for 10,000 tons at $2 a ton. The trader can also select how long they want the bid or offer out on the system. We are going to leave it out there for a month, submit the bid, and we now see that the bid is registered in the system, and if I go back to the active bid sheet we now see my bid of 10,000 tons at $2 a ton.

That ends my demonstration for this part of today's hearing. But I think, in conclusion, it is important to point out that trading alone does not deliver emissions reductions. The trading system, however, is providing our managers with the incentive to attack emissions with innovation.

As I stated earlier, this year we not only launched the full trading system across our company, but we traded our one millionth ton. This comes just 2 years after launching our pilot trading system and our commitment to a company-wide system.

We have learned many lessons along the way. The most important lessons are to keep things simple and to get started, to capture learnings and continuously improve the system. Practical experience we have found has been the key to developing a robust system.

Mr. Chairman, I would like to end by saying that BP's experience is that trading can be a powerful tool in managing emissions in a cost effective way. We have not stopped learning and BP seeks to continuously improve our trading system, and we stand ready to share our experience with all interested parties.

Thank you for the opportunity to share our system and our learnings with you today.

[The prepared statement of Mr. Morgheim follows:]

PREPARED STATEMENT OF JEFF MORGHEIM, CLIMATE CHANGE MANAGER, BP,

HOUSTON, TEXAS

Mr. Chairman and Members of the Committee, my name is Jeff Morgheim and I am the Climate Change Manager for BP. I'm based in Houston, Texas, where I manage BP's Emissions Trading System. I'm excited to present our system to you. The BP system is the world's first global trading system for greenhouse gases and is the only trading system that has voluntarily participation across a company's entire operations.

The BP trading system is the product of a commitment to explore the use of trading systems to control emissions. The trading system is a powerful tool that is helping BP meet its reduction target cost effectively. I would like to recount how we developed the system.

In May 1997, Sir John Browne, chief executive officer of BP, announced that BP would reduce its emissions of greenhouse gases and launch a pilot internal emissions trading system. In July of that same year, BP teamed with Environmental Defense to develop the pilot system. Environmental Defense has been an important partner and we want to again express our thanks to Fred Krupp and Dan Dudek of Environmental Defense for their contribution and continued support.

In September 1998, the pilot system was launched. The pilot involved twelve business units from across the globe, representing approximately 25 percent of the company's emissions. In that same month, Sir John Browne announced that BP would reduce its greenhouse gas emissions by 10 percent from 1990 levels by the year 2010. He also announced that we would launch a company wide trading system by 2000. In November 1998, I had the privilege to sell the first emissions permit in the pilot system while working for the Forties Pipeline System in the United Kingdom.

I would like to briefly describe how our system functions. On January 1 of this year, BP launched its company-wide emissions trading system. More than 150 business units in over 100 countries participate. These business units range from oil exploration to power generation. On January 14, the first trade was made with a sale to our refinery in Toledo, Ohio. I am pleased to announce that BP traded its millionth ton of greenhouse gas just over 2 weeks ago, with the sale of permits from

our gas operations in the Western United States to our refinery in Salt Lake City, Utah.

I would like to outline the mechanics of our global trading system. Every year, BP sets a target for greenhouse gas emissions stated in carbon dioxide equivalent terms. BP then allocates its target to every business unit in the form of permits. One permit is equal to one ton of carbon dioxide equivalent emissions. Each business unit is required to have enough permits to cover their annual emissions.

Each business unit then decides if it more economical for them to live within their permit level, to invest in reductions below their permit level and sell the additional reductions to other business units, or to exceed their permit level, provided they have bought permits resulting from reductions at another business unit. In this way, BP achieves the company emissions target at the lowest possible cost.

Trading alone does not deliver emissions reductions. The trading system, however, provides our managers with the incentive to attack emissions with innovation. For example, in the Western United States, we are changing 4,000 valves on our gas well sites to reduce emissions of methane equivalent to more than a million tons of carbon dioxide per year while also saving the company money.

As stated earlier, this year we not only launched the full trading system across our company, but traded our one millionth ton of greenhouse gases. This milestone was reached only 2 years from the launch of our pilot system and our commitment to a company-wide system.

We have learned many lessons along the way. The most important lessons are: to keep things simple, to get started, to capture the learning and to continuously improve the system. Practical experience is the key to developing a robust system. Mr. Chairman, I would like to conclude by saying that BP's experience is that trading is a powerful tool in the management of emissions in a cost-effective way. We haven't stopped learning and BP seeks to continuously improve its trading system. We stand ready to share our experience with all interested parties. Thank you for the opportunity to share our system and our lessons.

The CHAIRMAN. Thank you, Mr. Morgheim. That was very interesting.

Mr. Palmer, welcome.

STATEMENT OF FREDRICK D. PALMER, GENERAL MANAGER
AND CHIEF EXECUTIVE OFFICER,
ASSOCIATION, INC., ARLINGTON, VA

WESTERN

FUELS

Mr. PALMER. Thank you, Mr. Chairman.

The CHAIRMAN. Would you pull the microphone closer.

Mr. PALMER. Thank you, Senators.

On a personal note, if I might, I grew up in Phoenix. I have spent 30 years here in Washington, but I also spent 7 years at the University of Arizona undergraduate and law school, and I have followed your career with interest and pride.

My grandfather, E. Payne Palmer, Senior, was the first surgeon in the Territory of Arizona and my grandmother, Bertha Louise Palmer, was instrumental in starting the Heard Museum and the Phoenix Symphony. So I am an Arizonan stuck in the East. I like it here, but I love going to Phoenix, particularly in the time of year that is coming at us.

The CHAIRMAN. Thank you, Mr. Palmer, and thank you for the contributions of your family to our State.

Mr. PALMER. Thank you, sir.

I do appreciate being here today and let me open by saying what I can endorse and what I am for. Somehow, Senator, I find myself in the middle of a very large argument and

The CHAIRMAN. I think you need to move the microphone a little bit closer. There you go.

Mr. PALMER. I have followed the developments in the Senate with interest. I would endorse the Murkowski-Hagel-Craig ap

proach embodied in S. 882 and S. 1776, which would entail the Federal Government being involved in a major way in research and development for carbon sequestration from fossil fuel systems that we currently utilize today, and also Senator Brownback's approach with respect to changing ag practices and forestry practices for carbon sequestration I can heartily endorse as well.

I think, Mr. Chairman, as we go forward in this very difficult issue we will find that our options are limited because of what is currently going on in energy markets, and I want to address that today.

There are 2 billion people on Earth that do not have electricity and there are another 4 billion people scheduled to be on Earth in the next 30, 40, or 50 years. People every day, of course, in living their lives make carbon dioxide and when we use fossil fuels we make carbon dioxide.

I notice this morning from the news that Vice President Gore is calling on releasing oil from the Strategic Petroleum Reserve and Secretary Richardson is on Capitol Hill today talking about oil. But our focus really should not be on oil in the United States. Our focus needs to be on electricity, because electricity is what has driven our economy for the last 20 years, and specifically the coal plants that were built as a part of President Carter's Project Energy Independence. My organization arose out of that time and that is how I got involved in this business and in this debate.

We have had these coal plants that we built in the interior part of our country providing cheap electricity to the U.S. economy for 2 decades and we have been living off of them. We invested over $125 billion. There are over 400 power plants that burn a billion tons of coal a year, or close to it.

In California, where they have had a train wreck on electricity supply and prices, they have not built power plants in the last 10 years. They have been living off the coal-fired electricity in the Rocky Mountain West and the Four Corners region, in Arizona, Colorado, New Mexico, up into the Plains States. Those power plants have been used up. That surplus capacity is gone, and people in California are going to have to start building additional power plants.

What is driving this, what is driving electricity demand in the United States, is the wonderful revolution that is represented by the Internet and by the broadband revolution. We did a study last year called "The Internet Begins With Coal," by Mark Mills. It has had some impact and we are proud of that. But Mark identified that 8 percent of electricity demand in the U.S. goes to Internetrelated consumption, and that number now is estimated to be 13 percent.

It is undeniable when you go to cities in the West, to Phoenix, to Denver, when you look at this region-I live in Northern Virginia-at what is going on, that the technology revolution is driving electricity demand in a major way.

Intel's vision is for an additional one billion people online within the next several years. That is the equivalent of burning another one billion tons of coal a year. Their estimates for broadband Internet access range up to a billion three hundred million people by

2004. That is the equivalent of another one billion tons of coal burned per year.

All of this activity generates economic growth. You cannot go anywhere in the Rocky Mountain West and not see remote areas where economic growth is occurring today and fiber optics are being put in for Internet access. It is happening before us as we sit here today. It is undeniable.

All of that is going to create more and more carbon dioxide emissions by people living their lives in normal ways, both here and abroad. Abroad it is just starting. In Western Europe it is just starting. Asia is going off the graph. These are undeniable realities, Mr. Chairman.

There are reasonable people, people in good faith, that are very concerned about more CO2 in the air and I understand that and I accept that, and we need to deal with that and we need to create an insurance policy to meet potential climate change threats in the future. But the only way to do that, Mr. Chairman, is to utilize what we use today. Renewables are not going to do it for us. We are going to have to burn coal, oil, natural gas to make electricity. There are other ways to make electricity. New technologies are very promising. All of those things are true. But more people will mean more CO2, particularly in the high tech revolution we are in today with the wireless and broadband revolution of the Internet.

So therefore, Mr. Chairman, I would embrace an approach with an activist Federal Government involved in this issue in a major way, continuing to do research and development with respect to renewables, continuing to do research and development with respect to climate, watchful waiting, at the same time developing carbon sequestration techniques from existing fossil fuel systems if those should prove to be necessary.

With due respect, Mr. Chairman, I do not believe the science today says it is necessary. But we have a lot to do between this point and that in any event in developing the technologies. So it is not particularly useful to say today we have to do this, that, or the other in terms of changing the way we live, because it is not going to happen. People are going to continue to live the way they live. Electricity demand is going to continue to grow. Economic prosperity is going to continue because of the high tech revolution. All of that means more CO2 in the air, Mr. Chairman, and the role of the government should not be to tax, cap, and limit in terms of what we are doing and how we live our lives, but to develop technology solutions should that prove to be necessary as we go forward in the years to come.

Thank you, sir.

[The prepared statement of Mr. Palmer follows:]

PREPARED STATEMENT OF FREDRICK D. PALMER, GENERAL MANAGER AND CHIEF EXECUTIVE OFFICER, WESTERN FUELS ASSOCIATION, INC., ARLINGTON, VA

Mr. Chairman, thank you for the opportunity to appear before you today on the important subject of energy and the environment.

The United States economy is a marvel and leads the world. In absolute terms, we represent one-third of total global output and approach $9 trillion in gross domestic product as compared to a worldwide economy of some $27 trillion.

More important, the U.S. economy is leading the world in almost every important area. Most significantly it is U.S. firms that are wiring the world. But for the

United States and private enterprise here, the Internet would not be what it is today. Worldwide, Internet use approaches 300 million people. Wireless usage, which in the future will mean Internet use as well, approaches 500 million people. Intel's vision has one billion people online in a few years. Projections of Internet access through wireless devices are even more staggering. With each passing day, there are media reports of new and amazing developments with respect to the penetration of the Internet and electronic commerce.

Electricity supply in the United States has enabled the Internet. In the 1970s, the United States Government embarked on a bipartisan program to wean our dependence upon foreign oil. It was hoped we could rely on domestic energy resources for energy supply. President Jimmy Carter's program-called Project Energy Independence has been a success, although we still import large amounts of oil.

It was a success because the vast coal reserves of the United States were employed to fuel a new generation of coal-fired power plants located all over the country, but primarily in the interior. In the timeframe between 1975 and approximately 1985, $125 billion worth of power plants were constructed. Today, in the United States, over 400 power plants burn close to one billion tons of coal per year. These power plants are capable of burning another 200 million to 300 million tons more if Federal policies accommodate this increased burn.

Coal-fired electricity in the United States is one of our great success stories. It is a story not well understood by the American people. This is no one's fault but the coal industry's, of course. We have taken for granted peoples' understanding of the benefits that coal provides to the United States. In fact, most people don't understand that 53 percent of our electricity comes from burning coal and fewer yet understand the importance of low cost electricity to our national economy.

Today, electric technologies—including computer-based technologies are the primary source of economic growth. According to the Commerce Department, the majority of economic growth in the United States in the last 15 years has been the result of the high tech industry.

The term "high tech" covers a lot of varied activity. But one thing is for certain, electricity enables high tech development in the United States.

The New Economy is enabled by electricity. Internet use-whether for information gathering, e-commerce, or recreation-and the broadband telecommunications revolutions are pure electricity plays. A year ago, it was conservatively estimated that 8 percent of U.S. electricity demand originates from use of the Internet. That figure now stands at 13 percent and is rising.

The technology revolution impacts electricity generation. Today there are many promising new ways to distribute and generate electricity that will have profound and important benefits for our society as we go forward. Included in these developments are the renewable electric technologies that have great promise and do have present day application under specific, but limited, circumstances.

Distributed generation and renewable electric technologies are important developments. We should encourage both. But while we do that, we need to understand that our society requires enormous quantities of electricity and will require more and more as we go forward. In that context, today's large, central generating stations are needed and must be operated at full rated capacity for as long as they can provide low-cost electricity. In addition, we will require new central station generation burning coal and natural gas if we are to fulfill our destiny and wire the world. For example, power consumption in Silicon Valley is growing 3 times faster than it is in the rest of California. California pursued electricity policies in the last two decades that ignored the supply side. Instead, they focused on conservation and renewables. While California's electricity demand was increasing, their supply came from surplus generating capacity in adjacent states.

Recently, the "no growth" electricity policies of the environmental community and the State of California hit a wall. Electricity is now scarce and expensive in California. It is a government-induced problem that confronts the people there.

The surplus electricity generating capacity in adjoining states is gone. Because no power plants have been built in California during the last decade, their backs are against the wall. Growth in that economy will continue to occur, but it will be at a reduced pace. Instead, electric intensive industries-high tech industries--will relocate their incremental manufacturing facilities in other parts of the country where supply is available.

California is an object lesson for the rest of the Nation. Mr. Chairman, we cannot wish electric supply into being and we cannot wish renewables into a competitive mode. The price of electricity matters and its availability matters more.

What is true in the United States will hold true abroad. The technological breakthroughs that we see today are not reaching everybody on the globe. In fact, two billion live without electricity at all. Doesn't every human on earth have the right