ies into a coherent least-cost policy framework turns conventional wisdom upside down. It shows that if U.S. climate policies embrace market and fiscal reforms, carbon-cutting investment shifts result in cumulative net economic gains of $250 billion by the end of the first Kyoto commitment period and $600 billion by 2020-before counting the benefits of avoided climate risks and damages.

Our analysis also shows that an energy strategy aimed at mitigating climate change would simultaneously relieve current U.S. energy problems and help safeguard the U.S. economy. Though mitigation will involve significant administrative and political challenges, meeting these challenges offers tangible economic rewards for U.S. consumers and improved competitiveness for U.S. firms. Conversely, inaction and delay carry significant opportunity costs.

In view of these results, objections to emission reduction goals such as the Kyoto target as too costly or unfair must be considered economically uninformed. Likewise, the U.S. insistence in recent international negotiations on certain outcomes regarding sinks and flexibility constraints would seem to be misguided. Given that the U.S. can meet and exceed targets such as those of the Kyoto Protocol at significant economic gains, and given recent evidence of increased global warming risks, it is in the national interest of the U.S. that carbon and other greenhouse gas emissions be speedily curtailed, both domestically and globally. Future U.S. climate policy should be based on improved information regarding the nation's economic and technology options.

STATEMENT OF KALEE KREIDER, GLOBAL WARMING CAMPAIGN DIRECTOR, NATIONAL ENVIRONMENTAL TRUST

The National Environmental Trust appreciates this opportunity to submit_testimony for this hearing before the Senate Committee on Environment and Public Works. The National Environmental Trust (NET) is a non-profit public interest group working to protect public health and the environment. The impacts of global warming present one of the most challenging sets of environmental policy issues that we face. NET supports the development and implementation of appropriate, comprehensive domestic and international policies to mitigate global warming. We especially advocate the leadership of the United States, the world's largest emitter of greenhouse gas emissions, in the international arena. In order to fully address the threat of global warming, countries must negotiate a binding treaty that will achieve real, verifiable global reductions of greenhouse gas emissions. In addition, the U.S. must implement strong domestic energy policy to reduce U.S. greenhouse gas emissions and transition our economy away from inefficient, polluting fuels toward clean energy technologies.

It is with great confidence that we state that the science of global warming is no longer disputed. The U.S. National Academy of Sciences determined just last year that global warming is "undoubtedly real," and taking place "at a rate substantially larger than the average warming during the twentieth century.” The third and most recent study by the Intergovernmental Panel on Climate Change (IPCC)—a panel comprised of over 1,200 of the world's leading scientists, concluded this year that: "In light of the new evidence and taking into account the remaining uncertainties, most of the observed warming over the last 50 years is likely to have been due to the increase in greenhouse gas concentrations. Emissions of CO2 due to fossil-fuel burning are virtually certain to be the dominant influence on the trends in atmospheric CO 2 concentration during the 21st Century."

The IPCC also found that unique natural ecosystems such as prairie wetlands, alpine tundra, and cold water ecosystems likely will not be able to adapt to warming, and that sea-level rise would erode coastlines, including along the U.S. Atlantic coast. The incidence of vector-borne diseases such as malaria, dengue fever, and Lyme disease are predicted to occur into Northern latitudes where they were not previously experienced. We are particularly concerned with the projected impacts of global warming on U.S. agriculture.

It is against this backdrop that the environmental community reacted with alarm and grave concern at the abrupt and unilateral actions of the Bush Administration, just months into taking office, on both domestic and international climate change policy. President Bush's decision on March 13, 2001 to abandon his campaign pledge of requiring mandatory reductions of carbon dioxide emissions from power plants dealt a critical blow to a credible domestic policy on climate change. Power plants are responsible for 40 percent of U.S. greenhouse gas emissions (and 10 percent of international greenhouse gas emissions), and policies to address what is perhaps the greatest industrial source of greenhouse gases in this country are imperative to addressing the problem.

Recognizing both the science and the impacts of global warming, senior representatives of the utility industry, in concert with members of the environmental community, were engaged in a dialog about cutting carbon dioxide from power plants, prior to the President's devastating announcement. The utility sector recognizes, as does most of the country, that climate change is a real phenomenon with human causality and profound potential consequences-and that domestic policies must be enacted to begin to deal with climate change now. The utility industry, much of which faces significant capital investments in the near future, is cognizant that policies and directions are needed now to begin to address carbon dioxide emissions over the long term. Utilities were engaged in discussions on this issue because they are looking for the regulatory certainty that multi-pollutant power plant legislation would bring-that is, legislation that seeks reductions in multiple pollutants, at the same time, rather than via piecemeal approaches. This legislation would allow the utility sector to make long-term investment strategies with the knowledge that they would not face new, unexpected, and costly regulatory and investment hurdles down the road.

Because the Administration has chosen not to honor this campaign commitment, and because they are prepared to introduce energy legislation that would continue U.S. dependence upon the dirtiest fossil fuels, we believe it is imperative that the Congress, and this committee specifically, move forward with legislation on a comprehensive, multi-pollutant bill to reduce emissions of the power plant pollutants of mercury, nitrogen oxides, and carbon dioxide.

On the international policy front, we are distressed at the Bush Administration's unilateral decision to abandon the the Kyoto Protocol, an agreement that has been years in the making and that has engendered the cooperative participation of 165 countries in a complex negotiating process. We strongly urge the Administration to carefully consider the hard-fought wins in the Kyoto Protocol-especially the market-based flexible mechanisms in the Kyoto Framework-mechanisms that would keep the costs of compliance and implementation of the treaty as low as possible. These mechanisms are perhaps the most important part of the framework, aside from the binding targets and timetables.

The flexible mechanisms in the Kyoto Treaty include emissions trading, the Clean Development Mechanism (CDM), and Joint Implementation (JI). The common feature of these mechanisms is that they would achieve real emissions reductions in the most cost-effective places and manners. In particular, these mechanisms offer the ability for countries such as the U.S. to export clean technologies that reduce global greenhouse gas emissions but allow share in the 'credits' or benefits.

Joint Implementation would allow industrialized countries to jointly agree to a project undertaken in one country, for which the other takes the initiative, and hence receives credits. This would allow for the sharing of benefits or activities that one country has either the resources or technologies for that another does not, but for which real emissions reductions are achieved. The CDM is similar to JI, but would allow an industrialized country to undertake a project or activity in a developing country, also to result in real emissions reductions, with prearranged agreement as to how the credits would be shared by the two countries. Emissions trading is a mechanism akin to the trading of sulfur dioxide credits under the domestic sulfur dioxide ("acid rain”) program. It operates based upon a cap-and-trade premise, whereby an upper level amount, or cap, is established for the amount of pollutants that can be emitted in a certain area (for instance, the entire United States), and entities within that area that emit those pollutants can share or trade pollutant credits. This enables the involved entities to seek the lowest-cost, 'easiest' reductions first, thus keeping the costs down while also buying' time for the harder reductions, which will conceivably occur later, but which will have the benefit of new technologies that can be developed in the interim.

In both the domestic and the international arenas, we would also like to point out that voluntary approaches, while they may be useful in some situations to deal with environmental issues, have failed to deal with the problem of climate change. The 1992 United Nations Framework Convention on Climate Change (UNFCCC), unanimously passed by the U.S. Senate and ratified during the first Bush Administration, has failed to cut greenhouse gas emissions. That treaty obligated this country and others to voluntarily reduce our emissions of greenhouse gases to 1990 levels by 2000. Instead, United States emissions' of greenhouse gases were 13 percent above 1990 levels in 2000, and they continue to rise. The Kyoto Protocol was negotiated by the world community in response to the failure of the voluntary approach of the UNFCCC. Binding targets and timetables are essential tools to help this country and other industrialized nations begin to grapple with the choices and policies that will reduce atmospheric concentrations of greenhouse gases to the point where they are stabilized and even reduced.

As evidenced by the testimony of witnesses today, and of many others in the energy sector, there are many tried and true policies that we can enact today to begin to address climate change on a domestic and international basis.

In particular, NET supports the following policies:

Completion of a binding international agreement to cut emissions of the six major greenhouse gases.

Advancement of domestic policies to use fossil fuel reserves more efficiently, particularly with regards to electricity generation, transportation, and buildings. Passage of a national Renewable Portfolio Standard that would allow consumers to choose the source of their electricity.

Passage of a comprehensive bill to cut the four major pollutants emitted from coal-fired power plants (NOx, SOx, mercury and carbon dioxide).

In summary, we have watched with great interest and concern the evolution of this topic in the Congress over the past several years. We are gratified that the debate in this arena has moved from one of questioning the science and the collective wisdom of international, multidisciplinary scientists to one where we are seeking real, near-and longer-term solutions to what is probably the greatest environmental issue facing this country, and the world.

STATEMENT OF JOHN W. CLARK, SENIOR VICE PRESIDENT FOR GOVERNMENTAL AND PUBLIC AFFAIRS, CMS ENERGY CORPORATION

Mr. Chairman, I am. John W. Clark, Senior Vice President of CMS Energy. We appreciate being given an opportunity to provide testimony on this important matter. CMS Energy is an integrated energy company with annual sales of $11 billion and assets of about $16 billion throughout the U.S. and in selected foreign markets, with businesses in electric and natural gas utility operations; independent power production; natural gas pipelines, gathering, processing and storage; oil and gas exploration and production; and energy marketing, services and trading.

A quick reading of nearly every major news publication on any given day reveals the extent to which the interplay between U.S. energy security, environmental policy, and the economy at large has risen to the top of the national agenda. CMS Energy commends the Committee for its leadership in examining a particularly critical element of the debate: whether and how voluntary efforts to reduce pollutants and other emissions, including CO2 emissions, can be effective, and what needs to be done to establish the framework for putting them into place.

We believe CMS Energy is an industry leader and well credentialed in this area through its successful effort to establish one of the world's largest climate change mitigation projects.

That effort, the Atlantic Methanol Production Company (AMPCO) on Bioko Island in Equatorial Guinea just off the coast of West Africa, is particularly innovative. As CMS began drilling and extracting liquids and condensate from its oil and gas operations in Equatorial Guinea, one of the by-products was an extraordinary amount of residue, or excess dry gas for which there was no market. Consequently, and in fill compliance with local laws and environmental regulations, we began to flare that gas in order to ensure its disposal.

That struck the company as both a waste of potentially valuable resources and as unnecessarily harmful to the environment. Determined to find a productive use for the gas, CMS decided to convert the gas into methanol for trading in the world market, thus giving rise to the AMPCO project. At the same time, we knew that there would be substantial benefit to the environment-the gas is flared at a rate of up to 135 million cubic feet per day, or enough to fuel a 500 MW power plant. Since methanol, like any commodity, is subject to price volatility, we began to explore the prospects for gaining recognition for AMPCO's substantial emissions reductions and materializing economic benefit from them, Over time, those reductions could help sustain the project's economics, so there was a clear market-based incentive for us to pursue the effort.

CMS Energy's Experience with the USIJI Program

That effort led the company to initiate a proposal to the U.S. Initiative on Joint Implementation, which is a pilot program established pursuant to the U.N. Framework Convention on Climate Change, or the Rio Treaty. While it is a global program, the USIJI is administered within the United States by an interagency panel, which includes among others the Departments of Energy, State and Commerce and the U.S. Environmental Protection Agency. After nearly a year's worth of discussions and after providing volumes of data and information to the USIJI staff, the AMPCO project was accepted into the program earlier this year. USIJI estimates

that the elimination of the flared gas will result in reductions of nearly 3 million metric tons per year of CO2-equivalent emissions, or nearly 75 million metric tons throughout the project's estimated 25-year lifespan. These reductions will be verified as the plant goes operational by an independent third party. The volume of reductions is the largest that USIJI has approved for an existing project.

There were significant residual benefits in our effort to gain acceptance for AMPCO into the USIJI program. Equatorial Guinea, which until then had chosen not to accede to the Rio Treaty, was induced to sign the treaty and thus became more filly integrated in the global environmental regime solely because of this project. And as a partner in the project, Equatorial Guinea emerges in a truly winwin position: it gains all of the benefits of the initial investment, it grows its economy, it gains valuable technology and knowledge transfer, and it will share in the economic benefits that will accrue through trading and monetizing emissions reductions.

Policy Implications

CMS Energy believes that its experience with the USIJI program can offer some valuable insights to the Committee's efforts. Applying the knowledge and lessons we've learned from AMPCO's acceptance into the USIJI, we believe that a serious, well designed effort to establish a voluntary emissions reduction program, coupled with a rigorous, market-based emissions trading effort, can provide companies with a sound economic rationale to undertake and sustain substantial reductions of greenhouse gas emissions, including CO2. For the program to be effective, it would need to have a balanced mix between the types of voluntary commitments that industry would make, and the incentives that would provided in exchange for the implementation of those commitments. It would also need to allow flexibility in the types of mechanisms that companies can use to comply.

CMS Energy believes that there would be multiple benefits to flow from the adoption of such a program. First and foremost, there would be substantial enthusiasm from companies such as CMS to participate, which would result in commensurately high levels of emissions reduced. Second, if properly designed, the program would provide economic incentives in proportion to the commitment that companies undertake to reduce their emissions. Accordingly, as the program succeeds it will induce companies to expand their own commitments, and demonstrate to skeptics the value of participation. Third, the program would demonstrate to America's international partners and allies that there are effective, market-friendly and verifiable ways to reduce emissions that do not require the adoption of a mandatory, command-andcontrol regime such as the Kyoto Protocol in its present form. Indeed, if a voluntary program succeeds and matures in ways that we believe it is capable of, it could well help to reshape the debate in the international community on how to address collectively climate change issues. Last, the successful implementation of a voluntary, market-based program would accomplish its objective of reducing emissions without inspiring the principal concern that many in the Congress and private sector have expressed about the Kyoto Protocol: that compliance would do irreparable harm to the U.S. economy.

Practical Considerations

Moving for a moment from the theoretical, allow me to offer some practical considerations about how such program would work and what might hinder it. Say for example that CMS Energy committed to a newly established voluntary program. The questions that arise immediately are how to establish a baseline, what volume of reductions to commit to, how to begin implementing that commitment, and how to account for natural growth in demand.

One of the attractive features of the AMPCO project for its acceptance into the USIJI program was the ease with which we could establish the baseline emissions and measure the reductions. It was a relatively simple proposition: the flare was there, and with the project in place it would be extinguished, and the reductions would be calculated on the difference. Calculating the baseline and levels of reductions from other emissions projects can be far more complicated, however, depending on what type of project is under consideration. It can be quite confusing to establish baselines and determine resulting reductions for efforts such as fuel switching, replacing old or inefficient equipment, recovering or reinjecting vented or flared gas, repairing gas leaks, or implementing demand-side management efforts. Efforts such as these are extremely useful and should be recognized in any voluntary program, but clear and specific guidelines will be needed to provide companies with a sufficient level of comfort and assurance that they will be justified in making the expense to implement them.

CMS Energy has undertaken a very preliminary analysis of its current and projected emissions of CO2 equivalent from 2000-2005. Specifically, we've looked at two alternative views of the company's future starting from the same point-our current level of CO2 equivalent emissions. One view shows a fairly sharp growth in emissions based on what would happen if we proceed with business as usual. Another view shows a far more gradual growth of emissions based on what would happen with an aggressive effort to institute a number of improvements, upgrades, and applications of new technologies to a variety of our existing and planned projects. Assuming we had the economic incentive through a voluntary program to implement these efforts, we can obtain significant reductions of CO2 equivalent reductions by 2005.

An important fact that emerged from our analysis is that both views of our future showed growth in total emissions-with one alternative growing at a sharper rate than the other. This reflects the fact that there will always be natural growth in demand. Accordingly, it is eminently clear that any voluntary program will have to account-and not penalize companies for normal growth. Without such an allowance, a voluntary program would be predicated on the totally unrealistic assumption that the US economy and resulting electricity demand would remain flat, and would make it more difficult and less attractive for companies to participate.

If companies could be rewarded along the way with a clear set of incentives for implementing commitments, they would have both a road map and an economic justification for achieving substantial amounts of emissions reductions. Moreover, as companies exceed their commitments, they should be able to market their excess reductions to other participating companies that anticipate shortfalls, That creates an additional incentive for companies to cut emissions aggressively, and a disincentive for others to fail to meet their commitments. It also facilitates the development of a robust trading market, which can be expanded to include international projects and purchasers.

A CO2 emissions trading market is already in its infancy. CMS Energy, for instance, has reached preliminary agreements with a foreign company for the sale of a parcel of AMPCO's emissions reductions, at a price that suggests the potential for real value for the reductions. Our experience is emblematic of an evident willingness of foreign companies to purchase emissions reductions from the United States. But the existing market is illiquid, transactions involve a great deal of risk for both buyers and sellers, and the process is beset with a great deal of uncertainty stemming from the lack of clear rules and definitions. A voluntary emissions reduction program that facilitates and rewards emissions trading, and provides clear rules on baselines, eligibility of projects, measurement of reductions, and flexibility for companies to meet commitments would allow the emerging marketplace to flourish. Recommendations

The practical considerations that I have mentioned form the basis for CMS Energy's recommendations for a voluntary emissions reduction program. Some of the recommendations are obvious and have been touched upon in my testimony, but I will conclude with a comprehensive list:

First, the program must be voluntary. Command and control regimes are inefficient, costly, politically untenable, and have the potential to do grave economic harm to the United States.

Second, the program needs to offer clear guidelines to companies about how to formulate their corporate-wide CO2 equivalent emissions baselines-what can and cannot be counted in terms of their emissions—as well as project-level baselines for greenhouse gas emissions.

Third, the program needs to offer precise rules about what projects are eligible and what constitutes and qualifies as a reduction. Companies will be discouraged from making major capital expenditures to upgrade existing operations or reconfigure new ones to obtain greater emissions reductions if they are uncertain the reductions will be recognized. Obviously, to improve prospects for success, as broad a range of acceptable projects and activities as possible should be encouraged. We believe the existing USIJI process and the DOE's 1605(b) program respectively offer a good basis from which to construct a framework for evaluating and implementing international and domestic projects, and for establishing which existing projects should be "grandfathered" into the new program. Both programs, however, would need to be refined dramatically and their rules made more specific and transparent to eliminate uncertainties and bureaucratic inefficiencies. On the other hand, we believe that reforming the USIJI and 1605(b) programs does not require legislation. • Fourth, in order to be credible the program requires monitoring and verification, which also has the potential to add costs. These costs must be reasonable or the program becomes self-defeating.