price of carbon, as well as a floor that would rise over time. There would be certainty over what the price of carbon would be over a range of years. If those standards and prices were public, we think it would be very constructive.

Lieberman How can we expedite the availability of technologies?

Darbee We believe the cap-and-trade system would be the best.

11:34 Pershing I have not seen Dr. Smith’s model in detail, but I believe it does not include feedback benefits or intrasectoral movement.

Lieberman I want to note if you’re Haley Barbour’s wiley cousin, ha ha. Just reelected governor of Mississippi, so we want to congratulate him. What do you think is most important for market efficiency?

Barbour They want the flexibility in when and where. I think the banking provisions are important. It incentivizes companies to overcomply today. I think that this is an essential feature. It’s that failure of banking in the EU system. The initial phase did not allow banking.

11:38 Carper I thought I heard Mr. Barbour and Mr. Darbee talk about offsets. I’d like to ask each of you to talk about the value of offsets.

Barbour The provision of the use of offsets is very wise. I’m a proponent of even greater use of offsets. I think it’s an opportunity to harness the technological know-how of our nation.

Darbee The offset mechanism is one of the reasons a cap-and-trade system is better than a tax. It unleashes the creativity of the free market.

Pershing I would agree with those comments, but mention that verifiability, transparency, monitoring must be a part of it.

Smith Offsets are a good thing to add. The limits of the offsets in the bill have something to do with the high costs of the program. You can do offsets with a carbon tax.

Thorning Verifying the offsets can be a sticky issue. Verifying Chinese offsets has been a problem. You need a real bureaucracy.

Carper I want to thank you all for your willingness to participate. Could you explain how output based allowances work?

Darbee The beauty of output-based allowances instead of historical emissions, there wouldn’t be an incentive for them to change. If you provide allowances to those who have low carbon emissions, you are rewarding that kind of behavior. Allocating emissions on the basis of output rewards those who produce electricity with no or low-carbon emissions.

11:45 Voinovich There are those that look at what we’re doing and conclude that unless we understand this is a global problem and do something more rapid than what this bill provides is fruitless. I think that what should drive this is technology. Technology to capture and sequester carbon. My concern is that there’s an urgency for us to move as quickly as possible and then it’s available for us to sell to other parts of the world. Where can we find the money to move this quickly. I’d like your comments on that. We’ve lost jobs in our state because of high natural gas costs. My heating bill is up 300% since 2000. The chemical industry. We were number one in plastics when I was governor. Are we moving fast enough.

Smith We to time the stringency of the caps, which is why there’s such a switch to gas in some projections. There’s no emphasis in this bill for funding research and development.

Thorning The Asia-Pacific Partnership is designed to do exactly what you’re asking.

11:51 Lautenberg Do you think the pace as structured in Lieberman-Warner would be too rapid, endangering our economy?

Smith It depends on how rapidly you go. The 2012-2025 pace goes too fast.

L* Is the long-term target too costly?

Smith* It’s aggressive and costly but doable.

Smith There would be no differences in the near term environmentally for a looser cap.

Smith US action would do nothing. Global action would be needed.

Lautenberg Don’t you know there’s melting happening all over?

Smith There’s ice melt in parts, and ice buildup in others. But I’m not debating that warming is happening.

Lautenberg Do you think Congress ought to require all coal plants to have the best technology?

Pershing I think Congress should add significant obligations. The cap-and-trade system effectively does that but other provisions could amplifiy that.

12:00 Craig Nuclear?

Darbee We think energy efficiency and renewables may obviate the need for nuclear, but there also may need be need for nuclear.

Coal about 3 cents per kilowatthour, nuclear today 4 cents, existing hydroelectric 3 cents, photovoltaic about 30 cents.

Craig Retirees from California are flowing into our state with our low-cost hydropower. We’re a clean state. WRI’s allocation preference? Free or not free?

Pershing We do believe the allocation should be phased out over time, the more quickly, the more economic efficiency. There are things you can do with the auction revenues. While the electricity price you pay may go up, the amount of electricity you may use may go down.

12:06 Sanders On page 12 of your written testimony you discuss a government report on concentrated solar power that by 2050 the cost could go to 8 cents by 2050. What do you see the potential of solar plants to be?

Darbee I failed to mention that new clean-coal technologies to be about 8 cents, new nuclear about 10 cents. We’re very excited about concentrated solar power because it’s cheaper than PV.

Sanders Am I wrong in saying that fossil costs are going to be going up steeply?

Darbee With solar there’s no input costs or input uncertainty. And the technology is simple.

Sanders How much electricity can we be generating?

Darbee The potential in the sunny parts of the United States, we could deliver more solar-thermal power than nuclear. Very substantial.

Sanders They’re talking about solar plants producing seven times the state of California’s needs.

Darbee That’s conceivable, yes.

Sanders I want to explore the potential of clean coal. They’re talking about getting hundreds of billions of dollars of subsidies. With solar subsidies we could get costs down to 4-5 cents pkwh.

Darbee That’s correct.

Sanders I noticed in your remarks you talked about new sources. Can you elaborate?

Darbee If one gives enough allowances to coal plants, the costs for running them will be zero. Shifting allocations will change that.

12:12 Craig Let me ask this question. It frustrates me a great deal when we move money around that doesn’t produce clean energy. Is that not a transfer of wealth?

Pershing Of course. The question is to what end. The shift should be from high-carbon-intensive processes to low-carbon intensity.

Craig Your analysis implies that emissions reductions will be achieved by the transfer of industry to other countries.

Smith What you’ve described is what we call leakage. I did not say that the cap is not met entirely by leakage. I did say provisions are missing from the bill.

Thorning The targets are so tight it would clearly impinge on consumers’ lifestyles. It would require much dimmer lighting, much more emphasis on building efficiency. We need to look very carefuly at the challenges in this bill.

Craig How can we be certain a cap-and-trade system doesn’t suffer the volatility of the European system?

Barbour There was an over-allocation to industry. There was no provision for banking into the next period. We have yet to discover how well it will work; 2008-2012 is the first period of Kyoto compliance.

12:17 Whitehouse I’d be interested in anybody’s thoughts on how to police the integrity of the auction and trade system. We’ve seen overheated markets. We have the SEC to police the capital markets. We’ve had unpoliced markets in California energy. Enron traded in energy futures and that was a nightmare. There have to be some pretty major safeguards, especially when you consider the billions, perhaps trillions of dollars in the market. This thing right now looks like the Wild West. Where would you recommend we go for models?

Darbee We’ve given a lot of thought, having been in California during that time. In general the SEC is a good model. Many people think Sarbanes-Oxley may have gone to far. And monitoring of the synthetic instruments. Secondly we’d like to propose extending on the Fed model and work with a collar with a ceiling and floor where the board would borrow against the future to maintain the ceiling.

Pershing One comment—how can you monitor it effectively. The continuous emissions monitor. We need a registry and to allow for full transparency. Almost 40 states have been providing that registry.

Smith I’d like to comment on the idea of a collar. It would provide some certainty. The only problem is that a collar will not be viable to sustain unless those prices are consistent with the cap. A safety valve type ceiling is necessary.

Thorning The SEC you have buyers and sellers on opposite ends of the transaction. But when you have an ETS it can be in both parties’ interest to collude.

Barbour I think the legislation addresses that as well as we can.

12:27 Sanders I would say that in Burlington we’ve grown reasonably well over 16-20 years without increasing electricity consumption. What is the potential of energy conservation?

Pershing The models range quite extensively. Even China has a very aggressive energy efficiency program. Energy efficiency programs improve local pollution, create jobs, etc.

Darbee I’ve heard people in out industry suggest the technology doesn’t exist. It does. We have actually entertained delegations from China. They’re gobbling up that information. They want to be more competitive than they are today. There is a lot we can do today just with energy efficiency. Waiting is not the appropriate course of action.

12:30 Sanders This hearing is adjourned.