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Hearing of the Energy and Environment Subcommittee of the House Energy and Commerce Committee - Allowance Allocation Policies in Climate Legislation: Assisting Consumers, Investing in a Clean Energy Future, and Adapting to Climate Change

Chaired By: Rep. Edward J. Markey

Witnesses: Thomas F. Farrell II, on Behalf of the Edison Electric Institute; Rich Wells, Vice President, Energy, Dow Chemical Company; Nat Keohane, Economist, Environmental Defense Fund; Reverend Dr. Mari Castellanos, Minister for Policy Advocacy, United Church of Christ, Justice and Peace Ministries; G. Tommy Hodges, on Behalf of the American Trucking Association; David Sokol, Chairman of the Board, Mid American Energy Holdings Company; David Montgomery, Vice President, Charles River Associates; Steve Cousins, Vice President, Lion Oil Company

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REP. MARKEY: Good morning. Good morning to all of you. And this hearing will come to order.

Today's hearing will examine the ways in which allowance value from the Waxman-Markey clean energy bill can be used to assist consumers, invest in a new energy future and help the United States and the world to adapt to climate change.

Although that is a tall order for any piece of legislation, the Waxman-Markey bill, which was reported from the committee on May 21st, 2009, does just that. The bill contains comprehensive energy legislation that will repower America with new clean energy sources; provide for increased energy independence; create new clean energy jobs; make investments in renewable energy sources; enhance competitiveness; strengthen our national security; and fight global warming.

This bill achieves those goals but does so in a way that will help not hurt consumers. And that actually reduces the budget deficit. In the more than 30 years that I have been in Congress, one word has always come first in every piece of legislation that I have worked on: consumers. From telecommunications to the environment to fuel economy standards, I have found that starting with the goal of saving families money is always the best organizing principle for an effective public policy. That is why the Waxman-Markey bill sends such a very high percentage of its allowance value directly to consumers.

Under the legislation more than 55 percent of the allowance value goes directly to consumers. Between 2012 and 2025, 32 percent goes to regulated electricity local distribution companies for the benefit of consumers; 6.5 percent goes to natural gas local distribution companies for the benefit of consumers; 1.6 percent goes to states for the benefit of home heating oil and propane consumers; 15 percent goes to low- and moderate-income consumers. In addition, the bill allocates 19 percent of allowance value to protect trade-exposed industries to help them maintain international competitiveness and to keep manufacturing jobs here in the United States.

The bill also provides 6 percent of allowance value to states for investments in clean energy and energy efficiency. These programs will also help save money for consumers, enhance our energy independence, and create good clean-energy jobs in renewable energy and energy efficiency that cannot be outsourced.

And finally, the bill allocates 2.5 percent of allowance value for domestic adaptation, including for public health. This allocation of allowance will assist consumers faced with increasing costs from a multitude of effects due to global warming.

So if you add it all up, between 2012 and 2025 more than 80 percent of allowance value will go towards programs that will: one, directly benefit consumers; two, lower costs for consumers; three, mitigate the effects of climate change for consumers; and four, keep or create jobs in the United States.

The rest of the value will also go to important public purposes. Between 2012 and 2025, 2 percent is dedicated to investments in electric vehicles and other advanced automobile technology that will strengthen our energy independence; 3.3 percent is dedicated to carbon capture and sequestration technologies; and 1.5 percent will go to research and development in clean energy and energy efficiency technologies. These investments also will create new jobs and help keep America more competitive.

Other uses of allowance allocation in the legislation include allocating 5 percent for supplemental reductions to be achieved by preventing tropical deforestation and distributing 2.5 percent for international adaptation and clean-energy transfer. These allocations will ensure that the United States will be well positioned to negotiate with other nations in the global climate treaty process. That in turn will also help protect our workers and consumers from foreign competition and from runaway costs due to unchecked global warming.

And finally, the bill dedicates a portion of the important -- to the important goal of deficit reduction. On Friday, the Congressional Budget Office announced in its cost impact analysis that the Waxman- Markey bill would reduce budget deficits or increase future surpluses by about $24 billion over the 2010-2019 period. Consequently, this bill is both environmentally responsible and fiscally responsible.

Our current reality is that America's economy is in a slump and consumers remain vulnerable to price spikes brought about by the old energy economy and an addiction to expensive foreign oil. But I have faith in our economy and that it will mend itself and once again become fully dominant if we make the right choices and unleash innovation now.

The choice that we opt for now is to invest in clean-energy jobs to improve our national security and provide a safe and healthy future for our economy.

We thank all of you for participating in today's hearing. Now let me turn and recognize the gentleman from Michigan, the ranking member of the committee -- subcommittee, Mr. Upton.

REP. FRED UPTON (R-MI): Well, thank you, Mr. Chairman. I have a prepared statement that I'm going to ask to put into the record. And I just --

REP. MARKEY: Without objection, it will be so ordered.

REP. UPTON: I came back from Michigan and was in the office yesterday when I heard about the CBO report, which I've not read yet. But I'm getting a copy and I look forward to reading it in the next day or two.

John Dingell in a subcommittee hearing that we had I believe it was last month or it might have been end of April called cap and trade a big -- great big tax. And man, was he right. Now, when you look at what different publications say -- CBO puts hefty price tag on emissions plan -- this cap and trade system is seen to cost $846 billion.

American -- and it goes on to say in the story, "American Petroleum Institute President Jack Gerard said the projected cost of the emissions allowance will mean an increase as much as 70 cents a gallon for gasoline with diesel fuel going up as much as 88 cents per gallon."

The Brookings Institute, not exactly a center-right organization, called cap and trade to reduce carbon dioxide emissions would lower the nation's gross domestic product in 2050 by 2.5 percent. It goes on to say that about 35 percent of crude oil-related jobs and 40 percent of coal-related jobs will be lost in 2025 according to the analysis. And it shows that the personal consumption would fall by as much as .5 percent or $2 trillion by 2050. It goes on -- it concludes, it says that they think that the government would raise about $1.5 trillion by 2020 if it sold all the carbon emissions, so almost double what CBO said.

During the Memorial Day break I visited one of my small companies that have been around for 100-some years in Niles, Michigan, Niles Steel Tank. Now, that's what they make, custom-made steel tanks. These were 750-gallon tanks. They know about cap and trade. In fact, they said that if cap and trade was enacted they were thinking about canceling the day shift and moving all of their production into the nighttime so that they could take advantage of lower energy costs because they were worried about what those costs would do knowing that they today pay about $11,000 a month in electricity and about $9,000 a month in natural gas.

And the testimony that we're going to hear from Mr. Sokol (sic/Cousins) as it relates to refineries, he indicates on Page 5 that India is building a 1-million-barrel-per-day refinery to make transportation fuels that will be exported almost exclusively to the U.S. and European markets. This refinery -- larger than any refinery in the United States -- is equal to the total capacity of about 15 of Lion Oil's. Under this bill, the Indian refinery, which already operates at a significant cost advantage, will not be required to purchase allowances for CO2 emitted from this -- from its plant.

Mr. Chairman, we are -- particularly those of us in the Midwest -- we are going through some very hard times: the news relating to the auto industry and other manufacturing sectors; our unemployment rate has been double digits for more than a year, and many of our counties, they're predicting perhaps as high as 20 percent by the end of the summer and even higher then. This cap and trade bill, as John Engler said, could put us into a permanent recession, those of us that are facing this in the Midwest.

And I look forward to the hearing. And I yield back my time.

REP. MARKEY: Great. The gentleman's time has expired.

The chair recognizes the chairman emeritus of the committee, the gentleman from Michigan, Mr. Dingell.

REP. JOHN DINGELL (D-MI): Mr. Chairman, thank you for holding this hearing.

It is important that our constituents understand the steps the Energy and Commerce Committee has taken to protect consumers, protect trade, vulnerable industries to invest in clean technologies and help vulnerable segments of the population in our natural environment to adapt to climate change.

From one day of trying to craft a sensible approach to deal with climate change, a time several years ago, I've been clear in my belief that it is not going to be cheap and that, most likely, consumers will be seeing substantially increased energy costs. Moreover, I've been extremely concerned that enacting an economywide cap and trade program could adversely affect our already struggling manufacturing section -- sector.

I have to say I'm impressed with the approach taken in H.R. 2454 in terms of allocating and the allowance values to programs to address these concerns. H.R. 2454 establishes five programs to protect consumers from potential energy price increases. EPA has estimated that global warming provisions in the discussion draft would cost the average household ($)98 to $140 per year. And they have concluded that the changes made in the committee draft will further reduce the costs of the legislation.

Now, being from the Midwest where we are extremely dependent on coal for our electricity, I have to believe that our people are particularly susceptible to electricity price increases. I am pleased with the approach adopted by the committee. Regulated utilities that distribute electricity to consumers will receive allowances that must be used to keep prices low. Giving the allowances to regulated utilities should cut down on opportunities for rascality. However, this is something on which we must be diligent in watching when this or similar legislation is signed into law.

I am also pleased with the portion of allowance value that's going to the auto industry for investment in green vehicles. Specifically, the majority would go into the Department of Energy Section 136 Advanced Technology Vehicles Manufacturing Program with a portion going to plug-in electric vehicle manufacturing and deployment.

We have seen remarkable innovations from automakers as consumers have begun to show interest in more fuel-efficient vehicles. And the allowance values will spur more innovations and new green job creation at home.

Finally, Mr. Chairman, I am pleased at the allowance values allocated to natural resource adaption (sic). As I have said on numerous occasions, I consider this to be a moral imperative. And I'm pleased that the chairman agrees with my perspective.

I look forward to hearing from our witnesses today for their perspectives on the allocation scheme as laid out in H.R. 2454. Thank you, Mr. Chairman.

REP. MARKEY: We thank the gentleman.

The chair recognizes the ranking member of the full committee, Mr. Barton.

REP. JOE BARTON (R-TX): Thank you, Mr. Chairman.

First, let me thank you and Chairman Waxman for agreeing to this hearing. I had asked that we hold two hearings. You all have agreed to at least this one and maybe another one. Even though the markup has already occurred, I think it's important to try to get into the mechanics and to understand the intricacies of the allocation in the cap and trade allowance as part of this legislation. So I do appreciate you and Chairman Waxman for agreeing to this hearing.

I want to thank our witnesses. I know many of you have spent many sleepless nights trying to understand this system. And hopefully you can help explain it to the people who are actually trying to put it into place.

We have a fundamental disagreement on the basic premise of this bill. The proponents of the bill are fervent and I think sincere in their belief that man-made CO2 is a dominant contributor to what is either called global warming or climate change. Most of the opponents of the bill -- and I certainly put myself in that camp -- think climate change is an issue that we need to study and we need to address, but we're not convinced that mankind generically and CO2 specifically is a dominant cause of the climate changing.

So we start with the fundamental disagreement on the basic premise of the bill. But if you get beyond that and you get beyond the science, you next come to a couple of inescapable facts. Number one is you can't have it both ways. If CO2 -- man-made CO2 in the United States really is a problem, then you don't give the allowances away. You either have a carbon tax, which would be the most efficient and straight-up and transparent way to deal with the problem, or you do 100 percent auction for CO2 allowances. Well, we put 100 percent auction allowance on the table in the markup. I think it got five votes out of 50-some-odd votes.

So if you're really not going to charge for that commodity -- in this case, man-made CO2 -- you're going to give a lot of it away, you're not going to reduce it. I listened to Mr. Markey's opening statement downstairs in my office on the television. And if I add it up correctly, in the beginning he's giving away around 85 percent of these allowances. So you're going to auction off 15 percent. You're not going to make a dent in CO2 charging only 15 percent of the population that you regulate trying to control it. So that's a fundamental problem.

The second fundamental problem is, in spite of the best efforts, you can't make an allocation system in an economy as complex as the United States. You can't really make it fair. I don't doubt the sincerity of the proponents of the bill when they say they're trying to make sure that nobody pays more than their fair share, but just this local distribution company system where you get 50 percent of your allowances and it all goes to the local distribution company, But 50 percent is based on the generating capacity, and then 50 percent is based on emissions. Well, if you're in an area like the Northwest where you have huge generating capacity but it's all hydro, you're getting a free gift. Now, if you're in an area like the Southeast where they don't really have a lot of wind power and they don't really have a lot of hydropower, you're going to have a wealth transfer when you pay for your allowances from the Southeast to the Northwest. Now, that may be what the proponents want, but it's not fair. And we need to address that.

Then you start these allowances for various industry groups. Refineries get 2 percent, and I heard Mr. Markey say there's kind of a general set-aside of 1.6 percent for heating oil. When you start trying to interact those types of allowances with the generic electricity allowances you're going to in some cases get double counting and in other cases get an undercounting. And I don't see how you rectify that.

So, you know, the -- my time is about to expire. The SO2, the sulfur -- when we did sulfur dioxide cap and trade in the '90s -- that's the model that everybody points to that we can make CO2 work here in the early part of the 21st century. There is a big difference. SO2 was almost totally man-made. SO2 had discrete point sources that we knew where it was. SO2 we had a technology to control it that was cost-effective.

We have none of that. The bill says any point source in the United States that generates more than 25,000 tons of CO2 a year is subject to regulation. Twenty-five thousand tons of CO2 is not a lot of CO2.

So, Mr. Chairman, I appreciate you holding this hearing. We are really going to have a fine time, as Chairman Dingell would say, trying to understand the system. And hopefully at the end of the hearing the American public will have a better understanding of it. Thank you and Mr. Waxman for holding this hearing.

REP. MARKEY: We thank the gentleman very much.

The chair recognizes the chairman of the full committee, the gentleman from California, Mr. Waxman.

REP. HENRY WAXMAN (D-CA): Thank you very much, Mr. Chairman. I appreciate this hearing.

The bill, H.R. 2454, requires major U.S. sources of emissions to obtain an allowance for each ton of global warming pollution emitted into the atmosphere. And the emission allowances provide a critically important tool in transitioning the country to a clean-energy future.

In deciding how to use the value of the allowances, the committee was guided by four principles.

First, we wanted to assist consumers with the transition. And we use over 50 percent of the allowances for this purpose. We have five programs that protect consumers for any -- from energy price increases: electricity price increases, one for natural gas, one for heating oil, one to protect low- and moderate-income families, and one to provide a tax dividend to consumers. In combination, these programs ensure that American consumers are protected as the legislation is implemented.

Secondly, the bill invests in developing and deploying energy efficiency programs and clean-energy technology. This will be a driver of costs -- a driver of jobs and innovation. And it will help us break the connection between energy generation and carbon emissions, allowing us to meet increasingly tighter emission limits at lower costs than are predicted today. This will also help the U.S. be a global leader in clean-energy technologies.

Third, we worked hard to assist industry in making the transition to clean-energy economy. We cannot afford to add significant uncompensated cost that would disadvantage manufacturing and production here compared to other countries that do not have emission limitations like China and India. And providing transition assistance to our industries helps ensure that the reductions in emissions occur because our industry is becoming more efficient, not because they are moving production and emissions overseas.

Finally, H.R. 2454 provides allowances for a number of other important purposes. It would provide assistance to help us adapt to climate change both here and abroad. The international adaptation piece rises to moral obligations and will help the president negotiate a strong treaty in Copenhagen. It will also help address some of the national security issues as Senator John Warner and others have warned us about. And the bill would also generate large additional lowest- cost-emission reductions by reducing tropical deforestation, helping us to avoid dangerous climate change.

The committee has worked hard on this allocation plan to ensure that it's fair. It does what a good energy bill needs to do: It balances the interests of different parts of the country and of different stakeholders, and accomplishes much of what is important to everyone. It will go a long way to moving the country into a clean- energy future.

I do want to point out there has been some misunderstanding I've seen in some of the articles in the press. They say that when we give out a free allowance we're not sending the right price signals to the consumers to make the reductions in use of energy. Well, I think that misunderstands the bill. We do have the limit -- overall limit on carbon emissions, so we have the incentives to make those reductions. We wanted to have those reductions made in the least costly way. And the signals are sent to the people who are most able to make the reductions, just as we have the requirements on the major sources of the pollution that we're trying to reduce.

So I think that a lot of people think that there is only one way, and that's to have a harsh burden on people to get the reductions. I think we can have a transition, reduce the carbon emissions and benefit everyone at the same time.

I yield back my time.

REP. MARKEY: Great. Gentleman's time has expired.

The chair recognizes the gentleman from Kentucky, Mr. Whitfield, for two minutes.

REP. ED WHITFIELD (R-KY): Thank you, Mr. Chairman.

When I heard you speaking of this bill I was not sure we were talking about the same bill. I was reading recently an article signed by Peter Orszag, the current chairman of OMB, entitled, "Trade-offs in Allocating Allowances for CO2 Emissions." In that study he said very clearly a common misconception is that freely distributing allowances to purchasers would prevent consumer prices from rising as a result of the cap.

And then he goes on to say higher consumer costs were borne out in the cap and trade programs for sulfur dioxide in the United States and also for CO2 emissions in Europe. Consumer prices increased even though producers were given free allowances.

He goes on to say in this report that those price increases would be regressive and that poorer households would bear a larger burden relative to their income than wealthier households would. He goes on to say that job losses in certain energy industries like coal, for example, would be severe. Job losses would be severe.

So I'm glad we're having this hearing because none of us really understand the way this is going to work. And we certainly do not understand the way that consumers are going to be protected.

The final comment that I would make, the Energy Information Agency came out with a report based on this bill. And it very clearly shows that we're moving lower electricity costs from one area of the country to other areas of the country. The states that really get hurt by this bill are Alabama, Florida, Georgia, Illinois, Indiana, Kentucky, Michigan, Missouri, Ohio, Oklahoma, Pennsylvania, Tennessee, Texas, West Virginia and Wyoming.

And there are some states on the East Coast and West Coast that will benefit from this bill.

I yield back. My time has expired.

REP. MARKEY: The gentleman's time has expired.

The chair recognizes the gentleman from Virginia, Mr. Boucher.

REP. RICK BOUCHER (D-VA): Thank you, Mr. Chairman. I'll waive opening statement and reserve time for questions.

REP. MARKEY: Okay. The chair recognizes the gentleman from California, Mr. McNerney.

REP. JERRY MCNERNEY (D-CA): Thank you, Mr. Chairman.

First of all, I want to thank the witnesses for coming today. It's a broad spectrum of philosophies, and that's important for this discussion.

I'm proud to support the act. I think it's a good act. It meets the environmental goals by capping carbon emissions, and in the long run it will create jobs -- a lot of jobs.

You know, the allowance allocation is essential. It has been devised to protect both businesses and families and to increase America's efficiency, which is absolutely essential for us to meet our long-term goals of getting ahead of the price increases by being more and more efficient so that the consumers pay less out of their pockets for the same result or in fact for better results.

So I think it's essential and I support it. And I'm looking forward to the discussion. I think there will be some good ideas that come out here today. So with that, I yield back.

REP. MARKEY: The gentleman's time has expired.

The chair recognizes the gentleman from Illinois, Mr. Shimkus.

REP. JOHN SHIMKUS (R-IL): I'm down here, Mr. Chairman. Thank you very much.

And I want to thank Joe Barton and Chairman Waxman for agreeing to this hearing. You know, I wish it would have been done prior to the markup, but that's water underneath the bridge. We move on. And I'm ready to move with you.

I was waiting for the great proclamation from the Chinese trip that they had China agree to an international standard to cap carbon trade. Mr. Chairman has been curiously silent on that issue. I am not shocked.

What I have heard is that the Chinese want $140 billion a year from the U.S. to help them in their transition to cap carbon from the taxpayers. They won't sign a treaty claiming to be (doing it ?) on themselves. And their claims actually result in a 30 percent increase for their carbon output. Does that sound like they are playing ball? I would say not.

I also want to make sure that if we have another hearing that we address this issue called compulsory licenses. For those of you who think that we're going to be making all this profit from green jobs and the green economy, guess what. We're going to sign an international agreement that forces the holder of a patent or a copyright to give away their exclusive rights to grant use to the states and to others.

So all those companies that think they're going to sell and make a profit by having a patent, we're going to give it to China without compensation or for minimal compensation. That's a great plan, and that's in this bill. And it ought to be stripped out.

And I will just end on this article from Business Week, "Banks Gearing up for Carbon Trading." Here is another wealth transfer to large, big banks. But while U.S. policymakers continue to squabble over the details of the cap and trade proposal, big banks -- haven't we bailed them out enough? -- are gearing up for what they see as a new profit center. U.S. carbon trading is coming.

So if you want to help out the big banks and bail them out, move on this legislation. I yield back my time.

REP. MARKEY: Great. The gentleman's time has expired.

The chair recognizes the gentleman from North Carolina, Mr. Butterfield.

REP. G. K. BUTTERFIELD (D-NC): Thank you very much, Mr. Chairman, for convening this hearing today. And I certainly thank the witnesses for their participation. I've looked forward to this hearing because there's still a lot of questions that we need to have answered. And perhaps some of your wisdom may be very helpful to us.

We have certainly had tremendous difficulty in devising an equitable way of the allowance allocations. We have spent a lot of time doing that. We finally reached a compromise and now we have it on paper.

The allowance allocation in this act accomplishes the difficult and necessary balance of assuring environmental integrity while easing the transition cost for the covered entities and thus easing the cost for consumers. And so yes, there will be free allocations. Criticism that the free allocation of credits in the early years of this program allows polluting companies off the hook could not be further from the truth.

The overall cap ensures greenhouse gas emitters will reduce their emissions. This law forces utility -- electric utilities and petroleum refiners and steel companies and paper and chemical manufacturers to make investments, substantial investments, in energy efficiency and cleaner fuels whether or not the credits are auctioned.

Now, throughout consideration of this issue I have spoken repeatedly about the necessity to protect consumers from price hikes resulting from this legislation. The allocation accomplishes this by devoting resources to regulated LDCs whose bylaws require that they pass the value along to the consumers.

Most importantly, the poorest Americans who contributed least to this problem and are least able to endure any increases in cost are held harmless. I am satisfied of that. The 15 percent allowance value devoted to these struggling households guarantee the recoupment of any lost purchasing power and does not phase out over the life of the program. This critical component is essential to a fair and balanced policy that achieves the long-term goal of reducing greenhouse gas emissions while keeping struggling consumers free from irreparable economic harm.

Again, Mr. Chairman, I support this legislation and thank the witnesses for coming. I yield back.

REP. MARKEY: Great. Gentleman's time has expired.

The chair recognizes the gentleman from Missouri, Mr. Blunt.

The chair recognizes the gentleman from Pennsylvania, Mr. Pitts.

REP. JOSEPH PITTS (R-PA): Thank you, Mr. Chairman. And thank you for holding this important hearing on the allocation policies under the American Clean Energy and Security Act.

Mr. Chairman, like all of us I believe we should work to decrease the amount of greenhouse gas emissions in our atmosphere. And we should be good stewards of this Earth and its resources. However, I do not believe this bill, which passed out of this committee last month, will do anything to accomplish its goal of reducing global temperatures.

Instead, I believe it will have a crippling effect on our economy for years to come without much environmental benefit. It will still irreparably damage our economy despite the allocation policies that are supposed to protect the consumer. No matter how it is doctored or tailored it is a tax. It's a national energy tax that will hurt each and every household. It will destroy sectors of our economy and cause job losses at an unprecedented rate.

We should be protecting our environment through innovation, through entrepreneurship and cooperation and encouragement.

This bill tries to cut carbon emissions through taxation and punishment, the heavy hand of big government and litigation. We should be creating jobs by encouraging entrepreneurship, competition, new technologies. Instead, this bill is going to cost countless working men and women their jobs.

This bill, as previously drafted -- in the original draft, which had 50 pages on light bulbs and two sentences on nuclear power; now that's changed somewhat -- but as analyzed a couple of weeks ago by the Public Utility Commission in Pennsylvania would have cost 66,000 jobs in Pennsylvania alone by 2020. Much of it is still applicable.

I urge my colleagues to consider just how irresponsible it is to continue to support legislation that will cost so many jobs and do so much damage to our economy just as we are struggling to come out of one of the worst recessions in recent history. The American people will see this. They can see this. And they will be angry. It punishes everyone in America who uses energy. That is everyone in America.

Instead, we should be crafting policies that create incentives to bring online new nuclear power plants, hydrogen storage technology, more cost-effective wind and solar technology, smart grid technology, more efficient electricity transmissions and other innovations. We don't need to wash trillions of dollars of American taxpayer money through the federal bureaucracy in order to get a clean-energy economy.

The alternative to job-killing and big government cap and trade plans is to create incentives and let the market pick the winners.

I want to thank the witnesses for coming today. I look forward to hearing their testimony. I yield back.

REP. MARKEY: Great. Gentleman's time has expired.

The chair recognizes the gentleman from Texas, Mr. Green.

REP. GENE GREEN (D-TX): Thank you, Mr. Chairman. And for holding the hearing, I thank you and our chair of the full committee for your leadership on the American Clean Energy and Security Act. The success is a testament to your ability to find a consensus among our diverse membership. I applaud your efforts and look forward to continuing to work on refinements in that bill.

Today's hearing is yet another opportunity to learn more about how allowances are distributed under H.R. 2454. The top criticisms of any cap and trade are the projected impacts on the American consumer and our domestic industries. With our economy sluggish and family incomes already stretched thin, any policy must ensure that hardworking Americans do not see their energy costs skyrocket or U.S. jobs moved overseas.

While I believe that additional transitional assistance may be needed, H.R. 2454 struck a careful balance in allocating carbon allowances. The legislation devotes significant allocation to protect consumer energy price increases, electric and natural gas. LDCs receive 40 percent of the allowances, a value that must be passed on to the benefit of the consumers through lower electric and natural gas bills.

Second, the legislation provides allowances to keep U.S. industry competitive with foreign nations who do not have carbon reduction. I want to thank my friends Inslee and Doyle for their work on the 15 percent allocation. The 2 percent allocation for refiners is intended to keep them competitive and encourage energy efficiencies improvement. Ultimately, I believe more assistance discussion is needed, and I know we'll hear that today from our witness from the refineries.

I know Congressman Barton is here, and he has questioned many times whether carbon -- human activity. And knowing our ranking member's love for Texas A&M, I just saw a recent study, Mr. Chairman, that was release by Reuters from Texas A&M showing that the Texas coast, particularly Corpus Christi, faces widespread flooding and the most powerful hurricanes. "Flooding and" -- quote from the author of the study -- "hurricanes will be more severe." Jennifer Irish, assistant professor of coastal and ocean engineering at Texas A&M statement --"The worse global warming gets the more severe the consequences for the Texas coast."

And Mr. Chairman, I've run out of my time. But we surely don't want to see Padre and Mustang Islands much less Galveston, Texas have too high tides. So I'll be glad to forward this to you, Mr. Chairman -- Ranking Member.

REP. BARTON: Not everything at Texas A&M is as it seems on the surface.

REP. GREEN: Okay. (Laughs.) Thank you.

I yield back whatever time I have left.

REP. MARKEY: The gentleman's has expired.

The chair recognizes the gentleman from Oregon, Mr. Walden.

REP. GREG WALDEN (R-OR): Thank you very much, Mr. Chairman.

I just want to make a couple of points. First of all, it's been said that there is enormous transfer to the Northwest as a result of cap and trade in this bill. And while there is a certain truth to that in some sectors, we're going to find out today that the 553,000 customers of PacifiCorp face a 17.9 percent increase in their power costs in the first year of this legislation in 2012. That's $163 million hit to customers in Oregon, according to the data that we're going to hear.

And so I think we've seen what happens when you have the government take over the auto sector. That's playing out in every rural town in America right now as dealers are getting shot in the head. This bill amounts to a government takeover of the energy sector, and we're going to see how that plays out.

Meanwhile, the Chinese -- you know, there is a story in The Washington Post today that quotes from a May 20th position paper regarding the Copenhagen meeting where the Chinese are expecting the developing countries -- or developed countries to reduce their emissions by at least 40 percent from the 1990 level by 2020. This legislation reduces it by 4 (percent). So you see the level of expectation that the Chinese have for us. If that's the case and it's a tenfold increase, then does that mean my ratepayers are going to see a 179 percent increase in their energy costs?

Meanwhile, I know you'd all be disappointed if I didn't point out that this legislation fails miserably in the area of woody biomass. And in fact, two-thirds of the federal land would be off limits as a result. That's still not been fixed in this legislation. I desperately hope it does, because as we know from the example in Sweden, you could actually create 30,000 jobs as they did using biomass and produce 18 percent of their electricity with woody biomass.

Finally, I'd say this does amount -- according to CBO -- an $846 billion increase in federal revenues, an $821 billion increase in direct spending. And while they initially say that's a surplus of $24 billion, they go on to point out that it would increase discretionary spending by about ($)50 billion over the 2010 to 2019 period. So it does cost money, it raises taxes, it'll hurt jobs, and it raises rates to consumers.

REP. MARKEY: (Sounds gavel.) All right, the gentleman's time has expired.

The chair recognizes the gentleman from Arkansas, Mr. Ross.

REP. MIKE ROSS (D-AR): Thank you, Chairman Markey, for holding today's hearing on allowance allocation policies and climate change legislation. This is an important topic, and I am pleased to see the subcommittee discussing this issue.

I'd like to also thank all the witnesses that have come before the subcommittee to testify today. I want to particularly use my time to recognize one of the witnesses, Mr. Steve Cousins with Lion Oil Company. Steve is the vice president of refining for Lion Oil Company, which is located in my congressional district in El Dorado, Arkansas. Lion Oil has been a leading employer in El Dorado for over 85 years, and their refinery in El Dorado produces approximately 70,000 barrels of gasoline and diesel fuel per day.

Lion Oil employs about 1,200 direct employees in El Dorado, one of many towns across my district that has been hit hard by the recession. And they employ another 3,600 individuals either -- that depend indirectly on the plant in El Dorado.

As such, I am concerned about how the cap and trade legislation that the committee recently passed will affect Lion Oil and other small refineries across America. And I'm eager to here Mr. Cousins' testimony today on their behalf.

I'm particularly concerned that perhaps as a committee we picked winners and losers in the allocation process. And certainly I feel that the small refineries came out on the short end of the stick.

As the leader of the free world I believe that America must lead by example on climate change. However, we must embrace a common-sense approach to imposing regulations that will help to improve our environment while still maintaining jobs and strengthening our nation's economy. And I am hopeful that Steve's testimony and others today will help us do that.

Once again, thank you for holding this hearing. And I look forward to the testimony in order to work on a solution to climate change that is consistent with common-sense Arkansas values, one that does right by the environment and the economy. And with that, Mr. Chairman, I yield back.

REP. MARKEY: Great. Gentleman's time has expired.

The chair recognizes the gentleman from Louisiana, Mr. Scalise.

REP. STEVE SCALISE (R-LA): Thank you, Mr. Chairman.

This hearing on allowance allocation policies is long overdue and should have been held months ago. The allocation section of the cap and trade energy tax bill that this committee marked up last month remained essentially empty until just hours before our committee met.

This ill-advised cap and trade energy tax, which was the product of secretive backroom deals and special interest trading, will hijack our entire American energy economy and will raise costs on all American families and businesses at a time when they can least afford it. The American people expect and deserve more, especially at a time when they were promised transparency.

No one denies that the cap and trade energy tax will cause millions of American jobs to be shipped to foreign countries like China and India while American families will pay thousands more in increased utility costs. Even President Obama has acknowledged that his cap and trade tax will lead to higher electricity prices by stating, quote, "Under my plan of a cap and trade system electricity rates would necessarily skyrocket," end quote. And just last month, the current CBO director, Douglas Elmendorf, testified before the Senate that a cap and trade program would lead to higher prices for energy and energy-intensive goods.

This bill creates big winners and big losers. The big losers are American families and small businesses. And make no mistake about it: The big winners are countries like China and India, who are chomping at the bit to take our jobs, and the same Wall Street speculators who brought our country's financial markets to near collapse and who stand to gain billions in new profits by creating a trading scheme for these carbon credits.

Instead of shipping millions of good jobs overseas and killing our energy economy, Congress should support an all-of-the-above national energy policy that will create American jobs by utilizing our nation's natural resources to reduce our dependence on Middle Eastern oil and promote alternative sources of energy like wind, solar and nuclear.

Along with many of my colleagues, I am proud to be a co-sponsor of H.R. 2300, the American Energy Innovation Act, legislation that takes this all-of-the-above approach. And the net effect of our comprehensive energy plan will result in lower carbon emissions because American jobs in manufacturing will not be shipped to foreign countries like China that have lower environmental standards than we have today here in America.

Thank you and I yield back.

REP. MARKEY: Great. Gentleman's time has expired.

The chair recognizes the gentleman from Utah, Mr. Matheson.

REP. JIM MATHESON (D-UT): Thank you, Mr. Chairman.

I think the issue of how you structure an allowance program is extremely complicated. And it's very important that we hold this hearing to create better understanding for of all the ramifications and the ways that this has been structured now and see if there are suggested improvements.

I hope as we move forward at this hearing -- I have not had a chance to read all of the pre-filed testimony -- but I would hope as we move forward in this hearing that the panel can shed some light on the impacts of the allocation structures as included in the bill as it's written now, which shows that half the allocations are based on total generation capacity and half on the fuel mix, if you will. I may be oversimplifying with that.

It seems to me this draws into question the issue of different impacts on different regions of the country. Some regions are heavily based on nuclear; some heavily based on hydro. I come from a state where over 90 percent of the electricity is generated from coal.

And I've been raising from the outset of these climate change hearings the question of impacts in terms of regional income transfers. And this specific topic today of the allocation structure of this bill is one of the key elements of regional impacts in my opinion.

So I welcome the witnesses. I hope as we move towards this hearing we can learn more about the impacts on different regions of the country. And if there are problems with the current allocation structures written in the bill, I'd look forward to suggestions if people think there might be a better way to address that concern.

With that, I yield back, Mr. Chairman.

REP. MARKEY: Great. Gentleman's time has expired.

The chair recognizes the gentleman from Florida, Mr. Stearns.

REP. CLIFF STEARNS (R-FL): Thank you, Mr. Chairman.

And I am -- as chairman -- our Ranking Member Barton has indicated, we're hoping there will be more than one of these hearings. I know that Mr. Waxman and yourself had indicated that we'd have at least one. And I think it's to your credit to have this hearing as well as ours because I think judging from the participation of our witnesses, this will be a great opportunity for us to ask questions.

We have the estimates from CBO. We have the Heritage Foundation. I'm going to mention this briefly. So there is quite a diverse opinion here on impact of this cap and trade. As mentioned by others, the CBO has indicated that this would hurt families by imposing an $850 billion energy tax that obviously would be paid by every American family. If you're going to drive a car, buy anything American or just simply turn on a light, you're going to be facing the possibility of increased taxes.

The Heritage Foundation, their projections for 2035 were pretty dramatic. Now, I don't know if they take into account the inflation which would normally occur. But they say raise electricity rates, almost double them, and raise gasoline prices, raise residential natural gas prices by almost 60 percent, increase the federal debt by 26 percent, and additional cost -- enormous cost per families.

So the resulting higher energy rates will be especially hard I think on the poor, the elderly, low income, particularly those individuals in my district who spend most of their paycheck on service industries -- gas, groceries and cooling their home.

During the Energy and Commerce Committee markup, we offered numerous amendments -- simple amendments I thought that would simply pass with bipartisan support. We thought to improve the bill to protect these American families from paying these massive new taxes, but they were defeated almost along party lines.

So Mr. Chairman, in the end this is really your bill. This is not a bill that's supported by Republicans.

And so you'll have to make the case why Americans should be saddled with an $850 billion new tax, particularly in light of the economy now they can least afford it. So, you know, I think fostering new technology and scientific research instead of capping our economy and trading U.S. jobs is a better guard to our nation's security and increase our energy independence.

And with that, I yield back.

REP. MARKEY: Great. We thank the gentleman.

Chair recognizes the gentleman from Georgia, Mr. Barrow.

REP. JOHN BARROW (D-GA): I thank the chairman.

All of us I think are depending on technological breakthroughs to get us something we don't have right now, and that's new sources of energy that are clean, cheap and abundant.

Mr. Barton talks about fundamental disagreements. I'm going to outline another one. So far, everybody who's talked has depended on increases in the cost of dirty energy to provide the incentive or the conditions to create this thing we don't have yet, the technological breakthroughs we need.

The do-nothing crowd says we can wait and let natural forces of supply and demand produce the crash in prices that will produce the incentives for folks to develop what we need. The do-something crowd says we need a controlled crash in advance of that condition before people -- before Florida is awash with water so we can try and, you know, accelerate the research and development in a sort of trickle- down fashion.

I think we ought to disenthrall ourselves from the whole idea that increasing the cost of dirty energy is the best way to come up with new sources of clean energy. It certainly ain't the best way and it's certainly not the only way.

We also ought to disenthrall ourselves of plans that were adopted at the state level or the result of regional cooperation which really reflect the limits of what states acting together or independently can do under the Constitution. It seems that folks who are pushing that idea are determined to impose the limits of state power, acting alone or in concert with other states, on our national efforts.

What we're talking about here is a plan to redistribute the proceeds of a plan to deliberately increase the cost of dirty energy in order to create some sort of supply of new energy that's cheap, clean and abundant. What I think we ought to do is recognize that that's going to provide uncoordinated research and development. It's going to provide resources that are weaker -- inherently weaker than what we can do at the national level.

What I think we need is not a program that depends on a price crash but a program that depends on a crash program of sustained public investment in research and development and deployment of clean sources of alternative energy. That's a level of fundamental disagreement that I haven't heard yet, and that's where I come from on this.

I think it's incumbent on those of us who are dissenting from this approach to set forth our vision for how we can do a better job that's more effective and more coordinated.

And with that, Mr. Chairman, I yield.

REP. MARKEY: Great. Gentleman's time has expired.

The chair recognizes the gentleman from Washington state, Mr. Inslee.

REP. JAY INSLEE (D-WA): Thank you.

Several people have mentioned China as an excuse for doing nothing on this problem. We just spent a week in China with the speaker. I thought I'd make three points about why we should assume our traditional role as world leaders in America on this subject.

Number one, in this bill we have provided protection for American workers in trade-sensitive, energy-intensive industries in steel, aluminum, paper by providing 15 percent of the allocations to these industries so we do not have to concern ourselves about job leakage to China in these trade-sensitive, energy-intensive industries. Mike Doyle and I worked on that, and thanks to the chair, we got it in this bill.

Point number two, China is acting on energy today in three ways that we are not even today. Number one, they have a 20 percent reduction of energy intensity from a carbon perspective, CO2 perspective. Number two, they have a 15 percent renewable energy portfolio. Number three, they have a corporate average fuel economy standard even more aggressive than ours.

And it is a certain irony today to me that some people here are arguing we should not act using China as an excuse when those are the same people who would not even allow America to do that tomorrow which China has already done yesterday. They are actually taking steps on this problem which we have not even taken yet, and unfortunately some of my colleagues across the aisle have resisted taking those actions.

Point number three, they have not done enough. And we are going to be pressing them to do more. It is clear that we need to ask them to do more given the rise in the number of their plants without coal sequestration that they're using right now. But it makes no sense to me whatsoever to continue to provide China an excuse for further inaction by inaction on our own part.

When it comes to China we ought to think of two things: one, they are acting; two, they're not going to act more unless we start to act. This is the start of a clean-energy revolution which both countries can benefit from. We ought to continue this effort.

Thank you, Mr. Chair.

REP. MARKEY: Great. Gentleman's time has expired.

The chair recognizes the gentleman from Louisiana, Mr. Melancon

REP. CHARLIE MELANCON (D-LA): Thank you, Mr. Chairman.

This committee has set a new high bar for work on a single legislative issue. And I commend the members and the staff for their dedication to this important issue.

While this committee has hosted many hearings, and I think this hearing is helpful in working to fully understand this, I do have a few concerns. First, what are the real cost impacts on the consumers? We know that EPA has come up with an estimate of around $140 per family per year. But I don't believe those numbers are modeled on RPS or an RES, and I don't believe that the allowance allocations were included in the analysis either.

But also on the other side, I do believe that the estimates of $3,100 per family were obviously a bit exaggerated to the other side. So my question is, what are the real numbers and can we get those at some point in time in a timely manner?

Second, what's the net job creation minus the carbon-related job loss, and will those jobs be more regional or spread out? My concern in Louisiana is I am for green jobs, but I'm not for giving up the good-paying jobs that I have in south Louisiana in hopes of getting some new jobs in other parts of the country. As mentioned earlier by one member of the panel, this shouldn't be about who wins and who loses, this should be about us all having some skin in the game and this country moving forward in a positive way that benefits all of us in the long run.

What tools -- thirdly, what tools can we use to moderate the impact on transportation fuels? Providing allowance relief to co- generate electricity producers was an admirable move to ensure that our constituents that are struggling through the current tough economic times won't be even more burdened by high utility prices.

As a representative for a rural district I have to worry about the people who regularly long distances as a requirement for their employment or commute. Developing similar cost containment measures for transportation fuels would be helpful to many people facing high gas prices this summer. I particularly have a son that commutes quite a long ways every day, and the concern that he has already is a concern for me as a parent.

So these are concerns of mine and my constituents in south Louisiana. And I don't think I have any time to yield back, but I thank you for the opportunity to comment.

REP. MARKEY: Great. Gentleman's time has expired.

The chair recognizes the gentleman from New Jersey, Mr. Pallone.

REP. FRANK PALLONE (D-NJ): Thank you, Mr. Chairman.

The allocation of emission allowances is one of the most important policy provisions in the Clean Energy and Security Act. These allowances will protect consumers, invest in clean energy and energy-efficiency programs, and help trade-exposed industries make the transition to clean-energy technologies.

The allocations for renewable energy and energy efficiencies are particularly important to me. States will receive 10 percent of allowances from 2012 through 2015 to invest in programs that will help meet the renewable electricity standard. My state, New Jersey, has one of the most aggressive renewable electricity standards in the country, requiring that 20 percent of our electricity needs come from renewable energy by 2020. By investing allowances in clean energy and energy efficiencies, we're helping states like New Jersey meet these goals.

I've always been a strong advocate for renewable energy programs, and I believe Congress should be doing as much as possible to encourage investments in renewables. This will help us not only reduce greenhouse gases in this country, but it will also create clean-energy jobs.

Hard choices were made with regard to final allocation formula that passed through this committee, and those choices will ensure that we take a huge step towards cutting greenhouse gas emissions and investing in the clean-energy economy. The committee did a good job, in my opinion, to ensure that consumers are protected, critical investment in clean energy and energy-efficiency programs are included, and industry is not harmfully affected by the cap on greenhouse gas emissions.

Thank you, Mr. Chairman.

REP. MARKEY: Great. Gentleman's time has expired.

The chair recognizes the gentlelady from Wisconsin, Ms. Baldwin.

REP. TAMMY BALDWIN (D-WI): Thank you, Mr. Chairman. I am going to waive my opening statement so that we can hear from the witnesses other than to thank you for holding two important additional hearings to perfect the record this week, today's hearing on allowances and Friday's hearing on transmission-related issues. I believe that these hearings will allow us to perfect or further complement the legislation that was already reported favorably by this full committee. And I appreciate the fact that you're holding these two additional hearings this week.

REP. MARKEY: I thank the gentlelady.

Although he's not a member of the Subcommittee on Energy and Environment, Mr. Terry is here from Nebraska. And by unanimous consent we can allow him to make an opening statement if he would like.

REP. LEE TERRY (R-NE): Yes, I would. Thank you.

REP. MARKEY: The gentleman is recognized.

REP. TERRY: And I appreciate holding this hearing on what is somewhat mysterious because of its complexity and the allowances and how they work. And it'll be fun, I think, as well as educational for us.

I have some difficulties getting my mind around the whole concept of cap and trade when there is alternatives such as cap and incentives or plants that we could have taken offline -- older, inefficient coal- fired plants -- and perhaps replace them with clean and efficient nuclear power plants. Why all those type of concepts were just routinely discarded baffles me, but on we go.

But I have the pleasure here of having a constituent at the witness table in David Sokol. David is one of Omaha's preeminent business executives and philanthropists. I've known him for a long time, about 20-some years. He is the CEO of MidAmerican Energy Holdings. There's a variety of energy companies within that holding generating electricity and also pipelines with natural gas.

And one of the things that I appreciate about Mr. Sokol is he studies the issue. In fact, he may have been ahead of the curve in reading the bill before most of the members probably had a chance to even read the bill, so I'm pleased to have him here.

He's straightforward, common sense, a little bit out of the box, which I respect and appreciate, so I welcome Mr. Sokol.

REP. MARKEY: The gentleman's time has expired and all time for opening statements has expired.

I would just like to for the record make it clear that there is absolutely nothing in the legislation that requires a compulsory copyright transfer, and that is one of the reasons why the Judiciary Committee has not been given a referral of this legislation because there is nothing in the bill on patents or copyrights. So I just want the record to reflect that in terms of transfer of patent or copyright interests that is affected by the bill.

Now let's turn and recognize our first witness, Mr. Thomas Farrell. He is the chairman and president and CEO of Dominion, who will speak today as a board member of the Edison Electric Institute. Mr. Farrell is also a board member of the Institute of Nuclear Power Operations and of the Council on Foreign Relations Independent Task Force on Climate Change.

Thank you so much, Mr. Farrell, for being with us here today. Whenever you're comfortable, please begin.

MR. FARRELL: Chairman Markey, Ranking Member Upton and members of the subcommittee, thank you for the opportunity to provide testimony on the allocation of emission allowances under the American Clean Energy Security Act.

REP. MARKEY: Could you move that microphone down just a little bit, please?

MR. FARRELL: Thank you, Mr. Chairman.

REP. MARKEY: Okay, thank you.

MR. FARRELL: Dominion Resources, to give you some perspective, is one of the nation's largest integrated electric and natural gas companies, with operations in the Midwest, Northeast and Mid-Atlantic regions of the country. Our corporate headquarters is in Richmond, Virginia.

REP. MARKEY: Can I ask, is your microphone on, Mr. Farrell?

MR. FARRELL: It says it is.

REP. MARKEY: Okay, good. Thank you.

MR. FARRELL: Is that better?


MR. FARRELL: Thank you, Mr. Chairman.

We're active along the entire energy production delivery chain. We operate a large fleet of nuclear, oil, coal, gas-fired renewable energy facilities, both regulated and merchant. Slightly more than half of our electric output is fossil-fired. We also operate natural gas pipelines, gas storage structures, LNG importation facilities, and we produce -- explore for and produce natural gas. We serve about 5 million retail customers in 12 states.

I'm appearing before you today on behalf of the Edison Electric Institute. EEI member companies serve 95 percent of the ultimate electricity customers in the investor-owned segment of the industry and account for about 70 percent of the total U.S. electric power business.

EEI has endorsed an economywide cap and trade program to reduce greenhouse gas emissions that includes provisions to mitigate the cost impacts on electricity customers and the economy.

Under any scenario it will be expensive to transform the United States into a low-carbon society. It will take effective carbon regulation and the development and deployment of a full range of climate-friendly technologies to get the job done, some of which are commercially available now and some of which are not.

EEI's membership spent two years developing a consensus proposal to minimize the economic impact of reducing carbon emissions for all electricity consumers, especially the low-income families and energy- intensive businesses and industries that will suffer the most from higher electricity costs.

The allowance allocation formula in H.R. 2454 is the essence of the EEI proposal. The allowance allocation concept has the broad support of a variety of shareholders, including the U.S. Climate Action Partnership, labor groups, and EEI and its member companies. The allowance allocation method we support offers the best means of protecting electricity consumers of all types -- large and small, rural, urban and suburban -- without sacrificing the desired environmental improvements. Consumers can be assured that whether they receive electricity from a shareholder-owned utility, an electric cooperative or a municipal utility, it will receive the benefits of the allowance program provided for in the legislation.

The bill's allowance allocations to the power sector amount to 35 percent of the total annual allowances available to all major sectors of the economy covered by the bill. About 30 percent go to local distribution companies and about 5 percent will go to merchant coal generators and other generators with long-term power purchase agreements until direct allocations begin to decline from 2026 through 2030.

A longer phase-out period is one of the modifications to the bill that EEI seeks. H.R. 2454 currently provides for allowances to decline precipitously from 35 percent to zero in the five-year period from 2025 to 2029. Because the emission cap declines sharply from 20 to 30, consumer protections would be strengthened if allowances were phased out more gradually.

The bill specifies that these allowances must be used exclusively for the benefit of retail ratepayers. The allocation proposal ensures that all classes of electricity customers receive the benefits of the value of the emissions allowances regardless of size, location or ownership structure of the LDC. Targeting LDCs as the primary recipient of the allowances ensures that the benefits and costs of those allowances flow directly to end-use consumers.

LDC rates are regulated by state commissions. These commissions have extensive oversight experience and authority to ensure that allowances received by LDCs will be reflected in any rate-making cases. The bill enhances the role of state commissions and includes safeguards to ensure that allowances directly benefit customers.

Allocations to LDCs can also take into account regional variations in electricity use, generation mix and cost. Different regions use different amounts of fossil fuel to produce electricity. Some regions use more coal than others. Average customer demand for electricity also varies significantly by region due to such things as weather and the price of power.

We are pleased that the bill provides direct allowances to the electricity sector in the early years of the program. This feature of the bill is critical to protect the consumers until new technologies are available to enable the continued use of our domestic coal resources.

It is important to note, however, that significant costs remain for the utility sector to comply with major programs in this act. The renewable electricity standard and the climate cap and trade program will require significant financial investments to either change the current generation profile, purchase renewable energy credits or offsets, make alternative compliance payments, purchase allowances from auction or some combination of all of these.

H.R. 2454 distributes emission allowances to LDCs based on a calculation of each LDC's share of the total LDC allowance pool. To give equitable treatment to the concerns of different local distribution companies, distribution of allowances follows a 50-50 formula -- 50 percent based on each LDC's share of average annual electric sector CO2 emissions during the base period, including emissions associated with purchased power, and 50 percent based on each LDC's share of average annual electricity retail sales during the base period.

The emissions component of the formula recognizes the concerns of utilities with significant fossil generation that their customers will face higher compliance costs. Emissions-based allowances would help offset those costs.

The sales component recognizes the concerns of other utilities whose customers already pay higher prices resulting from utility investments in carbon-free power generation.

REP. MARKEY: Mr. Farrell, if you could summarize?

MR. FARRELL: It would be my pleasure.

We will I'm sure get into discussions about what happens with merchant coal generators; it's a very important part of the bill.

In sum, we believe the allowance allocation approach set forth in the bill will moderate the economic impact of greenhouse gas regulation on electricity consumers nationwide, especially during the early years of the program.

We commend the committee for the hard work it has done to craft a climate policy that successfully reduces greenhouse emissions while addressing the cost implications to consumers and the economy.

Thank you, Mr. Chairman.

REP. MARKEY: Thank you, Mr. Farrell, very much.

Our next witness is Mr. Rich Wells. He is the vice president for energy at the Dow Chemical Company, where he is responsible for Dow's complete energy portfolio. He has been a member of the board of directors of the Alliance to Save Energy.

We welcome you, Mr. Wells. Whenever you're ready, please begin.

MR. WELLS: Thank you, Mr. Chairman and members of the committee. I thank you for the opportunity today to comment on the allowance allocation provisions of the American Clean Energy and Security Act.

I am vice president of energy for the Dow Chemical Company, a leading specialty chemical and advanced materials company with over 50,000 employees, half of which are located here in the United States.

While we're known as an energy-intensive company, Dow also makes products that help consumers save energy and reduce their greenhouse gas emissions. As an example, our thermal insulation and foam sealant products can reduce home and business energy costs by up to 30 percent. In fact, a recent life cycle assessment found that emission reductions from the use of Dow insulation products were seven times greater than our company's total annual emissions. So as you can see, American energy-intensive companies can and do develop products that help lower the overall carbon footprint of our economy.

In order for the cap and trade system proposed in the committee bill to be economically sustainable, it must be designed in a way that allows American energy-intensive and trade-exposed manufacturers to remain globally competitive in the face of rising energy costs.

When I testified before this committee in April I said that it was critical under the competitiveness title that the output-based rebates be adequate to cover direct and indirect emissions associated with sectors that meet the energy-intensive and trade-exposed criteria. Since that time the committee has allocated 15 percent of the total number of allowances towards this purpose. We believe the committee has made a reasonable allocation choice based on available information; however, due to the uncertainty surrounding indirect emissions, we urge continued study of this issue as the bill is further reviewed by Congress.

We are, however, concerned that the current bill phases out the amount of allowances for energy-intensive and trade-exposed sectors before carbon leakage is addressed. We urge the committee to continue to study this issue to ensure that there is adequate allocation of allowances until such time that the carbon leakage problem is solved through an international agreement. If we do not properly address this issue then we will fail to protect American jobs in the manufacturing sector.

Also in April I testified that the compensatory allowance provision for feedstock material was restrictive to the point where no company would be able to claim a single allowance for using fossil energy in non-emissive ways. We would like to thank the committee for modifying that provision, which we now believe does not punish those companies that use hydrocarbons as raw materials to make non-emissive products.

One of the easiest ways to meet aggressive short-term issue reduction targets is through fuel switching from coal to natural gas in the power sector. Too strong a price signal on carbon would accelerate this movement, which is already under way even in the absence of climate change legislation. If fuel switching is excessive, demand for U.S. natural gas will rise and American manufacturers that depend upon this energy source will suffer.

Dow supports the allocation of some portion of free allowances to coal-fired power generation to help minimize fuel switching for the same reason we also support the allocation of bonus allowance to promote carbon capture and storage deployment. It is critically important that the bill be designed to minimize the cost imposed on U.S. manufacturers. That is why we should not assume allowance allocation alone can address all the challenges posed by cap and trade for the manufacturing sector. For instance, compensatory allowances will not cover all the fossil energy Dow purchases as a feedstock material. Likewise, allowance allocation will lessen but it won't eliminate fuel switching from coal to natural gas.

Therefore, in order to complement allowance allocation measures and to keep U.S. manufacturers globally competitive, we think it'd be better for the 2020 target to reflect a 14 percent reduction from 2005 levels rather than a 17 percent reduction. We also believe the bill's excessive procedural hurdles on offsets will result in high-quality, legitimate offsets being excluded.

Mr. Chairman, we commit to working with you and others to further refine the basic provisions to ensure the competitiveness of energy- intensive and trade-exposed industry.

I thank you for the time today. I'd be happy to answer your questions when appropriate.

REP. MARKEY: Thank you, Mr. Wells, very much.

Let me turn now to Mr. Terry to introduce our next witness.

REP. TERRY: Pleased. I gave him a pretty good introduction for time allowed, but I want to once again welcome and thank a good friend and constituent, David Sokol, CEO of MidAmerican Energy, who has great insight into the issues facing electrical generation.

Thank you, David.

MR. SOKOL: Thank you, Congressman.

Thank you, Mr. Chairman.

As the congressman said, I'm Dave Sokol, chairman of MidAmerican Energy Holdings Company, part of Berkshire Hathaway, and we have $41 billion in energy assets in 20 states and around the world serving 7 million end-use customers. Our two domestic utilities serve retail electric and natural gas customers in 10 states and our generation capacity consists of about 22 percent renewables, 48 percent coal, 24 percent natural gas and the remainder nuclear.

I want to be absolutely clear at the outset: cap and trade is two concepts. As we have consistently stated, the electricity sector can meet the interim and ultimate caps of reducing greenhouse gas emissions to 80 percent below 2005 levels by 2050, but the bill's trading mechanism will impose a huge and unacceptable double cost on our customers, first, to pay for emissions allowances which will not reduce greenhouse gas emissions by one ounce, and then for the construction of new low- and zero-carbon power plants and other actions that will actually do the job of reducing these emissions.

This bill will cost hundreds of billions of dollars and we think it is wrong to saddle customers with these unnecessary and duplicative costs that provide them with absolutely no benefit. Some congressmen claim that the cost of compliance with this bill will be zero or modest at worst. They're wrong, either because they've not read the bill or they've chosen to intentionally mislead the public on this topic.

The cost impact of the allowance trading mechanism has been grossly understated for utilities with coal-fired generation. Under the allowance allocation formula, we calculate, strictly pursuant to the bill, that our 2012 allowance shortfall will be nearly 50 percent, not 10 percent. This represents 32.4 million allowances which at $25 per allowance will cost our customers in the first year alone $810 million. That would essentially create a tax of between 12 and 28 percent in the states that we serve.

That's just for the first year and at a very conservative estimate of $25 per allowance. And as you know, some predict market prices to be two to four times higher. As the cap tightens and auctions increasingly replace free allocations, annual compliance costs will run into the tens of billions of dollars.

But as they say, the devil's in the details, so let's take a closer look at the bill.

In the first year the bill creates 4.6 billion allowances; it takes off 1 percent for strategic reserves, and then gives the electricity sector a percentage that amounts to 2 billion allowances. Now the sector's total greenhouse gas emissions in 2005 were 2.4 billion tons, so the 2 billion allowance constitutes a 16.7 percent shortfall. The bill then gives an estimated 300 million allowances to merchant coal generators and other long-term power purchase agreements which will therefore not be utilized for the benefit of customers, and that leaves local distribution companies with about 1.7 billion allowances, a 30 percent cut below the sector's 2.4 billion tons of emissions, not a 10 percent cut.

But there are other cuts as well. For example, our two utilities have added about 2,000 megawatts of wind generation since 2004. We're the largest utility owner of wind generation in the United States. How does that bill treat our customers for their early action and willingness to move on climate change by adding wind and reducing carbon emissions? The bill penalizes them.

And under your bill utilities -- the ones that actually need the allowances for compliance -- will be forced to compete with Wall Street investment banks, hedge funds and speculators. Those folks don't generate electricity, they don't cut emissions, but they do love volatility.

The bill's supporters also point to the SO2 trading program as a successful template for this bill. Let's be clear: The only similarity between the SO2 program and the Waxman bill is that they're both called cap and trade. The differences are huge.

First, the SO2 program applied only to the utility sector, not economywide.

Secondly, the volume of trading in the carbon market will be at least 300 times greater than the SO2 market.

Third, the SO2 program started -- when it started plant owners had choices. They could implement off-the-shelf available technology, switch to lower sulphur fuels or buy allowances. Today there is no commercially available technology to capture and sequester carbon from coal and natural gas plants and, as you know, they produce 70 percent of our nation's electricity.

And fourth, 97 percent of the SO2 allowances went to the utilities and are freely distributed over the life of that program -- again, not the case here.

And then lastly, the proceeds from the SO2 auction were redistributed to the utilities to offset their cost of compliance -- again, not so here with CO2.

As we've said, the billions of dollars we pay for these allowances in this new market will not reduce our greenhouse gas emissions by one ounce. Only actions to actually meet emissions caps will do that. If your goal is to de-carbonize the electric power sector, then you should keep the long-term caps but give states the option to bypass this trading mechanism by using the existing state and federal regulatory framework to determine the most efficient way to get there.

This tackles the real problem, or at least the problem we thought, which is reducing greenhouse gas emissions, but it eliminates the costly and useless allowance trading.

Is this still going to be expensive? Yes. But let's not make the consumer pay twice to reach these goals.

Thank you. I'd be happy to take any questions.

REP. MARKEY: Our next witness is Mr. Steve Cousins, the vice president of refining for Lion Oil and chairman of the National Petrochemical and Refiners Association Manufacturing Committee.

We welcome you, sir.

MR. COUSINS: Thank you, Chairman Markey, Ranking Member Upton and members of the subcommittee.

REP. MARKEY: Can you move that microphone in just a little bit closer?

MR. COUSINS: My name is Steve Cousins. I am the vice president of refining for Lion Oil Company. My training is as a chemical engineer and I've spent my 31-year professional career at our El Dorado, Arkansas, refinery, which has been in operation for 85 years.

Our refinery produces approximately 70,000 barrels per day and our main products are gasoline, diesel fuel and asphalt. We employ 1,200 people directly at our unionized El Dorado facility and there are approximately 3,600 other individuals that depend indirectly on our plant for their livelihood.

And like many in the audience here today, we wear hard hats to work, too. We aren't big oil; we're a small, rural oil refinery.

The subject of this hearing is extremely important to Lion Oil. In our opinion, the proposed allocation of allowances will result in the shuttering of our refinery and the loss of the 1,200 jobs we have worked for decades to bring to and sustain in southern Arkansas.

If Congress includes transportation fuels in the cap and trade program and makes refiners hold allowances for those products, it must provide the industry with a fair and equitable allowance allocation.

According to EPA's best estimates, the combined carbon dioxide emissions from domestic petroleum refineries and the consumer combustion of refined products constitute approximately 35 percent of the nations' current CO2 emissions. These emissions also represent 52 percent of the legislation's total emissions allowance pool, and yet the bill as currently drafted only provides our industry with 2 percent of the CO2 emissions allowances.

Compare that proposed allocation to other industries. Electric generators will receive allocations for 90 percent of their CO2 emissions. So-called energy intensive industries will receive allocations for 100 percent of their CO2 emissions. And remarkably, domestic auto manufacturers, which are not responsible for the CO2 emissions from their vehicles at all, will also receive a larger allocation for CO2 emissions than refiners.

Simply stated, American refiners like our business are dramatically shortchanged in this bill.

I'm not an economist, but I strongly believe if the bill's current allocations stand the impact on Lion Oil will be profound. At a cost of $20 a ton, Lion Oil will have to spend $180 million a year to purchase allowances in the first years of the cap and trade program just to cover our obligation for consumer emissions for fuels. Further into the program our company could be forced to spend ($)750 million by the year 2030 and nearly $2 billion a year by the year 2050.

Over the last 23 years Lion Oil's actual average net profits have been $13 million per year. It's not hyperbole to say that the addition of $180 million per year to the operating costs of a refinery that averages $13 million a year in profit will make our survival impossible.

We cannot offset these large carbon costs through profits from other lines of business. We don't have any other lines of business. We don't have gasoline stations. We don't have oil wells. Lion is a small, independent refiner. We're not a big oil company. Our operation has to pay for itself or the plant cannot continue to operate.

In short, without a fair and equitable allowance allocation, our company will be unprofitable in year one and insolvent within a matter of months not years.

Proponents of this bill suggest that we will simply pass the compliance costs through to consumers in the form of higher retail pump prices for gasoline and diesel. Even assuming that 90 percent of the carbon cost could be passed through, the remaining 10 percent -- or $18 million per year -- is still 150 percent of our annual profit. No company can survive those kind of negative financial results for long.

Foreign refiners already have a competitive advantage over American businesses. This bill would effectively outsource our energy future and eliminate hundreds of thousands of American jobs in our industry as well as those at companies that rely on our industry.

There is a new refinery in India. It's already expanding to over 1 million barrels per day. It's not designed to sell any product in India. It's designed to sell its product in the United States and Europe. They don't have to meet the U.S. EPA standards. They don't have to meet U.S. OSHA standards. They don't have to compensate for their on-site CO2 emissions. They would be more than happy to take the place of Lion Oil and 15 other small refiners in this country.

In closing, I'd simply stress that this legislation should not be passed in its current form to protect the quality jobs we provide, to protect the consumers, farmers and truckers we supply with higher gasoline -- from higher gasoline and diesel fuel prices.

I appreciate the opportunity to appear before you today and look forward to any questions you may have.

REP. MARKEY: Thank you, Mr. Cousins, very much.

Our next witness is Mr. Tommy Hodges. He's the chairman of Titan Transfer Incorporated and will speak today on behalf of the American Trucking Association.

We welcome you, sir.

MR. HODGES: Thank you, Mr. Chairman, Ranking Member --

REP. MARKEY: Okay, could you move that microphone in just a little bit closer?

MR. HODGES: Thank you -- (off mike) -- that without trucks America stops. We believe that.

Trucking is and will remain the predominant means of moving the nation's freight. We must be careful not to inhibit the ability of the nation's trucking fleets to afford fuel purchases in order to keep up with business and consumer demands for products.

If the diesel fuel prices are not kept in check, the movement of the nation's freight will be impeded and the very core of the nation's economy impacted.

One might ask how. In our area of the woods there's a little plant in Red Boiling Springs called Nestle and they make water, and all of us have got addicted to carrying around a bottle of water. And that bottle of water's far more expensive than diesel fuel, but we still spend and buy it and most of the times we'll buy a bottle for 99 cents. If that bottle suddenly costs us a dollar you may not buy that bottle of water, but with little thought that you just put somebody out of a job in Red Boiling Springs.

And some of the proponents may ask quickly, well, they'll find another job in a green industry. There is no other industry in Red Boiling Springs, Tennessee.

REP. MARKEY: Could you summarize, please, Mr. Hodges?


Mechanisms should be put in place to ensure fuel emissions and allowances that in fact keep prices in check.

Thank you, Mr. Chairman. This concludes my oral remarks. And I would encourage each member to read and study my written testimony and I would be happy to provide ATA's Sustainability Task Force report to committee members.

REP. MARKEY: Thank you, Mr. Hodges.

Our next witness is Mr. David Montgomery. He is the vice president of Charles River Associates and co-head of their energy and environment practice.

Welcome, sir.

MR. MONTGOMERY: Thank you, Mr. Chairman.

I'm honored by your invitation to appear today. Although I am the vice president of Charles River Associates, I am speaking to my own conclusions today as an economist.

I have actually worked on the subject of emission trading for close to 40 years -- I made the unfortunate calculation -- starting with my Ph.D. thesis that turned into the first rigorous theoretical analysis of how a cap and trade program could actually be made to work.

My testimony today is based on some of the findings in a report that was recently authored by several of us at Charles River Associates and I'd like to submit that for the record as well as my testimony in order to provide backup for these statements.

REP. MARKEY: Without objection, it'll be included in the record.

MR. MONTGOMERY: Thank you.

I think the most important point in my testimony is that no distribution of allowance value can eliminate all of the cost of capping emissions. Free allowances can only eliminate the necessity of paying the government for permission to emit up to the level of the cap. But even if allowances are free, businesses and consumers must still bear the cost of the actions that they need to take to get emissions down to the cap. I think this is the point also made by Mr. Sokol and I think he is absolutely right on that.

The cost to bring emissions down to the cap is reflected in reductions in GDP and household consumption. Allocations do shift who bears the burden across industries, regions and income groups as would decisions about how to spend or return to taxpayers the revenues from allowance auctions, but it's important to keep in mind that there is never enough to go around in the allowance value and completely insulating some parties only increases the share of the cost of achieving the cap that must be borne by others.

The cost for the average family will be significant even after taking into account free allocations and spending of the auction revenues. These impacts can't be predicted with certainty, but taking into account all of the provisions of the bill, in our analysis on average nationwide the cost per household in 2020 could be from $600 to $1,600 per household. And we base this range on what I think are reasonable assumptions at both ends of the range.

It's also important not to be deceived by these averages in looking at the impacts on any particular sector or group. The cost for the -- for this hearing I've taken a closer look at the regional impacts of H.R. 2454, taking into account the 50/50 formula for allowance allocations to local distribution companies in particular. Even with those allowance allocations, our analysis suggests that the regional impacts would be unequal and uneven. Impacts on household income differ across regions and appear regressive based on regional average income and the magnitude of cost increases. The wealthiest regions -- the Northeast, Mid-Atlantic and California -- have the lowest cost, and the two least-wealthy regions -- which in our analysis are Oklahoma, Texas and the Southeast -- have the highest cost per household.

The free allocations to electric local distribution companies, according to the formula, will also lead to different increases in electricity rates in different regions.

Interestingly, there also seems to be an inverse relationship between regional income and the benefits of free allowances. The Southeast has the lowest average regional income and a 15 percent increase in electricity costs, while the Northeast has the highest average regional income and nearly no increase in electricity costs. International offsets and allocations to tropical deforestation also play a huge role in H.R. 2454. All the economic impacts I've discussed would be much larger if the full amount of international offsets allowed by the bill does not become available.

And I think there are some significant questions that have been raised by recent studies about whether the countries that are suffering now from the highest rates of deforestation and forest degradation have the institutional capacity to meet the requirements of ACES for governance of those forests.

Let me turn to another topic I think is quite important. Despite some claims to the contrary, how allowances are allocated can have effects on the overall, but depends on the allocation formula.

In particular, thinking about the allocations to LDCs, if free allowances are used to reduce energy prices seen by consumers, the incentive to conserve energy will be reduced and the costs of complying with H.R. 2454 will increase.

Two other uses of allocations can also increase economic impacts. Technology subsidies that lead to uneconomical choices of technology, such as bonus allowances for CCS or use of allocations to interfere with the economics of fuel switching, will raise cost.

Output-based allowances to industries can also lead to uneconomic choice as the level of output. The output-based award of allowances to specific trade-impacted industries has been mentioned a couple of times today. But it appears to me, based on the work we've done on trade issues, that it would be in direct violation of the WTO agreement on subsidies and countervailing measures, would likely be ruled an actionable subsidy if any other country were to challenge it before the WTO.

Everything about the WTO is murky, but this possibility seems to have gone unrecognized. And it needs to be carefully considered, because otherwise we might pass a bill into law that we'll later discover doesn't have any real trade protection at all.

If any of these problems materialize -- limited availability of international offsets, distortions created by free allocations, and I'd also mention -- I discuss in my testimony -- unnecessary regulatory measures -- that could raise costs by imposing the judgment of Congress and government agencies over the judgment of consumers in response to a cap and trade program. And the bill contains many regulatory measures. But the idea of a cap and trade program is to put a price out there and let individual businesses and consumers make a decision.

I'm in favor of letting the market work that way, but those regulatory measures, if they become binding, could significantly increase the cost of the bill and change it.

Anyway, if any of these materialize, then the cost of reducing emissions to the stated caps will increase. I think that's relevant to the topic today, because the higher the cost is of getting emissions down to the cap, the harder it is to use allocations to insulate needy portions of the economy form the cost and the larger will be the cost that those who do not get free allocations have to bear.

Thank you, Mr. Chairman.

REP. MARKEY: Thank you, Mr. Montgomery, very much.

Our next witness is Nat Keohane, an economist and director of economic policy and analysis for the Environmental Defense Fund Climate and Air Program.

We welcome you, sir.

MR. KEOHANE: Thank you, Mr. Chairman and distinguished members of the subcommittee, for holding this hearing. I'm honored to be here today.

I'll add -- I'm also an economist by profession and training and have worked on cap and trade markets, although I can't claim to have the 40 years behind me that -- when Mr. Montgomery -- Dr. Montgomery was writing his thesis I was yet to be born. So that's an interesting contrast. (Laughter.) So with the --

REP. MARKEY: I'm with you, Mr. Montgomery. (Laughter.)

MR. KEOHANE: With the proposed legislation that's the subject of this hearing, Congress has an unprecedented opportunity to put the American economy on a stronger footing for the 21st century.

A cap on carbon will harness the efforts of entrepreneurs and innovators throughout our economy, ensuring that America will lead the world in making the next generation of clean-energy technologies.

And the investment unleashed by a carbon cap will help jump-start our economy today, while paying rich dividends later in the form of cleaner air, enhanced energy security and, most of all, a livable planet to pass on to our children and grandchildren.

In the process, a carbon cap will transform a common resource into a valuable asset. That asset is a public trust, and allocating its value wisely and equitably is a crucial test of any climate bill.

So what are the principles any set of allocations should reflect?

First, a substantial portion of the allowance value should go to energy consumers, particularly low-income households.

Second, the allocation should preserve and strengthen international competitiveness of American businesses and workers during the transition to a clean energy economy.

Third, the allocation must be fair and equitable, respecting differences across states and regions.

Fourth, the integrity and credibility of the program must be preserved. Allowances that are intended for the benefit of consumers must be accompanied by strong safeguards to ensure that consumers receive the value. And while some allowances may fairly be allocated to industries in order to smooth the transition to a clean-energy economy, Congress must avoid giving windfall profits to industry.

Finally, the allocation should use some value to help advance the underlying objectives of the legislation, such as investment in clean energy and for adaptation.

These principles are consistent with the Blueprint for Legislative Action that the business and industry coalition USCAP has put forward. And the bill performs well on each of them.

First, energy consumers will receive ample protection against increases in cost. For the first part of the program, 40 percent of the allowance value will directly benefit energy consumers -- households, small businesses and industrial users. In addition, a full 15 percent of the allowance value will be given to low- and moderate-income households. The Center for Budget and Policy Priorities estimates that this amount is sufficient to fully compensate those households for higher energy costs. Finally, nearly 20 percent of the value of allowances over the whole period will be returned to all households in the form of tax rebates.

When you add it all up, about 44 percent -- nearly half -- of the total allowance value goes directly to households in the form of tax rebates or lower utility bills. That amounts to an estimated $700 billion in present value, using EPA's projected allowance prices.

So that's the first principle. What about the second? Well, the Inslee-Doyle provision directs up to 15 percent of allowances in the early years to energy-intensive, trade-exposed industries. And EPA estimates that this provision will fully compensate those industries for their increased costs.

Third, the bill strikes an equitable balance across regions. This is done by allocating half of the allowances for electricity sector on the basis of carbon dioxide emissions and half on the basis of electricity generation. But more broadly, regional equity is ensured by the use of multiple channels -- for example, combining direct tax rebates for households with reductions in utility bills.

Fourth, the legislation ensures that allowance value intended for consumers will reach them. Allowances will be allocated to local distribution companies, with clear and stringent provisions requiring those LDCs to demonstrate how they will pass on the value to consumers before they can receive a single allowance.

Finally, over one-quarter of the allowance value over the life of the bill will fund public purposes to help achieve the broader environmental objectives. These include funding for clean energy innovation, for carbon capture and sequestration, for investments in renewable energy and energy efficiency, and adaptation.

In sum, this legislation satisfies the five principles I laid out and does so with flying colors. But in a sense, the true test of the allocation scheme boils down to just one number: the estimated cost to American households.

The best estimate we have is from a recent analysis by the Environmental Protection Agency of the bill. You'll hear groups on both sides, including the prior witness come up with other numbers. But the EPA relied on the gold standard: two of the best and the most widely respected, peer-reviewed economic models available. And what they found -- and by the way, they only looked at the costs to households. They did not look at the benefits in the form of enhanced energy security and cleaner air and averting catastrophic consequences of climate change.

Only looking at the costs, the EPA estimated the average cost -- the annual cost to the average household at just 98 to 140 dollars per year in present value. One way to think of it: that's 27 to 38 cents a day for the average American family -- or less than a postage stamp. It's also -- and I've done this before, but I'll do it again to make it concrete -- it's about 13 cents per person per day -- a little more than a dime a day.

A big part of the reason these estimated costs are so low is because they take into account that much of the value of allowances will go back to households. And while the EPA specifically analyzed the discussion draft, it has reported that the estimated household costs are likely to be even lower once all the provisions of the current legislation are taken into account.

Mr. Chairman, environmental organizations like mine are quick to criticize Congress when public policy diverges from what we see as the public interest. In this case, however, this committee got it right.

The proposed allocations will keep costs low for consumers, ensure a level playing field for American industry, and promote investment in a clean energy future -- all while preserving the environmental and economic effectiveness of this legislation.

Thank you for inviting me to testify. I look forward to your questions.

REP. MARKEY: We thank you very much.

And our final witness is the Reverend Dr. Mari Castellanos. And she is a minister for policy advocacy with the Justice and Witness Ministries of the United Church of Christ.

We welcome you.

REV. CASTELLANOS: Good morning. Good morning Chairman Markey, Ranking Members Upton and Barton, and members of the Committee.

REP. MARKEY: Could you move your mike toward you just a little bit closer or make sure that it's on?

REV. CASTELLANOS: I don't think I can.


REV. CASTELLANOS: (Laughs.) Well, we're going to -- just about to trade it.

Let me start all over again. Good morning, Chairman Markey, Ranking Member Upton and Ranking Member Barton and members of the committee. Thank you very much. Thank you for the invitation to testify today. It is a pleasure to be here. And I am honored to be here this morning representing the National Council of Churches.

The church is called to address the issue of climate change to remain faithful to our teachings about justice and stewardship. The Bible teaches us to love our neighbors as ourselves, to protect and provide for those living in poverty and to tend to for God's creation in a manner that recognizes the beauty and the bounty that the Lord has blessed us with.

Climate change is a moral issue and a reflection of our failure to live out God's call. Diverse faith traditions including Catholics, Protestants and Jews have recognized the importance and necessity of reducing our greenhouse gas emission to a level that will prevent the worst impacts of climate change.

A recent report by the Global Humanitarian Forum paints a bleak picture of the impact that climate change is having and will continue to have on God's creation and God's people. The findings indicate that every year climate change leaves over 300,000 people dead, 325 million people seriously affected, and creates economic losses of $125 billion.

These are astonishing numbers but they provide the quick realization that climate change is not any longer something that may happen, but rather, it is already happening. And we must act decisively to prevent the worst impacts while protecting the most vulnerable.

Rosemary Mayiga is one individual whose story comes to mind. A middle-aged Ugandan woman, after retiring from government work, Rosemary started her own farming cooperative. After five successful years of Rosemary working with local farmers in her region, helping them increase their profit, the rain patterns in Uganda began to shift. What had been a flourishing, self-sufficient farming community became impoverished almost overnight.

Churches and nongovernmental organization around the world are working to help communities adapt to changes in their local environment, but it is not enough. Estimates indicate that ($)86 billions per year will be needed to help developing countries adapt to climate change. As the world's largest historical emitter of greenhouse gases, it is morally imperative for us to provide a response that is adequate to their needs and proportional to our share of the emissions. This is why ample international adaptation assistance must be included in any climate legislation the United States puts in place. At a bare minimum, the U.S. should provide ($)7 billion a year to the most vulnerable developing nations, those who are suffering and will suffer from the impacts of climate change we can no longer reverse.

This is an issue of justice and moral responsibility. It is also an issue of global security and stability. Our willingness to adequately assist our global neighbors in their time of need will be a direct reflection of our ability to accept responsibility for our past actions and will play a critical role in the development of a successful global agreement that addresses climate change.

As the United Nations currently negotiates the post-Kyoto Treaty it is vital for the United States to commit to a more equitable response. For the United States to be seen as a good global neighbor we must provide financial assistance to developing countries through both bilateral and multilateral agreements. For too long we have dragged our feet. If we are to be taken seriously, we must bring something substantial to the table.

The inclusion of responsible international adaptation assistance will help to maintain both economic stability and global security. We truly live in a global village and depend on all our neighbors for our prosperity. International adaptation assistance will ensure the economic and political stability of developing nations. The committee's inclusion of equitable international adaptation assistance in the American Energy and Security Act would be a compassionate, just and appropriate step forward to meet the severe needs of those who are already suffering and at risk.

REP. MARKEY: (Sounds gavel.) If you could summarize please.

REV. CASTELLANOS: While we are thankful to the committee for its support of this critical component, we do fear that the amount of money available to this program is insufficient to meet the pressing and growing needs of the communities around the world.

Thank you very much, and may God bless your endeavors.

REP. MARKEY: Thank you so much. Our committee needs God's blessing in terms of this legislation. Thank you.

REP. : Amen, brother.

REP. MARKEY: The chair will recognize himself for a round of questions.

And I'll first note that in December of 2008 the price of a barrel of oil had gone down to $30 a barrel. It's now up to $69 a barrel. The price of gasoline at the pump on a national average was $1.61 in December; it's now up to $2.62, so it's gone up 80 cents. And this is as we're in the middle of the worst recession since World War II.

So we can only assume that we're in the eye of the storm. We're heading back towards $4 a gallon gasoline. We're heading back towards $147 a barrel for oil. So we need a plan, and we can't run the risk of just living on this rollercoaster where our economy just rises and falls with the price of oil and held hostage by OPEC. So we need a plan, and we need something that works.

Your company, Mr. Farrell, generates power using a similar formula to Mr. Sokol's company. We have a formula in the legislation that follows the recommendation of the Edison Electric Institute that allocates 50 percent of electric power's allowances based on emissions and 50 percent based on retail electricity sales. Can you explain why you believe that formula -- why EEI believes that formula is fair and what would happen in terms of EEI's support if we altered that formula?

MR. FARRELL: Mr. Chairman, thank you for the question. The background for the formula is important, I think, to understand how it got to where it is.

EEI has member companies from all across the country, represents all the regions, all different kinds of customers, has all different kinds of generation mix -- some very heavy coal, some very heavy nuclear, some mixed like ours is, like some of MidAmerica's assets.

And as we sat through a two-year process to come up with a program that could allocate out the allowances, we came to a conclusion to compromise that made sure that the most -- there was the most consumer protection across the nation was to come up with this formula where half of it came -- the allowances came related to your sales and half of it came related to the way in which your power is generated, and that includes purchase power for utilities that don't own all of their generation, a very important component.

But the key is not so much the allocation methodology -- the break -- the breakdown between 50 percent sales and 50 percent how your generation comes. It is the length of the timetables and the rapidity with which you have to meet the caps. So the longer the timetable the more consumer protection, and the lower the cap is or the higher the emissions allowances -- higher the emissions allowed are over the period of time the greater the consumer protections. And that's why our focus was on trying to get to 2025 before there was a phase out. We were hopeful that the phase-out would be longer, and we hope that there will be improvements.

But no one is requiring a utility -- the mandate in the bill, as I understand it, is a cap -- is a reduction of greenhouse gas emissions over a period of time. You're not required to take allowances. If you choose to change out your fleet over that period of time you are free to do that. So there wouldn't be any cost associated with allowances over that period of time as may have been suggested.

So the key is we were trying to come up with a methodology that would spread out the consumer protections across as many consumers as possible and to take into account the various generation mixes that exist in the United States. That's how we came up with the formula.

REP. MARKEY: Mr. Keohane, could you reflect on Mr. Montgomery's testimony? Tell me about past studies that have been conducted by his organization and more generally how have past industry cost estimates compared to actual costs of programs under the Clean Air Act.

MR. KEOHANE: Thank you, Mr. Chairman. Yes, I think it's important to note a few things. And by noting these I'm just looking at the numbers. I don't mean to cast any aspersions on the intents or what Dr. Montgomery and his colleagues may have tried to do.

But it's a fact that if you look -- if you go back and you look, every time there has been a climate change bill there is a range of cost estimates. And CRA is always on the high end of those cost estimates.

Even more tellingly, we went back actually and we looked at a range of estimates that CRA had made of prior environmental regulation. And again, in that case, every time CRA was on the high side, sometimes -- usually at the very high side of those estimates of environmental regulation, sometimes several times, three to four or more times the costs that were estimated by EPA and independent government agencies. And when you go back and you compare those to the actual costs, CRA consistently was much, much higher than the actual cost.

This is, by the way, a general trend. And it's useful to mention because several researchers, including some at Resources for the Future, have gone back and compared actual costs of environmental regulation to predicted costs that were done at the time it was passed, and in an overwhelming majority of the cases, particularly for market-based regulation, the estimates that were made at the time of legislation even by independent -- or government agencies like EPA turned out to be much higher than the actual costs.

I'll give one estimate. We've heard about the SO2 allowance program. That turned out to be less than 30 percent of the cost that was estimated by EPA on the eve that the legislation was passed. So I think if we take that pattern, what we learn from the past record is that estimates -- in particular by CRA but actually -- and frankly, by everybody -- have turned out to be overestimates of the costs of environmental regulation. And the reason is they can't take into account technological innovation.

Thank you.

REP. MARKEY: Thank you, Mr. Keohane.

I'm going to have to recognize -- my time has expired. I'm sure that there are members who are going to give you plenty of time.

REP. BARTON: Mr. Chairman, I think since he made a direct comment against Mr. Montgomery, Mr. Montgomery ought to have a right to respond to what he just said.

REP. MARKEY: Well --

REP. BARTON: I ask unanimous consent that the chairman has an additional two minutes so that Mr. Montgomery can respond.

REP. MARKEY: If the gentleman would like to yield me two additional minutes, that would be great. I'm not requesting it. Let me recognize --

REP. BARTON: Well, you can object to it, Mr. Chairman.

REP. MARKEY: Mr. Montgomery -- no, not all.

Mr. Montgomery?

MR. MONTGOMERY: Thank you, Mr. Chairman. I appreciate your indulgence.

But Mr. Keohane's statements about the comparison between CRA's estimates and analysis of the costs of climate legislation are simply not true. I am sure that we have been on different ends of the range of estimates at various points in time, and I'm not sure I can even figure out what it was that he is referring to in our analysis of other environmental regulations.

But let me point out what actually happened last year. This disturbs me because this calumny against CRA has been repeated over and over again that we are consistently higher than everyone else. And we actually responded to it for the record in the hearings that were held on the Lieberman-Warner bill. And I would like to submit again both the question and the answer for the record that we submitted when this came up in the Lieberman-Warner debate when my colleague Anne Smith was testifying.

But the fact is that last year there were a number of studies that were done of the Lieberman-Warner bill. They differed a great deal. They differed mostly because people made different assumptions about what was in the bill. Many of the studies were looking at outdated versions of the bill.

The Electric Power Research Institute, which is, I believe, an independent and objective research institution, part of the electric power industry, put on a forum in Washington where they brought all of the modelers who had actually produced analyses of the Lieberman- Warner bill -- the Clean Air Task Force, the Energy Information Administration, the work that was sponsored by the National Association of Manufacturers, Massachusetts Institute of Technology with their EPA model, EPA, and Charles River Associates.

When you took the analyses that made similar assumptions and that characterized the bill in a similar way, we were dead in the center of those results. We have generally been dead in the center of any effort to look at our analysis that has compared comparable analyses. That we're looking at the same bills, the same carbon credits and the same characterization, for example, of how much offsets were available.

So I object to the characterization that we have always been higher than anybody else in this analysis.

REP. MARKEY: Gentleman's time has expired.

The chair recognizes the gentleman from Michigan, Mr. Upton.

REP. UPTON: Thank you, Mr. Chairman.

I ask unanimous consent to put in a statement from the -- by Jim May, president and CEO of the Air Transport Association of America, on allowance allocations if I might.

REP. MARKEY: Without objection, so ordered.

REP. UPTON: I regret in my opening statement I referred to Mr. Sokol's testimony; I meant Mr. Cousins, so I apologize for that.

Mr. Cousins, how much money have you all invested in environmental improvement projects at your refinery? And can you describe some of those improvements that you've made?

MR. COUSINS: Well, first, that's the first and only time in my life I'm going to be mistaken for somebody as articulate and intelligent as Mr. Sokol, so I appreciate that.

We have spent somewhere upwards of $300 million over the last 30 years on environmental projects. I do not have the exact number because of some of the data is just not --

REP. UPTON: And do you have an estimate of what this bill for you to stay in business -- you indicated in your testimony that you'd be out of business in fairly short order, 1,200 jobs. But if you were able to stay in what type of capital improvements would this bill require you to do in terms of cost?

MR. COUSINS: Well, actually, in our business, since there is no way to reduce the carbon and hydrocarbon products, there really is no investment solution to fix this for us.

REP. UPTON: You're just done.

MR. COUSINS: Just buying the credits, which is $180 million a year and progressing on up to as high as ($)750 million or $2 billion a year, which are far beyond our annual profits of ($)13 million a year.

REP. UPTON: Is your sense that what Jack Gerard from the American Petroleum Institute said today that's quoted in The Washington Times that allowances would mean an increase as much as 77 cents a gallon for gas and diesel going up 88 cents? Is that about right? Is your --

MR. COUSINS: I've seen numbers that high. I've seen numbers as low as 20 cents a gallon and as high as the 80 cent range. It's very difficult to predict. The carbon number portion you can predict. The ramifications of shifting most of this nation's energy supply into the hands of a very few giant multinational corporations out of the hands of a more diverse group of smaller companies is hard to predict.

REP. UPTON: And Mr. Hodges, what would an 88-cent increase for a gallon of diesel do to the trucking industry?

MR. HODGES: Well, it would take our number two cost and immediately push it to our number one cost. It would immediately start to drive trucking companies out of business, mostly those that are small and somewhat marginally capitalized.

REP. UPTON: Mr. Sokol, you indicated in your remarks that you were figuring that it was going to cost $810 million at $25 a ton?

MR. SOKOL: That's just for our regulated utility customers.

REP. UPTON: Right. And I noticed that the -- I guess it was Brookings that said -- Brookings estimates that the market could drive up the price of carbon dioxide allowance to as much as $50 a ton by 2020. So I would presume that that would double the cost again.

MR. SOKOL: We've seen estimates between ($)50 and $125 a ton.

REP. UPTON: And how much would that mean for the average consumer? Is it really 13 cents?

MR. SOKOL: No. And those numbers -- you can make numbers say whatever you want. If you like, I can go through an example form the state of Iowa. While I live in Nebraska, we actually -- Nebraska is 100 percent public power state -- which I'd point out, public power association, rural electric co-ops also opposed this bill for the same reasons we do. And it -- the reason is it throws the consumer under the bus.

In Iowa our cost increase, just for 784,000 customers, is $283 million in the first year, just for the allocation purchases. That'll be $110 per month per customer. They can't afford it. The notion that --

REP. UPTON: That's more than a postage stamp, right?

MR. SOKOL: Well, it is at least where we buy them.

REP. UPTON: Could at least send a few bricks.

Mr. Wells -- last question, because my time is coming out -- you indicated in your testimony that you would support a carbon agreement to prevent carbon leakage. That was part of your --

MR. WELLS: Well, the thing is, for trade-exposed, energy- intensive industries we'd need the 15 percent allowance until such time that there is agreement -- international agreement to level the playing field.

REP. UPTON: So if for some reason the WTO rules that either the border adjustment or free allowances are, in fact, unfair and need to be taken out, is Dow Chemical still going to support this bill?

MR. WELLS: If we don't have the free allowances --

REP. UPTON: If those are taken out?

MR. WELLS: Yeah. If the free allowances aren't there, that would put us at a competitive disadvantage to other economies, particularly those economies that are more carbon intensive. That would be a problem for our industry and for our company.

REP. UPTON: My time is expired.

Thank you.

REP. BOUCHER: Thank you very much, Mr. Upton.

The chair will now recognize himself for a round of questions.

Mr. Farrell as a fellow Virginian, let me take this moment of personal privilege to welcome you to the subcommittee today and thank you for your outstanding testimony.

I want to propound several questions to you in order to demonstrate how a cap and trade program that operates based on free allocation can effectively reduce greenhouse gas emissions with the least cost to consumers.

So let's begin with the obvious. Some have suggested that for the program to be effective it has to be based on an auction, that only the auction can put a price on carbon dioxide emissions, that only under an auction scenario will the program actually be effective in reducing greenhouse gases. So let me ask you to explain how under free allocation, with a cap and trade provision, reductions actually occur.

MR. FARRELL: Thank you, Mr. Chairman. There is a cap, as you say. And the cap limits the amount of carbon dioxide emissions that can actually occur. So the cap itself acts to reduce carbon emissions.

REP. BOUCHER: And then that cap is lowered over time.

MR. FARRELL: It lowers over time. As you get to 2050, you are at an 80 percent lower level than you are now. So that is how you get there with one respect.

We didn't touch on this, but the bill has a very rigorous energy- efficiency standard in it, which is going to reduce carbon emissions independently form the cap and trade part of the bill.

The allowance provisions, the free allowance provisions, particularly for electric utilities allow us to keep costs of the transition of this economy away from more carbon-based sources of generation to less carbon-based to dampen, moderate the costs on the consumer.

I think to -- I don't want to get into a debate with another witness, but to suggest that a free allowance system throws consumers under the bus is something I just cannot agree with. And I think you --

REP. BOUCHER: Well, I'll get to that -- let me get to that part of it in just a moment.

So what I think we can conclude from this answer is that the effectiveness of the cap and trade program, based on free allocation, comes from the cap itself and the fact that that cap is lowered every year in accordance with the terms of the program. And so the emitting entities are allowed to emit less each year. And as they comply with that lowering cap, overall emissions are reduced. Is that a --


REP. BOUCHER: -- fair description of how it works? And that works with free allocation?

MR. FARRELL: Yes, Mr. Chairman.

REP. BOUCHER: So I think the next obvious question is how we make sure that the financial value of these freely allocated allowances under inure solely to the benefit of the electricity consumers. And could you address the provisions in the legislation that make sure that when these allowances are allocated to the local distribution companies, that the financial benefit of that allowance inures to the ratepayer benefit?

MR. FARRELL: Mr. Chairman, local distribution companies -- that is the essence of the proposal. And what that means is that the local company that has the wires, that distributes the electricity -- rather than the generator of the electricity -- the company that distributes it will receive the allowance in this 50-50 breakout -- 50 percent based on sales, 50 percent based on its generation sources.

Local commissions, state commissions exist in all 50 states and have been regulating electric utilities for 100 years have a lot of knowledge on how to protect ratepayers against profit-taking by utilities -- or excess profits by utilities. So to the extent there's some dysfunction and there's some over-allocation of a particular allowance, a local utility commission is there to ensure that the benefit of it will go to the ratepayers. And the bill has a particular provision in it -- that's this bill -- requiring it go to the benefit of the ratepayer.

REP. BOUCHER: And the local distribution companies are regulated everywhere in the nation?

MR. FARRELL: All 50 states and the District of Columbia.

REP. BOUCHER: Okay. Now you have mentioned in your testimony a problem with the provisions in the bill that require a phase-out of free allocation and a phase-in of auctions. And that phase period begins in 2026 and goes through 2030. And I think you have recommended that that phase period be a longer period of time, rather than simply five years. Can you talk about the importance of having a longer period, as opposed to just that five-year period?

MR. FARRELL: Well, Mr. Chairman, the key consumer protection in this bill is, as I said earlier, is not so much the 50-50. That's very important, but it is the length of the time of the free allowances and the phase-in period as you move to auction, because we need time for the technology to catch up with the public policy. And as we have -- the more time we have to get to the same end point -- the 80 percent reductions by 2050 -- more time we have to change out our technologies, which is going to cost consumers money -- the longer we have the free allowances, the better.

REP. BOUCHER: One argument that I've heard for a longer period is that as the transition to auction occurs over a five-year period, the electricity price increases that attend a movement from free allocation to auction would be relatively severe in each of those five years, that if you have a longer phase-in period -- perhaps 15 years -- the price shock of electricity price increases is therefore lessened. And from the vantage point of consumers it would be better to have that longer period rather than the shorter period. Would you agree with that?

MR. FARRELL: That's correct. We would agree with that.

REP. BOUCHER: All right.

Now, let me address one final issue while I still have another couple of minutes remaining.

I think it's important that everyone understand that there are two possible ways that electricity price increases could occur in association with a cap and trade program. One comes from the allocation process itself. And we've taken steps in our legislation -- I think you would agree -- to make sure that to the greatest possible extent we have cushioned the ratepayer form the rate-increase effects that might come just from the allocation process.

The second way in which electricity prices could increase is when utilities and other emitters have to take steps in order to meet the emission reduction requirements that come under the cap and the ratcheting down of that cap year by year.

And I would like for you to address, if you would, the extent to which you think the provision in our legislation that would actually auction 15 percent of the total allowances and then have the revenue that the government receives from that auction be dedicated to cushioning the effect of the rate increase from that latter phenomenon -- that is, the cost of actually reducing emissions -- for the middle- and lower-income electricity consumers across the country.

Could you talk about the extent to which you think that can be effective?

MR. FARRELL: Yes, Mr. Chairman.

There will be -- as the generation fleets are changed out over time, there will be increases in expenses by utilities to change to newer systems, as Mr. Sokol referred to -- absolutely valid point. And as we go over time, those will increase.

The point of the 15 percent set-aside is that that will be a revenue source that then can be redistributed to help dampen the cost of what will necessarily increase electricity rates from the change- out of our generation fleets.

REP. BOUCHER: All right. Thank you very much, Mr. Farrell.

My time has expired.

The gentleman form Texas, the ranking Republican on the full committee, Mr. Barton, is recognized for five minutes.

REP. BARTON: Thank you, Mr. Chairman.

I want to commend you for chairing this hearing in the absence of Mr. Markey and also commend you for actually paying attention. I think it is somewhat telling that on the majority side you're the only one here. And this is pretty important. So hopefully you'll take your knowledge and disseminate it on your side so that they'll at least know what was said at this important hearing.

Mr. Sokol, when you made your remarks you talked about some costs. It's my understanding that you're taking those numbers strictly from your service territories that your company provides electricity for. Is that true?

MR. SOKOL: That's correct. And I think it's very important to understand.

Those numbers that I gave you -- and Congressman Boucher, we appreciate the efforts you've made to try and make this as fair as possible, and I don't mean to -- you've done everything I think you can given the cards that are being dealt to you. But those numbers take into account everything you said.

And I'll tell you why the concern we have the consumer is being left under the bus here, not intentionally by you. I understand that. But all of these numbers that I went through -- so just the state of Iowa, $283 million a year, is after all the allocations are passed 100 percent through the customer, the 15 percent is reallocated to low income. It doesn't change the fact that purely compliance with the purchasing of the trading credits costs $283 million, which cumulates, un-inflated, to $9 billion over 30 years for those consumers. And that's on top of the $9.3 billion they're going to have to spend to build new generation plants to actually meet your caps, because your point was -- and it's an important one -- we have to meet the caps. And we've not argued with the caps.

REP. BARTON: Well, I need to reclaim my time, Mr. Sokol ---

MR. SOKOL: All right.

REP. BARTON: -- because I have about four other questions. (Laughs.)

My question to the rest of the panel: Does anybody dispute Mr. Sokol's numerical analysis? Anybody?

MR. KEOHANE: I would just like to point out that I think Mr. Sokol speaks from a unique case, very long on coal-fired generation and --

REP. BARTON: I'm not asking where he's -- I'm asking if you dispute his numerical analysis.

MR. SOKOL: We're also the largest donor of renewables.

MR. KEOHANE: I think there's --

REP. BARTON: Is he telling the truth? I mean, he knows what the numbers are in his service territory. Do you dispute that he's lying to this committee? Do you assert that he's lying to this committee?

MR. KEOHANE: I didn't say that, Mr. Barton. I said that he is an exception to a rule.

I also want to point out it was interesting me because --


MR. KEOHANE: -- we talk about old coal-fired power plants when --

REP. BARTON: Mr. Chairman, could I reclaim my time? I only have two minutes and 22 seconds.

So we've established that one of the major power companies in this -- at least in his service territory -- there are huge cost increase in this bill that you can't paper away.

Now I want to go to Mr. Cousins. You're represented by Mr. Ross, I believe. I think he's in -- your facility's in his district.

MR. COUSINS: Yes, sir.

REP. BARTON: If I understand you correctly, for a refinery industry, you're saying that there are 2 percent allowances given to refineries, generically, but the products that the refinery industry in America creates are responsible for 35 percent of the emissions. Is that correct?

MR. COUSINS: That's correct.

REP. BARTON: And you're saying in the case of your refinery you simply can't recoup the cost it's going to cost your refinery to stay in business. It's going to cost you $180 million a year. You don't believe you can pass that through. Is that correct?

MR. COUSINS: We do not believe we can pass 100 percent of that through.

REP. BARTON: Okay. So you -- you're fairly certain if this will becomes law or isn't changes in a material way for refineries that your refinery that's been in business for 80 years is going to go out of business?

MR. COUSINS: Yes, sir. And that's a serious thing to say, for us to say publicly. We would not say that if we were not --

REP. BARTON: And that's 1,200 direct jobs and 3,600 indirect jobs.

MR. COUSINS: That's correct.

REP. BARTON: Now, do you -- would you care to speculate on how many of those job losses are going to get one of these new green jobs and at what level their going to be compensated if they do get one of the new green jobs?

MR. COUSINS: We don't have any of those jobs in our area right now. And I'm not a economist or even a -- I wouldn't know how to speculate on that.

I would not think that many of those jobs are paying in the 25 to 30 dollar-an-hour range.

REP. BARTON: Okay. Mr. Montgomery, the analysis of the bill for many of the proponents of the bill uses a per-ton estimate of about $10 a ton. In the bill itself, in the strategic reserve they have a minimum price for allowances sold for the strategic reserve of $38 a ton. Could you explain, if you wish to, the dichotomy between people that estimate the cost at ($)5 to $10 a ton and the fact that the strategic reserve minimum price is $38 a ton?

MR. MONTGOMERY: I'm not sure I can give a definitive answer to this. But my understanding is that in the intention of the strategic reserve is to prevent prices -- is to intervene much like the Strategic Petroleum Reserve when prices spike to an "un-anticipatedly" high level.

I think that the estimate of $10 a ton, presumably, is those who assume that there is a very large -- that all of the international offsets -- for forestry, from other sources, all the domestic offsets -- will be available at very low prices and that there's not much left to do after that to reduce emissions, and that comes up with a price of $10 a ton. Suggest that price would have to increase by a factor of four before the strategic reserve accomplished anything, which implies there's an awful lot of price volatility that would remain even if the strategic reserve were released when something really absolutely extraordinary happened.

REP. BARTON: Chairman my time has expired. I would like Mr. Keohane to submit for the record an answer to that same question, since he's also an economist, or if you wish to give him a chance to testify right now, I'd appreciate that.

MR. BOUCHER: Well, thank you, Mr. Barton.

Mr. Keohane, let me ask you, in fact, to do as Mr. Barton suggests and submit that for the record and add to that answer, if you would, your response to Mr. Sokol's economic analysis. Look at it carefully. Run your analysis against it, and let us have the benefit of your view on that as well.

MR. KEOHANE: I'd be pleased to do both those things. Thank you.

REP. BOUCHER: Thank you very much.

Gentleman from Kentucky, Mr. Whitfield, is recognized for five minutes.

REP. WHITFIELD: Well, thank you, Mr. Chairman. And this testimony today has been quite interesting.

And Mr. Sokol, now, you and Mr. Farrell, your companies both are members of the Edison Electric Institute; is that correct?

MR. SOKOL: Correct.

REP. WHITFIELD: And the Edison Electric Institute -- did they formally, Mr. Farrell, endorse this bill, or did they not endorse the bill?

MR. FARRELL: We have -- it -- are very supportive of the allocation formula. And we are supportive of the bill going through the legislative process.

REP. WHITFIELD: So you support the bill as is?

MR. FARRELL: We're supportive of the bill going through the legislative process. We've asked for improvements, which the chairman mentioned a couple. Yes, sir.

REP. WHITFIELD: Okay. So you're supporting it, but you hope you can improve it as we go through the process.


REP. WHITFIELD: Now, Mr. -- and I'm assuming that the Edison Electric Institute Board voted upon this and majority of them felt this way, correct?

MR. FARRELL: It was unanimous of those attending the meeting.


MR. SOKOL: We voted against it.

MR. FARRELL: He voted against it.

REP. WHITFIELD: Okay, well, so it was unanimous but one voted against it, I won't get into that. But --

MR. SOKOL: I know for sure we voted against it --


Well, Mr. Sokol, up here, listening to you and Mr. Farrell testify -- you both have retail electric. You both have natural gas customers. You both are kind of -- operate in multi-states -- 12 and 10 states. And you heard Mr. Farrell's testimony to Mr. Boucher's question.

But would you explain to the committee why, in your opinion, your company and Mr. Farrell's company do not agree on this legislation?

MR. SOKOL: Well, the Edison Electric Institute, of which we've been involved with the discussions for several years, first of all is an association, so it deals with all kinds of different members, some of which have 100 percent nuclear. Some have no generation at all. And so a normal and understandable debate would occur with an association that basically there were winners and losers. And it ultimately came down from the association standpoint that this is the best they could get.

And our view is that the consumer's not being represented in this debate. And I'll give you an example, and this is our severe issue --

REP. WHITFIELD: And could you try to also specify what the difference is, you think, between your company and Mr. Farrell's company?

MR. SOKOL: Well, there really is no difference between any of the companies in that the bill will act as it is written. Our difference is, and I think I can state it perhaps using a third company, a large company, AEP: They were recently challenged that this may cost their company $28.6 billion, a number they did not refute. Their comment was, well, the report doesn't remember that we get to recover these costs through rate increases.

That's the problem, is that utilities, particularly investor- owned utilities -- and we are -- we own several -- have made the decision that they're going to cut the best deal they can and then let the payer -- the customer beware.

But the customer's not in this room. And that's what bothers us. Our ratepayers have to pay this. If you would add something that says, have every public utility commission in every state in the next 30 days analyze this bill and tell the consumer what it will cost them and the consumers are happy with that -- it's a pass-through for us.

But I'm not going to abdicate my responsibility to those consumers, because people have to pay these bills.


MR. SOKOL: And that's our difference with the Edison Electric Institute. And I think it's why EPPA and the rural electric co-ops are very concerned. They don't have shareholders, they just have consumers.

REP. WHITFIELD: And I've heard from both of those groups quite emphatically.

But Mr. Farrell, you sound like you're not worried about any increase for the consumer. I mean, are you concerned about that? Or do you feel that this bill actually protects them?

MR. FARRELL: We are absolutely concerned about consumer protections, Mr. Whitfield. And I apologize to Mr. Sokol if we didn't -- if I didn't hear his vote at the meeting. It was a very large majority of member companies --

MR. SOKOL: That is true, by the way.

MR. FARRELL: -- across the United States.

And EEI's proposal is all about consumer protections.

If the bill had called for 100 percent auctions, we would not -- certainly wouldn't be here responding favorably to Mr. Boucher's questions.

Changing this to hundred -- to the free allowances for the length of time -- we'd like a longer period of time. We'd like a less quick rise to the cap, because we think that would increase the consumer protections. But it is the essence of the free allowances through 2025, even though the cap is rising over that period of time, that provides the consumer protections in this bill.


MR. FARRELL: If they were not there, EEI would not be where it is today.

REP. WHITFIELD: I might also say, Mr. Hodges, I'm glad you're here testifying today. I read an article in The New York Times about six months ago comparing the trucking industry in the United States to China. And this article said we have in this country one of the most stringent emissions standards for diesel fuel emissions for trucks in the world and China has one of the worst. And it sounds like, from your testimony, with the possible increase of diesel fuel cost that we'll even be less competitive with the Chinese transportation system.

MR. HODGES: Well, fortunately, we don't haul to China.

REP. WHITFIELD: Right. (Laughter.)

MR. HODGES: But --

REP. WHITFIELD: But companies do --

MR. HODGES: We are concerned with domestic transportation. And everything that China does send to this country generally ends up getting delivered by a truck. And that truck is powered by diesel.

REP. WHITFIELD: And the reason I'm concerned about it is, when companies decide where to locate, they look at cost. And if transportation cost, labor cost, environmental cost are higher, then they may make decisions to go elsewhere.

My time's expired.

REP. BOUCHER: Thank you, Mr. Whitfield.

The gentleman from Oregon, Mr. Walden, is recognized for five minutes.

REP. WALDEN: Thank you, Mr. Chairman.

Mr. Sokol, I want to go to this issue of equal allocation around the country, because I've heard from some witnesses that this seems to be all fairly distributed and couldn't have been done better. And yet, I understand from data I've received, that PacifiCorp, your subsidiary company in Oregon is only going to receive 53 percent of the allowances for free that it needs for compliance in 2012, which means ratepayers there'll have to make up the difference of $163.5 million in one year.

Meanwhile our neighbors to the north, under this legislation, Seattle City Light will get 29 times the number of allowances it needs for compliance for a windfall of $54 million in one year alone.

Now, that doesn't sound like a very even distribution of allocation of these credits, does it, to you?

MR. SOKOL: It doesn't. And I think it begs the question, if all these allocations are free, why are we doing it? You know, rarely have I seen a circumstance in my career where someone says, all right, you have to buy these, and then I'm going to give them to you for free and so you're going to be neutral. Well, if it's that simple, why don't we just not do it? And that's really our point.

Sometimes I think people can't take yes for an answer. Place the caps in place -- the caps of 3 percent reduction, 17 percent, growing to 83 percent by 2050.

If that's policy, put them in place and mandate that every utility in the United States meet it. Those that already meet it have no cost and no harm. Those that don't meet it -- and our utilities would not meet it -- we would be required to go in and change our equipment to do that. And that's a fair thing for us to do. This bill then adds again to that through this trading mechanism.

And I guess the point just is, why have it? If the allocation's fair and it's not going to cost anybody anything, then why are we doing it? Why don't we just put the caps in place, as we did with the Clean Air Act initially, and ask our companies to meet it, and we will do so or be shut down?

REP. WALDEN: Well, I -- that's a thought I've often had, Mr. Sokol, that -- I don't get this. It looks to me like we should've learned our lessons from the subprime market. We had an amendment to prevent derivatives being pulled out of this. And I think that was defeated during the markup. I'm deeply concerned about the gaming of the system that lies ahead and the cost to ratepayers.

Now, we focused a lot, and rightfully so, on household costs. And I've heard ranges from a postage stamp to, you know, $1,600. My concern, having been a small-business owner for 21 years that ran transmitters in the radio business, we consumed a lot of electricity.

Has anybody done analysis you're aware of -- or anybody on the panel -- on what this means to small businesses in America? Because I don't see them getting a rebate under this. They don't get a check form the government under this, do they?


REP. WALDEN: I mean, if I'm a PacifiCorp customer, and my business was -- I've sold it -- do I get -- what do I get out of this bill, other than a higher rate in Oregon?

MR. SOKOL: Well, the way the allocations are done, the industrial customers would carry a larger piece of it. But --

REP. WALDEN: Is a small business an industrial customer? If you're just a shopkeeper, is that how you're treated?

MR. SOKOL: Yeah. Barber shops, grocery stores, folks of that nature would not fall underneath the low-income assistance side of the allocations. So --

REP. WALDEN: So what happens to them?

MR. SOKOL: They would pay more.

MR. KEOHANE: Mr. Chairman, may I, very quickly?

REP. WALDEN: Actually, I control the time, but go ahead.

MR. KEOHANE: I was just going to say I think you -- the commercial ratepayers are included in that local distribution company allocation. So I think they would be addressed through the -- thanks, sir.

MR. SOKOL: Well, no, but that's --

REP. WALDEN: Mr. Sokol?

MR. SOKOL: -- again, those allocations are already in the numbers you used; 100 percent of them were given to the customer's benefit. The low-income allocations would not go to commercial --

REP. WALDEN: Right. That's my point. And so it's a little misleading to say they're going to get that when these numbers include that.

MR. SOKOL: Right.

REP. WALDEN: And so they don't get the extra help. And that's -- we -- you know, I'm in a district that is really facing Depression era unemployment numbers. We are second to Michigan in Oregon in unemployment. My counties are at 17 to 20 percent unemployment. People are trying to figure out how to keep their doors open. And this bill is going to absolutely put a new bill on their doorstep they can't afford. And I've been a small-business person. I've signed the front of a payroll check and paid the bills, paid the light bills to public utilities, to co-ops and even to you in the old days, PacifiCorp. And it matters. And I'm deeply concerned about where this is headed.

Now, I want to go off into wind, because my district has a lot of wind energy. And I just want to get something on the record here. And I've been an advocate of renewable energy and wind energy. But I don't think it's the panacea some people think. And it has a cost associated with it.

And, Mr. Sokol, it's my understanding that for every megawatt of wind, a power company has to have a backup -- or prudently should have some sort of backup energy source for when the wind doesn't blow.

Is that true in your company? And if so, is there a ratio that you use?

MR. SOKOL: If you're a load-serving utility, the answer to that is you do need to have a backup until -- and hopefully there's a lot of promise for battery storage technology currently emerging. If that happens, that will help enormously. But without that, the wind only blow when it blows. And --

REP. WALDEN: And so you have to have gas backup, right?

MR. SOKOL: Gas or other generation.

REP. WALDEN: Mr. Farrell, is that right? You're nodding your head as well.


REP. WALDEN: So aren't we, in effect, creating two energy systems here, one that works when the wind's blowing and one that works when it doesn't. And isn't there an added cost to that?

And I'm not against wind. We've got a lot of it. It's a good thing. But to me, there are limits to what we can do and we need to know what those costs --

MR. SOKOL: I think, in fairness, there is a cost to it, but there's also an environmental benefit that when the wind is blowing we're not creating any emissions.

And so there --

REP. WALDEN: I agree with that.

MR. SOKOL: -- you know, there is a balance there. But there is a cost.

REP. WALDEN: All right. My time's expired.

Mr. Chairman, thanks for your --

REP. BOUCHER: Thank you very much, Mr. Walden.

The gentleman from Louisiana, Mr. Scalise, is recognized for five minutes.

REP. SCALISE: Thank you, Mr. Chairman.

Start with Mr. Wells, and in your earlier comments you had talked about carbon leakage. I think you'd said will fail to protect American jobs if the allowances aren't allocated properly. You said that 2020 target is too high, there are excessive procedural hurdles, and then you said if free allowances are not in the bill that will be at a competitive disadvantage. Now, you're a supporter of this bill, right? This is coming from who's a proponent?

MR. WELLS: Yeah, much like a previous comment, we're supportive of continuing to move through the process but there are parts of the bill we would like --

REP. SCALISE: So those are the highlights of the bill, that jobs can be shipped overseas if it's not done properly. I want to ask you, especially as you talked about if the allocations aren't done properly you'll be at a competitive disadvantage. Exactly what do you mean by that? Who will be at a competitive disadvantage against?

MR. WELLS: Let me use an example. Natural gas -- I've talked about that every time I've been here -- very, very critical to the American chemical industry. Natural gas prices have gone up 460 percent since 2000. In that time, American manufacturers have lost 3.7 million jobs. My own industry has lost close to a million jobs.

REP. SCALISE: Because of the higher cost --

MR. WELLS: The higher cost of energy --

REP. SCALISE: -- as it fluctuates.

MR. WELLS: -- and the higher cost of feed stocks associated with the rise in natural gas pricing. If the free allowances are not there for what we call the energy-intensive trade-exposed manufacturers, like petrochemicals, then it's safe to assume a similar sort of thing will occur.

REP. SCALISE: Lost to where? Where would be -- if you were at a competitive disadvantage, who are the people that would be at a competitive advantage?

MR. WELLS: Places where energy costs are cheaper --

REP. SCALISE: Have you got some examples of some of the countries?

MR. WELLS: That would be the Middle East.

REP. SCALISE: So our friends in the Middle East who we're trying to -- those of us who want to have a real comprehensive energy policy to encourage use of our natural resources to create good jobs here to reduce our dependence on the Middle Eastern world -- in effect, the Middle Eastern countries could actually benefit from a cap and trade energy tax if there is not adequate allocation to keep you competitive.

MR. WELLS: Absolutely, yes.

REP. SCALISE: That's encouraging for some people, surely not people like me, but -- what are the average pay of the jobs that your company has? I know they're well paying; I don't have a number. Our operators in the Gulf Coast -- it's been many years since I worked down there but --

MR. WELLS: Seventy thousand and above is a good number.

REP. SCALISE: Seventy thousand dollars a year on average. When you talk about jobs going to the Middle East, and obviously we've expressed concerns in this committee in other industries of jobs going to places like China, India, steelmakers going to Brazil -- in your industry, if a job that's producing products here in America goes to the Middle East, where they're going to be producing the same product, they'll just be producing it in another country, do you know how the carbon emissions compare -- in other words, how much carbon your company admits producing something here in the United States versus how much they would produce in a country in the Middle East?

MR. WELLS: I don't have exact numbers, but in many cases our carbon footprint is a function of our energy efficiency and how well we use energy. And I've testified in front of this group that my particular company has cut our energy use by 38 percent since 1990. We know that developing economies have not had that kind of improvement so it's safe to say that they are much more carbon intensive than we are.

REP. SCALISE: Which is another irony of this legislation that it purports to want to reduce carbon emissions when in effect by running more of these jobs overseas they're going to go to countries that emit more carbon and carbon's a worldwide --

MR. WELLS: If we don't take care of our energy-intensive trade- exposed --

REP. SCALISE: So you could end up emitting even more carbon by --

MR. WELLS: Absolutely.

REP. SCALISE: -- legislation like that this because those jobs go to other countries that emit more.

Mr. Cousins, you had talked about your refinery, the 1,200 jobs that would be lost, I think thousands more indirect jobs that would be lost. What is the average pay of your workers?

MR. COUSINS: The pay is similar to the Gulf Coast. We might be 5 percent lower, so that number is 70,000. With overtime we've got many employees in that range.

REP. SCALISE: Seventy thousand dollars a year jobs that would be lost. I know my time is running out.

If I could hit it real quickly, I don't know if you've seen the Spain study. Spain did a study on cap and trade in their country and how it affected them after years and years of going through that process. What they identified was for every, quote-unquote, "green job" that they created they lost 2.2 full-time jobs, and in effect, the green jobs they created, nine out of 10 of them were temporary jobs.

So if you looked at it from a permanent job standpoint, for every one job they created they lost 20 full-time jobs. And when you talk about the jobs that would be lost and you talked about India building a refinery basically to take the place -- when they shut down your 1,200 jobs at $70,000 a year, India will now be refining that oil that they will then be shipping here. How do their emissions compare to the carbon that you emit?

MR. COUSINS: It's going to be the same. It's going to go into the same atmosphere; it's going to be the same amount of carbon. It's going to be the same amount --

REP. SCALISE: And if they don't follow the same regulations that --

MR. COUSINS: They won't follow --

REP. SCALISE: -- are followed in American, if they actually emit more carbon -

MR. COUSINS: Right. They won't have to --

REP. SCALISE: -- producing the same oil that then we would have to be paying more for because then it would be coming from another country.

And Mr. Hodges, if I can, you had talked about the job losses. I think last year you said somewhere around 5,000. When the price of oil hit over $4 a gallon, obviously because we don't have a strong policy we became more dependent on Middle Eastern oil. For those of us that want to reduce our dependence on Middle Eastern oil, if we can lower that we could, I guess, create more jobs. But how many jobs would you lose if you actually had to pay more money because as the president, President Obama, said, prices would skyrocket under cap and trade. As his budget director, Peter Orszag, said, families would have to pay higher utility costs and energy costs. Would you be able to absorb those costs or would you have to pass those on?

MR. HODGES: Most of the time in our industry we can pass a percentage of our fuel increases to our customers, but unfortunately, we only get about 85 percent of that cost recouped from our customers, meaning we'd have to absorb 15 percent. In addition to, as noted earlier, we would have additional high electricity costs. When we have a $40,000 spend a month for utilities, we're suddenly looking from going from ($)40,000 to $50,000.

REP. SCALISE: So if you can't pass all of it on, then what happens?

REP. BOUCHER: Mr. Scalise, I believe your time --

REP. SCALISE: I apologize. Obviously they'll be possibly raised and you'll lose jobs too. So I yield back, thanks.

REP. BOUCHER: Thank you, Mr. Scalise.

The gentleman from Florida, Mr. Stearns, is recognized for five minutes.

REP. CLIFF STEARNS (R-FL): Thank you, Mr. Chairman. At this hearing the American Gas Association wanted to testify. Unfortunately they weren't able to, but they would like to put their statement, with unanimous consent, as part of the record, Mr. Chairman.

REP. MARKEY: Without objection.

REP. STEARNS: I'd like to ask each of you a question, and this is relative to India and China. Because once assuming, let's say, that somehow this gets through Congress and it's signed by the president, the question would be would India, China, Russia and other countries unilaterally go ahead and implement a similar cap and trade. So the question I have just for each one of you, just go down the panel here, do you believe that India and China would unilaterally adopt a cap and trade after we did it? Yes or no, and then you might just give me a sentence -- if you say yes, why they would do it; if you say no, why they wouldn't do it.

We'll start with you, Reverend Castellanos.

REV. CASTELLANOS: Well, you're asking a theologian to come up with an answer from an economist. I would --

REP. STEARNS: What better person to ask?

REV. CASTELLANOS: I would say yes if they really want to be faithful to the commitment to the nature and the environment.

REP. STEARNS: I mean, do you think the history of China has shown that they would be faithful?

REV. CASTELLANOS: I believe in hope, and I think that people change. And I see progress and I think we could have a great influence on whether it goes that way.

REP. STEARNS: Okay, next?

MR. KEOHANE: I think sometimes the difference between theology and economics is not so great as people say. At any rate, in answer to your question, I do think that the most important thing the United States can do to get countries like India and China --

REP. STEARNS: Well, just yes or no. Do you think they will do it, first of all, yes or no?

MR. KEOHANE: I do think they will follow --

REP. STEARNS: So you're yes, they will unilaterally pass that cap and trade, okay.

MR. KEOHANE: I think they will follow with a program to reduce and a commitment to reduce their own emissions within a reasonable period of time. And I know this, that if we don't do anything, they won't do anything, and that means that the climate crisis will continue.

REP. STEARNS: Even though they're building a new coal plant every week.

But anyway, go ahead, Mr. Montgomery.

MR. MONTGOMERY: Unequivocally no.


MR. MONTGOMERY: We would be giving away the only card remaining in our hand as we negotiate with the Chinese to convince them that they need to do something other than that we do not pay 100 percent of the bill for. These are negotiations on national interest and we would be -- and by committing ourselves to do something which they want us to do and getting nothing in exchange, we'd give away our only position.

REP. STEARNS: And you're also saying that they have a competitive advantage by not adopting a cap and trade, so they could stretch this out a couple years and say, we will, we will, but we won't. And over five our six years, they would get a competitive advantage.

Mr. Hodges?

MR. HODGES: I would say also no simply based on the fact that it's been my experience over the years that issues like this only get addressed as economies mature. When they're in rapid growth they don't address these issues; they address other issues that are pertinent to the growth, not issues that are pertinent to controlling the growth and refining that growth.

REP. STEARNS: Mr. Cousins?

MR. COUSINS: Based only on my limited supply of common sense, I'd say no.


Mr. Sokol?

MR. SOKOL: I think when it becomes in their economic and political interest to do it, they would, and not until then.

REP. STEARNS: So your answer is no, and so we're operating on the cap and trade and they would not adopt it and they would -- do you think they would ever adopt it?

MR. SOKOL: Well, at some point, like I said, when it becomes in their economic and political interests --


MR. SOKOL: -- then they will. But that point may be 20 years from now. And your question really drives to the point that I think is extremely important is if we're going to do this -- and I think the sense is we're going to put the caps -- let's do it at the lowest cost to the consumer and the industry so that if we're wrong in our guess that they're going to follow us we've at least done the least damage --


MR. SOKOL: -- economically.

REP. STEARNS: So we don't lose a whole, complete competitive advantage.

Mr. Wells?

MR. WELLS: No, I don't think they're going to have cap and trade anytime soon. However, I do think if we go ahead they will do things to address their intensity, particularly very optimistic about their work on energy intensity and energy efficiency, which in fact in many cases is better than what we're doing here.

REP. STEARNS: Do you think India is developed enough that even if they could they would? Do they have the regulatory powers and the type of political environment that they could adopt something like this?

MR. WELLS: I would have to defer. I'm not an expert on India. I do know quite a bit more about China, but cannot answer for India. I apologize.


And lastly, Mr. Farrell?

MR. FARRELL: Congressman, I'm here on behalf of EEI, and as far as I'm aware, they don't have a position on that question.

REP. STEARNS: How about you? Do you have a position?

MR. FARRELL: I am not an expert enough in what goes on in China and India to offer you any useful information.

REP. STEARNS: Okay. So you defer not to answer. Okay.

REP. MARKEY: The gentleman's --

REP. STEARNS: The time has expired?

REP. MARKEY: -- time.

REP. STEARNS: Okay, thank you, Mr. Chairman.

REP. MARKEY: The gentleman's time has expired.

The chair recognizes the gentleman from Washington state, Mr. Inslee.

REP. JAY INSLEE (D-WA): Thank you.

Mr. Wells, I want to commend your company for its great energy efficiency. It's been a real leader and our commendations to you.

Mr. Sokol, I don't know much about your company, but I presume it considers itself responsible and I want to ask you about your solid waste disposal programs. I presume you do not dispose of your solid waste on land which you don't own without permit, I assume. Is that correct?

MR. SOKOL: I think I can say fairly we don't dispose of any waste in any location that is not properly permitted. I can't confirm to you that we own 100 percent of the land but I think it would be in the high 80 or 90s, but I'm not certain 100 percent.

REP. INSLEE: Right. And I assume you don't believe that you own the atmosphere.

MR. SOKOL: Clearly not.

REP. INSLEE: And yet your testimony would suggest that you have believed your company has a right to dispose of your gaseous waste in the form of carbon dioxide in an atmosphere which you do not own, without charge and without regulation. And I'm not -- don't understand how you take that position.

MR. SOKOL: Congressman, I don't know where in my testimony you see that. We've agreed for five years on these caps, actually slightly more stringent. We have no issue with a cap on CO2. If that's government policy, put it in place as we did the 1970 Clean Air Act, the 1990 amendments and allow us to go meet it.

We don't disagree with the early caps, the late caps. It is only the trading mechanism which becomes a duplicative cost without any help at all to the environment that we struggle with for our customers, but we are not opposed to the caps and if these caps are put in place we will meet them on time.

REP. INSLEE: So you recognize the need for a limitation on the amount of carbon dioxide in the atmosphere, but you expect the government to just give you a permit to that gratis to a limited amount --

MR. SOKOL: Tell us what the limit is and we'll meet it. That's all we're asking.

REP. INSLEE: Well, we have -- we have a limit.

MR. SOKOL: There is no limit today on CO2.

REP. INSLEE: Here's my question to you. We've set a limit in this cap. That means there's a limit on the amount of carbon dioxide that can go into the atmosphere.

MR. SOKOL: And we would meet that, and we don't want you to pay for us to do that.

REP. INSLEE: Well, then somehow we have to figure out who's going to have the right to use that limited cap to dispose of CO2 into the atmosphere. And you have suggested by objecting to this partial auction that somehow you should have full right to give as much as you want from your company without figuring out how the next company will get its permit.

MR. SOKOL: What the bill states for utility is that you'd go back to our average 2005 CO2 emissions rates and that we would have to reduce them pursuant to this cap in each of the years shown, and we're fine with that. We don't want anybody else's allocation; we don't want to go plant trees in Honduras. We will make technological changes --

REP. INSLEE: But what --

MR. SOKOL: -- to our system to meet them pursuant to the cap.

REP. INSLEE: What gives your company a right to -- sort of a constitutional right to a permit to use a limited carrying capacity vis-a-vis some other company or some other ratepayer? In other words, why are your ratepayers sort of constitutionally entitled, in your view, to a free permit as opposed to my ratepayers or somebody in Florida or anywhere else? I just don't understand that.

MR. SOKOL: I don't think they are. I'm not asking for a free permit.

REP. INSLEE: But you are asking for a free permit. You're essentially saying that you shouldn't have to buy at any auction, at any price set by the market, for this limited asset. I don't understand that.

MR. SOKOL: No, Congressman, the last time I checked the Constitution -- I've got a copy here -- these assets are owned by us. We have operating permits today to operate them. The United States Congress is trying to make a decision to put limits on CO2 and tell us that we can emit less in the future. And we think that is an appropriate government policy decision to make, and when you make that we'll comply with it.

We're not asking you to give us any -- we're running these facilities today pursuant to state and federal law; they were regulated. Some of them are in the state of Washington, Oregon, Nebraska -- not Nebraska -- Iowa, Wyoming, Utah. And you're asking us to reduce the amount of CO2 that we emitted, and we're saying we will do that.

REP. INSLEE: Well, my concern is that -- I'll just make a comment and then I've got one more question -- my concern is either we have limited ability to hand out, if you will, permits for a limited carrying capacity of the atmosphere. And when people come and want total free permits, they're asking for something that doesn't belong to them, frankly. It belongs to the taxpayers and the citizens.

Then I want to ask a quick question of Mr. Farrell, if I can. We do have regional disparities by almost necessity, and I'm not responsible for putting the Columbia River in the Northwest, nor am I responsible for putting coal in the East.

MR. FARRELL: It was Virginians who found the river.

REP. INSLEE: That's the way it should be. But we've tried to -- isn't it fair to say that by having a half and half distribution model between the type of energy you have and half of the system of the base, half the amount, isn't that one way to better address some of these regional disparities?

MR. FARRELL: That is exactly what we were trying to accomplish.

REP. INSLEE: Thank you.

REP. MARKEY: Thank you. The gentleman's time has expired.

The chair recognizes the gentleman from Arizona, Mr. Shadegg.

REP. JOHN B. SHADEGG (R-AZ): Thank you, Mr. Chairman.

When he left, Mr. Walden asked that this paper from the American Forest and Paper Association be put into the record. He had been asked by them to put it into the record; he forgot to do so. I ask unanimous consent to do so.

REP. MARKEY: Without objection, it will be included in the record.

REP. SHADEGG: Thank you very much.

Mr. Sokol, I'd like to clarify the question that just occurred because it confused me. The Clean Air Act, for example, regulates various pollutants, NOx, SOx, SO2 and others, and it did that by simply setting limits. It did not charge a fee for emitting what was below the limit. Is that correct?

MR. SOKOL: That's correct.

REP. SHADEGG: And that's what you envision here?

MR. SOKOL: Yeah.

REP. SHADEGG: You're willing to live with a limit as proposed in this legislation. As I understand it, you said you could live with a limit that was even lower than that. This notion of charging you for what you're currently emitting, to allocate it between various companies is something that would be completely new to the emissions of -- so far as I know, the Clean Air Act doesn't operate in that function, does it?

MR. SOKOL: It does not. And the reference that people often make to the SO2 trading situation from the 1990 Clean Air Act is completely "unanalogated."

REP. SHADEGG: I thought you did an excellent job in pointing out the differences in that. So you can meet the caps in this legislation. I think people listening to your testimony would like to have greater clarity on, I think, a fundamental point you made. You said the bill doubles the cost. That is, consumers are actually paying both to reduce the carbon dioxide, presumably a good thing, but also paying for this tremendous trade mechanism that can be gained on the other side. I believe in Europe it has been gained. I'd like you to take a moment and re-explain why you see it doubles those costs.

MR. SOKOL: In our testimony that we filed for the record, you'll see we've done it for each of our utilities. It's going to be very quick, but this bottom red line here is the amount of free allocations we will receive from this bill, our customers will receive. The black line is the stepping down of carbon obligation under your cap.

We're a utility. Our natural gas plants emit CO2 and our coal plants emit CO2. There is no technology commercially available today to take that CO2 out of that air stream. So what we've had to do is go with our regulator and say, look, if this is the requirements, here's how quickly we can replace those plants to meet these requirements. You don't build new generation in a day, and new generation's not free.

So that's laid out. Then, between now and then, we just have to buy allocations up to the cap to continue serving our customers. Those two costs -- the cost of compliance, is $9.1 billion over 30 years to build those new plants, and the cost of just paying for the allocations, again, below the cap -- we're already going to be at or below the cap -- is another $9.3 billion that our customers will pay. That's the double cost. If we're below the cap, why should they be penalized more?

And all that is is a wealth transfer, and a good portion of it going to states like Washington and California and others from the Midwest, and it doesn't make any sense.

REP. SHADEGG: And the trading market itself, at least if we look at what happened in Europe, has made a number of people rich. That's allowed people to get rich off of the trading scheme itself, hasn't it? And is that a part of your objection or is that not a part of your objection?

MR. SOKOL: It's not only an opportunity for the gaming of the system, which we -- there was a recent article written that said within three years it will be larger than the trading of petroleum as a commodity market. That's over a trillion dollars a year. But secondly, our industry doesn't need it. Just set the permits where they need to be and make us go do it.

REP. SHADEGG: Got it. Some of us would agree with that.

Quickly, this hearing is on the allocations. It looked to me like your testimony pointed out that the allocations as between electricity generation and high-intensity energy users -- language I think that was negotiated by one of my colleagues from Pennsylvania -- is not fair or equitable, and the same with regard to the auto industry. Is that correct?

MR. SOKOL: Well, I think there's a whole number of elements here that people in good faith probably tried to negotiate, to be fair, but this is a massive question. And the allocation of -- there should be weeks of regulatory hearings where people can submit information to get these unintended consequences known. I mean, if you want to make a bad decision, you know, you're Congress and I'm fine with that. You have the prerogative, but at least know the decision you're making. And that's what's not happening, and this is a -- this is a reordering of American economy. It deserves some time.

REP. SHADEGG: Mr. Cousins, as I understood your testimony ,which I thought was quite clear, there is no question but that at the cost of this legislation, which you said could not be passed on to 100 percent, that being -- I guess I calculated it about seven times what your profit has been in the past, 13 to 100 million -- it would drive you out of business.

MR. COUSINS: Yes, sir.

REP. SHADEGG: Mr. Barton asked you about the number of job losses that would produce and you said direct and indirect were how many?

MR. COUSINS: Direct were 1,200 and indirect were 3,600.

REP. SHADEGG: At your --

MR. COUSINS: At our facility.

REP. SHADEGG: And are there similar refineries that would be in the same position?

MR. COUSINS: Yes, there are. There are approximately 36 small refiners in the small category that are our size roughly, spread all out in rural areas, and most of those would be equally vulnerable.

REP. SHADEGG: I have one last question. It seems to me that in part this bill is being sold as a way to make us less dependent on foreign energy sources, yet the story you told about the refinery built in India to deliver products to the United States, not to India, combined with this bill driving your company out of business, I guess you perceive this bill as in fact resulting us having less refining paths in the United States and driving us or forcing us to use foreign suppliers rather than domestic. Is that correct?

MR. COUSINS: In the near term, I think that's absolutely correct. In the long term, I think that is beyond my ability to predict.

REP. SHADEGG: Thank you very much.

REP. MARKEY: Great. The gentleman's time has expired. All time for questions from the subcommittee members has now expired.

We thank you all so much; this was a very valuable hearing. It's helping us to focus on the very important issues that are part of this legislation. With the thanks of the committee, this hearing is adjourned and we ask the witnesses to stay close to us. We're going to need additional conversations with you. Thank you.


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