IMPACT OF INTERNATIONAL EMISSIONS TRADING

Ms. JACKSON LEE. Let me try to focus on what we might have gotten, doing what I will call the initial negotiations. Help me understand the impact that the international trading emissions might have. And let me say this in the context of an industry that I represent, the energy industry, which is obviously going through many changes, including potential electricity deregulation. And the question would be: How do we match the interests of maintaining the productivity of our industries, but with very high interest, of what I have great concern of the many of my constituents with asthmatic illnesses and other breathing illnesses, along with, of course, my working families who have to work?

So what did you secure out of the international emissions trading concept in contrast to what I understand we do not have, these mandatory measures such as energy taxes, if you can compare those two issues?

Ms. MCGINTY. Yes, yes. Congresswoman, our approach in these negotiations is very similar to what we've tried to do working with you domestically, and that is, yes, we have called for tough environmental protection, whether it means cleaning up the air, so our children don't have asthma and other lung disease, or now in this context that they're not suffering the consequences of global climate change. But with those tough standards or tough goals, we've really said we should have all the flexibility in the world, so that our industries can figure out the best, cheapest, most cost-effective way to get that job done.

So we've tried to have two things, both domestically and internationally: Have the tough target, but through things like emissions trading, joint implementation, now called the clean development mechanism, and using sources and sinks, in the jargon of all of this, that industry is assured complete flexibility in how they achieve the target.

And I would just say that the energy industry has been very much in the forefront of this. Whether it's the Sunoco Company, who has endorsed the approach we have taken here, British Petroleum, who has endorsed the approach we have taken here, or other companies, they're saying, look, we don't mind environmental challenges; we're good environmental companies, but give us the flexibility and the tools we need to get the job done, and that's what we tried to do

Ms. JACKSON LEE. Excuse me for interrupting, but I want to sort of pursue-what does not having the energy taxes do?

Ms. MCGINTY. It means that if you are, let's use the Sunoco Company again, a company that wants to reduce your greenhouse gas emissions, you have a universe of choices as to how to go about that. No one is telling you we're going to impose an energy tax on you. So you decide yourself. It makes more sense for us, for example, to plant trees and sack CO2 out of the air than it does to reduce our emissions per se.

Ms. JACKSON LEE. So it adds to the flexibility, in response to some of the concerns as to whether we're all going to play in the same playing field, which is commitment to improving the environ

ment, but how we do it leaves the door open? Is that where we are, from your perspective?

Ms. MCGINTY. Open, yes.

WHEN TO MOVE FORWARD WITH AN INTERNATIONAL AGREEMENT

Ms. JACKSON LEE. Mr. Smith, let me ask again, and I think the question had been asked by my colleagues, when do you think we can go forward with the kind of international cooperation and treaty that would get to where many of us want to be, which is to assure a good environment for our children and our grandchildren? Mr. SMITH. Well, I think the answer to that, Ms. Lee, I don't know the precise date, but it's when the Administration has succeeded in meeting the goal that the President articulated on his way or on the way of the negotiators-to Kyoto: that we secure meaningful participation by the entire world community, and that means not necessarily, and certainly not likely, that the same kind of targets that we accept, but nonetheless, measurable and enforceable targets. So that at the end of the day we can all be assured that we've stabilized the concentration of greenhouse gases at a level that's appropriate to a secure environment.

In the meantime, we quite agree with the Administration and with many of my colleagues on the panel, we ought to proceed in a way to encourage investments in clean technology, to encourage research and development in both how to use our existing resouces more effectively and exploring new energy resources. There's nothing about the treaty that says we can't start doing that now. We agree with the Administration that we should, but we should not undertake binding commitments to a potentially very disruptive regime without the inclusion of the balance of the global community. Ms. JACKSON LEE. Mr. Chairman

Chairman SENSENBRENNER. The gentlewoman's time has expired.

Ms. JACKSON LEE. Mr. Chairman, I would ask for an additional 15 seconds to pose a question, and then I would be happy if either Mr. Goffman could answer it in two seconds, but if he could not, then I will certainly appreciate it being in writing.

Chairman SENSENBRENNER. The gentlewoman will get 17 sec

onds.

[Laughter.]

Ms. JACKSON LEE. Thank you very much, Mr. Chairman, for your indulgence, and also, Mr. Luther, thank you very much.

Mr. Goffman, first, I want to appreciate that you're here, and I think this should be a discussion and a dialogue to get where we'd like to be.

How can we work together to be assured of the question I asked, a good quality environment, but recognizing that economics is very important in this country?

And thank you for your work.

Mr. GOFFMAN. Thank you. And in 2 seconds

Ms. JACKSON LEE. You might have longer, but

Mr. GOFFMAN [continuing]. As an example of how to answer that question, our written testimony includes the outline for what we call an early reduction credit proposal, which not only, I think,

but is, I guess, a nice little microcosm of how balancing what Ms. McGinty referred to as tough environmental goals with economic incentive-based flexibility can allow us to hit both the environmental objective while maintaining economic productivity.

Ms. JACKSON LEE. Thank you, Mr. Chairman. Thank you, Mr. Goffman.

Chairman SENSENBRENNER. The gentlewoman's time has really expired.

[Laughter.]

Ms. JACKSON LEE. Thank you.

Chairman SENSENBRENNER. The gentleman from Minnesota, Mr. Luther.

REAL LEVEL OF U.S. GREENHOUSE GAS EMISSIONS REDUCTIONS IN THE KYOTO PROTOCOL

Mr. LUTHER. Thank you, Mr. Chairman. I appreciate your having this hearing. I think it's terrific, the interest that's been shown in this particular subject, which obviously is a key issue for Congress to deal with.

I'm going to be very brief. The question that I'd like just any panelist that's interested to touch on is this issue of what our real reduction in CO2 emissions would really be under this. We all understand the formal commitment to a 7 percent reduction. That's the one that's been publicized widely. But we continue to get information that the real, actual reduction would be more in the area of 3 percent, for example. Well, there's obviously a big difference in terms of not only reality, but perception in terms of those numbers. And what I'd like is anyone on the panel to just discuss that, and perhaps highlight that difference and that issue.

Ms. MCGINTY. Congressman, if I could take a shot at that, as you will recall, the President in October proposed that we should reduce U.S. emissions to their 1990 levels by the Years 2008 to 2012. Out of Kyoto, that number is 7 percent below 1990 levels, as you just referred to. Now the reason why it's actually only about 2 to 3 percent different from what the President has proposed is because of two things. One is that in our original proposal, the one the President spoke to in October, there were six gases included in that calculation. All six gases were measured at their 1990 levels. In the Kyoto agreement, we won on getting all six gases into the agreement, but we also achieved some additional flexibility, if you will, because three of those six gases will now be measured at their 1995 levels, which is a higher level than 1990. That change amounted to about a 1 percentage point reduction. So rather than 7 percent in real terms, according to what the President was speaking to, we're talking 6 percent. Now the other 3 percent comes from the change that was made in how sinks, forestry activities, will be treated under the treaty. The basic result of the discussions in Kyoto was that you didn't have to count anymore in the baseline year, 1990, how much CO2 was being taken out of the air by your trees, but in the target year, 2008 to 2012, you could still get credit if you planted trees and brought those emissions down. That amounted to another 2 to 3 percentage points in terms of real changes from what the President had articulated. You add that together: 7 is actually about 2 to 3.

[Laughter.]

Chairman SENSENBRENNER. Is this the new math or the old math?

[Laughter.]

Chairman SENSENBRENNER. Mr. Smith.

Mr. SMITH. I was going to comment, Mr. Chairman, I've heard Ms. McGinty do this before, and I've been dazzled and I'm convinced.

[Laughter.]

Mr. SMITH. But let me take the opportunity, Mr. Luther, to raise a question that's troubled us related to the target issue. We will end up, assuming that the President is successful, that the global community does comply, agreeing to some set of targeted reductions that could put quite serious burdens on the economy, as we've discussed. But what has struck us is missing from this conversation, in fact, is the real target that the global community ought to be aiming for, which is what level of greenhouse gases should we try to stabilize atmospheric concentrations at. Emissions contribute to that level, but they are not, in and of themselves, determinant it. And it's one of the reasons why it's so important, of course, that the entire world community participate. Reduction of our emissions to levels quite below the levels agreed to in Kyoto, in the absence of any reduction in developing country base case emissions, will result in no reduction in global concentration levels, which seems to us to fall far short of the environmental goal which we ought to set. So part of the discussion-and it's important because it does affect both the pace and the nature of the economic change, what we'll have to go through-does need to be about U.S. emissions, but at the end of the day we need a discussion about what sustainable and safe level of concentrations should we be striving for.

Chairman SENSENBRENNER. The gentleman's time has expired. Now, as I indicated, there will be a second round of questions for those diehards that were not able to get their questions answered the first round, starting with the Chairman.

[Laughter.]

EMISSIONS CREDIT SCHEME

Chairman SENSENBRENNER. Ms. McGinty, I have been listening very attentively to all of the testimony and answers to questions today, and I commend the Administration for, No. 1, opposing a carbon tax or a Btu tax as a way of meeting our goals, and, No. 2, putting great emphasis on market forces in terms of doing this. But the devil is always in the details, and what I'd like to know is, who establishes the credits that our industry can buy? How many credits will be established for sale on the global market? And is this something that is flexible that can expand or contract? And how will these credits be priced and paid for, and then how is the money from these credits to be distributed?

Ms. MCGINTY. The credit system itself. One thing that's very important is that, while there are some rules of the road that we need to work out, both on emissions trading and the clean development mechanism, Article 16 in the treaty immediately establishes the right and ability of countries and companies to begin to trade. The

degree to which credits are both recognized and then divvied up between the partners will be part of the business agreement that the U.S. company and maybe a company in another country agree to among themselves.

Chairman SENSENBRENNER. Well, this is different than emissions trading. The credit purchase is different than trading of emissions. They're two separate issues. You know, the trading thing, I'm not particularly concerned about, if the details can be worked out in Buenos Aires, but what I want to know is, say Wisconsin Electric wants to keep its coal-fired power plant going and needs to buy a credit. How do they go about buying credit?

Ms. MCGINTY. And there will be two ways in which that could happen. One is that they could engage in a project-directed activity with either another company in the United States or another company in another country. So

Chairman SENSENBRENNER. Okay. If that's not enough, then where do they go? They already do that for acid rain credit changing. If that's not enough for what they need, then where do they go?

Ms. MCGINTY. The second piece of this would be essentially a secondary market that's not project-driven; it's just a secondary market in this new commodity that is being created. The new wealth, the new commodity that is created through these initiatives is a CO2 commodity. Right now SO2 is traded on the Chicago Board of Trade. We would envision a similar kind of secondary market system to trade this new unit of wealth.

Chairman SENSENBRENNER. Okay, and where does Wisconsin Electric write out the check and who creates the number of credits that are on the market? That's subject to the law of supply and demand. You know, if you run the printing press, the price goes down. If you're stingy on the printing press, then the price goes up. Ms. MCGINTY. Yes. Well, the total number of credits would come from each country, of course, has taken on. Each developed country has taken on a target, and that target represents a certain volume of emissions, and those volumes of emissions would represent the volume of credits that are there and available either to be used by a particular plant or traded among plants.

Chairman SENSENBRENNER. Now one of the things that I think really has not been specific is how the Third World gets its cut in this.

Ms. MCGINTY. Right.

Chairman SENSENBRENNER. And that includes Iran and Iraq, because they're less-developed countries, too.

Ms. MCGINTY. Well, one of the things about one of the inducements to developing countries to join this treaty is that if they do not, while they can engage on the project-by-project kinds of approaches under the clean development mechanism, they will not be able to participate in emissions trading-this whole secondary, much more liquid market in this new unit of wealth.

Now in terms of the Irans and the Iraqs, this treaty, an environmental treaty, doesn't speak to rogue nations, but certainly any treaty that's out there, rules of the road with regard to whether rogue nations play, that all still exists and would be effective in this regard as well.