[Senate Hearing 107-670]
[From the U.S. Government Printing Office]



                                                        S. Hrg. 107-670

                     CLIMATE CHANGE TECHNOLOGY AND
                             POLICY OPTIONS

=======================================================================

                                HEARING

                               before the

                         COMMITTEE ON COMMERCE,
                      SCIENCE, AND TRANSPORTATION
                          UNITED STATES SENATE

                      ONE HUNDRED SEVENTH CONGRESS

                             FIRST SESSION

                               __________

                             JULY 10, 2001

                               __________

    Printed for the use of the Committee on Commerce, Science, and 
                             Transportation


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       SENATE COMMITTEE ON COMMERCE, SCIENCE, AND TRANSPORTATION

                      ONE HUNDRED SEVENTH CONGRESS

                             FIRST SESSION

              ERNEST F. HOLLINGS, South Carolina, Chairman
DANIEL K. INOUYE, Hawaii             JOHN McCAIN, Arizona
JOHN D. ROCKEFELLER IV, West         TED STEVENS, Alaska
    Virginia                         CONRAD BURNS, Montana
JOHN F. KERRY, Massachusetts         TRENT LOTT, Mississippi
JOHN B. BREAUX, Louisiana            KAY BAILEY HUTCHISON, Texas
BYRON L. DORGAN, North Dakota        OLYMPIA J. SNOWE, Maine
RON WYDEN, Oregon                    SAM BROWNBACK, Kansas
MAX CLELAND, Georgia                 GORDON SMITH, Oregon
BARBARA BOXER, California            PETER G. FITZGERALD, Illinois
JOHN EDWARDS, North Carolina         JOHN ENSIGN, Nevada
JEAN CARNAHAN, Missouri              GEORGE ALLEN, Virginia
BILL NELSON, Florida
               Kevin D. Kayes, Democratic Staff Director
                  Moses Boyd, Democratic Chief Counsel
                  Mark Buse, Republican Staff Director
               Ann Choiniere, Republican General Counsel


                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on July 10, 2001....................................     1
Statement of Senator Brownback...................................   156
    Prepared statement...........................................   160
Statement of Senator Kerry.......................................     1
    Prepared statement...........................................     4
Statement of Senator McCain......................................     5
    Prepared statement...........................................     6
Statement of Senator Snowe.......................................    29
    Prepared statement...........................................    30

                               Witnesses

Cassidy, Frank, President and Chief Operating Officer, PSEG Power 
  LLC............................................................   139
    Prepared statement...........................................   141
Claussen, Eileen, President, Pew Center on Global Climate Change.   127
    Prepared statement...........................................   129
Duffy, Dennis J., Vice President of Regulatory Affairs, Energy 
  Management, Inc................................................    48
    Prepared statement...........................................    50
Evans, Dr. David L., Assistant Administrator, Oceanic and 
  Atmospheric Research, National Oceanic & Atmospheric 
  Administration.................................................     6
    Prepared statement...........................................    10
German, John, Manager, Environment and Energy Analyses, Product 
  Regulatory Office, American Honda Motor Company, Inc...........    80
    Prepared statement...........................................    82
Hawkins, David G., Director, Natural Resources Defense Council, 
  Climate Center.................................................   131
    Prepared statement...........................................   133
Kammen, Dr. Daniel M., Professor of Energy and Society, Energy 
  and Resources Group, and Professor of Nuclear Engineering, 
  University of California.......................................    56
    Prepared statement...........................................    58
Koetz, Maureen, Director of Environmental Policy and Programs, 
  Nuclear Energy Institute.......................................    41
    Prepared statement...........................................    43
Miller, William T., President, International Fuel Cells..........    32
    Prepared statement...........................................    34
Sandor, Dr. Richard L., Chairman and CEO, Environmental Financial 
  Products LLC...................................................   104
    Prepared statement...........................................   105

                                Appendix

Coleman, William C., President and Chief Executive Officer, 
  Hancock Natural Resource Group, prepared statement.............   196
The Pacific Forest Trust, prepared statement.....................   197
Response to written questions submitted by Hon. Ernest F. 
  Hollings to:
    Eileen Claussen..............................................   164
    Dr. David L. Evans...........................................   169
    David G. Hawkins.............................................   177
    Daniel M. Kammen.............................................   179
    William T. Miller............................................   189
Response to question asked at hearing by Hon. John McCain to:
    Dr. David L. Evans...........................................   172
Response to written questions submitted by Hon. John McCain to:
    Frank Cassidy................................................   163
    Eileen Claussen..............................................   166
    Dennis J. Duffy..............................................   167
    Dr. David L. Evans...........................................   172
    David G. Hawkins.............................................   178
    Daniel M. Kammen.............................................   183
    Maureen Koetz................................................   184
    William T. Miller............................................   190
    Dr. Richard L. Sandor........................................   195
Response to written questions submitted by Hon. Olympia J. Snowe 
  to:
    Dr. David L. Evans...........................................   174
    William T. Miller............................................   191

 
                     CLIMATE CHANGE TECHNOLOGY AND
                             POLICY OPTIONS

                              ----------                              


                         TUESDAY, JULY 10, 2001

                                       U.S. Senate,
        Committee on Commerce, Science, and Transportation,
                                                    Washington, DC.
    The Committee met at 9:30 a.m., in room SR-253, Russell 
Senate Office Building, Hon. John F. Kerry, presiding.

           OPENING STATEMENT OF HON. JOHN F. KERRY, 
                U.S. SENATOR FROM MASSACHUSETTS

    Senator Kerry. The hearing will come to order, which it 
appears to already have done brilliantly.
    Good morning everybody, and welcome to this full Committee 
hearing of the Commerce, Science, and Transportation Committee. 
I would like to thank Chairman Hollings and Ranking Member 
McCain for calling the hearing and heading us off in the 
direction that we will move today, and I would like to put that 
in a context if I can just for a moment.
    For many years now, we on this Committee have held hearings 
on the issue of global warming starting around 1990, 1991. Then 
Senator Gore joined me to begin the early inquiries into global 
climate change. A number of us traveled to Rio de Janeiro for 
the Earth Summit in 1992 where the original framework 
convention on climate change was passed, which was obviously a 
voluntary framework, but which established that this is a 
serious problem and that we need to deal with it.
    Here we are now in the next century, the next millennium, 
2001, and regrettably some have been still content to just 
debate the science. This hearing is specifically geared towards 
building on the hearings that then Chairman McCain held earlier 
in the year to move us beyond that debate. Today's hearing 
focuses on the technologies and policies that can help us to 
mitigate the threat of climate change.
    And while obviously we will still focus on some of the 
science--and clearly the underlying science remains an 
important concern of the Committee because we have to use that 
science in making judgments about what technologies make the 
most sense or what the results may be--this does mark a very 
significant shift in the focus of this Committee from science 
to solutions.
    Over the past year as I mentioned, Senator McCain held a 
series of hearings that included some of the top scientists of 
the world, and not surprisingly, the record of those hearings 
paralleled the findings of the National Academy of Science's 
report released in June on the science of climate change. That 
report, which follows on the heels of similar findings of the 
Intergovernmental Panel on Climate Change's report and dozens 
of other individual studies, concluded that greenhouse gases 
are accumulating in the Earth's atmosphere as a result of human 
activities, that air and ocean temperatures are rising and are 
expected to rise further, and that human activities, mainly 
burning fossil fuels and deforestation, are a contributing 
factor.
    So this Committee will not ignore the science of climate 
change, because that obviously drives our agenda. But it is 
important that we try to move now to constructively considering 
the options that other countries have already moved to and that 
seem to become more compelling.
    Let me state for the record that the Department of State 
and the White House were invited to testify before the 
Committee today, but declined to do so. I wrote both Secretary 
Powell and Chief of Staff Card late last week, when we heard 
that they had decided against testifying, in hopes that they 
would reconsider. Obviously they did not, and I am very pleased 
to have Dr. Evans, who is a very respected career scientist 
from NOAA here to represent the Department of Commerce, and I 
appreciate your doing so, and I appreciate your testimony, 
which I read just before coming in here.
    But I do regret that other officials have not come to share 
with us their views at this point about what possibilities may 
exist. This is not a political exercise; this is a policy 
exercise, one that we are engaged in inquisitively. We are 
trying to find solutions, as are other people, and it is 
helpful for the country to have a dialog about this so we can 
all understand the options better.
    I thought this was our chance, two weeks before the next 
meeting of the parties of the conference, to try to help come 
to some decision about where we proceed post-Kyoto, that it 
might have been a good opportunity to be able to have some of 
that discussion. We have been told that the Administration has 
committed significant resources at the highest levels of 
Government to assess this issue. National Security Advisor 
Condoleezza Rice has described the effort as so intense as to 
be unprecedented.
    The Commerce Committee has demonstrated, through Senator 
McCain's earlier efforts this year and prior to that, a serious 
commitment to understanding the science of climate change and 
also to recognizing our jurisdiction over important laws and 
programs relevant to this issue, ranging from the basic 
scientific research to auto efficiency standards, to 
technological research, development and deployment. So I regret 
that we can't have as full a discussion, but I hope we will be 
able to proceed to follow up on that sometime in the near 
future.
    Let me emphasize what this hearing is about. I don't 
approach this with a preconceived determination as to what the 
order of priorities is for how we proceed. I am not sure any 
member of this Committee could or would dare to do so today. 
What we do want to try to do is lay out on the table some of 
the technologies and policies that make climate change not an 
intractable problem, but rather an opportunity and a moment 
where we could conceivably help our economy and not hurt it, as 
well as implement good environmental policy at the same time.
    Clearly, to address climate change the United States and 
the world have to move from polluting technologies to 
sustainable technologies. I don't propose that we immediately 
stop burning coal, oil and natural gas in order to respond to 
this problem, nor do I know any other person of common sense 
who suggests that. It is not an option. I recognize we have to 
build an additional pipeline and we need to continue to drill. 
We are stuck, to a certain degree.
    But there are many, many things that all of us understand 
are available as options that could move us much more rapidly, 
much more affirmatively and proactively, toward the adoption of 
those sustainable policies in ways that are the least 
intrusive, most efficient, and least cost--approaches that 
could wind up being synergistic with our economic interests, 
rather than counterproductive.
    So those are the options that we are interested in looking 
at. It is interesting to note, in that vein, that our economy 
today is twice as energy-efficient as it was in 1973, which 
means that producing a single unit of GDP today requires half 
the energy that it required in 1973. We have doubled, during 
that period of time, the efficiency of America's automobiles, 
thanks to the CAFE program. We save 3 million barrels of oil 
daily and more than 20 billion annually by building safer, more 
highly reliable quality cars.
    The sale of efficient compact fluorescent lamps increased 
fivefold from 1990 to 1999. American steel mills are 25 percent 
more efficient today, and paper and pulp production is nearly 
30 percent more efficient than 30 years ago. Many people 
believe that there are incentives such as tax incentives, 
grants, various kinds of technological transfer programs, and 
other mechanisms we could use to excite and rapidly accelerate 
our capacity to augment those kinds of gains.
    In fact, energy efficiency is misunderstood by many people. 
Conservation means turning off the lights or using less fuel, 
but energy efficiency means achieving the same output, the same 
consequence with less, and we have proven over the last 20 
years that we have the ability as a country to do that.
    We will hear today from people who will talk about many 
different technologies that are right on the borderline of 
being able to become economically viable, which could have a 
profound impact on America's contribution to the entire issue 
of climate change, and that is the purpose of today's hearing. 
There are many of us who believe we are moving far too slowly, 
that we have not really adopted as a national enterprise the 
effort to prove our bona fides in this area.
    Many of the technologies that could help us do that are 
already in the marketplace, and the challenge is to increase 
their use, including cogeneration, wind power, solar, methane, 
biomass, hydrogen fuel cells, more efficient cars and 
appliances. Others are technologically proven, but have yet to 
gain a commercial foothold. And still others remain on the 
drawing board, and while they have tremendous potential, that 
potential will only be achieved if we pursue them with the same 
kind of intensity and investment that we have pursued in space 
exploration, communications, and medicine.
    I believe, and others share the belief, that the burden is 
on us to create the push and pull of incentives and mandates 
that will move these technologies to the marketplace faster.
    [The prepared statement of Senator Kerry follows:]

               Prepared Statement of Hon. John F. Kerry, 
                    U.S. Senator from Massachusetts

    I want to thank Chairman Hollings and Ranking Member McCain for 
holding this hearing. To begin, I'd like to put this hearing into 
context. Today's hearing focuses on the technologies and policies that 
can help us mitigate the threat of climate change. While we will focus 
some on the science and while the underlying science remains an 
important concern of this Committee, today marks a significant shift in 
our focus from the science to the solutions of climate change.
    Over the past year, Senator McCain--as Chairman of this Committee--
held a series of hearings that included some of the top scientists in 
the world. Not surprisingly, the record of those hearings parallels the 
findings of the National Academy's of Sciences report released in June 
on the science of climate change. That report--which follows on the 
heels of similar findings of the Intergovernmental Panel on Climate 
Change's report and dozens of other individual studies--concluded that 
greenhouse gases are accumulating in the Earth's atmosphere as a result 
of human activities; that air and ocean temperatures are rising and are 
expected to rise further; and that human activities, mainly burning 
fossil fuels and deforestation, are a contributing factor.
    This Committee is by no means ignoring the science of climate 
change--the science is what is driving this Committee's agenda in 
regard to climate change--and that is why, after four hearings that 
together create a compelling argument for action, we are now 
investigating the technologies and policies that can reduce greenhouse 
gas emissions. It is an important step, and I'm glad to see the 
Committee take it.
    Second, I want the record to show that the Department of State and 
the White House were invited to testify before the Committee today but 
declined to do so. I wrote both Secretary Powell and Chief of Staff 
Card late last week when I heard that the Administration had decided 
against testifying in hopes that they would reconsider. Obviously, they 
did not. While I'm pleased to have Dr. Evans, a respected career 
scientist from NOAA here to represent the Department of Commerce, I 
regret that senior officials from the State Department, Commerce 
Department, and the White House are not here today.
    I want to be clear that while I have differences with 
Administration's approach to this issue, I am not here to assail the 
Bush Administration. Today was a chance for the Administration to set 
forth its approach to climate change, which is not an unreasonable 
request. The Administration has told us that it has committed 
significant resources at the highest levels of government to assessing 
climate change--National Security Advisor Condoleezza Rice has 
described this effort as so intense as to be unprecedented. The 
Commerce Committee has demonstrated a commitment to understanding the 
science of climate change over past several years. The Committee has 
jurisdiction over several laws and programs important to the issue--
ranging from basic scientific research to auto efficiency standards to 
technological research, development and deployment. It seems to me that 
the Administration might have welcomed the opportunity to come before 
the Committee and discuss the policies that it believes this nation 
should enact. It seems to me that today is lost opportunity for the 
Administration.
    Lastly, today's hearing will bring forth some of the technologies 
and policies that, I believe, make climate change not an intractable 
problem, but a challenge to be understood and addressed, and, as 
importantly, an economic opportunity. To address climate change, 
America and the world must move from polluting technologies to 
sustainable technologies. I don't propose that we immediately stop 
burning coal, oil and natural gas to address climate change or other 
environmental issues. Instead, I advocate a gradual transition from 
heavily-polluting energy to clean energy at a pace that is 
technologically viable and economically beneficial. I advocate that we 
do this in the most efficient, least cost manner and that we address 
the real world economic realities associated with any technological 
shift. Today, we are moving far too slowly with almost no recognition 
of the environmental implications of our pollution and with no purpose 
to incite the necessary technological innovation. Some of these 
technologies are already in the marketplace and the challenge is to 
increase their use--they include cogeneration, wind power, solar, 
methane, biomass, hydrogen fuel cells and more efficient cars and 
appliances. Others are technologically proven but have yet to gain a 
commercial foothold. And still others remain on the drawing board, and 
while they have tremendous potential, that potential can only be 
achieved if we pursue them with the same kind of intensity and 
investment we have placed in space exploration, communications and 
medicine. I believe that the burden is on us to create the push and 
pull of incentives and mandates that will move these technologies into 
the marketplace for the benefit of our economy and our environment.
    Thank you.

    Senator Kerry. Senator McCain.

                STATEMENT OF HON. JOHN McCAIN, 
                   U.S. SENATOR FROM ARIZONA

    Senator McCain. Thank you, Senator Kerry, for continuing 
this series of hearings on this very, very important topic. I 
think that each study, each new expert on this issue reveals 
the urgency and compelling aspect of this problem of climate 
change in America. Based upon previous hearings, you, I and 
others have been working on legislation to address many of the 
options, and hopefully in the near future, we can join together 
with a joint bipartisan piece of legislation that I think would 
at least make some progress, towards addressing this issue.
    I look forward to hearing about the status of several 
technologies which can lead to significant emissions 
reductions. I recognize the solutions to the problems will 
require increased investments in many different areas, and 
today's second panel certainly represents a diversity of 
technologies. Some of these technologies, such as wind and 
nuclear power, have been around for many years. These 
technologies possess tremendous abilities to reduce the amount 
of carbon dioxide in the atmosphere while playing a major role 
in the future energy production and utilization needs of the 
country.
    Many of these technologies will allow the Nation to become 
more energy efficient and will conserve precious natural 
resources. I think the information the second panel will 
provide us with is critically important as we deliberate on how 
to increase energy supplies to meet our future energy needs, 
while taking important measures to protect the environment.
    Mr. Chairman, in the recent National Academy report, 
Climate Change Science and Analysis of Some Key Questions, it 
was stated that--and I quote--``National policy decisions made 
now and in the longer term future will influence the extent of 
any damage suffered by vulnerable human populations and 
ecosystems later in this century.''
    The report further states--and I quote--``There is 
considerable uncertainty in current understanding of how the 
climate system varies naturally and reacts to emissions of 
greenhouse gases and aerosols.''
    These statements by the Academy put the upcoming policy 
decisions into the proper perspective along with the need for 
additional research. As we in the Senate continue to debate the 
policy issues, it is pleasing to see that industry has started 
to take initiatives of their own to address these problems. I 
look forward to hearing about their voluntary activities and 
their impact on the economies.
    I feel it is important we fully explore all policy options, 
including mandatory emission reductions, before proceeding with 
any final and definitive position. The issue of climate change 
is an important one, and the Committee should be very informed 
about the latest developments. It is also an issue that we need 
to take some action on.
    And I thank you, Senator Kerry, not only for this hearing, 
but your continued and many years of involvement in this issue. 
I thank the Chairman.
    Senator Kerry. Thank you very much, Senator McCain.
    [The prepared statement of Senator McCain follows:]

                Prepared Statement of Hon. John McCain, 
                       U.S. Senator from Arizona

    First of all, let me thank Senator Kerry for continuing this series 
of hearings on this very important topic. I think that today's hearing 
is an appropriate one considering the fact that several Members are 
currently considering several options for legislation. Based upon 
previous hearings, I have been working on legislation to address many 
of these options and plan to introduce a bill in the near future.
    I look forward to hearing about the status of several technologies 
which can lead to significant emission reductions. I recognize that the 
solution to this problem will require increased investments in many 
different areas. Today's second panel certainly represents a diversity 
of technologies. Some of these technologies, such as wind and nuclear 
power, have been around for many years. These technologies possess 
tremendous abilities to reduce the amount of carbon dioxide in the 
atmosphere while playing a major role in the future energy production 
and utilization needs of the country. Many of these technologies will 
allow the Nation to become more energy efficient and will conserve 
precious natural resources. This is critically important as we 
deliberate on how to increase energy supplies to meet our future energy 
needs while taking important measures to protect the environment.
    In the recent National Academy Report, ``Climate Change Science: An 
Analysis of Some Key Questions,'' it was stated that ``national policy 
decisions made now and in the longer-term future will influence the 
extent of any damage suffered by vulnerable human populations and 
ecosystems later in this century.'' The report further states that 
``there is considerable uncertainty in current understanding of how the 
climate system varies naturally and reacts to emissions of greenhouse 
gases and aerosols.'' These statements by the Academy put the upcoming 
policy decisions into the proper perspective along with the need for 
additional research.
    As we in the Senate continue to debate the policy issues, it is 
pleasing to see that industry has started to take initiatives of their 
own to address these problems. I look forward to hearing about their 
voluntary activities and their impact on the economy.
    I feel that it is important we fully explore all policy options, 
including mandatory emission reductions, before proceeding with any 
final and definitive position. This issue of climate change is a very 
important one and the Committee should be very informed about the 
latest developments surrounding it. It is also an issue that we need to 
take action upon.
    Again, I thank you Senator Kerry for holding this hearing and 
welcome all of our witnesses here today.

    Senator Kerry. Dr. Evans, thank you very much for joining 
us today. We look forward to your testimony. If I can state, as 
is our norm, your full testimony will be placed in the record 
as if read in full. If you could summarize, that will give us 
more time to explore possibilities with you. Thank you very 
much.

          STATEMENT OF DR. DAVID L. EVANS, ASSISTANT 
       ADMINISTRATOR, OCEANIC AND ATMOSPHERIC RESEARCH, 
         NATIONAL OCEANIC & ATMOSPHERIC ADMINISTRATION

    Dr. Evans. Thank you very much, Mr. Chairman. As you know, 
I am David Evans. I am Assistant Administrator of the National 
Oceanic and Atmospheric Administration's Office of Oceanic and 
Atmospheric Research, and I am here today to discuss global 
climate change, how the Department of Commerce is working to 
improve our understanding, and the Department's programs to 
advance technologies which may help mitigate climate change.
    The information I will present to you is based primarily on 
the 2001 report of the Intergovernmental Panel on Climate 
Change (IPCC) and the recent National Academy report that both 
you and Senator McCain have referred to.
    But before addressing those findings, there are two 
fundamental points that really are quite worthy of note, and 
they have been known for quite some time. The first one is that 
the natural greenhouse effect is real. It is an essential 
component of the planet's climate process. A small percentage, 
about 2 percent of the atmosphere, is and has long been 
composed of greenhouse gases, water vapor, carbon dioxide, 
ozone, methane, and these effectively prevent part of the heat 
radiated by the Earth's surface from otherwise escaping into 
space.
    The global system responds to this trapped heat with a 
climate that is warmer on average than it would be otherwise 
without the presence of these gases and, indeed, supports life 
as we have come to appreciate it.
    In addition, some greenhouse gases are increasing in the 
atmosphere because of human activities, and are increasingly 
trapping more heat. Direct atmospheric measurements made over 
the past 40 years have documented the steady growth in the 
atmospheric abundance of carbon dioxide. Ice core measurements 
using air bubbles trapped within layers of accumulating snow 
show that atmospheric carbon dioxide has increased by more than 
30 percent over the industrial era compared with the preceding 
750 years. The predominant cause of this increase in carbon 
dioxide is the combustion of fossil fuels and the burning of 
forests.
    Particles or aerosols in the atmosphere resulting from 
human activities can also affect climate. Some aerosol types, 
such as sulfate aerosols, act in the opposite sense to 
greenhouse gases and cause a cooling of the climate system, 
while others, like soot, act in the same sense and warm the 
climate. In summary, emissions of greenhouse gases and aerosols 
due to human activities continue to alter the atmosphere in 
ways that are expected to affect the climate.
    Moving on to the more recent findings, there is a growing 
set of observations that yields a collective picture of a 
warming world over the past century. The global average surface 
temperature has increased over the 20th Century by between 0.4 
and 0.8 degrees centigrade. The average temperature increase in 
the Northern Hemisphere over the 20th Century is likely to have 
been the largest of any century during the past thousand years.
    Other observed changes are consistent with this warming. 
There has been widespread retreat of mountain glaciers in non-
polar regions. Snow cover and ice extent have decreased. The 
global average sea level has risen between 10 and 20 
centimeters, and that is consistent with a warmer ocean, 
occupying more space just due to thermal expansion of sea 
water.
    There is new and stronger evidence that most of the warming 
over the last 50 years is attributable to human activities. 
Since the IPCC assessment in 1995, there is now a longer and 
more closely scrutinized temperature record. Climate models 
have improved significantly since the last assessment, and 
recent analyses have compared surface temperatures measured 
over the last 140 years to those simulated by the models.
    Both natural climate change agents, such as variations in 
solar output and episodic explosive volcanic eruptions, and 
human agents, greenhouse gases and fine particles, have been 
included in the models. The best agreement between the 
observations and the model simulations over the last 140 years 
is found when both the human-related and the natural climate 
change agents are included. Further model simulations indicate 
that warming over the past century is very likely not to be due 
to natural variability alone.
    Scenarios of future human activities indicate continued 
changes in atmospheric composition through the 21st Century. 
The amount of greenhouse gases and aerosols over the next 100 
years cannot be predicted with high confidence, since future 
emissions will depend on many diverse factors, including world 
population, the economies, technology development, human 
choices, and they are not uniquely quantifiable.
    Based on scenarios covering a range of those factors, the 
resulting projection for global temperature increase by the 
year 2100 ranges from 1.3 to 5.6 degrees C. or about 2\1/2\ to 
10 degrees Fahrenheit. Such a projected rate of warming would 
be much larger than the observed 20th Century changes. The 
corresponding projected change in sea level would be between 10 
and 100 centimeters, between about 3\1/2\ and 35 inches.
    Finally, greenhouse warming could be reversed only very 
slowly. This is because of the slow rate of removal from the 
atmosphere of greenhouse gases, a period of centuries, and 
because of the slow response of the ocean to thermal changes. 
Global average temperature increases and rising sea level are 
projected to continue for hundreds of years after stabilization 
of greenhouse gas concentrations, owing to the long time 
scales.
    The IPCC report stresses a critical role of the oceans in 
understanding the Earth's climate system due to sea water's 
capacity to store and transport large amounts of heat. 
Scientists have recently published a study using newly 
available data to prepare analysis of ocean warming over the 
last 50 years. The global volume mean temperature increase in 
the upper 300 meters was about three-tenths of a degree 
Centigrade, and just to sort of give you a scale for that, the 
U.S. consumption of electricity for something like 17,000 
years, so it is a very significant amount of energy.
    Two recent computer modeling studies have found that model 
increases in the ocean heat were comparable to that which was 
observed only when the effects of greenhouse gases and other 
forcings were included.
    The White House requested that the National Academy of 
Sciences prepare a study to assist in identifying the areas of 
climate change science where there are greatest certainties and 
uncertainties and give views on whether there were any 
substantive differences between the IPCC reports and the IPCC 
summaries.
    The National Academy of Science reported on June 6 with a 
study entitled, Climate Change Science: An Answer to Some Key 
Questions, and that summary states that, ``Greenhouse gases are 
accumulating in the Earth's atmosphere as a result of human 
activities, causing surface air temperatures and subsurface 
ocean temperatures to rise. Temperatures are, in fact, rising. 
The changes observed over the last several decades are likely 
mostly due to human activities, but we cannot rule out that 
some significant part of these changes are also a reflection of 
the natural variability.''
    And it goes on to say, ``Because there is considerable 
uncertainty in the current understanding of how the climate 
system varies naturally and reacts to the emissions of 
greenhouses gases and aerosols, current estimates of the 
magnitude of future warming should be regarded as tentative and 
subject to future adjustments, either upward or downward.''
    To address this uncertainty, the President has directed a 
Cabinet-level review of U.S. climate change policy. Based on 
their findings, the President in his June 11 remarks committed 
his Administration to increased investments in climate science. 
He announced the establishment of U.S. climate Change Research 
Initiative to study areas of uncertainty and identify areas 
where investments are crucial.
    The President directed the Secretary of Commerce, working 
with other agencies, to set priorities for additional 
investments in climate change research, review such 
investments, and provide coordination amongst Federal agencies. 
He pledged to fully fund high-priority areas for climate change 
science over the next 5 years and provide resources to build 
climate-observing systems in developing countries, and to 
encourage other developed nations to match our commitment. That 
review process has begun, and we expect the results to be 
reflected in the President's fiscal 2003 budget submission to 
Congress.
    In addition to better understanding of the science, we will 
need to advance our technology to deal with climate change. Due 
to the long lifetime of CO2 in the atmosphere, 
stabilizing concentrations means that we must ultimately end up 
with much lower net emissions.
    The long-term objective, the stabilized greenhouse 
concentrations in the atmosphere, can be addressed in two ways: 
first by reducing the emissions of greenhouse gases; second by 
means of capturing and sequestering gases, either at the source 
or after they have been released into the atmosphere.
    There are significant climate change technology programs at 
many Federal agencies, including notably the Department of 
Energy, Environmental Protection Agency, and the Department of 
Agriculture. However, within the Department of Commerce, a NIST 
advanced technology program has funded research into 
technologies aimed at reducing emissions--that is the first one 
of those strategies--and improving energy efficiency, and 
increasing the use of low-carbon fuels.
    Similarly, the Manufacturing Extension Partnership helps 
manufacturers reduce their dependencies on fossil fuels and the 
use of ozone-depleting substances. Other agencies are working 
on capture and sequestration issues, on that side of the 
problem.
    While the development of these and other technologies is 
crucial, we should recognize that the apparent change in 
climate that we have seen over the last 100 years has taken, 
indeed, 100 years to present themselves. Stabilizing the 
climate will take comparable time periods. It is not 
unreasonable to expect that the technology of the world in 100 
years will be as different today as today's is from 100 years 
ago. At NOAA, we will pursue better science to inform the 
decisions as we proceed along.
    Thank you very much for the opportunity to come and talk 
about the science, Mr. Chairman. I would be happy to answer any 
of your questions.
    [The prepared statement of Dr. Evans follows:]

  Prepared Statement of Dr. David L. Evans, Assistant Administrator, 
   Oceanic and Atmospheric Research, National Oceanic & Atmospheric 
                             Administration

    Good morning, Mr. Chairman and members of the Committee. I am David 
Evans, Assistant Administrator of the Office of Oceanic and Atmospheric 
Research. NOAA Research is one of five line offices within the National 
Oceanic and Atmospheric Administration (NOAA) of the Department of 
Commerce. I have been invited to discuss the Administration's position 
on climate change, how the Department is working to improve our 
understanding of climate, and the Department's programs that may 
advance technologies which may mitigate climate change.
    NOAA is the agency within the Department of Commerce tasked with 
developing much of the ongoing research on climate change and climate 
variability and has made major contributions to the understanding of 
the Earth's climate system. We work in partnership with other federal 
agencies, scientific organizations, and universities to generate the 
most accurate and reliable science that we can present on this issue. 
In recent years, we have worked to identify gaps in our knowledge and 
capabilities and to determine the impacts that climate change may have 
on society and the environment. While our role in climate change is 
non-regulatory, our scientific information is relied upon by policy 
makers in government and industry, including those in the United States 
and other countries.
    The information I will present to you today is based on a number of 
findings and mainly represents the state of the science, and the 
Administration's policies as set forth in the initial report of the 
Climate Change Review. With respect to the science, I will refer 
primarily to the set of findings of the 2001 report of the 
Intergovernmental Panel on Climate Change (IPCC) and the National 
Academy of Sciences (NAS) June 6, 2001 report, ``Climate Change 
Science: Analysis of Some Key Questions.''
    For more than a decade, NOAA scientists have been involved in 
various national and international scientific assessments. These 
include National Academy of Science studies, World Meteorological 
Organization/United Nations Environment Programme (WMO/UNEP) reports on 
the scientific understanding of the ozone layer and IPCC climate change 
science assessments. In the recently concluded IPCC scientific 
assessment, four of our scientists served as lead authors, and three of 
our scientists served as coordinating lead authors on the Technical 
Summary of the Working Group I Report of the IPCC: Change 2001: The 
Scientific Basis, and the Chapter on Observed Climate Variability and 
Change; the Chapter on Atmospheric Chemistry and Greenhouse Gases; the 
Chapter on Aerosols, Their Direct and Indirect Effects; the Chapter on 
Radiative Forcing of Climate Change; and the Chapter on the Projections 
of Future Climate Change. The Summary was formally approved in detail 
and accepted along with the underlying assessment report at the IPCC 
Working Group I Plenary session in January 2001.
    The IPCC assessment took almost three years to prepare and 
represents the work of more than 100 scientific authors worldwide. It 
is based on the scientific literature, and was carefully scrutinized by 
hundreds of scientific peers through an extensive peer review process. 
The independent NAS report was requested by the administration, and was 
a consensus report compiled by a 11-member panel of leading U.S. 
climate scientists, including a mix of scientists who have been 
skeptical about some findings of the IPCC and other assessments on 
climate change. The NAS panel attempted to better articulate levels of 
scientific confidence and caveats than the IPCC Summary for Policy 
Makers.
    Before addressing the findings of both reports, two fundamental 
points are worthy of note. These have been long-known, are very well 
understood, and have been deeply underscored in all previous reports 
and other such scientific summaries.

 The natural ``greenhouse'' effect is real, and is an essential 
component of the planet's climate process. A small percentage (roughly 
2%) of the atmosphere is, and long has been, composed of greenhouse 
gases (water vapor, carbon dioxide, ozone and methane). These 
effectively prevent part of the heat radiated by the Earth's surface 
from otherwise escaping to space. The global system responds to this 
trapped heat with a climate that is warmer, on the average, than it 
would be otherwise without the presence of these gases.
    In addition to the natural greenhouse effect above, there is a 
change underway in the greenhouse radiation balance, namely:

 Some greenhouse gases are increasing in the atmosphere because 
of human activities and increasingly trapping more heat. Direct 
atmospheric measurements made over the past 40-plus years have 
documented the steady growth in the atmospheric abundance of carbon 
dioxide. In addition to these direct real-time measurements, ice cores 
have revealed the atmospheric carbon dioxide concentrations of the 
distant past. Measurements using air bubbles trapped within layers of 
accumulating snow show that atmospheric carbon dioxide has increased by 
more than 30% over the Industrial Era (since 1750), compared to the 
relatively constant abundance that it had over the preceding 750 years 
of the past millennium. The predominant cause of this increase in 
carbon dioxide is the combustion of fossil fuels and the burning of 
forests. Further, methane abundance has doubled over the Industrial 
Era. Other heat-trapping gases are also increasing as a result of human 
activities. However, we are unable to state with certainty the rate at 
which the globe will warm or what effect that will have on society or 
the environment.
    The increase in greenhouse gas concentrations in the atmosphere 
implies a positive radiative forcing, i.e., a tendency to warm the 
climate system. Particles (or aerosols) in the atmosphere resulting 
from human activities can also affect climate. Aerosols vary 
considerably by region. Some aerosol types act in a sense opposite to 
the greenhouse gases and cause a negative forcing or cooling of the 
climate system (e.g., sulfate aerosol), while others act in the same 
sense and warm the climate (e.g., soot). In contrast to the long-lived 
nature of carbon dioxide (centuries), aerosols are short-lived and 
removed from the lower atmosphere relatively quickly (within a few 
days). Therefore, aerosols exert a long-term forcing on climate only 
because their emissions continue each year.
    In summary, emissions of greenhouse gases and aerosols due to human 
activities continue to alter the atmosphere in ways that are expected 
to affect the climate. There are also natural factors which exert a 
forcing of climate, e.g., changes in the Sun's energy output and short-
lived (about 1 to 2 years) aerosols in the stratosphere following 
episodic and explosive volcanic eruptions. Both reports evaluated the 
state of the knowledge and assessed the level of scientific 
understanding of each forcing. The level of understanding and the 
forcing estimate in the case of the greenhouse gases are greater than 
for other forcing agents.
    What do these changes in the forcing agents mean for changes in the 
climate system? What climate changes have been observed? How well are 
the causes of those changes understood? Namely, what are changes due to 
natural factors, and what are changes due to the greenhouse-gas 
increases? And, what does this understanding potentially imply about 
the climate of the future?
    These questions bear directly on the scientific points that you 
have asked me to address today. In doing so, findings emerging from 
both the recent IPCC and NAS climate change science reports with 
respect to measurements, analyses of climate change to date, and 
projections of climate change will be summarized.

 There is a growing set of observations that yields a 
collective picture of a warming world over the past century. The 
global-average surface temperature has increased over the 20th century 
by 0.4 to 0.8+ C [NAS, p.16]. The average temperature increase in the 
Northern Hemisphere over the 20th century is likely to have been the 
largest of any century during the past 1,000 years, based on ``proxy'' 
data (and their uncertainties) from tree rings, corals, ice cores, and 
historical records. Other observed changes are consistent with this 
warming. There has been a widespread retreat of mountain glaciers in 
non-polar regions. Snow cover and ice extent have decreased. The 
global-average sea level has risen between 10 to 20 centimeters, which 
is consistent with a warmer ocean occupying more space because of the 
thermal expansion of sea water and loss of land ice. The NAS report 
also found that at least part of the rapid warming of the Northern 
Hemisphere during the first part of the 20th century was of natural 
origin.

 There is new and stronger evidence that most of the warming 
observed over the last 50 years is attributable to human activities. 
The 1995 IPCC climate-science assessment report concluded: ``The 
balance of evidence suggests a discernible human influence on global 
climate.'' There is now a longer and more closely scrutinized observed 
temperature record. Climate models have evolved and improved 
significantly since the last assessment. Although many of the sources 
of uncertainty identified in 1995 still remain to some degree, new 
evidence and improved understanding support the updated conclusion. 
Namely, recent analyses have compared the surface temperatures measured 
over the last 140 years to those simulated by mathematical models of 
the climate system, thereby evaluating the degree to which human 
influences can be detected. Both natural climate-change agents (solar 
variation and episodic, explosive volcanic eruptions) and human-related 
agents (greenhouse gases and fine particles) were included. The natural 
climate-change agents alone do not explain the warming in the second 
half of the 20th century.

 Scenarios of future human activities indicate continued 
changes in atmospheric composition throughout the 21st century. The 
atmospheric abundances of greenhouse gases and aerosols over the next 
100 years cannot be predicted with high confidence, since the future 
emissions of these species will depend on many diverse factors, e.g., 
world population, economies, technologies, and human choices, which are 
not uniquely specifiable. Rather, the IPCC assessment aimed at 
establishing a set of scenarios of greenhouse gas and aerosol 
abundances, with each based on a picture of what the world plausibly 
could be over the 21st century. Based on these scenarios and the 
estimated uncertainties in climate models, the resulting projection for 
the global average temperature increase by the year 2100 ranges from 
1.3 to 5.6 degrees Celsius. Such a projected rate of warming would be 
much larger than the observed 20th-century changes and would very 
likely be without precedent during at least the last 10,000 years. The 
corresponding projected increase in global sea level by the end of this 
century ranges from 9 to 88 centimeters. Uncertainties in the 
understanding of some climate processes make it more difficult to 
project meaningfully the corresponding changes in regional climate. The 
NAS report agrees with this projection but notes that future climate 
change will depend on what technological developments may allow 
reductions of greenhouse gas emissions.
    Finally, I would like to relate a basic scientific aspect that has 
been underscored with very high confidence in all of the IPCC climate-
science assessment reports (1990, 1995, and 2001). It is repeated here 
because it is a key (perhaps ``the'' key) aspect of a greenhouse-gas-
induced climate change:

 A greenhouse-gas warming could be reversed only very slowly. 
This quasi-irreversibility arises because of the slow rate of removal 
(centuries) from the atmosphere of many of the greenhouse gases and 
because of the slow response of the oceans to thermal changes (NAS, p. 
10). For example, several centuries after carbon dioxide emissions 
occur, about a quarter of the increase in the atmospheric 
concentrations caused by these emissions is projected to still be in 
the atmosphere. Additionally, global average temperature increases and 
rising sea level are projected to continue for hundreds of years after 
a stabilization of greenhouse gas concentrations (including a 
stabilization at today's abundances), owing to the long timescales 
(centuries) on which the deep ocean adjusts to climate change.
    Both reports stress the critical role of the oceans in 
understanding the Earth's climate system due to the seawater's capacity 
to store and transport large amounts of heat. While the first study to 
conclude that the global radiative balance of the Earth system requires 
heat transport from the tropics to the poles was published almost a 
century ago, identifying the mechanisms by which heat is transported 
remains a central problem of climate research. Because of its large 
specific heat capacity and mass, the world ocean can store large 
amounts of heat and remove this heat from direct contact with the 
atmosphere for long periods of time. Studies of ocean subsurface 
temperature variability were limited due mostly to the lack of data. 
About 25 years ago, programs were initiated to provide measurements of 
upper ocean temperature, and for the past 10 years there has been an 
increase in the amount of historical upper ocean thermal data 
available. Levitus et al. have used these data to prepare yearly, 
gridded objective analyses for the period of 1960 to 1990. With the use 
of the World Atlas Database 1998 temperature anomaly fields were 
prepared. These analyses lead to the quantification of the interannual-
to-decadal variability of the heat content (mean temperature) of the 
world ocean from the surface through 3000-meter depth for the period 
1948 to 1998. The mean temperature of the ocean increased by 2x10\23\ 
joules, representing a volume mean warming of 0.06+ C. This corresponds 
to a warming rate of 0.3 watt per meter squared (per unit area of 
Earth's surface). Substantial changes in heat content occurred in the 
300- to 1000-meter layers of each ocean and in depths greater than 1000 
meters in the North Atlantic. The global volume mean temperature 
increase for the 0- to 300-meter was 0.31+ C. Two studies by U.S. 
scientists (Levitus et al. and Barnett et al.) attempted to address the 
causes of the world ocean warming using computer model simulations.
    These studies were published in the April 13, 2001 issue of the 
journal of Science. Both studies found that the model simulated 
increase in ocean heat content were comparable to the observed increase 
only when the effects of greenhouse gases and other forcings were 
included. The findings further reported that it is unlikely that the 
observed increases result from random fluctuations of the climate 
system. The long-term increase requires a sustained warming, such as 
would be expected from increasing concentrations of atmospheric 
greenhouse gases. However, this assessment depends upon how well the 
models simulate the internal variability of the ocean system on time 
scales of 40 to 50 years.
    The NAS study titled ``Climate Change Science--An Analysis of Some 
Key Questions'' was released on June 6 and originated from a White 
House request to inform the Administration's ongoing review of U.S. 
climate change policy. In particular, the Administration asked for 
``assistance in identifying the areas in the science of climate change 
where there are the greatest certainties and uncertainties,'' and views 
on ``whether there are any substantive differences between the IPCC 
reports and the IPCC summaries.''
    The NAS Committee generally agreed with the assessment of human-
caused climate change presented in the IPCC Working Group I (WG I) 
scientific report, but aimed at articulating more clearly the remaining 
uncertainties. The NAS report summary states: ``Greenhouse gases are 
accumulating in earth's atmosphere as a result of human activities, 
causing surface air temperatures and subsurface ocean temperatures to 
rise. Temperatures, are in fact, rising. The changes observed over the 
last several decades are likely mostly due to human activities, but we 
cannot rule out that some significant part of these changes are also a 
reflection of natural variability.'' Importantly, the report observes: 
``Because there is considerable uncertainty in current understanding of 
how the climate system varies naturally and reacts to emissions of 
greenhouse gases and aerosols, current estimates of the magnitude of 
future warming should be regarded as tentative and subject to future 
adjustments (either upward or downward).''
    To address this uncertainty, the President has directed the 
Cabinet-level review of U.S. climate change policy. Based on the 
Cabinet's initial findings, the President in his June 11 remarks 
committed his Administration to invest in climate science. He announced 
the establishment of the U.S. Climate Change Research Initiative to 
study areas of uncertainty and to identify areas where investments are 
critical. He directed the ``Secretary of Commerce, working with other 
agencies, to set priorities for additional investments in climate 
change research, review such investments, and to provide coordination 
amongst federal agencies. We will fully fund high-priority areas for 
climate change science over the next five years. We'll also provide 
resources to build climate observation systems in developing countries 
and encourage other developed nations to match our American 
commitment.''
    I would like to underscore that we will use the descriptions of the 
uncertainties identified in the NAS report as the basis for development 
of U.S. research in climate. Cited areas of uncertainty include:

   Feedbacks in the climate system that determine the magnitude 
        and rate of temperature increases

   Future usage of fossil fuels

   How much carbon is sequestered on land and in the ocean

   Details of regional climate change

   Natural variability of climate, and the direct and indirect 
        effects of aerosols

    We have convened an interagency working groups to develop a science 
plan to reduce the areas of uncertainties.
    There is a great deal of concern as to what are the CO2 
emissions from various countries, and what scientists are finding about 
what level of CO2 reductions are needed to stabilize 
concentrations in the atmosphere. According to the most recent data 
from the Carbon Dioxide Information Analysis Center at the Department 
of Energy's Oak Ridge National Laboratory, countries with the highest 
CO2 emissions are: the United States, with 1.49 billion tons 
of carbon emissions a year; China, with 0.91 billion tons; Russia, with 
0.39 billion tons; Japan, with 0.32 billion tons; India, with 0.28 
billion tons; Germany, with 0.23 billion tons; the United Kingdom, with 
0.14 billion tons; and Canada, with 0.13 billion tons.
    Ultimately, due to the long lifetime of CO2 in the 
atmosphere to stabilize concentrations we must make progress on net 
emissions. To achieve this goal, technological advances must be made. 
Technology will continue to play an important role in reducing 
greenhouse gas emissions and controlling costs of climate change 
mitigation. The long-term objective--to stabilize greenhouse 
concentrations in the atmosphere--can be addressed in two ways: first, 
by reducing emissions of greenhouse gases; and second, by means of 
capturing and sequestering gases, either at the source or after they 
have been released into the atmosphere.
    There are significant climate change technology programs at many 
federal agencies, including notably the Department of Energy, the 
Environmental Protection Agency, and the Department of Agriculture. I 
will confine myself to discussion of programs at the Department of 
Commerce. In the past, the Department of Commerce NIST Advanced 
Technology Program has funded research into technologies aimed at 
improving energy efficiency, and increasing the use of low carbon 
fuels. Similarly, the Manufacturing Extension Partnership helps 
manufacturers to reduce their dependencies on fossil fuels and use of 
ozone depleting substances. The NIST Measurements and Standards 
Laboratory Program also provides the measurement science and data to 
support climate change studies as well as calibration services relating 
to atmospheric measurements. These activities contribute to the science 
base for understanding the behavior of industrial chemicals in the 
environment, evaluation of environmentally benign chemical 
alternatives, and measurement techniques for key environmental species 
in the atmosphere.
    In closing, we have outlined a significant number of items that 
challenge our existing understanding, and we will be placing special 
emphasis on them in the future. We look forward to continuing to work 
with you on these issues. Thank you again for the invitation to appear 
today. I hope that this summary has been useful. I would be happy to 
address any questions.

Sources of cited information:
Levitus, S., J.I. Antonov, J. Wang, T.L. Delworth, K.W. Dixon, and A.J. 
    Broccoli. Anthropogenic Warming of Earth's Climate System. Science 
    292: 267-270 (2001).
Levitus, S., J.I. Antonov, T.B. Boyer, and C. Stephens. Warming of the 
    World Ocean. Science 287: 2225-2229 (2000).
Rossby, C. The Atmosphere and the Sea in Motion. Rockefeller Institute. 
    1959.
Committee on the Science of Climate Change. Climate Change Science: An 
    Analysis of Some Key Questions. National Academy Press: Washington, 
    D.C. 2001. 28 p.
Summary for Policy Makers, Climate Change 2001: The Scientific Basis. 
    Summary for Policymakers and Technical Summary of the Working Group 
    I Report. Cambridge University Press, 98 pp. Also available at 
    http://www.ipcc.ch. The full report will be available this summer.
Parallel IPCC reports:
Climate Change 2001: Impacts, Adaptation and Vulnerability--
    Contribution of Working Group II to the Intergovernmental Panel on 
    Climate Change (IPCC) Third Assessment Report.
Climate Change 2001: Mitigation--Contribution of Working Group III to 
    the Intergovernmental Panel on Climate Change (IPCC) Third 
    Assessment Report.
IPCC, 2000: IPCC Special Report on Emissions Scenarios. Cambridge 
    University Press.

    Senator Kerry. Let me begin just by, if I can, putting on 
the record a little bit of your background. How long have you 
been at this?
    Dr. Evans. How long have I been at this?
    Senator Kerry. Yes.
    Dr. Evans. Well, I have been at NOAA for a little over 8 
years. Prior to that, I managed the physical oceanography 
program, large-scale ocean program, for the Office of Naval 
Research and dealt with the ocean part of climate from the Navy 
point of view for about 6 years, and prior to that, I was at 
the University of Rhode Island as an oceanographer, looking at 
large-scale phenomena for about 15 years. Pretty long time by 
now.
    Senator Kerry. So you have had a lot of experience 
following the entire evolution of this issue itself.
    Dr. Evans. That is right.
    Senator Kerry. And you are deeply immersed in it.
    Dr. Evans. That is right.
    Senator Kerry. Now, based on your experience as a 
scientist, you have made a judgment here which I think is very 
important, and I want to just explore for a moment. You said 
toward the end of your testimony, ``Ultimately due to the long 
lifetime of CO2 in the atmosphere, to stabilize 
concentrations, we must make progress on net emissions.'' 
Correct?
    Dr. Evans. That is correct.
    Senator Kerry. So it is your conclusion that based on all 
of the science to date, and based on our knowledge of our 
contribution from a human level, that we are forced to find a 
way to reduce the net emissions.
    Dr. Evans. I think that is certainly going to be the case. 
The alternative would be to continue to accumulate CO2 
in the atmosphere at whatever rate and take the consequences of 
that.
    Senator Kerry. And that is unacceptable in your judgment as 
a scientist.
    Dr. Evans. Well, I didn't say that it was unacceptable. I 
said that the consequence of not getting to a very low emission 
rate would be continued accumulation of CO2, and 
that would probably lead to continued changes of the sort that 
we have seen. The acceptability or not, I think, has to do with 
how we want to live on the planet. It is not strictly a 
scientific question.
    Senator Kerry. Fair enough. But applying your common sense 
to what we have observed already in terms of consequences, 
would you deem those consequences acceptable from a policy 
point of view?
    Dr. Evans. Well, this is going to get us down a slippery 
slope, I am afraid, Senator. NOAA's position and role in all of 
these activities really has been to try to present the science 
as clearly as we can to those folks who are in a position to 
make the policy determinations. NOAA doesn't really offer any 
regulation or any management specifically on the policies.
    Senator Kerry. Well, let me just ask you. Leaving NOAA 
aside, talk to me as Dr. Evans, you know, family man, American 
citizen. What do you think?
    Dr. Evans. I think that if we continue to accumulate 
CO2 in the atmosphere, we will continue to see 
warming of the Earth's climate, change in the Earth's climate. 
I think that we understand very little about what the 
consequences of that will be. We are much more confident in 
looking at the record of what we have done so far and seeing 
the changes that have occurred so far, which are modest, 
detectable for sure but modest, and we are far less confident 
about what the consequences of those changes will be in the 
future.
    You know, we can certainly expect warming to continue, but 
whether there would be dramatic changes and what those impacts 
would be, our science for understanding that is far less well 
developed.
    Senator Kerry. Now, accepting, as I do, that some of the 
models with respect to what happens where, when and how are 
still in the developmental stages, we are still struggling with 
those to some degree. But we are not struggling with the notion 
that there are observable impacts as a result of warming, 
ranging from ice pack melting, glacier melting, more violent 
weather, other kinds of things that people have observed. Is 
that correct?
    Dr. Evans. Well, ice pack melting, glacial melting, those 
changes are certainly consistent with a warming climate. I am 
not sure that the evidence is actually in, in changes in 
violent weather, to be perfectly honest. I think there is 
really quite a lot of controversy, and there is far less 
certainty about the impacts on what you call weather as opposed 
to the overall climate. But we certainly are seeing impacts. I 
believe that.
    Senator Kerry. And do you accept, as some have set forth, 
that the range of consequences is not simply the increased 
warming itself, but other things that happen to crops, to 
forest migration, to spread of disease, to drought, to water 
supply? There are more complicated consequences that certainly 
wise people would make some precautionary judgments about, 
would they not?
    Dr. Evans. I think that there are a range of consequences 
of the sort that you outlined that are certainly possible in a 
warmer world. They don't take place in a uniform sense. You 
know, it is not that any of those phenomena would take place 
everywhere.
    One of the things that we have learned is that as the 
climate changes, as the world warms, if you will, we will see 
changes that are more pronounced of one sort or another in 
different regions. It might be that one part of the country or 
one continent becomes warmer and another part becomes wetter or 
drier. Unfortunately, that is the very point where our science 
begins to provide us with less confidence in our projections.
    When we run the climate models, we get increased 
differences in discrepancies among those models as we look at 
finer resolution geographically, so that an effort to 
scientifically assess what the consequences will be, in the 
northwest or the southeast part of this country, we are less 
certain there.
    Senator Kerry. Well, I completely agree with that, and I 
think that is part of what makes it difficult, but--the ``but'' 
is--it is irreversible.
    Dr. Evans. It will take a very long time to change. We have 
taken a long time to warm things up now, and I wouldn't say 
that it is necessarily irreversible. You know, there are 
natural processes that do remove CO2 from the 
atmosphere. It is just that the time scales associated with the 
change are very long.
    Senator Kerry. Can you name a natural process that will 
reverse the rise of sea level?
    Dr. Evans. If the climate were to cool, then you would see 
a reverse of that, in the same way that we have warmed it, so 
if CO2 were removed from the atmosphere by 
processes, vegetation processes or continued absorption in the 
ocean, for example, processes that take a very long time, then 
you could see a decrease in the concentration of carbon dioxide 
in the atmosphere, a gradual cooling, and a slow reversal of 
those processes. The thing that is so striking about it, 
though, is that these are phenomena that have got time scales 
in centuries, in fact.
    Senator Kerry. And that is what makes it more compelling, 
because at the moment there is no public policy in any country 
anywhere in the world that is stimulating or exciting that 
reversibility, is there?
    Dr. Evans. Not that I am aware of.
    Senator Kerry. So, in fact, that is what puts on the table 
this question of what steps are available to us that might or 
might not make sense at this point in time. Now, measuring 
those, do you at this point in time offer this Committee and 
the policymakers of the administration any set of steps or 
priorities that you think make the most sense in order of 
priority that we should be thinking about adopting?
    Dr. Evans. There have been a wide range of possibilities 
offered, and just taking a look at what you probably will get 
to hear in the next two panels of your hearing today, I think 
you will probably see a lot of those explored. My personal 
expertise is really in how the ocean works and how the ocean 
and the atmosphere work together, and so one of the things, I 
think, scientists need to be prepared to do is to explore in 
their models and with their understanding about the way the 
world works what the potential consequences are of the options 
that are offered, whether they are economic options or 
technical options, technological options.
    When some of those options are put forward, then we need to 
build tools which are very poorly developed right now to 
explore how those options would actually play out in the 
physical environment, so that people would have an ability to 
make a rational choice among the various options that might be 
in front of them.
    Senator Kerry. Are there any that you particularly, just 
speaking again scientifically, are excited about, that would 
have the best effect in terms of the net zero emissions or net 
additional emissions?
    Dr. Evans. Do I have a favorite? I would be hard-pressed to 
have a favorite, I think. If we can figure out some way to deal 
with some sort of capture and sequestration programs, I think 
that those are probably going to be helpful somewhere along the 
line. We have large amounts of fossil fuel still available, and 
as you mentioned in your opening comments, we can anticipate 
using them for some time to come. And so if we can develop some 
technologies that help us reduce the amount of CO2 
that we put into the atmosphere as we extract energy from those 
fuels, I think that would probably have some great benefit.
    Senator Kerry. One of the greatest natural sequestration 
efforts comes from the ocean itself. Correct?
    Dr. Evans. That is correct.
    Senator Kerry. And there is a huge amount of CO2 
that is contained within the ocean, in effect stored in the 
ocean.
    Dr. Evans. That is right.
    Senator Kerry. But we don't know what the saturation point 
is with respect to ocean storage, do we?
    Dr. Evans. No, we don't.
    Senator Kerry. So it is possible that at some point in 
time, we could reach that saturation point, and all of a 
sudden, you have an overload on the rest of the planet. It is 
possible; I am not saying it will happen. But we don't know the 
answer, do we?
    Dr. Evans. We certainly don't know the answer. That is 
right.
    Senator Kerry. So you could conceivably have reached the 
point where the oceans in effect, have swallowed up as much 
CO2 as they are capable of, and then it starts being 
released in the atmosphere with a much more devastating, 
rolling impact with further consequences for global warming 
itself. No?
    Dr. Evans. That is possible. Yes.
    Senator Kerry. Given the possibility of that, what does 
that say to us in your judgment from a policy point of view? I 
mean, if we are sitting here saying, ``Well, gee whiz,'' we are 
kind of indolently rolling along here without any knowledge of 
when we reach this point. Is there a danger in that? Should we 
be taking more radical steps to avoid whatever might be 
uncontrollable at the outside of that curve?
    Dr. Evans. That is a very difficult question to answer from 
a scientific perspective. How much weight you want to put on 
the possibility of an extreme event of whatever sort and 
admittedly rare, or an event that you have difficulty assigning 
the probability to and how much action you would like to take 
to provide insurance against that, I think.
    Unfortunately, one of the areas of climate change science 
that has been studied a lot recently and where there has been 
recent new attention placed has been trying to look at the 
changes in extreme events. What is the probability of making a 
dramatic change in the ocean's circulation that would 
significantly affect climate over a short period of time? We 
know that historically things like that have occurred. We have 
seen them in the climate record, but we don't understand the 
physics enough to know what triggers them.
    So it would be very difficult for me to tell you, you know, 
in a probabilistic way whether putting CO2 in the 
ocean or some other kind of proposed solution might trigger 
those events. That is an area of active research where I hope 
science can make a real contribution in the near term.
    Senator Kerry. I have just a couple more questions, and 
then I will turn it over to Senator McCain and come back. The 
administration, through National Security Advisor Rice, has 
said that, ``I would dare say, dare challenge you to find a 
situation in which you have had so many high-ranking people, 
sitting there week after week after week, understanding the 
challenge that we face in global climate change, everybody from 
the Vice President, the Secretary of State, Secretary of 
Interior, Secretary of Agriculture. It has been quite something 
to see all of these people grappling with this issue.''
    Have you been at these meetings, Doctor?
    Dr. Evans. I have been to some of those meetings. Yes.
    Senator Kerry. How many Cabinet-level meetings have there 
been on this?
    Dr. Evans. I would be hard-pressed to count. Over a period 
of a couple of months, the Cabinet was meeting probably at 
least weekly on the subject.
    Senator Kerry. And can you share with us, so that we get a 
sense of how this is working, who is actually in charge of this 
policy?
    Dr. Evans. Who is charge well, the Cabinet is meeting as--
--
    Senator Kerry. No. Who would be in charge of the global 
warming policy itself? Is it Administrator Whitman? Is it the 
Vice President? Is it the Secretary of Commerce?
    Dr. Evans. I am not aware that any individual has been 
designated as the lead for climate change policy. The Cabinet 
has been meeting, I would say, sort of as a committee of the 
whole, receiving briefings from experts on a whole--on a wide 
range of subjects, ranging from science to policy options, to 
economic considerations, a wide variety of things, and spent a 
lot of time in deliberation there. But to the best of my 
knowledge, no individual person has been identified as the 
principal spokesman as yet.
    Senator Kerry. And in a matter of days, the talks resume at 
COP-6 in Bonn. Has the U.S. at this point, to your knowledge, 
developed a plan for those talks and what we will do with 
respect to the next steps of Kyoto?
    Dr. Evans. The simple answer is, I don't know. I haven't 
been party to those discussions. I know that discussions have 
been going on over the last couple of weeks to develop a 
negotiating position, but I haven't been a participant in those 
discussions.
    Senator Kerry. If you were to be presented with a plan that 
essentially set out the following: No. 1, set greenhouse gas 
emission targets and timetables to try to achieve significant 
emission reductions; use flexible compliance mechanisms and 
more efficient technology to reduce the economic impacts on 
business; make significant investments in tax incentive and R&D 
for new technologies; and then give early credit for near-term 
actions to cut emissions--in other words if somebody cuts them, 
and they do it more rapidly, they would get additional credit 
as an added incentive to taking that kind of action; ensure 
participation of developing countries as part of that solution; 
institute market-based trading systems, both domestically and 
internationally; and utilize sequestration, is that a fair 
outline of a sensible approach, in your judgment, to what we 
might consider?
    Dr. Evans. I think that all of those items are elements 
that have been discussed. I think that they have probably all 
been presented in combinations, one or some together.
    Senator Kerry. Is there any one of them that doesn't make 
sense to you or that has problems?
    Dr. Evans. You know, most of those are not essentially 
scientific questions. I mean, one of the things that I would 
like to be able to do, to be honest, is to have the tools 
available so that if we had a menu of options or menu of 
approaches such as you just outlined with some details behind 
it, we would actually be able to evaluate and tell you 
scientifically what we could expect the world to look like 
under a scenario like that, given a range of accomplishments.
    But we don't have the tools to do that right now, and so it 
is very difficult to make a scientifically informed judgment as 
to whether that list of admittedly plausible-sounding things 
that one might do, in fact, would get us to a particular goal 
or would achieve a particular purpose.
    Senator Kerry. Well, if you want to stick, then, 
exclusively to science-based, we can pursue the policy part 
later, but let me come back quickly to the science. As a 
scientist, are there not also benefits of reducing emissions 
beyond simply global warming?
    Dr. Evans. Yes. That is particularly true for a number of 
the species. For example, I mentioned in my testimony that 
soot, black carbon, if you will, a byproduct of burning, has a 
positive greenhouse effect, that causes warming. It also 
represents a health hazard. And so if we were to take actions 
that reduced soot or particulate matter in the atmosphere, we 
would all realize some health benefits from that.
    I should point out that it is a two-sided issue, however. 
It is not ever quite as simple as it seems. Sulfate aerosol 
particles, as I mentioned, which are produced largely by 
burning sulfur-containing fuels, coal in particular, form 
particles in the atmosphere which actually reflect incoming 
radiation, and so sulfur, sulfates, tend to have a cooling 
effect from the climate perspective, and that cooling effect, 
of course, acts in opposition to the greenhouse warming.
    Nevertheless, we have got a vigorous program to try and 
reduce sulfates in the atmosphere exactly because of the health 
benefits or the secondary benefits that you mentioned, so that 
some of these issues play both ways. Tropospheric ozone is 
another example.
    Senator Kerry. Well, it actually plays a third way, because 
as the author of part of the Clean Air Act that dealt with acid 
rain, nobody I know is proposing to put additional sulfates in 
the air in order to induce cooling.
    Dr. Evans. That is right.
    Senator Kerry. Because we have an acid rain problem as well 
as a particulate problem.
    Dr. Evans. Exactly.
    Senator Kerry. So that is not exactly a positive counter to 
the problem of global warming.
    Dr. Evans. No. It is positive only in the sense that those 
particles provide a negative cooling influence relative to 
greenhouse warming.
    Senator Kerry. Agreed.
    Dr. Evans. Anyone would suggest that we reverse our plan on 
sulfates.
    Senator Kerry. So, in effect, if you are looking for a net 
positive impact on human beings and on the planet, you want to 
reduce both.
    Dr. Evans. Absolutely.
    Senator Kerry. OK. Thank you.
    Senator McCain.
    Senator McCain. Dr. Evans, let's talk about, just for a 
second, observable impacts. Glaciers melting, coral reefs 
dying--what percent of the coral reefs in the oceans of the 
world are dying, in your estimation?
    Dr. Evans. Let me see if there is someone here with me that 
actually knows that number.
    [Pause.]
    Dr. Evans. We will have to get back to you with a number on 
that. [Refer to Appendix.] There have been a number of numbers 
published. It is significant. A number of folks have published 
studies showing that apparent warming has led to coral 
bleaching which may, indeed, be leading to the death of quite a 
large number of reefs, but I don't know that number right now.
    Senator McCain. And, I mean, to state the obvious, when the 
coral reefs die, the beginning of the food chain is eliminated, 
and that has incredible impacts over time on marine life. 
Throughout Antarctic, holes--large lakes are appearing. Isn't 
that true?
    Dr. Evans. Yes. There are waters appearing. That is right.
    Senator McCain. I guess there is a long list of observable 
impacts.
    Dr. Evans. That is correct.
    Senator McCain. That, to me, is very troubling, and I 
understand that sometimes these observable impacts are 
exaggerated by media coverage, et cetera, but it seems to me 
there is a rather long list of observable impacts which should 
lend some urgency to at least modest action.
    Now, Senator Kerry just quoted some statement that there 
have been many, many high-level meetings in the White House, 
and you said you have attended some of these. And by the way, I 
am very appreciative that you are here.
    I also am not appreciative, Mr. Chairman, of other members 
of the administration. If this issue is, as you just described 
in the National Security Advisor's statement, as compelling, 
perhaps they should share some of those views with the Congress 
and this Committee which has oversight, since any meaningful 
remedy is going to require legislative action. I hope that you 
will get a better response in future hearings to your 
invitations.
    But we are very grateful you are here, Dr. Evans. So you 
have this long list of observable impacts. It seems to me that 
would impel us to at least some modest action to begin with. Do 
you have any recommendations as to what immediate action we 
could take?
    Dr. Evans. I think, to be honest, the people in my business 
are not of a single mind about what sort of actions to take. 
The scientists take a look at the way the world changes and 
there are lots of natural variability in the system as well. 
Many of the phenomena which are consistent with global warming 
are also consistent with natural variability in the climate 
system, and we are just beginning to learn.
    So, once you get beyond that level of understanding, I 
don't think that there really is what you would call a 
consensus about what to do next. Should we look at automobiles? 
Should we look at power plants? Should we impose mandatory 
standards? Should we have voluntary programs? I don't think 
scientists are necessarily the right group to ask about what 
one should do in that regard.
    Senator Kerry. Would the Senator yield just for one moment?
    Senator McCain. Sure.
    Senator Kerry. But the critical point you make in your 
testimony, which you underline, is that we have to make 
progress on net emissions.
    Dr. Evans. I think that if we don't make progress on net 
emissions, we are going to continue to accumulate CO2 
in the atmosphere and we are going to see an accumulation and 
perhaps acceleration of the effects that you are talking about. 
I believe that is true.
    Senator McCain. Well, first of all, in previous testimony, 
the body of scientific opinion is--and please correct me if I 
am wrong here--that there is global warming. It just depends--
it is the end of that curve that goes on since the beginning of 
time, and it depends on whether you believe that there is a 
high end of global warming or a low end of global warming, but 
all of it is higher than ever observed before. Is that correct?
    Dr. Evans. Absolutely correct. Yes, sir.
    Senator McCain. OK. So now we have a body of scientific 
opinion that agrees that climate change--let's call it climate 
change--is a reality. The debate is not whether it is 
happening. The debate is the extent of it. Is that an accurate 
statement?
    Dr. Evans. I think the debate is even more sharply focused 
than that. There are two components: how much of what has 
happened as part of some natural system of the Earth and how 
much is anthropogenic, and there is consensus that at least a 
significant amount of it is caused by human beings.
    But the real problem is: Given what we have now, what is a 
reasonable projection for the future, because you are asking 
the scientists to project into an area scientifically where, in 
fact, they don't have any data or they don't have any 
experience. That curve that you are referring to, if one 
projects it into the future, one is sort of leaping off into an 
area where there really aren't any data to substantiate it 
right now, and you are depending upon the models that we have 
of the way the physical world works in a way that, quite 
frankly, stresses them.
    And so I think you are right in saying that there isn't 
doubt about what has happened so far. I don't think that there 
is doubt that some degree of that will continue to happen in 
the future.
    Senator McCain. Which?
    Dr. Evans.--But the degree to which it happens in the 
future which is very important is not known very well.
    Senator McCain. And just a few years ago, there was not 
this basic unanimity of opinion, was there?
    Dr. Evans. That is correct. I think the consensus is much 
stronger right now than five years ago. That is correct.
    Senator McCain. With every study, we are gathering in a 
larger and larger body of scientific opinion.
    Dr. Evans. That is correct.
    Senator McCain. All right. Then could I just finally get 
back to the Chairman's comment. You do agree that net emissions 
is an issue that must be addressed.
    Dr. Evans. I think that that is true. If we are not going 
to continue that trend, then I think we are going to have to 
deal with emissions. Is that correct?
    Senator McCain. How do we do that?
    Dr. Evans. At that point, you sort of begin to move 
personally beyond my area of expertise. There are a lot of 
things that people have mentioned. Mr. Kerry mentioned the list 
of topics there which could contribute to reducing emissions, 
but the trade-offs on those topics, which one or ones of them 
do you want to use, how strongly do you want to apply it, when 
do you want to do it, those really become more social and 
economic decisions than scientific decisions.
    Like I said, I would like the science to be able to support 
a discussion of those options by telling you what the world 
might look like under a range of scenarios that you would put 
together by exercising those options. That would be the right 
role for science to play in this. A choice as to which option 
to use, though, unfortunately, gentlemen, you are going to have 
a much harder job than the scientists have had so far in trying 
to sort through that.
    Senator McCain. Is that effort underway, to get some 
scientific opinion as to what would happen under various 
options?
    Dr. Evans. Yes. People are working on those scenarios now. 
That work is underway. I think it is an area that we are going 
to need to accelerate to some degree.
    Senator McCain. In a collective fashion, is your 
organization involved in that?
    Dr. Evans. We have just begun working on that. We have had 
a significant activity, as you know, in climate modeling and 
modeling the physical climate, and we have a growing program, 
an evolving program, that begins to understand the impacts and 
provide the tools for doing that kind of interactive modeling 
that we are going to need to develop.
    Senator McCain. Well, I thank you, Dr. Evans.
    I know you have other witnesses, but, Mr. Chairman, I guess 
the question is not only how we act but when do we act. How 
long do you wait for this body of scientific opinion to be 
unanimous? You and I can find witnesses who will disagree that 
there is any global warming of any kind. We have had them 
before the Committee, but I think that if you look at the 
historical perspective of scientific studies, there is a larger 
and larger body of opinion that this is reality. Climate change 
is a reality.
    And then the question, I think, that faces all of us--and 
the scientific community has to be involved, Dr. Evans--is what 
actions we will take and when. And I am not sure, Mr. Chairman, 
if we should wait until every scientist in America agrees that 
this is a serious and almost unprecedented challenge. I thank 
you, Mr. Chairman.
    I thank you, Dr. Evans.
    Senator Kerry. Well, Senator McCain, thank you very much, 
and I thank you for your leadership when you were chairman in 
pulling together a very important scientific baseline, on which 
this Committee can base some judgments.
    Let me say personally in answer to the question you posed 
generically: I am sure that we should not wait, and the reason 
I am sure that we should not wait is that there are other 
benefits. We are getting trapped in the wrong debate here, and 
as we listen to the President and the administration say, 
``Well, we are studying this,'' we are, in fact, being misled, 
because the President is not just studying this. The President 
has, in fact, taken actions. He has reneged on a campaign 
promise on CO2 emissions. That is an action; that is 
a positive action that runs counter to some of the steps we 
might have taken.
    He has declared the Kyoto Treaty dead, not replacing it 
with a different alternative, not saying how he could fix it, 
just declared it dead. That is an action. That is an 
affirmative action that has a negative consequence on doing 
something about this.
    The President has proposed an energy plan that will 
increase emissions by 35 percent, directly contrary to what you 
have said here in your testimony today, that we must have a 
policy of no net emissions. That is a affirmative step he has 
taken, not a study, an affirmative step that runs directly 
contrary to the efforts to do what we are trying to figure out 
here today.
    We have a tax plan on the table--now signed into law--that 
has reduced the options of giving incentives to create fuel-
efficient vehicles, to create all kinds of other options that 
we might have with respect to this. Now, that is an affirmative 
step. It is a declaration of a priority. And so I will just 
make it very clear that we are not simply studying. We have had 
a series of proposals made to the Congress and to the country 
that are directly flying in the face of all of the scientific 
evidence and of the alarm that Senator McCain just signaled, 
and that is the concern of many of us here.
    The debate should not be over just whether we can predict 
all of the consequences of what is going to happen 
scientifically. We know that enough is happening that is 
negative already, and we know that if you extrapolate that out 
into the future as you have, we can't continue to add to it. We 
know that the consequences are negative, so we could at least 
begin to take some modest steps that might begin to deal with 
that.
    An example: We are back down to 1980 levels in the fuel 
efficiency standards of our vehicles, while other countries are 
moving ahead and being more affirmative in trying to reduce 
their emissions. So there are many things that we could do as a 
matter of good health policy, for instance.
    In 1973 when many of us remember waiting in fuel lines for 
hours, we were 35 percent dependent on foreign oil. Today we 
are about 55 percent dependent, and we are about to head into 
the 60's. Wouldn't it be wonderful if the United States of 
America were, indeed, independent in terms of our energy base 
today? And think of what the consequences could be for peace in 
the Middle East, for not having to perhaps fight another war as 
we have already fought one in the last 12 years on the subject 
of oil, if we were to move to that kind of independence.
    So there are, in fact, very compelling reasons: health, 
asthma among children, lung disease, cancer, countless numbers 
of security reasons--matters of the human condition that should 
be compelling us to move in this alternative direction. And I 
wonder, Dr. Evans, if you don't accept the notion that those 
are compelling options that ought to be on the table?
    Dr. Evans. I think that probably all of those options are 
on the table. As I indicated earlier, I did attend some of the 
meetings, and I think quite a few of those options are on the 
table. I think that lots of them are under discussion right 
now.
    As I tried to indicate before, my particular expertise is 
on the science side, and basically that is what I have been 
asked to comment on, and I have tried to indicate, those areas 
where the science could help choose among those options, to try 
and deal with some of the issues that you have raised there.
    Senator Kerry. Well, actually, both Senator McCain and I 
tried to ask you what options you might pursue, and you said, 
Well, that is not really the job of the scientist.
    Dr. Evans. No. I think that the job of the scientist is to 
try and evaluate those options when they are posed at this 
point. What would be the consequences of----
    Senator Kerry. Well, what would be the consequence of a 
mandatory target for emissions reduction? That is what I asked 
you. I gave you the plan. I laid it out. That was my first 
question to you. What would be the consequence of a greenhouse 
gas emission target and a timetable to achieve significant 
emissions reductions at a specific future date?
    Dr. Evans. One would assume, from a scientific point of 
view, that one would end up with somewhat lower carbon dioxide 
or at least a decreased rate of increase of carbon dioxide in 
the atmosphere, but the other consequences of that, economic 
consequences or what the consequences would be in other aspects 
of our daily lives, frankly I don't know.
    Senator Kerry. But from a scientific point of view, would 
that goal be a salutary one?
    Dr. Evans. Salutary?
    Senator Kerry. Would it be one we would want to achieve?
    Dr. Evans. It would be a goal that would lead to less 
carbon dioxide in the atmosphere.
    Senator Kerry. And is that better?
    Dr. Evans. Better? It would----
    Senator Kerry. Is that desirable? Pick any word you want 
that says whether or not that is something we ought to try to 
do.
    Dr. Evans. I think at some level the answer is yes, because 
at the extreme of greatly increased carbon dioxide 
concentrations, I think that the answer would be that we 
wouldn't want to go there, but where along the continuum from 
where we are now to more is desirable, good, safe, to use a 
word that was in the climate treaty, for example, I think is 
really an open question right now. It is not one to which we 
actually have an answer.
    Senator Kerry. Would it be a smart policy to adopt a 
national effort to increase all available beneficial 
sequestration methods, like increased forest acreage, less 
deforestation? Would that help reduce CO2?
    Dr. Evans. Possibly. I mean, I don't know.
    Senator Kerry. What do you mean by ``possibly''?
    Dr. Evans. I don't know what the trade-offs would be. I 
don't know what you would stop doing in order to increase 
forests. I don't know what--you know, whether you would need 
other kinds of fertilization. There is a whole range of issues 
associated with pretty much any of those, and I guess what I 
was suggesting is rather than trying to offer a kind of a 
general answer off the top of my head about any particular 
policy, I think that those are exactly the kinds of things that 
really warrant some pretty careful investigation. What are the 
consequences of doing one thing versus another? What are the 
costs of doing one thing versus another? How would they play 
together, and what would be the overall impact on carbon 
dioxide in the atmosphere?
    Senator Kerry. But isn't----
    Dr. Evans. You know, but to get there----
    Senator Kerry. But isn't that specifically one of the 
options? Didn't we have significantly more forests on this 
planet in the last centuries?
    Dr. Evans. Yes.
    Senator Kerry. And didn't we do pretty well? I mean, was 
that negative? Did we seek to cut the forests because it was a 
bad idea?
    Dr. Evans. I don't know how to answer that, sir. I don't 
think we cut the forests because it was a bad idea. I think we 
cut the forests to do things with the lumber, to clear the land 
for agriculture, to make paper. There is a variety of reasons 
for having cut the forests.
    Senator Kerry. Well, I understand that, but aren't we now 
specifically talking about sequestration through increased 
planting?
    Dr. Evans. Yes.
    Senator Kerry. I mean, we are actually talking about 
counting forests----
    Dr. Evans. Yes.
    Senator Kerry.--as part of the sinks?
    Dr. Evans. Yes.
    Senator Kerry. And those sinks are, in fact, what we are 
seeking as a means of sequestering carbon dioxide.
    Dr. Evans. Yes.
    Senator Kerry. So planting them is a benefit. I don't know 
why we have to struggle to get to that.
    Dr. Evans. Well, the planting is certainly a benefit, over 
some period of time, and the question honestly in the case of 
forests is, what is the period of time, because once the trees 
start growing, if you cut them down, what do you do with the 
carbon that has been sequestered there. It is not a permanent 
solution.
    Senator Kerry. But we are doing that right now. We are 
cutting them down without even counting it.
    Dr. Evans. Yes.
    Senator Kerry. I think the point is made.
    Senator Ensign.
    Senator Ensign. Thank you, Mr. Chairman.
    I just had kind of a couple of general overall questions, 
because I have spent a lot of time with this issue--we have an 
institution in Nevada called the Desert Research Institute. 
They do a lot on atmospheric studies and have a lot of 
scientists out there that have been studying a lot of 
climatological changes.
    Some of my discussions with them--and I would maybe like 
you to comment on some of these--are studying climate in 
general over time, seems to me, to be a difficult prospect at 
best. Some of the things they talk to me about, are studying 
some of the densities of glaciers and the various things that 
they have tried to do over time to be able to tell whether 
there has been changes in global temperatures, but it also 
seems that it is difficult in that it is not a closed system.
    In other words, it is not like you are taking like in our 
old chemistry experiments that we have got a little styrofoam 
cup and we have got a thermometer and we can measure that as 
almost a closed system. It is not like you have the Earth and a 
thermometer, and so you are measuring a closed system. 
Depending on where you are taking the temperatures--are you 
taking them all in the cities? We know that the more populated 
that you get in a city and obviously the more emissions that 
you have in that city, at that particular place, you may have 
an increased temperature, but it also varies in various parts 
of the globe.
    So I guess I would just like your overall comments about 
the difficulty in studying that, and what are the implications 
on setting policy because of those difficulties?
    Dr. Evans. Well, you have raised a number of issues 
associated with how you measure temperature, for example. There 
has been a lot of discussion in the scientific literature about 
that. You referred, in particular, to the so-called heat island 
effect from cities. These are phenomena which are, I think, 
becoming rather well understood. The heat island effect in 
cities and looking at the historical records is something that 
is known and to a large degree has been corrected in our 
assessment of temperature change.
    There have been the usual scientific discourse back and 
forth on whether your correction is better than his, and vice 
versa, but I think that the basic sense of the long-term 
temperature record right now, collected from a variety of 
means, instrumental means, thermometers, if you will, for the 
last 150 years, proxy records and tree rings and ice cores and 
a wide variety of other methods for much longer periods than 
that have really achieved a large degree of consensus in the 
scientific community, so this basic question of whether it is 
getting warmer or not, or what does the basic pattern of 
temperature change look like, I personally don't think has a 
huge degree of controversy associated with.
    Yes. There are people with different opinions, and I won't 
say that this is a consensus view or unanimous view. But it is 
one that, I think, represents a strong sense of what the 
scientific community believes, those measurement problems 
notwithstanding.
    Now, you do highlight the need, though, for a real 
observing system if we want to know what is going on, if we 
want to better initialize our climate models to understand the 
future, if we want to have a better understanding of the way 
the world systems work so we can separate natural variability 
from warming induced by the things we have put in the 
atmosphere, having a robust, global climate monitoring system 
is very important.
    There have been a number of plans offered from doing that. 
We derive some data these days from satellites. There is a 
long-term instrumental record. There are a variety of 
organizations worldwide that have proposed systems for doing 
that, and we are making progress in implementing these 
worldwide observing systems. We probably need to accelerate 
that progress for the future.
    But to answer your specific question, I think that there is 
a good sense in the scientific community that a number of those 
issues that you raised are ones that have been addressed and 
where we still find a significant record of warming.
    Senator Ensign. The things that I have read in my 
literature and my discussions have been that there is not 
unanimity among scientists. Hopefully, there is never 
unanimity, because----
    Dr. Evans. Right.
    Senator Ensign.--then we are not questioning in the way 
that we should question in science. But given that, there is a 
fairly strong consensus that there has been an increase in the 
temperature of the planet in the last 100 years. Can you just 
comment on how significant that temperature increase, how much 
has been induced, and what percentage of that has been induced 
by humans, or have we been able to determine that, and how 
significant it is compared to natural increases or decreases in 
temperature, especially when we are dealing with geologic time?
    Dr. Evans. Well, when you are dealing with geologic time, 
of course, you can look back through the Ice Ages or the age of 
the dinosaurs, and you will find climates for the Earth which 
are very different than the one that sustains our livelihoods 
right now. So I am not sure that that is really helpful. The 
Earth certainly has had a variety of different climates in its 
history. There is no doubt about that.
    But the temperature changes that we have seen in the last 
150 years, let's say, basically since the Industrial 
Revolution, really are unprecedented in the record of, say, 
1000 years prior to that, and other properties associated with 
the temperature fluctuation are probably not really detected or 
are separate from the kinds of variability, natural 
variability, that we would expect to see in the system going 
back even 10,000 years. So it is quite significant, the changes 
that we have seen in the last--certainly over the course of the 
20th Century.
    And the body of scientific evidence suggests that at least 
a large fraction of that change is due to the increase of 
greenhouse gases that we have observed. The best that is 
measured or the way that we get our arms around that most 
accurately is by taking the models that we have that capture 
all of the physics and chemistry that we know, and running 
those models with a variety of scenarios; that is, include the 
greenhouse gases, exclude the greenhouse gases, include the 
sulfates or the particles that come from volcanic eruptions, 
changes in solar variability, the sulfates that increased and 
then decreased as a consequence of our actions in the 
atmosphere.
    And what we find is that we get the best agreement with the 
measured temperature record over the last 150 years, when all 
of those factors, including the man-caused increases in 
greenhouse gases are included in those models.
    Senator Ensign. The question, though, that you didn't 
answer was: When we are looking at the percent of man-caused 
versus natural--you mentioned solar. From what I understand, 
the changes on the sun can be incredibly significant as far as 
what happens on the Earth, not only temperature-wise, but 
obviously as far as all kinds of electromagnetic activity and 
radiation and the various things that can happen here.
    And the reason that I am asking the question is I think it 
is important for policymakers to understand, you know, how big 
of an impact are we making in the negative to our planet 
temperature-wise or environmentally, so that if we make 
changes, how significant of changes can we make percentage-wise 
as far as will we really make any difference by the policy, 
because when you are doing any of these, you do have to take 
costs into account? You have to take into account a lot of 
other things. So it would be nice if we at least had some kind 
of a handle on this.
    Dr. Evans. Well, like I said, we have good measurements of 
a lot of the sorts of natural variability in the system over 
the last few decades. We have good measurements, for example, 
of solar input and solar variability over the last 30 years 
while we have been flying satellites and have good global 
measurements of those data.
    Those kinds of variabilities are included in the models. 
They have an impact, but solar variability, quite frankly, is 
rather small. There are other impacts due to variations in the 
sun. As you know, NOAA does operate the Space Environment 
Center that monitors solar activity and provides warnings and 
forecasts of solar events, which can have impacts on all sorts 
of aspects of daily life, changes in the electric grid and 
health and safety of astronauts and satellites. There is a wide 
range of potential impacts of the solar variability on the 
Earth.
    We have actually been monitoring solar variability through 
the last two or three solar cycles, including that kind of 
measured variability, and the sun doesn't begin to account for 
the kinds of changes in temperature that we have seen.
    Now, in looking at the two bursts of change, if you will, 
in temperature, the early part of the 20th Century and the 
latter part of the 20th Century, more of the temperature change 
can be ascribed to some of these naturally occurring factors, 
but the changes that we have seen over the last 50 years don't 
seem to be accounted for that way.
    Senator Kerry. Thank you very much, Senator.
    Senator Snowe. We are going to move to the next panel right 
after Senator Snowe.

              STATEMENT OF HON. OLYMPIA J. SNOWE, 
                    U.S. SENATOR FROM MAINE

    Senator Snowe. Yes. Thank you, Mr. Chairman, and I will be 
very brief.
    But, Dr. Evans, based on what we know--and obviously we 
have a significant body of work with respect to climate change 
and how it is affecting our world in which we live--do you 
think that we can make some policy changes right now to effect 
global warming and climate change? I mean, how long do we 
have--how far do we have to go and how long do we have to take 
before we can initiate policy changes?
    Dr. Evans. That is a very difficult question. We have taken 
about 150 years in practical terms over the industrial 
Revolution to sort of get where we are now. The climate system 
responds rather slowly. We know that we are going to see 
increased warming in the oceans. Even if we were to reduce 
emissions dramatically right now, we are going to continue to 
see ocean warming, because the processes are very long and 
slow.
    That means that actions that we take will have consequences 
over a long period of time. It also suggests that dramatically 
taken actions are not likely to produce dramatically evident 
results, and so I think that we have time to take a look, to 
consider what we need to do carefully, but we do need to 
recognize that the consequences of our actions or inactions 
have very long time constants associated with them.
    Senator Snowe. But we know that human activity obviously 
has a significant impact on climate change. For example, why 
not take steps, like closing the loophole on CAFE standards for 
SUVs? Knowing that SUVs contribute significantly to carbon 
dioxide emissions, far more than passenger cars. That is a step 
that we know could help in improving the atmosphere. So why not 
take that kind of step? Would the administration be supportive 
of that initiative?
    Dr. Evans. Senator Snowe, I have tried to confine most of 
my answers as best as I have been able to.
    Senator Snowe. Well, let me ask you----
    Dr. Evans. Try and understand the scientific impact of what 
is happening. If we were to take any steps that reduced the 
emissions of CO2, that would probably have a 
mitigating effect or a slowing effect on the kinds of change 
that we are attributing to the accumulation of CO2.
    Senator Snowe. So transportation obviously is a significant 
contributor.
    Dr. Evans. That is correct.
    Senator Snowe. OK. So then obviously it could have an 
impact. And, Mr. Chairman, I would even recommend that this 
Committee have a hearing on closing the CAFE standards loophole 
on SUVs, because I do believe that it could have a major 
effect. In fact, if we implemented a standard of 27.5 miles per 
gallon, we could reduce carbon dioxide emissions by more than 
200 million tons every year. I think that has a significant 
effect and a significant result.
    I think the time has come to take policy steps that will 
have an impact, however incremental they might be. But the fact 
is we have to begin to take steps. I think the National Academy 
of Science report on the effectiveness of CAFE standards is a 
wake-up call for where we are today. So I would hope that the 
administration, beyond looking to further studies, should also 
be considering what steps can be taken, what legislative 
measures could be taken, so that we can begin to address this 
perilous issue when it comes to our environment.
    Senator Kerry. Senator Snowe, thank you very much. Let me 
just say that Senator McCain and Senator Hollings and I are 
putting together legislation right now, even as we speak. It 
will be ready in a few days, and we will be proceeding forward 
on that as well as several other initiatives.
    [The prepared statement of Senator Snowe follows:]

  Prepared Statement of Hon. Olympia J. Snowe, U.S. Senator from Maine

    Thank you, Mr. Chairman, and thank you for holding this hearing 
today, as this is an appropriate follow up to the climate change 
hearings Ranking Member McCain has held both in the 106th Congress and 
in the 107th, the latest being this past May. This Committee does have 
a large responsibility in the oversight of the climate change issue and 
I'm pleased to see that responsibility being exercised.
    In Senator McCain's hearings, we heard from renowned scientists 
with varying opinions on global warming, and just weeks ago, and at the 
President's request, a well respected and balanced panel of U.S. 
scientists came out with a report that there is strong evidence that 
warming over the past 50 years is attributable to human activities, and 
significant increases in global temperatures and sea level can be 
projected. I believe this National Academy of Science Report is the 
wake up call for many who have not yet gotten engaged in the issue of 
climate change as we now have a growing collective picture of a warming 
world over the past century. Climate change is a perilous environmental 
problem that deserves to be addressed on both the domestic and 
international level.
    It appears clear that regional climate changes, particularly 
temperature changes, are affecting physical and biological systems. 
Many human systems, the scientists say, are sensitive to climate 
change, and the potential for large scale and possibly irreversible 
impacts pose risks that have yet to be quantified. We must recognize 
that those around the globe with the least resources have the least 
capacity to adapt and are the most vulnerable to these changing climate 
processes.
    The United States had a large part in the development of a climate 
change convention treaty at the ``Earth Summit'' in Rio de Janeiro in 
1992. President George H. W. Bush went on to sign the UNFCCC Treaty and 
it was unanimously ratified by the U.S. Senate. I believe Congress' 
prudent response to climate change is to work for the adoption a 
portfolio of clear and concise U.S. actions aimed at mitigation, 
adaptation, and research as the issue is one with unique long-term 
effects involving complex interactions between climatic, environmental, 
economic, political, institutional, social and technological processes.
    As one of the many pieces we can consider, I would like to suggest 
support for a simple change--the Feinstein-Snowe bill that closes the 
SUV loophole by raising the fuel efficiency, or CAFE, standards for 
``light truck'' vehicles to meet those expected of passenger vehicles. 
The overall fuel economy of new cars and trucks sold in America, after 
improving slightly a year ago, has dropped back to the lowest levels 
since 1980, mainly because of the lower fuel efficiency standards 
currently set for the popular SUVs and minivans.
    It is estimated that fixing the SUV loophole will save one million 
barrels of oil a day, reduce oil imports by 10 percent, cut America's 
trade deficit--oil deficits are the largest of this--save consumers 
money at the gas pump, and provide healthier and cleaner air benefits, 
and, very importantly, prevent more than 200 million tons of carbon 
dioxide--the major greenhouse gas connected to global warming--from 
going into the atmosphere. This legislation is under the jurisdiction 
of the Commerce Committee and I urge the Chair to hold a hearing on the 
Feinstein-Snowe bill.
    I have asked the Administration for support of the SUV loophole 
bill as one way to move toward reducing our carbon dioxide emissions, 
and I look forward to hearing about what the Administration's 
strategies are as we work through the domestic and international issues 
relating to climate change.
    Thank you, Mr. Chairman.

    Senator Dorgan.
    Senator Dorgan. Mr. Chairman, I was delayed, so I will 
defer questioning. I have read Dr. Evans' statement. Thank you 
very much for appearing, and I will be here for the next panel.
    Senator Kerry. Thank you.
    Senator Stevens.
    Senator Stevens. No. Thank you.
    Senator Kerry. Dr. Evans, thank you very, very much. The 
only thing I would conclude by saying is that, as you have 
pointed out, the slowness of response is a compelling reason to 
think about some of the things like Senator Snowe and others 
have suggested. I gather the half-life of existing 
CO2, where we are right now is about 70, 80 years.
    Dr. Evans. That is about right. Yes.
    Senator Kerry. So what we have already put out there is 
going to continue to do the current rate of damage for the next 
70 years, no matter what we do, unless you and others discover 
some means of reversing, i.e., of rapid sequestration that 
takes CO2 out of the atmosphere. Is that correct?
    Dr. Evans. That is a fair assessment. Yes.
    Senator Kerry. So it might even make more compelling the 
notion that even without knowing fully what those consequences 
are, we who make policy ought to be more thoughtful about being 
precautionary and trying to avoid catastrophe.
    Dr. Evans. I think that those of you who make policy at 
this point have some very difficult challenges in front of you. 
I think that you have got potentially very significant 
decisions to make, and I am afraid that in the science 
community, we are not giving you all the tools that I wish that 
we were to help make those decisions earlier.
    Senator Kerry. Well, this is a great segue into the next 
panel. I don't find it as economically challenging or policy 
challenging as some people suggest. There are some wonderful 
technologies already out there. There are things that we can do 
that create whole new sectors of our economy, countless numbers 
of jobs, huge new opportunities, all of which can take us down 
a different road. So I don't think we have to view this as a 
difficult challenge.
    The Japanese automobile manufacturers and others are moving 
rapidly to provide hybrid automobiles, to get up to 75, 80 
miles per gallon very quickly. I suppose the most significant 
question is why we are always the last ones to move in these 
directions, but I think the opportunities are there, and that 
is what we are going to explore in the next panel.
    Thank you, Dr. Evans, very much for being here.
    Dr. Evans. Thank you.
    Senator Kerry. If I could invite the next panel to move up 
as rapidly as possible, we will begin right away with Dr. 
Kammen, and then Mr. German, Mr. Miller, Mr. Duffy, and Ms. 
Koetz.
    Oh, I apologize. We have a plane problem I wasn't aware of, 
so Mr. Miller, if you would lead off. I understand you have a 
flight you have to get, and I apologize for any delay on that.

 STATEMENT OF WILLIAM T. MILLER, PRESIDENT, INTERNATIONAL FUEL 
                             CELLS

    Mr. Miller. Thank you, Mr. Chairman. I am president of 
International Fuel Cells, which is a subsidiary of United 
Technologies Corporation. I appreciate the opportunity today to 
testify regarding the role of fuel cells in addressing climate 
change.
    Fuel cells are an important climate change technology, 
because when fueled with hydrogen, they do not produce any 
carbon dioxide emissions. When fueled by natural gas, fuel 
cells produce substantially less carbon dioxide emissions than 
other technologies. IFC has a long history in fuel cells. We 
have produced the fuel cells for every U.S. manned space 
mission since 1966, including the space shuttle. These fuel 
cells produce the electricity for the orbiter when it is in 
space and all the drinking water for the astronauts.
    IFC is also the only company in the world currently 
producing a commercially available fuel cell. That unit, the 
PC25TM, produces 200 kilowatts of electric power, 
which is enough to power roughly 150 homes. Currently these 
units power schools, hospitals, military installations, data 
processing centers, and other facilities.
    Fuel cells are electro-chemical devices that combine 
hydrogen and oxygen to create electricity. This is a single 
fuel cell, capable of generating one-third of a kilowatt of 
electricity. You put hydrogen in the orifices on the end, 
oxygen from air under these orifices, and you produce 
electricity, water, and heat. This produces a third of a 
kilowatt. If you need more, you just stack one on top of 
another to produce more kilowatts.
    Fuel cells do not use combustion to produce electricity, 
and it is that combustion that creates NOX, which is 
responsible for smog, and SOX, which is responsible 
for acid rain. When pure hydrogen is the fuel source, fuel 
cells produce no harmful emissions at all, including no carbon 
dioxide, which is the primary manmade greenhouse gas involved 
in global warming.
    Because hydrogen is not yet readily available as a fuel, we 
use fuel processors to reform commonly available hydrocarbon 
such as natural gas into hydrogen fuel for the fuel cell. When 
running on these hydrocarbons, fuel cells do produce carbon 
dioxide, but substantially less carbon dioxide, once again, 
than other means of electricity generation.
    IFC has sold more than 220 fuel cell power plants to 
customers in 16 countries on five continents. Examples of 
installations range from the police station in New York City's 
Central Park to hospitals in several states, and to the main 
postal facility in Anchorage, Alaska. We have 32 PC25s 
operating in states represented by Senators on this Committee.
    Our total fleet of PC25 power plants has accumulated more 
than 4.2 million hours of combined operation. They operate day 
or night, regardless of weather. Our installed base of PC25s 
has already prevented nearly 800 million pounds of carbon 
dioxide emissions and more than 14\1/2\ million pounds of 
NOX and SOX compared with typical U.S. 
combustion-based power plants. The U.S. Environmental 
Protection Agency recognized IFC last year with a climate 
protection award because of this achievement.
    Building on this success, we are now developing fuel cell 
technology for residential and transportation applications. IFC 
is currently developing a 5-kilowatt unit for homes and small 
buildings. We expect to begin marketing these devices in 2003.
    For the transportation market, IFC is working with a number 
of car and bus manufacturers to develop fuel cell vehicles. Our 
zero emission hydrogen fuel cells now power four Hyundai SUVs. 
These vehicles are the world's first zero emissions SUVs and 
get the gasoline equivalent of 50 to 60 miles per gallon.
    We have also developed fuel processors capable of taking 
pump-grade gasoline and reforming it, and using it to power a 
fuel cell. Such technology will allow fuel cell vehicles to use 
the existing gasoline infrastructure until a hydrogen 
infrastructure is in place.
    Cars, buses and trucks now represent about one-third of 
carbon dioxide emissions in the United States. By developing 
the necessary hydrogen infrastructure and fuel cell vehicles, 
we can take ground transportation out of the climate change 
debate.
    But there is still one major barrier to the introduction of 
fuel cells for these various applications, and that is cost. 
IFC and other fuel cell companies are now developing new fuel 
cells, like the one I showed you earlier, that are smaller, 
lighter, and cheaper to produce than the ones presently in 
manufacturing. This new technology, along with higher 
production volume, should help us to reduce the cost of fuel 
cell power plants by two-thirds from today to 2003, so from 
$4,500 a kilowatt today to $1,500 a kilowatt in 2003, and the 
cost of fuel cell power plants will trend down even further 
beyond that. If we achieve the goal of automotive production, 
costs may decline to as low as $50 a kilowatt.
    In conclusion, let me say that fuel cells are already 
helping to reduce carbon dioxide emissions today. Further 
commercialization of this technology will produce not only 
climate change benefits but improved air quality, independence 
from foreign oil, and technology leadership for the United 
States.
    I look forward to working with you, Mr. Chairman, members 
of the Committee, and other interested parties, to accelerate 
the commercialization of fuel cell technology. And I would be 
happy to answer your questions later. Thank you.
    Senator Kerry. Mr. Miller, thank you very much. Thank you 
also for hitting the timing right on the button. It is helpful 
to all of us. Do you have time to stay through the other 
testimonies for questions?
    Mr. Miller. I will stay through.
    Senator Kerry. You are able to?
    Mr. Miller. Yes.
    Senator Kerry. That would be very helpful. Thank you for 
doing that.
    [The prepared statement of Mr. Miller follows:]

          Prepared Statement of William T. Miller, President, 
                        International Fuel Cells

    Good morning. My name is William Miller. I'm the President of 
International Fuel Cells (IFC), a subsidiary of United Technologies 
Corporation (UTC). UTC is based in Hartford, Connecticut and provides a 
broad range of high-technology products and support services to the 
building systems and aerospace industries. UTC's products include 
Carrier air conditioners, Otis elevators and escalators, Pratt & 
Whitney jet engines, Sikorsky helicopters, Hamilton Sundstrand 
aerospace systems and fuel cells by International Fuel Cells.
    IFC has a long history in fuel cells. We've produced the fuel cells 
for every U.S. manned space mission since 1966, including the Space 
Shuttle. These fuel cells produce the electricity for the orbiter when 
it is in space and all the drinking water for the astronauts. IFC is 
also the only company in the world currently producing a commercially 
available fuel cell power plant. That unit, the PC25TM, 
produces 200 kilowatts, which is enough to power roughly 150 homes. 
Currently, these units power schools, hospitals, military 
installations, data processing centers and other facilities.
    Fuel cell technology is a reality today in space and commercial/
industrial applications. By the end of this decade it will also power 
homes, cars, trucks and buses.
    Fuel cells offer great potential for addressing climate change. 
Current fuel cell technology using hydrocarbon feed stocks produces 60% 
more electricity per pound of carbon dioxide emissions than the average 
US combustion based power generating system. Using hydrogen as the fuel 
will enable us to eliminate CO2 emissions from the fuel cell 
power plant's operation.
    Unlike other environmentally favorable solutions such as solar or 
wind power, fuel cells can be used as a continuous source of base 
power--independent of time-of-day or weather--for critical facilities, 
thereby offloading demand and providing independence from the grid.
Fuel Cell Description
    Fuel cells are an electrochemical device that combines hydrogen and 
oxygen to produce electricity, with only water and heat as the by-
products. Fuel cells do not use combustion to create electricity. It is 
combustion that creates NOX, which is responsible for smog, 
and SOX, which is responsible for acid rain.
IFC History and Current Fuel Cell Applications
    International Fuel Cells is the world leader in fuel cell 
production and development for commercial, transportation, residential 
and space applications. IFC is the sole supplier of fuel cells for U.S. 
manned space missions and is the only company in the world producing a 
commercial fuel cell system, the PC25TM power plant.
    IFC's headquarters, research and development, and manufacturing 
facilities are located in South Windsor, Connecticut, and cover more 
than 350,000 square feet. IFC employs some 750 engineers, researchers, 
managers and production workers.
    Since 1966, IFC fuel cells have provided electrical power, as well 
as drinking water, for more than 250 astronauts on all of the United 
States' manned space flights. Each space shuttle mission carries three 
IFC 12-kilowatt fuel cell units. These units have accumulated more than 
81,000 hours of fuel cell operating experience.
    IFC is also the only company in the world currently producing a 
commercially available fuel cell power plant. That unit, the PC25, 
produces 200 kilowatts, which is enough to power roughly 150 homes. IFC 
has delivered more than 220 PC25s to customers in 16 countries and five 
continents.
    This PC25 fleet of fuel cells has accumulated more than 4 million 
hours of operational experience in a range of operating environments. 
The PC25 system requires only routine maintenance and has a life of 
40,000 hours, or five years, before a major overhaul is required. IFC 
has 32 PC25s operating in states represented by Senators on the 
Commerce, Science and Transportation Committee.
    IFC is now developing fuel cell technology for residential/light 
commercial and transportation applications, including buses, fleet 
vehicles and cars.
Environmental and Climate Change Benefits of Fuel Cells
    When pure hydrogen is the fuel source, fuel cells produce no 
harmful emissions--no carbon dioxide, which is the primary man-made 
greenhouse gas involved in global warming and no NOX or 
SOX, the pollutants that cause smog and acid rain.
    Hydrogen is not yet readily available as a fuel. Because of this, 
fuel cell power plants incorporate fuel processors to reform commonly 
available hydrocarbons such as natural gas, propane, or methane from 
waste water treatment plants into hydrogen fuel.
    Even when running on these hydrocarbons, IFC's fuel cells are still 
very climate friendly and efficient. They produce 60% more electricity 
per pound of carbon dioxide emission than the average US combustion 
based power generating system.
    IFC'S installed base of PC25 power plants has already prevented 
nearly 800 million pounds of CO2 emissions and more than 
14.5 million pounds of NOX and SOX compared with 
typical US combustion-based power plants. The U.S. Environmental 
Protection Agency recognized IFC last year with a Climate Protection 
Award in recognition of these accomplishments.
Fuel Cells are More Efficient Energy Producers
    Fuel cells, because they do not use combustion, are significantly 
more efficient, meaning they produce more energy from the same amount 
of fuel
    For example, in the ``electricity-only'' mode of operation, IFC's 
PC25 unit achieves approximately 40% efficiency. However, fuel cells 
are generally installed at the point of use, so the waste heat from the 
fuel cell can be used for such things as space heating. This is known 
as co-generation. When used in co-generation applications, the PC25 can 
reach efficiencies as high as 87%.
Fuel Cells for Distributed Generation
    Distributed generation is increasingly being recognized as one way 
to address both the need to reduce the demand on the current electric 
distribution system and to provide assured power at facilities such as 
data centers where uninterruptible power is a requirement.
    As our society increases its reliance on sophisticated computer 
systems, very short power interruptions can have profound economic 
consequences. In 1996 the Electric Power Research Institute reported 
that US businesses lose $29 billion annually from computer failures due 
to power outages and lost productivity.
    Locating distributed generation assets at the point of use also 
eliminates transmission line losses that can run as high as 15%.
    Fuel cells are an excellent distributed power asset because they 
are clean, quiet and small enough to provide power at the point of use. 
For example, two IFC PC25s are located inside the Conde Nast skyscraper 
at Four Times Square in New York City.
    IFC's PC25s are used in a number of installations in this capacity. 
Some examples:

   The Central Park Police Station in New York City uses a PC25 
    to provide all the power for the facility on a ``24-7'' basis 
    completely independent of the grid.

   In Rhode Island, a PC25 system provides power for the South 
        County Hospital. The installation supplies base load electrical 
        and thermal energy to the hospital where it helps ensure clean, 
        reliable power for sensitive medical equipment and systems such 
        as CAT scanners, monitors, analyzers, and laboratory test 
        equipment. If there is a grid outage, the PC25 automatically 
        operates as an independent system, continuing to power critical 
        loads at the hospital. Heat from the installation provides 
        energy for space heating, increasing the fuel cell's overall 
        efficiency.

   The largest commercial fuel cell system in the world is 
        currently operating at a U.S. Postal Service mail-processing 
        center facility in Anchorage, Alaska. The PC25 units operate in 
        parallel to the grid and are owned and operated by the local 
        utility. The fuel cells can either provide power to the U.S. 
        Postal Service or provide power back to the grid. If the grid 
        fails, a near instantaneous switching system automatically 
        disconnects the grid and allows the fuel cells to provide 
        uninterrupted power.

   One of IFC's installations at the First National Bank of 
        Omaha involves four fuel cells as the major component of an 
        integrated assured power system that is meeting customer 
        requirements for 99.9999% reliability.

   A number of schools and colleges in Massachusetts, New York 
        and New Jersey have purchased fuel cells to ensure clean, 
        efficient, and reliable power for data processing and computer 
        operations, provide basic electricity and heating needs as well 
        as use the units as a teaching tool for students. For example, 
        Cape Cod Community College expects its fuel cell to help save 
        the college about $54,000 of the $185,000 in energy costs each 
        year. This fuel cell power plant installation is part of a 
        comprehensive energy savings performance contract agreement 
        being implemented by NORESCO.

    As these examples illustrate, fuel cells are very flexible in 
meeting customers' power requirements for base load, assured power, 
emergency back up and co-generation. In addition, fuel cells are being 
used in grid connected, grid independent and grid parallel 
applications.

Renewable Energy
    Fuel cells are already using renewable energy sources.
    IFC and the US Environmental Protection Agency (EPA) collaborated 
in the early 1990s on a greenhouse gas mitigation program that 
continues to bear fruit today. Initial efforts targeted landfills and 
the development of gas cleanup systems that enable fuel cells to use 
waste methane to generate electricity and resulted in the issuance of 
several patents jointly held by EPA and IFC. These systems avoid the 
use of fossil fuels as the fuel source.
    Follow-on work has focused on anaerobic digester off-gases (ADGs) 
from wastewater treatment facilities. This technology has been 
implemented successfully at PC25 installations in Yonkers, New York; 
Calabasas, California; Boston, Massachusetts; and Portland, Oregon as 
well as Cologne, Germany and Tokyo, Japan.
Residential and Light Commercial Fuel Cell Application
    IFC, along with several other companies, is currently pursuing 
residential and light commercial fuel cell applications for homes and 
businesses using next-generation proton exchange membrane (PEM) fuel 
cell technology.
    IFC is drawing on its experience in commercial programs to develop 
a five-kilowatt PEM fuel cell system suitable for homes and small 
commercial buildings. IFC is teaming up with its sister UTC unit 
Carrier Corp., the world's largest maker of air conditioners, as well 
as Toshiba Corp. of Japan and Buderus Heiztechnik of Germany on this 
effort.
    IFC is currently testing residential power plants and plans to have 
residential fuel cell units commercially available in 2003. Initial 
markets will include off-grid residential (an estimated 150,000 
Americans live off the grid today), telecommunications providers who 
need assured power for cell towers and public buildings such as fire 
stations that required assured power.

Transportation Fuel Cell Applications
    In the transportation arena, IFC is aggressively developing quiet, 
highly efficient ambient-pressure PEM fuel cells and gasoline 
reformation technology for automobiles, heavy-duty trucks and bus 
applications. Fuel reforming technology allows fuel cells to operate on 
pump gasoline.
    IFC is currently working with major automobile manufacturers, 
including BMW and Hyundai and with the U.S. Department of Energy on 
development and demonstration programs for automobiles.
    Last year, for example, IFC replaced the internal combustion engine 
in a Hyundai Santa Fe Sport Utility Vehicle with its zero emission 
Series 300 75-kilowatt hydrogen powered fuel cell. This vehicle was 
featured at the grand opening ceremony of the California Fuel Cell 
Partnership on November 1, 2000. This is the world's first zero 
emission SUV and gets the gasoline equivalent of 50 to 60 miles per 
gallon. Pure water vapor is the only by-product of this fuel cell power 
system. Hyundai and IFC have put two fuel cell powered Santa Fe's into 
driving service in California.
    The IFC vehicle power plant is quiet and efficient. It's unique 
because it uses a near ambient pressure system, which substantially 
increases its efficiency. Other transportation fuel cells require a 
compressor, which is a parasitic drain on the system because it uses 
part of the electricity produced by the fuel cell.
    The IFC system has fewer parts, which translates into lower costs 
for the consumer and is smaller and hence easier to put in a car. To 
date, we have demonstrated the following capabilities with the IFC/
Hyundai Santa Fe fuel cell vehicle:

   Performs with undetectable noise levels;

   Achieves maximum power output of 75 kW and a top speed in 
        excess of 70 mph;

   Fills the vehicle's fuel tank with hydrogen to a pressure of 
        roughly 3,000 psi in less than 3 minutes; and

   No infringement on passenger or cargo space.

    In addition, IFC has also developed fuel cell auxiliary power units 
(APUs) that can power all the electronic components of a car thus 
removing this heavy power demand from the engine. In 1999, BMW 
demonstrated at the Frankfurt Auto Show a Series-7 vehicle featuring a 
5-kilowatt hydrogen IFC fuel cell that powered the onboard electrical 
systems and air conditioning. During the two-week exhibition, we used 
the APU to run the car's lights and radio continuously without the 
engine running.
    For buses, IFC has teamed with Thor Industries, the largest mid-
size bus builder in North America and Irisbus, one of the largest 
European bus manufacturers, to build fuel cell powered zero emission 
transit buses. These prototype vehicles will take to the road this 
year.

Hydrogen Future
    Fuel cells are already beginning to bring forth the clean, 
renewable, hydrogen future.
    Some examples:

   IFC's hydrogen fuel cells have been used in space 
        applications since 1966.

   IFC operated a 200-kilowatt fuel cell unit in Germany 
        running on hydrogen.

   BMW has incorporated a hydrogen fuel cell auxiliary power 
        unit into a Series 700 automobile.

   IFC has installed hydrogen-powered fuel cells into four 
        Hyundai Santa Fe sports utility vehicles.

   IFC is developing hydrogen fuel cell buses with US and 
        European partners.

    Buses and fleet vehicles, since they return to a central location 
each day, are a near term opportunity to create the necessary hydrogen 
infrastructure including production, distribution and storage 
capability.
    Meanwhile, a number of companies are making substantial progress on 
hydrogen production and storage. Ultimately, the vision is to produce 
hydrogen for diverse fuel cell applications through the use of 
renewable energy such as hydroelectric, solar and wind power.

Challenges
    The cost of fuel cells has been one of the greatest impediments to 
their commercial use. However, the costs have been reduced dramatically 
in the past two decades. The space shuttle fuel cells, developed in the 
late 1970s, cost roughly $600,000 per kW. The PC25 commercial 
stationary unit, which was developed in the early 1990, has an 
installed cost today of $4,500 per kilowatt.
    IFC and other fuel cell companies are now developing new fuel cells 
that are smaller, lighter and cheaper to produce. This new technology, 
along with higher production volume, should help reduce the cost of 
fuel cell power plants by two-thirds by 2003, from $4,500 a kilowatt to 
$1,500. The cost of fuel cells will continue to trend down. If we 
achieve the goal of automotive production, the cost may decline to as 
low as $50 per kilowatt.

Government Actions
    There are a number of things the federal government can do to help 
accelerate the commercialization of fuel cell technology. These include 
providing financial incentives, eliminating regulatory barriers, 
funding government purchases and demonstration programs and continuing 
the nation's commitment to hydrogen research and development.

Summary
    Fuel cell technology represents an important component of the 
solution to climate change. This technology is already reducing carbon 
dioxide emissions and using methane as a fuel source. By the end of the 
decade, fuel cells will power homes, cars, trucks, buses and 
businesses. Widespread commercialization of fuel cells and 
establishment of the necessary hydrogen infrastructure will enable a 
wide spectrum of energy applications to eliminate their emissions of 
greenhouse gases without sacrificing our standard of living. Fuel cells 
powered by hydrogen that is produced using renewable energy is the 
long-term vision, and substantial progress has already been made. We 
look forward to working with Members of the Senate Commerce Committee 
and other stakeholders to ensure this vision becomes a reality.
    Thank you, Mr. Chairman.

    
    
    Senator Kerry. Do you have an order you want to proceed in, 
or, Mr. Koetz, why don't you go next, and then we will run down 
the table to Mr. Duffy, Mr. Kammen, Mr. German.

 STATEMENT OF MAUREEN KOETZ, DIRECTOR OF ENVIRONMENTAL POLICY 
             AND PROGRAMS, NUCLEAR ENERGY INSTITUTE

    Ms. Koetz. Thank you, Mr. Chairman, members of the 
Committee. On behalf of NEI's over 270 member companies 
representing a multi-billion-dollar industry operating in 
almost every state in the nation, I am pleased to be here to 
discuss the role of nuclear technology in mitigating the 
potential harmful effects of climate change.
    As the old industrial economy transitions into the new 
digital economy, one thing has remained certain. The backbone 
of sound economic policy is effective energy policy. As 
President Bush pointed out in his speech announcing the new 
national energy policy, our history was built on energy that 
was abundant and affordable and reliable. So, too, will be this 
nation's energy future. NEI agrees, and we are delighted to be 
here among many of the emerging and advanced technologies 
needed for that energy future.
    The challenges of providing abundant, affordable, and 
reliable energy have historically relied on technological 
advancements to secure supplies and avoid and minimize 
environmental degradation. Baseload fission electricity 
production is a successful example of advanced clean energy 
technology that is good for the environment, supplants foreign 
fuel sources, and manages economic risks that can result from 
price or supply fluctuations.
    Nuclear energy was first recognized as an emission control 
technology for both conventional air pollutants and greenhouse 
gases in the 1950's and 1960's. Since then, its dual capability 
to provide secure, reliable baseload supply with minimal 
environmental impact has made nuclear energy the backbone of an 
energy system that is not only abundant, reliable, and 
affordable, but cleaner and more environmentally friendly as 
well.
    As we look to ways to effectively control our greenhouse 
gas emissions, nuclear electricity will once again play a key 
role. In his recent address on climate change, President Bush 
made a critical observation regarding the path forward on 
climate change, and he stated--and I quote--``There are only 
two ways to stabilize concentration of greenhouse gases. One is 
to avoid emitting them in the first place. The other is to try 
to capture them after they are created.''
    Avoiding emissions is our specialty. In the year 2000 
alone, generating with nuclear plants in lieu of baseload 
alternatives avoided 174 million metric tons of carbon-
equivalent emissions. And just to sort of scale that to what 
Mr. Miller just told you in terms of the capability of fuel 
cells, that is actually 1 trillion pounds of CO2. 
Give you something to shoot for.
    Without this critical contribution, the difference between 
current U.S. greenhouse gas emission levels and our 1990 
baseline established in the framework convention on climate 
change would double. And just to give you some idea, too, since 
1973, the total avoided emissions from using nuclear power are 
over 2 billion metric tons of carbon, and again that is 
approaching 6 billion tons of CO2.
    The value of avoiding emissions is not uniquely known and 
understood by U.S. leadership. On the contrary, our trading 
partners and competitors fully intend to take advantage of 
concentrated, large-scale nuclear energy sources to meet their 
objectives for climate change abatement. Japan has announced 
plans to build nuclear plants to meet emission targets. The 
United Kingdom is re-evaluating its nuclear energy program, and 
Finland is planning a new plant for the European Union grid. 
Even Germany, long thought to be on a glide path to nuclear 
phase-out, has effectively postponed any potential plant 
retirements until well after the timeframe to meet its targets 
under the Kyoto protocol.
    In all, the approximately 150 nuclear plants in Western 
Europe will be a key technology used by the EU to meet global 
climate goals without compromising economic growth, and the 
same is true for the Pacific Rim as well as advanced developing 
countries like Brazil and South Africa.
    In sum, as we tackle the issue of climate change, the 
United States cannot afford to lose its leadership in advanced 
nuclear energy. Our designs have been developed to provide even 
greater safety, improve production efficiencies and additional 
cost reductions. We employ members of our communities in high-
paying jobs, contribute to a tax base that pays for education 
and municipal services, and we support other economic 
activities that help grow and improve the standard of living 
for more and more Americans.
    And just to play Ms. Snowe's point about transportation, 
just to give you an idea, the New York City subway uses 1.8 
billion kilowatts of electricity annually. Without large-scale 
baseload generation, those kinds of transportation programs 
that are in and of themselves an emission control program, 
cannot run.
    Right now many nuclear plants in the United States make 
electricity for little more than a penny a kilowatt, and that 
includes the costs of eliminating greenhouse gases and other 
conventional pollutants. As we recognize our responsibilities 
to the world community to support sustainable economic 
development, our investment in nuclear technologies continues 
to pay dividends. For example, using uranium for electricity in 
the developed world slows the depletion of limited global 
energy resources that are needed in developing countries.
    Emission-free baseload electricity will continue to be the 
backbone of our energy and environmental policies, Mr. 
Chairman, supporting our sustained economic growth and 
protecting resources for future generations. The nuclear 
industry looks forward to working with you and all the parties 
engaged in climate change, so that we can use the best of our 
technology wisely and well to mitigate greenhouse gas emissions 
without undermining the American way of life.
    I thank you, and I would be happy to answer your questions.
    Senator Kerry. Thank you very much. Am I pronouncing your 
name correctly?
    Ms. Koetz. Koetz, sir.
    Senator Kerry. Koetz. I was correct then. Good. Thank you.
    [The prepared statement of Ms. Koetz follows:]

 Prepared Statement of Maureen Koetz, Director of Environmental Policy 
                 and Programs, Nuclear Energy Institute

    Mr. Chairman, ranking members, and distinguished members of the 
Committee, I am Maureen Koetz, director of environmental policy and 
programs for the Nuclear Energy Institute (NEI). As with other air 
quality issues we have faced, the potential for climate change is 
challenging our ingenuity and our markets to devise, enhance and 
support technologies that avoid or mitigate man-made emissions of 
greenhouse gases. Foremost among these is a robust, safe nuclear energy 
industry, able to prevent these emissions while preserving the 
affordable electricity system that is the foundation for America's 
commercial success and future economic growth.
    On behalf of its more than 270 members, NEI acknowledges and 
appreciates congressional support for the industry, which has helped 
bring nuclear energy to the renaissance we see today. In developing 
public policy for the nuclear industry, NEI represents a broad spectrum 
of interests from every U.S. utility that operates a nuclear power 
plant, nuclear fuel cycle companies, suppliers, engineering and 
consulting firms, national research laboratories, manufacturers of 
radiopharmaceuticals, universities, labor unions and law firms. The 
jobs, tax base and economic value the industry represents comprise a 
vital segment of our energy infrastructure, as well as American 
communities and families whose welfare and well-being derive from the 
construction, maintenance and operation of this nation's commercial 
nuclear power plants.
    I am pleased to testify before this Committee regarding the role of 
our country's 103 nuclear electric generating units in protecting the 
environment from many potential adverse effects--including climate 
change--while providing 20 percent of our nation's electricity. The 
unique ability of nuclear-generated electricity to provide both energy 
security and protect the environment makes it one of the most important 
risk management tools available to minimize the adverse economic and 
environmental impacts from foreign fuel supply limitations and 
disruptions, energy price fluctuations, or environmental dispatch 
limits that can threaten U.S. growth and prosperity.
    The growing importance of an adequate climate change response is 
causing energy supply and emission control issues to again converge as 
they did in the 1960s and 1970s. Effective climate change action will 
require a comprehensive energy policy that uses all forms of energy, 
particularly electricity generation, to their full potential and 
advantage. The national energy policy formulated by President Bush 
provides a positive framework to accomplish this goal by supporting the 
expansion of emission-free technologies--including nuclear 
electricity--to ensure adequate electricity supplies while mitigating 
the potential for climate change. Additionally, Sens. Bingaman and 
Murkowski this year have sponsored separate comprehensive energy bills 
that call for an expanded nuclear energy industry. Sen. Domenici has 
sponsored stand-alone legislation intended not merely to protect 
nuclear energy's vital role in our nation's energy portfolio, but to 
ensure that role continues to grow to help meet the nation's increasing 
electricity demand--and doing so while avoiding the emission of harmful 
greenhouse gases.
Emission Avoidance: A Key Policy Tool
    In his recent address on climate change, President Bush made a 
critical observation regarding the path forward on climate change, 
stating: ``There are only two ways to stabilize concentration of 
greenhouse gases. One is to avoid emitting them in the first place; the 
other is to try to capture them after they're created.'' This framework 
builds on our historical success with combining pollution avoidance and 
end-of-the-pipe controls in addressing other potentially harmful air 
emissions from power generation.
    As early as 1969, the Department of the Interior listed increased 
use of nuclear energy as one of 11 methods to control sulfur dioxide 
emissions. Since then, the advent of nuclear energy has been a major 
component of achieving domestic air quality goals. For example, from 
1975 to 1990, making electricity in nuclear plants instead of fossil-
fueled alternatives avoided more tons of nitrogen oxide than were 
eliminated through controls under the Clean Air Act. In 2000 alone, 
nuclear plants avoided more than 4 million tons of sulfur dioxide, 
nearly 2 million tons of nitrogen oxides, and 174 million metric tons 
of carbon equivalent. In the absence of current nuclear production, the 
difference between current U.S. greenhouse gas emission levels and our 
1990 baseline established in the Framework Convention on Climate Change 
would double.
    As the president correctly points out, future efforts to control 
greenhouse gases will require our continued investment in emission-free 
technologies of all kinds, but particularly nuclear plants because of 
their sizable electric output, minimal environmental impact and siting 
capability near load demand. To fully understand the vital role of 
emission avoidance, one need only look at the success of voluntary 
emission reduction programs to date. With approximately half the units 
reporting so far, nuclear plants are the single largest contributor to 
voluntary greenhouse gas emission reductions (40 percent of the 
program) under the Department of Energy's 1605(b) program (established 
under the 1992 Energy Policy Act).

Growth Through Efficiency and Safety
    In the face of public opposition to alternative fossil options that 
would have increased air pollution, construction of the first 
commercial nuclear reactor began at Shippingport, Pa., near Pittsburgh, 
in 1955. Since that first plant, nuclear energy has evolved into a 
reliable, affordable and essential baseload electricity technology with 
an unparalleled safety record.
    In 2000, nuclear plants generated a record 754 billion kilowatt-
hours of electricity, 25 billion kilowatt-hours more than the previous 
year and 178 billion kilowatt-hours more than in 1990. Last year's 
record performance capped the best decade in the industry's history. 
The average production cost of electricity generated by nuclear power 
plants during 1999 was 1.83 cents per kilowatt-hour, the lowest of all 
fuel sources. And improved production was matched with ever-improving 
safety.
    The dramatic increase in electricity generation by America's 
nuclear plants is also one of the most successful energy efficiency 
programs of the past decade. Output increases are equivalent to adding 
22, 1000-megawatt power plants to our nation's electricity grid, 
without the environmental disruptions and impacts that would have 
occurred if new facilities had been brought on line to meet these 
needs. Although the lack of new nuclear construction since the 1980s 
often is identified as a sign of industry stagnation, in fact, the more 
efficient operation of existing nuclear electric generating facilities 
has been an environmentally beneficial alternative for making 
additional electricity.
    Plant uprates, improved maintenance, reduced outage times and 
safety improvements will continue to provide higher operating 
efficiency and additional electricity output from existing power 
plants. But these increases are finite, limited to the maximum capacity 
of each reactor. To meet future demands of an electricity-hungry 
digital economy--especially if carbon mitigation efforts limit some 
options--some electric companies are beginning to examine the market 
for new nuclear plants. Advances in renewable generation, distributed 
sources such as fuel cells, and continued conservation will all improve 
our competitive energy/environmental position. But these advances will 
not displace the continued need for baseload sources as part of 
providing secure energy supplies that meet the 99.9999 percent 
reliability rating needed in the future.
    In addition, bulk users will continue to need bulk electricity 
supply that mitigates environmental impact, a product these alternative 
sources may not be able to provide. For example, the New York City 
subway uses 1.8 billion kilowatt-hours of electricity annually. Mass 
transit is necessary to mitigate air quality impacts, including 
increased greenhouse gas emissions, from carbon-based mobile sources. 
Other environmental protection systems, such as wastewater treatment 
and water purification, also require bulk electricity to serve the 
large, urban populations where 80 percent of Americans now live--not to 
mention to help meet electrical demands of a concentrated population. 
Continued use and expansion of nuclear electricity works in tandem with 
other advanced technologies to meet the range of market needs for 
energy that can also avoid or mitigate impacts such as global warming.

An Unrivaled Waste Management Record
    Nuclear energy facilities, like other electricity sources, have 
waste streams and byproducts that must be managed safely. The 
environmental policies and practices at nuclear energy plants are 
unique in having avoided or prevented significant harmful impacts on 
the environment since the start of the commercial nuclear industry more 
than 40 years ago. Effective waste avoidance, minimization and 
management practices have successfully prevented or mitigated adverse 
impacts on water, land, habitat, species and air from releases or 
emissions in the production of nuclear electricity, some of which have 
already been discussed in detail above. Throughout the nuclear 
electricity production process, the small volumes of waste byproducts 
actually created are treated and released, or carefully contained, 
packaged and safely stored.
    The safe handling and storage of used nuclear fuel is one of the 
most successful solid waste management programs in the industrial 
sector. Used fuel rods are stored in contained, steel-lined pools or in 
robust stainless steel containers at limited-access reactor sites.
    As a result of improved process efficiencies, the average volume of 
waste generated at nuclear energy plants has decreased significantly in 
the past two decades. The high-level radioactive material in used fuel 
rods totals less than 20 metric tons per nuclear plant each year. The 
trillions of kilowatt-hours of nuclear electricity generated over more 
than 40 years have produced about 38,000 metric tons of used fuel rods. 
These rods, if stacked together, would fill a football field to a depth 
of a little more than four yards. Although this is an astonishingly 
small residual volume of used fuel from the production of all of the 
nation's nuclear electricity over the past 40 years, and although it is 
fully accounted for and very safely separated from the environment, its 
removal to a central repository has caused considerable angst. It is 
helpful to keep this very small disposal issue in perspective. For each 
one ton of this used fuel, 345,000 metric tons of greenhouse gas, 
dispersed to the atmosphere, were avoided. Surely, seen in this light, 
the completion of Congress' resolve for the disposal of used fuel 
enacted in 1982 is clearly in the nation's environmental interest and 
will encourage expanded use of nuclear energy.
    Although U.S. policy originally envisioned recycling reactor fuel 
to separate out small volumes of waste and reuse the remaining fuel, 
prior administrations chose instead to dispose of the fuel after only 
one use in a deep geologic repository, leading to the site 
characterization project at Yucca Mountain. Research continues to 
develop improved processes for recycling used fuel--a policy option 
that will provide strategic fuel reserves that can increase the future 
contribution of nuclear electricity to sustainable development--but it 
is imperative that the United States keep its program for a federal 
repository program on track toward a presidential decision in 2001. The 
Yucca Mountain program is key to effective climate policy for two 
reasons. First, cost-effective operation of nuclear plants requires a 
centralized, permanent site to continue the environmentally preferable 
practice of isolated storage for used fuel. Second, nations around the 
world will use emission-free electricity from nuclear plants as part of 
their climate change mitigation strategies. As the world leader in 
nuclear technology, the United States must also be the world leader in 
effective, long-term management of used fuel.

The Future
    U.S. electricity demand grew by 2.2 percent a year on average 
during the 1990s and by 2.6 percent in 2000. Even if demand grows by a 
modest 1.8 percent annually over the next two decades, the nation will 
need nearly 400,000 megawatts of new electric generating capacity, 
according to the U.S. Energy Information Administration. That figure 
takes into account replacement of retired capacity. This capacity is 
the equivalent of building about 800 new mid-size (500-megawatt) power 
plants in the next 20 years, which amounts to roughly 40 plants per 
year.
    Currently, more than one-third of U.S. electricity production is 
from emission-free sources. In order simply to maintain that 
percentage--and the contribution to air quality and greenhouse gas 
abatement it represents--the current nuclear fleet must increase by 50 
percent. To meet that challenge, the nuclear industry has established a 
goal of 50,000 megawatts of new nuclear power plant construction by the 
year 2020.
    Meeting this goal will require effective energy policies that 
promote adequate supply, a balanced fuel portfolio, and the advancement 
of clean technologies. We believe those policies should include the 
following actions:

 Preserve U.S. Global Leadership in Nuclear Science and 
        Technology Through Adequate R&D Funding
    The President's Council of Advisors on Science and Technology 
(PCAST) has said that the government is not doing all it can in nuclear 
energy research and development. The reason, said the council, is that 
``the public has been lulled into a sense of complacency by a 
combination of low energy prices and little sense of the connection 
between energy and the larger economic, environmental and security 
issues that people do care very much about.''\1\ In its 1999 report, 
PCAST noted that its recommendation for nuclear R&D funding by the year 
2003 ($120 million) would merely return the U.S. level of effort to 
that of 1995.\2\
---------------------------------------------------------------------------
    \1\ Federal Energy Research and Development for the Challenges of 
the 21st Century, Report of the Energy Research and Development Panel 
of the President's Council of Advisors on Science and Technology, Page 
ES-31, November 1997.
    \2\ November 1997 PCAST Report, Page ES-5.
---------------------------------------------------------------------------
    The Nuclear Energy Research Initiative (NERI) and Nuclear Energy 
Plant Optimization (NEPO) research programs should be funded at levels 
double the administration's 2001 budget request. These programs are 
designed to produce generic improvements that reduce capital and 
operating costs for both current reactors and advanced reactor designs 
available for new nuclear plant construction. Funding also is important 
for the Energy Department's University Support Program, which helps 
maintain research reactors and enhances educational programs in nuclear 
science and technology at our nation's colleges and universities, 
thereby encouraging a steady stream of new entrants into the nuclear 
industry workforce.
    In comparison to other electricity-generating sources, nuclear 
energy unequivocally is the most economical federal research and 
development investment. In 2000, the federal government spent six cents 
on nuclear energy R&D for every megawatt-hour ($.06/MWh) of electricity 
generated at nuclear power plants. By comparison, solar photovoltaics 
received more than 1,300 times that amount per megawatt-hour ($81.79/
MWh). Obtaining a fair share of R&D funding is essential for the 
expanded use of nuclear energy.
 Level the Electricity Competition Playing Field
    In recent years, state and federal initiatives have accelerated the 
transition to a competitive electricity market. As companies prepare to 
do business in this new market, the unbundling of their products and 
services will require a re-examination of costs and allocation of value 
to activities that previously were not valued. Congress can enact 
several legislative initiatives that remove unnecessary impediments to 
nuclear power and pave the way for sensible, market-based business 
decisions that will preserve and extend the operation of today's 
nuclear power plants.
    First, Congress should eliminate unnecessary requirements that may 
prevent effective ownership transactions in a competitive market. 
Consolidated ownership of nuclear plants allows for economies of scale 
in operations, maintenance, outage planning and administration. These 
transactions can further improve safety because ownership and operating 
responsibility will be consolidated in the hands of large companies 
with the financial and management resources to operate the plant at the 
highest possible levels of safety and reliability. Resulting cost 
savings encourage continued plant operation by reducing the operating 
costs of plants when operated as part of a larger nuclear organization. 
Policy changes are important to remove potential barriers to permitting 
otherwise economical plant consolidations, including revision of 
Section 468A of the Internal Revenue Code, which addresses the tax 
treatment of nuclear decommissioning trust funds.
    In addition, public policy incentives to encourage carbon abatement 
or avoidance technologies must be equally applied, whether they are 
production and/or investment tax credits to address climate change, 
access to market-based pollution control mechanisms, or access to 
favorable financing and other funding mechanisms. The importance of 
nuclear energy to clean air and carbon abatement is one of the 
previously unvalued services that must be recognized to prevent 
competitive disadvantage and position nuclear power plants to continue 
their crucial environmental contribution.
    Any plausible strategy to mitigate greenhouse gas emissions will 
require an expanded use of nuclear energy in the United States and 
around the world. Equal treatment in these market and incentive 
programs will allow new nuclear plants to effectively compete with 
alternative forms of generation, extending nuclear energy's unique 
ability to provide energy security and environmental protection.
 Assure Adequate Funding for the Repository Program at Yucca 
        Mountain
    Since 1983, consumers of nuclear-generated electricity have paid 
one-tenth of a cent per kilowatt-hour into the Nuclear Waste Fund--a 
fund solely intended to finance the federal government's used fuel 
management program. The fund, which has collected about $17 billion, 
has a balance of about $10 billion--and it's growing at about a $1 
billion a year. Still, obtaining appropriations from the fund for the 
Yucca Mountain project between now and 2010--the year it is estimated 
the facility would be ready for operation--could be significantly 
challenging because of budgetary rules. The fund initially was intended 
as an off-budget account, but subsequent congressional laws introduced 
appropriations caps and other budgetary restrictions. The result has 
been a perennial failure by Congress to appropriate enough money from 
the Nuclear Waste Fund to meet the Energy Department's annual budget 
request, undercutting the Yucca Mountain project.
    DOE has requested $445 million for fiscal year 2002 work on the 
Yucca Mountain project. The House of Representatives endorsed the 
recommendation of its Appropriations Committee, approving $443 million. 
We encourage the members of this Committee and the Senate to do the 
same, facilitating the opening of the Yucca Mountain repository in 
2010.
 Extend Self-Insurance Pooling Under the Price-Anderson Act
    The public has $9.5 billion of insurance protection in the event of 
a nuclear reactor accident. The nuclear reactor operators--not the 
public or the federal government--pay for this insurance. This utility 
self-insurance pool was first established in 1957, when Congress passed 
the Price-Anderson Act. The act provides an umbrella of no-fault 
insurance protection for the public and ensures that money will be 
immediately available to pay liability claims that could result from a 
major nuclear accident. Price-Anderson most recently was amended in 
1988, and the deadline for reauthorization is 2002.
    In a 1998 report to Congress, the NRC recommended that the act be 
extended for an additional 10 years. DOE also has recommended that 
Congress approve an extension of the Price-Anderson law. Both agencies 
recommended reauthorization with minimal change. The nuclear industry 
strongly supports the reauthorization of the Price-Anderson Act for an 
indefinite period.

Conclusion
    One of the most prominent environmental protection advancements in 
the industrial sector has been the increased reliance on domestically 
available nuclear energy to power our fast-growing digital economy 
while improving air quality. The United States leads the world in the 
development and application of nuclear technology. The economic value 
of this export market is substantial, bringing high-paying jobs and 
revenues to many areas around the country that participate in nuclear 
power production.
    Congress should not lose sight of this important energy security 
and clean air resource, and policymakers should employ a strategy that 
maximizes nuclear energy's potential to power our economy and address 
climate change. Working together for national security and public 
sector needs, the nuclear energy industry and the federal government 
can ensure that emission-free electricity will continue to help meet 
our nation's public policy goals regarding energy production and 
environmental protection for workers, consumers, businesses, and urban 
dwellers looking to protect their quality of life and their 
environment.
    Thank you for giving me this opportunity to share the industry's 
perspective on climate change and technological development issues the 
Committee is focusing on at this hearing.




    Senator Kerry. Mr. Duffy.

  STATEMENT OF DENNIS J. DUFFY, VICE PRESIDENT OF REGULATORY 
                AFFAIRS, ENERGY MANAGEMENT, INC.

    Mr. Duffy. Thank you. I appreciate this opportunity to 
address the Committee regarding the role of wind energy in 
establishing a balanced environmental and energy policy.
    My name is Dennis Duffy, vice president of regulatory 
affairs for Energy Management, Inc., or EMI. EMI is a privately 
held company with 25 years of experience in the energy 
business. As our name implies, our original business was 
advising industrial energy users as to the conservation and 
optimal use of their energy resources. We subsequently focused 
on the development and operation of major electrical generation 
facilities, and over the past decade, raised a billion dollars 
in project capital, and developed, owned, and operated some of 
the most efficient gas-fired combined cycle plants in the 
United States.
    As of the end of last year, however, EMI sold all of its 
fossil-fueled units and is now focusing exclusively upon the 
development of wind energy facilities. As indicated by this 
shift in our energy market segment and the associated 
commitment of our own capital, we are confident that wind 
energy technology has now advanced to the point where it is 
proven reliable and can play a much more meaningful role in our 
national environmental and energy policy.
    As an initial matter, the environmental benefits of wind 
generation are striking. As the Committee is no doubt aware, 
the combustion of fossil fuels for the production of 
electricity is one of the most important factors affecting air 
quality throughout the nation. While fossil fuels will 
certainly remain a large portion of our national energy 
portfolio, the important point is that, as of today, renewable 
technologies have developed to the point where much more 
substantial portions of our energy needs can be met without the 
combustion of fossil fuels.
    By way of example, we are currently developing an 
approximately 400-megawatt wind generation facility located off 
Massachusetts that would each year offset the combustion of 
either 85 million gallons of oil or 500,000 tons of coal that 
would be required to produce an equivalent amount of 
electricity utilizing traditional combustion technologies. 
Further, today's wind projects can be designed and sited in a 
manner that is environmentally sensitive and compatible with 
existing land and marine uses.
    An important point here is that wind generation is often a 
nonexclusive land use, so, for example, wind units can often be 
located on operating farms and ranches without disturbing the 
current operation, so farmers can go ahead, continue their 
operation, but do so with an incremental revenue stream which 
really has no adverse effect on their operations.
    Wind energy also furthers the important energy policy 
objective of diversification of supply and reduce dependence on 
imported fuel. Diversification of supply is important to both 
maintaining price stability and to get to the continued 
reliability of electrical service. As experience over the last 
year has taught us all, electricity prices are directly linked 
to the often volatile and unregulated pricing of fossil fuels. 
In this regard, the addition of substantial amounts of wind-
generated electricity to supply portfolios would provide a 
valuable hedge against fuel price spikes and effectively 
mitigate the volatility of the energy markets.
    Further, the current state of regulatory affairs has 
induced the overwhelming majority of new plants constructed to 
utilize a single fuel, natural gas, a growing dependence, which 
has caused some market managers serious reliability concerns.
    Additional wind units would also cause consumers in 
deregulated power market pools to see substantial reductions in 
their overall power cost, a point which is often not--
misapprehended. All sellers in these deregulated pools are paid 
the same clearing price, which reflects the marginal, primarily 
fuel, cost of the last generating unit dispatched in any given 
hour. Each pool prioritizes and dispatches its generating units 
in economic merit order for the lowest to highest marginal cost 
bids, until sufficient units are dispatched to meet overall 
customer demand, and with the last and most expensive unit 
dispatched, setting the clearing price for the entire pool.
    The key point is that because wind units have a marginal 
cost of close to zero, they will displace higher marginal cost 
units that might have otherwise set the clearing price and 
thereby placed downward pressure on pool clearing prices in 
every hour of every day. Because the resulting reductions in 
clearing prices are then applied to the entire volume of 
electricity traded in the spot market of the pool, there is a 
multiplier savings effect so that the cost of supporting wind 
industry development results in far greater cost savings to the 
consuming public.
    The bottom line is that in deregulated power pools where 
the clearing prices are driven by marginal costs, you can spend 
more to support wind energy and still substantially reduce the 
overall power costs to the public.
    Obviously the degree to which wind energy can be relied 
upon to further the foregoing policies depends on the 
performance of the underlying technology. In this regard, 
reference to the worldwide growth of wind energy confirms that 
the technology has advanced to the point where it is not only 
proven reliable but also a leading source of new generation in 
the global market. The American Wind Energy Association 
recently summarized as follows: ``Total worldwide wind capacity 
today is approximately 17,000 megawatts. Wind energy was the 
world's fastest growing energy source during most of the 
1990's, expanding at annual rates ranging from 25 to 35 
percent. In the year 2000, about 3,500 megawatts of new wind 
capacity, close to a $4 billion investment, was installed 
around the world.''
    Although the technology has been proven in the field, I 
think it is important and I will close briefly to note that the 
technology is still a developing technology in this country and 
is still needing various market and regulatory supports, most 
important being the extension of the production tax credit. 
Now, I know--there seems to be bipartisan support for the 
extension. It is critical from our perspective that that 
extension be for a period of not less than 5 years.
    What is driving that is that there is such a demand for 
wind turbines throughout the world, the manufacturers are hard-
pressed to assure delivery within the 3-year window, so it is a 
good technology. It is proven in the field. It is reliable, but 
we still need the economic incentives, and most importantly the 
production tax credit.
    Thank you. I am available for questions.
    Senator Kerry. Mr. Duffy, thank you very, very much.
    [The prepared statement of Mr. Duffy follows:]

  Prepared Statement of Dennis J. Duffy, Vice President of Regulatory 
                    Affairs, Energy Management, Inc.

1. Introduction
    I appreciate this opportunity to address the Senate Commerce 
Committee regarding the role of wind energy in establishing balanced 
environmental and energy policy. I am Dennis J. Duffy, Vice President 
of Regulatory Affairs of Energy Management, Inc. (``EMI''). EMI is a 
privately-held company with twenty-five years of experience in the 
energy business. As our name implies, our original business was 
advising industrial energy users as to the conservation and optimal use 
of energy resources. We subsequently focused on the development and 
operation of major electrical generation facilities and, over the past 
decade, raised $1 billion in project capital and developed some of the 
most efficient gas-fired plants operating in the United States. As of 
December of 2000, however, EMI has sold all of its fossil-fueled units 
and is now focusing exclusively upon wind energy development. As 
indicated by this shift in energy market segment (and the associated 
commitment of our capital), we are confident that wind energy 
technology has now advanced to the point where it is proven and 
reliable and can play a much more meaningful role in our national 
environmental and energy policy.

2. Benefits of Wind Energy
  A. Environmental Benefits
    As an initial matter, the environmental benefits of wind generation 
are striking. As the Committee is no doubt aware, the combustion of 
fossil fuels for the production of electricity is one of the most 
important factors affecting air quality throughout the nation. While 
fossil fuels will certainly remain an integral part of our national 
energy portfolio, the important point is that, as of today, renewable 
technologies have developed to the point where substantial portions of 
our energy needs can be met without the combustion of fossil fuels or 
the environmental issues associated with nuclear power. By way of 
example, we are currently developing an approximately 400 megawatt wind 
facility to be located five miles off the coast of Massachusetts that 
would each year offset the combustion of (i) 85,000,000 gallons of oil 
or (ii) 500,000 tons of coal that would be required to produce an 
equivalent amount of electricity utilizing traditional technologies. 
Further, today's wind projects can be designed and sited in a manner 
that is environmentally sensitive and compatible with existing land and 
marine uses.

  B. Diversification Benefits
    Wind energy also furthers the important energy policy objectives of 
diversification of supply and reduced dependence upon imported fuel. 
Diversification of supply is important to both maintaining price 
stability and to the continued reliability of electrical service. As 
experiences over the last year have taught us, electricity prices are 
directly linked to the often volatile and unregulated pricing of fossil 
fuels. In this regard, the addition of substantial amounts of wind-
generated electricity to supply portfolios would provide a valuable 
hedge against fuel price spikes and effectively mitigate the volatility 
of the energy markets. Further, the current state of regulatory affairs 
has induced the overwhelming majority of new plant construction to 
utilize a single fuel--natural gas, a growing dependence which has 
caused market managers serious concern.\1\ The inclusion of significant 
portions of wind generation in future supply portfolios mitigates these 
reliability concerns, while at the same time mitigating electric price 
volatility.
---------------------------------------------------------------------------
    \1\ For example, the Independent System Operator of New England 
(``ISO-NE'') released a report earlier this year noting its serious 
concern over this potential over-reliance upon a single source of fuel 
whose deliverability has not been fully assured.
---------------------------------------------------------------------------
  C. Overall Consumer Cost Savings
    Additional wind units would also cause consumers in deregulated 
power pools to see substantial reductions in their overall power costs. 
All sellers into these pools are paid the same ``clearing price'' 
reflecting the marginal (i.e., primarily fuel) cost of the last 
generating unit dispatched in any given hour. Each pool prioritizes and 
dispatches its generating units in ``economic merit'' order, from the 
lowest to highest marginal cost bids, until sufficient units are 
dispatched to meet customer demand, with the last/most expensive unit 
dispatched setting the clearing price for the entire pool. The key 
point is that because wind units have a marginal cost of zero, they 
will displace higher marginal cost units from the economic dispatch and 
thereby place downward pressure on pool clearing prices in every hour 
of every day. Because the resulting reductions in clearing prices are 
then applied to the entire volume of electricity trading in the pool, 
there is a multiplier savings effect, so that costs of supporting wind 
industry development result in far greater cost savings to the 
consuming public. The bottom line is that, in deregulated power pools, 
you can spend more for wind energy and still substantially reduce 
overall power costs to the public.

3. The Proven Performance of Today's Wind Technology
    Obviously, the degree to which wind energy may be relied upon to 
further the foregoing policy objectives depends upon the performance of 
the underlying technology. In this regard, reference to the world-wide 
growth of wind energy confirms that the technology has advanced to the 
point where it is not only proven and reliable, but also a leading 
source of new generation in the global market. The American Wind Energy 
Association (``AWEA'') recently summarized the global acceptance and 
implementation of wind power in the following matter:

        Total worldwide wind capacity today is approximately 17,000 mw, 
        enough to generate about 34 billion kilowatt-hours of 
        electricity each year. This is about the same amount of 
        electricity as 5 million average California households 
        (containing 12.5 million people) use. Wind energy was the 
        world's fastest-growing energy source during most of the 
        1990's, expanding at annual rates ranging from 25% to 35%. In 
        2000, about 3,500 mw of new wind capacity (close to a $4 
        billion investment) was installed around the world, but only 53 
        mw of that total, or little more than 1% was installed in the 
        U.S.

This world-wide growth in wind power is shown in graphic form on 
Attachments 1 and 2 hereto. Also notable is the marked trend in the 
European markets towards offshore wind facilities, of which more than 
3,000 mw are now under development, as indicated on Attachments 3 and 
4, with a representative project shown in Attachment 5.
    This international growth in wind generation provides a practical 
validation of today's wind turbine technology. Indeed, Denmark now 
obtains approximately 20% of its power from wind resources and northern 
portions of Germany have achieved even higher concentrations. 
Importantly, the European experience has also demonstrated that utility 
systems can operate in a safe and reliable manner with concentrations 
of wind resources far in excess than those now existing in the United 
States. With respect to the potential for wind energy in the United 
States, AWEA has stated as follows:

        The leading [US] states in terms of installed wind capacity are 
        California (1,646 mw), Minnesota (272 mw), Iowa (242 mw) and 
        Texas (188 mw). US wind potential is enormous--many times the 
        amount installed. California's potential, for example, is 
        conservatively estimated at 5,000 mw of wind capacity. Other 
        western states have much larger potential--e.g., Wyoming has 
        more than ten times California's. The U.S. is, quite literally, 
        a ``Saudi Arabia of wind,'' with vast resources throughout the 
        Plain States.
                              *    *    *
        AWEA expects as much as 2,000 mw of new wind capacity to be 
        installed in the U.S. this year.

4. Policy Issues for Wind Energy
    Notwithstanding the proven performance of wind technology, further 
inroads into the U.S. market still require a degree of market and 
regulatory support. Most important is the extension of the Production 
Tax Credit (``PTC''), which currently provides an income tax credit for 
the production of electricity from qualified wind energy facilities. 
While I am happy to note that there is bipartisan support for an 
extension of the PTC, some proposals would provide only a three year 
extension, whereas others propose a five year extension. It is 
extremely important to the wind industry that the PTC extension be for 
a period of not less than five years. The global demand for new wind 
turbines has created substantial doubt as to the ability of 
manufacturers to produce, deliver and install new units within a three-
year window. Thus, a PTC extension of at least five years is necessary 
in order to accommodate limited production capabilities.
    Another policy initiative important to the growth of the wind 
industry in the U.S. market are Renewables Portfolios Standards 
(``RPSs''), a ``minimum content requirement'' specifying that a certain 
percentage of electric supply portfolios must be obtained from 
renewable energy resources (wind, solar, and others), either through 
direct purchase of electricity or the indirect purchase of ``green 
credits'' or certificates. Several states have included such RPS 
requirements as part of their electric utility restructuring 
legislation. Texas, for example, has set a RPS requirement of 2,000 mw 
of new renewable energy generation by the year 2009, and one-half of 
such amount (1,000 mw) will be met by wind generation that will be in 
service by the end of this year. Massachusetts similarly included an 
RPS requirement in its electric restructuring legislation, which 
requires that 10% of all retail supply portfolios be supplied from 
renewable resources by 2010. We believe that such requirements are a 
sound policy tool to ensure that the public benefits of renewable power 
are not frustrated by the established order in the electric industry, 
and would strongly support initiatives for a RPS requirement as a 
matter of Federal policy.
    Finally, we believe that it is important to encourage utilities to 
consider long-term purchases of renewable energy as part of their 
overall portfolio planning. While some restructuring plans encouraged 
utilities to rely primarily or exclusively upon short-term purchases, 
experience has shown the undue volatility that can result. Further, 
long-term pricing more fully recognizes the competitive value of wind 
energy and its ability to provide an economic hedge against market 
volatility through pricing that can remain fixed irrespective of fuel 
prices.

5. Conclusion
    In closing, I wish to reinforce our conclusion, based upon our 
experience in the energy business and of the current state of 
technology, that wind energy is a proven and reliable option that can 
play a much greater role in the nation's environmental and energy 
policies. While the environmental benefits of clean and renewable 
generation are obvious, wind energy would have the additional benefits 
of (i) reducing overall customer costs, (ii) mitigating fuel-driven 
price spikes and (iii) improving system reliability through 
diversification of supply and reduced reliance upon imported fuels. 
Although wind technology has been validated in the global arena, it 
remains a developing industry in the U.S. which requires both market 
and regulatory support in order to make the inroads into the 
established market that would further the national interests of 
environmental and energy policy.
    Thank you.
                                                       Attachment 1

                                           World Growth of Wind Power
----------------------------------------------------------------------------------------------------------------
                                                          Wind Power \1\             All electricity
                                                       ------------------- Annual      Generation
                                                                                      Capacity \2\       Annual
                    Generation Year                     Capacity   Energy  Growth --------------------  Growth %
                                                            GW      TWh     %  of  Capacity   Energy     of TWh
                                                                             TWh       GW       TWh
----------------------------------------------------------------------------------------------------------------
1996                                                        6.07    12.23  --      (3,159)   (13,613)  (IEA '00)
----------------------------------------------------------------------------------------------------------------
1997                                                        7.64    15.39  25.8%     3,221    13,949       2.8%
----------------------------------------------------------------------------------------------------------------
1998                                                       10.15    21.25  38.1%     3,298    14,340       2.8%
----------------------------------------------------------------------------------------------------------------
1999                                                       13.93    28.18  32.6%     3,377    14,741       2.8%
----------------------------------------------------------------------------------------------------------------
2000                                                       18.43    37.30  32.0%     3,458    15,153       2.8%
----------------------------------------------------------------------------------------------------------------
2010                                                      145.0    355.68            4,386    19,989
----------------------------------------------------------------------------------------------------------------
Average Annual growth 1996 through 2000                                    27.2%                           2.8%
----------------------------------------------------------------------------------------------------------------
Source: BTM Consult ApS--March 2001.
\1\ World Market Update, BTM-C (Chapter 2 & 4); 2) IEA World Energy Outlook 2000--General Projection.


                                                       Attachment 2

                        World Share of Wind Power
------------------------------------------------------------------------
                                                Electricity      Wind
                                  Electricity    form all      Power's
                                    gen. by        gen.        share of
  Generation  Technology Year:     Wind Power  Technologies   the worlds
                                  (BTM-C) TWh   (inc. Wind)  Electricity
                                                  IEA TWh     Generation
------------------------------------------------------------------------
1996                                  12.23       13,613         0.08%
------------------------------------------------------------------------
1997                                  15.39       13,949         0.11%
------------------------------------------------------------------------
1998                                  21.25       14,340         0.15%
------------------------------------------------------------------------
1999                                  28.18       14,741         0.19%
------------------------------------------------------------------------
2000                                  37.30       15,153         0.25%
------------------------------------------------------------------------
2010 (est.)                         355.68        19,989         1.78%
------------------------------------------------------------------------
Source: BTM Consult ApS--March 2001: World Figures: IEA World Energy
  Outlook 2000.


                                                  Attachment 3
                                            World Share of Wind Power
----------------------------------------------------------------------------------------------------------------
                                               Identified offshore Wind Power Projects in Europe by country MW--
Country of location: Identification                             capacity planned to be installed
         of projects/sites:            Year:  ------------------------------------------------------------------
                                               Belgium  Denmark  Germany  Ireland  Netherlands   Sweden     UK
----------------------------------------------------------------------------------------------------------------
Stengrunden (SE)                        2001                                                      10
----------------------------------------------------------------------------------------------------------------
Horns Rev (DK)                          2002             160
----------------------------------------------------------------------------------------------------------------
Hakefjorden (SE)                        2002                                                      44
----------------------------------------------------------------------------------------------------------------
Klasfjorden (SE)                        2002                                                      42
----------------------------------------------------------------------------------------------------------------
Rostock (GE)                            2002                       60
----------------------------------------------------------------------------------------------------------------
Rodsand (DK)                            2003             150
----------------------------------------------------------------------------------------------------------------
Laeso (DK)                              2003             150
----------------------------------------------------------------------------------------------------------------
Lillgrund (SE)                          2003                                                      72
----------------------------------------------------------------------------------------------------------------
Gros. Vogels. GEO (GE)                  2003                       80
----------------------------------------------------------------------------------------------------------------
Lubeck (SKY) (GE)                       2004                      100
----------------------------------------------------------------------------------------------------------------
NOVEM (NL) N. Shore                     2003                                          100
----------------------------------------------------------------------------------------------------------------
Electrabel (BE)                         2004    100
----------------------------------------------------------------------------------------------------------------
Dublin Bay (IR)                       2003-4                               240
----------------------------------------------------------------------------------------------------------------
Scroby Sands (UK)                     2002-3                                                               76
----------------------------------------------------------------------------------------------------------------
E-Connection (NL)                       2003                                          240
----------------------------------------------------------------------------------------------------------------
PNE, Borkum (GE)                        2004                       60
----------------------------------------------------------------------------------------------------------------
Two Projects in UK (UK)               2004-5                                                              260
----------------------------------------------------------------------------------------------------------------
Eirtricity (Arklow) (IR)                2005                               500
----------------------------------------------------------------------------------------------------------------
Omo Stalgrund (DK)                      2005             150
----------------------------------------------------------------------------------------------------------------
Helgoland I (GE)                                                  500
----------------------------------------------------------------------------------------------------------------
Total by Country (MW)                           100      610      800      740        340        168      336
----------------------------------------------------------------------------------------------------------------
Source: BTM Consult ApS--March 2001.

                                                       Attachment 4

                  Status of Planned Offshore Projects




                                                       Attachment 5




    Senator Kerry. Mr. Kammen.

        STATEMENT OF DR. DANIEL M. KAMMEN, PROFESSOR OF 
 ENERGY AND SOCIETY, ENERGY AND RESOURCES GROUP, AND PROFESSOR 
        OF NUCLEAR ENGINEERING, UNIVERSITY OF CALIFORNIA

    Dr. Kammen. Thanks very much for having us speak today. I 
am Daniel Kammen, and I am a professor of energy and society in 
the University of California at Berkeley. I am also professor 
of nuclear engineering and director of the Renewable and 
Appropriate Energy Laboratory.
    And what you have heard in the previous testimonies are a 
number of technologies that are showing market entrance and 
great potential, and I want to just summarize a couple of key 
things, and that we are right now in a take-off phase, where a 
variety of renewables are playing a significant role, but they 
need a marketplace to be balanced out. And so my testimony 
details but let me summarize three simple and very clear truths 
about this.
    One is that the U.S. could meet and exceed the Kyoto or 
other obligations or other targets for climate protection and 
do that at an economic benefit, not a cost, and I will come 
back to that at the very end. That is a critical feature that 
has now been recognized in a variety of recent studies.
    The next feature is that research and development for 
renewable energy alternatives has been on a 25-year roller 
coaster, and we see funding levels that go up, programs cut and 
then added to and cut and added to in ways that have been 
incredibly inefficient. A critical thing is to not pick 
individual winners, not say, We are going to bank all of our 
money on a given technology, but to support portfolios that 
allow a variety of low-carbon and no-carbon energy systems to 
become part of the mix.
    And the third feature is that this technology push needs to 
be coupled with clear market pull, and so building markets for 
cleaner technologies is the third and critical piece of what we 
are looking at, and we are seeing some significant 
opportunities now, and one of the most disappointing things we 
have seen in the current roller coaster over funding and over 
the current national energy policy plan has been that a lot of 
the lessons about how to use energy efficiency and renewables 
most effectively are not being utilized in the market.
    I am going to say a few words about each of these. Our R&D 
path has been, as I said, a bizarre roller coaster, with these 
increases and decreases. The uncertainty in energy markets has 
also meant that energy companies and industry in general has 
invested very small amounts of their returns back into R&D. The 
energy sector in general in the U.S. puts something like of a 
quarter of a percent of their profits back into R&D. 
Pharmaceuticals and other areas that I would argue are a little 
more healthy are investing more like 10 or 15 percent of their 
revenues back into R&D, so we have got a sector which because 
of policy, ambiguity, and unclear directions has not performed 
the way that it might have.
    Despite that, we have seen a variety of advances, and if we 
pick those winners and work for those, both for stationary 
power plants and for vehicles, as Senator Snowe had mentioned, 
we have a variety of things that could dramatically improve 
what we see coming on.
    The other last feature of the R&D story is that it has 
proved to be a dramatically good investment. Investments made 
in energy efficiency, in wind turbines, in photovoltaics have 
all been programs that when you cost them out, have had 
dramatic economic benefits, not in costs, and one of the big 
claims about the climate debate has been that this is an area 
where if we do something to reduce greenhouse gas emission, it 
will come at a cost. And, in fact, a variety of studies are now 
indicating that we can do all these things and make money at 
the same time.
    The next feature is to look at markets. Currently in the 
markets, we dramatically subsidize the fossil fuel industry. We 
subsidize those technologies that are already mature to an 
overwhelming degree. Oil and gas and coal receive the lion's 
share of Federal subsidies for energy programs, which doesn't 
make economic sense, let alone environmental sense, because 
right now we have emerging opportunities in fuel cells, in 
wind, in photovoltaics, in a variety of things, in biomass. 
Those are the areas where we can much more effectively spend 
Federal dollars and marry Federal programs with state programs.
    Another feature of that is that the market entry for new 
clean air technologies has been particularly difficult. The 
California energy debacle has been one that has highlighted the 
degree to which new clean options are prevented from entering 
the market, because the economic rules have been ones that 
largely benefit existing technologies and don't pave the way 
for these new clean options to come on line.
    One critical piece of this providing markets for clean 
energy would be to enact a renewables portfolio standard, which 
is the way to use markets correctly. It is a way to set targets 
for how much clean energy we want to see in the market and then 
to let market forces pick and choose between winners, and that 
is a way to utilize the competitive feature of industry within 
markets but not to have a market that is biased against new 
entrants, and it doesn't make any sense that we haven't pushed 
harder on that.
    In the last 106th Congress, there was a bill on the table, 
Senate Bill 1369, that looked at renewables portfolio standard. 
That is a critical piece of what we might do down the line.
    The other piece of this is that we have seen from a variety 
of systems, from energy-efficient lighting to getting some wind 
capacity on line, to looking at R&D development in the 
photovoltaic sector, that the industry can respond dramatically 
to these challenges if given a reasonable timetable to put this 
into place, and every year and every month that we delay right 
now in acting on climate change, we make it more difficult and 
costly for industry to act.
    It would make a great deal of sense to set clear standards 
for renewables portfolio in our energy mix and also for 
improving the efficiency of lighting and to reduce some of the 
inefficient technologies we have in the market right now.
    The estimates that have come out of a variety of studies in 
our laboratory from the national labs, from the International 
Project for Sustainable Energy Paths have all concluded that if 
we tackled the Kyoto targets, we could do that at a cost of 
around 30 billion a year, but at reduced energy expenditures of 
more than 45 billion a year, economic benefits from those 
reduced energy expenditures of more than 40 billion, and 
reduced environmental damage from around 5 billion, so we could 
be making dramatic amounts of money if we put policies into 
effect that supported a broad range of renewables and got them 
much more firmly entrenched in the market, and in fact, doing 
that at this economic benefit.
    The U.S. has also fallen behind in a variety of areas. Our 
wind production and our photovoltaic production are now 
slipping behind European and Asian nations. That makes no 
sense, because this is an area of tremendous economic growth 
potential.
    Let me just say thank you for the chance to appear today, 
and I would be happy to discuss any of those policies at more 
length later on.
    [The prepared statement of Dr. Kammen follows:]

  Prepared Statement of Dr. Daniel M. Kammen, Professor of Energy and 
     Society, Energy and Resources Group, and Professor of Nuclear 
                 Engineering, University of California

Introduction: the Emerging Critical Role of Renewable Energy and Energy 
        Efficiency
    Mr. Chairman and members of the Committee, thank you for this 
opportunity to appear before you today to provide testimony on how 
renewable energy and energy efficiency technologies can address climate 
change. My name is Daniel Kammen, and I am Professor of Energy and 
Society in the Energy and Resources Group and in the Department of 
Nuclear Engineering, as well as Director of the Renewable and 
Appropriate Energy Laboratory (RAEL) at the University of California, 
Berkeley.\1\ I am pleased to be able to present information on how to 
utilize the many important advances in renewable energy and energy 
efficiency technology, economics, and management for the formulation of 
a strong national climate change mitigation policy. This critical 
initiative is long overdue, and is particularly relevant today. The 
recent release of the IPCC Third Assessment Report \2\ as well as the 
analysis by the National Academy of Sciences on climate change science 
\3\ both conclude that climate change is real and needs to be addressed 
now. The clean energy technology options and policies I will discuss 
are needed to address the challenge of global environmental 
sustainability. Despite dramatic technical and economic advances, we 
have seen far too little R&D, and too few incentives and sustained 
programs to build markets for renewable energy technologies and energy 
efficiency programs. We stand today at a critical juncture where clean, 
low-carbon, energy choices make both economic and environmental sense, 
and where policy action can place us on a path to a clean energy 
future.
    There is a growing understanding that an effective climate 
mitigation policy is also a responsible energy policy. I am concerned 
that the current crisis mentality pervading the discussions of energy 
issues in the country has fostered an ill-founded rush for ``quick 
fix'' solutions that, while politically expedient, will ultimately do 
the country more harm than good from both a climate change and an 
energy policy perspective. California's energy crisis has focused 
attention and raised fundamental questions about regional and national 
energy strategies. Rising demand suggests the need for new energy 
supplies. However, there is a wide range of options for achieving 
supply and demand balance, and some of these options have not been 
given adequate attention. It is clear that an energy policy weighted 
towards increasing the supply of traditional forms of energy will do 
little to decrease our greenhouse gas (GHG) emissions and will create a 
host of other environmental, health and national security problems.
    In the last decade the case for renewable energy has become 
compelling economically, socially, and environmentally. For many years 
renewables were seen as environmentally and socially attractive options 
that at best occupied niche markets due to barriers of cost and 
available infrastructure. That situation has dramatically changed. 
Renewable energy resources and technologies--notably solar, wind, 
small-scale hydro, and biomass based energy, as well as advanced energy 
conversion devices such as fuel cells--have undergone a true revolution 
in technological innovation, cost improvements, and in our 
understanding and analysis of appropriate applications.\4\ There are 
now a number of energy sources, conversion technologies, and 
applications, where renewable energy options are either equal, or 
better, in price and services provided than are prevailing fossil fuel 
technologies. For example, in a number of settings in industrialized 
nations, wind energy is now the least cost option across all energy 
technologies with the added benefit of being quick to install and bring 
on-line, as well as being modular. In fact, some farmers in the Midwest 
have found that they can generate more income per hectare from the 
electricity generated by a wind turbine on their land than from their 
crop or ranching proceeds. Furthermore, photovoltaic panels and solar 
hot water heaters placed on buildings across America can: dramatically 
shave peak-power demands; produce a healthier living environment; and 
increase our energy supply while managing our energy demand.
    The potential for renewable energy technologies and energy 
efficiency to have a significant role in protecting our climate as well 
as our energy future is an example of the type of energy options that 
demand far greater examination and commitment to implementation than we 
have seen to date. And so, I am particularly pleased Mr. Chairman that 
you are holding this hearing to discuss how we can effectively and 
efficiently bring these technologies to market.

Energy Policy Recommendations
 Increase Federal R&D Funding for Renewable Energy and Energy 
    Efficiency Technologies
    Federal investment in renewable energy and energy efficient 
technologies has been sparse and erratic, with each year producing an 
appropriations battle that is often lost. A combination of a federal 
program for steadily increasing funding and active political leadership 
would transform the clean energy sector from a good idea to a pillar of 
the new economy.

 Provide Tax Incentives for Companies that Develop and Use 
    Renewable Energy and Energy Efficiency Technologies
    Support for the production and further development of renewable 
fuels, all found domestically, would have a greater long-term effect on 
the energy system than any expansion of fossil-fuel capacity, with 
major health and environmental benefits as an added bonus. We should 
extend the existing production tax credits (PTC) for electricity 
generated from windpower and closed loop biomass for five years. Also, 
this production credit should be expanded to include electricity 
produced by open loop biomass (i.e., agricultural and forestry residues 
but excluding municipal solid waste), solar energy, geothermal energy, 
and landfill gas. The same credit should be provided to closed loop 
biomass co-fired with coal, and a smaller credit (one cent per kWh) 
should be provided for electricity from open-loop biomass co-fired with 
coal. These provisions (in part or full) are included in the Murkowski-
Lott (S. 389) bill, Bingaman-Daschle bill (S. 596), Grassley bill (S. 
530), Reid bill (S. 249), Dorgan bill (S. 94), Collins bill (S. 188), 
Filner bill (HR 269), Foley bill (HR 876), Herger-Matsui bill (HR 
1657), and Dunn bill (HR 1677). I also support a minimum of a 15 
percent investment tax credit for residential solar electric and water 
heating systems. This proposal was introduced by Senator Allard (S. 
465) and Representative Hayworth (HR 2076). It also is included in the 
Murkowski-Lott (S. 389) bill. In addition, I support a 30 percent 
investment tax credit being proposed for small (75 kW and below) 
windpower systems as in the Bingaman-Daschle (S. 596) bill.

 Improved Federal Standards for Vehicle Fuel Economy and 
    Increased Incentives for High Fuel Economy Vehicles
    We need to first remove the separate fuel economy standards for 
cars and light trucks (i.e., close the light truck `loophole' as 
proposed in S. 804 by Senators Feinstein and Snowe and H.R. 1815 by 
Rep. Olver). I then believe that a 40 mpg combined car and light truck 
fuel economy standard could be accomplished in the 2008 to 2012 
timeframe with negligible net cost. I support the tax credits of up to 
$5,000 for hybrid electric vehicles, up to $6,000 for battery electric 
vehicles, and $8,000 for fuel cell vehicles, and an incentive scheme 
for energy-use performance that rewards both fuel savings and lower 
emissions, as proposed in the CLEAR Act, S. 760, introduced by Senators 
Hatch, Rockefeller, and Jeffords, and its companion bill (H.R. 1864) 
introduced by Rep. Camp.

 A Federal Renewable Portfolio Standard (RPS) to Help Build 
    Renewable Energy Markets
    I support a 20 percent RPS by 2020. A number of studies indicate 
that this would result in renewable energy development in every region 
of the country with most coming from wind, biomass, and geothermal 
sources. A transparent and properly constructed federal standard is 
needed to set a clear target for industry research, development, and 
market growth. I recommend a renewable energy component of 2 percent in 
2002, growing to 10 percent in 2010 and 20 percent by 2020 that would 
include wind, biomass, geothermal, solar, and landfill gas. This 
standard is similar to the one proposed by Senators Jeffords and 
Lieberman in the 106th Congress (S. 1369).

 Federal Standards and Credits to Support Distributed Small-
    Scale Energy Generation and Cogeneration (CHP)
    Small scale distributed electricity generation has several 
advantages over traditional central-station utility service, including 
reducing line losses, deferring the need for new transmission capacity 
and substation upgrades, providing voltage support, and reducing the 
demand for spinning reserve capacity. In addition, locating generating 
equipment close to the end use allows waste heat to be utilized to meet 
heating and hot water demands, significantly boosting overall system 
efficiency. I support at least a 10 percent investment tax credit and 
seven-year depreciation period for renewable energy systems or combined 
heat and power systems with an overall efficiency of at least 60-70 
percent depending on system size. Similar proposals are included in the 
Murkowski-Lott energy bill (S. 389), the Bingaman-Daschle energy bill 
(S. 596), as well as bills targeted to CHP promotion introduced by Rep. 
Wilson (H.R. 1045) and Rep. Quinn (H.R. 1945).

 Enact New and Strengthen Current Efficiency Standards for 
    Buildings, Equipment, and Appliances
    Significant advances in heating and cooling systems, motor and 
appliance efficiency have been made in recent years, but more 
improvements are technologically possible and economically feasible. A 
clear federal statement of desired improvements in system efficiency is 
needed to remove uncertainty and reduce the economic costs of 
implementing these changes. Under such a federal mandate, efficiency 
standards for equipment and appliances could be steadily increased, 
helping to expand the market share of existing high efficiency systems.

 Institute a National Public Benefits Fund
    I recommend a public benefits fund which could be financed through 
a $0.002/kWh charge on all electricity sales. Such a fund could match 
state funds to assist in continuing or expanding energy efficiency, 
low-income services, the deployment of renewables, research and 
development, as well as public purpose programs the costs of which have 
traditionally been incorporated into electricity rates by regulated 
utilities.

Renewable Energy
    Conventional energy sources based on oil, coal, and natural gas 
have proven to be highly effective drivers of economic progress, but at 
the same time highly damaging to the environment and to human health. 
These traditional fossil fuel-based energy sources are facing 
increasing pressure on a host of environmental fronts, with perhaps the 
most serious being the looming threat of climate change and the need to 
set GHG emission targets. It is now clear that any effort to maintain 
atmospheric CO2 concentrations below even doubled pre-
industrial levels \5\ cannot be accomplished in an oil and coal-
dominated global economy, barring radical and problematic carbon 
sequestration efforts.
    The potential of renewable energy sources is enormous as they can 
in principle meet many times the world's energy demand. Renewable 
energy sources such as biomass, wind, solar, hydropower, and geothermal 
can provide sustainable energy services while meeting the challenges of 
energy security, diversity, and regional needs as well as global 
environmental quality. A transition to a renewable-intensive energy 
economy is now possible given the consistent progress in cost and 
performance of renewable energy technologies, new methods for managing 
distributed energy generation, and a transformation of the 
transportation system. Costs of solar and wind power systems have 
dropped substantially in the past 30 years, and continue to decline, 
while the price of oil and gas continue to fluctuate. In fact, fossil 
fuel and renewable energy prices are heading in opposite directions 
when social and environmental costs are included. Furthermore, the 
economic and policy mechanisms needed to support the widespread 
dissemination of renewable energy systems have also rapidly evolved. 
Financial markets are awakening to the future growth potential of 
renewable and other new energy technologies, and this is a harbinger of 
fully competitive renewable energy systems.
    In addition, renewable energy systems are ideal components of a 
decentralized power system that can result in lower capital and 
environmental costs and improved opportunities for highly efficient 
cogeneration (combined heat and power) systems. As an alternative to 
customary centralized power plants, renewable systems based on 
photovoltaic (PV) arrays, windmills, biomass or small hydropower, can 
be mass-produced ``energy appliances'' capable of being manufactured at 
low cost and tailored to meet specific energy loads and service 
conditions. These systems can have dramatically reduced as well as 
widely dispersed environmental impacts, rather than larger, more 
centralized impacts that in some cases are serious contributors to 
ambient air pollution and acid rain. This evolution of our ability to 
meet energy needs with clean sources is only in its infancy, and 
policies that reward R&D, power generation from clean sources, and a 
leveling of the playing-field with existing power providers are all 
critical components of a sound energy strategy.

Recent Progress in Renewable Energy System Cost and Performance
    There has been significant progress in cost reductions made by wind 
and PV systems, while biomass, geothermal, and solar thermal 
technologies are also experiencing significant cost reductions. In 
general, renewable energy systems are characterized by low or no fuel 
costs, although operation and maintenance (O&M) costs can be 
considerable. It is important to note, however, that O&M costs for all 
new technologies are generally high, and can fall rapidly with 
increasing familiarity and operational experience. Renewable energy 
systems such as photovoltaics contain far fewer mechanically active 
parts than comparable fossil fuel combustion systems, and therefore are 
likely in the long-term to be less costly to maintain. Figure 1 
presents U.S. DOE projections for the levelized costs of electricity 
production from these same renewable energy technologies, from 1997 to 
2030.\6\
    Given these potential cost reductions, recent analyses have shown 
that additional generating capacity from wind and solar energy can be 
added at low incremental costs relative to additions of fossil fuel-
based generation. The economic case for renewables looks even better 
when environmental costs are considered along with capital and 
operating costs. As shown in Figure 2, geothermal and wind can be 
competitive with modern combined-cycle power plants, and geothermal, 
wind, and biomass all have lower total costs than advanced coal-fired 
plants, once approximate environmental costs are included.
    The remarkable difference between the setting for renewable energy 
today, relative to the past 30 years, is that renewable and other clean 
energy technologies are now becoming economically competitive, and the 
push to develop them is no longer being driven solely by environmental 
concerns. With regard to prospects for investing in companies 
developing clean energy resources, Merrill Lynch's Robin Batchelor 
recently stated:

        ``This is not an ethical investment opportunity, it's a 
        straightforward business opportunity.''

    Mr. Batchelor also noted that the traditional energy sector has 
lacked appeal to investors in recent years because of heavy regulation, 
low growth, and a tendency to be cyclical. He has identified 300 
companies worldwide whose aim is to develop wind, solar, and wave power 
technologies and to advance capabilities in energy storage, 
conservation, and on-site power generation. Over the past decade the 
U.S. has lost its leadership position in the development and production 
of many clean energy systems--notably wind and solar energy--due to 
lack of support for innovative new companies and the signals that U.S. 
energy markets are biased against new entrants. With an expanding 
global energy market, this is precisely the wrong time not to support 
the clean energy industry, which could become a world-leading industry 
akin to that of U.S. semi-conductors and computer systems.
    Despite their recent success, renewable energy sources have 
historically had a difficult time breaking into markets that have been 
dominated by traditional, large-scale, fossil fuel-based systems. This 
is partly because renewable and other new energy technologies are only 
now being mass produced, and have previously had high capital costs 
relative to more conventional systems, but also because coal, oil, and 
gas-powered systems have benefited from a range of subsidies over the 
years. These include military expenditures to protect oil exploration 
and production interests overseas, the costs of railway construction 
that have enabled economical delivery of coal to power plants, and a 
wide range of subsidies such as tax breaks.
    One argument used to limit the attention paid to renewable energy 
systems has been the intermittent nature of some sources, such as wind 
and solar. A solution to this problem is to develop diversified systems 
that maximize the contribution of renewable energy sources but that 
also uses clean natural gas and/or biomass-based power generation to 
provide base-load power. In fact, this greatest disappointment in the 
response to the California energy crisis and in the Administration's 
recent National Energy Policy Plan has been the focus on expanding the 
gas supply without any attention to the economic and security benefits 
of building a diverse energy system. The Administration's plan would 
add one to two new power plants, many gas-fired, a week for the next 
several years, making us far more dependent on gas than we were on oil 
even at the height of the OPEC crisis in the 1970s.
    In essence, renewable energy technologies face a similar situation 
confronting any new technology that attempts to dislodge an entrenched 
technology. For many years, we have been ``locked-in'' to a suite of 
fossil fuel and nuclear-based technologies, and many of our secondary 
systems and networks have been designed and constructed to accommodate 
only these sources. Particularly in the absence of targeted policy 
interventions (discussed below), we will likely remain locked-in to 
existing technologies, even if the benefits of technology switching 
overwhelm the costs.

Level the Playing Field for Renewables: Public and Private Sector 
        Investments and Market Transformations
    As shown in Figure 2, renewable energy technologies are 
characterized by low environmental costs. In an ideal world, this would 
aid them in competing with conventional technologies, but of course 
many of these environmental costs are ``externalities'' that are not 
reflected in market prices. Only in certain areas and for certain 
pollutants do these environmental costs enter the picture, and clearly 
further internalizing these costs would benefit the spread of 
renewables. The international effort to limit the growth of greenhouse 
emissions through the Kyoto Protocol may lead to some form of carbon-
based tax, and this could prove to be an enormous boon to renewable 
energy industries. However, any proposed carbon-based taxation scheme 
continues to face stiff political opposition in the U.S. Perhaps more 
likely, concern about particulate matter emission and ozone formation 
from fossil-fuel power plants will lead to expensive mitigation 
efforts, and this would help to tip the balance toward cleaner 
renewable systems.
    There are two principal rationales for government support of 
research and development (R&D) to develop renewables and other clean 
energy technologies. First, conventional energy prices generally do not 
reflect the social cost of pollution. This provides the rationale, 
based on a well-accepted economic argument, to subsidize R&D for 
alternatives to polluting fossil fuels. Second, private firms are 
generally unable to appropriate all the benefits of their R&D 
investments. Consequently, the social rate of return for R&D exceeds 
available private returns, and firms therefore do not invest enough in 
R&D to maximize social welfare. Thus, innovation ``spillover'' among 
clean energy firms is a form of positive externality that justifies 
public R&D investment. These provide compelling arguments for public 
funding of Market Transformation Programs (MTPs) that subsidize demand 
for some clean energy technologies in order to help commercialize them.
    A principal motivation for considering MTPs is inherent in the 
production process itself. When a new technology is first introduced it 
is invariably more expensive than established substitutes. There is, 
however, a clear tendency for the unit cost of manufactured goods to 
fall as a function of cumulative production experience. Cost reductions 
are typically very rapid at first, but taper off as the industry 
matures. This relationship is called an `experience curve' when it 
accounts for all production costs, and it can be described by a 
progress ratio where unit costs fall by a certain percent with every 
doubling of cumulative production. Gas turbines, photovoltaic cells and 
wind turbines have both exhibited the expected price-production 
relationship, with costs falling roughly 20 percent for each doubling 
of the number of units produced (Figure 3).
    If firms retain the benefits of their own production experience 
they have an incentive to consider experience effects when deciding how 
much to produce. Consequently, they will ``forward-price,'' producing 
at a loss initially to bring down their costs and thereby maximize 
profit over the entire production period.
    In practice, however, the benefits of production experience often 
spill over to competitor firms, causing private firms to under-invest 
in bringing new products down the experience curve. Among other 
channels, experience spillovers could result from hiring competitors' 
employees, reverse engineering rivals' products, informal contacts 
among employees of rival firms, or even industrial espionage. Strong 
experience effects therefore imply that output is less than the 
socially efficient level. MTPs can improve social welfare by correcting 
the output shortfall associated with these experience effects.\7\
    This suggests a role for MTPs in national and international 
technology policies. MTPs are best limited to emerging technologies 
with steep industry experience curves, a high probability of major 
long-term market penetration once subsidies are removed, and price 
elastic demand. The condition that they be clean technologies mitigates 
the risk of poor MTP performance by adding the value of displaced 
environmental externalities. The recent technical and economic advances 
seen for a range of renewable energy products make them ideal 
candidates for support through market transformation programs, and I 
strongly urge federal action to reward the early production and use of 
clean energy technologies. Finally, as with energy R&D policy, public 
agencies should invest in a portfolio of new clean energy technologies 
in order to reduce overall MTP program performance risk through 
diversification.

Energy Efficiency
    To adequately address climate change we must decrease our 
dependence on fossil fuels and increase our use of clean renewable 
systems as well as cut energy waste and improve energy efficiency. What 
the U.S. wastes simply in the production of electricity (24 
quadrillion BTUs annually) is more energy than is used by the entire 
Japanese economy for all end uses. According to DOE's recent 
Interlaboratory Working Group study, Scenarios for a Clean Energy 
Future,\8\ cost effective end-use technologies could reduce electricity 
consumption by 1,000 billion kWh by 2020, which would almost entirely 
offset business as usual projected growth in electricity use. This 
level of savings would reduce U.S. carbon emissions by approximately 
300 million metric tons of carbon compared to a business-as-usual 
scenario.
    There is often confusion about the definition of energy efficiency 
and energy conservation that is important to clarify. Energy efficiency 
means improving equipment and systems to get the same output (e.g., 
miles traveled or widgets produced) but with less energy input. Energy 
conservation means reducing energy use, and at times may mean reducing 
the services received. Examples of energy conservation include changing 
thermostat settings, reducing lighting levels, and driving less. To the 
extent energy conservation eliminates waste it is generally desirable. 
For example, many commercial buildings are excessively lit and over 
air-conditioned, wasting large amounts of energy without providing any 
useful service.
    Energy efficiency has been the single greatest asset in improving 
the U.S. energy economy. Based on data from the Energy Information 
Administration (EIA), U.S. primary energy use per capita in 2000 was 
almost identical to that in 1973, while over the same period economic 
output (GDP) per capita increased 74 percent. Between 1996 and 2000, 
GDP increased 19 percent while primary energy use increased just 5 
percent. In addition, national energy intensity (energy use per unit of 
GDP) fell 42 percent between 1973 and 2000. About 60 percent of this 
decline is attributable to real energy efficiency improvements and 
about one-quarter is due to structural changes and fuel switching. 
These statistics clearly indicate that energy use and GDP do not have 
to grow or decline in lock step with each other, but rather that GDP 
can increase while energy use does not.
    If the United States had not dramatically reduced its energy 
intensity over the past 27 years, consumers and businesses would have 
spent at least $430 billion more on energy purchases in 2000. Energy 
efficiency improvements have contributed a great deal to our nation's 
economic growth and increased standard of living over the past 25 
years, and there continues to be much potential for energy efficiency 
increases in the decades to come. It certainly represents the best 
short-term option for addressing today's environmental and energy 
concerns. The U.S. Department of Energy (DOE) estimates that increasing 
energy efficiency throughout the economy could cut national energy use 
by 10 percent or more in 2010 and about 20 percent in 2020, with net 
economic benefits for consumers and businesses. The American Council 
for an Energy-Efficient Economy (ACEEE) estimates that adopting a 
comprehensive set of policies for advancing energy efficiency could 
lower national energy use by as much as 18 percent in 2010 and 33 
percent in 2020, and do so cost-effectively. Many of these changes can 
be accomplished at negative cost, while others can be realized for only 
a few cents per kWh, far less than the cost delivered by new power 
plants.
    Increasing the efficiency of our homes, appliances, vehicles, 
businesses, and industries must be an important part of a sound 
national energy and climate change policy. Increasing energy efficiency 
reduces energy waste without forcing consumers to cut back on energy 
services or amenities, lowers U.S. GHG emissions; saves consumers and 
businesses money since the energy savings more than pay for any 
increase in first cost, reduces the risk of energy shortages, reduces 
energy imports, and reduces air pollution. Furthermore, increasing 
energy efficiency does not present a trade-off between enhancing 
national security and energy reliability on the one hand and protecting 
the environment on the other, as do a number of energy supply options. 
Increasing energy efficiency is a ``win-win'' strategy from the 
perspective of economic growth, national security, reliability, and 
environmental protection.
    Interested consumers--both residential and commercial--lack access 
to information on energy efficient options. Such market barriers to 
energy efficiency technologies exist and will continue to persist if we 
do not invest in tax and market incentives to encourage their 
implementation in all sectors of our economy.

Climate Change Policy
    With proper policy support, investments in renewable energy and 
energy efficiency can increasingly be justified based on economic 
arguments alone. At the same time, the U.S. is currently squandering a 
critical opportunity to provide global environmental leadership that is 
also good business. The need for leadership on the global climate issue 
has become particularly apparent with President Bush's recent rejection 
of the Kyoto Protocol. Domestic political opposition to U.S. leadership 
in this area has been based on outdated views of the science and 
economics of climate change. First the science is now widely accepted 
and, second several recent comprehensive analyses have shown that while 
the costs of inaction on global warming can be catastrophic the 
economic benefits of innovative actions to reduce the health and 
environmental impacts of energy use can be substantial. This represents 
the classic `win-win' scenario. Unfortunately, significant action on 
climate change mitigation is in jeopardy unless the administration 
returns to the promise made by President Bush to take steps to control 
our nation's greenhouse gas emissions. I applaud the Chairman and 
ranking member on this Committee and others in the Senate for their 
attempts to do just that.
    The U.S. can reduce GHG emissions while improving our economic 
efficiency, creating jobs and saving consumers money, maintaining our 
technological leadership, and achieving other environmental benefits. 
Policies to encourage the extensive development and deployment of 
renewable energy and energy efficiency technologies are a critical part 
of this equation.
    I strongly support the recent bills introduced in Congress to 
reduce pollutant emissions from electricity generation by Senators 
Jeffords and Lieberman (S.556) and Representatives Boehlert and Waxman 
(H.R. 1256). This legislation contained provisions that addressed the 
environmental impact and competitive distortions created by the 
patchwork of unequal and inadequate standards that currently apply to 
electric power plants nationwide. The bill puts a national cap on 
emissions from power plants of nitrogen oxides, sulfur oxides, mercury, 
and carbon dioxide, and allows market-oriented mechanisms such as 
emissions trading to meet the reduction requirements. The reductions in 
carbon dioxide would bring emissions levels back to 1990 levels by 
2007, the same level implied by the non-binding targets of the Rio 
Treaty of 1992, as ratified by the U.S. Senate. Our analysis indicates 
that if implemented in an expedient but planned process, consistent 
with these legislative beginnings, that the costs would likely be 
dwarfed by the resulting benefits of industrial innovation.9,10
    Legislation that controls the four major power plant 
pollutants in an integrated package will help reduce regulatory 
uncertainties for electric generators and will be less costly than 
separate programs for each pollutant. Integrated control encourages 
system-wide efficiency improvements and increased utilization of 
cleaner fuels. And while voluntary action by American companies is an 
attractive option to consider, in the last ten years voluntary actions 
have failed to reduce carbon dioxide emissions in the U.S. Instead, 
emissions have increased by 15.5 percent since 1990 and continue to 
increase. The EIA recently released data showing a substantial increase 
in U.S. carbon dioxide emissions in 2000 of 2.7 percent from the 
preceding year, with the annual average since 1990 being 1.5 percent. 
This demonstrates the need for mandatory emissions reductions now and 
shows that solutions will be more costly and difficult if we continue 
to stall.
    Last December an EIA analysis concluded that such mandatory carbon 
dioxide caps would cause a large increase in future electricity prices 
that President Bush then used as a justification for abandoning his 
campaign promise to regulate carbon emissions from utilities. A more 
recent analysis by EPA uses the same model but instead allows for the 
use of advanced technologies to reduce emissions, which are more likely 
to emerge under tighter emission constraints, as opposed to using the 
standard reference case of today's technologies as the original 
analysis did. The re-estimation finds that this simple adjustment 
substantially decreases the projected price increases.\11\ Furthermore, 
as will now be discussed, if additional policies for encouraging the 
development and use of renewable and energy efficiency technologies to 
reduce GHG emissions are included in the analysis, the average consumer 
electricity price will then be comparable to business as usual 
projections.

Policy Options for Renewable Energy and Energy Efficiency Technology 
        Development
    I firmly believe that the ultimate solutions to cost-effectively 
reducing our GHG emissions must be based on private sector investment 
bolstered by well-targeted government R&D and incentives for emerging 
clean energy technologies. This must be coupled with policies that open 
markets to new clean generating capacity. We now have the opportunity 
to build a sustainable energy future by engaging and stimulating the 
tremendous innovative and entrepreneurial capacity of the U.S. private 
sector. To accomplish this, we must pursue policies that guarantee a 
stable and predictable economic environment for advancing clean energy 
technologies. This can be further bolstered by market incentives to 
reward actions that further the public good.
    With these thoughts in mind, I present several options that will 
start us down a path of GHG reductions while at the same time creating 
a sustainable, economic and environmentally sound U.S. energy policy.

1) Increase federal R&D funding for renewable energy and energy 
        efficiency technologies
    To date, federal investment in renewable energy and energy 
efficient technologies has been sparse and erratic, with each year 
producing an appropriations battle that is often lost. The resulting 
financial and policy uncertainty discourages effective energy 
technology development and deployment in the marketplace.\12\ With 
energy now a clear national priority, and I hope climate change quickly 
becoming one, funding for the U.S. DOE's Energy Efficiency and 
Renewable Energy Program must be substantially and systematically 
increased. The realization that R&D funding provides a critical driver 
to economic growth has resulted in important commitments in Congress, 
particularly in the life sciences, to double R&D funding in five to ten 
years. The same return on investment exists in the energy sector, but 
it has not been translated into increased R&D funding for new renewable 
and energy efficiency technologies. If the U.S. expects to be a world 
leader in this industry, as it is in the biomedical and high-tech 
sectors, such investments in renewable energy and energy efficiency are 
essential.
    DOE recently documented 20 of its most successful energy efficiency 
projects as having saved the nation 5.5 quadrillion BTUs of energy. 
This is worth about $30 billion in avoided expenses, mostly over the 
last decade, with a cost to tax payers of only $712 million, less than 
3 percent of the energy bill savings so far. Study after study 
concludes that spending of taxpayer's money on energy efficiency R&D 
has been a very sound investment.13,14 The Bush 
Administration's initially proposed deep cuts in their FY2002 budget 
for DOE's renewable energy and energy efficiency programs must be 
reversed and turned into budget increases. Such cuts would harm 
existing public-private partnerships as well as the R&D at the national 
labs and elsewhere. Thankfully, some of these cuts are being restored 
to current funding levels, in current appropriations bills. This 
budgetary roller-coaster harms all investments, sends mixed signals to 
industry, and as a result is the least efficient form of both energy 
and financial policy. In order to address climate change seriously we 
must at a minimum double this funding in the next five years (a 15-20 
percent increase per year), as was recommended by PCAST.\15\
    Federal funding and leadership for renewable energy and energy 
efficiency projects has resulted in a small number of notable 
successes, such as the EPA's Energy Star and Green Lights Programs that 
has now been emulated in a number of countries. For example, 15 percent 
of the public sector building space in the country has now signed up 
for Energy Star Buildings Program and saved more than 21 billion kWh of 
energy in 1999 or about 4.4 million metric tons of carbon, resulting in 
$1.6 billion in energy bill savings according to EPA. Despite these 
achievements, funding in this area has been both scant, and so uneven 
that private sector involvement has actually been discouraged. By 
increasing funding for these EPA programs their scope could be 
considerably expanded resulting in substantially greater savings.
    A combination of a federal program for steadily increasing funding 
for clean energy and energy efficiency R&D and active political 
leadership would transform the clean energy sector from a good idea to 
a pillar of the new economy. In particular, promising technologies such 
as fuel cells deserve special attention. Fuel cell development is 
attracting significant public and private funding and offers the 
promise of being a keystone technology for the ultimate transition from 
natural gas, petroleum, and coal energy to a renewable and hydrogen 
based energy economy.

2) Provide tax incentives for companies and individuals that develop 
        and use renewable energy and energy efficiency technologies
    The R&D tax credit has proven remarkably effective and popular with 
private industry, so much so that there is a strong consensus in both 
Congress and the Administration to make this credit permanent. In 
addition to this support of private sector R&D, an increased tax 
incentive for R&D investment in renewable and energy efficiency 
technologies is exactly the type of well-targeted federal policy that 
is needed. To compliment this further, tax incentives directed toward 
those who use the technologies would provide the `demand pull' to 
accelerate the technology transfer process and rate of market 
development. The U.S. has largely lost its position as the global 
leader in energy innovation, resulting in the loss of jobs and earning 
potential for U.S. companies precisely at the time when the 
international market for clean energy technologies is booming. Our 
domestic industries as well as the global energy economy would both 
benefit directly and significantly from a clear commitment to U.S. 
clean energy leadership.
    Currently, Federal tax expenditures have an unequal distribution 
across primary energy sources, distorting the market in favor of many 
conventional energy technologies. The dollar apportionment of 
expenditures, including income and excise tax credits as well as direct 
subsidies (such as the Renewable Energy Production Incentive) does not 
reflect the market distribution of fuels nor does it encourage the 
establishment of a market niche for disadvantaged emerging 
technologies. For example, renewable fuels make up four percent of the 
U.S. primary energy supply, and yet receive only one percent of Federal 
tax expenditures and direct expenditures combined (see table below). 
This does not include the Alcohol Fuels Excise Tax, directed towards 
ethanol production. The largest single tax credit in 1999 was the 
Alternative Fuel Production Credit,\16\ which totaled over one billion 
dollars. This income tax credit was designed to reduce dependence on 
foreign energy imports by encouraging the production of gas, coal, and 
oil from non-conventional sources (such as tight gas formations and 
coalbed methane) found within the United States. However, support for 
the production and further development of renewable fuels, all found 
domestically, would have a greater long-term effect on the energy 
system than any expansion of fossil-fuel capacity, with major health 
and environmental benefits as an added bonus.


----------------------------------------------------------------------------------------------------------------
                                                                     PRIMARY ENERGY SUPPLY   DIRECT EXPENDITURES
                                                                       1998 CONSUMPTION     and TAX EXPENDITURES
                                                                   ------------------------        (1999)
                            FUEL SOURCE                                VALUE               ---------------------
                                                                      (quads,                 VALUE
                                                                    quadrillion   PERCENT    (million   PERCENT
                                                                        BTU)                    $)
----------------------------------------------------------------------------------------------------------------
Oil                                                                      36.57         40%        263        16%
----------------------------------------------------------------------------------------------------------------
Natural Gas                                                              21.84         24%      1,048        64%
Alternative Fuels Credit                                                                      (1,030)
----------------------------------------------------------------------------------------------------------------
Coal                                                                     21.62         24%         85         5%
----------------------------------------------------------------------------------------------------------------
Oil, Gas, Coal Combined                                                                           205        12%
----------------------------------------------------------------------------------------------------------------
Nuclear                                                                   7.16          8%          0         --
----------------------------------------------------------------------------------------------------------------
Renewables                                                                3.48          4%         19         1%
----------------------------------------------------------------------------------------------------------------
Electricity                                                                                        40         2%
----------------------------------------------------------------------------------------------------------------
    Total                                                                90.67        100%      1,660       100%
----------------------------------------------------------------------------------------------------------------
Energy Information Administration, Federal Financial Interventions and Subsidies in Energy Markets 1999: Primary
  Energy, (Washington, DC: DOE, 1999).


3) Improve federal standards for vehicle fuel economy and increase 
        incentives for high fuel economy vehicles
    New vehicles types based on hybrid gasoline-electric and fuel cell-
electric power systems are now being produced in commercial (gasoline 
hybrid) and prototype (fuel cell) quantities. These vehicles are 
combining high-efficiency AC induction or permanent magnet electric 
motors with revolutionary power systems to produce a new generation of 
motor vehicles that are vastly more efficient than today's simple cycle 
combustion systems. The potential for future hybrid and fuel cell 
vehicles to achieve up to 100 miles per gallon is believed to be both 
technically and economically viable in the near-term, and with 
continued commitments from industry, only clear federal guidelines and 
support are needed to move from planning to reality. In the longer 
term, fuel cell vehicles running directly on hydrogen promise to allow 
motor vehicle use with very low fuel-cycle emissions, and again better 
government and industry coordination and cooperation over the next ten 
years could do much to hasten the development of this promising 
technology.
    The improvements in fuel economy that these new vehicle types offer 
will help to slow growth in petroleum demand, reducing our oil import 
dependency and trade deficit. While the Partnership for a New 
Generation of Vehicles helped to generate some vehicle technology 
advances, an increase in the Corporate Average Fuel Economy (CAFE) 
standard, which has been stagnant for 12 years now, is required to 
provide an incentive for companies to bring these new vehicles types 
rapidly to market. Tax credits and incentives are an important 
complement to raising CAFE, but I do not believe that they alone can 
accomplish the key goal of simultaneously stimulating production of 
high fuel economy vehicles and provide strong incentives for consumers 
to purchase them.
    Now, after five years of Congressional bans, studies on the 
potential for increases in CAFE standards to cost-effectively reduce 
petroleum demand are now underway by the Department of Transportation 
and the National Academy of Sciences. These studies, with results 
expected later this summer, will help to suggest optimal levels of 
increased standards, given the costs and benefits of higher fuel 
economy, as well as phase-in schedules that will protect the 
competitive interests of domestic automakers.
    In the meantime, other recent analyses of the costs and benefits of 
providing higher fuel economy motor vehicles have been conducted by the 
Union of Concerned Scientists,17,18 MIT,\19\ OTA,\20\ and 
Oak Ridge National Lab/ACEEE.\21\ These studies have generally 
concluded that with longer-term technologies, motor vehicle fuel 
economy can be raised to 45 mpg for cars for $500 to $1,700 per vehicle 
retail price increase,\22\ and to 30 mpg for light trucks for $800 to 
$1,400 per vehicle retail price increase.\23\ These improvements could 
be the basis for a new combined fuel economy standard of 40 mpg, which 
could be instituted after first removing the separate fuel economy 
standards for cars and light trucks (i.e. closing the light truck 
`loophole' as proposed in S. 804 by Senators Feinstein and Snowe and 
H.R. 1815 by Rep. Olver). I believe the 40 mpg combined car and light 
truck standard could be accomplished in the 2008 to 2012 timeframe with 
negligible net cost once fuel savings are factored in, given adequate 
lead time for the auto industry to re-tool for this new generation of 
vehicles.
    I also strongly support tax credits for hybrid electric vehicles, 
battery electric vehicles, and fuel cell vehicles. These funds could in 
principle be raised through a revision of the archaic `gas guzzler' 
tax, which does not apply to a significant percentage of the light duty 
car and truck fleet. The tax penalty and tax credit in combination 
could be a revenue-neutral `fee-bate' scheme, similar to one recently 
proposed in California, that would simultaneously send two strong price 
signals rewarding economical vehicles (particularly those using 
advanced drive systems) and penalizing uneconomical ones. Furthermore, 
this would help jump start introduction and purchase of the most 
innovative, fuel-efficient technologies. However the incentives are 
designed, they should be based primarily on energy-use performance and 
ideally provide both fuel savings and lower emissions. I support the 
CLEAR Act, S. 760, introduced by Senators Hatch, Rockefeller, and 
Jeffords, and the companion bill (H.R. 1864) introduced by Rep. Camp.

4) Establish a federal Renewable Portfolio Standard (RPS) to help build 
        renewable energy markets
    The RPS is a renewable energy content standard, akin to efficiency 
standards for vehicles and appliances that have proven successful in 
the past. A gradually increasing RPS provides the most economically 
efficient way of ensuring that a growing proportion of electricity 
sales are provided by renewable energy, and is designed to integrate 
renewables into the marketplace in the most cost-effective fashion. In 
this manner, the market picks the winning and losing technologies and 
projects, not administrators. With all the discussion and hype about 
market forces, a RPS provides the one true means to use market forces 
most effectively. I recommend a renewable energy component of 2 percent 
in 2002, growing to 10 percent in 2010 and 20 percent by 2020 that 
would include wind, biomass, geothermal, solar, and landfill gas. A 
number of studies indicate that this 20 percent in 2020 level of an RPS 
is broadly good for business and can readily be achieved.24,25 
This standard is similar to the one proposed by Senators Jeffords and 
Lieberman in the 106th Congress (S. 1369). This bill has not been 
reintroduced nor has any other RPS legislation been introduced in this 
Congress yet. States that decide to pursue more aggressive goals--many 
of which make economic and environmental sense--could be rewarded 
through an additional federal incentive program. To achieve compliance 
a federal RPS should use market dynamics to stimulate innovation 
through an active trading program of renewable energy credits. 
Renewable credit trading is analogous to the sulfur allowance trading 
system established in the Clean Air Act. Like emissions trading, it is 
designed to be administratively simple and to increase flexibility and 
decrease the cost of compliance with the standard. Electricity 
suppliers can generate renewable electricity themselves, purchase 
renewable electricity and credits from generators, or buy credits in a 
secondary trading market. The coal, oil, natural gas, and nuclear power 
industries are mature; yet continue to receive considerable government 
subsidies. Moreover, the market price of fossil and nuclear energy does 
not include the cost of the damage they cause to the environment and 
human health. Conversely, the market does not give a value to the 
environmental and social benefits of renewables. Without the RPS or a 
similar mechanism, many renewables will not be able to compete in an 
increasingly competitive electricity market focused on producing power 
at the lowest direct cost. The RPS is designed to deliver renewables 
that are most ready for the market. Additional policies are still 
needed to support emerging renewable technologies, like photovoltaics, 
that have enormous potential to eventually become commercially 
competitive through targeted investment incentives. Smart investors 
typically acquire a portfolio of stocks and bonds to reduce risk. 
Including renewables in America's power supply portfolio would do the 
same by protecting consumers from fossil fuel price shocks and supply 
shortages. A properly designed RPS will also establish a viable market 
for the long-term development of America's renewable energy industries, 
creating jobs at home and export opportunities abroad.
    The RPS is the surest market based approach for securing the public 
benefits of renewables while supplying the greatest amount of clean 
power for the lowest price. It creates an ongoing incentive to drive 
down costs by providing a dependable and predictable market, which has 
been lacking in this country. The RPS will reduce renewable energy 
costs by:

   Providing a revenue stream that will enable manufacturers 
        and developers to obtain reasonable cost financing and make 
        investments in expanding capacity to meet an expanding 
        renewable energy market.

   Allowing economies of scale in manufacturing, installation, 
        operation and maintenance of renewable energy facilities.

   Promoting vigorous competition among renewable energy 
        developers and technologies to meet the standard at the lowest 
        cost.

   Inducing development of renewables in the regions of the 
        country where they are the most cost-effective, while avoiding 
        expensive long-distance transmission, by allowing national 
        renewable energy credit trading.

   Reducing transaction costs, by enabling suppliers to buy 
        credits and avoid having to negotiate many small contracts with 
        individual renewable energy projects.

    Analysis of the 20 percent RPS target in 2020 that I strongly 
support would result in renewable energy development in every region of 
the country with most coming from wind, biomass, and geothermal 
sources. In particular, the Plains, Western, and Mid-Atlantic States 
would generate more than 20 percent of their electricity from 
renewables as shown in Figure 4. Electricity prices are projected to 
fall 13 percent between 1997 and 2020 under this RPS. While this is not 
as much as the projected 18 percent decrease under business-as-usual 
without an RPS, it is nonetheless a substantial decrease and has 
additional nation-wide environmental and health benefits (see Figure 
5).\26\ This increase in renewable energy would also reduce some of the 
projected rise in natural gas prices for all gas consumers by 5 percent 
in 2020 again saving households money who heat with natural gas.
    Texas has been a leader in developing and implementing a successful 
RPS that then Governor Bush signed into law in 1999. The Texas law 
requires electricity companies to supply 2,000 MW of new renewable 
resources by 2009. The state may meet this goal by the end of 2002, 
seven years early. The RPS has also been signed into law in Arizona, 
Connecticut, Maine, Massachusetts, Nevada, New Jersey, New Mexico, 
Pennsylvania, and Wisconsin. Minnesota and Iowa also have minimum 
renewables requirements similar to an RPS. Bills with the RPS are also 
pending in several states. Variations in the details of these programs 
have kept them from being overly successful. A clear and properly 
constructed federal standard would correct these problems, and set a 
clear target for industry research, development, and market growth.\27\

5) Institute federal standards needed to support distributed small-
        scale energy generation and cogeneration (CHP)
    Small scale distributed electricity generation has several 
advantages over traditional central-station utility service. 
Distributed generation reduces energy losses incurred by sending 
electricity through an extensive transmission and distribution network 
(often an 8-10 percent loss of energy), defers the need for new 
transmission capacity and substation upgrades, provides voltage 
support, and reduces the demand for spinning reserve capacity. In 
addition, the location of generating equipment close to the end use 
allows waste heat to be utilized to meet heating and hot water demands, 
significantly boosting overall system efficiency.
    Distributed generation has faced several barriers in the 
marketplace, most notably from complicated and expensive utility 
interconnection requirements. These barriers have led to a push for 
national safety and power quality standards, currently being finalized 
by the Institute of Electrical and Electronics Engineers (IEEE). 
Although adoption of these standards would significantly decrease the 
economic burden on manufacturers, installers, and customers, the 
utilities are allowed discretion in adopting or rejecting these 
standards. Therefore, a Federal mandate to require utilities to accept 
these standards, along with tax incentives for utilities and customers 
who use distributed generation systems would ease their acceptance into 
the marketplace.
    While all distributed generation systems have the advantage of 
lower line losses, there is large variability in the overall 
efficiencies of the systems based on system type and installation. It 
is important to design credits based on overall efficiency and offset 
emissions compared to central station generation. This is accomplished 
by giving highest priority to renewable systems or fossil fuel systems 
that utilize waste heat through combined heat and power designs. While 
a distributed generation system may achieve 35-45 percent electrical 
efficiency, the addition of heat utilization can raise overall 
efficiency to 80 percent. U.S. CHP capacity in 1999 totaled 52,800 MW 
of power, but the estimated potential is several times this. Industrial 
CHP potential is estimated to be 88,000 MW, the largest sectors being 
in the chemicals and paper industries. Commercial CHP potential is 
estimated to be 75,000 MW, with education, health care, and office 
building applications making up the most significant percentages \28\ 
(see Figure 6). This tremendous resource has the advantage of 
offsetting separate electric and fossil fuel heating systems, but CHP 
applications are only feasible through the use of onsite distributed 
electricity generation.
    I support at least a 10 percent investment tax credit and seven-
year depreciation period for renewable energy systems or combined heat 
and power systems with an overall efficiency of at least 60-70 percent 
depending on system size. This proposal is similar to one included in 
the Murkowski-Lott energy bill (S. 389), the Bingaman-Daschle energy 
bill (S. 596), as well as bills targeted to CHP promotion introduced by 
Rep. Wilson (H.R. 1045) and Rep. Quinn (H.R. 1945). It is important to 
note again that these measures would be most effective coupled with 
mandated utility interconnection requirements.
    The U.S. should pursue a policy of not only net-metered energy use, 
but also real-time pricing where homeowners, businesses, and industry 
can all participate fully in supplying their excess power generation 
into the market. Homes with solar photovoltaic, wind, or fuel-cell 
systems should be able to sell their excess energy. Opening the energy 
supply markets to local generation will provide strong, economically 
sound, signals to the utilities, the Qualifying Facilities, and 
homeowners that the energy market is fair, accessible, and one where 
clean energy generation will be rewarded. The investment in the grid, 
largely in the form of upgrades to local sub-stations, will lead to 
further energy efficiency benefits as an added bonus. Federal 
leadership and standards are needed to guide this transformation.

6) Enact new and strengthen existing efficiency standards on buildings, 
        equipment, and appliances
    Buildings, appliance, and equipment standards are an important 
strategy for promoting energy efficiency. Tax credits, while important, 
do not necessarily remove the market barriers that prevent clean energy 
technologies from spreading throughout the marketplace. Minimum 
efficiency standards were adopted by President Reagan in 1987, and then 
expanded under President Bush in 1992, because market barriers 
inhibited the purchase of efficient appliances and equipment. These 
barriers include lack of awareness, rush purchases when an existing 
appliance breaks down, and purchases by builders and landlords. Figure 
7 shows how federal standards dramatically increased the market share 
of highly efficient magnet ballasts used for lighting.
    Significant advances in heating and cooling system, motor, and 
appliance efficiency, have been made in recent years, but more 
improvements are technologically possible and economically feasible. A 
clear federal statement of desired improvements in system efficiency is 
needed to remove uncertainty and reduce the economic costs of 
implementing these changes. Under such a federal mandate, efficiency 
standards for equipment and appliances could be gradually increased, 
helping to expand the market share of existing high efficiency 
systems.\29\
    Historically, building, appliance, and equipment standards have 
proven to be one of the federal government's most effective energy-
saving programs. Analyses by DOE and others indicate that in 2000, 
appliance and equipment efficiency standards saved 1.2 quadrillion BTUs 
of energy (1.3 percent of U.S. electric use) and reduced consumer 
energy bills by approximately $9 billion with energy bill savings far 
exceeding any increase in product cost. By 2020, standards already 
enacted will save 4.3 quadrillion BTU/year (3.5 percent of projected 
U.S. energy use), and reduce peak electric demand by 120,000 MW (more 
than a 10 percent reduction). ACEEE estimates that energy would be 
reduced in 2020 by 1.0 quadrillion BTU by quickly adopting higher 
standards for equipment currently covered under federal laws, such as 
central air-conditioners and heat pumps, and by adopting new standards 
for equipment not covered, such as torchiere (halogen) light fixtures, 
commercial refrigerators and reduction of appliance's standby power 
consumption (see Figure 8 for standby power used by today's 
televisions). This is nearly a 1 percent reduction in projected U.S. 
energy use, resulting in a savings of nearly 20 million metric tons of 
carbon. Consumers and businesses would see their energy bills decline 
by approximately $7 billion per year by 2020. Additional savings can be 
achieved by future updates and expansions to the appliance standards 
program; the savings estimated here just apply to actions that can be 
taken in the next few years.

7) Institute a National Public Benefits Fund based on revenue collected 
        from a national, competitively neutral wires charge
    Electric utilities have historically funded programs to encourage 
the development of a host of clean energy technologies. Unfortunately, 
increasing competition and deregulation have led utilities to cut these 
discretionary expenditures in the last several years. Total utility 
spending on demand side management programs fell more than 50 percent 
from 1993 to 1999. Lack of investment in the future has been a hallmark 
of utility `planning' in face of deregulation, and needs to be reversed 
through rewards (such as tax incentives) for companies that re-invest 
profits and invigorate the power sector.\30\ I recommend a national 
public benefits fund which could be funded through a $0.002/kWh charge. 
This concept and amount were put forth in bills sponsored by Senator 
Jeffords (S. 1369) and Rep. Pallone (H.R. 2569) in the last Congress 
and in the Bingaman-Daschle energy bill (S. 597). Furthermore, there 
should be federal matching of state funds. The funds could be used for 
programs promoting:

   R&D

   Low-cost financing or financing guarantees

   Grants, production incentives, or buy-downs for project 
        costs

   Infrastructure development

   Development of uniform standards for siting, permitting, and 
        connection with the electrical grid

   Education of the public on the benefits and costs of clean 
        energy technologies and efficiency

   Incentives, such as rebates, to help establish markets for 
        new products

   Installation, operation, and maintenance of renewable energy 
        and energy efficient technologies

Cost and Benefit Analysis of Clean Energy Policies on Electricity 
        Generation
    I agree wholeheartedly with the findings of the Union of Concerned 
Scientists' report, Clean Energy Blueprint: A Smarter National Energy 
Policy for Today and the Future,\31\ which examines the costs, 
environmental impacts, and effects on fossil fuel prices and consumer 
energy bills of a package of clean energy polices. These policies 
include: incentives for consumers to purchase more efficient 
appliances; stricter energy codes for buildings; residential and 
commercial building retrofits; voluntary programs with industry to 
reduce energy use meaningfully; a RPS requiring electricity providers 
to obtain 20 percent of their supplies from renewables power sources by 
2020 using tradable renewable energy credits; an expanded production 
tax credit to include all renewables; and a public benefits fund funded 
through a $0.002/kWh charge to customers.
    This analysis is based on the Energy Information Administrations 
National Energy Modeling Systems (NEMS) with modifications used in the 
Interlaboratory Working Group's study to accurately account for the 
growth and costs of the renewable and energy efficiency technologies 
modeled. Under the business-as-usual scenario the nation is expected to 
increase its reliance on coal and natural gas to meet strong growth in 
electricity use of 42 percent by 2020 as shown in Figure 9. To meet 
this demand it is estimated that 1,300 300-MW power plants would need 
to be built with electricity generation from non-hydro renewables 
increasing from 2 percent today to only 2.4 percent of total generation 
in 2020. This amounts to a policy of energy and economic stagnation. 
If, on the other hand, the set of clean energy polices listed above are 
implemented energy efficiency and renewables will meet a much larger 
share of our future energy needs with energy efficiency measures almost 
completely offsetting the projected business-as-usual growth in 
electricity (Figure 10). Unlike the Bush-Cheney energy plan, this clean 
energy strategy plan builds energy security for the U.S. by supporting 
energy diversity and domestic supplies. The result is a large decrease 
in emissions from the utilities sector compared to business-as-usual 
projections with declines continuing beyond 2020. Figure 11 compares 
the projected power plant carbon dioxide reductions with the level 
proposed by the Senator Jeffords' and Representative Waxman's 4-
pollutant power plant emission reduction bills (S. 556 and H.R. 1256). 
Through a steady shift to clean energy production, the requirements of 
these bills would not be difficult or expensive to meet, and if 
anything are expected to increase U.S. economic activity.
    Finally the more efficient use of energy and the switch from fossil 
fuels to renewable energy sources saves consumers money by decreasing 
energy use in homes, businesses, and industry. This results in price 
drops for natural gas, as shown in Figure 12, and reduced household 
electricity bills from business-as-usual predictions (Figure 13), while 
average consumer prices are about the same. One of the greatest 
advantages that energy efficiency and renewable energy sources offer 
over new power plants, transmission lines, and pipelines is the ability 
to deploy these technologies very quickly. We can begin to deploy these 
technologies now and so reap the benefits all that much sooner.\32\ 
CO2 emission reductions will also have a `clean cascade' 
effect on the economy since many other pollutants are emitted in 
concert with carbon from fossil fuel use.
    A range of studies are all coming to the conclusion that simple but 
sustained standards and investments in a clean energy economy are not 
only possible but would be highly beneficial to our nation's future 
prosperity.\33\ A recent analysis of the whole economy shows that we 
can easily meet Kyoto type targets with a net increase of 1 percent in 
the Nation's GDP 2020.\34\ The types of energy efficiency and renewable 
technologies and policies described here have already proven successful 
and cost-effective at the national and state level. I argue that this 
is even more reason to increase their support. Figure 14 shows how a 
combination of readily available options can be used to meet the Kyoto 
Protocol targets. This type of strategy would cost-effectively enable 
us to meet goals of GHG emission reductions\35\ while providing a 
sustainable clean energy future.

Conclusions
    We stand at a critical point in the energy, economic, and 
environmental evolution of the United States. Renewable energy and 
energy efficiency are now not only affordable, but their use will also 
open new areas of innovation and technological and economic leadership 
for the U.S., if we choose to embrace these options. Creating 
opportunities and--critically--a fair market place for a clean energy 
economy requires leadership and vision. The tools to implement this 
evolution are now well known, and are listed in the previous section. I 
look forward to the opportunity to work with you to put these cost-
effective measures into effect.

Biographical Sketch: Daniel M. Kammen
    Daniel M. Kammen received his undergraduate degree physics from 
Cornell University 1984, and his Masters (1986) and Doctorate (1988) 
degrees in physics, from Harvard University. He was a Bantrell & 
Weizmann Postdoctoral Fellow at the California Institute of Technology, 
and then a lecturer in the Department of Physics at Harvard University. 
From 1992-1998 Kammen was on the faculty of the Woodrow Wilson School 
of Public and International Affairs at Princeton University, where he 
was Chair of the Science, Technology and Environmental Policy Program. 
Kammen is now Professor of Energy and Society in the Energy and 
Resources Group (ERG), and in the Department of Nuclear Engineering at 
the University of California, Berkeley. At Berkeley Kammen is the 
founding director of the Renewable and Appropriate Energy Laboratory 
(http://socrates.berkeley.edu/rael), and is campus representative to 
the University of California Energy Institute. He has been a Lecturer 
in Physics and Natural Science at the University of Nairobi.
    Kammen's research centers on the science, engineering, economics 
and policy aspects of energy management, and dissemination of renewable 
energy systems. He also works on the health and environmental impacts 
of energy generation and use; rural resource management, including 
issues of gender and ethnicity; international R&D policy, climate 
change; and energy forecasting and risk analysis. He is the author of 
over 110 journal publications, a book on environmental, technological, 
and health risks (Should We Risk It?, Princeton University Press, 1999) 
and numerous reports on renewable energy and development. Kammen 
received the 1993 21st Century Earth Award and is a Fellow of the American Physical Society. He is a Permanent Fellow of the African Academy of 
Sciences. For information of any of these activities and for copies of Professor Kammen's writings, see http://socrates.berkeley.edu/dkammen.

Figure 1. Levelized cost of electricity forecast for renewable energy 
        technologies (U.S. DOE, 1997)

        
        

Figure 2. Actual electricity costs in year 2000 



Source: Ottinger, R. L. et al. (1991) Environmental Costs of 
Electricity (Oceana Publications, Inc: New York); U.S. Department of 
Energy (2000), Annual Energy Outlook 2000, DOE/EIA-0383(00), Energy 
Information Administration, Washington, D. C., December; U.S. DOE, 
1997.

Figure 3. Progress ratios (experience curves) for photovoltaics, 
        windmills, and gas turbines

        
        
Source: IIASA/WEC (1995) Global Energy Perspectives to 2050 and Beyond 
(Laxenburg, Austria and London, UK).

Figure 4. Renewable energy generation in the U.S. by region for a RPS 
        with a 20 percent target in 2020 (Clemmer, 1999)

        
        

Figure 5. Average monthly electricity bill for typical non-electric 
        heating household 

        
        
Source: Nogee, A., Clemmer, S., Paulos, B., and Haddad, B. (1999) 
``Powerful Solutions: 7 Ways to Switch America to Renewable Energy,'' 
Union of Concerned Scientists, January.

Figure 6. CHP growth potential within several sectors of the economy 
        (ACEEE, 2001)

        
        

Figure 7. Market Share of efficient magnetic ballasts for lighting 
        (Interlaboratory Working Group, 2000)

        
        

Figure 8. Standby power consumption for a selection of 365 televisions 



Source: K. Rosen, LBNL, US DOE, 1999.

Figure 9. Electricity Deregulation under business as usual * (Clemmer, 
        2001)

        
        

Figure 10. Energy generation with the implementation of various 
        renewable energy and energy efficient policy options * 
        (Clemmer, 2001)

        
        

Figure 11. Power plant carbon dioxide emissions (Clemmer, 2001)




Figure 12. Natural gas prices (national average)* (Clemmer, 2001)




Figure 13. Typical household electricity bill (Clemmer, 2001)




Figure 14. Potential carbon reductions from energy efficiency and 
        renewable energy measures

        
        
Source: Energy Foundation, 2001.

ENDNOTES
    1. The Renewable and Appropriate Energy Laboratory: URL http://
socrates.berkeley.edu/rael
    2. IPCC (Intergovernmental Panel on Climate Change) (2001) Climate 
Change 2001: The Scientific Basis, January.
    3. National Research Council (NRC) (2001) ``Climate Change Science: 
An Analysis of Some Key Questions,'' Committee on the Science of 
Climate Change, National Research Council, National Academy Press, 
Washington, DC.
    4. Herzog, A.V., Lipman, T.E., and Kammen, D.M. (2001) ``Energy 
Resource Science and Technology Issues in Sustainable Development: 
Renewable Energy Sources,'' in, OUR FRAGILE WORLD: Challenges and 
Opportunities for Sustainable Development, forerunner to the 
Encyclopedia of Life Support Systems (EOLSS), (UNESCO-EOLSS 
Secretariat, EOLSS Publishers Co. Ltd.).
    5. IPCCi, op. cit.
    6. U.S. Department of Energy (1997) Renewable Energy Technology 
Characterizations, Topical Report Prepared by U.S. DOE Office of 
Utility Technologies and EPRI, TR-109496, December.
    7. Duke, R. D., and Kammen, D. M. (1999), ``The economics of energy 
market transformation initiatives,'' The Energy Journal, 20: 15-64.
    8. Interlaboratory Working Group (2000) Scenarios for a Clean 
Energy Future (Oak Ridge, TN; Oak Ridge National Laboratory and 
Berkeley, CA; Lawrence Berkeley National Laboratory), ORNL/CON-476 and 
LBNL-44029.
    9. Kinzig, A. P. and Kammen, D. M. (1998) ``National trajectories 
of carbon emissions: Analysis of proposals to foster the transition to 
low-carbon economies,'' Global Environmental Change, 8 (3), pages 183-
208.
    10. Krause, F., DeCanio, S, and Baer, P. (2001) ``Cutting Carbon 
Emissions at a Profit: Opportunities for the U.S.,'' (International 
Project for Sustainable Energy Paths: El Cerrito, CA), May.
    11. Personal communication, S. Laitner, EPA Office of Atmospheric 
Programs, Washington, DC, 2001.
    12. Margolis and Kammen, op. cit.
    13. President's Committee of Advisors on Science and Technology 
(PCAST) (1997) Federal Energy Research and Development for the 
Challenges of the Twenty-First Century (Washington, D.C. OSTP).
    14. Krause, F. et al., 2001, op cit.
    15. PCAST, op cit.
    16. Established by the Windfall Profit Tax Act of 1980. Tax credit 
is $3 per barrel of oil equivalent produced, and phases out when the 
price of oil rises to $29.50 per barrel (1979 dollars).
    17. Mark, J. (1999) ``Greener SUVs: A Blueprint for Cleaner, More 
Efficient Light Trucks,'' Union of Concerned Scientists.
    18. David J. Friedman, Jason Mark, Patricia Monahan, Carl Nash, and 
Clarence Ditlow (2001) Drilling in Detroit: Tapping Automaker Ingenuity 
to Build Safe and Efficient Automobiles, U. of Concerned Scientists, 
Cambridge, MA.
    19. Malcolm A. Weiss, John B. Heywood, Elisabeth M. Drake, Andreas 
Schafer, and Felix F. AuYeung (2000) ``On the Road in 2020: A lifecycle 
analysis of new automobile technologies,'' Energy Laboratory, 
Massachusetts Institute of Technology, MIT EL 00-003, Cambridge, 
October.
    20. Office of Technology Assessment (1995) Advanced Vehicle 
Technology: Visions of a Super-Efficient Family Car, OTA-ETI-638, 
Office of Technology Assessment, U.S. Congress, Washington, D.C., 
September.
    21. David L. Greene and John Decicco (2000) ``Engineering-Economic 
Analyses of Automotive Fuel Economy Potential In The United States,'' 
Annual Rev. Energy Environ. 25: 477-536.
    22. Greene, D.L. and DeCicco J., op cit.
    23. Interlaboratory Working Group, op cit.
    24. Clemmer, S.L., Nogee, A., and Brower, M. (1999) ``A Powerful 
Opportunity: Making Renewable Electricity the Standard,'' Union of 
Concerned Scientists, January.
    25. PCAST, op cit.
    26. Clemmer, S., Nogee, A, and Brower M. (1999) ``A Powerful 
Opportunity; Making Renewable Electricity the Standard,'' Union of 
Concerned Scientists, January.
    27. Rader, N. (2000) ``Getting it Right and Wrong in the States,'' 
Windpower Monthly, pp. 42-47, April.
    28. Dixon, R. K. (2001) Office of Power Technologies, U.S. 
Department of Energy, Second International CHP Symposium, Amsterdam, 
Netherlands, May.
    29. Clemmer, S.L., Donovan, D., Nogee, A. (2001), ``Clean Energy 
Blueprint: A Smarter National Energy Policy for Today and the Future, 
Phase I'' Union of Concerned Scientists and Tellus Institute, June.
    30. Margolis and Kammen, op cit; 
    31. Clemmer, S.L., Donovan, D., Nogee, A., op c it.
    32. Kinzig and Kammen, op cit.
    33. Interlaboratory Working Group, op cit.
    34. Krause, F., et al, op cit.
    35. Baer, P., Harte, J., Haya, B., Herzog, A.V., Holdren, J., 
Hultman, N.E., Kammen, D.M., Norgaard, R.B., and Raymond, L. (2000) 
``Equity and Greenhouse Gas Responsibility,'' Science, 289, page 2287.

    Senator Kerry. Thank you very much. We will, Mr. Kammen.
    Mr. German.

   STATEMENT OF JOHN GERMAN, MANAGER, ENVIRONMENT AND ENERGY 
   ANALYSES, PRODUCT REGULATORY OFFICE, AMERICAN HONDA MOTOR 
                         COMPANY, INC.

    Mr. German. My name is John German. I am the manager of 
environmental energy analyses in the product regulatory office 
for American Honda Motor Company.
    I appreciate the opportunity to testify this morning on 
near, mid-, and long-term technological opportunities for 
increased motor vehicle fuel efficiency. I will summarize my 
prepared statement and ask that the full statement be printed 
in the hearing record.
    Senator Kerry. It will be printed in the record.
    Mr. German. There is a popular misconception that vehicle 
manufacturers have not introduced fuel-efficient technology 
since the mid-1980's. The basis of this belief is that car and 
light-truck CAFE have remained constant for the last 15 years. 
The fact is, however, that there has been a substantial amount 
of efficiency technology introduced during this period, 
including lock-up torque converters, port fuel injection, and 
four-valve-per-cylinder technologies.
    However, this new technology has been employed to respond 
to vehicle attributes demanded by the marketplace rather than 
to increase fuel economy. Over the past two decades, consumers 
have insisted on such features as enhanced performance, luxury 
and safety, and greater utility. As reflected in my prepared 
statement, even though vehicle weight increased 12 percent from 
1987 to 2000, the zero to 60 acceleration time decreased by 22 
percent from 1981 to 2000. This is because average horsepower 
increased by more than 70 percent.
    The bottom line is that it is these other attributes, not 
fuel economy, that influence customer decisions in the 
marketplace. We calculate that if these technologies had been 
used solely for fuel economy instead of performance and other 
attributes, if the current car fleet were still at 1981 
performance weight and transmission levels, then passenger CAFE 
would be almost 36 miles per gallon, rather than the current 
level of 28.1. Since 1987, technology has gone into the fleet 
that could have improved fuel economy by almost 1.5 percent per 
year if it had not gone to other attributes demanded by the 
market. Thus, while fuel economy did not increase, the fuel 
efficiency of the vehicles did.
    We see four pathways to improve fuel efficiency in the 
future. First, in the near term, we believe that the 1.5 
percent efficiency improvement from conventional technology 
could continue into the future. There are a number of 
technologies that are just beginning to penetrate the market, 
including direct injection gasoline engines, five-speed 
automatic and six-speed manual transmissions, continuously 
variable transmissions, cylinder cut-off during light-load 
operation, and idle-off features.
    Honda, for example, has been aggressive in incorporating 
fuel-efficient variable valve timing in almost 60 percent of 
our 2000 model year vehicles. Other manufacturers are beginning 
to utilize this technology as well. However, for this level of 
fuel economy improvement to continue, it would require that all 
benefits of these new technologies be applied to fuel economy 
and not the other vehicle attributes such as comfort, 
convenience, and performance.
    Second, use of materials for weight and strength 
optimization, measures to reduce friction and accessory losses, 
and aerodynamic designs can be effective in both the near and 
the long-term. Many of these approaches to fuel efficiency were 
incorporated in our new Acura seven-passenger sport utility, 
the MPX, which has the highest fuel economy in its class. They 
are also used extensively in the Honda Insight, which attained 
68 miles per gallon highway and 61 miles per gallon city.
    While I will discuss the hybrid system in this vehicle in a 
moment, I simply want to point out that 30 percent of the 
enhanced fuel economy of the Insight is attributable to body 
technologies, such as an all-aluminum body and low rolling 
resistance tires.
    Third, over the next five to fifteen years, we believe the 
most promising opportunities will come through hybrid 
technology, vehicles which employ two power sources. There are 
currently two such vehicles sold in the U.S. today, the Honda 
Insight and the Toyota Prius. There are some basic operating 
characteristics that help shape the design of any hybrid 
system. The primary demands on horsepower and torque occur 
while accelerating and climbing grades. Minimal power is needed 
to maintain a vehicle's speed while cruising on a level road. 
By using an electric motor to provide a power boost to the 
engine when needed, a smaller, more fuel-efficient gasoline 
engine can be used.
    In addition, the electric motor can be used to capture 
energy that would normally be lost during deceleration and 
braking. This energy can then be used to recharge the battery. 
One of the attributes of hybrids is that they run on gasoline 
and do not require a new refueling infrastructure. Moreover, 
hybrids do not need to be plugged in for recharging; they 
recharge themselves.
    A number of manufacturers have announced their intentions 
to introduce hybrid vehicles over the next few years. We 
believe that a good hybrid system will give a 20 to 40 percent 
improvement in fuel economy. While a number of challenges 
remain before we will see high levels of hybrid penetration in 
the marketplace, there is no greater challenge than cost.
    Hybrid systems are not cheap. While manufacturers are 
understandably reluctant to discuss cost, hybrids could cost 
several thousand dollars more than the equivalent conventional 
gasoline vehicle. With fuel costs so inexpensive in the U.S. 
relative to Japan and Europe, it is likely that hybrid sales 
will increase more quickly there than in the U.S.
    In the long-term, the most promising technology appears to 
be fuel cell vehicles. Fuel cell vehicles run on hydrogen gas. 
The only emission is water. Honda's work currently focuses on 
direct hydrogen fuel cell vehicles in which hydrogen is carried 
on board the vehicle in highly compressed form and is used to 
make electric energy to power the vehicle. Other manufacturers 
are working with reformers which convert a fuel like gasoline 
or methanol into hydrogen on board the vehicle.
    While we have been making good progress in our work, major 
hurdles remain. Reformers are expensive, take up a lot of room 
in the vehicle, and are slow to warm up and respond to 
transient driving conditions. They reduce the efficiency of the 
vehicle, both because of the energy needed for the reforming 
process and because the resulting fuel stream is not pure 
hydrogen. For compressed hydrogen fuel cell vehicles, in 
addition to significant technological challenges, there would 
also be the need for a new refueling infrastructure.
    While fuel cell technology is promising, we must be 
realistic in our expectations. We do not anticipate seeing a 
consumer fuel cell vehicle market for at least one or two 
decades, and we must be forever mindful of our experience with 
battery electric vehicles. A decade or so ago, we all thought 
battery electric vehicles were the future, but the battery 
technology simply never evolved to the point we expected. The 
best battery electric vehicles out there today have a range of 
up to only 100 miles, take three to 8 hours to recharge, and 
cost tens of thousands of dollars for the batteries alone, and 
there are no technological breakthroughs on the horizon.
    Mr. Chairman, I think there is much that technology can do 
to achieve enhanced fuel efficiency, but we must be realistic 
about the pace of technology and the hurdles that we will 
encounter along the way. Also manufacturers can sell only what 
consumers are willing to buy. Absent programs or marketplace 
conditions that stimulate demand or provide incentives, the 
manufacturers' challenge will be to increase fuel efficiency 
without sacrificing the performance, safety, convenience, and 
comfort that customers demand.
    Thank you. I would be happy to answer any questions.
    [The prepared statement of Mr. German follows:]

  Prepared Statement of John German, Manager, Environment and Energy 
Analyses, Product Regulatory Office, American Honda Motor Company, Inc.

    Good morning, my name is John German, Manager, Environment and 
Energy Analyses, Product Regulatory Office, American Honda Motor Co., 
Inc. Honda appreciates the opportunity to appear before the Senate 
Commerce, Science and Transportation Committee to discuss automotive 
fuel efficiency with a focus on technology.
    The environmental challenge is one that Honda has long embraced. 
Honda products have always focused on the most efficient use of 
resources. It has been a part of Honda's culture from the beginning. To 
quote our founder, Mr. Honda, in 1974, ``I cannot overstress the 
importance of continuing to cope with the pollution problem.'' We 
believe that we must think about more than just the products we make. 
We think about the people who use them and the world in which we live. 
We believe that it is our responsibility, as a manufacturer of these 
products, to do all we can to reduce the pollutants that are created 
from the use of products that we produce.
Conventional Technology
    There is a popular misconception that vehicle manufacturers have 
not introduced fuel efficient technology since the mid-80s. This is 
understandable, as the car and light truck CAFE have remained constant 
for the last 15 years (and the combined fleet has gone down due to 
increasing light truck market penetration), as shown in Figure 1. 
However, there has been a substantial amount of efficiency technology 
introduced in this time period. Some examples for the entire car and 
light truck fleet from EPA's 2000 Fuel Economy Trends are shown in 
Figure 2.

Figure 1




Figure 2




    However, this new technology has been employed more to respond to 
vehicle attributes demanded by the marketplace than to increase fuel 
economy. Over the past two decades consumers have insisted on such 
features as enhanced performance, luxury, utility, and safety, without 
decreasing fuel economy. Figure 3 shows the changes in vehicle weight, 
performance, and proportion of automatic transmissions since 1980 in 
the passenger car fleet. Even though weight increased by 12% from 1987 
to 2000, the 0-60 time decreased by 22% from 1981 to 2000. This is 
because average horsepower increased by over 70% from 1982 (99 hp) to 
2000 (170 hp). In addition, the proportion of manual transmissions, 
which are much more fuel efficient than automatic transmissions, 
decreased from 32% in 1980 to 14% in 2000.

Figure 3




    It is clear that technology has been used for vehicle attributes 
which consumers have demanded or value more highly than fuel economy. 
Figure 4 compares the actual fuel economy for cars to what the fuel 
economy would have been if the technology were used solely for fuel 
economy instead of performance and other attributes. If the current car 
fleet were still at 1981 performance, weight, and transmission levels, 
the passenger car CAFE would be almost 36 mpg instead of the current 
level of 28.1 mpg. The trend is particularly pronounced since 1987. 
From 1987 to 2000, technology has gone into the fleet at a rate that 
could have improved fuel economy by about 1.5% per year, if it had not 
gone to other attributes demanded by the marketplace.

Figure 4




    There is no reason why this technology trend of improved efficiency 
(as opposed to fuel economy) should not continue. Many of the 
technologies in the 2000 fleet, such as 4-valve per cylinder, have not 
yet spread throughout the entire fleet (although Honda vehicles have 
been virtually 100% 4-valve per cylinder since 1988). In addition, 
several new technologies that will have significant efficiency benefits 
are just beginning to penetrate the fleet. One technology pioneered by 
Honda is variable valve timing. While Honda used variable valve timing 
in almost 60% of our 2000 vehicles, penetration in the other 
manufacturers' fleets is only a percent or two. Other technologies that 
have recently been introduced or for which at least one manufacturer 
has announced plans to introduce include:

   Direct injection gasoline engines (only announced for Europe 
        and Japan to date)

   5-speed automatic and 6-speed manual transmissions

   Continuously variable transmissions (works like an 
        automatic, but more efficient)

   Lightweight materials

   Low rolling resistance tires

   Improved aerodynamics

   Cylinder cut-off during light-load operation (for example, 
        an 8-cylinder engine shuts off 4 cylinders during cruise 
        conditions)

   Idle-off (the engine stops at idle)

    Technologies are continuously being incorporated into vehicles. 
However, consumer's sense of value usually puts fuel efficiency near 
the bottom of their list. The dilemma facing manufacturers is that 
customers may not value putting in these technologies just to improve 
fuel economy.

Gasoline-Electric Hybrids
    The competitive technologies that I have just described will be 
integrated in vehicle fleets in the relative near term. The most 
promising technology on the mid-term horizon (5-15 years) are hybrid 
vehicles--vehicles which employ two power sources. The two hybrid 
vehicles recently introduced in the US, the Honda Insight and the 
Toyota Prius, both use innovative hybrid techniques. There are some 
basic operating characteristics that help shape the design of any 
hybrid system. The greatest demands on horsepower and torque occur 
while accelerating and climbing grades. Minimal power is needed to 
maintain a vehicle's speed while cruising on a level road. By using an 
electric motor to provide a power boost to the engine when appropriate, 
a smaller, more fuel-efficient gasoline engine can be used. In 
addition, the motor can be used to capture energy that would normally 
be lost during deceleration and braking and use this energy to recharge 
the battery. This process is referred to as ``regenerative braking.'' 
These vehicles do not need to be plugged in. Finally, the powerful 
electric motor can restart the engine far quicker than a conventional 
starter motor and with minimal emission impact, allowing the engine to 
be shut off at idle.




    Honda's Integrated Motor Assist (IMA) relies primarily on a small 
gasoline motor and is supplemented by a high torque, high efficiency DC 
brushless motor located between the engine and the transmission.\1\ 
This 10 kW motor is only 60 mm (2.4") thick and is connected directly 
to the engine's crankshaft. It supplies up to 36 ft-lb. of torque 
during acceleration and acts as a generator during deceleration to 
recharge the battery pack. This is a simple, elegant method to package 
a parallel hybrid system and minimizes the weight increase.
---------------------------------------------------------------------------
    \1\ ``Development of Integrated Motor Assist Hybrid System,'' K. 
Aoki et al, Honda, June, 2000, SAE paper # 2000-01-2059.




    Toyota's hybrid system combines both series and parallel 
systems.\2\ The Prius powertrain is based on the parallel type. 
However, to optimize the engine's operation point, it allows series-
like operation with a separate generator.
---------------------------------------------------------------------------
    \2\ Prius information is based upon October, 1999 Presentation by 
Dave Hermance of Toyota, ``Toyota Hybrid System Concept and 
Technologies.''
---------------------------------------------------------------------------
    Both models use relatively small battery packs. The Insight's NiMH 
battery pack is rated at about 1 kW-hr of storage and only weighs about 
22 kg (48 pounds). The battery pack on the Prius is larger, but is 
still no more than twice the size of the Insight's. These lightweight 
battery packs help to maintain in-use performance and efficiency while 
maintaining most of the hybrid system benefits. The larger motor and 
battery on the Prius also allow limited acceleration and cruise at 
light loads on electricity only.
    Both the Insight and the Prius incorporate substantial engine 
efficiency improvements, in addition to the downsizing allowed by the 
hybrid system. The Prius uses a low friction, Atkinson cycle 1.5L 
engine. The Atkinson cycle uses a longer expansion stroke to extract 
more energy from the combustion process to boost efficiency.
    The Insight engine incorporates a number of different strategies to 
improve efficiency. The engine has Honda's variable valve technology, 
which boosts peak horsepower and allows even more engine downsizing. 
The 1.0L, 3-cylinder engine also incorporates lean-burn operation, low 
friction, and lightweight technologies to maximize fuel efficiency. 
Despite the small engine size, the Insight can sustain good performance 
with a depleted battery, due to the high power/weight from the VTEC 
engine.
    What is especially interesting about the Insight and Prius 
comparison is that very different powertrain technologies were used to 
achieve similar efficiency goals. One important lesson is that the 
different types of hybrid systems have reasonably similar environmental 
performance. The new continuously variable transmission (CVT) Insight 
is rated as a SULEV. There are an infinite number of ways to combine 
hybrid components to create a practical hybrid electric vehicle.
    Both the Insight and the Prius have achieved impressive fuel 
economy improvements. The manual transmission Insight has the highest 
fuel economy label values ever for a gasoline vehicle, 61 mpg city and 
68 highway. The CVT Insight is rated at a slightly lower level. While 
much of the high fuel efficiency is attributable to the hybrid engine, 
other fuel efficient technologies, such as aerodynamic design and 
strategic use of lightweight materials were incorporated into the 
Insight as well. The Prius values are 52 mpg city and 45 highway.
    Projections have also been made for prototype or future hybrid 
designs. Table 1 compares the manufacturer claims for the prototype 
vehicles to the production values for the Insight and Prius. It should 
be noted that Table 1 presents CAFE values, instead of fuel economy 
label values.\3\
---------------------------------------------------------------------------
    \3\ EPA discounts the city test by 10% and the highway by 22% when 
calculating fuel economy values, so the combined FE based upon the 
label values discussed in the last paragraph is about 15% lower than 
the CAFE values in Table 1.

                   Table 1: Hybrid Vehicle Comparison
------------------------------------------------------------------------
                                                           % improvement
                                                CAFE mpg        **
------------------------------------------------------------------------
Commercial            Honda Insight                76             91%
------------------------------------------------------------------------
Commercial            Toyota Prius                 58             50%
------------------------------------------------------------------------
Prototype             Ford Escape SUV              40          40-70%
------------------------------------------------------------------------
Prototype             Dodge Durango SUV            19             20%
------------------------------------------------------------------------
Prototype             GM SUV                       35             20%
------------------------------------------------------------------------
Prototype             GM full-size pickup          20             15%
------------------------------------------------------------------------
Prototype             Ford Prodigy--PNGV          70*            155%
                       diesel
------------------------------------------------------------------------
Prototype             DC ESX3--PNGV diesel        72*            162%
------------------------------------------------------------------------
Prototype             GM Precept--PNGV diesel     80*            191%
------------------------------------------------------------------------
* Gasoline-equivalent mpg.
** Baseline for Escape is 24 mpg (V6) to 29 mpg (4-cyl).
  Baseline for PNGV is 28 mpg (based on typical midsize car).


    While it is easy to overlook because of the large efficiency 
benefits, hybrids also offer some potential emission reductions. The 
lower fuel consumption directly reduces upstream emissions from 
gasoline production and distribution. If the higher efficiency is used 
to increase range, evaporative emissions from refueling are reduced.

Future potential for hybrid powerplant applications and volume sales
    Hybrids have a number of positive features that are desired by 
customers. They use gasoline (or diesel fuel); thus there are no 
concerns about creating a new infrastructure to support fueling. The 
customer benefits from lower fuel costs, extended range, and fewer 
trips to the gas station. Hybrids have good synergy with other fuel 
economy technologies and even help reduce emissions. Equally important, 
there is little impact on how the vehicle operates. The vehicles drive 
and operate similar to conventional vehicles.
    Recent announcements from a number of manufacturers indicate that 
hybrid systems are being considered across a very broad vehicle 
spectrum. Toyota has announced production of a hybrid electric minivan 
for the Japanese market.\4\ Honda recently announced a hybrid version 
of the Civic 4-door sedan that will be sold in the US beginning in 
spring 2002. Ford has announced plans to put a hybrid system into a 
2003 model year Escape, a small SUV.\5\ DaimlerChrysler will offer a 
hybrid in its Durango SUV sometime in 2003.\6\ General Motors is 
already selling hybrid bus systems and plans to sell hybrid versions of 
its full-size pickup truck and the forthcoming Saturn VUE SUV in 
2004.\7\ There appears to be no inherent limitation on the use of 
hybrid systems, as long as packaging, weight, and cost issues can be 
managed.
---------------------------------------------------------------------------
    \4\ ``Toyota sees a hybrid future,'' Autoweek, October 30, 2000
    \5\ Ford Motor Co. press releases, January 10, 2000 and April 7, 
2000
    \6\ Associated Press article by Justin Hyde, October 25, 2000
    \7\ General Motors Co. press release, January 9, 2001
---------------------------------------------------------------------------
    While there have been tremendous strides in hybrid technology, 
there remain some packaging issues such as finding space for the motor, 
battery pack, and power electronics, as well as some additional weight. 
However, these issues are secondary compared to the cost issue.
    Unfortunately, hybrid systems are not cheap. Manufacturers are 
understandably reluctant to discuss the cost of their hybrid systems, 
so it is difficult to determine a realistic cost. Initially, hybrids 
also have high development costs spread over relatively low sales. 
DaimlerChrysler has said the hybrid Durango will cost about $3000 more 
than the standard model.\8\ Peugeot-Citroen recently stated that they 
``. . . have set a target of making the cost of stepping up to hybrid 
power no greater than the amount motorists are now prepared to pay for 
the switch from petrol to diesel.'' \9\ Ford stated that the hybrid is 
expected to add about $3000 to the price of the Escape,\10\ although it 
should be noted that a Ford engineer recently stated that the $3000 
price increment will not cover all of their costs.\11\
---------------------------------------------------------------------------
    \8\ Associated Press article by Justin Hyde, October 25, 2000
    \9\ Parallel hybrid project director Emmanuel Combes of PSA in 
August, 2000 issue of Global Automotive Network.
    \10\ Ford Motor Co. press release, January 10, 2000
    \11\ Ford Escape Chief Engineer, comments during May 18, 2001 
edition of PBS Science Friday
---------------------------------------------------------------------------
    To put the cost issue into context, let's take a look at what 
customers might be willing to pay in exchange for the fuel savings, 
both in the US and overseas. To do this, we need to make a few 
assumptions. The most critical is customer discounting of fuel savings. 
It is generally understood that most customers in the US only consider 
the first four years of fuel savings, plus they heavily discount even 
these four years. This is roughly equivalent to assuming that customers 
only value the fuel savings from the first 50,000 miles. For lack of 
information, the same 50,000 mile assumption is used for overseas 
customers (who drive less per year but may value the fuel savings 
more).
    Estimates were made for three different size vehicles, small cars, 
midsize cars, and large trucks. Three estimates were also made for the 
hybrid benefits, as the improvements listed in Table 2 range from 15% 
to 196%. Of course, most of the vehicles in Table 1 include factors 
that go well beyond the impact of the hybrid system itself, such as 
weight and load reduction, engine efficiency improvements, and 
dieselization. A reasonable factor for just the hybrid system and 
corresponding engine size reduction is probably about 30-40% over 
combined cycles. Sensitivity cases of 20% (for very mild hybrids) and 
80% (for hybrids combined with moderate engine and load improvements) 
are also shown in Table 2.
    The final factor is fuel cost. Table 2 lists two cases: $1.50/
gallon (US) and $4.00/gallon (Europe and Japan). The formula used to 
calculate the fuel savings in Table 2 is:





  Table 2: Customer Value of Hybrid Fuel Savings (savings for the first
                              50,000 miles)
------------------------------------------------------------------------
                                    Small car   Midsize car  Large truck
   FE increase        Fuel cost   --------------------------------------
                                      40 mpg       27 mpg       16 mpg
------------------------------------------------------------------------
20%                $1.50/gal           $313         $463         $781
------------------------------------------------------------------------
                   $4.00/gal           $833       $1,235       $2,083
------------------------------------------------------------------------
40%                $1.50/gal           $536         $794       $1,339
------------------------------------------------------------------------
                   $4.00/gal         $1,429       $2,116       $3,571
------------------------------------------------------------------------
80%                $1.50/gal           $833       $1,235       $2,083
------------------------------------------------------------------------
                   $4.00/gal         $2,222       $3,292       $5,556
------------------------------------------------------------------------


    The results are sobering. From a societal view, the fuel savings 
over the full life of the vehicle (which are about three times the 
values in Table 2), would likely justify the approximately $3000 cost 
of hybrid systems. However, the typical customer would not make up the 
incremental cost of $3000 by the fuel savings, especially in the US. In 
Japan and Europe, there may be a substantial market for hybrids even at 
a cost of $3000, due to the higher fuel prices. If the hybrid cost 
could be reduced to $1500 or $2000, the majority of customers in Japan 
and Europe might be willing to purchase a hybrid vehicle.
    Even in the US, there are customers who, because they drive a lot 
or value the benefits more highly, will be willing to pay a $3000 
premium for a hybrid vehicle. However, it is clear that hybrids will 
not break into the mainstream market in the US unless the cost of 
hybrid systems comes down and/or some sort of market assistance or 
incentive program is adopted.
    Over the next five to ten years, we are likely to see a gradual 
increase in hybrid sales in the US. While the approximately $3000 cost 
increment in 2003 is too high for the mass market in the US, enough 
customers will desire the features to keep the market growing. In 
addition, hybrid sales are likely to increase much faster in Europe and 
Japan, due to their much higher fuel costs. This will lead to higher 
volume production and further development, both of which will reduce 
cost worldwide. Sales in the US will continue to increase as the costs 
come down.
    But there is a broader message here for US policymakers. All of the 
technology improvements that can be made are incremental and have a 
financial cost. Absent marketplace signals as well, progress on 
achieving higher fuel efficiency in the marketplace may be slower than 
we may desire.

Fuel Cells
    Fuel cells are the most promising mid- to long-term option. 
Hydrogen fuel cells have virtually no emissions and are extremely 
efficient. Large-scale production of hydrogen would probably use 
natural gas, which would reduce our dependence on fossil fuels. Even 
longer term, we may be able to produce hydrogen using solar energy or 
biomass fuels.
    However, there remain a lot of issues to resolve before fuel cell 
vehicles become commercially viable. Cost and size must be drastically 
reduced and on-board hydrogen storage density must be significantly 
improved. Durability must also be proved. Even after all these problems 
are solved, there are still infrastructure issues for fueling systems 
to resolve. Thus, fuel cells will be a long time in development.
    There also are some serious concerns about on-board reformers for 
creating hydrogen. Reformers are the hardware that converts fuel like 
natural gas or methane, to hydrogen. These reformers are expensive, 
take up valuable space in the vehicle, and are slow to warm up and 
respond to transient driving conditions. In addition, they reduce the 
efficiency of the vehicle, both because of the energy needed for the 
reforming process and because the resulting fuel stream is not pure 
hydrogen. The dilution of the fuel stream requires a larger fuel cell 
stack to maintain the same performance, increasing weight, size, and 
cost of the system. In fact, recent research has concluded that fuel 
cells with on-board reformers may not be more efficient than a good 
gasoline hybrid.\12\
---------------------------------------------------------------------------
    \12\ ``On the Road in 2020,'' M. Weiss, J. Heywood, E. Drake, A. 
Schafer, and F. AuYeung, Massachusetts Institute of Technology, October 
2000.
---------------------------------------------------------------------------
    Honda's current research efforts are focused on direct hydrogen 
fuel cell vehicles. These are not yet ready for the public, not ready 
for ``numbers,'' not ready to help fill requirements for zero emission 
vehicles. There is much work to be done--our focus is to see if we can 
stimulate progress on R&D for hydrogen production ideas and toward 
infrastructure concepts and development. But even if all of the 
technological and infrastructure obstacles can be overcome, we are 
still one to two decades away from serious commercial introduction. 
However Honda is serious about this technology because it holds promise 
for environmentally sound transportation.

Electric Vehicles
    While we are optimistic about the prospects of fuel cell vehicles, 
our experience with battery electric cars must serve as a warning. A 
decade ago, we all thought battery electric vehicles were the wave of 
the future. They promised emission-free, potentially renewable mobility 
with the performance of conventional internal combustion engines. So 
confident was California in the technology that the state required all 
major manufacturers to sell battery electric vehicles for 10% of their 
California sales.
    Unfortunately, the battery technology did not evolve as we all had 
hoped or expected. Today's batteries--even the most sophisticated--are 
heavy, expensive (tens of thousands of dollars per vehicle at 
production levels), have poor capacity (100 miles at best) and take 3 
to 8 hours to charge. Moreover, there is nothing on the horizon that 
will make these vehicles acceptable in the marketplace. While 
California stubbornly clings to the hope that battery EVs will evolve 
(although it will now require these vehicles to constitute 2% of sales) 
they simply will not meet our expectations as an alternative to the 
internal combustion engine. I offer this experience as a caution that 
policymakers cannot get too far ahead of the technology. Sometimes what 
we expect simply does not occur.
    But there is also another lesson to be learned from our experience 
with electric vehicles. Market-forcing regulation should remain 
technologically neutral. California's zero emission vehicle mandate 
essentially requires manufacturers to sell electric vehicles--vehicles 
which very few consumers will want. In response to the California 
mandate, there will be a flood of golf cart type electric vehicles 
hitting the California market--which technically comply with the 
mandate but whose real contribution to air quality will be very mild at 
best. If there is to be regulation, it should be in the form of 
realistic performance standards which leave to the ingenuity of 
industry the opportunity to explore, develop or market technologies 
that are practical, perform as required and are economical.

Customer Preference
    Honda believes it has a duty to be a responsible member of society 
and to help preserve the global environment. Honda is committed to 
contributing to mitigation of greenhouse gas emissions through 
technological progress. We believe it is our responsibility to develop 
and offer efficient products in the market. We have been an industry 
leader in introducing such products and will continue to do so.




    However, unless the customer becomes an integral participant in the 
process of reducing greenhouse gases, market acceptance of these 
products will be limited. Programs will be far more effective if they 
include government and customers, not just industry. The industry can 
provide a ``pull'' by providing products desired by the consumer. But, 
we cannot push customers into buying vehicles they do not want. 
Government programs to stimulate demand, provide incentives, and 
educate the customer could dramatically affect acceptance of new 
technologies and market penetration.
    Thank you for this opportunity to testify. I would be pleased 
answer any questions you may have.

    Senator Kerry. Thank you very much, Mr. German. It is very 
interesting, and we do want to come back to a number of those 
things.
    Mr. Miller, picking up on what Dr. Kammen said about the 
market, that you have to create the market balance, et cetera, 
here you are. The fuel cells work in a limited fashion. We know 
that you have small power generation capacity. Is there an 
expectation that this could become a source of larger power 
capacity?
    Mr. Miller. Mr. Chairman, we definitely think that is true. 
The one thing that is preventing that from becoming more 
ubiquitous, let's say, in the economy is the cost. Our cost 
today is $4,500 a kilowatt. Our new technology, which will be 
out in less than 2 years, is one-tenth the size and one-tenth 
the weight of the current technology, and we think we can 
dramatically reduce the cost and make it economical for more 
people to buy these for home use, for building use, ultimately 
for automobile use. It would certainly help--we have been 
helped historically by government incentives, and certainly 
future government incentives would help from the standpoint of 
increasing volume and therefore driving down costs even faster.
    Senator Kerry. Which is the bigger problem as a restraint 
on your penetration of the marketplace? Is it the cost, or is 
it the technological problem?
    Mr. Miller. I would say it is cost, because today we have 
fuel cells that will operate 5 years continuously. They get 
extremely good efficiency. In other words, they convert most of 
the energy and the natural gas into electricity or usable heat. 
And so our fuel cells today are very reliable.
    Senator Kerry. So you are saying your cost is $4,500 a 
kilowatt.
    Mr. Miller. Right.
    Senator Kerry. The kilowatt, competitive cost is what? 
About $1,000?
    Mr. Miller. $1,000 to $1,500, we start getting into being 
economical, and that is why this new type of fuel cell, which 
is one-tenth the size and weight, gives us the promise that 
within 24 months, we will be down to that $1,500 kilowatt 
level.
    Senator Kerry. And begin to become competitive.
    Mr. Miller. Begin to become competitive.
    Senator Kerry. Now, how does that compare to what Mr. 
German was talking about in terms of the fuel for the 
automobile itself? Is that the same?
    Mr. Miller. OK. A car--to become economical in a car, we 
are going to have to get down to $50 a kilowatt. Now, that 
seems like a long way, but I would tell you that there are 
probably six or seven auto makers, spending in excess of $100 
million a year on fuel cell vehicles, because they think that 
that can be accomplished over time. Now, we see that occurring 
toward the end of this decade, but as was indicated earlier, it 
may be a little longer, it might be a little sooner.
    Senator Kerry. Now, what do you think we either could or 
should do--and if the two mix, terrific--to facilitate the kind 
of market pull that Dr. Kammen was talking about?
    Mr. Miller. Well, there are bills in Congress today, co-
sponsored by a number of members of your Committee, to give 
fuel cell tax credits for residential and stationary fuel cells 
starting next year. That would be an initial one.
    The second issue which I think is important is that buses 
are one of the main pollutants in inner cities, and they also 
obviously emit tremendous amounts of carbon dioxide. Buses may 
be the first transportation market which comes about, because 
whereas with cars, you have the whole infrastructure to change, 
buses come home every night, and if you put a hydrogen fueling 
station at those few bus terminals, you could have hydrogen 
fuel cell buses in the 2005 timeframe.
    And what we have been recommending from a government 
standpoint is a program to test fuel cell buses and to prove to 
transit agencies that they are reliable. And there have been a 
number of----
    Senator Kerry. What is the resistance to that?
    Mr. Miller. Transit bus companies, their No. 1 criteria is 
reliability, and they are very reluctant to try a new 
technology until it has been proven out. And so that is why we 
need a couple of programs in a couple of cities to show them 
that fuel cell vehicles are just as reliable as diesel and 
gasoline buses, and they have the added advantage they are much 
more fuel-efficient. They will get many times----
    Senator Kerry. So you could provide a fleet of those how 
quickly?
    Mr. Miller. Well, we have buses right now. We have one that 
will enter commercial service in Turin, Italy, this year. We 
are partnered with Iris bus, which is basically Fiat over 
there, to demonstrate a vehicle in commercial service over----
    Senator Kerry. One vehicle.
    Mr. Miller. Pardon?
    Senator Kerry. One vehicle.
    Mr. Miller. A large transit bus. We are also working with 
Thor Industries, which is a U.S. company, and we will have one 
fuel cell bus on the road also beginning next year.
    Senator Kerry. If we were to create a pilot program that 
tried to designate a specific community, either for school 
buses or for transit buses, how fast could the supply of buses 
be made available?
    Mr. Miller. We could have those--I think we could have 
buses available for a demonstration program like that by the 
end of next year.
    Senator Kerry. And what we are talking about is a vehicle 
which has literally zero emissions, zero, no NOX----
    Mr. Miller. Fueled by hydrogen----
    Senator Kerry.--no SOX, fueled by hydrogen. 
Hydrogen, incidentally, is it not about 80 percent of the 
matter here on Earth?
    Mr. Miller. I am not sure of the exact percentage, but 
obviously water, you know, has--hydrogen as the main----
    Senator Kerry. So it is ample in terms of supply and 
potential; plus, you can create it.
    Mr. Miller. Yes. We can also reform hydrocarbons which 
separate the hydrogen atoms from the carbon atoms and actually 
produce hydrogen that way. That is what we do with our natural 
gas PC25s today.
    Senator Kerry. Now, Dr. Kammen, pick up on that. What do 
you think we should and could do that would have a positive 
impact in helping to expand the market?
    Dr. Kammen. Well, certainly. I mean, the key lesson that 
the more product turnover cycles you get, the better. The more 
generations of vehicles you build, the more efficient they get, 
the lower the cost comes down.
    A couple of things one could do right off----
    Senator Kerry. But how do we get to the point where----
    Dr. Kammen. Right.
    Senator Kerry. Mr. German referred to the consumer here. 
The consumer wants that acceleration, zero to 60, wants the 
comfort--I mean, there are certain things that the marketplace 
is automatically responding to. Now, in Europe, the prices of 
fuel are higher, so you have had a marketplace response as a 
consequence. Nobody here in the Congress is going to advocate a 
higher fuel price, so how do we deal with this in those 
circumstances?
    Dr. Kammen. Well, it is interesting. I mean, Mr. German 
mentioned the degree that we have seen vehicles improve quite a 
bit, but a lot has gone into performance, not into efficiency. 
If we (a) close the SUV loophole standard on the CAFE standard 
and if we raise the overall CAFE standards, those would send a 
strong signal to companies that some of that R&D effort should 
go back into these more efficient vehicles that would get the 
costs down.
    We could also institute tax credits for hybrid vehicles, 
for fuel cell vehicles, and those would have an important 
effect, because those would tell companies----
    Senator Kerry. We actually have a bill. Senator Rockefeller 
and I and others are hoping we could actually pass that here.
    Dr. Kammen. That is what I am hoping as well, and that 
really does set the clear standard for industry, that it is an 
area worth investing in, because the market is going to be 
there for a while. That is what I mentioned before, that 
building markets for these clean technologies is a critical 
thing. In the past, markets have come and gone, and there has 
been individual programs, but setting standards like the CAFE 
is one way to really focus that effort on those technologies.
    Senator Kerry. Mr. Miller, what would have the greatest 
impact, the fastest impact on you, beyond the pilot project 
here? If we wanted to accelerate the creation of a vehicle that 
has no emissions, how could we do that as rapidly as possible?
    Mr. Miller. Well, I think the tax credit bill which you 
referred to is an important part of that, but I would also say 
once again the fuel cell cost target is very low for 
transportation, and what would help the industry drive down the 
cost is to start also working the stationary fuel cell supports 
and incentives, because that is the first initial application. 
We think for stationary you will see fuel cells in buildings 
and homes in 2003. So if we can increase the demand for those 
products, that will drive the cost curve down and help us get 
toward that $50 a kilowatt number that we need to achieve to be 
competitive with the internal combustion engine.
    Senator Kerry. Now, each of you heard the discussion with 
the first panel where we were talking about the requirements to 
try to reduce our net emissions. It is obvious, is it not, that 
if this country rapidly began to adopt the technologies you 
have talked about, you could have a fairly painless movement 
very rapidly to a more responsible position, would you not?
    Mr. Miller. I would agree.
    Dr. Kammen. I certainly agree. And, in fact, the issue, I 
think, is really delay, because the longer we wait, the harder 
it is for companies to make those changes, and the earlier that 
we put in standards like more efficient vehicles, like carbon 
targets, those are the ways to really get companies to make 
those investments in this area, and those have paid off. We 
have seen companies consistently making money by investing in 
clean technologies, despite a lot of earlier rhetoric that 
these energy-efficient technologies are, in fact, costly. They 
are, in fact, not.
    The more we invest in them, like with compact fluorescent 
lighting, the Federal program, the green lights program, paid 
dramatic dividends back and transformed the lighting of the 
country, and those kinds of programs have a big effect.
    Mr. Duffy. Senator, I would also concur, and I would like 
to reference an example as to how quickly markets will respond 
to the right incentives, and that is the renewable portfolio 
standard, or RPS as it was referred to earlier, that was 
established by Texas several years ago, and in many respects, 
it is the national model for people who want to see the 
competitive development of renewable fuel.
    Texas had an RPS requirement for 2,000 new megawatts of 
renewable energy generation to be in service by the year 2009. 
One-half of that amount, 1,000 megawatts, will be met by wind 
generation that will be placed in service by the end of this 
year, so the technology is ready, and with the right market 
incentives, the industry will respond.
    Ms. Koetz. Senator, if I may, there is another aspect to 
all of this market penetration that I think might be useful. 
Most of the technologies you see here sitting at the table are 
almost zero-emitting. The problem is that none of our systems 
for accounting for emissions take into account a zero emitter. 
If you never make the emissions to begin with, you never get on 
the books; you are never part of a static baseline for--that is 
measured, that somebody wants to measure reductions off of, so 
you essentially wind up in a category that has now become known 
as ``anyway tons.'' You were sort of going to do that anyway, 
and in many respects, being zero-emitting is thought of as just 
almost an accident of design rather than as a positive public 
output.
    So if there is one other thing--and that also translates 
into some of the numbers you are hearing here. 1,000 to $1,500 
a kilowatt is the price for combustion fuels, and those 
combustion fuels do not have to make the additional investment 
it takes to go all the way to zero-emitting. So we are aiming 
for targets that don't include the cost of getting this 
additional public value that we say we want to get.
    Senator Kerry. And obviously that needs to be reflected in 
the equation. I understand. I agree with you.
    It is also part of what we need to do as we cost out these 
issues. Whenever we are thrown the costs of doing something in 
the economic analysis, we are always given a cost that is very 
one-sided. We never have the costs factored in for the cleanup, 
for the damage, for the disease, for all the other negative 
sides. We often don't weigh that balance. Dr. Kammen, that is 
why you are saying there is a $45 billion upside. Am I correct?
    Dr. Kammen. It is even more than that. I mean, that is the 
direct upside. If you instituted these energy efficiency and 
lower cost fuels, you get that, but you also get an economic 
stimulus, because that fossil fuel cost is essentially like the 
national debt. That is money we are paying and not getting 
something out of. If we invest in these clean technologies, we 
generate new markets. We then see an additional effect on the 
market.
    And what is interesting is that is now a very robust 
result. As I said in the testimony, there is national lab 
studies. Our research group at Berkeley has seen some of that. 
There are independent groups who have all, coming along, seen 
different programs that they would support, that overall the 
more investment in energy efficiency and renewables that we 
see, the better economic stimulus we see. So it is having the 
exact opposite effect as the detractors have been claiming for 
many years.
    Senator Kerry. Let me document that by saying that in 1980, 
the end of the Carter administration, after the initial 
investments of the 1970's in response to the 1973 crisis, we 
were the world's leader in photovoltaics and renewables. We 
started the Energy Institute in Colorado. Tenured professors 
left positions to go out there and help feed this engine, and 
then the Reagan administration came in, didn't believe in that 
kind of market support or intervention, and completely gutted 
the program. We lost the lead in both technologies to Germany 
and Japan, if I am correct, and not to mention, discarded our 
leadership overall in that field.
    So the consequences are enormous in these fields when you 
make these choices. In Massachusetts during that same 
timeframe, the fastest growing sector of the Massachusetts 
economy, notwithstanding our extraordinary presence in 
education, in health care, in financial services, in defense 
technology, in bio technology, and other technologies, the 
fastest growing sector of the Massachusetts economy was 
environment companies that were growing as a consequence of 
those incentives that were created, and we had a job base going 
from 50,000 up to about 75,000 people.
    The brakes were put on, as several of you mentioned 
earlier, and progress kind of ground to a halt because we 
weren't consistent and sustained in our commitment. I believe 
too much is being made of the difficulties of this transition 
personally. We are the world's greatest technological leader 
and creator on the planet. If we would unleash our 
technological capacity to pursue some of these things, the 
market responds: ``Build it and they will come.'' If we will do 
this, we can quickly lower the current dependencies that we are 
all so concerned about.
    Now, I am not going to say it is going to happen overnight. 
Obviously, I understand the difficulties. There are regulatory 
issues we have to work through; there are liability issues that 
we have to work through. I think many of us on our side of the 
aisle who have been very supportive of some of those efforts 
need to be very thoughtful about the changes and approaches we 
need to think about in the context of the regulatory schemes. 
There are many of these things that could get out there today 
that can't because of the heavy-handedness of the regulatory 
process itself and other kinds of issues, and I think we have 
to be really thoughtful about how we come at that.
    On the topic of wind energy--and then I want to defer to 
Senator Ensign who has been very patient. Mr. Duffy, how many 
countries are using wind today as a major source of energy?
    Mr. Duffy. I am going to have to get back to you with a 
number on that, Senator, but I think it is safe to say that 
throughout Europe, it is being relied upon as one of the 
primary new sources, as new construction is being placed into 
service. And as I mentioned before, the number from the AWEA 
study, $4 billion investment last year. I mean, it is--we also 
see it as--we try to develop plants in the United States. We 
see the impact of how well accepted and proven it is in Europe 
by the backlog that is quickly building up to get wind turbines 
in service within a reasonable period of time.
    So globally there is no question it is one of the leading 
sources and particularly one of the leading new sources. What 
we need to do is just take the additional steps so we can 
expand that into this country.
    Senator Kerry. And just very quickly, Ms. Koetz, obviously 
nuclear is zero emission, and its record is stronger in many 
regards than many people have acknowledged. On the other hand, 
there are two very significant issues that still stand out 
there, and maybe you would share with us what progress has been 
made and what one might look forward to there. One is the waste 
issue, and the other is the safety concerns that people have 
had. Do you just want to comment quickly on both of those?
    Ms. Koetz. I will do that. Thank you, sir. First of all, I 
will go to safety. We have had an ever-increasing safety record 
such that we are one of the safest ways to produce power in the 
world right now. In addition, we see a direct correlation 
between safety improvements and economic enhancement. We have 
many plants, as I mentioned, making electricity for just over a 
penny a kilowatt. Those are the same plants with the best 
safety records, so we do not see any need to sacrifice safety 
or otherwise fail to live up to our own imposed safety 
standards in order to get improved economic performance, and we 
intend to see more plants going forward on that correlation as 
well.
    As to the--and if you don't mind, I am going to call it the 
so-called waste issue, sir, because one of the most important 
things we deal with here in global climate change is dealing 
with our greenhouse gas emissions as we approach 
sustainability.
    And, frankly, we have always understood that our processed 
uranium fuel stocks were reusable at some point in time. We 
also understood that this was valuable material that we needed 
to take care of, so in many respects, although it has been 
labeled waste because of some of the policies we have pursued, 
in fact, this is a secondary raw material.
    And before I get to the details of what we have been doing, 
I think it is important to put it in context. We make about 40 
million tons of hazardous waste every year in the United 
States. We have 40,000 tons of used nuclear fuel from 50 years 
of making carbon-free, sulfur-free, nitrogen-free electricity. 
That material would cover roughly the size of football field to 
about 15 or 16 feet.
    There is no denying that this is potentially dangerous 
material that must be very effectively managed. However, the 
good news is it has been very effectively managed. There are no 
Superfund sites at commercial nuclear power plants. There are 
no RCRA corrective actions going on commercial nuclear power 
plants. We have always done the right thing with this material 
from the get-go. And because of that, we have not had any 
adverse environmental impacts from this material. it has been 
what I would call the poster child for effective waste 
management for the last 45 years.
    We have had a program in place for the last decade or so to 
create a centralized repository for this material. 
Unfortunately from Mr. Ensign's standpoint, that is now in 
Nevada. This does replicate what has been the systemic solid 
waste management programs followed by the United States over 
the last several decades. You identify your hazardous waste at 
the end of a process. You secure it. You package it, and you 
transport it to a centrally located facility where it can be 
better managed than it would be in dispersed facilities.
    We are tracking every other waste management program we 
have. Unfortunately, this does create significant political 
issues, and we understand that. At the same time----
    Senator Kerry. Fortunately for Mr. Ensign and for Nevada, 
Harry Reid is in the majority, and it is not going to happen, 
so----
    Ms. Koetz. Yes. Well, we understand that. But fortunately 
for this country, the onsite facilities are doing such a good 
job managing that material that if we either do not eventually 
use Yucca Mountain or we come up with a different recycling 
technology, such as separation and recycling technologies, 
which are under research and development now. The best thing to 
do frankly for sustainable development in many ways is to reuse 
this material more effectively. We think that we must be very 
careful not to presume two things. First, we can't assume that 
the current handling situation is inadequate; it is really 
quite adequate for what we will need to do to make decisions in 
policy space over the next several decades. And, second, we 
can't assume static technological development in this area. I 
mean, we are going to get better at using this material.
    Senator Kerry. Well, thank you. That was an articulate 
answer, and I appreciate it.
    Senator Ensign.
    Senator Ensign. Thank you, Mr. Chairman.
    I want to followup on that line of questioning. And, Ms. 
Koetz, I was actually excited about especially your last couple 
of comments that you made, and I would like you to comment in 
general. We now have Yucca Mountain out there that is--I think 
originally was supposed to cost somewhere around $15 billion, 
and now the GAO, I think their latest cost estimate was $58 
billion. And some of the scientists think that it could go as 
high as $75 billion, which by the way, would be the most 
expensive construction project in the history of the world.
    Senator Kerry. Puts the Big Dig to shame.
    Ms. Koetz. Maybe we could call it Big Dig II.
    Senator Kerry. Please don't.
    Senator Ensign. The bottom line, the reason I wanted to 
mention the cost, because when you are mentioning kilowatt 
hours, Mr. Kammen, when you were talking about taking total 
costs in, if you figured a $60 billion cost to that, what does 
that take your kilowatt hours to, when you put--do you have 
that figure?
    Ms. Koetz. I don't know if we have done that. Now, right 
now, as most of you know, we are adding a mill to the price of 
nuclear electricities, and that is being put in a fund. That 
fund is already far in excess of what we anticipate being able 
to spend over the next several decades. My estimation would be, 
to be honest with you, Senator, that if we continue to pay the 
mill in, we would have enough money to pay for the repository, 
even if it got to $60 billion. I couldn't tell you that 
definitively.
    Senator Ensign. I was going to say, that is not my 
understanding of what the GAO--GAO, that was the purpose of 
their report.
    Ms. Koetz. I apologize. I haven't seen the report.
    Senator Ensign. Their report basically was saying that the 
taxpayer is going to end up holding the bag. The reason I bring 
that up also is not just to--you know, I don't want to get into 
a tit for tat on any of that. But if, as you said, the sites 
are handling it adequately at this point--obviously we don't 
have some national crisis with nuclear waste right now.
    Dry cask storage, which a few of the sites are doing 
currently--and that is happening around the world as well. Dry 
cask storage, I understand, you know, maybe is a $2 billion, 
maybe $3 billion type of--we don't have the transportation 
problems. We don't have a lot of those types of things. If we 
went to something like dry cask storage onsite--and I know the 
biggest problem that you have with dry cask storage is not from 
your industry's point of view; it is the states' point of view, 
is getting the sites licensed for dry cask storage.
    But if the states would do that--and we are looking at a 
country-wide policy, because I think that nuclear power is part 
of the answer for the global warming and some of the things 
that we are talking about in this hearing today. I just don't 
think it is part of the solution if we don't deal with the 
economic problem.
    But the--if we go to onsite dry cask storage, which is far 
cheaper, doesn't that, in fact, make nuclear power more viable 
from an economic standpoint and therefore help us in the future 
as far as the environment is concerned?
    Ms. Koetz. Well, Senator Ensign, the first thing we would 
have to do is examine whether it truly is cheaper, if you will, 
to have dry cask storage at the facilities. Yes. You are 
correct in the actual cost of putting the facilities up. But 
then we are put in the position of having to maintain those 
separately funded facilities with proper security and proper 
other costly items to maintain them very effectively as a 
repository for this kind of material.
    So in the long term, although the initial perhaps capital 
costs of the facility would be a little bit less, from a long-
term perspective, it is not cost-effective to have separate 
facilities for this material, no more than it would be cost-
effective not to have a centralized hazardous waste landfill 
under RCRA in a state or a locality where you centrally moved 
your other hazardous byproducts that we make all the time, just 
like you are not going to keep computers which contain lead in 
various dispersed municipal landfills. We are going to 
eventually have to consolidate them in well-run, centrally 
located, secure facilities.
    So I think you can't just look at an initial capital cost 
situation. You have to have the much longer term costs in mind.
    Senator Ensign. Well, and speaking of some of those longer 
term costs, when we are looking at recycling technology, 
separation, recycling, whether it is accelerated or 
transmutation accelerator technology or the reprocessing that 
several countries are doing--I understand that Japan is 
building a new reprocessing plant, one of the most modern in 
the world.
    We are looking at those types of technology. I mean, we 
understand--we cannot separate politics from any of this, and 
transportation is one of the most difficult parts of any of 
this. And so if you are looking at the total cost, we also have 
to look at political costs. I just want the industry to keep in 
mind that because of transportation, if we can look at onsite 
dry cask storage as the alternative right now, looking at the 
long-term future, because I believe that recycling this waste 
is very, very important thing to do and looking at new 
technologies. It seems to me that the overall benefits, if we 
can do onsite dry cask storage, as we develop the technology, 
we won't have to transport it, and then transport it again.
    Ms. Koetz. There is a very interesting climate change 
connection to what you are saying. One of the things we want to 
do the most for climate change, not just in this country but 
around the world, is to engage in successful technology 
transfer. And interestingly enough, nuclear, again, represents 
a 30- or 40-year history of very successful technology transfer 
to the rest of the world, mostly in the form of research 
reactors. And that research reactor fuel has been coming back 
into this country and been transported to centrally located 
places on government facilities in this particular instance for 
years as well.
    So I agree with you that while transportation is a 
difficult political issue, it is also a successful 
transportation, scientific and climate change issue, because we 
have been transporting spent nuclear fuel around this country 
for decades now very, very safely. So I agree with you. We try 
to take all of those costs, political and technical, into 
account. But we also hopefully can take some of the realities 
into account as well.
    Senator Ensign. Mr. Chairman, could I ask a couple other 
questions to the other witnesses? Obviously this is kind of a 
big issue to us, but I was--I had some other questions of the 
other witnesses.
    Mr. Kammen, you were talking about, you know, fossil fuels, 
and one of the things you said about fossil fuels being 
subsidized, one of the things you didn't mention is how we 
subsidize them militarily, and that is a fairly significant 
cost.
    Dr. Kammen. I agree.
    Senator Ensign. Yes, from the military standpoint. But I 
was also--there was something that you said about the 
Government not choosing winners and losers, and I think that 
that is so important, because we do get messed up. It seems 
historically what we have learned is when we try to say that, 
Here is what you are going to do, and therefore, these are the 
winners and losers, even when we are trying to do something 
laudatory like clean up the environment.
    I think a really good example is what California did with 
the MTBE situation, and this is the technology you will use to 
clean up the air, and, oh, yes, by the way, it does hurt the 
groundwater. And I think that when we get into situations where 
we skew the marketplace, we could end up with the most 
inefficient technology. Could you just further comment on how 
we make the marketplace determine the winners and losers, not 
Government and some, you know, favorite senator's program or 
whatever determine the marketplace.
    Dr. Kammen. Right. That has been a real challenge, and 
partially the subsidies that are already on board for existing 
technologies make it hard to open those new markets up. That 
has been part of the story.
    And the other one, as you say, there has been a number of 
programs in the past, syn fuels, clean coal. I would argue some 
of the subsidies that went into nuclear, et cetera, have been 
ones that were technology-specific, and that hasn't worked very 
well. I would argue that we are now in a new era, in the sense 
that many of these renewables are market-competitive or just on 
the edge right now, and so we can actually use those market 
tools much more effectively.
    The renewables portfolio standard is one that I think does 
exactly that. It calls for a certain amount of renewable energy 
in the mix, and it lets the market then look at those options. 
And the UK has had an interesting experience with their non-
fossil fuel obligation, the NFFO. Texas, as was mentioned, has 
had a very interesting plan that is basically 8 years ahead of 
schedule.
    Those types of programs where you say, We are going to set 
and stick with a standard, whether it is an approved CAFE 
standard--and I, for example, support a quite highly increased 
one, 40 miles a gallon over about a decade--or one with a 
certain fraction of clean energy in the mix. Two percent, for 
example, next year is the standard for RPS, which I would ramp 
up to 10 percent in the year 2010 to 20 percent in 2020.
    Those set these clear targets and let the market then 
select technologies and don't make it a pork or a favorite 
technology program. And that has been a very important way to 
do things, and that has been a discovery the last 10 years of 
programs, a number of them supported by Department of Energy, 
so I would agree.
    Mr. German. I would just like to say that Honda also 
definitely supports Senator Ensign's comments about not 
choosing winners and losers. We are faced with a great example 
of that right now with the California mandate and electric 
vehicles, which is a real problem for us, so Honda is very 
supportive of performance requirements.
    Senator Ensign. Mr. German, I actually had--just to follow 
that up with Honda's, I think, very impressive environmental 
record as far as the type of vehicles that they build, but you 
mentioned before what Americans are choosing to drive, and I 
think that the difficulty in all of this is that when you are 
thinking about--I know certainly when I am thinking about my 
family--I have a wife and three small children, and I want 
something big around them, and it might smash another small 
car, but I know that they are going to be safer in it.
    [Laughter]
    And, you know, I mean, everybody looks at these things kind 
of selfishly. We have three small kids, and when you have three 
small kids, you don't want a little car because of something 
called space, and between small children on a trip, it is 
important.
    But how do we get--why doesn't Honda it seems to have 
built--and you mentioned some of the technologies and some of 
these high-fuel vehicles or better gas mileage. If it is 
possible, why aren't the car manufacturers today, Honda and 
others, making the larger SUVs that just have higher gas 
mileage? I mean, if we set as--and we close the loophole, is it 
possible to meet those standards and still give Americans what 
they want? Is that possible? And if it is possible, why aren't 
we doing it now?
    Mr. German. You can certainly close some of the loophole. 
Honda is traditionally cautious about moving into new markets, 
and we are behind most of the manufacturers on light trucks, 
but the recent example is our Acura sport utility, the MPX, 
which is seven-passenger. It has much more interior volume than 
a Ford Explorer. It also gets much better fuel economy, because 
we have incorporated a lot of our fuel-efficient technologies 
into it.
    Honda has a philosophy of being an environmentally 
conscious company and being a technology leader, and we try to 
bake this into all of our products. And I can't speak for the 
other manufacturers.
    Senator Ensign. Mr. Kammen.
    Dr. Kammen. An interesting feature on that point is that 
when innovation is directed in these ways, you find that there 
are impressive benefits. So, for example, over the last five or 
6 years, we have seen an increase in the number of different 
types of air bags, side impact, a whole variety of features 
that have improved safety. Now, it doesn't solve the problem of 
three kids and a long drive issue, but it does do the safety 
things.
    And so if you couple in--say, we want to see more efficient 
vehicles, but vehicles will sell better that are safer, those 
are the kinds of signals that work together to meet the market-
based targets that you are saying, because I certainly think 
that we could see much more innovation along these lines and 
convert more of that percent-and-a-half increase in efficiency 
that Mr. German mentioned into this area.
    Mr. German. I mean, it is just a question of how much you 
want to spend and the lead time involved.
    Senator Ensign. Mr. Miller, just one last thing for you, as 
far as the fuel cells. I think it is kind of interesting. I 
forget where I was reading the article. I think it might have 
been Time magazine, and they were talking about fuel cells, and 
they were using New York City--they were saying that fuel cells 
in the future may be the PC answer--not politically correct, 
but computer PC--answer to our power problems, because one of 
the biggest problems--and we certainly face this in the Western 
United States--is transmission.
    Getting new transmission lines approved are incredibly 
difficult, and this actually may be a place where, you know, a 
big part of the cost in the future for power plants is going to 
have to be looked as transmission lines, and if you can, in a 
local area, use at least as far as a new part of the power 
grid--certainly California doesn't want, you know, new power 
plants, new power lines, anything being built. It would seem to 
me that they should be focusing on technology like the fuel 
cells.
    Mr. Miller. Yes. I think that is a good analogy between 
mainframe computers and large power generating stations, and 
PCs and fuel cells. Fuel cells will be distributed power, at 
homes or in buildings, and will not need as much transmission 
capacity as presently exists in the United States and around 
the world. I agree with that.
    Senator Ensign. And, Mr. Chairman, just my last comment on 
this. I think it is interesting that we are hearing that new 
technology is a big part, it looks like, to our answers, and I 
certainly believe it is to our answers, if we focus that new 
technology in the right way, to our environmental concerns. But 
it is also funny that if you look at every one of our--or 
almost every one of our states, we tax cars, new cars, higher 
than we tax old cars, and yet new cars produce less pollution.
    There was an op ed in our paper today, and it was kind of 
an interesting--I had never really thought about that before, 
but we penalize people for being more environmentally friendly 
today, and maybe it is a policy that we need to look at in the 
future. Thank you, Mr. Chairman.
    Senator Kerry. I think that is a good observation, and I 
concur completely. I think we learned a number of years ago 
about the winner/losers issue. We don't want to pick them. We 
want to create a framework within which people can make their 
own choices, and capital will move thoughtfully and rapidly in 
a certain direction. But which particular technology comes out 
of it, I think the marketplace can often make that decision 
itself better.
    Mr. Duffy. Senator, I would like to confirm that. Just by 
way of example, we mentioned a major Massachusetts wind project 
we are working on. We are doing that for the specific reason 
that Massachusetts has always, similar to Texas, adopted an RPS 
standard where they have specific guidelines of percentages, 
ramping up to 10 percent, for which a number of renewable 
technologies would be eligible. It could be solar; it could be 
hydro; it could be wind. We are going forward on the basis of 
that structure, putting our capital at risk. We know there's 
others out there, and it is up to the market to see who is 
actually able to pull the projects off.
    Senator Kerry. Absolutely. Obviously the competition is 
healthy, and presumably there will be several different niches 
and technologies out there that are in the range, but I think 
it is helpful for us to try to create the framework to attract 
that.
    I am particularly grateful to all of you. Some of you 
traveled long distances, and this is very helpful to the 
Committee. We are going to leave the record open for colleagues 
who may want to submit some questions in writing over the 
course of the next 10 days, and I appreciate very much you 
taking time to be here.
    We do have another panel, so I would like to switch panels, 
if we can, as quick as possible.
    [Pause.]
    Senator Kerry. Dr. Sandor, you have a flight that you are 
going to try to get to, and it is out of Dulles, so we are 
going to lead off with you, and if we have any questions, we 
will focus in on them.

     STATEMENT OF DR. RICHARD L. SANDOR, CHAIRMAN AND CEO, 
              ENVIRONMENTAL FINANCIAL PRODUCTS LLC

    Dr. Sandor. Thank you for the courtesy, Senator. It is a 
pleasure to be here to talk about a subject which I think is 
very, very exciting, and that is market-based solutions to 
environmental problems.
    I am chairman of the board and CEO of a small company 
called Environmental Financial Products, and a visiting scholar 
at Northwestern University. We professionally design, develop 
and participate in new markets, and our experience has gone 
from financial futures in the 1970's to insurance derivatives, 
hurricane index bonds, earthquake bonds, climate derivatives, 
and most recently in the SO2 program which, I know, 
Senator, you were a key figure in.
    In the SO2 program, we think there is a model 
that serves very well any inquiry into carbon and carbon 
trading. As you are well aware, in the late 1980's people 
talked about $1,500 or $1,800 a ton as the cost of abating 
SO2 emissions. As early as 1992, the median levels 
were $600. At nine auctions at the Chicago Board of Trade since 
its inception, the costs were roughly $130 a ton, 20 percent of 
the forecasted levels.
    I think we need to get into the practicalities and less 
talking and more action to really inform the debate. If, in 
fact, the cost of reducing global warming is very, very low, 
policy-makers need to have that fact, and the best way to 
uncover this cost is through practical experience.
    We have been involved in carbon markets since Rio in 1992 
at Kyoto and The Hague and we are now talking about a pilot 
trading program. A year and a half ago, we approached the Joyce 
Foundation, which is a billion-dollar Midwest foundation to see 
if they would fund the feasibility of developing a climate 
exchange within the Midwest area (Wisconsin, Minnesota, Iowa, 
Illinois, Indiana, Michigan, and Ohio).
    We undertook that feasibility study. We looked at the size 
of that particular region, which has roughly $2 trillion GDP. 
It would rank as the fourth largest country in the world if it 
were separate entity. It has a broad array of industry, 
agriculture, forestry, manufacturing, and energy industries.
    The results suggest that there is, indeed, a possibility 
that we could develop a market that had balance and included a 
wide variety of constituents and a voluntary cap which 
corporations would take on and ultimately implement through 
trading. It would include carbon sequestration in agriculture 
and forestry, landfill gas, wind, and other renewable energy.
    At the end of the study, we formed an advisory group, and 
that advisory group includes former members of the Senate, the 
House, former governors, Republicans, Democrats, deans at Yale 
and Northwestern, the former Undersecretary General of the U.N. 
who was the lead organizer of the Rio summit. We have 
scientists, the former mayor of Rio de Janeiro and a forestry--
sustainable forestry expert. So we were advised by a lot of 
talented people.
    We took it to the field about 3 months ago, and the 
critical test was: Could you get companies to agree to a 
voluntary cap, and could you get a broad enough constituency to 
build a consensus, to develop a market, and could you buildup 
the monitoring protocols, the verification, the registry.
    We had a target, Senator, of five companies. We had hoped 
to get a couple of utilities, some large agricultural 
producers, and a landfill gas operator who would help us with 
these protocols, enough to get a mini-market. Well, we were 
dead wrong. We ended up with 33 major companies, eight 
utilities that constitute 20 percent of the total emissions in 
the Midwest. They range from WEPCO and Cinergy, Midwest 
Generation, Exelon, PG&E.
    We found out the forestry companies were interested as 
well, including International Paper, Mead, Temple-Inland. We 
also went to some of the largest corporates in the region. BP, 
Ford, DuPont, all have joined; Zapco, Waste Management, a wide 
variety of alternative energy sources, and heavy manufacturers. 
As a matter of fact, the market capitalization of the companies 
that are helping us in the design process and have joined the 
Chicago Climate Exchange is roughly $425 billion. So we have 
some serious interest.
    In the farming sector, we have four farmer cooperatives, 
including the Iowa Farm Bureau Federation, which has 80,000 
members, who farm 25 million acres, which is 85 percent of all 
of the farms in the state of Iowa.
    We are entering the second stage now. We think that there 
is practicality in this. The companies have agreed to consider 
a pilot stage emission reduction of 5 percent from 1999 levels, 
to be phased in from 2002 to 2005. When we complete this market 
design study, we will begin implementation and trading.
    Senator, in conclusion, there are a couple of things which 
I would like to mention. We need some help at the legislative 
level. There is a role for early reduction credits and for 
early action legislation. We need some help with the registry. 
We need some help in monitoring and verification of soil 
carbon, and we need some research in those areas. We think if 
that happens, we will move along.
    And, finally, the carbon market is ongoing. Today we are 
privileged to close a trade between Nuon, one of the largest 
utilities in Europe, and a New Jersey electric utility for 
300,000 tons of carbon, so we have actually been trading 
already in an over-the-counter market.
    Thank you very much.
    [The prepared statement of Dr. Sandor follows:]

    Prepared Statement of Dr. Richard L. Sandor, Chairman and CEO, 
                  Environmental Financial Products LLC
Feasibility and Initial Architecture of a Voluntary Midwest Greenhouse 
                    Gas Reduction and Trading Market

Context
    The debate over appropriate actions to address the risks arising 
from changes in the Earth's climate--the ``greenhouse effect''--suffers 
from two major information gaps. The first is a lack of consensus 
regarding the damages that could occur to the environment without 
action to reduce greenhouse gas (GHG) emissions. The scientific process 
may not precisely predict the nature and implications of climate 
changes that would occur if society does not make significant changes 
in energy and land use patterns associated with higher levels of GHG 
emissions. That is, the costs of inaction and the benefits of taking 
mitigation actions are uncertain.
    The second information gap is lack of understanding of the monetary 
costs associated with undertaking mitigation to reduce greenhouse 
gasses. The absence of hard, proven data on greenhouse gas mitigation 
costs reduces the quality of the climate policy debate.
    The nature of the implied cost-benefit analysis underlying the 
climate debate suggests that for any particular level of benefits 
accruing from action to mitigate climate change, a high cost of 
mitigation will lead policy makers to take less action. If mitigation 
costs are proven to be low, it appears policy makers would support 
stronger action to address climate change. At this time, however, we 
lack the data for realizing the costs involved in pursuing climate 
mitigation actions.
    The ultimate objective of the proposed Chicago Climate Exchange is 
to generate price information that provides a valid indication of the 
cost of mitigating greenhouse gases. By closing the information gap on 
mitigation costs, society and policymakers will be far better prepared 
to identify and implement optimal policies for managing the risks 
associated with climate change.
Overview and Methodology

    This report presents a feasibility analysis and initial 
architecture for a voluntary pilot greenhouse gas emissions trading 
program that would be launched in the Midwest and expanded over time. 
The objectives of the pilot program--hereafter called the Chicago 
Climate Exchange (CCX)--are:
  Proof of concept:
   demonstrate the ability to cut and trade greenhouse gases in 
        a market system involving multiple industrial sectors, 
        mitigation options and countries;

   initiate greenhouse gas reductions through a modest size but 
        scalable program;

   form a basis of experience and learning for participants;

   introduce a phased, efficient process for achieving 
        additional GHG reductions in the future.
  Price discovery:
   provide realistic information signaling the cost of 
        mitigating greenhouse gases;

   enhance the quality of climate policy decision-making by 
        providing hard data on mitigation costs to the public and 
        policymakers.

    The strategy used to assess the feasibility of a pilot GHG market 
relied on several research methodologies. A theoretical economic 
assessment accompanied by quantified data guided the structure of the 
study. The proposed market architecture was influenced by lessons from 
other successful emissions, financial, and commodity markets. The 
successful USEPA SO2 emissions trading program to reduce 
acid rain served as a model for the design of key elements of the 
Chicago Climate Exchange.
    The research is a continuing work in progress. The next step of the 
process is to incorporate industry input to refine the initial proposed 
market terms and conditions. This process will yield a working 
prototype for which an attempt to build a consensus will be initiated. 
That consensus design would represent a functional architecture for the 
first phase of a market. Implementing the proposed market design and 
incorporating lessons from practical experience are core elements of 
the program.

Market Architecture and Participants: Theory and Design
    The negative effects caused by the release of greenhouse gases is 
currently not priced. Consumers and businesses do not fully take 
account of such effects in their economic decision-making because there 
is no price on the use of the atmosphere. The goal of the proposed 
pilot greenhouse gas trading program is to establish the market for 
discovering the price for reducing emissions. The core steps are to 
limit overall consumption of the atmosphere (GHG emissions) and 
establish trading in instruments that allow participants to find the 
most cost-effective methods for staying within a target emission limit. 
The market price of those instruments will represent a value signal 
that should stimulate new and creative emission reduction strategies 
and technologies. Emissions trading is a proven tool that works with 
and harnesses the inventive capabilities of business.
    Various market architecture design options were considered. A 
market could include emission limits taken by fossil fuel producers and 
processors--the ``upstream'' entities in the carbon emissions cycle--or 
by major ``downstream'' sources that burn fossil fuels, such as 
electric power generators, factories, and transport firms. An 
``intermediary'' level approach could focus on firms that produce 
energy consuming devices, such as automobiles, or other intermediaries 
such as fuel distributors. Based on responsiveness (the ability of 
participants to directly cut emissions), administrative costs and 
existence of successful precedents, the recommended approach is a 
predominantly ``downstream'' approach. Accordingly, the research 
findings suggest the CCX should aim to include participation by large 
emission sources at the downstream level (e.g. power plants, 
refineries, factories, vehicle fleets).
    In order to incorporate other mitigation projects that add to the 
flexibility of the market (and which are gaining international 
recognition as valid projects), the proposed design would also allow 
crediting for a range of offset projects that encourage micro-level GHG 
mitigation actions.
    Reflecting international consensus and successful precedent, the 
items to be traded in the pilot market--GHG emission allowances and 
offsets--are instruments representing one ton of carbon dioxide 
(CO2) or their equivalent (CO2e). For every ton 
of CO2 emitted, a participating emission source must 
relinquish one allowance or offset.

Potential For A Market Initiated in the U.S. Midwest
    The Midwest represents a microcosm of the U.S. The region's economy 
is as large as the economies of the United Kingdom (U.K.) and the 
Netherlands combined and has annual GHG emissions equal to those of the 
U.K. plus France (1.375 billion tons CO2). The region's 
industrial diversity--including a broad range of energy, heavy 
manufacturing, transport, agriculture, pharmaceuticals, electronics and 
forestry--make it well-suited as a starting point for a robust and 
representative greenhouse gas emissions trading market.
    The feasibility analysis suggested a hypothetical target market 
covering 20% of all Midwest emissions. The scale of such a market and 
the proposed GHG mitigation goals are summarized in Table A. The Table 
portrays a proposed GHG reduction schedule calling for emissions in the 
first year of a pilot market, 2002, to be 2% below 1999 levels (the 
baseline year) and falling a further 1% each year from 2003 through 
2005.

               Table A. Scale of a Hypothetical Midwest GHG Market and Mitigation During 2002-2005
                                     (in million metric tons CO2 equivalent)
----------------------------------------------------------------------------------------------------------------

----------------------------------------------------------------------------------------------------------------
Estimated Midwest 1999 emissions                                                                          1,375
----------------------------------------------------------------------------------------------------------------
1999 emissions of a hypothetical 20% coverage market                                                        275
----------------------------------------------------------------------------------------------------------------
Cumulative baseline emissions during 2002-2005 under for the 20% coverage scenario                        1,100
----------------------------------------------------------------------------------------------------------------
Cumulative 2002-2005 CCX emissions target for hypothetical 20% coverage program (2%                     1,061.5
 below 1999 levels during 2002, 3% below 1999 in 2003, 4% below in 2004, 5% below in
 2005)
----------------------------------------------------------------------------------------------------------------
Four-year Mitigation Demand (baseline emissions--target)                                        38.5 mil. tons CO2e
----------------------------------------------------------------------------------------------------------------


    The hypothetical 20% coverage Midwest market appears to provide 
sufficient scale for a pilot market that could be representative of a 
larger market. Total emissions covered in such a market would equal the 
emissions of Scandinavia (Denmark, Finland, Norway and Sweden) and 
would be more than double the emissions covered in the successful 
internal GHG market operated by BP-Amoco. While broad coverage is an 
ultimate goal, the main benefits of a pilot--proof of concept and price 
discovery--can be realized with a modest size but a diverse set of 
participants.

Proposed Market Architecture and Mechanics
    Table B summarizes the core elements of the proposed market 
architecture.

               Table B. Indicative Term Sheet Market Architecture for the Chicago Climate Exchange
----------------------------------------------------------------------------------------------------------------

----------------------------------------------------------------------------------------------------------------
Geographic Coverage                                2002: emission sources and projects in seven Midwest states
                                                    (IA, IL, IN, MI, MN, OH, WI), offsets accepted from projects
                                                    in Brazil;

----------------------------------------------------------------------------------------------------------------
Greenhouse Gases Covered                           Carbon dioxide, methane and all other targeted GHGs
----------------------------------------------------------------------------------------------------------------
Emission Reduction Targets                         2002: 2% below 1999 levels, falling 1% per year through 2005
----------------------------------------------------------------------------------------------------------------
Industries and Firms Targeted                      Primarily ``downstream'' participants: power plants,
                                                    refineries, factories, vehicle fleets; approximately 100
                                                    firms initially targeted; individual entities or operating
                                                    groups must produce over 250,000 tons CO2e to become a
                                                    participating emission source
----------------------------------------------------------------------------------------------------------------
Tradable Instruments                               Fully interchangeable emission allowances (original issue)
                                                    and offsets produced by targeted mitigation projects
----------------------------------------------------------------------------------------------------------------
Eligible Offset Projects                           --Carbon sequestration in forests and domestic soils
                                                   --Renewable energy systems activated after 1998
                                                   --Methane destruction in agriculture, landfills and coalbeds
                                                   --Offset projects must be over 100,000 tons CO2e; smaller
                                                    offset projects must aggregate reductions to meet the
                                                    requirement
----------------------------------------------------------------------------------------------------------------
Annual Public                                      2% of issued allowances withheld and auctioned in ``spot''
  Auctions                                          and ``forward'' auctions, proceeds returned pro rata
----------------------------------------------------------------------------------------------------------------
Central Registry                                   Central database to record and transfer allowances and
                                                    offsets; interfaces with emissions database and trading
                                                    platform
----------------------------------------------------------------------------------------------------------------
Trading Mechanisms                                 Standardized CCX Electronic Market, private contracting
----------------------------------------------------------------------------------------------------------------
Trade Documentation                                Uniform documentation provided to facilitate trade
----------------------------------------------------------------------------------------------------------------
Accounting and Tax Issues                          Accounting guidance suggested by generally accepted
                                                    accounting principles; precedent exists for U.S. tax
                                                    treatment
----------------------------------------------------------------------------------------------------------------
Market Governance                                  Self-governing structure to oversee rules, monitoring and
                                                    trade
----------------------------------------------------------------------------------------------------------------

    The following summarizes the mechanics of the proposed system:

        1. Participating emission sources agree to the prescribed 
        emission limits and standardized emissions monitoring and 
        reporting rules.

        2. Participating emission sources receive a four-year stream of 
        emission allowances equal to their target emission level.

        3. Emission offsets may be generated by independently verified 
        GHG mitigation projects.

        4. Starting in 2002, annual allowances and offset holdings must 
        cover annual emissions.

        5. Participants can comply by cutting their own emissions or 
        purchasing emission allowances from those who make extra 
        emission cuts or from offset projects.

        6. Failure to fulfill commitments triggers automatic non-
        compliance penalties.

        7. Periodic auctions and organized trading will reveal market 
        prices.

    Tradable emission allowances and offsets exist and are transferred 
as records in a publicly accessible computerized tracking system called 
the Registry. Each unit is assigned a unique identification number. A 
variety of best-practice methods for measuring or calculating GHG 
emissions will be applied, including continuous emissions monitoring, 
fuel records and mass balance calculations. Methods for addressing new 
entrants and facilities and partial ownership of emission sources have 
been proposed but need further refinement based on industry input.
    Emission offsets reflect mitigation actions generated by individual 
projects undertaken by entities not qualified to be emission sources 
(generate less than 250,000 tons CO2e emissions reductions 
per year). When possible, standard rules and conservative reference 
emission values can be used to determine offset project effectiveness. 
Offsets are earned by undertaking specified mitigation projects that 
must be independently verified. Multiple small offset projects will be 
grouped into 100,000 ton pools. Offset projects must follow 
standardized registration, reporting and verification processes. This 
design feature is intended to produce fungible instruments that will be 
recognized in other emerging carbon markets.
    Examples of eligible offset projects include:

   Carbon sequestration from forest expansion, and domestic no-
        till agricultural soils and agricultural tree and grass 
        plantings;

   Electric power generated by wind, solar and geothermal 
        systems;

   Methane capture and destruction (e.g. from agricultural 
        waste, landfills and coal mines).

    Selected categories of offsets can be implemented in Brazil. This 
feature allows the pilot market participants to develop expertise on 
issues associated with cross-border transactions, including the 
opportunity to develop trading across differing legal and regulatory 
systems. Brazil also represents a natural location as it has extensive 
linkages to many Midwest businesses, presents a variety of low-cost 
mitigation opportunities, and its policymakers are actively preparing 
for the international carbon market.
    Annual auctions of emission allowances will be held to help 
stimulate the market and publicly reveal prices. To complement private 
contracting, an electronic mechanism for hosting CCX trading will 
provide a central location that facilitates trading and publicly 
reveals price information. Several existing trading systems will be 
considered for use in the CCX market. Trading will be encouraged by 
provision of uniform trade documentation and by listing standardized 
spot and forward contracts on the CCX electronic market.
Market Administration Issues, Public Policy Context
    Administration of the CCX market by an efficient, corporate style 
governance system, with an elected Board of Directors and a strong 
Chief Executive, is recommended. The rules structure and decisions of 
the governing body should be codified through a Rulebook. Under the 
guidance of the Board and the Rulebook, a professional staff should be 
responsible for making most operational decisions and managing outside 
vendors. In order to assure the market incorporates current best 
practices, several expert advisory committees will be convened, 
including committees on rules and enforcement; market operations and 
technical specifications; and emissions and project monitoring, 
verification and audits.
    The capabilities of various service providers who might construct 
and/or operate an emissions and emissions trading registry were 
examined. Discussions have been held with Environmental Resources 
Trust, Epotec, PricewaterhouseCoopers and the Emissions Trading Group 
in the U.K. Each group offers potentially attractive features that will 
be further examined. EFP has also worked to build links to other 
emerging GHG markets (e.g. the UK), multilateral organizations, 
national governments, corporations, non-governmental organizations and 
financial and commodity exchanges.
    Professional research on the accounting and tax issues associated 
with participating in the CCX was conducted under subcontract by 
PricewaterhouseCoopers LLP. An extensive body of guidance on both 
accounting and tax issues associated with emissions trading has been 
established in the U.S. Preliminary indicative guidance is provided on 
proper accounting and income tax treatment for issues associated with 
enrollment in the market, trading, swaps, auctions and participation 
costs.
    A variety of legislative proposals have provided further indication 
that participation in CCX will help position participants to 
intelligently influence and benefit from possible future regulations. 
Legislative proposals to require reductions in power plant CO2 
emissions, and to assist or reward farm and forest carbon 
sequestration, could introduce a policy environment that provides 
competitive advantages to CCX participants.

Industry Outreach, Response
    In order to identify potential CCX participants, a database 
containing salient information on major Midwest emission sources was 
assembled and screened based on various criteria. Many Midwest 
businesses have already initiated climate change programs, and some 
industries, including the electric power industry, are already involved 
in emissions trading. Approximately 100 companies met the screening 
criteria. Additional screening identified forty firms that received 
first-round invitations to participate in forming the market. Sectors 
represented in this list include: electric power, auto manufacturers, 
petroleum refining, transport, pharmaceuticals, forest and paper, 
chemical manufacturers, and computers and telecommunications.
    The broad outreach program also involved development of a CCX 
website and brochures, thirty conference presentations in eight 
countries, ten pieces of print media coverage, four electronic media 
events, and three EFP-authored publications featuring CCX.
    Thirteen entities recognized as leaders in their industries 
provided a positive response to the first round of invitations to 
participate in CCX. Each entity signed a letter indicating their intent 
to help form the CCX rules and, if the rules are consistent with their 
objectives, to participate in the CCX market. Included are major 
manufacturers such as DuPont and Ford Motor Company, leading 
diversified energy companies such as Cinergy and Calpine, major 
international financial entities such as Swiss Re, agricultural 
businesses such as Growmark and Agriliance, and Zahren Alternative 
Power, a leading landfill gas energy company. Appendix A provides a 
brief description of the entities from which a positive response to the 
first round of invitations has been received to date.

High-Level CCX Advisory Board
    A high-level Advisory Board has been formed to receive strategic 
input from top world experts from the environmental, business, academic 
and policy-making communities. Members of the Board include 
internationally recognized environmental leaders such as Maurice Strong 
and Israel Klabin, former governors of U.S. states (James Thompson and 
David Boren), and individuals who have served in senior positions in 
major businesses and academic institutions, such as Donald Jacobs and 
Jeffrey Garten. The dignitaries serving on this Board can help inform 
corporate and governmental decision-makers and contribute to the 
formation of a robust group of CCX market participants. Appendix B 
provides a brief biographical summary of each of the individuals who 
have agreed to serve on the CCX Advisory Board.

Next Steps
    The report constitutes an initialization of a market architecture. 
It is the first step of an iterative process to be used in defining and 
implementing a pilot market. The next step is to build consensus on the 
initial architecture by further incorporating industry input through a 
Technical Committee comprised of experts, including representatives of 
the entities identified in Appendix A. The subsequent step will be 
preparation and launch of the first phase of the pilot market. Further 
iteration will involve refinement of market operations based on actual 
experience with the market, and expansion to allow increased 
participation and broader geographic coverage.
    Detailed discussions with participants and service providers will 
be undertaken in order to identify a consensus on the market 
architecture and implementation plan. This effort will aim to finalize 
emission baselines, targets, timetables, as well as rules on emissions 
monitoring, non-compliance penalties, new entrants, and jointly owned 
facilities. Proposed rules must be finalized for emission offset 
standards, mechanics of aggregating offsets and project verification. A 
simultaneous effort can be undertaken to select vendors for the 
registry and trading platform, and to enroll project verifiers. The 
consensus market design will be codified in the CCX Rulebook, which 
will also establish the responsibilities and operating procedures of 
the CCX governance structure.
    Pre-launch preparation of the market will entail official 
enrollment of participating emission sources, activation of the 
Registry, and placing emission allowances in the accounts of 
participants. Launch of the market will require initiation of the 
emission monitoring and reporting procedures, accepting applications 
from offset projects, and activation of the electronic trading 
mechanism.
    Operation of the market during the first year will include 
execution of the first auction, acceptance of quarterly emission 
monitoring reports, issuance first-year offsets based on independent 
verification reports, and the compliance ``true-up'' subsequent to year 
end. A process for expanding the market will be established in order to 
allow for orderly growth of participation.

Appendix A
    Entities that have given early indication of their intent to 
participate in the CCX market design process
    DuPont: DuPont is a manufacturer of diverse products that deliver 
science-based solutions that make a difference in people's lives in 
food and nutrition; health care; apparel; home and construction; 
electronics; and transportation. Founded in 1802, the company operates 
in 70 countries and has 93,000 employees. DuPont's stated core values 
reflect a commitment to safety, health and the environment; integrity 
and high ethical standards; and treating people with fairness and 
respect.
    Ford Motor Company: Ford Motor Company is one of the world's 
largest automobile manufacturers and marketers. Its brands include 
Ford, Mercury, Lincoln, Volvo, Jaguar, Land Rover, Aston Martin and 
TH!NK. The Company and its subsidiaries also engage in other 
businesses, including financing and renting vehicles and equipment. 
Hertz Corp., a Ford subsidiary, operates a car rental business, as well 
as an industrial and construction equipment rental business. Ford's 
philosophy is that its operations, products and services should 
accomplish their functions in a manner that takes responsibility for 
protection of health and the environment.
    Alliant Energy: Alliant Energy Corporation is a growing energy-
service provider with both domestic and international operations. 
Headquartered in Madison, WI, Alliant Energy provides electric, natural 
gas, water and steam services to more than two million customers 
worldwide. Alliant Energy Resources Inc., the home of the company's 
non-regulated businesses, has operations and investments throughout the 
United States, as well as Australia, Brazil, China, Mexico and New 
Zealand.
    Cinergy Corp.: Based in Cincinnati, Ohio, Cinergy Corp. is one of 
the leading diversified energy companies in the U.S. Its largest 
operating companies, The Cincinnati Gas & Electric Company (Ohio), 
Union Light, Heat & Power (Kentucky), Lawrenceburg Gas (Indiana), and 
PSI Energy, Inc. (Indiana), serve more than 1.5 million electric 
customers and 500,000 gas customers located in a 25,000-square-mile 
service territory encompassing portions of Indiana, Ohio and Kentucky. 
The interconnections of Cinergy's Midwestern transmission assets give 
it access to 37 percent of the total U.S. energy consumption.
    Calpine: Headquartered in San Jose, CA, Calpine has an energy 
portfolio comprised of 50 energy centers, with net ownership capacity 
of 5,900 megawatts. Located in key power markets throughout the United 
States, these centers produce enough energy to meet the electrical 
needs of close to six million households. Calpine was ranked 25th among 
FORTUNE magazine's 100 fastest growing companies and it was recently 
ranked by Business Week as the 3rd best performing stock in the S&P 
500.
    Energy company ``X'' (for the time being this company wishes to not 
make public its intent to participate in CCX): With regional offices 
from coast to coast, this company is one of the nation's leading 
competitive power producers, has natural gas facilities that connect 
major producing regions to some of the fastest-growing markets in North 
America, and operates one of the top energy trading businesses in the 
country.
    Swiss Re New Markets: Swiss Re is one of the world's largest 
reinsurance firms. It also owns primary insurance companies in numerous 
companies. Swiss Re New Markets brings together Swiss Re Group's 
expertise in alternative risk transfer and risk financing. Swiss Re New 
Markets staff includes more than 550 professionals from investment 
banking, corporate finance, insurance and reinsurance. From locations 
in Zurich, New York and London, these specialists combine capital 
market instruments with finite and conventional reinsurance to produce 
integrated risk management and financial management solutions for large 
corporations and insurers.
    Growmark: The GROWMARK System is a federated farmer cooperative 
network based out of Bloomington, IL. GROWMARK holds ownership in five 
interregional farmer cooperatives to ensure a stable and competitive 
supply of agricultural raw materials, needed services, and research.
    Agriliance: Agriliance is a partnership of agricultural producer-
owners, local cooperatives and regional cooperatives. Agriliance offers 
crop nutrients, crop protection products, seeds, information 
management, and crop technical services to producers and ranchers in 
all 50 states as well as Canada and Mexico. They have sales and 
marketing offices in St. Paul, Minn., and Kansas City, Mo. Agriliance, 
LLC was formed on February 3, 2000, as an agronomy marketing joint 
venture between Cenex Harvest States Cooperatives, Farmland Industries, 
Inc. and Land O'Lakes, Inc.
    IGF Insurance Company: IGF Insurance Company is the fifth-largest 
crop insurance company. IGF serves businesses in 48 states and 
maintains eight service offices nationwide. IGF prides itself in 
developing niche products for farmers' risk management needs.
    Iowa Farm Bureau Federation: Farm Bureau is an independent, 
nongovernmental, voluntary organization of farm and ranch families 
united with the freedom to analyze their problems and formulate action 
to achieve educational improvement, economic opportunity, and social 
advancement and, thereby, to promote the national well-being. Farm 
Bureau is local, statewide, national and international in its scope and 
influence and is nonpartisan, nonsectarian and nonsecret in character.
    National Council of Farmer Cooperatives: NCFC's mission is to 
protect the public policy environment in which farmer-owned cooperative 
businesses operate, promote their economic well-being, and provide 
leadership in cooperative education. NCFC remains the only organization 
serving exclusively as the national representative and advocate for 
America's farmer-owned cooperative businesses.
    ZAPCO: Zahren Alternative Power Corporation (ZAPCO) is among the 
largest and most respected developers of Landfill Gas (LFG) projects in 
the United States. Through predecessor subsidiaries and affiliates, 
including the former Energy Tactics, Inc., ZAPCO has been engaged, 
since 1981, in the development, financing, and operation of a large and 
diverse group of LFG-based projects, including waste-to-energy 
electricity systems.

Appendix B
Biographies of the Advisory Board
    David Boren, has been President of The University of Oklahoma since 
1994. Under Mr. Boren's leadership, the University has emerged as a 
recognized ``pacesetter in American public higher education,'' with 
twenty major new programs initiated in the Arts, Honors College, 
International Programs and innovative programs to enhance faculty-
student relations. Mr. Boren formerly served as a three-term U.S. 
Senator, where he was Chairman of the Senate Select Committee on 
Intelligence and a member of the Agriculture Committee. Mr. Boren, a 
Rhodes scholar, served as a member of the Yale University Board of 
Directors from 1988 to 1997. Prior to becoming Senator, Mr. Boren 
served as Governor of Oklahoma and in the state legislature.
    Ernst Brugger is Founding Partner and Chairman of Brugger Hanser & 
Partner Ltd. in Switzerland, a business consulting firm with 
international experience and range. He is also a professor at the 
University of Zurich, chairman and member of the board of various 
companies and a member of the International Committee of the Red Cross 
(ICRC). Dr. Brugger serves as Chairman of the Board of Directors of 
Sustainable Performance Group, an investment and risk management 
company which invests in pioneering and leading companies which have 
taken up the cause of sustainable business
    Jeffrey E. Garten is Dean of the Yale School of Management. 
Formerly Garten served as undersecretary of commerce for international 
trade in the first Clinton Administration. He also held senior economic 
posts in the Ford and Carter administrations. From 1979-1992 he was a 
managing director first at Lehman Brothers, where he oversaw the firm's 
Asian investment banking activities from Tokyo, and then at the 
Blackstone Group. Currently Dr. Garten writes a monthly columnist for 
Business Week. His latest book is ``The Mind of the CEO'' (2001).
    Donald P. Jacobs is Dean of the Kellogg Graduate School of 
Management and its Gaylord Freeman Distinguished Professor of Banking. 
Under his leadership, the Kellogg School has become a leader in the 
field of business and finance and is consistently ranked as one of the 
top five business schools in the United States. Dean Jacobs is a former 
Chairman of the Board of Amtrak (1975-1979) and currently serves on 
several corporate boards. His work on banking, corporate governance and 
international finance has been published in many scholarly journals and 
he holds several honorary degrees and professional awards.
    Dennis Jennings is the Global Risk Management Solutions Leader for 
PricewaterhouseCoopers' (PwC) Global Energy and Mining Industry 
Practice. Mr. Jennings previously served as the Dallas/Fort Worth 
Energy Industry Market Leader; Co-Chairman of the U.S. Oil and Gas 
Industry Program; and on Steering Committee of the International Energy 
Practice. His responsibilities have included leading PwC's global risk 
management practice for the energy and mining industry, providing 
financial advice and performing due diligence reviews on numerous 
merger, acquisitions and divestiture efforts by major international 
corporations.
    Joseph P. Kennedy II is Chairman and President of Boston-based 
Citizens Energy Group. Before returning to Citizens Energy, Mr. Kennedy 
represented the 8th Congressional District of Massachusetts in the U.S. 
House of Representatives for 12 years. Mr. Kennedy founded the non-
profit company in 1979 to provide low-cost heating oil to the poor and 
elderly. Under his leadership, Citizens grew to encompass seven 
separate companies, including the largest energy conservation firm in 
the U.S. Mr. Kennedy also advises and serves on the boards of several 
companies in the energy, telecommunications, and health care 
industries. Mr. Kennedy is the son of the late U.S. Sen. Robert F. 
Kennedy.
    Israel Klabin is the president of the Brazilian Foundation for 
Sustainable Development, a major Brazilian non-governmental 
organization devoted to issues of environmental and sustainable 
development policy. Mr. Klabin is the former chairman of Klabin SA, one 
of the largest forestry companies in Latin America. He is a former 
mayor of Rio de Janeiro and was one of the main Brazilian organizers of 
the United Nations Conference on the Environment (Rio 92). He is also 
actively involved in several philanthropical activities.
    Bill Kurtis has had a distinguished career in broadcasting for over 
30 years, as a news anchor in Chicago and later of the national CBS 
Morning News. He started his own company, Kurtis Productions, when he 
returned to Chicago in the mid 1980's and currently hosts shows on the 
Arts and Entertainment network. Mr. Kurtis is involved in The National 
Science Explorers Program, Electronic Field Trips and the Electronic 
Long Distance Learning Network, all aimed at teaching children about 
science. Mr. Kurtis and his shows have been the recipients of several 
awards. He serves on the board of directors of organizations devoted to 
natural history and the environment, including the National Park 
Foundation, the Nature Conservancy and the Kansas State Historical 
Society.
    Thomas E. Lovejoy, is a world-renowned tropical and conservation 
biologist. Dr. Lovejoy is generally credited with having brought the 
tropical forest problem to the fore as a public issue. In 1987, he was 
appointed Assistant Secretary for Environmental and External Affairs 
for the Smithsonian Institution and is Counselor to the Smithsonian's 
Secretary for Biodiversity and Environmental Affairs. Dr. Lovejoy is 
also Chief Biodiversity Advisor to the President of the World Bank. 
From 1989 to 1992, he served on the President's Council of Advisors in 
Science and Technology (PCAST), and acted as scientific adviser to the 
Executive Director of the United Nations Environment Programme (1994-
97). He was the World Wildlife Fund's Executive Vice President from 
1985 to 1987. Dr. Lovejoy is the author of numerous articles and books.
    David Moran is vice president of ventures for the Electronic 
Publishing group of Dow Jones & Company and president of Dow Jones 
Indexes. Mr. Moran is also President of Dow Jones Indexes, which 
includes all Dow Jones indexes for countries, regions, sectors and 
industry groups as well as the world index. He is also chairman of Dow 
Jones Sustainability Group Index GmbH. Prior to joining Dow Jones, Mr. 
Moran was an associate with Patterson, Belknap, Webb & Tyler, a New 
York City law firm, from 1979 to 1985.
    Les Rosenthal is a former Chairman of the Chicago Board of Trade 
(CBOT) and a principal of Rosenthal Collins, a leading Chicago-based 
commodities and futures trading firm. During his time as member of the 
Board and Chairman of the CBOT, Mr. Rosenthal was instrumental in 
advancing the cause of new and innovative exchange-traded products such 
as Treasury Bond futures and insurance derivatives.
    Maurice Strong is a former Secretary General of the 1992 United 
Nations Conference on Environment and Development (the Rio Earth 
Summit) and Under-Secretary General of the United Nations. He is 
currently the Chairman of the Earth Council, a non-governmental 
organization dedicated to the cause of sustainable development. In June 
of 1995, he was named Senior Advisor to the President of the World 
Bank. From December 1992 until December 1995, Mr. Strong was Chairman 
and Chief Executive Officer of Ontario Hydro, one of North America's 
largest utilities. Mr. Strong is an advisor to the United Nations, and 
has been a director and/or officer of a number of Canadian, U.S. and 
international corporations.
    James R. Thompson is a former four-term Governor of Illinois and 
currently a managing partner of Winston and Strawn. During his last 
term as Governor, Mr. Thompson was involved in the implementation of 
the sulfur dioxide (SO2) market created by the 1990 Clean 
Air Act. During his last term as Governor he was the Head of the Global 
Climate Change Task Force at the National Governors' Association (1988-
1989). Governor Thompson is also a director of the Chicago Board of 
Trade (CBOT).
    Brian Williamson is the Chairman of the London International 
Financial Futures and Options Exchange (LIFFE), one of the world's 
largest exchanges. Mr. Williamson has been involved in trading 
financial futures for almost three decades in London, New York and 
Chicago. He held senior executive positions for prominent trading firms 
and was a member of the International Advisory Board of the Nasdaq 
Stock Market, becoming Chairman in 1996. He was also Governor-at-Large 
of the National Association of Securities Dealers in Washington DC. 
(1995-1998).

           Corporate giants to aid design of US carbon market
                         Dr. Richard L. Sandor
                    Environmental Finance--June 2001

    As the US enters a major debate on energy use and endeavours to 
develop a policy to reduce carbon dioxide (CO2) emissions, a 
project taking shape in the upper Midwest is poised to test market-
based solutions to global warming.
    The size, diversity, and volume of emissions (1.375 billion tons of 
CO2 per year) from this region--Illinois, Indiana, Iowa, 
Michigan, Minnesota, Ohio and Wisconsin--make it well-suited as a 
starting point for a robust and representative greenhouse gas (GHG) 
emissions trading market expandable to include all of North America. 
The region's economic output of $2 trillion is equal to that of the UK 
and the Netherlands combined. A diverse group of major firms has 
indicated their intent to participate in the design phase of a 
voluntary pilot trading market for the region, the Chicago Climate 
Exchange (CCX--see Table 1).

        1. Companies participating in the design phase of the CCX
Agriliance                                            National Council
Alliant Energy                                         of Farmer
Calpine                                                Cooperatives
Carr Futures/Credit Agricole Indosuez                 NiSource
Cinergy                                               ORMAT
DuPont                                                Pinnacle West
Ford Motor Company                                     Capital
GROWMARK                                              PG&E National
IGF Insurance                                          Energy Group
International Paper                                   STMicroelectronics
Iowa Farm Bureau Federation                           Suncor Energy
IT Group                                              Swiss Re
Midwest Generation                                    Temple-Inland
                                                      The Nature
                                                       Conservancy
                                                      Wisconsin Energy
                                                      ZAPCO



    A study of such a market suggests a goal of reducing participants' 
GHG emissions by 5% below 1999 levels over five years. The feasibility 
study for the CCX was funded by the Chicago-based Joyce Foundation 
through a special Millennium Initiative grant to the Kellogg Graduate 
School of Management at Northwestern University. According to Joyce 
Foundation president Paula DiPerna, ``the CCX would represent a major 
step forward while an appropriate regulatory framework for greenhouse 
gases evolves. A regional success on a global challenge like climate 
change could be transformational. Because of its variety of economic 
activities, including its strong agricultural sector, the Midwest is 
the perfect place to begin demonstrating the regional-global 
interface.''
    Trading will help reduce GHG emissions cost-effectively and offer 
new opportunities for environment-based income for farmers, foresters 
and renewable energy firms.
    A high-level advisory board consisting of academic, business, 
environmental and public sector leaders has been formed with the 
objective of gathering strategic input (see Table 2).

                        2. Advisory board members
David Boren                         President of The University of
                                     Oklahoma; former US Senator and
                                     Governor of Oklahoma

Ernst Brugger                       Founding Partner and Chairman of
                                     Brugger Hanser & Partners

Jeffrey E. Garten                   Dean of Yale School of Management

Lucien Y. Bronicki                  Chairman of ORMAT International

Donald P. Jacobs                    Dean, Kellogg Graduate School of
                                     Management, Northwestern University

Dennis Jennings                     Global Risk Management Solutions
                                     Leader, PricewaterhouseCoopers

Jonathan Lash                       President, World Resources Institute

Joseph P. Kennedy II                Chairman and President of Boston-
                                     based Citizens Energy Group; former
                                     US Congressman

Israel Klabin                       President of the Brazilian
                                     Foundation for Sustainable
                                     Development

Bill Kurtis                         National broadcaster, host of Arts&
                                     Entertainment cable TV show

Thomas E. Lovejoy                   Chief Biodiversity Advisor to the
                                     President of the World Bank

David Moran                         President of Dow Jones Indexes

Les Rosenthal                       Former Chairman, Chicago Board of
                                     Trade; principal, Rosenthal Collins

Maurice Strong                       Chairman of the Earth Council,
                                     former UN Under-Secretary General

James R. Thompson                   Former four-term Gov. of Illinois

Brian Williamson                    Chairman, London International
                                     Financial Futures and Options
                                     Exchange (LIFFE)



    The notion of trading carbon emissions has long been debated, but 
the proposed CCX offers the first test of the concept on a scale that 
has global potential.
    As proposed, the exchange could:

   demonstrate that GHG emissions trading can achieve real 
        reductions in emissions across multiple business sectors;

   help discover the price of reducing GHG emissions; and

   develop the frameworks, for monitoring emissions, 
        determining offsets and conducting trades, needed for a 
        successful market.

    The study proposes starting the market in the seven Midwest states, 
including emission offset projects in Brazil, and expanding overtime to 
include all of the US, Canada and Mexico. Participating companies would 
be issued tradable emission allowances. Emitting firms would commit to 
a phased schedule for reducing their emissions by 5% by 2005.They could 
then either cut their emissions directly, buy allowances from companies 
that have achieved surplus reductions, or buy credits from agricultural 
or other offset projects. Potential offset projects would include 
renewable energy systems and the capture and use of agricultural and 
landfill methane. Offsets could also be generated by carbon 
sequestration projects such as forest expansion and conservation soil 
management, which remove CO2 from the atmosphere (see Table 
3).

    3. Proposed market architecture for the Chicago Climate Exchange
Geographic coverage                 2002: emission sources and projects
                                     in seven Midwest states; 2003-05:
                                     emission sources and projects in
                                     US, Canada and Mexico; Offsets also
                                     accepted from projects in Brazil
                                     for both periods.

Greenhouse gases                    Carbon dioxide, methane and all
  covered                            other targeted GHGs

Emission reduction                  2002: 2% below 1999 levels, falling
  targets                            1% per year through 2005

Industries and firms targeted       Primarily ``downstream''
                                     participants: power plants,
                                     refineries, factories, forestry,
                                     vehicle fleets; 40 firms initially
                                     targeted. Individual entities or co-
                                     operating groups of entities must
                                     have emissions exceeding 250,000
                                     tons CO2e in 1999 to become a
                                     participating emission source.

Tradable instruments                Fully interchangeable emission
                                     allowances (original issue) and
                                     offsets produced by targeted
                                     mitigation projects

Eligible offset projects            A. Carbon sequestration in forests
                                     and domestic soils; B. Renewable
                                     energy systems; C. Methane
                                     destruction in agriculture,
                                     landfills and coalbeds Offsets must
                                     be aggregated into pools of 100,000
                                     tons CO2e per year; Projects placed
                                     into service after 1 January 1999
                                     can qualify.

Emissions/project                   Direct measurement (eg CEMs); fuel
  monitoring                         flows/emission factors; carbon
                                     sequestration: standard tables,
                                     case-specific estimates, direct
                                     measurement.

Provisions for new                  Allowance allocations reflect best
  facilities                         technology emission rates

Annual public auctions              2% of issued allowances withheld and
                                     auctioned in ``spot'' and
                                     ``forward'' auctions, proceeds
                                     returned pro rata

Central registry                    Central database to record and
                                     transfer allowances and offsets;
                                     interfaces with emissions database
                                     and trading platform

Trading mechanisms                  Standardised CCX Electronic Market,
                                     private contracting

Trade documentation                 Uniform documentation provided to
                                     facilitate trade

Accounting and tax issues           Accounting guidance suggested by
                                     generally accepted accounting
                                     principles; precedent exists for US
                                     tax treatment

Market governance                   Self-governing structure to oversee
                                     rules, monitoring and trade


    The commitment from the advisory committee and the participating 
companies is to be commended. Their input in the design phase will help 
formulate the final rules and procedures for the CCX and determine if 
this regional programme can shape the beginning of a global solution to 
climate change.
    Richard Sandor is chief executive of Environmental Financial 
Products. He would like to thank Dr. Michael Walsh, Alice LeBlanc, 
Rafael Marques, and Scott Baron for their invaluable support and 
intellectual contributions to this feasibility study. With special 
thanks to the Joyce Foundation and Paula DiPerna, Margaret O'Dell, Mary 
O'Connell and James Seidita for making all this possible.

                           The case for coal
                         Dr. Richard L. Sandor
                   Environmental Finance--March 2001

    Discussions of coal as a viable energy source of the future usually 
end with cries of concern about its environmental impact. However, 
these discussions take a different tack when a generating company of 
the 21st century considers the many factors that affect the cost of 
producing power. These include the choice of fuel, changes in 
technology that alter emissions, and the costs of offsetting carbon 
dioxide (CO2), sulphur dioxide (SO2) and other 
pollutants. Those in the power business who make informed investment 
decisions and are environmentally concerned should question the premise 
that, under all conditions, coal is dead.
    Many have long considered coal the least desirable fossil fuel 
because of its environmental impact. It causes acid rain and 
contributes to global warming. Some concluded that nothing could 
improve its status. Then came the US Clean Air Act Amendments of 1990. 
Emissions trading and the economic viability of low sulphur coal, 
sulphur scrubbing, and nitrogen oxide (NOX) controls have 
altered the belief that the only way to eliminate acid rain is to 
reject coal as an energy source. But this offered only a temporary 
respite in the belief that coal was dead. Low gas prices bolstered the 
argument that there was a clean and cost-effective alternative to coal.
    After an extended bull market in gas prices, however, and an energy 
crisis in California, things are changing. Power plant investment 
decisions are far more complex today and must account for the costs 
associated with environmental compliance.
    Under what conditions might coal-fired generation remain attractive 
in the face of strict environmental constraints? To answer this 
question, we examined the economics of new power plant construction in 
a manner that creates a special new class of hypothetical power plants: 
the emission-neutral plant. We assume a new power plant must fully 
offset its emissions of SO2, NOX and CO2 
via assumed cap-and-trade systems. Analysis of the emission-neutral 
plant reveals some interesting and surprising conclusions about fuel 
choice and environmental costs.
    For example, assume a utility must choose among the following 
alternative investments for a new power plant: coal; gas combined cycle 
(CC); gas combustion turbine (CT); wind; and solar. Assume the features 
of each plant reflect the most efficient and clean technologies that 
are commercially available.\1\ The coal and CC plants are run as 
baseload units (i.e. they produce 85% and 80% of potential annual 
production, respectively). The GT plant runs at peak demand with a low 
capacity factor (15%). The wind and solar plants are smaller in 
capacity and are assumed to operate at 30% of capacity.
---------------------------------------------------------------------------
    \1\ Analyzing Electric Power Generation under the CAAA, Office of 
Air and Radiation; US EPA, March 1998
---------------------------------------------------------------------------
    We assume a natural gas cost of $4.00/million BTU and a coal cost 
of $1.21/million BTU, (today's prices). Table 1 presents the assumed 
prices for emission allowances.


             Table 1. Environmental compliance cost  ($/ton)
------------------------------------------------------------------------
                     Commodity                              Price
------------------------------------------------------------------------
CO2                                                 $5, $10

SO2                                                 $160
NOX                                                 $1,500
------------------------------------------------------------------------
SO2 and NOX figures reflect market prices. CO2 price based on
  projections and early trading experience


    The emission rates for each plant type (presented in Table 2) 
reflect a coal plant that uses low-NOX burners and selective 
catalytic reduction technologies to control NOX (and 
mercury), and has wet limestone SO2 scrubbing (95% 
effectiveness). The CC gas plant also uses low-NOX burners 
and selective catalytic reduction technologies to control NOX 
while the CT plant uses steam injection.


     Table 2. Emission rates of newly built power plants (lbs/MMBtu)
------------------------------------------------------------------------
      Plant type             CO2              SO2              NOX
------------------------------------------------------------------------
Coal                   207              0.08             0.1
Gas                    117              0                0.024
Wind/solar             0                0                0
------------------------------------------------------------------------
Source: Clean Coal Technology Compendium, EPA, DOE


    Table 3 presents the capital and operating/maintenance costs 
reported in the March 1998 EPA study cited in footnote 1. Capital costs 
are spread evenly over 20 years. The fifth column shows the total cost 
per megawatt hour of electricity produced by each emission neutral 
plant assuming a CO2 price of $5/ton. The last three columns 
indicate which plant type can produce power at the lowest cost for 
various CO2 prices (including $0/ton).


                        Table 3. Cost estimates for emission-neutral power plants ($/MWh)
----------------------------------------------------------------------------------------------------------------
                                                  Levelised
                                                   capital   O&M costs  Total      Total      Rank   Rank   Rank
                                                    cost:    (variable   fuel  cost    1      2      3
                   Plant type                      over 20      and     price     ($/Mwh)     (CO2   (CO2   (CO2
                                                   yrs  ($/    fixed)     ($/   (CO2 = $5)   = $0)  = $5)    =
                                                     Mwh)     ($/Mwh)   Mwh)*                               $10)
----------------------------------------------------------------------------------------------------------------
Wind (50MW)                                         19         10       --         29         2      1      1
Coal (400MW)                                         9          7       11         34         1      2      2
Gas CC (400MW)                                       4          4       27         37         3      3      2
Gas CT (80MW)                                       14          2       44         64         4      4      3
Solar                                               77          3       --         80         5      5      4
  (5MW)
----------------------------------------------------------------------------------------------------------------
* Coal price = $1.21/million BTU (about $25/short ton), gas price = $4/million BTU.
 Includes CO2, SO2, NOX costs (see table 2).
 The costs for operating a coal unit and a CC are approximately equal at $10/ton CO2.


    The chart shows power generation costs ($/MWh) for each of the five 
plant types for various CO2 prices, assuming gas prices of 
$4.00/million BTU. Under our fuel price assumptions, total production 
costs at an emission-neutral coal-fired plant are below those of a CC 
gas plant when CO2 prices are below $10/ton.




    In another scenario we find that a $5.00 gas price makes a new 
emission-neutral coal plant less costly than a CC gas plant if CO2 
prices are below $21. Conversely, a $3.00 gas price would make a CC gas 
plant the cheapest option. Naturally, volatility of gas prices 
increases the riskiness of gas plants.
    In the hypothetical scenario of emission neutrality for new fossil-
fuelled power plants, wind-power is the least-cost option. But, while 
new technologies are making wind power cost-competitive, even without 
comprehensive emission offset requirements for fossil plants, it may 
not be feasible to meet demand growth exclusively with wind facilities. 
Their production is inherently variable and they are not feasible in 
all locations. At the best sites, however, wind plants can be expected 
to achieve a capacity factor of over 30%, which reduces the cost per 
hour of generation.\2\
---------------------------------------------------------------------------
    \2\ American Wind Energy Association
---------------------------------------------------------------------------
    In essence, power generators in the 21st century face indifference 
curves when choosing to build new power plants. Various combinations of 
fuel prices, emissions prices (and rules) and technologies will yield 
identical costs of production. A clean-burning gas plant facing high 
gas prices may have no cost advantage over a coal plant that faces low 
fuel costs but high environmental costs. Fully-offset coal plants can 
be the least-cost option in locations such as the western US (eg 
Montana) where power plants can be built right on top of abundant coal 
reserves.
    New coal-fired plants are a viable option under some circumstances, 
even when their emissions are fully offset. It is also clear that the 
choice among alternative plant types is quite complex. For example, our 
model assumes technology is constant and does not include emissions 
associated with coal extraction.
    With US public policy encouraging reliance on domestic energy and 
sophisticated private sector investment decisions, we may see more 
coal-fired power plants in the near future.
    Richard Sandor is chairman and chief executive of Environmental 
Financial Products.

       Native Americans sell carbon credits from forestry project
                              David Robson

    Sustainable Forestry Management (SFM), a London-based company which 
invests in forestry projects with environmental and social benefits, 
has agreed to buy greenhouse gas (GHG) emission reductions equivalent 
to almost 48,000 tons of carbon dioxide from native Americans in 
Montana.
    SFM is paying the Confederated Salish and Kootenai tribes an 
undisclosed amount to reforest 100 hectares of their Montana 
reservation that was hit by forest fires in 1994. In return, the tribes 
have undertaken to maintain the forest for 100 years and to pass on the 
associated GHG offsets or `carbon credits' to SFM for 80 years, 
explains Michael Walsh, senior vice-president of Chicago-based 
Environmental Financial Products, which arranged the deal.
    The transaction was co-ordinated by the Montana Offset Coalition, 
an organization which is helping farmers and foresters participate in 
the emerging carbon markets.
    The quantity of GHG offsets is based on conservative growth 
assumptions, says Walsh, and the deal will also help improve soil 
quality while providing a revenue stream for local communities, notes 
SFM.
    ``This first project will set the stage for a process that will 
help fund chronically underfunded tribal reforestation projects 
throughout the west and start the ball rolling on market-based 
solutions to global warming,'' says Tom Corse, supervisory forester for 
the Confederated Salish and Kootenai tribes.

   U.S. Landfill Concern, Ontario Utility Agree to Swap Gas-Emission 
                                 Rights
                             Peter A. McKay
      Staff Reporter of The Wall Street Journal--October 26, 1999

    An American landfill company and a Canadian power-generation 
concern will announce today what experts describe as the largest 
exchange to date of rights to emit ozone-depleting gases.
    Such rights are effectively off-exchange pollution futures.
    Officials from both sides said Ontario Power Generation Inc. has 
bought from Zahren Alternative Power Corp. the rights to emit 2.5 
million tons of carbon dioxide--roughly the equivalent released by 
550,000 cars in one year.
    An adviser to the deal said the total value was less than $25 
million--a per-ton rate well below that charged in previous emissions-
rights sales.
    The deal was structured as a private exchange because it comes 
before a global treaty is in place for governments to formally 
recognize such international emissions deals. The companies and their 
advisers said that in part they wanted to set a precedent for the 
fledgling ``greenhouse-gas'' trade, hoping it would demonstrate the 
need for little regulation to require industry to combat global 
warming.
    ``We're hoping this will jump-start the thinking on how to initiate 
a more formalized process,'' said Bernie Zahren, president and chief 
executive of the Avon, Conn., company that bears his name.
    Mr. Zahren's firm removes methane gas from landfills, mostly in the 
Northeast U.S. He said that in the deal, Ontario Power essentially 
bought the right to 119,000 tons of that methane in exchange for 2.5 
million tons of carbon dioxide. That compound is the international 
standard for measuring reductions of greenhouse gases that many 
scientists believe contribute to global warming.
    The actual emissions cuts will be reviewed by 
PricewaterhouseCoopers LLP, said Richard Sandor, chairman of 
Environmental Financial Products, a Chicago consulting firm that 
advised both sides.
    The deal comes at least nine years ahead of a timetable set by the 
Kyoto Protocol, a treaty named for the Japanese city where it was 
negotiated, which will require 37 industrialized nations to reduce 
greenhouse-gas emissions beginning in 2008.
    The treaty hasn't been ratified by the U.S. Senate, nor has it 
approved a separate congressional bill that would give credit to 
companies that reduce emissions ahead of schedule, said Andrew Hoffman, 
a Boston University professor who has studied the trading of emissions 
credits.
    ``What you've got here is basically a demonstration product,'' Mr. 
Hoffman said. ``There are some big questions in creating a global 
trading system, and this deal seems to be orchestrated to address a lot 
of them.''
    That is exactly what Mr. Sandor said he intended the deal to do. A 
former vice chairman of the Chicago Board of Trade, he said he hopes to 
establish an exchange-traded market for carbon-dioxide credits similar 
to one that exists for sulfur dioxide, which is blamed for acid rain.




    He estimated that market is valued at about $3 billion.
    ``We have a whole new avenue that's being opened to us as air and 
water become scarcer,'' Mr. Sandor said. ``Essentially we have to 
ration them, or the planet's going to be one big barbecue. And the best 
way to do that is through the free market, not the government dictating 
where all the emissions are going to be.''
    Mr. Hoffman, however, said developing countries could be left 
behind in such a scenario, because their businesses and governments are 
less accustomed to U.S.-style financial products such as the emissions 
derivatives Mr. Sandor envisions.
    ``Ever since Kyoto, developing countries have been worrying that 
America and other big countries will just buy their way out of the 
limitations,'' Mr. Hoffman said. ``If they have to go through a period 
of adjustment just to figure out how to trade the credits, maybe that 
would mean being left behind.''

       Greenhouse Gas Emissions Trading Market Emerges in Chicago
                        Environment News Service

CHICAGO, Illinois, May 30, 2001 (ENS)--The world's first emissions 
trading market for greenhouse gases is materializing in Chicago. A 
diverse group of 25 large corporations and nonprofit organizations has 
agreed to participate in the design phase of a voluntary pilot trading 
market, the Chicago Climate Exchange.
    The project is spearheaded by Dr. Richard Sandor, CEO of Chicago 
based Environmental Financial Products, who is known for developing 
innovative commodity and environmental markets and has designed 
revolutionary market mechanisms for environmental protection programs.
    Sandor said today that the results of a feasibility study he 
conducted to test interest in the Chicago Climate Exchange show that a 
voluntary pilot market starting in seven midwestern states, ``is 
feasible and can be expanded over time.''
    ``The widespread corporate interest in preparing rules and 
regulations for this voluntary market affirms the private sector's 
demand for flexible, market based mechanisms to address climate 
change,'' Sandor said.
    Sandor is a visiting scholar at the Kellogg Graduate School of 
Management at Northwestern University. The feasibility study was funded 
by the Chicago based Joyce Foundation through a $347,000 Millennium 
Initiative grant.
    The idea of trading carbon emissions has been debated for at least 
a decade, but the proposed Chicago Climate Exchange offers the first 
test of the concept on a scale that has global potential.
    The Midwest is a promising location for starting the market because 
of its 20 percent share of the U.S. economy and greenhouse gas 
emissions, its mix of manufacturing, transport, energy, agriculture and 
forestry sectors, and its extensive international linkages.
    Dr. Sandor's study suggests a goal of reducing participants' 
emissions of six greenhouse gases, including carbon dioxide, by five 
percent below 1999 levels over five years. These emissions, created by 
the combustion of coal, oil and gas, are linked by most scientists to 
climate change.
    This market based approach may be particularly attractive to U.S. 
corporations after President George W. Bush announced in March that 
U.S. would not participate in the international agreement governing the 
emission of these six greenhouse gases known as the Kyoto Protocol.
    ``Most of the actions needed to begin reducing the risk of climate 
change will have to be undertaken by the private sector, so a market 
developed by a private association can be an important part of the 
overall solution,'' said Sandor.
    Trading would help reduce greenhouse emissions in a cost effective 
manner and offers new opportunities for environment based income for 
farmers, foresters and renewable energy firms.
    As proposed, the Chicago Climate Exchange could demonstrate that 
greenhouse gas trading can achieve real reductions in emissions across 
different business sectors. It could help discover the price of 
reducing greenhouse gases.
    It would develop the standard frameworks for monitoring emissions, 
determining offsets and conducting trades needed for a successful 
market.
    Sandor's study proposes starting the market in seven Midwest 
states--Illinois, Indiana, Iowa, Michigan, Minnesota, Ohio and 
Wisconsin--including emission offset projects in Brazil, and expanding 
over time.
    Participating companies would be issued tradable emission 
allowances. Emitting firms would commit to a phased schedule for 
reducing their emissions five percent by 2005.
    They could then either directly cut their emissions, or buy 
allowances from companies that have achieved surplus reductions. Or the 
market traders could buy credits from agricultural or other projects 
that produce power without emissions or offset greenhouse gases by 
holding them out of the atmosphere.
    Potential offset projects include renewable energy systems, such as 
wind and solar power, and capture and use of agricultural and landfill 
methane. Offsets can also be generated by carbon sequestration projects 
such as forest expansion and conservation soil management, which remove 
carbon dioxide from the atmosphere.
    Twenty-five companies and non-profits have agreed to participate in 
the market design phase, including manufacturers, electric utilties, 
agricultural cooperatives, and conservation groups.
    The participants include Ford, DuPont, Suncor Energy, The Nature 
Conservancy, STMicroelectronics, Temple-Inland, International Paper, 
the Iowa Farm Bureau Federation, Alliant Energy, Calpine, Cinergy, 
NiSource, PG&E National Energy Group, Wisconsin Energy, ZAPCO, 
Agriliance and GROWMARK. (A complete list can be found below.)
    An advisory board consisting of academic, business, environmental 
and public sector leaders has been formed with the objective of 
gathering strategic input.
    Board members include Maurice Strong, former under-secretary 
general of the United Nations who led the 1992 Earth Summit in Rio de 
Janeiro; James Thompson, a former four term governor of Illinois; 
Jonathan Lash, president of the World Resources Institute, a non-profit 
research organization based in Washington, DC; Joseph P. Kennedy II, 
chairman and president of the Boston based Citizens Energy Group; Dr. 
Thomas Lovejoy, a world renowned tropical and conservation biologist, 
and Israel Klabin, president of the non-governmental Brazilian 
Foundation for Sustainable Development. (A complete list is given 
below.)
    ``The Chicago Climate Exchange would represent a major step forward 
while an appropriate regulatory framework for greenhouse gases 
evolves,'' said Joyce Foundation president Paula DiPerna. ``A regional 
success on a global challenge like climate change could be 
transformational. Because of its variety of economic activities, 
including its strong agricultural sector, the Midwest is the perfect 
place to begin demonstrating the regional-global interface.''
    The Joyce Foundation has a tradition of catalyzing new ideas, said 
DiPerna, who acted as vice president of international affairs for the 
late oceanographer and conservationist Jacques Cousteau.
    DiPerna says Dr. Sandor's interest in the trading approach to 
environmental problems is what attracted the support of the Joyce 
Foundation.
    ``He, being a trader par excellence, said we have to discover the 
price at which greenhouse gas emissions credits will trade,'' DiPerna 
told ENS. ``The way to do that is to try it and see. We never know if 
it will work until we try. Now that we know we have enough players in 
the game, the game will start as early as next year.''
    The Joyce Foundation is now considering a request to be involved in 
the second phase of the Chicago Climate Exchange--the phase that would 
launch the trading.
    DiPerna and Sandor believe that a representative carbon trading 
market can yield lessons that may be relevant for economies worldwide 
for the next century.
    ``The beauty of this emissions trading mechanism is that it's both 
practical and philosophical,'' DiPerna said. ``We must solve the 
problem in a practical manner and retain the philosophical value that 
motivates us all.''

Companies Participating in the Design Phase of the Chicago Climate 
        Exchange
    Agriliance: Agriliance is a partnership of agricultural producer-
owners, local cooperatives and regional cooperatives. Agriliance offers 
crop nutrients, crop protection products, seeds, information 
management, and crop technical services to producers and ranchers in 
all 50 states as well as Canada and Mexico.
    Alliant Energy: Alliant Energy Corporation is a growing energy 
service provider with both domestic and international operations. 
Headquartered in Madison, Wisconsin, Alliant Energy provides electric, 
natural gas, water and steam services to more than two million 
customers worldwide. Alliant Energy Resources Inc., the home of the 
company's non-regulated businesses, has operations and investments in 
the United States, Australia, Brazil, China, Mexico and New Zealand.
    Calpine: Headquartered in San Jose, California, Calpine has an 
energy portfolio comprised of 50 energy centers, with net ownership 
capacity of 5,900 megawatts, enough energy to meet the electrical needs 
of close to six million households. Calpine was ranked 25th among 
``Fortune'' magazine's 100 fastest growing companies and it was 
recently ranked by ``Business Week'' as the 3rd best performing stock 
in the S&P 500.
    Carr Futures/Credit Agricole Indosuez: Carr Futures, a subsidiary 
of Credit Agricole Indosuez, is a global institutional brokerage firm 
headquartered in Chicago. Carr holds memberships on all major futures 
and equity markets worldwide, and consistently ranks among the largest 
futures brokerage firms in the world.
    Cinergy Corporation: Based in Cincinnati, Ohio, Cinergy is a 
diversified energy company. Its largest operating companies, The 
Cincinnati Gas & Electric Company of Ohio, Union Light, Heat & Power of 
Kentucky, Lawrenceburg Gas of Indiana, and PSI Energy, Inc. of Indiana, 
serve more than 1.5 million electric customers and 500,000 gas 
customers. The interconnections of Cinergy's Midwestern transmission 
assets give it access to 37 percent of the total U.S. energy 
consumption.
    DuPont: DuPont is a science company, delivering science based 
solutions in the areas of food and nutrition, health care, apparel, 
home and construction, electronics, and transportation. Founded in 
1802, the company operates in 70 countries and has 93,000 employees.
    Ford Motor Company: Ford is the world's second largest automotive 
company. Its Automotive operations include: Ford, Mercury and TH!NK 
brands; wholly owned subsidiaries Volvo, Jaguar, Aston Martin and Land 
Rover; Mazda (33 percent ownership); and Quality Care and Kwik-Fit. 
Ford Financial Services, providing automotive financing and other 
services, and The Hertz Corporation, providing car rental services, are 
the other major components of Ford Motor Company.
    GROWMARK, Inc.: GROWMARK, headquartered in Bloomington, Illinois, 
is a federated regional cooperative that provides agriculture related 
products and services in Illinois, Iowa, Wisconsin and Ontario, Canada. 
FS brand farm supplies and services are marketed to farmers in these 
areas by nearly 100 GROWMARK member cooperatives.
    IGF Insurance Company: IGF is the fifth largest crop insurance 
company serving farmers in 46 states from eight service offices 
nationwide. IGF develops niche products for farmers' risk management 
needs.
    International Paper: With over 12 million acres of land managed in 
the United States alone, International Paper is one of the world's 
largest private landowners. International IP has global businesses in 
paper and paper distribution, packaging, building materials and other 
forest products.
    Iowa Farm Bureau Federation: The Iowa Farm Bureau is a federation 
of 100 county Farm Bureaus in Iowa. Founded in 1918, it now takes in 
more than 154,000 member families. Legislative, educational and service 
programs are provided to help farm families prosper and improve their 
quality of life. An independent, non-governmental organization, the 
federation is local, statewide, national and international in scope and 
is nonpartisan, nonsectarian and nonsecret in character.
    IT Group, Inc.: The IT Group is a provider of consulting, 
engineering and construction, remediation and facilities management 
services through its group of highly specialized companies. Its broad 
range of services includes the identification of contaminants in soil, 
air and water and the design and execution of remedial solutions.
    Midwest Generation: Headquartered in Chicago, Midwest Generation, a 
subsidiary of Edison Mission Energy, owns 13 electricity generating 
units in Illinois and Pennsylvania with a generating capacity of over 
11,400 megawatts, enough power for more than 13 million homes. Midwest 
Generation sells wholesale power in competitive electricity markets. 
The company is undertaking a major program to reduce emissions from its 
coal fired plants.
    National Council of Farmer Cooperatives (NCFC): NCFC is the only 
organization serving exclusively as the national representative and 
advocate for America's farmer owned cooperative businesses. It aims to 
protect the public policy environment in which farmer owned cooperative 
businesses operate, promote their economic well being, and provide 
leadership in cooperative education.
    NiSource Inc.: NiSource is a holding company with headquarters in 
Merrillville, Indiana, whose operating companies engage in all phases 
of the natural gas and electric business from exploration and 
production to transmission, storage and distribution of natural gas, as 
well as electric generation, transmission and distribution. Its 
companies provide service to 3.6 million customers from the Gulf of 
Mexico through the Midwest to New England.
    ORMAT: ORMAT is the world leader in distributed reliable remote 
microturbine power units, also known as Closed Cycle Vapor Turbo 
Generators. ORMAT's operations use locally available heat sources, 
including steam and hot water generated by geothermal sources, 
industrial waste heat, solar energy, biomass, and low grade fuels.
    Pinnacle West Capital Corp.: Based in Phoenix, Arizona, Pinnacle 
West is the parent company of APS and Pinnacle West Energy. APS is 
Arizona's oldest and largest electric utility, serving more than 
857,000 customers, and Pinnacle West Energy is the company's 
unregulated wholesale generating subsidiary. Among the utilities listed 
in the S&P 500, Pinnacle West is ranked in the top 10 percent for 
environmental performance by an international investment advisory firm. 
``Fortune'' magazine ranks the company in the top 10 percent for total 
shareholder return over the last five years.
    PG&E National Energy Group: Headquartered in Bethesda, Maryland, 
PG&E National Energy Group develops, owns and operates electric 
generating and gas pipeline facilities and provides energy trading, 
marketing and risk management services in North America. The National 
Energy Group operates power production facilities with a capacity of 
about 7,000 megawatts, with another 10,000 megawatts under development, 
and more than 1,300 miles of natural gas transmission pipeline with a 
capacity of 2.7 billion cubic feet per day. PG&E National Energy Group 
is not the same company as Pacific Gas and Electric Company, the 
California utility, and is not regulated by the California Public 
Utilities Comission.
    STMicroelectronics: STMicroelectronics is the world's third largest 
independent semiconductor company. Shares in the company are traded on 
the New York Stock Exchange, on Euronext Paris and on the Milan Stock 
Exchange. The company designs, develops, manufactures and markets a 
broad range of semiconductor integrated circuits and devices used in a 
wide variety of microelectronic applications, including 
telecommunications systems, computer systems, consumer products, 
automotive products and industrial automation and control systems. In 
2000, the company's net revenues were $7.8 billion and net earnings 
were $1.45 billion.
    Suncor Energy, Inc.: Suncor is a Canadian integrated energy company 
that explores for, acquires, produces, and markets crude oil and 
natural gas, refines crude oil, and markets petroleum and petrochemical 
products. Suncor has three principal business units: Oil Sands, 
Exploration and Production, and Sunoco.
    Swiss Re: Founded in 1863 in Zurich, Switzerland, Swiss Re is the 
world's second largest reinsurer, with roughly 9,000 employees and 
gross premiums in 2000 of US$15.3 billion. Standard & Poor's gives the 
company its AAA rating; Moody's rates it Aaa. From over 70 offices in 
30 countries, Swiss Re offers insurers and corporates classic 
(re)insurance covers, alternative risk transfer instruments, and 
supplementary services for comprehensive risk management.
    Temple-Inland Inc.: A diversified forestry, forest products and 
financial services company, the three main operating divisions of 
Temple-Inland include a paper group, which manufactures corrugated 
packaging products; a building products group, which manufactures a 
wide range of building products and manages the Company's forest 
resources consisting of approximately 2.2 million acres of timberland 
in Texas, Louisiana, Georgia and Alabama; and the financial services 
group, which consists of savings bank, mortgage banking, real estate, 
and insurance brokerage activities.
    The Nature Conservancy: A nonprofit organization founded in 1951, 
The Nature Conservancy is the world's largest private international 
conservation group taking in over one million members. The conservancy 
has protected over 12,089,000 acres of land in the United States.
    Wisconsin Energy Corporation: Headquartered in Milwaukee, 
Wisconsin, Wisconsin Energy Corp. is an $8.4 billion holding company 
with a portfolio of subsidiaries engaged in electric generation; 
electric, gas, steam and water distribution; pump manufacturing and 
other non-utility businesses. The corporation's utilities subsidiaries 
serve more than one million electric and 950,000 natural gas customers 
in Wisconsin and Michigan's Upper Peninsula.
    ZAPCO: Zahren Alternative Power Corporation (ZAPCO) is among the 
largest developers of landfill gas projects in the United States. ZAPCO 
develops, finances, and operates waste-to-energy electricity systems, 
and has executed international trades of greenhouse gas reductions 
involving over two million tons CO2 equivalent. ZAPCO 
operates 10 of its 27 landfill gas projects in the Midwest.
Chicago Climate Exchange Advisory Board Members
    David Boren is the president of the University of Oklahoma. He 
served as a member of the Oklahoma House of Representatives (1967-
1975), Governor of Oklahoma (1975-1977) and as a U.S. Senator (1979-
1994). Senator Boren was the longest serving chairman of the Senate's 
Select Committee on Intelligence. Boren was educated at Yale and 
attended Oxford University as a Rhodes Scholar and earned a law degree 
from the University of Oklahoma College of Law.
    Lucien Bronicki is the chairman of Ormat International, an Israeli 
company in the field of innovative technology solutions to geothermal 
power plants, power generation from industrial waste heat, and solar 
energy projects. Chairman of Ormat since he founded the company in 
1965, Bronicki chairs the World Energy Council's Israeli National 
Committee, is a member of the Executive Committee of the Weizmann 
Institute of Science, and member of the board of Ben Gurion University.
    Ernst Brugger is founding partner and chairman of Brugger Hanser & 
Partner Ltd. in Switzerland, a business consulting firm with 
international experience and range. He is also a professor at the 
University of Zurich, chairman and member of the board of various 
companies and a member of the International Committee of the Red Cross 
(ICRC). Dr. Brugger serves as chairman of the Board of Directors of 
Sustainable Performance Group, an investment and risk management 
company which invests in pioneering companies which have taken up the 
cause of sustainable business.
    Jeffrey Garten is Dean of the Yale School of Management. Formerly, 
Garten served as undersecretary of commerce for international trade in 
the first Clinton administration and has held senior economic posts in 
the Ford and Carter administrations. From 1979 to 1992 he was a 
managing director first at Lehman Brothers, where he oversaw the firm's 
Asian investment banking activities from Tokyo, and then at the 
Blackstone Group. Currently Dr. Garten writes a monthly column for 
``Business Week'' magazine. His latest book, ``The Mind of the CEO,'' 
was published this year.
    Donald Jacobs is dean of the Kellogg Graduate School of Management 
and its Gaylord Freeman Distinguished Professor of Banking. Jacobs is a 
former chairman of the board of Amtrak and currently serves on several 
corporate boards. His work on banking, corporate governance and 
international finance has been published in many scholarly journals and 
he holds several honorary degrees and professional awards.
    Dennis Jennings is the global risk management solutions leader for 
PricewaterhouseCoopers' global energy and mining industry practice. 
Jennings previously served as the Dallas/Fort Worth energy industry 
market leader, co-chairman of the U.S. oil and gas industry program, 
and on the steering committee of the international energy practice. He 
handles PwC's global risk management practice for the energy and mining 
industry, providing financial advice and performing due diligence 
reviews on merger, acquisitions and divestiture efforts by major 
international corporations.
    Joseph P. Kennedy II is chairman and president of Boston based 
Citizens Energy Group, a non-profit company he founded in 1979 to 
provide low-cost heating oil to the poor and elderly. Before returning 
to Citizens Energy, Kennedy represented the 8th Congressional District 
of Massachusetts in the U.S. House of Representatives for 12 years. 
Citizens now encompasses seven separate companies, including the 
largest energy conservation firm in the U.S. Kennedy advises and serves 
on the boards of companies in the energy, telecommunications, and 
health care industries. He is the son of the late U.S. Senator and 
Attorney General Robert Kennedy.
    Israel Klabin is the president of the Brazilian Foundation for 
Sustainable Development, a Brazilian non-governmental organization 
devoted to issues of environmental and sustainable development policy. 
He is the former chairman of Klabin SA, one of the largest forestry 
companies in Latin America. A former mayor of Rio de Janeiro, Klabin 
was one of the main Brazilian organizers of the 1992 United Nations 
Conference on the Environment in Rio de Janeiro.
    Bill Kurtis has been a broadcaster for over 30 years, as a news 
anchor in Chicago and on the national CBS Morning News. He founded 
Kurtis Productions when he returned to Chicago in the mid-1980s and now 
hosts shows on the Arts and Entertainment network. Kurtis is involved 
in The National Science Explorers Program, Electronic Field Trips and 
the Electronic Long Distance Learning Network, and serves on the board 
of directors of the National Park Foundation, and the Nature 
Conservancy.
    Jonathan Lash is president of the World Resources Institute, a 
Washington, DC based non-governmental organization. From 1993 until 
1999, Lash served as co-chair of the President's Council on Sustainable 
Development, a group of government, business, labor, civil rights, and 
environmental leaders that developed recommendations for national 
strategies to promote sustainable development. From 1987 to 1991, he 
headed the Vermont Agency of Natural Resources, having served the 
previous two years as Vermont's Commissioner of Environmental 
Conservation.
    Thomas Lovejoy, is a world renowned tropical and conservation 
biologist and author generally credited with having brought the 
tropical forest problem to the fore as a public issue. In 1987, he was 
appointed assistant secretary for environmental and external affairs 
for the Smithsonian Institution and is counselor to the Smithsonian's 
secretary for biodiversity and environmental affairs. Dr. Lovejoy is 
also chief biodiversity advisor to the president of the World Bank. 
From 1989 to 1992, he served on the President's Council of Advisors in 
Science and Technology, and acted as scientific adviser to the 
executive director of the United Nations Environment Programme from 
1994 to 1997.
    David Moran is vice president of ventures for the Electronic 
Publishing group of Dow Jones & Company and president of Dow Jones 
Indexes. He is president of Dow Jones Indexes, which includes all Dow 
Jones indexes for countries, regions, sectors and industry groups as 
well as the world index. He is also chairman of Dow Jones 
Sustainability Group Index GmbH.
    Les Rosenthal is a former chairman of the Chicago Board of Trade 
and a principal of Rosenthal Collins, a Chicago based commodities and 
futures trading firm. He has been instrumental in advancing the cause 
of innovative exchange traded products such as Treasury Bond futures 
and insurance derivatives.
    Maurice Strong is a former secretary general of the 1992 United 
Nations Conference on Environment and Development, the Rio Earth 
Summit, and under-secretary general of the United Nations. He is 
currently the chairman of the Earth Council, a non-governmental 
organization dedicated to the cause of sustainable development. In June 
of 1995, he was named senior advisor to the president of the World 
Bank. From 1992 to 1995, Strong was chairman and CEO of Ontario Hydro, 
one of North America's largest utilities.
    James Thompson is a former four term governor of Illinois and 
currently a managing partner of Winston and Strawn. During his last 
term as governor, Thompson was involved in the implementation of the 
sulfur dioxide (SO2) market created by the 1990 Clean Air 
Act and headed the Global Climate Change Task Force at the National 
Governors' Association. He is a director of the Chicago Board of Trade.
    Brian Williamson is the chairman of the London International 
Financial Futures and Options Exchange, one of the world's largest 
exchanges. He has been involved in trading financial futures for almost 
three decades in London, New York and Chicago. He held senior executive 
positions for prominent trading firms and was a member of the 
International Advisory Board of the Nasdaq Stock Market, becoming 
Chairman in 1996. He was also governor-at-large of the National 
Association of Securities Dealers in Washington, DC from 1995 to 1998.

    Senator Kerry. Thank you very much, Dr. Sandor.
    Ms. Claussen.

 STATEMENT OF EILEEN CLAUSSEN, PRESIDENT, PEW CENTER ON GLOBAL 
                         CLIMATE CHANGE

    Ms. Claussen. My name is Eileen Claussen, and I am the 
president of the Pew Center on Global Climate Change.
    The Pew Center on Global Climate Change is a nonprofit, 
nonpartisan, and independent organization, dedicated to 
providing credible information, straight answers, and 
innovative solutions in the effort to address climate change.
    Thirty-six major companies in the Pew Center's Business 
Environmental Leadership Council, most included in the Fortune 
500, work with the Center to advance public policy and educate 
themselves and the public on the risks, challenges, and 
solutions to climate change.
    Mr. Chairman, I would like to emphasize two points for you 
today. First, it is our view that the long-term reductions of 
greenhouse gas emissions needed to truly address global climate 
change can only be achieved through a comprehensive and binding 
strategy.
    Second, we believe the steps we take to reduce greenhouse 
gas emissions, especially those promoting the development and 
use of energy-efficient technologies, will help U.S. industry 
compete in the international marketplace. Reducing emissions to 
the levels necessary to prevent serious climate disruption will 
take decades, because it will essentially require a new 
industrial revolution, one enabling the broad introduction of 
low carbon technologies to power a growing global economy.
    Much as some would like to believe otherwise, it will be 
extraordinarily difficult, if not impossible, to muster the 
kind of global sustained effort that is needed without the 
force of legally binding commitments. There is little incentive 
for any country or any company to undertake real action unless 
ultimately all do and are in some manner held accountable.
    Markets, of course, will be instrumental in mobilizing the 
necessary resources and know-how. Market-based strategies such 
as emissions trading, will also help deliver emission 
reductions at the lowest possible costs, but markets could move 
us in the right direction only if they are given the right 
signals. In the United States, these signals have neither been 
fully given nor fully accepted.
    Three decades of experience fighting pollution in the U.S. 
have taught us a great deal about what works best. In general, 
the most cost-effective approaches allow emitters flexibility 
to decide how best to meet a given, binding emissions limit, 
provide early direction so targets can be anticipated and 
factored into major capital and investment decisions, and 
employ market mechanisms such as emissions trading to achieve 
reductions where they cost least.
    To ease the transition from established ways of doing 
business, targets should be realistic and achievable. What is 
important is that they be strong enough to spur real action and 
to encourage investment in development of the technology and 
infrastructure needed to achieve the long-term objectives.
    A good first step is to get our house in order by 
immediately requiring accurate measurement, tracking, and 
reporting of greenhouse gas emissions. In addition, the 
Government could enter into voluntary enforceable agreements 
with companies or sectors willing to commit to significant 
reductions.
    While such efforts could help get the United States on 
track, the long-term emission reductions needed can be achieved 
only with a more comprehensive and binding strategy. 
Alternative approaches should be closely studied and the 
results publicly debated. But much of the analysis thus far 
suggests that a cap-and-trade system, which sets an overall cap 
on emissions and establishes a market in carbon credits, can 
provide the private sector the flexibility and incentive to 
achieve emission reductions at the least possible costs.
    As I mentioned earlier, there will be important side 
benefits to many of these measures. The steps we take to reduce 
greenhouse gas emissions will help U.S. companies compete in 
the international marketplace. Improving energy efficiency, for 
example, makes for good business as well as good economic 
policy. In key energy-intensive or import-sensitive sectors, 
energy costs can make or break companies.
    ALCOA, for example, has reduced the electricity required to 
produce a ton of aluminum by 20 percent over the last 20 years, 
but almost all companies can benefit from aggressive energy-
efficiency measures, and many of the best companies already 
have. IBM saved nearly $50 million in energy bills in the year 
2000 alone. Despite the association of energy conservation with 
the so-called soft path, it is striking the extent to which 
hard-driving, profitable companies focus on high-tech lighting 
upgrades, smart systems that precisely match energy 
availability to energy needs, and new motors.
    But energy efficiency is more than a cost reduction 
strategy. It is also a business opportunity, both here and 
abroad. Companies like Whirlpool and Maytag focus on producing 
high efficiency consumer appliances. Toyota recently introduced 
the Prius, a high-efficiency hybrid electric vehicle.
    Two billion people in the world do not yet have access to 
electricity. Twice as many do not have access to cars, let 
alone SUVs. Efficiently meeting the world's exploding demand 
for power and transportation services is a key business 
strategy for many companies. Global investment in energy 
between 1990 and 2020 will total some $30 trillion in 1992 
dollars.
    The number of motor vehicles worldwide is expected to be 
816 million by 2010 with enormous growth expected in developing 
countries where vehicle ownership rates are now quite low. The 
lure of this market has led a company like ABB, for example, to 
focus on alternative energy and small-scale distributed power 
generation, including wind farms, fuel cells, and combined heat 
and power plants using miniature gas turbines.
    In closing, Mr. Chairman, as we address climate change, we 
will learn as a nation what businesses are already finding, 
that opportunities and co-benefits abound, that meeting this 
challenge will not bankrupt our economy but will make it more 
competitive, and the sooner we move to address it, the better 
it will be, both for the environment and our economy.
    Thank you.
    [The prepared statement of Ms. Claussen follows:]

           Prepared Statement of Eileen Claussen, President, 
                  Pew Center on Global Climate Change

    Mr. Chairman and members of the committee, thank you for this 
opportunity to testify on climate change policy. My name is Eileen 
Claussen, and I am the President of the Pew Center on Global Climate 
Change.
    The Pew Center on Global Climate Change is a non-profit, non-
partisan and independent organization dedicated to providing credible 
information, straight answers and innovative solutions in the effort to 
address global climate change. Thirty-six major companies in the Pew 
Center's Business Environmental Leadership Council, most included in 
the Fortune 500, work with the Center to educate the public on the 
risks, challenges and solutions to climate change. The BELC companies 
do not contribute financially to the Center.
    Mr. Chairman, I would like to emphasize two points for you today. 
First, it is our view that the long-term reductions of greenhouse gas 
emissions needed to truly address global climate change can only be 
achieved through a comprehensive and binding strategy. Second, we 
believe the steps we take to reduce greenhouse gas emissions--
especially those promoting the development and use of energy efficient 
technologies--will help U.S. industry compete in the international 
marketplace.
    In assessing how the United States can or should proceed to reduce 
greenhouse gas emissions domestically and, in turn, internationally, it 
is important to recognize certain defining characteristics of the 
climate challenge, and what they imply for the effort required to meet 
it. First, climate change is truly a global challenge: Averting the 
worst consequences of global warming ultimately requires action by all 
major emitting nations.
    Second, it is a long-term challenge. Reducing emissions to the 
levels necessary to prevent serious climate disruption will take many 
decades because it essentially requires a new industrial revolution--
one enabling the broad introduction of low-carbon technologies to power 
a growing global economy.
    Much as some would like to believe otherwise, it will be 
extraordinarily difficult if not impossible to muster the kind of 
global, sustained effort that is needed without the force of legally 
binding commitments. There is little incentive for any country--or any 
company--to undertake real action unless, ultimately, all do, and are 
in some manner held accountable. Markets, of course, will be 
instrumental in mobilizing the necessary resources and know-how; 
market-based strategies such as emissions trading will also help 
deliver emissions reductions at the lowest possible cost. But markets 
can move us in the right direction only if they are given the right 
signals. In the United States, those signals have been neither fully 
given nor fully accepted.
    So what would constitute an effective domestic program to reduce 
greenhouse gas emissions? To date, efforts to reduce U.S. emissions 
have been limited almost exclusively to voluntary activities at the 
federal, state, local, and corporate level. Spurred on by the United 
Nations Framework Convention on Climate Change, to which the United 
States is a party, a number of these efforts have resulted in 
significant emission reductions. For example some companies on our 
Business Environmental Leadership Council have cut emissions by 10 
percent or more from 1990 levels. DuPont has cut its greenhouse gas 
emissions by 45 percent from 1990 levels. Shell is on track to hit 10 
percent by next year (2002).
    However, while technology has decreased the energy intensity of 
products and processes over the last 50 years, the efficiency has been 
outpaced by increased demand driven by economic expansion, population 
growth, and changing consumer preferences. In the aggregate, voluntary 
efforts have not ended overall growth in U.S. emissions. Indeed, U.S. 
emissions have grown approximately 12 percent over the past decade. The 
lesson here is clear: voluntary programs can make a contribution, but 
will not, on their own, be enough.
    What will? To effectively address climate change, we need to lower 
carbon intensity, become more energy efficient, promote carbon 
sequestration, and find ways to limit emissions of non-CO2 
gases. This will require fundamentally new technologies, as well as 
dramatic improvements in existing ones. New, less carbon-intensive ways 
of producing, distributing and using energy will be essential. The 
redesign of industrial processes, consumer products and agricultural 
technologies and practices will also be critical. These changes can be 
introduced over decades as we turn over our existing capital stocks and 
establish new infrastructure. But we must begin making investments, 
building institutions, and implementing policies now.
    Three decades of experience fighting pollution in the United States 
have taught us a great deal about what works best. In general, the most 
cost-effective approaches allow emitters flexibility to decide how best 
to meet a given, binding emissions limit; provide early direction so 
targets can be anticipated and factored into major capital and 
investment decisions; and employ market mechanisms, such as emissions 
trading, to achieve reductions where they cost least. To ease the 
transition from established ways of doing business, targets should be 
realistic and achievable. What is important is that they be strong 
enough to spur real action and to encourage investment in development 
of the technology and infrastructure needed to achieve the long-term 
objective.
    A good first step is to get our house in order by immediately 
requiring accurate measurement, tracking and reporting of greenhouse 
gas emissions. Current efforts lack rigorous reporting standards and 
verification requirements. Public disclosure of the reported data, 
similar to what is required for certain pollutants under the federal 
Toxic Release Inventory (TRI) program, would encourage companies to 
hunt for ways to reduce their greenhouse emissions.
    There are other ways we can and should spur companies to act ahead 
of any mandatory requirements. One is for the government to enter into 
voluntary enforceable agreements with companies or sectors willing to 
commit to significant reductions--either in process emissions, or those 
from the use of products they make (e.g. automobiles or washing 
machines). In exchange for its commitment to cut emissions, a company 
or sector should be guaranteed that it would not be bound by subsequent 
mandates for greenhouse gas controls over the same time period. A 
similar approach could encourage companies, particularly in the 
electric utility sector, to cut carbon emissions as they undertake air 
pollution reductions required by existing law--a more cost-effective 
way to achieve multiple environmental objectives.
    While such efforts can help get the United States on track, the 
long-term emission reductions needed can be achieved only with a far 
more comprehensive--and binding--strategy. Alternative approaches 
should be closely studied, and the results publicly debated. But much 
of the analysis thus far suggests that a ``cap-and-trade'' system--
which sets an overall cap on emissions and establishes a market in 
carbon credits--can provide the private sector the flexibility and 
incentive to achieve emission reductions at the least possible cost. As 
yet, we do not believe that we have economic models that can accurately 
predict the long-term costs and benefits of a serious climate strategy. 
However, the best analyses to date suggest that, with the use of 
rational strategies, the costs are reasonable, particularly when 
weighed against the serious and significant costs of not acting.
    Also, as I mentioned earlier, there will be important side benefits 
to many of these measures. The steps we take to reduce greenhouse gas 
emissions will help U.S. companies compete in the international 
marketplace. Improving energy efficiency for example, makes good 
business sense, as well as good economic policy.
    Efficiency can mean new kinds of light bulbs that provide better 
light, waste less energy, and save money over their lifetimes. It can 
mean new industrial process designs that use less energy, produce more 
valuable products and produce less waste. It can mean superconductors 
that dramatically cut electricity transmission losses. Efficiency is 
not just a short-term solution; it is also a long-term solution. Both 
the electricity system and the automobile waste most of the energy they 
produce. In fact, we waste so much energy that the potential for long-
term savings is huge.
    The California energy crisis has focused all our attention on the 
critical role that energy plays in U.S. competitiveness. Annual U.S. 
economy-wide energy expenditures--approximately $567 billion in 1997--
are comparable to the total annual federal government consumption and 
investment expenditures ($538.7 billion in 1997; note that this 
excludes transfer payments, for example, under entitlement programs). 
Our increasing dependence on imported oil--we now import over half of 
the oil we use--has a major impact on our balance of payments, and 
makes us vulnerable to price volatility in the world oil market. Thus 
improving energy efficiency means reducing energy bills, freeing up our 
nation's resources for other activities, and increasing energy 
security.
    The U.S. electricity system wastes two-thirds of the energy it 
produces--in the form of waste heat at power plants, and energy losses 
from power lines. Available combined heat and power technologies could 
recapture most of the power plant losses in a usable form. Distributed 
generation (power plants located near the point of electricity use) and 
new kinds of conductors (and ultimately superconductors) could 
dramatically reduce the distribution and transmission losses that now 
waste 9 percent of gross electric generation.
    Similarly, cars and trucks waste 85% of the energy in each gallon 
of gasoline. Thus the potential to improve fuel economy with advanced 
technologies is huge. For example, new materials can reduce vehicle 
mass and thus the energy required for acceleration. Regenerative 
braking can recapture energy lost during deceleration. Advanced tires 
can cut rolling resistance.
    In key energy-intensive or import-sensitive sectors, energy costs 
can make or break companies. Alcoa, for example, has reduced the 
electricity required to produce a ton of aluminum by 20% over the last 
20 years. But almost all companies can benefit from aggressive energy 
efficiency measures; and many of the best companies already have. IBM 
saved $14.8 million in energy bills in the year 2000 alone. Despite the 
association of energy conservation with the so-called ``soft'' path, it 
is striking the extent to which hard-driving, profitable companies 
focus on high-tech lighting upgrades, ``smart'' systems that precisely 
match energy availability to energy needs, and new motors.
    But energy efficiency is more than a cost-reduction strategy, it is 
also a business opportunity, both here and abroad. Companies like 
Whirlpool and Maytag focus on producing high-efficiency consumer 
appliances. Toyota recently introduced the Prius, a high efficiency 
hybrid electric vehicle. Two billion people in the world do not yet 
have access to electricity; twice as many do not have access to cars 
(let alone SUVs). Efficiently meeting the world's exploding demand for 
power and transportation services is a key business strategy for many 
companies. Global investment in energy between 1990 and 2020 will total 
some $30 trillion in 1992 dollars. The number of motor vehicles 
worldwide is expected to be 816 million by 2010, with enormous growth 
expected in developing countries where vehicle ownership rates are now 
quite low. The lure of this market has led ABB, for example, to focus 
on alternative energy and small-scale distributed power generation, 
including wind farms, fuel cells, and combined heat and power plants 
using miniature gas turbines. United Technologies' International Fuel 
Cells subsidiary produces the world's only commercial fuel cell power 
plants.
    In closing, Mr. Chairman, as we address climate change, we will 
learn as a nation what businesses are already finding--that 
opportunities and co-benefits abound, that meeting this challenge will 
not bankrupt our economy, but will make it more competitive. And the 
sooner we move to address it, the better it will be for both the 
environment and our economy. Thank you.

    Senator Kerry. Thank you very much, Ms. Claussen.
    Mr. Hawkins.

  STATEMENT OF DAVID G. HAWKINS, DIRECTOR, NATURAL RESOURCES 
                DEFENSE COUNCIL, CLIMATE CENTER

    Mr. Hawkins. Thank you, Mr. Chairman. Good afternoon.
    Let me make these points. First, today CO2 
concentrations in the atmosphere are greater than they have 
been in 400,000 years. We have done this by taking 75 million 
years' worth of stored carbon and returning it to the 
atmosphere at about 100,000 times faster than it was stored.
    Second, unless we cut emissions, CO2 
concentrations will keep on going up.
    Third, to reduce the risks of climate change, we have to 
stabilize CO2 concentrations, and the higher our 
stabilization targets are, the greater the risks there are. 
Without cuts, CO2 will go up somewhere between two 
times and five times preindustrial levels during the next 
century. They may double before a child born today is eligible 
for Social Security.
    Fourth, once we release CO2, it is up in the 
atmosphere for a long time. If we put 1,000 tons in the 
atmosphere today, a hundred years from now, 400 tons of it are 
still there. A thousand years from now, 150 tons of it are 
still there.
    Now, these facts mean that delay in taking action is going 
to cost us more than taking that action now. By failing to cut 
emissions, we fail to slow the increasing momentum that leads 
to increasing concentrations that leads to increasing climate 
risks. And we make it much more difficult to reach any 
particular stabilization goal. In fact, today we are in danger 
of passing reasonable stabilization goals and eliminating 
options for stabilization at lower concentrations for ourselves 
and for future generations.
    Estimates by the Pacific Northwest Labs indicate that to 
preserve the stabilization goal of 350 parts per million 
(roughly 30 percent above preindustrial levels), we would have 
to be cutting global emissions today; not increasing them but 
cutting them. To preserve the 450 part per million scenario, we 
would have to be successful in cutting global emissions from 
business as usual, starting no later than 2007, and for 550, no 
later than 2013. Now, 2013 may seem like a long way from now. 
It is in terms of congressional terms or even senatorial terms. 
But it is not in terms of achieving a real reduction in global 
emissions.
    To cut global emissions 12 years from now, it requires 
additional research and development, private sector decisions 
to invest billions of dollars, corporate decisions to deploy 
those resources, and then actually doing the design work and 
getting it in the field. You have to start today to accomplish 
those results. And, unfortunately, we are not starting today.
    But fortunately we have a range of policy options before us 
that would send the right signal. Let me just list some that 
are pending before Congress, and I mention them in my 
testimony.
    First, the four-pollutant bill for electric generation: 
caps on pollutants in accord with what previous witnesses have 
described. This is Senate Bill 556, sponsored by yourself, by 
Senator Snowe, and others. This can be complemented with a 
renewable portfolio standard and a public benefits fund in 
order to help reduce overall emissions in the electric sector, 
including carbon emissions.
    In the vehicle sector, close the SUV loophole and adopt 
increases in the CAFE standards to the 40-mile-per-gallon. 
Second, we support the CLEAR Act which provides tax incentives 
for high-technology vehicles. These programs would also produce 
substantial cuts from business as usual in the motor vehicle 
sector.
    In the building sector, S. 207 provides tax incentives for 
buildings. Buildings consume more than a third of the energy in 
our economy. They are tremendous sources of waste in our 
economy. We don't get benefits from that wasted energy. We get 
pollution. We get higher energy bills. We can cut those bills. 
We can cut the pollution, and we can do it cost-effectively, 
but we need to deal with market barriers, and the tax 
incentives in S. 207 would do that.
    And finally let me just mention that integrated policies 
can have tremendous power to deliver benefits, both 
economically and in terms of pollution reduction, including 
global warming pollution reduction. This is exemplified in the 
Clean Energy Futures report that the five labs of the 
Department of Energy published last November. That report 
really does show the power of integrated policies that consist 
of caps on pollution, tax incentives, performance standards, 
and voluntary agreements.
    Now, the suite of measures that these five labs analyzed in 
that study showed that you could cut carbon emissions from 
business as usual by the year 2020 by 30 percent, and that you 
could produce energy bill savings of over $100 billion a year 
at the same time, as well as cutting conventional pollutants by 
about 50 percent. These are benefits you get by having an 
integrated set of policies, ones that support one another in a 
complementary fashion.
    Finally, let me just close by saying that the critical 
policy need today is to adopt measures that send a clear signal 
to the private sector that the Government is serious about the 
issue of climate change. That signal needs to convince the 
private sector that cutting carbon is good business. If you 
send that signal, you will harness the private sector's 
energies. If you don't send that signal, you will send the 
signal that has been sent for the last 10 years: which is, 
``The Government is not serious about it,'' and then the 
private sector will sit by and wait until the Government is 
serious.
    Thank you.
    [The prepared statement of Mr. Hawkins follows:]

  Prepared Statement of David G. Hawkins, Director, Natural Resources 
                    Defense Council, Climate Center

    My name is David Hawkins, and I am the Director of the Climate 
Center at the Natural Resources Defense Council. I appreciate the 
opportunity to appear before you today on the issues of policies to 
combat the threat posed by climate change or global warming. The 
Natural Resources Defense Council is a national, non-profit 
organization of scientists, lawyers, and environmental specialists, 
dedicated to protecting public health and the environment. Founded in 
1970, NRDC serves more than 500,000 members from offices in New York, 
Washington, Los Angeles, and San Francisco.
    My message today is a simple one: the United States should no 
longer delay the adoption of effective policies to limit emissions of 
carbon dioxide and other greenhouse gas pollution. Nearly a decade ago, 
the U.S. and more than 100 other countries ratified a global climate 
change treaty that should have spurred adoption of serious policies to 
combat global warming. Instead, we have had a decade of delay, during 
which U.S. greenhouse emissions have increased by about 14%. Rather 
than adopt meaningful policies that would have sent an effective signal 
to the private sector that constraining carbon emissions was a sound 
course for business planning, we have relied on voluntary pledge 
programs that have been effective only in communicating to business 
leaders that the government is not yet serious about limiting global 
warming pollution.
    Mr. Chairman, the first rule for getting out of a hole is to stop 
digging. Every year that we delay adoption of real global warming 
policies, we dig ourselves deeper and make our ultimate response 
programs more costly, disruptive, and risky. The United States is 
better positioned than any other country in the world to lead the way 
in showing that economic progress can go hand in hand with controlling 
global warming pollution. The time for us to exercise that leadership 
is now.
    Global warming is a problem that becomes more difficult to manage 
the longer we wait to start. Let's review some basic information. 
Starting about 300 million years ago, for a period spanning about 75 
million years, our planet transferred, through geologic processes, vast 
amounts of carbon from the atmosphere and living organisms to immense 
underground reserves, producing what we call fossil fuels. Estimates 
are that some 5 trillion tonnes of carbon were stored in this way. 
Imagine a 75 million year video documenting the removal of 5 trillion 
tonnes of material from our global living room and its storage in a 
remote subterranean repository. Now, imagine running this video in 
reverse and at hyper speed. That is what we have been doing for the 
past 150 years.
    Since the Industrial Revolution, we have been putting these immense 
underground carbon stores back into the atmosphere by burning these 
fuels and we are doing so at ever increasing speed. At current 
consumption rates, we put back in the air each year about 100,000 years 
of stored carbon. In the last 150 years we have put about 290 billion 
tonnes (gigatonnes or Gt) into the air. Amidst the claimed 
uncertainties about the climate change phenomenon, there is no dispute 
that these emissions have caused significant increases in atmospheric 
concentrations of CO2. Today's CO2 levels are 
about 370 parts per million (ppm), about 30% higher than the pre-
industrial level of 280 ppm.
    Nor is there any dispute that continued emissions of CO2 
from fossil burning will cause concentrations to go still higher. The 
latest forecasts for global carbon emissions in the 21st century are 
sobering. The IPCC's most recent report estimates emissions of between 
1000 and 2100 Gt of carbon in the next 100 years--or about 3 to 7 times 
more than we released in the last 150 years. With cumulative emissions 
in these ranges, atmospheric CO2 would build up to between 
540 and 970 ppm by the year 2100 and continue to increase unless 
emissions were cut. Several of the plausible emission scenarios would 
lead to doubled CO2 concentrations before a child born today 
would be eligible for social security.
    A final undisputed fact is that once a certain atmospheric 
concentration is reached, it cannot be significantly reduced for 
hundreds of years, no matter how drastic a ``response program'' 
policymakers decide to put in place. Unfortunately, carbon dioxide's 
lifetime in the atmosphere is a long one: of each 1000 tons we emit 
today, 400 of those tons will still be in the air 100 years from now 
and 150 tons will remain 1000 years from now. So the bed we are making 
is a procrustean one that we and generations to come must lie on.
    As a result of fossil fuel combustion, we already have increased 
atmospheric CO2 to levels greater than ``at any time during 
the past 400,000 years,'' notes the recent National Academy of Sciences 
report to President Bush. And we are on a path to dramatically higher 
concentrations in the coming decades. The policy questions this 
Committee and this Congress must address are whether and when to act to 
reduce the buildup of CO2 concentrations in the atmosphere. 
In NRDC's view the answers are, yes we must act and we should start 
now.
    Yet for more than a decade, fossil-fuel dependent industries have 
vehemently opposed policies to limit global warming pollution and 
governments, including the U.S. government, have declined to adopt such 
policies. One can explain the position of the industrial opponents as 
driven by the narrow interests of their current business plans but what 
explains the compliant position of governments, which should show at 
least some signs of support for the broader public interest. One 
explanation is the influence of money on politics and enactment of the 
McCain-Feingold legislation would be a salutary development. A second 
explanation is that legislators and executive branch officials believe 
that we can wait until the emergence of greater consensus on the 
detailed nature of the threats we face from global warming and that 
acting later will reduce the costs of a response program compared to 
acting now. NRDC believes this basic assumption--that later is 
cheaper--is simply wrong.
    The basic fact is that further delay in adopting effective policies 
forecloses options for us and for our children. Further delay will 
increase the costs of achieving stable atmospheric concentrations at 
levels less than double or even triple the concentrations under which 
human societies have evolved. How important is it for us to preserve 
the option to stabilize greenhouse gas concentrations at these lower 
levels? The policy dilemma is that we may not know the answers in a 
manner convincing to all for decades to come. Yet if we delay policy 
action until we have amassed a more comprehensive and detailed body of 
evidence of the full range of damages that a changed climate will 
bring, the planet's growing emissions will have made stabilizing 
concentrations at levels anywhere near today's levels very much more 
expensive, if not impossible.
    Each year of delay in developing an effective global response 
program brings us closer to the point of no-return when we lose the 
ability to limit the increase in greenhouse gas concentrations to lower 
levels. By failing to act, we are passing these points of no-return 
without even understanding what we are giving up for ourselves and our 
descendants. As I mentioned, pre-industrialization levels of CO2 
did not exceed 280 ppm and we are now at 370 ppm, the highest level in 
400,000 years. Because the way CO2 builds up in the 
atmosphere is well understood, we can determine the cumulative 
emissions during the next century that allow us to stabilize the 
atmosphere at various levels, such as 350, 450, 550, 650, or even 750 
ppm and experts have done these calculations. The most recent IPCC 
report summarizes these 21st century emission budgets as follows:


--------------------------------------------------------------------------------------------------------------------------------------------------------

--------------------------------------------------------------------------------------------------------------------------------------------------------
Stabilization target (ppm)                                                                   350          450          550          650          750
--------------------------------------------------------------------------------------------------------------------------------------------------------
Cumulative emissions in 21st century (GtC)                                                   280          630          960         1150         1300
--------------------------------------------------------------------------------------------------------------------------------------------------------


    The same report forecasts cumulative global emissions during this 
period, in the absence of effective global warming policies, to range 
from 1000 to 2100 Gt of carbon. While many members of Congress don't 
fancy themselves expert in global warming, most have a good 
understanding of budget fundamentals. In budget terms we are spending 
at a rate that far exceeds what we can afford if we learn we need to 
stabilize CO2 concentrations in the 350 to 550 ppm range. At 
first glance, these numbers may suggest we still have lots of time to 
study this issue but consider that to keep the next hundred years' 
emissions under 300 Gt we would need to cut today's global emissions 
immediately by more than 60% and keep them there while the world grows 
in population and affluence. Or we might pursue the cut more gradually 
but then we must achieve even deeper cuts later to stay within the same 
budget. While this example is for the 350 ppm option, the same dynamic 
exists for each of the higher stabilization targets: the longer we 
delay adoption of policies that limit business as usual growth in 
emissions, the deeper the cuts the planet must achieve to hit any 
stabilization target. And if we delay too long, each successive 
stabilization target becomes impossible to achieve.
    Dr. James E. Edmonds of the Department of Energy's Pacific 
Northwest National Laboratory and colleagues have estimated least-
abatement cost schedules for reducing emissions to meet these 
stabilization targets. He points out that these schedules require 
global emissions to drop below business as usual paths in the very near 
future. Here is a summary of this information as he presented it to the 
Senate Energy Committee on June 28, 2001:


----------------------------------------------------------------------------------------------------------------
                           CO2 Concentration (ppmv)                             350    450    550    650    750
----------------------------------------------------------------------------------------------------------------
Maximum Global CO2 Emissions (billions of tonnes carbon per year)               8.5    9.5   11.2   12.9   14.0
----------------------------------------------------------------------------------------------------------------
Year in which Global Emissions Must Break from Present Trends                  Today  2007   2013   2018   2023
----------------------------------------------------------------------------------------------------------------


    As can be seen, for the lower targets, the dates for achieving 
significant global emission reductions are upon us now and the dates 
for preserving even the higher targets are very close. To appreciate 
that these dates do not allow time for further delay in adopting 
policies, consider the sequence of events that must occur to actually 
succeed in reducing global emissions. Clear public policies must be 
debated and adopted, not just in the U.S. but in other countries too. 
The private sector must develop strategies for response to those 
policies. The strategies must be translated into specific investment 
decisions needed to carry out the strategies, most likely involving 
additional development work for certain technologies. The investment 
decisions must be followed with detailed engineering and planning work. 
And this work must be followed by deployment of lower-carbon 
technologies in the field on a sufficient scale to actually reduce 
global emissions below current forecasted increases. Thus, to reduce 
global emissions by dates like 2007-2020, we must start today with 
adoption of effective policies.
    Stated another way, further delay in adopting policies to limit 
global warming pollution means we are discarding the options of 
stabilizing concentrations at levels closer to the lower end of the 
range of targets. I cannot prove today that stabilizing CO2 
at 350 ppm is essential for our well-being. But I think it is self-
evident that it is not responsible to eliminate this option without any 
assurance that we can live well with the resulting future. As the 
National Academy of Sciences panel noted in its report to President 
Bush, ``risk increases with increases in both the rate and the 
magnitude of climate change.'' By committing ourselves to ever-higher 
CO2 concentrations, we are committing to higher rates and 
magnitudes of climate change for our descendants and ourselves.
    Fortunately, there are no technical or economic impediments to 
adopting policies today that will restore U.S. leadership on fighting 
global warming and send important signals to the private sector and to 
other countries that the time for effective action has arrived. 
Congress has before it a number of major legislative initiatives that 
will address the principal sources of global warming pollution in the 
U.S. in a way that will stimulate the new technology that is essential 
to meeting the challenges of limiting these emissions during the 
remainder of this century.

         Near-term Domestic Policies to Address Global Warming

A. Comprehensive Power Plant Clean-up Legislation
    NRDC supports comprehensive legislation to reduce all four major 
pollutants from electric generation--sulfur oxides, nitrogen oxides, 
mercury and carbon dioxide. Electric generation is responsible for 40% 
of total U.S. CO2 emissions. We have the technology to make 
significant reductions in CO2 from this sector through a 
combination of efficiency measures on the supply and the demand side, 
and through increased reliance on cleaner fuels. Enactment of a cap and 
trade program for CO2 from the electric sector would produce 
the needed market signal to all the players in the electric production 
and consumption sectors that there is value in reducing carbon 
emissions. The bipartisan bill, S. 556, the ``Clean Power Act,'' 
sponsored by Senators Kerry, Lieberman, Collins, Jeffords and Snowe 
would accomplish this objective and NRDC strongly supports it.
    Complementary policies to reduce emissions from electric generation 
include renewable portfolio standards proposed in the last Congress in 
S. 1369, to facilitate the deployment of renewable energy resources, a 
public benefits fund as proposed in last year's S. 1369 and this year's 
S. 597, to promote continued investments in demand side management 
programs and net metering provisions (as found in both bills), to 
promote clean and efficient distributed generation.

B. Policies to Reduce Petroleum Dependence and Protect the Environment 
        and Public Health

1. Close the Light Truck Loophole and Raise Fuel Economy Standards to 
        40 Miles per Gallon
    Incentives for advanced technology vehicles will be most effective 
if enacted in combination with updated fuel economy standards. This can 
be accomplished in two steps. First, congress should quickly eliminate 
the light truck loophole in the current fuel economy standards. The 
share of new vehicles that are classified as light trucks (SUVs, 
minivans, and pickups) has increased dramatically from 20 percent of 
sales when the CAFE law was first enacted in 1975 to nearly 50 percent 
of the market today. Yet the vast majority of vehicles currently 
regulated as light trucks are in fact used in exactly the same way as 
passenger cars. EPA recognized the need to eliminate the light truck 
loophole in its Tier II tailpipe standards beginning in 2004. Congress 
should follow this lead and eliminate the light truck loophole in fuel 
economy regulations in the same time frame. Congress should raise the 
overall fuel economy standard for the entire light vehicle fleet over a 
longer time period. A recent report by the Union of Concerned 
Scientists shows that the fleet average efficiency could be increased 
to 40 miles per gallon (mpg) by 2012 and 55 miles per gallon by 2020. 
The 40 mpg standard could be achieved through incremental improvements 
to vehicles with conventional drive trains, although hybrid and fuel 
cell vehicles would likely contribute to achieving this efficiency 
level. The 55 mpg standard could be most easily achieved by applying 
hybrid technology throughout the vehicle fleet.\1\
---------------------------------------------------------------------------
    \1\ Union of Concerned Scientists, Drilling in Detroit: Tapping 
Automaker Ingenuity to Build Safe and Efficient Automobiles. (June 
2001). Available from http://www.ucsusa.org/
---------------------------------------------------------------------------
    Congress should also set standards for replacement tires. It is a 
little known fact that auto manufacturers use highly-efficient tires to 
comply with current CAFE requirements, but comparable tires are not 
available to the consumers as replacements. Congress should require 
replacement tires to meet the same specifications as those sold on new 
cars. This measure alone would save over 70% more oil than is likely to 
be found if drilling were permitted in the Arctic National Wildlife 
Refuge.

2. Pass the CLEAR Act: Tax Incentives for Advanced Technology Vehicles 
        and Alternative Fuels
    The CLEAR Act (S. 760) provides a comprehensive set of performance-
based tax incentives to accelerate the commercialization of advanced 
technology vehicles and alternative fuels. This bill is a major advance 
over previous vehicle tax credit proposals because it is the first 
proposal to link publicly-funded incentives directly to the public 
benefits provided by the vehicles that get the incentive, in this case 
the amount of petroleum and carbon dioxide displaced. This is 
accomplished by linking the amount of the tax credit it offers in part 
to the actual fuel economy of the qualifying vehicles. The bill also 
includes important provisions to ensure that public support only goes 
to truly advanced vehicles that reduce local air pollution as well as 
global warming pollution and petroleum consumption.
    The policy advances incorporated into CLEAR reflect the collective 
advice of a unique coalition of environmental advocates and automakers. 
Public interest organizations that have joined NRDC in endorsing the 
CLEAR Act include the Union of Concerned Scientists, Environmental 
Defense, the American Council for an Energy-Efficient Economy, the 
Ecology Center of Ann Arbor, Michigan and the Michigan Environmental 
Council.

3. Establish Incentives to Promote Smart Growth Development Patterns
    Gasoline use also can be reduced by directing real estate 
development away from urban sprawl and toward ``smart growth.'' Smart-
growth suburbs reduce the need to drive by 30 percent or more, cutting 
household expenditures on transportation.\2\ An important incentive for 
smart growth is to establish mortgage qualification rules that 
recognize the increased affordability of homes that have low 
transportation costs because they are located in areas with good access 
to public transportation.
---------------------------------------------------------------------------
    \2\ David Goldstein, ``Mortgages Can Remove the Incentive for 
Sprawl,'' Earthword: The Journal of Environmental and Social 
Responsibility, Issue #4.
---------------------------------------------------------------------------
4. Modify the Ethanol Tax Credit to Make it Performance-Based
    The largest incentive currently going to alternative fuels is the 
excise tax credit provided for ethanol. Unfortunately, the 
environmental benefits generated by this tax credit are limited because 
it does not currently incorporate performance criteria. Most ethanol is 
currently produced from corn and requires high levels of chemical and 
fossil fuel inputs that are almost as great as those for conventional 
gasoline over the full fuel cycle of production and use. The existing 
tax incentive for ethanol could be made much more effective by linking 
the amount of the credit to the net reduction in global warming 
pollution or fossil fuel consumption achieved by the ethanol producer. 
This would encourage ethanol producers to shift to less energy 
intensive feedstocks, such as agricultural wastes and perennial crops, 
and to improve the efficiency of their conversion processes.

C. Benefits of a Comprehensive Policies to Promote Advanced Technology 
        Vehicles and Alternative Fuels
    The economic and environmental benefits of enacting the 
comprehensive set of policies described here would be profound. EPA 
estimates that the average light truck on the road today produces 164 
pounds of smog-forming pollution (hydrocarbons plus nitrogen oxides) 
and 8.0 tons of global warming pollution in traveling 14,000 miles each 
year. This does not include upstream emissions associated with 
producing the fuel, which would add about 11 pounds of smog-forming 
pollution and 2 tons of global warming pollution, bring the totals to 
175 pounds of smog-forming pollution and 10 tons of global warming 
pollution. Conventional new vehicles are substantially cleaner than 
this average with respect to smog-forming pollution, but have roughly 
the same fuel economy and therefore the same global warming pollution 
emissions as the vehicle existing vehicle it is likely to replace. For 
example, a vehicle meeting the National Low Emission Vehicle standard 
would emit only 12 pounds of smog-forming pollution from its tailpipe, 
but upstream emissions would still add 11 pounds, bringing its total 
impact to 23 pounds of smog-forming pollution and 10 tons of global 
warming pollution. In contrast, a hybrid vehicle qualifying for a $3000 
tax credit under the CLEAR Act would emit less than 1 pound of smog-
forming pollution from its tailpipe and would use only half as much 
fuel. As a result, its total impact would be only 6 pounds of smog-
forming pollution and 5 tons of global warming pollution.
    Aggregating from the vehicle level to the fleet level, the Union of 
Concerned Scientist (UCS) estimates that the combination of tax 
incentives and higher fuel economy standards advocated here would save 
540 million barrels of oil in the year 2010, reduce upstream smog-
forming pollution by 320 million pounds, and reduce global warming 
pollution by 273 million tons. By 2020 the savings would be even more 
dramatic: 1.8 billion barrels of oil, 1000 pounds of smog-forming 
pollution, and 890 million tons of global warming pollution. All of 
these benefits would be achieved while saving consumers billions of 
dollars: nearly $10 billion in 2010 and $28 billion in 2020 according 
to UCS.

D. Legislation to Provide Energy-Efficiency Incentives for the 
        Buildings Sector
    The performance based approach adopted in the CLEAR Act should also 
be applied to the design of tax incentives to promote efficiency in 
other energy using sectors of our economy. For example, ``The Energy-
efficient Buildings Incentives Act'' (S. 207), introduced by Sens. 
Robert Smith (R-N.H.) and Diane Feinstein (D-Calif.), would provide tax 
breaks for building energy-efficient commercial buildings, schools, 
rental housing and new homes, cutting their energy needs by 30 percent 
to 50 percent. It also would provide tax incentives for the purchase of 
energy-efficient air conditioners, heating and cooling systems, and 
solar water heating and photovoltaic systems.
    S. 207 provides tax incentives for energy efficiency in buildings. 
Buildings are an often-overlooked source of energy waste. They consume 
over a third of U.S. energy use and account for about a third of total 
air pollution in the United States. Energy use in buildings can be cut 
in half or better using cost-effective technologies that are available 
to those consumers that are willing to search them out.
    But in practice most of those technologies simply are not options 
for energy users, whether consumers or businesses, because they are too 
hard to find. Economic incentives can cause the entire chain of 
production and consumption, from the manufacturer to the contractor or 
vendor to the consumer, to accept new technologies rapidly. In the few 
cases where utility programs have been consistent enough across the 
country and long-lasting enough, new products have been introduced that 
have become or will become the most common product in the marketplace, 
with reductions in energy use of 30%-60%.
    Examples include:

   Refrigerators, where, new products that are available this 
        year consume less than a quarter of the energy of their smaller 
        and less feature-laden counterparts 30 years ago. The last step 
        forward, saving 30%, resulted from a coordinated incentive 
        program, the Super Efficient Refrigerator Program (SERP), which 
        was sponsored by utilities with the advice of the U.S. 
        Environmental Protection Agency.

   Clothes washers, where some 10% of the market now provides 
        cleaner clothes at a reduction in energy use of 60% or more. 
        This gain in efficiency resulted from a program organized by 
        the Consortium for Energy Efficiency (CEE) and supported by 
        Energy Star. New standards adopted by the Department of 
        Energy--and supported by the manufacturers--will bring all of 
        the market to this level by 2007.

   Fluorescent lighting systems, where new technologies that 
        also will be required by manufacturer-supported federal 
        standards will reduce lighting energy consumption by 30% 
        compared to mid-70's practice while improving the performance 
        of the lighting system.

    The policies embodied in S. 207 are built on success stories like 
these.
    Manufacturers have pointed out that in order to introduce new 
technologies that cost more and that are perceived to be risky, they 
need the assurance that the same product can be sold throughout the 
country and that the financial incentives will be available for enough 
time to make it worth investing in production. S. 207 does this by 
providing nationally uniform performance targets for buildings and 
equipment that will be eligible for tax incentives for 6 full years.
    It's worth mentioning that S. 207 and other policies improving 
efficiency of electricity and natural gas use have immediate benefits 
for consumers and the economy. Let's start with the problem of electric 
reliability. Not only in California and the West, but in other parts of 
the country, we are facing the risk of electrical blackouts and/or 
excessively high electricity prices this summer and next. Regions that 
are confronting these problems are trying to move forward aggressively 
both on energy efficiency programs and on power plant construction. But 
the lead times for most actions on the supply side are far too long to 
provide a solution. And demand-side approaches attempted on a state-by-
state level are much less effective than coordinated national 
activities.
    Here, S. 207 could be a critical piece of a national solution. Air 
conditioners, for example, represent about 30% of summertime peak 
electric loads. Air conditioners that use a third less power can be 
purchased today, but they are not produced in large enough quantities 
to make a difference to peak load. If incentives are made available, 
manufacturers could begin to mass-produce these products in a matter of 
months, not years. Mass production and increased competition for tax 
incentives will drive prices sharply lower, so the incentives will be 
self-sustaining in the long-term. And with 5 million air conditioners 
being sold every year, a sudden increase in energy efficiency could 
have a significant effect in balancing electricity supply and demand 
even after less than a year.
    Another peak power efficiency measure with a very short lead time 
is installing energy-efficient lighting systems--either new or 
retrofit--in commercial buildings. Some 15% of electrical peak power 
results from lighting in commercial buildings. Efficient installations, 
such as those NRDC designed and installed in our own four offices, can 
cut peak power demand by over two-thirds while improving lighting 
quality. Lighting systems are designed and installed with a lead time 
of months, so incentives for efficient lightings as provided in S. 207 
could begin to mitigate electric reliability problems as soon as next 
summer.
    The second major new problem is the skyrocketing cost of natural 
gas, which caused heating bills throughout the country to increase last 
winter. Improved energy efficiency can cut gas use for the major uses--
heating and water heating--by 30%-50%. Much of this potential could be 
achieved in the short term, because water heaters need replacement 
about every ten years, and are the second largest user of natural gas 
in a typical household (and largest gas user in households living in 
efficient homes or in warm areas).
    These types of quick-acting incentives help consumers in two 
different ways: first, they provide new choices that are not now 
available in practice for families and businesses that want to cut 
their own energy costs while obtaining tax relief. But they also help 
the non-participants, because reduced demand cuts prices for everyone.

E. Benefits of Integrated Policies to Promote Efficiency, Renewable 
        Energy and Limit Carbon Emissions
    The beneficial impacts of policies like those described above are 
magnified when assembled into an integrated program that combines 
incentives for energy efficiency and renewable energy and explicit 
measures to limit carbon emissions. An example of such an integrated 
program can be found in the November 2000, Department of Energy Report, 
``Scenarios for a Clean Energy Future.'' The policies described in the 
Clean Energy Future report include greatly expanded research and 
development funding for energy efficiency and renewable energy 
breakthroughs, a renewable energy portfolio standard, incentives for 
renewable energy production and suites of performance standards and 
incentives for the vehicles, buildings, and industrial sectors. DOE's 
report forecasts that together, these policies would avoid the need for 
construction of over 60 percent of the nation's base-case predicted 
need for new electric power plants over the next 20 years. The policies 
also would lower Americans' electric bills by over $120 billion per 
year, cut CO2 pollution by one-third, and slash emissions of 
other pollutants in half. These policies are not the imaginings of 
wild-eyed dreamers. In many cases they amount to expanding programs 
that have proven to work well already: cap and trade emissions 
programs; tax incentives; appliance standards; targeted research and 
development programs; and well-structured voluntary performance 
commitment programs. Adoption of such programs now is feasible and we 
urge members of the Committee to lend their support to early enactment 
of each of these measures.

    Senator Kerry. Thank you very much, Mr. Hawkins.
    Mr. Cassidy.

        STATEMENT OF FRANK CASSIDY, PRESIDENT AND CHIEF 
               OPERATING OFFICER, PSEG POWER LLC

    Mr. Cassidy. Thank you, Mr. Chairman, Senator.
    I am pleased and honored to appear before you this 
afternoon to represent my company, Public Service Enterprise 
Group, and our coalition, the Clean Energy Group. The Clean 
Energy Group members are Consolidated Edison, KeySpan Energy, 
Northeast Utilities, Conectiv, Exelon, PG&E National Energy 
Group, Sempra Energy, as well as my own company, PSEG.
    Members of our coalition share a number of significant 
attributes and principles. We operate and are developing power 
plants in almost every region of the United States. We operate 
coal, gas, and oil-fired fossil fuel generating plants and 
nuclear-powered facilities. We believe in responsible 
environmental stewardship. We are committed to working 
cooperatively with the environmental community, Government, and 
other stakeholders to promote adoption of progressive policies 
that provide meaningful environmental improvements on an 
economically sound and sustainable basis.
    There is no question that the issues of environmental 
policy, climate change, and carbon dioxide reductions present 
tremendous challenges to our industry. Members of our coalition 
share the view that the scientific evidence on climate change 
has progressed to the point where prudent action on reducing 
greenhouse gas emissions is warranted. We also share the 
concerns expressed by Members of Congress, President Bush, and 
members of his administration about the necessity of 
maintaining a secure, diverse, reliable, and affordable 
electric energy supply.
    We believe we can make progress on reducing carbon dioxide 
and other greenhouse gas emissions without bankrupting the 
economy or eliminating coal as a viable fuel supply. One of the 
key questions I and my industry colleagues confront is how best 
to accommodate the requirement for environmental improvements 
as we make business decisions that involve billions of dollars 
and affect the lives and livelihoods of hundreds of thousands 
of investors and employees.
    The Clean Energy Group believes the best way to provide 
business certainty on which to base these decisions is through 
an integrated environmental strategy and a multi-pollutant 
approach that includes carbon. The Clean Energy Group has 
developed a legislative proposal that would deliver significant 
reductions in power plant emissions of nitrogen oxide, sulfur 
dioxide, and mercury, and implement mandatory carbon dioxide 
reductions in a manner that will not compromise the 
reliability, fuel diversity, or affordability of the nation's 
energy supply.
    The legislation calls for mandatory emission caps to be 
achieved on established timetables and use of emissions trading 
and other cost-effective market-based compliance techniques 
that will allow industry to meet the emission caps efficiently 
and at low cost.
    I have attached a copy of the Clean Energy Group's 
legislative proposal to my written testimony, and we look 
forward to discussing it with interested members and staff at 
any time. We believe the legislation will provide real and 
significant environmental benefits. However, there is also a 
strong business rationale for an integrated approach and for 
establishing a clear policy on carbon reductions now.
    Our industry needs to know now what the future 
environmental requirements will be in terms of the amount of 
reductions and the timetable. The issue boils down to one of 
business certainty for both the electric power industry and the 
capital markets we turn to for financing of new generation 
projects.
    We don't want to confront a situation in which we are 
forced to waste or put at risk large-scale investments 
predicated on one set of assumptions, only to have the rules 
changed a few years down the road. Our view is that the best 
and most prudent course of action and the one that will foster 
investment in new energy technologies and the electric energy 
infrastructure our country needs is a comprehensive program 
that establishes clear, unambiguous environmental targets and 
timetables over the next 15 years.
    We also believe that such a program should be mandatory. If 
a goal is to provide business certainty, our view is that only 
a mandatory program in which all participants in the electric 
generating industry are required to internalize the cost of 
making necessary reductions will work. This is especially 
relevant in the highly competitive wholesale power market in 
which even small cost differentials can provide a material 
competitive advantage for those who choose not to participate 
in a voluntary program.
    Again, I am honored by the opportunity to make this 
statement on behalf of my company and the Clean Energy Group, 
and I would be happy to respond to your questions.
    [The prepared statement of Mr. Cassidy follows:]

  Prepared Statement of Frank Cassidy, President and Chief Operating 
                        Officer, PSEG Power LLC

    Mr. Chairman and Members of the Committee, I am pleased and honored 
to appear before you this morning to represent my company, Public 
Service Enterprise Group Incorporated (PSEG), and our coalition, the 
Clean Energy Group.
    PSEG is a diversified energy holding company based in New Jersey 
with assets and operations overseas as well as in the United States. 
The company, I head is PSEG Power, a subsidiary of PSEG, and an 
independent power producer and energy trading company. We have more 
than 17,000 megawatts of electric generating capacity in operation, 
construction, or advanced development and our energy trading business 
is the 15th largest by volume in the country. PSEG's other subsidiaries 
include Public Service Electric and Gas Company (PSE&G), one of the 
nation's largest combined electric and gas utilities, and PSEG Global 
which develops and operates energy production and distribution 
facilities internationally.
    The Clean Energy Group members are Consolidated Edison Company, 
KeySpan Energy, Northeast Utilities, Conectiv, Exelon Corporation, 
Northeast Utilities, PG&E National Energy Group, Sempra Energy, and my 
company, PSEG.
    Members of coalition share a number of significant attributes and 
principles:

   We operate and are developing power plants in almost every 
        region of the United States.

   We operate coal, gas, and oil-fired fossil-fueled generating 
        plants and nuclear-powered facilities.

   We believe in responsible environmental stewardship.

   We are committed to working cooperatively with the 
        environmental community, government, and other stakeholders to 
        promote adoption of progressive policies that provide 
        meaningful environmental improvements on an economically sound 
        and sustainable basis.

    There is no question the issues of environmental policy, climate 
change and carbon dioxide reductions present tremendous challenges to 
our industry. Members of our coalition share the view that the 
scientific evidence on climate change has progressed to the point where 
prudent action on reducing greenhouse gas emissions is warranted. We 
also share the concerns expressed by Members of Congress, President 
Bush, and members of his Administration about the necessity of 
maintaining a secure, diverse, reliable, and affordable electric energy 
supply.
    We believe we can make progress on reducing carbon dioxide and 
other greenhouse gas emissions without bankrupting the economy or 
eliminating coal as a viable fuel supply.
    Our industry is in the process of fundamental change. My company, 
PSEG Power, was created just about two years ago as a result of these 
changes. We own and operate generating facilities that were formerly 
part of an integrated, regulated utility in New Jersey. We are now one 
of the largest unregulated independent power producers in the U.S. with 
an aggressive growth plan that involves entering new markets and 
building new facilities.
    One of the key questions I and my industry colleagues confront is 
how best to accommodate the requirement for environmental improvements 
as we make business decisions that involve billions of dollars and 
affect the lives and livelihoods of hundreds of thousands of investors 
and employees.
    The Clean Energy Group believes the best way to provide the 
business certainty on which to base these decisions is through an 
integrated environmental strategy and a multi-pollutant approach that 
includes carbon.
    The Clean Energy Group has developed a legislative proposal that 
would deliver significant reductions in power plant emissions of 
nitrogen oxide, sulfur dioxide, and mercury, and implement mandatory 
carbon dioxide reductions in a manner that will not compromise the 
reliability, fuel-source diversity, or affordability of the nation's 
electric energy supply.
    The legislation calls for mandatory emissions caps to be achieved 
on established timetables and use of emissions trading and other cost-
effective, market-based compliance techniques that will allow industry 
to meet the emissions caps efficiently and at low cost.
    I've attached a copy of the Clean Energy Group's legislative 
proposal to my written testimony. We would look forward to discussing 
it with interested Members and staff at any time.
    We believe the legislation will provide real and significant 
environmental benefits. However, there also is a strong business 
rationale for an integrated approach and for establishing a clear 
policy on carbon reductions now.
    Our industry needs to know now what the future environmental 
requirements will be in terms of the amount of reductions and the 
timetable.
    The issue boils down to one of business certainty for both the 
electric power industry and the capital markets we turn to for 
financing of new generating projects. We don't want to confront a 
situation in which we are forced to waste or put at risk large-scale 
investments predicated on one set of requirements only to have the 
rules changed a few years down the road.
    Our view is that the best and most prudent course of action--and 
the one that will foster investment in new energy technologies and the 
electric energy infrastructure our country needs--is a comprehensive, 
program that establishes a clear, unambiguous environmental targets and 
timetables over the next fifteen years.
    We also believe such a program should be mandatory.
    Clean Energy Group companies have participated in a number of 
voluntary programs in the past that helped developed emissions trading 
protocols for ozone precursor pollutants. These programs have been 
useful tools for the industry. However, if a goal is to provide 
business certainty, our view is that only a mandatory program in which 
all participants in the electric generating industry are required to 
internalize the cost of making necessary reductions will work. This is 
especially relevant in the highly competitive wholesale power market in 
which even small cost differentials can provide a material competitive 
advantage for those who choose not to participate in a voluntary 
program.
    Again, I am honored by the opportunity to make this statement on 
behalf of my company and the Clean Energy Group. We look forward to 
working with Congress and the Administration to craft the policies 
under which our industry will make substantial environmental progress 
while it fulfills its mission of providing a secure, reliable, and 
affordable supply of electric energy. I would be happy to respond to 
your questions.

               CLEAN ENERGY GROUP'S LEGISLATIVE PROPOSAL
                             107TH CONGRESS
                              1st Session
                              Bill Number

To establish a national uniform multiple air pollutant regulatory 
program for the electric power generation sector
                   IN THE HOUSE OF REPRESENTATIVES or
                    THE SENATE OF THE UNITED STATES
                            Date Introduced
Sponsor(s)
Referred to Name of Committee
_______________________________________________________________________
                                 A BILL
To establish a national uniform multiple air pollutant regulatory 
program for the electric power generation sector

        Be it enacted by the Senate and House of Representatives of the 
        United States of America in Congress assembled

SECTION 1. SHORT TITLE; TABLE OF CONTENTS

    (a) SHORT TITLE--This Act may be cited as the Integrated Air 
Quality Planning Act.

    (b) TABLE OF CONTENTS--

    Section 1. Short Title; Table of Contents
    Section 2. Findings and Purpose
    Section 3. Definitions
    Section 4. National Pollutant Tonnage Caps
    Section 5. Implementation: Sulfur Dioxide (SO2) Program 
            Revisions
    Section 6. Implementation: Nitrogen Oxides (NOX) and 
            Mercury Allowance Trading Programs
    Section 7. Implementation: Carbon Dioxide (CO2) 
            Allowance Trading Program
    Section 8. New Source Review Program Revisions
    Section 9. Savings Provisions

SECTION 2. FINDINGS AND PURPOSE

    (a) FINDINGS--Congress finds that--

          (1) fossil fuel-fired power plants, consisting of plants 
        fueled by coal, fuel oil, and natural gas, produce nearly two-
        thirds of the electricity generated in the United States;

          (2) fossil-fuel fired power plants account for approximately 
        two-thirds of the total SO2 emissions, one-third of 
        total NOX emissions, one-third of total CO2 
        emissions and are a leading source of anthropogenic mercury 
        emissions in the U.S.;

          (3) many generating units have been exempt from emissions 
        limitations applicable to new units based on the expectation 
        that over time these units would be retired or updated with new 
        pollution control equipment. However, many of these units 
        continue to operate and emit at relatively high rates;

          (4) pollution from existing power plants can be reduced 
        effectively through adoption of modern technologies and 
        practices;

          (5) the electricity industry is being restructured with the 
        objective of providing lower electricity rates and higher 
        quality services to consumers;

          (6) the full benefits of competition will not be realized if 
        environmental impact costs are not uniformly internalized;

          (7) the ability of power plant owners to effectively plan for 
        the future is impeded by the uncertainties surrounding future 
        environmental regulatory requirements that are imposed 
        inefficiently on a piecemeal basis.

    (b) PURPOSES--The purposes of this Act are--

          (1) to protect and preserve the environment and safeguard 
        health by ensuring that substantial emissions reductions are 
        achieved at fossil fuel-fired generating facilities;

          (2) to greatly reduce the quantities of mercury, 
        CO2, SO2, and NOX entering the 
        environment from the combustion of fossil fuels;

          (3) to internalize the cost of protecting the values of 
        public health, air, land and water quality in the context of a 
        competitive market in electricity;

          (4) to assure fair competition among participants in the 
        market in electric power that will result from fully 
        restructuring the electric industry;

          (5) to provide a period of environmental regulatory stability 
        for owners/operators of electric generating facilities for 
        improved management of existing assets and new capital 
        investments;

          (6) to achieve emissions reductions from electric generating 
        facilities in a cost-effective manner.

SECTION 3. DEFINITIONS

          (1) Act--``Act'' means the Integrated Air Quality Planning 
        Act.

          (2) Administrator--``Administrator'' means the Administrator 
        of the U.S. Environmental Protection Agency.

          (3) Affected unit, for the purpose of the tonnage caps in 
        Section 4 and the emission reduction program provisions under 
        Sections 5, 6 and 7, shall have the following meaning--

                  (a) With respect to SO2, the term 
                ``affected unit'' has the same meaning as in Section 
                402 of the Clean Air Act.

                  (b) With respect to mercury, the term ``affected 
                unit'' means a coal-fired electric generating facility 
                with a nameplate capacity greater than 25 megawatts 
                that uses a combustion device primarily to generate 
                electricity for sale, and with respect to NOX 
                and CO2, the term ``affected unit'' means a 
                fossil fuel-fired electric generating facility with a 
                nameplate capacity greater than 25 megawatts that uses 
                a combustion device primarily to generate electricity 
                for sale, including any unit that--

                          (i) co-generates steam and electricity if it 
                        supplies more than one-third of its potential 
                        capacity and more than 25 megawatts of 
                        electrical output to the electric power grid;

                          (ii) serves a closed district heating and 
                        cooling system that, on an aggregate basis, 
                        supplies more than one-third of its potential 
                        capacity and more than 25 megawatts of 
                        electrical output to the electric grid.

          (4) Allowance--The term ``allowance'' means an authorization 
        allocated by the Administrator under this Act to authorize 
        emissions during or after a specified calendar year, as 
        follows--

                  (a) NOX allowance shall mean an 
                authorization to emit one ton of NOX;

                  (b) SO2 allowance is defined at paragraph 
                5(b) of this Act;

                  (c) CO2 allowance shall mean an 
                authorization to emit one ton of CO2;

                  (d) Mercury allowance shall mean an authorization to 
                emit one pound of mercury.

          (5) Eligible electric power generating unit--The term 
        ``eligible electric power generating unit'' means incremental 
        increases in generation (in megawatt hours) relative to 1990 
        levels produced by nuclear generating units, and generation 
        produced by renewable energy sources, as defined herein.

          (6) Greenhouse gas--The term ``greenhouse gas'' or ``GHG'' 
        means (a) carbon dioxide, (b) methane, (c) nitrous oxide, (d) 
        hydroflourocarbons, (e) perflourocarbons and (f) sulfur 
        hexaflouride.

          (7) New unit--For the purpose of the allocation provisions 
        under Sections 6 and 7, the term ``new unit'' means an affected 
        unit that has not operated for a sufficient period of time 
        following commencement of operation to receive allocations 
        under the following provisions of this Act--

                  (a) paragraph 6(c)(1) for the NOX and 
                mercury provisions, and

                  (b) paragraph 7(c)(1) for the CO2 
                provisions.

          (8) Renewable energy or renewable energy sources--The term 
        ``renewable energy'' or ``renewable energy sources'' means 
        electricity generated from wind, organic waste (excluding 
        incinerated municipal solid waste), biomass (including 
        anaerobic digestion from farm systems and landfill gas 
        recovery), hydroelectric, geothermal, solar thermal, 
        photovoltaic, fuel cells and other sources, all as designated 
        by rule by the Administrator.

          (9) Sequestration--The term ``sequestration'' means the 
        action of sequestering carbon, either through enhancing natural 
        sinks (e.g., afforestation), or by capturing the CO2 
        emitted from fossil fuel based energy systems and storing it in 
        geologic formations or the deep ocean, or converting it to 
        benign solid materials through biological or chemical 
        processes.

SECTION 4. NATIONAL POLLUTANT TONNAGE CAPS

A new Title XII is added to the Clean Air Act entitled ``National 
Pollutant Caps for the Electric Generating Sector'' comprised of the 
following provisions--

    (a) NITROGEN OXIDES (NOX)

          (1) Annual Tonnage Cap--Effective January 1, 2008, the annual 
        tonnage cap for emissions of nitrogen oxides from affected 
        units in the continental U.S. shall be 2.11 million tons.

    (b) SULFUR DIOXIDE (SO2)

          (1) Annual Tonnage Cap--Effective January 1, 2008, the annual 
        tonnage cap for emissions of sulfur dioxide from affected units 
        in the continental U.S. shall be 4.45 million tons.

    (c) CARBON DIOXIDE (CO2)

          (1) Annual Tonnage Cap--

                  (A) From January 1, 2008 until December 31, 2011, the 
                annual tonnage cap for emissions of CO2 from 
                affected units in the U.S. shall be the amount of 
                emissions emitted from electric generating facilities 
                in calendar year 2000, as determined by the 
                Administrator.

                  (B) On and after January 1, 2012, the annual tonnage 
                cap for emissions of CO2 from affected units 
                shall be 1.925 billion tons.

    (d) MERCURY

          (1) Annual Tonnage Cap--

                  (A) For calendar years 2008-2011 (inclusive), the 
                annual tonnage cap for emissions of mercury from coal-
                fired generating units in the continental U.S. shall 
                equal a 50 percent reduction from baseline mercury 
                emission levels, as determined by the Administrator.

                  (B) For calendar year 2012, and each year thereafter, 
                the annual tonnage cap for mercury shall equal a 70 to 
                90 percent reduction from baseline mercury emission 
                levels, the exact percentage reduction to be determined 
                by the Administrator by January 1, 2004 based on the 
                best scientific data available at the time.

    (e) REVIEW OF POLLUTANT CAPS

          (1) The pollutant tonnage caps established under paragraphs 
        4(a), 4(b), 4(c) and 4(d) shall remain in effect until [insert 
        date 15 years from date of enactment ].

          (2) Not later than [insert date thirteen years from date of 
        enactment] the Administrator shall determine, based on air 
        quality and cost considerations, whether one or more of the 
        national pollutant caps should be revised.

          (3) If, based on the assessment conducted in accordance with 
        paragraph 4(e)(2), it is determined by the Administrator that 
        no revisions to any of the pollutant caps are warranted, a 
        notice of this determination, and the supporting rationale, 
        shall be published in the Federal Register.

          (4) If, based on the assessment conducted in accordance with 
        paragraph 4(e)(2), it is determined by the Administrator that 
        revisions to one or more of the national pollutant caps are 
        warranted, a proposed rulemaking reflecting such revisions 
        shall be published in the Federal Register no later than 
        [insert date 13 years and 6 months from date of enactment]. A 
        final rulemaking shall be promulgated no later than [insert 
        date fourteen years from date of enactment] and the revisions 
        to the pollutant cap(s) shall become effective no later than 
        [insert date fifteen years from date of enactment].

          (5) Determinations made under this paragraph by the 
        Administrator shall remain in effect for another 15-year 
        period, wherein the review cycle established under this 
        paragraph shall be repeated (i.e., EPA will determine if the 
        caps need to be adjusted again by December 31, 2027; if not, 
        the determination shall be noticed in the Federal Register; if 
        so, a proposed rule shall be published by June 30, 2028; etc.).

          (6) Notwithstanding the national pollutant caps established 
        pursuant to this section, emissions from individual sources may 
        be ordered reduced by federal or state authorities to address 
        local air quality problems.

SECTION 5. IMPLEMENTATION: SULFUR DIOXIDE REDUCTION PROGRAM REVISIONS

    (a) REGULATIONS--Not later than January 1, 2004, the Administrator 
shall promulgate revisions to its regulations implementing Title IV of 
the Clean Air Act as deemed necessary to implement the provisions of 
this section.
Section 402 of the Clean Air Act is amended by striking paragraph (3) 
thereof and inserting the following--

    (b) ALLOWANCE--the term ``allowance'' means an authorization, 
allocated to an affected unit by the Administrator under this title, to 
emit, during or after a specified calendar year--

          (1) in the case of allowances allocated for calendar years 
        1995 through 2007, one ton of sulfur dioxide; and

          (2) in the case of allowances allocated for calendar year 
        2008, and each year thereafter, an amount of SO2 
        determined by the Administrator and set forth in the 
        regulations promulgated pursuant to paragraph 5(a) that is 
        consistent with the new national sulfur dioxide tonnage cap 
        established under paragraph 4(b)(1).

SECTION 6. IMPLEMENTATION: NITROGEN OXIDES AND MERCURY ALLOWANCE 
        TRADING PROGRAMS

The Clean Air Act is amended by striking Section 407. A new Title XIII 
is added to the Clean Air Act, entitled ``Nitrogen Oxides and Mercury 
Allowance Reduction Program for the Electric Utility Sector'' comprised 
of the following provisions--

    (a) REGULATIONS--Not later than January 1, 2004, the Administrator 
shall promulgate regulations establishing an allowance trading program 
for NOX and an allowance trading program for mercury for 
affected units in the continental U.S. Such regulations shall establish 
the allowance system prescribed under this section, including, but not 
limited to, the allocation, issuance recording, tracking, transfer and 
use of allowances, and the public availability of all such information 
that is not confidential. These regulations shall also establish the 
requirements governing affected unit compliance with allowance limits, 
the monitoring and reporting of emissions and the provisions for excess 
emission penalties.

    (b) NEW UNIT RESERVES--The Administrator shall establish through 
rulemaking a reserve of NOX and of mercury allowances set 
aside for use by new affected units.

          (1) The Administrator in consultation with the Department of 
        Energy shall determine the size of the new unit reserves based 
        upon projections of generation output for new affected units--

                  (A) not later than June 30, 2004, the new unit 
                reserves for 2008 through 2012;

                  (B) not later than June 30, every five years 
                thereafter, the new unit reserves for the next five-
                year control period.

    (c) NOX AND MERCURY BUDGETS AND ALLOWANCE ALLOCATIONS

          (1) Distribution to affected units

                  (A) NOX allowances shall be distributed to 
                affected units--

                          (i) not later than December 31, 2004, for 
                        calendar year 2008;

                          (ii) by December 31 of each calendar year 
                        after 2004, for the year that begins 36 months 
                        thereafter.

                  (B) Subject to paragraph 6(b), the Administrator 
                shall distribute NOX allowances to affected 
                units on a generation output basis in accordance with 
                the following formula--

                        1.5 lbs NOX/megawatt hour, 
                        multiplied by the affected unit's highest 
                        calendar year net electricity generation (in 
                        megawatt hours during the most recent three-
                        year period, on a rolling annual basis), 
                        divided by 2000 lbs/ton.

                  (C) Subject to paragraph 6(b), the Administrator 
                shall distribute mercury allowances to affected units 
                on a generation output basis in accordance with the 
                following formula--

                        [0.0000227 lbs mercury/megawatthour, multiplied 
                        by the affected unit's highest calendar year 
                        net electricity generation (in megawatt hours 
                        during the most recent 3 year period, on a 
                        rolling annual basis).]

                If total allocations based on this formula exceed or 
                fall short of the applicable caps specified in Section 
                4 minus the new unit reserves for that year, 
                allocations to affected units will be adjusted on a pro 
                rata basis to equal the applicable caps specified in 
                Section 4.

                  (D) An allowance shall not be considered a property 
                right. Notwithstanding any other provision of law, the 
                Administrator may terminate or limit an allowance.

                  (E) A distribution of allowances by the Administrator 
                under paragraph 6(c)(1) shall not be subject to 
                judicial review.

          (2) Distribution to new affected units--

                  (A) The Administrator shall promulgate regulations 
                that establish a methodology for distributing 
                allowances to new affected units.

                  (B) The number of allowances available to a new unit 
                shall be based on actual generation output times the 
                permitted emission rate.

    (d) NOX AND MERCURY ALLOWANCE TRANSFER SYSTEM

          (1) Use of Allowances--The regulations promulgated pursuant 
        to this section shall--

                  (A) prohibit the use (but not the transfer in 
                accordance with paragraph 6(d)) of any allowance before 
                the calendar year for which the allowance is allocated;

                  (B) provide that unused allowances may be carried 
                forward and added to allowances allocated for 
                subsequent years;

                  (C) provide that such allowances may be transferred 
                by the person to whom allocated or to any other person. 
                Any person to whom such allowances have been 
                transferred may use the allowances in the control 
                period for which the allowances were allocated or in a 
                subsequent control period to demonstrate compliance 
                with paragraph (6)(e)(i) or may transfer such 
                allowances to any other person for such purposes.

          (2) Certification of Transfer--A transfer of an allowance 
        shall not be effective until a written certification of the 
        transfer, authorized by a responsible official of the person 
        making the transfer, is received and recorded by the 
        Administrator.

          (3) Permit Requirements--An allowance allocation or transfer 
        shall, upon recording by the Administrator, be considered a 
        part of each unit's operating permit requirements, without a 
        requirement for any further permit review or revision.

    (e) COMPLIANCE AND ENFORCEMENT--

          (1) Compliance With Allowance Limits--For each calendar year 
        beginning after December 31, 2007, the operator of each 
        affected unit shall surrender to the Administrator a number of 
        allowances for NOX equal to the total tons of 
        NOX emitted by that unit during the calendar year, 
        and a number of allowances for mercury equal to the total 
        pounds of mercury emitted by that unit during the calendar 
        year.

          (2) Monitoring System--The Administrator shall promulgate 
        regulations requiring the accurate monitoring of the quantities 
        of NOX and mercury that are emitted at each affected 
        unit.

          (3) Reporting--

                  (A) In general--Not less than quarterly, the owner or 
                operator of an affected unit shall submit NOX 
                and mercury monitoring reports to the Administrator.

                  (B) Authorization--Each report required under 
                paragraph 6(e)(3)(A) shall be authorized by a 
                responsible official of the affected unit, who shall 
                certify the accuracy of the report.

                  (C) Public Reporting--The Administrator shall make 
                available to the public, through one or more published 
                reports and one or more forms of electronic media, 
                unit-specific emission data for each affected unit for 
                NOX and mercury.

          (4) Excess Emissions--The owner or operator of any affected 
        unit that emits NOX or mercury in excess of the 
        allowances the owner or operator holds for use for the unit for 
        the calendar year shall be liable for the payment of an excess 
        emissions penalty, and shall be liable to offset the excess 
        emissions by an equal amount in the following calendar year or 
        such other period as the Administrator shall prescribe. The 
        excess emissions penalty for NOX shall be calculated 
        on the basis of the number of tons emitted in excess of the 
        total number of allowances held, multiplied by $5,000, indexed 
        by inflation under rules promulgated by the Administrator. The 
        excess emissions penalty for mercury shall be calculated on the 
        basis of the number of pounds emitted in excess of the total 
        number of allowances held, multiplied by $10,000, indexed by 
        inflation under rules promulgated by the Administrator.

SECTION 7. IMPLEMENTATION: CO2 ALLOWANCE TRADING SYSTEM

A new Title XIV is added to the Clean Air Act entitled ``Greenhouse Gas 
Reduction Program for the Electric Utility Sector'' comprised of the 
following provisions--

    (a) REGULATIONS--Not later than January 1, 2004, the Administrator 
shall promulgate regulations establishing a CO2 allowance 
trading program for affected units and eligible electric power 
generating units operating in the U.S. Such regulations shall establish 
the allowance system prescribed under this section, including, but not 
limited to, the allocation, generation, issuance recording, tracking, 
transfer and use of CO2 allowances, and the public 
availability of all such information that is not confidential. These 
regulations shall also establish the requirements governing affected 
unit compliance with allowance limits, the monitoring and reporting of 
emissions and the provisions for excess emission penalties. In 
addition, the regulations adopted by the Administrator under this 
section shall establish standards, guidelines and procedures governing 
the creation, certification and use of additional allowances requested 
under the flexibility mechanism provisions of paragraph 7(d) of this 
Act.

    (b) NEW UNIT RESERVE--The Administrator shall establish through 
rulemaking a reserve of CO2 allowances set aside for use by 
new affected units.

          (1) The Administrator in consultation with the Department of 
        Energy shall determine the size of the new unit reserve based 
        upon projections of generation output for new affected units--

                  (A) not later than June 30, 2004, the new unit 
                reserve for 2008 through 2012;

                  (B) not later than June 30, every five years 
                thereafter, the new unit reserve for the next five-year 
                control period.

    (c) CO2 BUDGETS AND ALLOWANCE ALLOCATION

          (1) Distribution of CO2 allowances

                  (A) CO2 allowances shall be distributed--

                          (i) not later than December 31, 2004, for 
                        calendar year 2008;

                          (ii) by December 31 of each calendar year 
                        after 2004, for the year that begins 36 months 
                        thereafter.

                  (B) The Administrator shall distribute CO2 
                allowances to affected units and eligible electric 
                power generating units in proportion to each such 
                unit's share of the total electric power generation 
                attributable to the generation of affected units and 
                eligible electric power generating units. The 
                distribution shall not exceed the CO2 
                tonnage budget established in paragraph (4)(c) minus 
                the new unit reserve established under paragraph 
                (7)(b).


----------------------------------------------------------------------------------------------------------------

-----------------------------------------------------------------------------------------------------------------
Alternative allocation option:

  (B) The Administrator shall distribute CO2 allowances to affected units and non-fossil fired generating units
 serving the grid, including accepted energy efficiency projects that reduce electricity demand from the grid.
 CO2 allowances shall be distributed in proportion to each unit's or projects' share of the total electric power
 generation and, in the case of energy efficiency projects, accepted energy efficiency projects' contribution to
 reductions in electricity demand. The distribution shall not exceed the CO2 tonnage budget established in
 paragraph (4)(c) minus the new unit reserve established under paragraph (7)(b).

  For this section, the term ``accepted energy efficiency project'' means any end use energy efficiency projects
 as defined by the Independent Review Board as referenced in subsection (d) of this section.
----------------------------------------------------------------------------------------------------------------


                  (C) In determining a unit's share of total electric 
                power generation, the Administrator shall consider the 
                unit's highest utilization level, in megawatt hours, 
                during the most recent three-year period, on a rolling 
                annual basis.

                  (D) A CO2 allowance shall not be 
                considered a property right. Notwithstanding any other 
                provision of law, the Administrator may terminate or 
                limit a CO2 allowance.

                  (E) A distribution of CO2 allowances by 
                the Administrator under paragraph 7(c)(1) shall not be 
                subject to judicial review.

          (2) Distribution to new affected units--

                  (A) The Administrator shall promulgate regulations 
                that establish a methodology for distributing CO2 
                allowances to new affected units.

                  (B) The amount of CO2 allowances available 
                to a new unit shall be based on actual generation 
                output times the permitted emission rate.

    (d) COMPLIANCE FLEXIBILITY MECHANISMS

          (1) Independent Review Board--An Independent Review Board 
        shall be established to assist EPA's implementation of the 
        flexibility mechanisms provided for under this section. 
        Requirements related to the creation, composition, duties, 
        responsibilities and other aspects of the Independent Review 
        Board shall be included in the regulations developed by the 
        Administrator under paragraph (7)(a).

                  (A) The Board shall be comprised of 11 members--one 
                representative of EPA (who shall also serve as 
                chairperson of the Board), one representative from the 
                Department of Energy, three representatives from state 
                government, three representatives from the electric 
                generating sector and three representatives from the 
                environmental community. The Review Board shall report 
                to the Administrator, who shall provide staff and other 
                resources to the Board as necessary. The Administrator 
                will respond promptly to requests for support.

                  (B) The Board shall promulgate guidelines for 
                certifying the additional allowances. The guidelines 
                shall be promulgated by (i) January 1, 2003 for 
                allowances generated pursuant to paragraph C(i) below, 
                and (ii) January 1, 2005 for allowances generated 
                pursuant to paragraph C(ii). The Board shall be 
                responsible for periodically updating these guidelines 
                as appropriate.


----------------------------------------------------------------------------------------------------------------

-----------------------------------------------------------------------------------------------------------------
Placeholder: Pending the outcome of analysis of the economic impacts of the unconstrained creation of off-site
 and off-sector allowances, CEG will determine whether there should be language placing constraints in this
 section.
----------------------------------------------------------------------------------------------------------------


                  (C) The Board shall be responsible for certifying 
                additional allowances requested, pursuant to the 
                following--

                          (i) For actions completed on or after January 
                        1, 1990 and prior to January 1, 2008, 
                        allowances for early action, limited to 10 
                        percent of the tonnage cap of 1.925 billion 
                        tons established in Section 4, will be granted 
                        for the following types of projects--

                                  (a) domestic and international 
                                projects that effectively sequester 
                                carbon;

                                  (b) projects reported under Section 
                                1605 of the Energy Policy Act of 1992;

                                  (c) domestic and international 
                                projects that reduce greenhouse gas 
                                emissions.

                          (ii) For actions completed on or after 
                        January 1, 2008, allowances will be granted for 
                        the following types of projects--

                                  (a) domestic and international 
                                projects that effectively sequester 
                                carbon;

                                  (b) CO2 reductions from 
                                greenhouse gas sources not meeting the 
                                definition of an affected unit.

                          (iii) For CO2 reductions achieved 
                        from investments in new renewable energy 
                        projects and for investments in energy 
                        efficiency projects, allowances will be granted 
                        according to the following guidelines--

                                  (a) Between January 1, 2002 and 
                                December 31, 2007, one allowance shall 
                                be granted to applicants for every $15 
                                invested in a certified new renewable 
                                energy project or efficiency project.

                                  (b) Between January 1, 2007 and 
                                December 31, 2014, one allowance shall 
                                be granted to applicants for every $25 
                                invested in a certified new renewable 
                                energy project or energy efficiency 
                                project.

                                  (c) No CO2 allowances will 
                                be granted for investments made in 
                                renewable energy projects or energy 
                                efficiency projects after December 31, 
                                2014.

          (2) The Issuance and Use of Allowances

                  (A) The Administrator shall make available allowances 
                to projects that receive certification by the 
                Independent Review Board. The allowance shall be in 
                addition to the tonnage budget set forth in paragraph 
                4(c).

                  (B) The regulations promulgated pursuant to paragraph 
                7(a) shall allow sources to purchase and use CO2 
                allowances that are traded under other domestic or 
                internationally recognized CO2 reduction 
                program and to use these allowances as a compliance 
                option for the domestic program created by this Act.

    (e) CO2 ALLOWANCE TRANSFER

          (1) Use of CO2 Allowances--The regulations 
        promulgated pursuant to this section shall--

                  (A) prohibit the use (but not the transfer in 
                accordance with paragraph 7(e)(2)) of any CO2 
                allowance allocated by the Administrator before the 
                calendar year for which the CO2 allowance is 
                allocated;

                  (B) provide that unused CO2 allowances 
                allocated by the Administrator may be carried forward 
                and added to CO2 allowances allocated for 
                subsequent years;

                  (C) provide that such allowances may be transferred 
                by the person to whom allocated or by any other person. 
                Any person to whom such allowances have been 
                transferred may use the allowances in the control 
                period for which the allowances were allocated or in a 
                subsequent control period to demonstrate compliance 
                with paragraph (7)(f)(2), or may transfer such 
                allowances to any other person for such purposes;

                  (D) provide that allowances originally allocated and 
                transferred pursuant to this section may be transferred 
                into any other market-based CO2 emissions 
                trading program approved by the President and 
                implemented pursuant to regulations developed by the 
                Administrator or other federal agency.

          (2) Certification of Transfer--A transfer of a CO2 
        allowance shall not be effective until a written certification 
        of the transfer, authorized by a responsible official of the 
        person making the transfer, is received and recorded by the 
        Administrator.

          (3) Permit Requirements--A CO2 allowance 
        allocation or transfer to an affected unit shall, upon 
        recording by the Administrator, be considered a part of each 
        affected unit's operating permit requirements, without a 
        requirement for any further permit review or revision.

    (f) COMPLIANCE AND ENFORCEMENT--

          (1) Compliance with the CO2 cap can be achieved as 
        follows--

                  (A) From 2008 through 2014 inclusive, compliance may 
                be demonstrated though the use of CO2 
                allowances distributed under paragraph 7(c) or 7(d).

                  (B) After 2014, compliance may be demonstrated though 
                the use of CO2 allowances distributed under 
                paragraph 7(c), or any internationally recognized 
                flexibility mechanisms in place at the time.

          (2) Compliance With Allowance Limits--For each calendar year 
        beginning after December 31, 2007, the operator of each 
        affected unit shall surrender to the Administrator a number of 
        allowances for CO2 equal to the total tons of 
        CO2 emitted by that unit during the calendar year.

          (3) Monitoring System--The Administrator shall promulgate 
        regulations requiring the accurate monitoring of the quantity 
        of CO2 that is emitted at each affected unit.

          (4) Reporting--

                  (A) In general--Not less than quarterly, the owner or 
                operator of an affected unit shall submit a report on 
                CO2 emissions from the unit.

                  (B) Authorization--Each report required under 
                paragraph (A) shall be authorized by a responsible 
                official of the generating unit, who shall certify the 
                accuracy of the report.

                  (C) Public Reporting--The Administrator shall make 
                available to the public, through one or more published 
                reports and one or more forms of electronic media, 
                CO2 emissions data for each affected unit.

          (5) Excess Emissions--The owner or operator of any affected 
        unit that emits CO2 in excess of the allowances the 
        owner or operator holds for use for the unit for the calendar 
        year shall be liable for the payment of an excess emissions 
        penalty, and shall be liable to offset the excess emissions by 
        an equal amount in the following calendar year or such other 
        period as the Administrator shall prescribe. The excess 
        emissions penalty shall be calculated on the basis of the 
        number of tons emitted in excess of the total number of 
        allowances held, multiplied by $100, indexed by inflation under 
        rules promulgated by the Administrator.


SECTION 8. NEW SOURCE REVIEW PROGRAM REVISIONS

Section 165 of the Clean Air Act is amended by the following--

The Administrator shall promulgate revisions to its New Source Review 
(NSR) regulations, including its Prevention of Significant 
Deterioration (PSD) requirements.

    (a) The regulations shall revise the NSR/PSD applicability criteria 
for affected units under either Section 4(a) or (b) such that--

          (1) Physical changes or changes in the method of operation at 
        affected units shall not be subject to the NSR/PSD regulations 
        and are not subject to EPA approval if--

                  (A) the project does not meet the definition of the 
                term ``reconstruction'' as defined in 40 CFR 60.15, or

                  (B) the project does not result in an increase of the 
                affected unit's emission rate on a lbs/megawatt hour 
                basis.

          (2) Projects that do not meet the criteria set forth in 
        paragraph 8(a)(1) shall be subject to the existing NSR/PSD 
        applicability provisions and general requirements.

    (b) The regulations shall continue to apply NSR/PSD to proposed new 
units, with the following changes--

          (1) New sources locating in non-attainment areas shall not be 
        required to obtain emission offsets.

          (2) The definition of ``Lowest Achievable Emission Rate 
        (LAER)'' technology shall be revised to allow costs to be 
        considered in the determination of what constitutes LAER, such 
        that new sources will not be required to install LAER 
        technology if the cost exceeds a threshold amount (in dollars 
        per ton) to be determined by the Administrator. This LAER cost 
        threshold amount may not be less than twice the amount of the 
        BACT cost guideline.

SECTION 9. SAVINGS PROVISIONS

Except as specifically provided herein, nothing in this section--

          (1) affects the permitting, monitoring and enforcement 
        obligations of the Administrator under the Clean Air Act (42 
        U.S.C. 7401 et seq.) and the remedies provided thereunder;

          (2) affects the requirements and liabilities of an affected 
        facility under the Clean Air Act;

          (3) requires a change in, affects, or limits any state law 
        regulating electric utility rates or charges, including 
        prudency review under state law; or

          (4) precludes a state or political subdivision of a state 
        from adopting and enforcing any requirement for the control or 
        abatement of air pollution, except that a state or political 
        subdivision may not adopt or enforce any emission standard or 
        limitation that is less stringent than the requirements imposed 
        under the Clean Air Act.

    Senator Kerry. Well, thank you very much. I want to thank 
all four of you. We had some very helpful and very important 
testimony, each point of view contributing significantly to the 
way in which we could start to think about this constructively.
    Mr. Cassidy, let me just ask you quickly since you just 
finished. Vice President Cheney has said that we need to build 
1,300 electric power plants over the next 20 years. Yet last 
year the Department of Energy reported that energy efficiency 
in renewable power sources could meet 60 percent of the 
nation's need for new power plants.
    What is PSEG's view with respect to these differing points 
of view? What is your view?
    Mr. Cassidy. I can't, in my head, Mr. Chairman, do the math 
as between whether 60 percent of requirements can be met by 
renewables and efficiency in new power plants. I would say, as 
you said earlier today, that an approach that is going to work 
has to emphasize new technology, efficiency standards, and the 
construction of new environmentally efficient plants replacing 
older inefficient plants.
    Senator Kerry. Well, is PSEG diversifying into renewable 
power?
    Mr. Cassidy. We are always on the lookout for new 
investments that make sense. We have done quite a bit of work 
on landfill and natural gas projects in the state of New 
Jersey. Other members of our coalition have made similar 
investments.
    Senator Kerry. What was your reaction to the preceding 
panel, to both the fuel cells and wind power discussions?
    Mr. Cassidy. My reaction is that they are--that both wind 
power and fuel cells will need to be a part of solving the 
carbon problem that we are trying to solve. I don't believe 
that efficiency and renewables alone can be the total solution.
    Senator Kerry. Mr. Hawkins, what is your reaction to that?
    Mr. Hawkins. Well, I think the administration is really a 
prisoner of its own assumptions. They started with adding up 
the current supply, and then they looked at forecasts of what 
future demand for total energy might be--and then the next step 
they took was where they went wrong. Basically you can fill 
that gap between supply and demand with either clean resources 
or dirty resources, and they basically assumed that it was all 
going to have to be filled with conventional dirty resources, 
more fossil, more nuclear, and they didn't look at the option 
of filling as much of that gap with clean resources.
    The analysis that did look at the clean resource option was 
the Clean Energy Futures report by the Department of Energy, 
and what that analysis indicated (using the metric that Vice 
President Cheney uses of 1,300 power plants)--it indicated that 
of those 1,300 power plants, 600 could be avoided by improving 
efficiency, so that you would get the same energy services, but 
you wouldn't need to build as many power plants to deliver 
those energy services.
    Two hundred additional of those power plants would be 
fueled by renewable resources rather than fossil resources. It 
is that difference in approach that produces a different 
result. You can start by filling up the gap with dirty 
resources and then say, Oh, let's add something in on 
efficiency and renewables, so that we can say we have a 
balanced package, or whether you prioritize it the other way 
and say, OK, let's see how much we can deliver with the 
cleanest resources first, and then meet remaining needs with 
the dirtier resources.
    Senator Kerry. And when you talk about those 200 renewable 
plants, is that based on current rate of deployment of existing 
technology, or is that looking down the road?
    Mr. Hawkins. No. That is based on the adoption of policies 
that would develop additional renewal resources, create tax 
incentives, create performance objectives, and otherwise 
provide more incentives for efficiency and renewable energy. It 
is also influenced by the adoption of policies that would 
provide an economic reward for renewable energy resources, 
specifically caps on carbon emissions in the electric sector.
    If you put a cap on carbon emissions from the electric 
sector, as Frank Cassidy has indicated, you send a signal to 
the market. You make it economically more attractive at the 
margin for a power plant developer to build a power plant that 
runs on renewable energy rather than one that runs on fossil 
energy, because the renewable fuel power plant won't have to 
get carbon permits from the market.
    Senator Kerry. Now, with respect to what you heard in the 
discussion I had with Dr. Evans at the very beginning, he made 
a point of separating what he can recommend in the context of 
the realities of the science, versus making a policy judgment. 
What is it that compels you, based on the science you've seen, 
to make the judgment you make that you need to move 
authoritatively to deal with this now?
    Mr. Hawkins. Well, it is this momentum of the system, the 
fact that we are inevitably and irretrievably building up 
carbon concentrations in the atmosphere. We know those 
increased carbon dioxide concentrations are linked to 
increasingly higher risks of climate change. We know that those 
potential climate changes are ones that haven't been 
experienced in the evolutionary history of the living systems 
that surround all of us. They certainly haven't been 
experienced in the history of human societies that have 
developed, and we know that we are sticking ourselves and our 
children with the consequences of those things.
    So from a standpoint of prudent behavior, if we don't 
understand the magnitude of the harm that we may be inflicting 
and we know that we are creating centuries' worth of harm by 
continuing on this current pace, we are leaving behind options 
to reduce the risk. Our current approach is a gamble and that 
is a winning strategy only if you are sure you are going to 
win. You know, if you have got a flip of the coin, if you want 
to maximize your income, if you are sure you are going to win, 
you bet all your assets on heads. And if you are sure it is 
going to be heads, but that is only a winning strategy if you 
are sure it is heads.
    Now, is there reason to believe the effects of increasing 
carbon dioxide concentrations will be trivial or beneficial? We 
have no basis for believing that at all, and we shouldn't be 
betting our economies on that assumption.
    Senator Kerry. Well, isn't it, in fact, more than that. You 
do not have a basis for not knowing it won't be beneficial, but 
you have a basis for knowing it is, in fact, going to be 
negative, isn't it?
    Mr. Hawkins. All of the plausible information is that these 
will be harmful effects. All of the analyses that have been 
done say that the higher probability outcome of these increased 
concentrations is to produce climate changes that are not going 
to be beneficial to the planet as a whole, are going to be 
highly detrimental to lots of places, lots of ecosystems, lots 
of people. Unfortunately, the poorest people in the world may 
suffer the most, because they are least able to adapt and 
because they are living in fairly extreme circumstances to 
begin with.
    So, yes. All of these factors point to the need for action 
to reduce emissions. My attempt was to be extremely generous to 
the other side's premises in answering your question.
    Senator Kerry. I see. In other words, you are just leaving 
it out there. Fair enough. I understand. I want to ask Ms. 
Claussen the same thing, but let me just ask you very quickly, 
Mr. Hawkins, before I do. In reading the energy policy of 
President Bush, he suggests the answer is in voluntary action, 
noting that the carbon intensity of the U.S. economy, quote, 
``declined 15 percent during the 1990's.'' And I don't 
understand that. Last year, U.S. carbon emissions increased 2.7 
percent in that 1 year alone. Can you address that discrepancy?
    Mr. Hawkins. The rate of carbon emissions per unit of gross 
national product went down modestly during the last decade. 
Unfortunately, the atmosphere really doesn't care about that. 
What the atmosphere cares about is the tons of emissions, and 
the tons of emissions went up by 16 percent.
    Senator Kerry. So in other words, a game is being played 
essentially in the way in which it is being reported.
    Mr. Hawkins. Yes. The relevant environmental statistic is 
how much did the tons of pollution go up, and the tons of 
carbon pollution from the U.S. economy went up by 16 percent.
    Senator Kerry. Ms. Claussen, did you want to comment on the 
previous question asked? If you didn't, I do have a question I 
wanted to ask you.
    Ms. Claussen. I did, because I thought David Hawkins was 
being so conservative. I think if you look at the results of 
the Intergovernmental Panel on Climate Change, if you look at 
the report from the National Academy that the President asked 
for, if you look at all the reports that we have done using, I 
think, some of the best scientists in this country, looking at 
environmental impacts in this country, I think there is no 
question that we are talking about something that will have 
negative environmental impacts, whether it is sea level rise or 
ecosystem destruction or effects on water resources or effects 
on agriculture.
    And I think it is not only prudent but it is really 
important that we figure out how to reduce our emissions of 
greenhouse gases and how to sequester those that we do put up 
there, and I think we should use every tool that we can. 
Whether it is energy efficiency or it is new technologies or it 
is new less-carbon-intensive power plants or whether it is 
carbon sequestration, it seems to me that all the tools in the 
tool box are ones that ought to be used.
    Senator Kerry. Now, can you share with the Committee--you 
have been a leader in trying to bring corporate leaders, CEOs, 
to the table, and, we keep being given, I think, a false 
presentation of this entire problem, suggesting such draconian 
negative impacts on business and the economy, et cetera.
    But on the other hand, you have corporations and industry 
leaders who have come together with you to take action as part 
of the Pew Center's Business Environmental Leadership Council. 
Thirty-three of the largest and most successful U.S. 
corporations have stated that the Kyoto agreement is a first 
step in addressing climate change, and, in fact, more must be 
done.
    What is it that your corporations see? Maybe you would say 
who they are, what are they seeing, and why do they feel 
compelled to move, while others are somehow trying to avoid 
this and go in a different direction?
    Just share your experience with us.
    Ms. Claussen. Sure. let me first say that--I am happy to 
say that it is now 36 rather than 33, because I think we are 
continuing to add companies who share the view that the science 
is sufficient to take some action, and----
    Senator Kerry. What kind of companies? What are you talking 
about?
    Ms. Claussen. Well, let me give you some ideas. I mean, we 
have got aluminum companies like ALCOA. We have electric 
generators like American Electric Power and Cinergy and Pacific 
Gas and Electric and Wisconsin Energy. We have got aircraft 
companies like Boeing, United Technologies and Lockheed-Martin. 
We have got cement companies like Holnam and California 
Portland Cement Co. We have got forest products companies like 
Georgia Pacific and Weyerhauser; appliance companies like 
Whirlpool and Maytag, Intel and IBM. So, I mean, it is a real 
range among these 36. We cover almost all sectors. We have even 
got a diesel engine manufacturer, Cummins, and obviously DuPont 
and companies like that.
    It is a real mix, and I think they have come together, one, 
because they think there is sufficient science; two, because 
they think they can do something about it, and 16 of these 
companies have already set internal targets to reduce their 
emissions and put in place programs to do it, and because they 
think there is a real need for public policy to help move this 
in the right direction.
    And I think if you look at what they are doing, these are 
not foolish companies. These are companies who are in business 
to make a profit, who want to look ahead to what the world is 
going to be like in ten or twenty or thirty years from now, and 
who want to be there with the new technologies and the new 
systems, and who are trying everything out right now as they 
get ready for this, because they think it is something that has 
to be done.
    And so, I mean, sure there are companies who are on the 
other side of this. I mean, we have got some oil companies, but 
there are oil companies who have a different point of view. I 
think these are the most forward-looking companies, and I think 
most of those who are, quote, on the other side, end of quote, 
are sort of worried about what happens to them tomorrow, and 
there are legitimate issues about what happens to them 
tomorrow. If you are a coal company, you may wonder.
    But I have to say that we have now got a big mining 
company, a global mining company, with substantial coal 
resources in the United States, and they think this is a 
serious problem, that something needs to be done, and they 
agree with us that we need some kind of a mandatory program, 
and so even companies who mine coal, let alone burn it, because 
we have got some of those, too, believe that something has to 
be done here.
    Senator Kerry. Dr. Sandor, you have been waiting patiently.
    Dr. Sandor. Yes. To make one point, the purpose of a market 
is really to help you understand the winners and losers and not 
to pick them. That is the whole purpose of the debate. The 
question of renewables is very easy to answer once you price 
carbon. For example, at the low end of the scale of current 
forecasts, that is, as low as $20 per ton carbon, you change 
the dynamics, and you would probably get rid of all the 
landfill methane leakage in the United States.
    Some economists are saying carbon prices may be $200 a ton. 
At $200 a ton, you basically would turn the U.S. agricultural 
sector entirely into sequestration and add $60 billion in net 
farm income. The best step we can take is to implement and to 
get those numbers. The actors can take advantage of the 
investment opportunities. We could avoid policies which 
subsidize a particular technology because the market will, 
indeed, reveal to you what farmers should be doing, what solar 
power companies should be doing.
    And with all due respect, comments about support for action 
on global warming can really be implemented much better by 
joining an exchange, putting a cap-and-trade system in place, 
and executing and informing the debate, and that is the 
critical part. There is far too much talk about the subject and 
no action. The action and activity of markets will bring you 
the information that one needs to make the decisions.
    So I just don't get it. We talk about it. I think the 
companies that have bought into the climate exchange are going 
to do something. They are actually going to do it. They are not 
going to say, ``We worry about global warming.'' They are going 
to talk and implement. Those that join are going to do 
something and take a positive action. The talk doesn't help us 
in the debate. We have got to become numerate and not just 
literate.
    Senator Kerry. Senator Brownback.

               STATEMENT OF HON. SAM BROWNBACK, 
                    U.S. SENATOR FROM KANSAS

    Senator Brownback. That is, I think, an excellent comment, 
Dr. Sandor. One of our former colleagues that was here has 
commented to me previously that until we find a way to measure 
something, we don't really know how to change it. We have got 
to be able to put a quantifiable figure on it, and then we can 
move from that point in time. And I think that is a good way of 
looking at it.
    As I understand the panel, if I have heard your testimony 
correct, you all support some sort of trading system--and from 
that, then, to a cap-and-trading system. Is that correct? Dr. 
Sandor, in particular, I want to understand this. Is that your 
position, that you feel like we should have a mandatory, 
federally set capping system, then the trade from that?
    Dr. Sandor. Yes. The system that we have implemented is a 
cap-and-trade system.
    Senator Brownback. OK. So everybody on the panel does 
support some form of cap-and-trade type of system. Dr. Sandor, 
to move your concept forward, what sort of Federal actions 
would be required? You would have to set a cap and then I 
presume some form of measurement where there is a definable 
measurement that is traded, or can the marketplace establish 
that?
    Dr. Sandor. The Chicago Climate Exchange is voluntary, so 
in the absence of a mandated cap, there is a significant amount 
of help that you can give us. You can give us an allowance 
tracking system; measurement help for companies in the 
industrial sector; the power sector; and in the soil 
sequestration. Anything that will facilitate the measurement 
process and develop an inventory level of emissions and offsets 
and how they occur wil help the market.
    You can help us in terms of distributing educational 
information to the agricultural community. For example, options 
for changes in tillage practices and how they impact soil 
sequestration, so we can take advantage and add another crop 
for farmers.
    You can, in fact, help support education and work on 
verification. Things like the Jet Propulsion Laboratory, which 
is doing flyovers with radar and other technologies to measure 
forests with satellite sensing systems. All these are new 
technologies, by the way, which are exportable. I think it is 
amusing that we have been involved in three carbon trades. One 
is a reforestation project of the Salish and Kootenai tribes in 
Montana. Another is landfill gases throughout the United 
States, and a third one is the Nuon trade. In all cases, 
American companies exported their environmental services and 
credits abroad. I find that an interesting anecdotal note.
    So you could give us the verification skills, the 
monitoring skills, the tracking, and most importantly, you can 
give companies who trade some baseline protection, that is, 
credit for early action. This, to me, is a key driver, and so--
--
    Senator Brownback. Let's expand that. By credit for early 
action, you are saying that if they take action now, they will 
be given credit for this, under any sort of regime that 
follows.
    Dr. Sandor. Yes.
    Senator Brownback. National or international.
    Dr. Sandor. Yes. And these companies now are drivers. they 
are motivated to join this exchange for several reasons. One of 
them, there are great states like Massachusetts that are 
already implementing a cap-and-trade program, so there will be 
state efforts. And in the West, there are also some efforts. 
There is a Danish program. There is a UK program coming next 
year. All of the companies that may comply as multi-nationals 
should be protected or given credit for any action they take 
now, in spite of the fact that there is no mandate, so we can 
encourage them to continue to do this.
    Senator Brownback. Mr. Hawkins, if we could, or any other 
panelist if you would like to respond to this, it seems to me 
if we go toward a cap-and-trade type system, that it answers a 
lot of the questions that you have put forward of moving us 
toward renewables and carbon sequestration, because you put an 
environmental cost onto carbon. It seems to me, rather than 
going through a number of tax credits, that you are just better 
off putting in place a market mechanism here, and letting the 
market then sort those factors out.
    How would you respond to that?
    Mr. Hawkins. Well, I think I would respond that there 
unfortunately is often a difference between the theoretical 
ideal and what Congress is actually able to legislate, and my 
hunch is that this Congress is probably not going to legislate 
a cap at a level that is going to be sufficient to send a 
signal to all sectors of the economy, that this is a serious 
effort. I certainly hope that this Congress will do so, but I 
think that we need a more robust and diverse portfolio approach 
politically to this question.
    There are a number of techniques which can enjoy broad 
support in Congress that would apply differently to different 
sectors, and I think that is the principal value of moving 
forward with some tax incentive programs, with some sector-
specific programs like the CAFE standards for the vehicle 
sector, and with a cap-and-trade program for the electric 
sector. It is a mix of strategies. It allows members to mix and 
match in terms of their own policy preferences and needs, and 
still gets the job done. It ain't perfect; it ain't the 
theoretical ideal, but that doesn't often happen in this town.
    Senator Brownback. What if you are able to put forward, Mr. 
Hawkins or Ms. Claussen, a system where you were able to just 
simply bank greenhouse gas credits? Something that could get 
through in your more practical model of Congress, a system of 
allowing companies to take credit for early action at this 
point in time?
    Ms. Claussen. Let me try to answer that a little bit. I 
think that is a very important first step, because some of 
these companies have actually started to do some really 
terrific things, and I think it is really important that they 
not be penalized for the things that they have done. In fact, 
you want them to continue doing it, and you want others to do 
it as well, so putting in some kind of baseline protection, 
some kind of recognition for what they have done, some kind of 
credit for early action, I think, is really important.
    But in the end, I think what you need is some combination 
of carrots and sticks. I think you do need some incentives to 
move the technology. I think you do want to have some kind of a 
mandatory cap. I don't think it has to be that stringent when 
you are getting started. I think you can put something in place 
that starts to send the right signals and that gradually over 
time becomes more and more stringent.
    So, you know, the idea of voluntary versus mandatory--
mandatory doesn't mean so stringent that it breaks the bank. It 
just means something that is real and something that is spread 
across the country, not just in a few people who actually 
choose to do it. So I am sort of favorably inclined toward 
something that maybe is relatively modest, but something that 
sort of puts in place the right things to get us moving. And I 
think once we start moving, we will find that we can really 
move pretty fast and pretty far.
    Senator Brownback. Dr. Sandor, you wanted to respond.
    Dr. Sandor. Yes. I would respectfully disagree with the 
comments about a variety of regulatory approaches and this 
body's ability to pass legislation. I have a great deal of 
faith in this body, the Senate's ability to do it. I think the 
SO2 program is a perfect example. The same sorts of 
criticisms were leveled at it. It wasn't stringent; it only had 
100-plus facilities; it was terrible; it was a camel, which is 
a horse designed by a committee; it wasn't ever going to fly, 
and it wasn't going to work.
    This past year, the total cost of the program--and it is in 
its second, more stringent phase, as Ms. Claussen indicated, 
which was supposed to be the back-breaker of U.S. industry, 
cost $2 billion per year, and the reduced medical costs 
associated with lung disease alone were $12-$40 billion per 
year. This was called a terrible program that the Senate 
designed; some said it would never work, but now we know all of 
the social benefits are there, and all of the economics are 
there. So please keep at it, gentlemen.
    Senator Brownback. Yes, Mr. Hawkins.
    Mr. Hawkins. I wanted to followup to your earlier question, 
but first let me be sure to say that I was one of the strong 
supporters of the 1990 acid rain legislation, both on its 
introduction and its passage, and I think it has----
    Senator Brownback. You picked a good horse.
    Mr. Hawkins. It has been a great success. On the question 
of the early action credits, I want to flag a concern that 
adopting an early action credit policy without a cap invites 
strategic game-playing. It invites the kind of problems we have 
seen with the existing registry of the Department of Energy, 
the 1605(b) program where people basically create their own 
baselines to maximize the number of credits in their account. 
This in turn can establish, in effect, a lien on future policy 
decisions, because you have all these entitlement holders, and 
you haven't made a policy to actually limit carbon emissions.
    The dynamic changes in the right direction if you have an 
early action credit policy combined with a cap. So, for 
example, if we adopt--if we enact S. 556, the cap program for 
power plants, it doesn't impose immediate caps on the power 
sector. The caps kick in some years down the road. But there 
may be some entities in the sector that want to move sooner and 
are able to move sooner. They should get credit for doing so, 
but those are going to be real tons, because they know they are 
going to be accountable in the cap system, so you avoid the 
problem of ``play money'' credits that you create if you have 
an early action credit scheme and no cap.
    Senator Brownback. That is a good comment.
    Mr. Cassidy.
    Mr. Cassidy. I just reinforce Ms. Claussen's comment that a 
mandatory system doesn't have to be a straightjacket. Our own 
legislative proposal features steadily more stringent caps and 
steadily less flexible trading and incentive mechanisms, and we 
think that is the approach that makes for the most efficient 
and effective implementation.
    Senator Brownback. Mr. Chairman, I want to thank you for 
holding the hearing and particularly for this panel. I think 
there are a number of things that can be agreed upon and that 
we can move forward on. I don't think we can do the whole 
thing. I don't think we should do the whole thing at once, but 
I think there are some pretty sensible mechanisms.
    I have visited one place in Brazil earlier this year where 
a group of companies and environmental groups purchased nearly 
75,000 acres of land to reforest for carbon benefits. This is a 
beautiful project that they are working on, good local input. 
Some of these things, I think, can really solve a couple of 
problems and they amount to a no-regrets policy. I am not sure 
if somebody in an earlier panel mentioned that, but I think 
there are some steps that can be made that make good sense.
    There is no regret on this, regardless of how things move 
on forward, and you create some business certainty out here for 
people that Mr. Cassidy and others represent that need that in 
long-term planning, need a 20-year horizon to be able to know 
if the type of investment they are taking is going to be stable 
or if it is going to be undercut by changes in laws that could 
occur. I think those involve some form of trading system and 
some form of banking system, where we can figure out what is a 
carbon credit.
    Mr. Hawkins' point, I think, is a valid one. People just 
kind of create on their own types of carbon credits for down 
the road, and say, ``Well, I have got 20 of my carbon credits; 
how many do you have of yours?'' Instead, we can create a 
standardized carbon credit, and that probably, Dr. Sandor, 
would help enormously in your market mechanisms as well, even 
if we did that simple step this year. And I think there would 
be a broad base of support for that so I think there are a 
number of items there we can move foward.
    I am appreciative of this panel and appreciative of your 
leadership in working on the topic.
    [The prepared statement of Senator Brownback follows:]

               Prepared Statement of Hon. Sam Brownback, 
                        U.S. Senator from Kansas

    Mr. Chairman--I thank you for calling this hearing to investigate 
the new technologies on the horizon that will help us deal with the 
significant problem of global climate change. I commend the positive 
approach this hearing is taking in looking for solutions--areas of 
agreement, rather than focusing on that which divides us. I know of the 
chair's personal interest and commitment to this issue and I thank him 
for this opportunity.
    The issue of global climate change has been controversial as long 
as its been an issue. Is the Earth's climate changing to a less 
hospitable place to live? At what rate is this change occurring? Is 
mankind responsible for some or a large part? How can you solve a 
problem that is global and involves the changing one of the basic 
economic engines of most economies--a cheap and abundant energy supply? 
How do we engage developing countries who will soon surpass the U.S. as 
largest greenhouse gas emitters?
    Invariably, there are more questions than answers to this 
complicated issue. But, just because there are difficult and sometimes 
incomplete answers, does not mean we should continue to avoid the 
questions. We need to find ways to address this problem that avoid the 
traditional approach to environmental problems of assigning winners and 
losers. There are numerous promising technologies and new uses for old 
measures--such as conservation and carbon sequestration, that can bring 
progress forward without inflicting economic burdens. It is certainly 
more flashy to cast this problem in terms of all or nothing solutions--
but that is never how true progress is achieved.
    Some of my colleagues are pushing for more research. I agree, this 
is a needed piece of the puzzle. But we can and should do more than 
that. We should be encouraging an aggressive investment in new cleaner 
technologies--which will, over time, create the economic means for us 
to tackle this problem in a more complete way than merely imposing 
punishing controls. But if we are to avoid arbitrary caps and burdens 
to industry, then industry must step forward and address the growing 
concerns posed by greenhouse gases. I am pleased that in my work on 
this issue, I have met with numerous companies who have accepted this 
challenge--specifically American Electric Power and BP have done 
pioneering work in finding cost effective ways to bring down or offset 
emissions.
    I look forward to hearing more about the technological approaches 
being pursued and ways in which this body can assist in bringing these 
promises to fruition.

    Senator Kerry. Well, Senator Brownback, I thank you very 
much, and I know you have been interested in this, and you have 
traveled to a number of the meetings, and it is going to be 
important to have your participation in it, and I certainly 
look forward to trying to do that.
    I do think, if you listened to Dr. Evans who spoke on 
behalf of the administration, I presume, because he was the 
only witness we could get here from them, his testimony made it 
very clear that we have got to have a policy of no net 
emissions at some point. And every panelist has essentially 
agreed that the goal here is to try to get to a point where the 
science says unequivocally, that you can't keep adding CO2 
to the atmosphere.
    The second panel presented a very interesting set of 
possibilities for ways in which you can avoid some of the 
hysteria that has surrounded this so-called debate. There are 
draconian pictures drawn that are just not what we face when 
you look at some of the things happening in the marketplace 
already, when you look at some of the technologies that are 
readily available, when you look at the narrowing down of the 
cost per kilowatt hour between what is dirty and what is clean. 
It is so close at this point in some regards that shame on us 
if we don't find a way to try to not pick a particular 
technology, but to create a framework where the marketplace is 
going to be able to decide which one of those works best and 
how.
    I do think that Ms. Claussen's point about some kind of 
target is very realistic. None of us want to create a draconian 
outcome here that requires something unrealistic or has 
implications that can't be enforced or that disadvantages the 
United States relative to what others are being asked to do or 
are doing. But I think most people are looking at some 
potential goals and targets here that could at least create a 
mind-set, send a message that would establish our bona fides 
with respect to the others that we are trying to negotiate with 
and create a global partnership with in this effort.
    And I think that it would have a profound impact on the 
marketplace, so that without ever getting draconian, we could 
excite the marketplace to recognize how serious it is. I mean, 
Ms. Claussen has these 36 companies--Intel, IBM is moving, 
ALCOA is moving, Polaroid. I mean, these are New York Stock 
Exchange major companies in the U.S. constellation of corporate 
excellence, and I think given their participation, what you 
would send to the rest of the marketplace is a message that 
could perhaps obviate Congress having to get its tentacles too 
much involved here.
    So I think there are great possibilities, and I certainly 
look forward to working with you, Senator Brownback, Senator 
McCain, Senator Hagel, and others, and see if we couldn't come 
up with something reasonable, which I think would do us all 
credit.
    I am particularly grateful to everyone on this panel for 
your extra patience in hanging in here, and the quality of the 
testimony here today, I think, speaks for itself. But I thank 
you on behalf of the Committee for sharing with us these 
important thoughts.
    And the record will remain open for the 10-days that I 
suggested, and with that, we stand adjourned. Thank you.
    [Whereupon, at 1 p.m., the hearing was adjourned.]

                            A P P E N D I X

    Response to Written Questions Submitted by Hon. John McCain to 
                             Frank Cassidy

Question 1. You stated that your group of companies does not want to 
confront a situation in which you are forced to waste or put at risk 
large scale investments predicated on one set of requirements only to 
have the rules changed a few years down the road. For many older, 
existing facilities this is their concern about going to a mandatory 
system for carbon dioxide reductions today. What would you tell them to 
ease their fears about a mandatory system?
    Answer. The only way to provide assurance that just such a scenario 
doesn't take place is by including mandatory requirements for carbon 
dioxide reductions in an integrated, comprehensive approach to power 
plant environmental performance. Including mandatory carbon controls in 
such a program will provide the industry with regulatory certainty on 
which to base decisions about investment in new facilities as well as 
how and whether to modify existing generating capacity.
    The electric power industry has made considerable improvement in 
its environmental performance since the Clean Air Act became law 30 
years ago. However, most of the improvements have resulted from 
regulations implemented on a pollutant-by-pollutant basis. The key 
public policy question is how best to deliver substantial additional 
emissions reductions necessary to protect public health at a time when 
continued supplies of safe, reliable, and affordable electric energy 
require considerable investment to rebuild an aging energy 
infrastructure.
    It's my view that our industry and the capital markets on which we 
depend will respond more favorably to the certainty provided by an 
integrated approach than continuation of a piecemeal, pollutant-by-
pollutant regulatory agenda. A multi-pollutant strategy with firm 
emissions caps will create a more stable environment for capital 
investment by providing long-term certainty about what the future 
demands on the industry will be in terms of environmental performance. 
Companies will be better able to develop strategies and justify 
investment in new and existing electric generating capacity with a 
clear understanding of future compliance obligations.

Question 2. Your proposed legislation for a mandatory cap involves 
timetables for implementation. How important are these timetables for 
the overall success of the effort?
    Answer. I think it's very important from both the standpoint of 
environmental management and business certainty to establish clear and 
unambiguous requirements for the amount of emissions reductions and a 
timetable for delivering the reductions. I want to know what the 
targets are and when I have to meet them in order to develop a coherent 
action plan. And I also want to know that my competitors are obligated 
to meet the same set of requirements.
    The timetables called for in the proposed legislation, in concert 
with predictable and reasonable emissions reductions targets and 
flexible and cost-effective compliance mechanisms, will deliver the 
benefits associated with reductions in the four targeted pollutants on 
an economically sound and sustainable basis.
    I fully understand the concerns about the cost impact of making the 
reductions in the prescribed timetables called for in the legislation 
and the potential impact on the future of coal-fired electric 
generating capacity. I believe very strongly that continued use of coal 
for electricity generation is critical for maintaining fuel diversity, 
minimizing volatility in electricity prices, and protecting long-term 
energy security.
    I also believe very strongly that the proposed legislation will not 
compromise the use of coal as an electric generating fuel, and in fact, 
the regulatory certainty and compliance flexibility called for in the 
legislation, will reduce barriers to investment in new, clean electric 
generation sources including coal.
    Recent studies conducted by the Energy Information Administration 
and the EPA provide evidence that new power plant emissions 
requirements for nitrogen oxide, sulfur dioxide, and mercury would not 
significantly affect electricity prices or displace existing coal-fired 
generation. The flexibility mechanisms and timetables for meeting 
carbon dioxide requirements included in the proposed legislation 
supports continued operation of existing coal-fired capacity as well as 
deployment of new technologies including advanced coal-generation 
technologies.
    This issue is critical to evaluating the policy options and 
benefits associated with an integrated multi-pollution approach. The 
Clean Energy Group is close to completing an economic analysis of the 
costs associated with complying with the proposed legislation, and the 
preliminary results are encouraging. I would be pleased to provide the 
report to Senator McCain, other Committee Members, and appropriate 
staff when the analysis is completed, and would welcome the opportunity 
to meet with Senators and their staffs to discuss our analysis.

Question 3. The President has said he will pursue a voluntary approach 
at this time. What are your concerns from an environmental perspective 
with this decision?
    Answer. A voluntary program, no matter how attractive, will allow 
certain companies to avoid internalizing the cost of carbon, placing 
those that ``volunteer'' at a competitive disadvantage relative to 
those who choose to continue to sit on the sideline. In a highly 
competitive wholesale power generation market, even small cost 
differentials can make a material difference, almost guaranteeing a 
race to the bottom.
    I am hard-pressed to think of what ``incentives'' might be offered 
(including New Source Review flexibility) which would compensate a 
company like ours for taking a limitation on carbon in the absence of 
an industry-wide commitment. We'd be doing a disservice to federal 
policymakers if we ignored or understated this point.
    We have been faithful participants in the U.S. Department of 
Energy's 1605b process from its inception; PSEG was, in fact, the first 
utility company in the nation to volunteer. Industry experience with 
this program, however, does little to engender confidence in the 
efficacy of voluntary approaches. I think most people recognize that 
the 1605b inventory of reductions is grossly inflated and fraught with 
inconsistencies in accounting, baseline measurements, and other 
measurement parameters.
    The single greatest motivator for participation in a voluntary 
carbon program would be assurance that competitors in the wholesale 
generation market are also participants. As I have stated, we remain 
highly skeptical that a voluntary program can be crafted to achieve 
both real greenhouse gas reductions and 100% participation by our 
industry. This skepticism is part of what motivates us to continue to 
advocate a reasonable, mandatory greenhouse gas reduction program in 
the context of a four-pollutant/NSR reform legislative package for our 
industry.
                                 ______
                                 
 Response to Written Questions Submitted by Hon. Ernest F. Hollings to 
                            Eileen Claussen
Economic Benefits of Renewables Energy
Question 1. Ms. Claussen, a few years ago Ross Gelbspan made the 
following statements on the potential economic benefits to the US of 
investment in renewables.
    ``While the climate crisis contains staggering destructive 
potential, it also contain an extraordinary opportunity to expand the 
wealth and stability of the global economy.''
    ``In a very few years the renewables industry could eclipse high 
technology as potentially the most powerful engine of the global 
economy.''
    Do you agree?
    Answer. I disagree that this will happen within a few years. Most 
analysts believe that ``greenhouse-friendly'' technologies such as 
nuclear, solar, wind, biomass, hydro, and conservation will continue to 
improve and achieve larger market shares in the future. But an energy 
revolution will take time: it has taken on average a century for the 
global market share of every major energy technology--from wood to coal 
to oil--to rise from 1 percent to 50 percent of global consumption.

Question 2. What are the other economic benefits to the US of reducing 
emissions through technology?
    Answer. Prominent economists such as Robert Solow have noted the 
importance of technological change as the major long-term determinant 
of continued increases in the standard of living.
    Specific to greenhouse gas emissions, technological change can: (1) 
make carbon-based fuels less expensive (e.g., through improvement in 
the efficiency of fossil fuel extraction); (2) affect the overall rate 
of growth of the economy through improvements in labor productivity; 
(3) increase the rate of improvement in alternatives to carbon-emitting 
energy technologies; (4) increase the rate of improvement in the 
efficiency with which carbon-based fuels are used.

Question 3. Are there trade export opportunities that we are missing 
under the current approach articulated by President Bush and the 
Administration's Energy Policy?
    Answer. Yes, I think so. The Administration's energy policy does 
not provide sufficient support for innovative clean energy 
technologies. The World Energy Council estimates that global investment 
in energy between 1990 and 2020 will be about $30 trillion in 1992 
dollars. Two billion people in the world now lack access to 
electricity; and the developing world faces enormous environmental 
challenges. This presents enormous opportunities to export innovative 
clean energy technologies that can help the developing world 
``leapfrog'' past some of the less efficient technological investments 
in the developed world. If U.S. companies develop these technologies 
here at home, and receive the support that they need in terms of 
research and development, and other domestic policies that encourage 
innovation, U.S. businesses and workers will reap the benefits of this 
huge export market. This will in turn enhance the long-term markets for 
other U.S. exports by building the energy basis for sustainable 
economic prosperity in other countries.

Question 4. Ms. Claussen, you say that the science is telling us we 
need to reduce greenhouse gas emissions over the long term, and that to 
do this we need ``a new industrial revolution'' that will involve 
introducing low-carbon energy efficiency technologies to the global 
economy. I am all in favor of improving U.S. competitiveness, but I see 
that many of the companies you represent have--in service of this 
``global economy''--sent may U.S. jobs overseas.
    How will this industrial revolution help build U.S. jobs and 
improve U.S. exports?
    Answer. See previous response.

Question 5. How far behind other countries is the U.S. in developing 
these technologies?
    Answer. It is hard to say. The United States is ahead in some areas 
and behind in others. For example, U.S. energy companies have a 
significant market share of highly efficient gas-fired power plants 
worldwide. On the other hand, U.S. auto companies have focused 
innovative efforts on producing large and powerful, but fuel-
inefficient vehicles, and are behind foreign manufacturers in producing 
highly efficient and hybrid-electric vehicles. United States companies 
face strong competition from European and Japanese companies in solar 
photovoltaic (PV) technologies.

Question 6. How do we ensure that U.S. technologies are on the leading 
edge and that jobs stay in the US over the long term--do your companies 
have a commitment to supporting US technologies?
    Answer. We need a two-pronged approach. First, we need to promote a 
domestic market for these technologies through government policies, 
such as tax credits, efficiency standards, labeling, and federal 
procurement. The domestic market is key to a domestic industry's 
success in developing export markets. In other countries where gasoline 
is taxed heavily and is thus relatively expensive, consumers demand 
more efficient vehicles. Most of the U.S. solar photovoltaic industry's 
markets are now outside the United States, where the industry faces 
strong competition from European and Japanese manufacturers. The 
fastest growing market segment is for applications that connect 
directly into the electricity grid in Europe and Japan, both of which 
are promoting these applications through government policies.
    Second, we need to increase energy R&D funding, through public-
private partnerships and tax credits, based on a dedicated funding 
source. A sustained effort over many years is needed. This means that 
we must begin making investments and implementing policies now. It 
means we must develop institutions and funding mechanisms that will 
stand the test of time. It means that we must take a portfolio 
management approach--casting the net broadly for technology options, 
investing most heavily in the most promising approaches, and shifting 
our priorities over time as we learn what works and what doesn't, both 
in the research laboratory and in the marketplace.
    The government has an important role in marshalling public 
resources, establishing goals and performance criteria, and providing 
incentives. But in the end, it is non-governmental innovators--
scientists in search of knowledge, businesses in search of profits, 
non-governmental organizations in search of societal benefits--who will 
find most of the technological solutions.
    The companies associated with the Pew Center have a huge presence 
in the United States, and would like to continue to prosper here. 
However, the greater the divergence between the United States market 
and that of the rest of the world, the more difficult it becomes for 
them to compete successfully both here and abroad.
                                 ______
                                 
    Response to Written Questions Submitted by Hon. John McCain to 
                            Eileen Claussen

Question 1. What would it mean to U.S. competitiveness if the rest of 
the world signs the Kyoto agreement without the U.S. and thereby 
establishing key International environmental regulations?
    Answer. In the short-run, the lack of U.S. action on climate change 
(and lack of participation in the Kyoto process) may appear a 
competitive advantage for companies here not having to operate under 
emissions caps. However, any short-term advantage will not be 
sustainable as the global marketplace moves toward more efficient, low-
carbon technologies. Companies operating in areas governed by 
greenhouse gas (GHG) reduction requirements will likely be at the 
forefront of developing these technologies that can ultimately be 
exported to the rest of the world, and will be ahead of the curve in 
buying and selling emissions credits. Further, by leaving the design of 
the international trading system to others, we are missing 
opportunities to structure it to the advantage of U.S. companies. The 
uncertainty regarding future GHG restrictions will also make it 
difficult for United States companies to make important investment 
decisions, and they will need to operate under very different regimes 
here and abroad. Finally, the possibility of boycotts for U.S. products 
grows over time if the U.S. chooses not to participate in a global 
approach to addressing climate change.

Question 2. Do you feel that voluntary trading systems will fail 
without any eventual mandatory emission caps?
    Answer. To date, efforts to limit GHG emissions in the United 
States have been limited almost exclusively to voluntary activities. 
Though some voluntary efforts have been successful, these reductions in 
GHGs have been more than offset by increased emissions associated with 
economic and population growth, resulting in overall growth in U.S. GHG 
emissions (an increase of 12 percent over the past decade). Voluntary 
programs can make an important contribution to a domestic climate 
change program, and can provide valuable experience for designing 
future mandatory efforts, but they cannot stimulate the broad 
engagement that will be required to achieve the level of emissions 
reductions necessary to stabilize the global climate.
    Because a voluntary trading program does not have the certainty 
associated with it that a government program would, and because it 
would not require participation of all important sectors, it remains 
unclear how such nascent programs could relate to an eventual domestic 
and/or international trading system. A voluntary trading approach 
cannot realize the full environmental and economic benefits of a fully 
integrated, economy-wide (or even better, an international) GHG market.
    Ultimately, an effective and affordable emissions reduction program 
must couple mandatory GHG reductions with technology development and 
market mechanisms.

Question 3. Can you comment on whether increasing energy efficiency 
often means increasing costs, at least initially, and whether US 
industries are willing to make that initial investment?
    Answer. There are many ways in which U.S. companies can begin to 
increase their energy efficiency with practices that require very 
minimal investment and earn much greater savings. For example, United 
Technologies Corporation--one of the Pew Center's Business 
Environmental Leadership Council (BELC) companies--made an investment 
in $5,000 for computer labels that resulted in an annual savings of 
more than $225,000 at one facility simply by reminding employees to 
turn off their computers at night. Also, the EPA's Energy Star program 
has resulted in U.S. greenhouse gas reductions in the year 2000 
equivalent to taking ten million cars off the road. 864 billion pounds 
of carbon dioxide emissions have been prevented due to Energy Star 
commitments to date, with cumulative energy bill savings of $60 billion 
through 2010.
    Of course, more significant and permanent reductions will require 
greater investment, but announcing a policy and allowing time for 
capital stock to turnover to more efficient technologies will be key to 
ensuring that transformation to a lower-carbon economy is done in a 
cost-effective manner. Certainly, providing emissions trading 
opportunities also allows for the most-efficient reductions to take 
place first.
    Many U.S. industries are already willing to make investments in 
more efficient and climate-friendly technologies and practices. The 36 
members of the BELC are evidence of that commitment--not only through 
reducing their own on-site energy use, but also in making more 
efficient products and appliances. For example, in 2000, 91 percent of 
IBM personal computers and 100 percent of monitors qualified for the 
EPA Energy Star label. Through its new silicon-on-insulator technology, 
IBM has increased the performance of computer chips by about one-third 
while using up to three times less power. Likewise, Intel has developed 
a technology that allows PCs to run more efficiently while reducing 
energy use by 60 percent. Total energy saved from this technology will 
reduce carbon emissions at Intel by 19.5 million metric tons over the 
next five years. (See the Pew Center website, http://
www.pewclimate.org, for more information on BELC company initiatives.)

Question 4. You have stated that efforts to reduce U.S. emissions have 
been reduced to voluntary efforts. Mr. Hawkins does not seem to support 
voluntary efforts. In your opinion, how helpful are voluntary programs, 
such as the Chicago Climate Exchange, in reducing greenhouse gas 
emissions?
    Answer. As mentioned above, voluntary programs can make important 
contributions to a domestic climate change program. To date, however, 
voluntary programs have not been sufficient to curb or stabilize U.S. 
greenhouse gas emissions. Internal emissions trading programs such as 
those initiated by BP and DuPont and inter-company pilot trading 
programs serve as useful laboratories and are obtaining early and cost-
effective GHG reductions. However, such programs are not a substitute 
for a domestic economy-wide program that would have the backing of the 
federal government and yield significant and verifiable emissions 
reductions across all sectors.

Question 5. You state that U.S. companies will find the production of 
energy efficient products to be a business opportunity. Yet, in the 
last panel, Mr. German seemed to say that there was not a large 
consumer demand for efficient technologies. Is there global demand for 
energy efficient technologies, and what can U.S. firms do to stimulate 
this demand?
    Answer. As EPA Administrator Christine Todd Whitman said in a 
recent press release regarding the Energy Star program's expansion into 
Canada, ``Energy efficiency, through technology and innovation will be 
crucial to our energy security, as well as our quality of life, in the 
21st century.'' (July 19, 2001, see http://www.epa.gov.) Demand for 
Energy Star-labeled products and buildings has grown. For example, by 
December of 1996, over 200 Energy Star homes had been built; by 
December of 2000, over 24,000 of these homes had been constructed. One 
way firms can stimulate demand in energy efficient products is through 
implementing education and product advertisement programs that 
demonstrate the annual energy cost savings of using more efficient 
appliances and other products.
    The Pew Center's research has found that government can aid in 
expanding this market through incentives aimed at product 
manufacturers. Coupled with product efficiency standards, labeling 
requirements, and efforts to train appliance salesmen, builders, etc., 
the market for efficient products could indeed be a lively and vigorous 
one.
                                 ______
                                 
    Response to Written Questions Submitted by Hon. John McCain to 
                            Dennis J. Duffy

Question 1. Who are the leading countries in the utilization of wind 
power? Where does the U.S. stand relative to these countries?
    Answer. Currently, the leading countries in aggregate installed 
wind power are Germany (6,107 mw), Spain (2,836 mw), United States 
(2,610 mw), Denmark (2,341 mw), India (1,220 mw) and the Netherlands 
(473 mw). World Market Update, BTM Consult Aps. With respect to wind 
power as a percentage of overall supply, however, the U.S. is well 
behind many other nations. Denmark, which is half the size of Indiana, 
has nearly as much wind energy installed as the entire U.S., and wind 
currently supplies more than 15 percent of its electricity needs. 
Germany, which is half the size of Texas, has over 2,000 more megawatts 
of installed wind energy than the entire U.S. Further, the rate of 
annual growth (1999-2000) in wind energy for the U.S. (6.8%), falls 
well behind the growth rates of many nations of the industrialized 
world, such as Germany (37.5%), Spain (56.6%), the United Kingdom 
(17.4%), Denmark (34.7%), Italy (53%) and China (34.4%). Id. The 
relative volumes and growth trends for the past decade are set forth in 
the following graph:



Question 2. You mention in your written statement that wind units have 
a marginal cost of zero. Can you explain this further?
    Answer. ``Marginal cost'' refers to the additional costs incurred 
in the production of a specific increment of a commodity, which would 
not otherwise have been incurred. In the electricity business, the 
marginal costs of production for most technologies consists primarily 
of the cost of fuel consumed in the process of generation, as well as 
any incremental O&M costs that would not have been incurred had the 
generation facility not been dispatched. In contrast to traditional 
combustion technologies, wind generation has ``marginal costs'' of 
close to zero, since there is no fuel costs and only insignificant O&M 
costs associated with any incremental production.
    It is this ability of wind power to generate electricity without 
marginal costs that would cause consumers in deregulated power pools to 
see substantial reductions in their overall power costs. All sellers 
into these deregulated pools are paid the same ``clearing price'' 
reflecting the marginal costs of the last (and highest marginal cost) 
generating unit dispatched in any hour. The underlying theory is that 
overall efficiencies are achieved by dispatching pool resources 
according to their marginal costs in ``economic merit'' order, from the 
lowest to highest marginal costs. Because wind units have a marginal 
cost of zero, they are among the first units dispatched in every hour, 
with the result being that other units with higher marginal costs that 
would otherwise have been dispatched and set the clearing price are 
displaced from the economic dispatch and are not run. The clearing 
price for the entire pool is thus set by a unit with a lower marginal 
cost bid than would otherwise been the case. Because the resulting 
reduction in clearing prices is then applied to the entire volume of 
electricity traded in the pool, there is a multiplier savings effect, 
such that amounts extended to support a relatively small volume of wind 
power results in far greater costs savings through the reduction of 
generally applicable clearing prices.

Question 3. If wind power is as cost effective as you have stated, why 
are government subsidies so vital?
    Answer. Although the cost per kilowatthour of wind energy has been 
reduced substantially in recent years, the capital cost of wind 
generation remains at a level where the growth of the U.S. wind 
industry still requires economic and regulatory market support. It must 
also be noted that the capital cost of wind generation (and hence the 
degree of support required) varies greatly amongst regions of the 
country, with such differential driven largely by varying transmission 
and construction costs and wind quality. In the Northeast, for example, 
the viable development of wind resources of substantial scale is 
limited to areas in mountainous terrain or offshore, both of which 
involve substantial construction challenges, as well as the requirement 
of new transmission lines in order to interconnect and deliver 
electricity to customer load centers. In any event, it is our belief 
that the relatively high capital costs of wind facilities would make 
them economically infeasible in most scenarios in the U.S. market 
absent continuing market support.
    This is not to imply, however, that support for the wind industry 
would cause the public to pay any more for its power. To the contrary 
(and as noted in the response above), the price for power in 
deregulated pools is driven solely by bids reflecting the marginal 
costs of the last unit dispatched in any interval, such that 
initiatives to support the capital costs of relatively small volumes of 
wind generation are offset many times over by the resulting suppression 
of the energy prices applicable to the entire volumes traded within the 
respective pools. I also note that the European nations that have taken 
the lead in wind development have done so with continuing market 
supports.

Question 4. Why are utilities not considering long-term purchases of 
renewable energy as part of their overall portfolio planning?
    Answer. When most regions of the country undertook deregulation of 
their electricity markets, there was a common presumption that 
traditional utilities would continue to sell electricity at retail at a 
far lesser degree than had formerly been the case. The belief was that, 
upon the opening of deregulated markets, the bulk of retail customers 
would migrate to retail sales provided by competitive marketers 
unaffiliated with the traditional utilities. Thus, in many regions, the 
continuing role of utilities in retail sales was to be a ``last 
resort'' supplier, with rates reflecting current (i.e., short-term) 
market prices which would serve as a benchmark against which 
competitive suppliers would propose sales to the public. Indeed, in 
some regions utilities were required to make all of their wholesale 
purchases in the spot markets and numerous jurisdictions still require 
utilities to make most of their wholesale purchases for durations of 
one year or less. Thus, many traditional utilities are reluctant to, 
and some cases precluded from, proposals for longer-term sales from 
wind generators, even if it can be demonstrated that such generation, 
through its lack of any marginal costs, would lead to substantial 
overall reductions in the price of electricity in the associated power 
pool.
    Although competitive marketers are not so limited by regulatory 
policy, many are similarly reluctant to enter into long-term contracts 
for wind power, a reluctance which may be explained in part by 
uncertainties as to long-term regulatory policies and market 
conditions. In any event, the reluctance of purchasers to entertain 
long-term arrangements is a serious problem, for which the requirement 
of stated renewable portfolio standards (``RPS'') percentages are an 
important market support structure. Such long-term RPS requirements are 
particularly important, since short-term pricing does not capture the 
full economic value of the economic hedge against fuel price volatility 
provided by wind energy.

Question 5. One constant criticism of wind power has been the 
reliability of the technology. However, Dr. Kammen has described a 
revolution in this technology. What recent developments have there been 
to improve wind technology?
    Answer. Improved design of mechanical and electrical components has 
proven to be a major factor in augmenting performance, increasing 
turbine lifetime and reliability, and reducing cost. Structural 
engineers are today designing turbines that are both stronger and 
lighter in weight than their predecessors. They perform better, and 
they cost less to produce because they use fewer materials than heavier 
structures. These new designs reduce stress by flexing, rather then 
rigidly withstanding harmful loads such as those caused by turbulence. 
Likewise, engineers have developed new, flexible mechanical components, 
such as teetered hubs, which reduce these loads by allowing the rotor 
to pivot away from turbulent winds and thus relieve stress. Electrical 
components such as generators continue to improve dramatically. For 
example, some new turbines come equipped with variable-speed generators 
(and drives) with power electronics. Other advances include a low-speed 
generator that will eliminate the need for a mechanical gearbox, 
reducing costs accordingly.
    Engineers at NREL and Sandia National Laboratories located in 
Albuquerque, New Mexico, have also developed a series of computer 
programs for designing state-of-the-art wind turbines. Using these 
programs, turbine designers can test new design ideas using 
sophisticated computer systems to model how they will perform and hold 
up under operating stresses before building expensive hardware. These 
codes lie at the heart of modern technological innovation, especially 
for using new lightweight materials.
                                 ______
                                 
 Response to Written Questions Submitted by Hon. Ernest F. Hollings to 
                           Dr. David L. Evans

Question 1. Dr. Evans, how well are we monitoring our carbon emissions?
    Answer.

   Carbon emissions from various sources (industrial, 
        transportation, agriculture, forestry, etc.) are monitored and 
        estimated by different methods. The accuracy of these estimates 
        varies by sector. U.S. aggregate greenhouse gas emissions are 
        estimated by both the Environmental Protection Agency (EPA) and 
        the Department of Energy's Energy Information Administration 
        (EIA). Under an interagency agreement, the EIA, provides energy 
        and energy-related carbon dioxide emission estimates to the 
        EPA. EPA uses these data, as well as estimates of methane, 
        nitrous oxide and halogenated substances emissions, to compile 
        the official U.S. inventory of greenhouse gases submitted under 
        the UN Framework Convention on Climate Change in EPA's 
        publication, ``Inventory of U.S. Greenhouse Gas Emissions and 
        Sinks.'' The information is available on the EPA website: 
        http://www.epa.gov/globalwarming/emissions/national/index.html. 
        EPA also receives highly accurate carbon dioxide emissions data 
        from continuous emissions monitors directly from electric 
        utilities as required under Title V of the Clean Air Act.

   EIA, as required by Section 1605(a) of the Energy Policy 
        Act, also compiles annual estimates of greenhouse gases (carbon 
        dioxide, methane, nitrous oxide and halogenated substances). 
        These estimates can be found in EIA's publication ``Emissions 
        of Greenhouse Gases in the United States,'' and the information 
        is provided by EIA on their website: http://www.eia.doe.gov/
        oiaf/1605/ggrpt/index.html.

   The net effect of these emissions on the atmosphere can be 
        monitored through atmospheric measurements. NOAA operates a 
        global atmospheric carbon dioxide and methane monitoring 
        program, collecting air samples from about 50 sites. This 
        allows the determination of how much carbon dioxide remains in 
        the atmosphere each year. When atmospheric carbon dioxide 
        changes are compared with data on annual emissions, a composite 
        estimate can be made (by subtraction) of how much carbon has 
        been taken up by the oceans, plants, and soils. Since samples 
        can only be collected once per week at present, and since the 
        number of measurement sites is currently limited, the temporal 
        and spatial resolution of such measurements is at best annual 
        and global with resolution of the two hemispheres possible. In 
        order to accurately monitor the atmospheric effect of carbon 
        emissions on a regional basis, the number of measurement sites 
        would have to be increased considerably.

Question 2. How can we engage in ``Carbon Management'' through limits, 
targets, early action, or credits if we don't know where our carbon is 
going?
    Answer. NOAA is currently working to estimate how much carbon is 
going into the oceans and how much is going into the terrestrial 
biosphere (trees, plants and soils as a single entity) globally on an 
annual basis. However, the present atmospheric measurement network is 
adequate to do this partitioning only on a hemispheric basis. Regional 
data are currently derived primarily from inventories and mapping 
conducted by other agencies, such as the U.S. Department of Agriculture 
(USDA), the U.S. Geological Survey (USGS), and the National Aeronautics 
and Space Administration (NASA). The federal agencies of the U.S. 
Global Change Research Program (USGCRP) are working together through 
the U.S. Carbon Cycle Science plan to develop methods and tools that 
will improve the accuracy and effectiveness of carbon measurement and 
monitoring.

Question 3. What role could the Department of Commerce--NIST, NOAA, 
Commercial Services, International Trade Administration--play in the 
following domestic or international carbon management areas: (1) 
monitoring and adaptive management; (2) verification; (3) registry; (4) 
coordination; (5) trading; and (6) technology transfer?
    Answer. NIST measurements and standards laboratories can play a 
central role in carbon management, specifically in the area of carbon 
monitoring. The proper NIST role would be to work with climate change 
experts in determining the proper measurements for carbon monitoring, 
to work with policy experts to determine the most effective monitoring 
network for total U.S. Carbon Emissions Management, work with national 
and international organizations and measurement experts in developing 
accurate and cost-effective measurement standards that support the U.S. 
interests and assure global acceptance of U.S. carbon monitoring 
results, to develop a nation-wide monitoring strategy and system and to 
work with state and local authorities to implement a cost-effective 
carbon monitoring system. NIST could play a continuing role in 
measurement quality assurance and conformity assessment throughout the 
United States.
    ITA can advance U.S. objectives regarding carbon management and 
climate change by actively facilitating international trade of 
environmental technologies goods and services and attendant technology 
transfer. ITA works on behalf of U.S. environmental technologies 
providers and supports multilateral and bilateral liberalization of 
environmental technology trade, improved protection of intellectual 
property rights, as well as bilateral environmental technology 
cooperation. ITA also provides the full range of trade development and 
trade promotion services to U.S. environmental technology providers.
    NOAA also has a strong role in global monitoring of greenhouse 
gases, particularly those involved in the carbon cycle. NOAA's Climate 
Monitoring and Diagnostics Laboratory makes ongoing discrete 
measurements from land and sea surface sites and aircraft, and 
continuous measurements from baseline observatories and tall towers. 
These measurements document the spatial and temporal distributions of 
carbon cycle gases and provide essential constraints to our 
understanding of the global carbon cycle. The measurement program 
includes air samples collected approximately weekly from a globally 
distributed network of sites. We also develop several products and 
services to make this information available to the public.
    In addition, many U.S. climate change activities in developing 
countries and economies in transition are undertaken by USAID. 
Therefore, Commerce has worked with USAID, as well as with EPA and 
other agencies, to share information and coordinate efforts where 
appropriate.

Question 4. What role do you see the Advanced Technology Program and 
NIST as a whole playing in the development of new energy efficient 
technologies and advancing technologies to support renewable energies?
    Answer. Facilitating the development and advancement of new 
technologies is at the core of the NIST mission. NIST sees an 
increasing demand for improved measurements, as well as the 
characterization of new energy efficient technologies, and technologies 
that support renewable energy. The development, acceptance, and usage 
of new technologies will not happen without the underpinning 
measurements that facilitate the selection and application of new 
materials, demonstrate their fit for purpose, or demonstrate increased 
energy efficiency or other advantages, such as reduced emissions.
    The NIST Measurements and Standards Laboratories provide this 
critical measurement infrastructure. For example, NIST is making 
significant contributions to the acceptance and use of alternative 
refrigerants to replace the ozone-depleting chlorofluorocarbons. The 
NIST program is comprehensive and includes: industrial consultation on 
exploratory materials and newly commercialized fluids; thermophysical 
measurements and critical data evaluation; theoretical modeling; 
establishment and promulgation of international standards; and 
dissemination of the critical data to the private sector. This data is 
fundamental to the design of efficient refrigeration systems and is 
used by industries worldwide.
    As further examples, NIST's work on the properties of advanced 
ceramics is aimed at the development of very high efficiency combustion 
engines; work on materials for solid-state lighting systems is aimed at 
developing next-generation energy-efficient lighting; development of 
standard reference data on the thermodynamics of bioprocessing that are 
critical for engineering biocatalytic processes used in manufacturing 
with renewable and/or more environmentally-friendly resources; and 
collaborations with our industrial partners on advanced fuel cell 
design will help develop cleaner, more fuel efficient vehicles. NIST 
and Advanced Technology Program (ATP) are participating in the Biomass 
R&D Board, a technical advisory committee of the Biomass Research and 
Development Advisory Committee, with the USDA, DOE, EPA, and other 
agencies, that was enacted under The Biomass Research and Development 
Act of 2000 and Executive Order 13134: Developing and Promoting 
Biobased Products and Bioenergy of 1999.
    The NIST Advanced Technology Program cost-shares research in 
advanced technologies across several sectors that directly and 
indirectly impact energy efficiency and global climate change. The 
Advanced Technology Program directly impacts energy efficiency by 
funding projects focused on reduced fuel consumption, the development 
of alternative sources of energy, and more efficient processes for 
current energy technologies. For example, under an Advanced Technology 
Program project, Cargill-Dow LLC developed critical process technology 
that permitted them to recently launch a new $200M manufacturing 
facility to convert corn into plastics for consumer items. In FY 2000, 
thirty-five projects directly related to energy production or storage 
were part of ATP's active portfolio--the outlays totaled $30M.
    The Advanced Technology Program funds projects that have a 
significant secondary impact on energy efficiency and environmental 
emissions, for example, through improved or alternative manufacturing 
processes and equipment in the chemical and transportation sectors. 
These secondary technologies include: sensors, software for industrial 
design and process control, composites, super alloys, hard coats for 
machine tools, catalysts, and refrigeration. For example, BalaDyne 
Corporation developed a vibration control technology to enable mass 
balancing of high-speed machining tools which could in turn enable 
companies to increase the quality and precision of parts for 
automobiles and other products, thereby improving downstream energy 
efficiency.
    Industry feedback indicates that an increasing need for new 
technologies applied to energy efficiency and renewable energy will 
drive future investment opportunities in the Advanced Technology 
Program.

Question 5. Would you not agree that NIST's Advanced Technology Program 
would be the best vehicle to create and promote these innovative 
partnerships between science and industry?
    Answer. The NIST Advanced Technology Program cost-shares high-risk 
research in public-private partnerships and accelerates the development 
of new technologies to generate widespread benefits for the Nation. One 
of the Advanced Technology Program's missions is to support and 
facilitate partnerships with the private sector, universities, non-
profit organizations, and other Federal agencies. The Advanced 
Technology Program also has a long history of working synergistically 
with the mission-oriented agencies of the Federal government in areas 
where ATP can support high-risk applied research efforts that are 
either not within the mission of the other agencies or, though high 
risk, could enable later research by the mission agencies.
                                 ______
                                 
     Response to Question Asked at Hearing by Hon. John McCain to 
                           Dr. David L. Evans

Question. What percent of the coral reefs in the oceans of the world 
are dying, in your estimation?
    Answer. Dr. Donna Turgeon, a marine ecologist with the NOAA 
National Ocean Service, has just completed a draft report, ``The Health 
of US Coral Reef Ecosystems: 2001,'' that is now under review with over 
100 U.S. managers and scientists. According to Dr. Turgeon's report, 
``. . . [t]he scientific evidence is regarding worldwide degradation of 
coral reefs over the past decade . . . 36% of all reefs globally were 
classified as threatened by over exploitation, 30% by coastal 
development, 22% by inland pollution and erosion, and 12% by marine 
pollution. When these threats were combined, 58% of the world's reefs 
are potentially threatened by human activity ranging from coastal 
development and destructive fishing practices to over exploitation of 
resources, marine pollution, and runoff from inland deforestation and 
farming. [A]bout 10% of the world's coral reefs may already have 
degraded beyond recovery and another 30% are likely to decline 
seriously within the next 20 years. Further, the Global Coral Reef 
Monitoring Network (2000) reported coral reefs have continued to 
decline since its 1998 report. An estimated 27% of the world's reefs 
have been effectively lost, with the largest single cause being an 
extensive climate-related coral bleaching event in 1998.''
                                 ______
                                 
    Response to Written Questions Submitted by Hon. John McCain to 
                           Dr. David L. Evans
Question 1. Recent National Academy of Science recommendations include 
the establishment of a National Climate Service which would focus on 
the weather monitoring as opposed to weather predicting. Can you 
highlight the distinction between weather monitoring and predictions? 
Also, how would a National Climate Service differ from the National 
Weather Service?
    Answer. Most of our current observing systems were designed to 
provide input into forecasting daily weather events, i.e., storms, 
temperature and rainfall extremes. These systems are designed to 
monitor daily large environmental changes. As the data needs are more 
immediate in nature, new instruments that are brought online may not be 
calibrated to collect data consistent with older tools for long-term 
observations. Climate applications require data sets that document 
small changes in the environment occurring over seasons to decades, 
i.e., monitoring how the planet is changing. This places a premium on 
accuracy and consistency over time. Climate observation needs special 
data sets not needed for weather forecasts. The changing forcing of the 
planet by changes in greenhouse gases, aerosols, and solar radiation 
requires that well-calibrated observing systems for these be 
established.
    The primary use of weather information is in the protection of 
lives and property. On seasonal to decadal timescales climate 
information is used for economic and long-range disaster planning, 
e.g., will there be more storms, what are the heating/cooling 
requirements this next season, will there be a drought, how to manage 
water resources, what crops to plant, etc. Climate forecast models also 
require a more interdisciplinary basis than is needed for weather 
forecasts in order to accurately incorporate factors such as chemical 
processes, carbon cycles, ocean dynamics, changes in land cover and 
surface albedo, and hydrologic processes. On multi-decadal to 
centennial timescales, climate information is input for policy 
decisions by governments and the private sector: how large should 
emission reductions be; what new energy technologies should be invested 
in; what are the societal threats; and what carbon sequestration 
strategies might be pursued.
    The different customer bases, e.g., economic and policy vs. 
protection of life and property, plus the need for new types of global 
observations and higher standards and uses for weather data, argue for 
the establishment of a Climate Service. Climate forecasts models also 
have to include more interdisciplinary physics, i.e., chemistry, 
interactive carbon cycles, global ocean dynamics, than are needed for 
weather forecasts. The need to run multi-decadal to centennial 
forecasts requires supercomputer resources that rival or exceed those 
needed for weather forecasts.
    However, there are advantages to have a Climate Service closely 
linked to the National Weather Service (NWS). The Weather Service 
provides much of the data infrastructure. The forecast dissemination 
infrastructure of the NWS can be leveraged to provide links to the user 
communities. The modeling advances from each can be leveraged to make 
improvements to both kinds of forecasts.

Question 2. Do you feel that climate-related technologies are being 
efficiently transferred from the government sponsored research programs 
into the market place such that their real potential may be fully 
realized?
    Answer. NOAA's climate-related activities are predominantly in the 
areas of research, observation and modeling. Technological advances 
have improved our climate observation systems. Computer simulation is 
one of the most important components of a comprehensive climate 
research program. The climate research community has made significant 
progress over the past 20 years, continuing the development and 
application of climate models. Efforts are planned within the U.S. 
modeling structure to more fully support the delivery of products 
critical for making climate simulation and prediction more usable and 
applicable to the broader research, assessment and policy communities.
    As noted in the National Academy of Science report Climate Change 
Science: An Analysis of Some Key Questions, future climate change will 
depend on technological developments that may allow reductions of 
greenhouse gas emissions or the capturing and sequestering of these 
gases. However, technology transfer activities related to greenhouse 
gases are found primarily at other federal agencies, including the DOE, 
EPA, and USDA. Within the Department of Commerce, the NIST Advanced 
Technology Program has funded research into technologies aimed at 
improving energy efficiency and increasing the use of low carbon fuels. 
Federal programs within EPA and DOE promote greenhouse gas reductions 
through the development of cleaner, more efficient technologies for 
electricity generation and transmission. Internationally, USAID 
undertakes programs to help disseminate these clean technologies to 
developing country markets through pilot demonstration projects and 
structural reform initiatives. The Department of Energy's Carbon 
Sequestration Program, which focuses on ways to capture greenhouse 
gases and either store them or recycle them into useful products, has 
evolved into larger scale partnerships with private research 
institutions, industries, and universities sharing a major portion of 
the research costs. The private co-sponsors of these projects 
contribute an average of 40 percent of the total project costs, well 
above the Department's minimum requirement of 20 percent. This 
significant cost share will help ensure that climate related 
technologies are efficiently transferred into the market place.

Question 3. The President has requested the Secretary of Commerce to 
set priorities for additional investments in climate change research, 
to review such investments, and to maximize coordination among federal 
agencies. Can you comment on how those responsibilities may be 
distributed within the Department?
    Answer. A well-coordinated interagency and interdisciplinary 
approach is critical for setting appropriate priorities and for 
addressing the complex issues of climate change research. The Secretary 
of Commerce is reviewing existing programs and developing 
recommendations for the President. Environmental data collection 
related to climate change research is a part of NOAA's mission. NIST is 
responsible for the national standards of measurements used by outside 
agencies to study some elements of climate change. Together, these two 
agencies provide critical components needed to effectively study and 
understand climate change in an interagency environment.
    As with the other global change-related research carried out by the 
U.S. government, the resulting activity may also include additional 
Federal agencies, including those that currently participated in the 
U.S. Global Change Research Program.

Question 4. Do you feel that the uncertainties in the science discussed 
in the National Academy report on Climate Change is sufficient to 
justify waiting to take legislative action?
    Answer. The scientific uncertainties identified by the National 
Academy have not in any way discouraged a strong national policy 
response to climate change, but have instead informed and directed the 
response appropriately toward enhanced scientific and technology 
research, development and application. The ongoing cabinet-level review 
of this important long-term policy challenge may result in additional 
policy options for legislation, in addition to the substantial measures 
announced by the President on June 11. Working closely with the 
Congress, the Administration will propose any new legislation that may 
be needed to implement the President's initiatives, when the 
interagency reviews and recommendations are completed.

Question 5. How has the ATP contributed to climate change research? How 
much funding has been spent in this area?
    Answer. ATP's historical commitments in the generation and storage 
of electrical power and in environmental technologies total over $180M 
in high-risk enabling research projects. These technologies will 
directly impact energy efficiency and global climate change through 
reduced fuel consumption, development of alternative sources of energy, 
and more efficient processes for current energy technologies. In FY 
2000, thirty-five projects directly related to energy production or 
storage were part of ATP's active portfolio--the outlays totaled $30M. 
The areas of research include oil and gas, batteries and super-
capacitors, energy conservation, wind and solar, fuel cells, and motors 
and generators.
    In addition, other ATP projects will have indirect impacts on 
energy and the environment as their technologies become distributed 
into manufacturing and other energy-intensive sectors. These technology 
development activities include high risk research in sensors, software 
for industrial design and process control, composites, alloys, hard 
coatings for tools, catalysts and biocatalysts, chemical separations, 
and refrigeration. Together, these additional technology developments 
will significantly increase the energy efficiency and reduce the 
emissions of manufacturing in the chemicals, materials, and 
transportation sectors.
                                 ______
                                 
  Response to Written Questions Submitted by Hon. Olympia J. Snowe to 
                           Dr. David L. Evans

Question 1. NOAA has recorded a rise in sea temperatures. Presuming 
that this trend continues and is accompanied by an elevation of sea 
level, how is NOAA planning for such an occurrence? Are various NOAA 
programs for fisheries and coastal zone management incorporating this 
information into both short- and long-term planning and management 
processes?
    Answer. According to the Intergovernmental Panel on Climate Change 
(IPCC), there has been a 10-20 cm rise in sea level over the last 
century globally. NOAA is responsible for maintaining the National 
Water Level Observation Network (NWLON) at approximately 190 stations 
around the U.S. coasts. The long-term measurements collected as part of 
NOAA's NWLON help provide the basis through which the rate of sea level 
rise can be determined.
    NOAA has been active in assessing the potential impacts of sea 
level rise on the U.S., examining the potential for erosion, wetland 
habitat loss, and increased vulnerability of coastal regions to storm 
surge as a result of sea level rise.
    The National Marine Fisheries Service (NMFS) has been involved in 
studying the potential impacts of global climate change on fisheries 
since the early 1990s. NMFS scientists co-chaired and co-authored the 
Fisheries Chapter of the 1995 IPCC Volume. The IPCC provides a status 
of global climate change research every five years. The volumes are 
compiled by teams of international scientists and broadly reviewed by 
the scientific community. NMFS also prepared a compilation volume on 
polar climate change impacts drawn from the 1995 IPCC volumes. By the 
very nature of the polar regions, impacts on fisheries were a 
significant portion of the work. NMFS scientists were technical 
reviewers of the recent 2001 IPCC volumes that updated the 1995 volume, 
but from a regional perspective. Similarly, NMFS provided technical 
review and comments on the recent National Assessment of climate change 
impacts coordinated by the USGCRP.
    NMFS has maintained sections of headquarters and field websites 
focused on the potential impacts of climate change and the existing 
research that contributes to this understanding. An initiative has been 
developed to work with coastal communities to determine their concerns 
about impacts of climate change on their economies, ecology, and way of 
life. The initial regional workshops would serve as a coordinated 
discussion to make the most recent information about climate change 
available to communities but also to ensure that future research by 
NMFS would be directed toward the expressed needs of our 
constituencies. While funding has not been identified to implement the 
full initiative, NMFS scientists have been working with the private 
sector to begin the efforts using private funding from competitive 
proposals. The Steering Committee is working with staff at local 
universities and calling on expertise across disciplines to help guide 
the discussions. NMFS' contribution will be to provide personnel, 
scientific expertise and contacts, and other in-kind services. The 
first workshop is being organized in Maine to look at the best 
estimates of climate change impacts on Maine fisheries and economies, 
to identify potential responses, and to determine if existing 
situations could be used as case studies to design innovative solutions 
that could provide guidance for communities in a changing climate 
scenario. NFMS is also working with other parts of NOAA and the U.S. 
Fish and Wildlife Service to investigate how data on sea level rise and 
associated alterations of coastal habitat can be used to guide habitat 
protection and restoration efforts.
    Finally, NMFS scientists participate on a variety of committees and 
review processes to ensure that climate change impacts on fisheries and 
on coastal economies dependent upon marine fish and their habitat are 
addressed in ongoing research and assessments.

Question 2. How would an integrated network of ocean observatories aid 
NOAA's climate change research and modeling capabilities? What would be 
required to create such a network?
    Answer. The integrated global ocean observing system for climate 
consists of in situ (fixed platforms [moorings and flux reference 
sites]; profiling floats; submarine cables; drifting buoys; shipboard 
[research and voluntary] observations such as expendable 
bathythermograph observations, thermosalinographs, and atmospheric 
observations, including precipitation; repeat oceanographic sections; 
and sea level gauges) and remotely sensed observations (satellite 
altimetry and scatterometry; coastal radars). It also includes 
satellite communications to transmit these data; support of shipboard 
operations; development of a real-time data management system; and the 
development of basic techniques to assimilate these data.
    The overall ocean observing system should provide a four-
dimensional (i.e., include spatial and temporal data) description of 
the oceanic variables of climatic and societal relevance. Fixed-point 
observations are required to resolve the variability associated with 
processes such as biological productivity relative to the carbon cycle, 
ocean bottom biogeochemical cycles; and air-sea interactions. Moorings 
are uniquely suited for sampling dynamic areas of the ocean such as 
high latitude regions and the deep ocean during adverse weather 
conditions. Fixed-point observations from moorings and observatories 
are an essential element of the required observing system because:

   they are uniquely suited for sampling two dimensions (depth 
        and time), thus complementing other components of the observing 
        system (satellites, drifting buoys, Argo floats, high frequency 
        radars in coastal regions, etc.). They resolve temporal 
        variability and are capable of sampling the entire water 
        column, including the ocean bottom;

   fixed-point observations are the only approach for resolving 
        multidisciplinary variability and processes such as biological 
        productivity and the cycle of CO2, ocean bottom 
        processes, and air-sea interactions; and

   moorings are uniquely suited for sampling critical or 
        adverse regions or periods such as boundary current regions, 
        the deep ocean, and observations during storm seasons.

    The observatory system would be multidisciplinary in nature, 
providing physical, meteorological, chemical, biological and 
geophysical time-series observations. The data would be publically 
available as soon as received and quality-controlled by the owner/
operator. An international science team would provide guidance, 
coordination, outreach, and oversight for the implementation, data 
management, and capacity building. The initial implementation would 
consist of all operating sites (e.g., Bermuda Atlantic Timer Series, 
Tropical Atmosphere-Ocean Array, etc.) and those planned to be 
established within five years, subject to evaluation in terms of the 
qualifying criteria by the science team. This would initiate a pilot 
phase approximately five years in duration. During this pilot phase, 
the international science team and those that deploy and maintain sites 
will:

   identify gaps in the system and encourage filling those 
        gaps;

   develop new technology for sensors and moorings;

   address implementation of the more challenging sites of 
        critical importance, including multi-community and multi-
        national efforts;

   identify products and end users and establish routine 
        provision of data from the sites to users;

   establish capacity building programs to enable participation 
        in the observatory system;

   review all operating sites after five years, accept the ones 
        proven useful into the longer-term system, add new sites for a 
        new trial phase;

   complete the deployment of the global array using the new 
        capabilities developed and reviews conducted; and

   work toward a transition to operational status.

    An international effort is underway to develop the global array. 
Sites throughout the world's oceans, some already in operation, have 
been identified for potential implementation based on critical oceanic 
regions for climate purposes and ecosystem observations. International 
partners are evaluating their potential roles in implementing these 
sites.

Question 3. Should the Administration have a designated Office of 
Climate Change within the White House? Would this help to coordinate 
the science and the policy for U.S. climate change activities through 
the various departments and agencies involved?
    Answer. In April, President Bush convened a cabinet-level policy 
review of this serious, long-term issue. That group has met many times 
to hear from leading experts on the issue and developed initial policy 
recommendations that the President announced on June 11. Specifically, 
the President announced the U.S. Climate Change Research Initiative and 
the National Climate Change Technology Initiative that will produce 
focused, prioritized and coordinated plans for federal scientific 
research in the next five years and significantly enhance research, 
development and deployment of advanced energy and sequestration 
technologies. Our success in developing those technologies will 
determine how effectively we can reduce the projected growth in 
greenhouse gases in the United States and internationally. The cabinet-
level review group has continued to meet and plans to continue to do so 
in the near future, in order to continue evaluating additional national 
and international policy options to address climate change.
    This ongoing cabinet-level policy review, along with the 
initiatives President Bush has announced to date, demonstrate that he 
recognizes the seriousness of climate change issues and that a 
coordinated response to these issues will have continuing high 
prioritization within the Administration. Within the Executive Office 
of the President, the Office of Science and Technology Policy and the 
Council on Environmental Quality provide ongoing coordination for 
program planning and implementation of climate change research, 
monitoring and technology activities at the interagency level. It is 
therefore unclear that creation of a designated Office of Climate 
Change within the White House would result in better coordination of 
U.S. climate change science and policy.

Question 4. How should any climate change policy be coordinated with 
the Energy Policy Development Group?
    Answer. The President's high-level climate change working group has 
overlapping membership with the Energy Policy Development Group, which 
ensures coordination and consistency between the Administration's 
energy and climate change policies. In fact, the May 2001 report of the 
National Energy Policy Development Group specifically recognized the 
linkage between the policies, addressing the policy challenge of 
climate change directly in chapters 3 and 8. In chapter 3, for example, 
the report states: ``Scientists continue to learn more about global 
climate change, its causes, potential impacts, and possible solutions. 
The United States recognizes the seriousness of this global issue as 
scientists attempt to learn more about climate change... .The United 
States has reduced greenhouse gas emissions by promoting energy 
efficiency and the broader use of renewable energy through a wide range 
of public-private partnership programs. These programs save energy, cut 
energy bills, enhance economic growth, and reduce emissions of 
conventional air pollutants as well as greenhouse gases. Industry and 
the federal government are researching various new technologies that 
will reduce greenhouse gas emissions or sequester those emissions, in 
geologic formations, oceans and elsewhere.''
    And in chapter 8, the NEPD Group recommended ``that the President 
direct federal agencies to support continued research into global 
climate change; continue efforts to identify environmentally and cost-
effective ways to use market mechanisms and incentives; continue 
development of new technologies; and cooperate with allies, including 
through international processes, to develop technologies, market-based 
incentives, and other innovative approaches to address the issue of 
global climate change.'' Importantly, in chapter 8, the NEPD affirmed 
that ``the President is committed to addressing the issue of global 
climate change in a manner that protects our environment and economy.''

Question 5. Are there current attempts at the President's Cabinet level 
and at the White House Office for Science and Technology Policy to 
coordinate both energy and climate change policies for both domestic 
and international environmental and energy strategies? If so, how is 
this being carried out and by whom?
    Answer. The President's high-level climate change working group has 
overlapping membership with the Energy Policy Development Group, which 
should facilitate coordination between energy policy and climate change 
policy.
                                 ______
                                 
 Response to Written Questions Submitted by Hon. Ernest F. Hollings to 
                            David G. Hawkins

Questions. Mr. Hawkins, the Bush Administration appears to be looking 
at ocean ``sequestration'' of carbon as a solution to the climate 
change and greenhouse gas emissions problem. Some have suggested that 
carbon could be taken up by increasing primary production of the 
oceans. Others have proposed that carbon be ``buried'' below the mixing 
zone of the oceans. This sounds a little like ocean ``disposal'' to 
me--but maybe I'm missing something.

   ``What is your understanding of the sophistication of this 
        technology?

   ``How much can we rely on these technologies as a permanent 
        way of taking carbon out of the atmosphere? How much carbon can 
        oceans absorb?

   ``The oceans have warmed substantially all over the world in 
        the past 50 years. What would putting carbon into the oceans do 
        to ocean temperatures?''
    Answers. NRDC opposes the use of the oceans as disposal sites for 
carbon dioxide for a number of reasons. Science is still in the early 
stages of understanding the details of ocean ecosystems. Consequently, 
we have no idea what might be the ecosystem implications of large scale 
disposal of CO2 into the oceans. Second, because we have 
only limited understanding of the movement of currents through the 
oceans of the world, we do not have a robust basis to conclude that 
disposal of CO2 into oceans would keep those gases out of 
the atmosphere even for hundreds of years.
    With respect to the effect of CO2 disposal on ocean 
temperature, there would likely be some highly localized cooling of 
surrounding waters in zones where liquefied CO2 is disposed. 
A more important temperature effect is that as warming penetrates the 
deep ocean, the capacity of the ocean to hold CO2 is 
reduced, resulting in release of CO2 back to the atmosphere.
    There is another fundamental flaw in using the ocean as a disposal 
site. For any given amount of carbon in the biosphere, the total carbon 
will be partitioned between four major areas: the atmosphere, soils, 
forests and other vegetation, and the ocean. Absent continued increases 
in emissions from human activities, the carbon in the biosphere would 
equilibrate over thousands to tens of thousands of years based on the 
relative concentrations of CO2 in the ocean and the 
atmosphere. If we continue to take carbon from the biologically 
isolated reserves of fossil fuels and ``dispose'' of it in the ocean, 
we will unavoidably increase the long-term concentration of CO2 
in the atmosphere because the resulting higher concentrations of 
CO2 in the ocean will increase the concentrations at which 
the atmosphere and the ocean equilibrate. More CO2 in the 
ocean means more CO2 in the atmosphere as the ocean-
atmosphere interface approaches equilibrium.
    A final point worth noting is that most if not all forms of ocean 
disposal would violate the London Dumping Convention.
    In contrast to ocean disposal, deep geological injection of 
CO2 may hold promise as a technique for true long-term 
storage of significant amounts of greenhouse gases. Much evaluation 
work on the physical integrity of potential storage sites remains to be 
done but if pursued as one element of a portfolio of strategies to 
combat climate change, geologic storage may prove important as a 
bridging technique while world energy systems evolve to zero or minimal 
carbon options. Geological storage should not be regarded as a 
substitute for the critical work of improving the efficiency of energy 
production and use and increasing the penetration of renewable energy 
resources. But geologic storage may hold promise as a supplement to 
efficiency and renewable energy programs.
                                 ______
                                 
    Response to Written Questions Submitted by Hon. John McCain to 
                            David G. Hawkins

Question 1. What value or weight does the NRDC give to economic impact 
in its decision to support immediate action on the emissions reductions 
of carbon dioxide?
    Answer. NRDC places great weight on the issue of the economic 
impacts of strategies to reduce carbon dioxide. We recognize that if 
policymakers believe that efforts to take action now to reduce carbon 
dioxide will be economically ruinous, they will resist taking action. 
We support action now because we believe that very substantial cuts in 
carbon dioxide will be required over the long term and to minimize both 
compliance costs and risks to the environment over the long term it is 
critical to send an unmistakable signal to the private sector now that 
carbon mitigation must be incorporated into investment and business 
planning decisions.
    We believe that the more sound analyses show that the costs of 
taking action now to achieve limited but significant cuts in carbon, 
such as those called for the 1997 Kyoto Protocol to the Framework 
Convention on Climate Change, can be achieved without harming the US 
economy. Indeed, the Department of Energy's ``Clean Energy Futures'' 
study, released in November 2000, shows that an integrated program of 
caps on carbon emissions combined with policies to enhance reliance on 
renewable energy sources and programs to improve efficiency of energy 
production and use can cut carbon emissions dramatically and lower 
Americans' total energy bills by more than $100 billion per year.
    In addition, we believe that establishing a requirement to reduce 
carbon emissions, when combined with appropriate flexible compliance 
mechanisms, will unleash massive cost minimizing innovations in the 
private sector as it seeks to find least cost ways to meet the carbon 
reduction obligation. The experience of the 1990 acid rain program 
crafted by the first President Bush is instructive. That program, which 
capped SO2 emissions from the electric generating industry 
at levels about 50% below historic highs, was also opposed as being too 
costly to adopt when it was proposed. Estimates were made by industry 
and government studies that SO2 allowances might cost more 
than $1000 per ton. Once enacted, however, the law stimulated efforts 
in industry to find least-cost compliance options and the result was a 
range of prices below $100 per ton for much of the program's first 
decade and still now below $200 per ton.
    Initial cost estimates for new programs are always high because the 
regulated community does not set its best and brightest minds to work 
figuring out how to minimize compliance costs until the programs become 
a reality.

Question 2. You have stated some disdain for voluntary pledge to reduce 
emissions in your testimony. What do you think about voluntary carbon 
exchange systems, such as the Chicago Climate Exchange? Do you believe 
that these type of programs can be helpful in reducing greenhouse gas 
emissions''
    Answer. Institutions like the Chicago Climate Exchange (CCX) are 
helpful in developing and testing the mechanisms that are likely to be 
relied on extensively in domestic and international programs to reduce 
greenhouse gas emissions. Under a program that caps emissions and 
allows participants to exchange or trade emissions to meet their 
obligations, there will be a need for efficient systems to register 
offers and carry out trading transactions. CCX can help develop and 
test such systems.
    In addition, as with other pilot programs, CCX provides a forum for 
firms that decide to volunteer with an opportunity to gain experience 
not just with internal efforts to reduce greenhouse gas emissions but 
with real world operation of a sophisticated trading system for such 
gases.
    While CCX may be successful in creating a pilot market for 
greenhouse gas trading, it is important to keep in mind that the market 
is the means to an objective, not the objective itself. In this case, 
the objective is to achieve significant reductions in greenhouse gas 
emissions. CCX can provide a vehicle for carrying out the objective but 
it cannot provide the motivation for a sufficient number of actors to 
use the vehicle.
    For markets to sustain themselves, there must be a scarcity of the 
goods that are trading in the market. As long as greenhouse gas 
emitters can release their emissions to the atmosphere without cost to 
the emitter, there will be a sharp limit on the number of firms that 
will be willing to commit to a reduction in their emissions and pay a 
cost for not meeting that commitment.
    Public policy action is needed to create a robust market in 
greenhouse gases that can accomplish a significant reduction in 
emissions. By capping allowable greenhouse gas emissions from the 
important emitting sectors of the economy, Congress can create the 
market conditions of a scarce (and therefore valuable) resource that a 
voluntary system cannot create.
    Bills like S. 556, The Clean Power Act of 2001, would cap carbon 
dioxide and other major air pollutant emissions from the electric 
generating sector in a manner similar to the successful acid rain 
provisions of the 1990 Clean Air Act amendments. Under S.556 a market 
for trading carbon dioxide emissions would rapidly emerge and in 
contrast to a voluntary program, large-scale participation and 
effectiveness in achieving the objective of reducing emissions by a 
targeted amount would be assured.
    Thus, the benefits of programs like CCX will be enhanced by policy 
actions to establish limits on the amount of greenhouse gases that can 
be freely emitted.

Question 3. An earlier panel discussed different types of renewable 
energy resources that can be used to reduce greenhouse gas emissions. 
Based on your studies, which resources show the most promise for 
widespread adoption and effective greenhouse gas reduction?
    Answer. NRDC believes that increased reliance on renewable energy 
sources is an essential component of an effective strategy to reduce 
emissions of greenhouse gases, in particular carbon dioxide. Solar 
technologies and wind power, as well as biomass energy sources all have 
the promise to become a much larger part of the U.S. energy mix and 
NRDC supports efforts to break down market barriers to greater 
penetration of these resources. One important barrier is that the 
market does not value today the fact that these technologies do not 
contribute to the buildup of greenhouse gases in the atmosphere. This 
market barrier could be removed by adopting caps on emissions of 
greenhouse gases from the energy sector, such as S.556 would do. 
Integrating caps with policies to accelerate the expansion of available 
and affordable renewable resources would lower the overall costs of 
complying with the caps. Accordingly, NRDC supports an integrated 
policy suite of emission caps, a renewable portfolio standard, and a 
public benefits fund that would provide financial resources for greater 
reliance on efficiency and renewable energy sources.

Question 4. Some industry representatives have argued that caps on 
emissions will create reduced productivity, economic hardship, and 
increased unemployment. What is your response to these concerns?''
    Answer. As I noted in my answer to question 1, when new policies 
are being debated, Congress is typically confronted with estimates that 
the policies will be ruinously expensive. History has demonstrated that 
the actual expense of implementing reform programs is usually 
significantly less than pre-enactment estimates for the very good 
reason that the entities whose behavior is changed under the reform 
program do not make significant efforts to minimize the costs of 
compliance until the policymakers have decided to adopt the reforms.
    The current failure of the Congress and the administration to move 
forward with effective policies to require mandatory reductions in 
greenhouse gas emissions will encourage a ``wait and see'' attitude 
among many firms as long as this indecision persists. NRDC hopes that 
Congress will act soon to adopt greenhouse gas reduction programs. We 
are confident that the response of the private sector to adoption of 
such programs will be to dramatically expand the attention and 
resources it devotes to minimizing the costs of reducing greenhouse 
gases.
    There is ample evidence that it is technically feasible to achieve 
major reductions of greenhouse gas emissions from key sectors like 
electric generators and motor vehicles without harm to the U.S. 
economy. As noted above, the Clean Energy Futures study by DOE 
concluded that an integrated policy set of emission caps, renewable 
energy programs, and advanced supply and demand-side efficiency 
programs can reduce consumers' energy bills by over $100 billion per 
year and cut carbon dioxide emissions by 30% from business as usual 
forecasts.
                                 ______
                                 
 Response to Written Questions Submitted by Hon. Ernest F. Hollings to 
                          Dr. Daniel M. Kammen

Benefits to the U.S. Economy from Technology Development
Question 1. What kinds of technologies are our best bet for technology 
transfer and export advancement over the next 10 years.
    Answer. Changes in the economies of both developed and developing 
nations over the next decade are likely to only accelerate the trends 
of: (1) the need for far greater flexibility in the security of energy 
services; (2) the need for energy services tailored to fit the needs of 
individual businesses, homes, and vehicles. Renewable energy systems--
notably solar photovoltaic and solar thermal systems, windmills, 
biomass energy systems, and fuel cells--are each technologies that meet 
these demands (1 & 2, above). It is particularly important for energy 
systems to be able to deliver energy at any scale, from less than a 
mega-watt (MW) to 10 MW or more reliably, and at least cost. The tragic 
attacks on both the Pentagon and the World Trade Center among other 
things illustrate the need for energy security, and quality in a 
distributed, often stand-alone fashion. Each of the renewable energy 
systems listed above can meet these conditions, and provide modular 
energy services that fit the needs of emerging markets in both 
developing and developed nations. Further, these are precisely what 
emerging distributed generation systems in the U.S. will need to move 
towards a clean, low-cost energy system. At present the U. S is lagging 
nations such as Japan (PV), Denmark and Germany (Wind), and Canada 
(Fuel Cells) in developing and commercializing these technologies each 
of which saw their initial development phase take place in the United 
States. Added material on the decline of R&D support for this critical 
emerging clean energy market can be found in two recent papers I co-
authored with my doctoral student Robert Margolis (Margolis and Kammen 
1999, 2001).

Margolis, R. M. and Kammen, D. M. (2001) ``Energy R&D and Innovation: 
    Challenges and Opportunities'' in Schneider, S, A Rosencranz, and 
    J. Niles, editors A Reader in Climate Change Policy (Island Press: 
    Washington, DC).
Margolis, R. and Kammen, D. M. (1999) ``Underinvestment: The energy 
    technology and R&D policy challenge,'' Science, 285, 690-692. WWW: 
    http://socrates.
    berkeley.edu/rael/Margolis&Kammen-Science-R&D.pdf

Question 2. What role will an international agreement on emissions 
reduction play--will it hurt or help the US ability to take a lead role 
in these technologies.
    Answer. Contrary to some of the claims about the Kyoto Protocol 
(and now the Bonn Compromise), recent analysis indicates that by taking 
a leadership position on the prevention of global warming, the U.S. 
will benefit financially. The lack of support for the global warming 
treaty that the current U.S. administration has shown is therefore 
particularly troubling.
    A range of studies are all coming to the conclusion that simple but 
sustained standards and investments in a clean energy economy are not 
only possible but would be highly beneficial to our nation's future 
prosperity.i A recent analysis of the whole economy shows 
that we can easily meet Kyoto type targets with a net increase of 1 
percent in the Nation's GDP 2020.ii The types of energy 
efficiency and renewable technologies and policies described here have 
already proven successful and cost-effective at the national and state 
level. I argue that this is even more reason to increase their support. 
Figure 14 in my testimony shows how a combination of readily available 
options can be used to meet the Kyoto Protocol targets. This type of 
strategy would cost-effectively enable us to meet goals of GHG emission 
reductions while providing a sustainable clean energy future.
---------------------------------------------------------------------------
    i Interlaboratory Working Group.
    ii Krause, F., et al, op cit.

Krause, F., DeCanio, S, and Baer, P. (2001) ``Cutting Carbon Emissions 
    at a Profit: Opportunities for the U.S.,'' (International Project 
---------------------------------------------------------------------------
    for Sustainable Energy Paths: El Cerrito, CA), May.

Question 3. Should we be using programs in the Department of Commerce 
like the Commercial Service to start exporting our existing 
technologies overseas?
    Answer. As discussed in my testimony, we have decades of experience 
that market support and expansion through a combination of `technology 
push' (i.e. support for R&D) and `demand pull' (i.e. domestic and 
overseas technology education and market support) provide the best 
recipe for economic expansion. Clean energy technologies are no 
exception, and, in fact, show far larger returns on the investment than 
do older technologies such as fossil-fuels. In a recent paper, I detail 
the benefits that the U.S. has achieved through this sort of integrated 
technology policy in the energy efficiency as well as the renewable 
energy sector (Duke and Kammen, 1999). The Department of Commerce, as 
well as US AID and the Department of Energy as well as the U.S. EPA all 
provide opportunities to support clean energy market expansion. In the 
past these efforts have been scattered, and often uncoordinated. I 
recommend that an Office of Clean Energy Commerce be established to 
utilize the changing technology base as well as the latest economic and 
policy measures to help the U.S. recapture its leadership role in this 
area.

Duke, R. D., and Kammen, D. M. (1999) ``The economics of energy market 
    transformation initiatives,'' The Energy Journal, 20 (4), 15-64. 
    WWW: http://socrates.
    berkeley.edu/dkammen/dukekammen.pdf

Question 4. What do we need to do to get our R&D investment out to the 
market?
    Answer. Certainly a key part of making effective R&D investments is 
also supporting `demand pull' policies, as indicated in the response 
the question above. The other key issue, however, is to demonstrate a 
sustained commitment and support for clean energy technologies. As 
detailed in Margolis and Kammen (1999) as well as in my written 
testimony, federal support for R&D has been episodic, consisting of 
`boom and bust' cycles. Research, development and dissemination, 
however, requires time to bring new ideas to market, and to overcome 
barriers in both the initial technology and in market economics. This 
can best be accomplished by demonstrating to the investors in new 
areas--such as renewable energy--that R&D and market support will not 
evaporate in the next budget cycle.
    Margolis, R. and Kammen, D. M. (1999) ``Underinvestment: The energy 
technology and R&D policy challenge,'' Science, 285, 690-692. WWW: 
http://socrates.
berkeley.edu/rael/Margolis&Kammen-Science-R&D.pdf
NIST Role in Efficiency Standards
Question 5. What can NIST do to help the renewables and energy 
efficiency sector.
    Answer. The greatest barrier that renewable energy and energy 
efficiency technologies face is simply that of barriers to enter the 
commercial energy market in the form of subsidies for fossil fuels. 
Coal, oil, gas, and nuclear energy all have very large subsidies, 
either through direct support, or through implicit subsidies in U.S. 
infrastructure, military actions, or political support. These are not 
always unreasonable, but they prevent our energy economy from becoming 
diverse, secure, and innovative. The following table, from my written 
testimony, highlights the degree of support for the fossil fuel and 
nuclear industry at the expense of other technologies, such as 
renewables.
    NIST could play a significant role in evening this economic 
`playing field.' Currently, few standards exist that explicitly reward 
clean air, human and environmental health. Several studies, for 
example, have found that the direct health impacts of coal burning 
rival the traditional economic cost of coal (i.e. doubling the 3-5 
cents/kilowatt hour cost of electricity from coal. NIST could examine 
the set of metrics it uses and make recommendations for energy 
generation technologies that meet these standards. Regional air 
quality, greenhouse gases, air and watershed protection, and energy 
security through efficient use of energy could all be measures that 
NIST recommends and measures. Instituting these measures would 
significantly level the playing field while providing direct economic 
and health benefits to the U.S.


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                                                                       1998 CONSUMPTION     and TAX EXPENDITURES
                                                                   ------------------------        (1999)
                            FUEL SOURCE                                VALUE               ---------------------
                                                                      (quads,                 VALUE
                                                                    quadrillion   PERCENT    (million   PERCENT
                                                                        BTU)                    $)
----------------------------------------------------------------------------------------------------------------
Oil                                                                      36.57         40%        263        16%
----------------------------------------------------------------------------------------------------------------
Natural Gas                                                              21.84         24%      1,048        64%
Alternative Fuels Credit                                                                      (1,030)
----------------------------------------------------------------------------------------------------------------
Coal                                                                     21.62         24%         85         5%
----------------------------------------------------------------------------------------------------------------
Oil, Gas, Coal Combined                                                                           205        12%
----------------------------------------------------------------------------------------------------------------
Nuclear                                                                   7.16          8%          0         --
----------------------------------------------------------------------------------------------------------------
Renewables                                                                3.48          4%         19         1%
----------------------------------------------------------------------------------------------------------------
Electricity                                                                                        40         2%
----------------------------------------------------------------------------------------------------------------
    Total                                                                90.67        100%      1,660       100%
----------------------------------------------------------------------------------------------------------------
Energy Information Administration, Federal Financial Interventions and Subsidies in Energy Markets 1999: Primary
  Energy, (Washington, DC: DOE, 1999).


Question 6. How can they (NIST) assist other agencies, whether state or 
federal in improving our energy efficiency and increasing the 
availability of renewable energy to consumers.
    Answer. There is a great deal that can be done to work across 
agencies to expand the role of clean energy in our society. Energy 
efficiency and environmental standards, if written to challenge the 
industry and encourage innovation provide the best, market based, means 
to clean-up our energy mix. The California `Zero Emission Vehicle' 
(ZEV) Mandate both accelerated the development of hybrid, fuel-cell, 
and battery-powered vehicles, but also rapidly accelerated the 
automotive industry around the world to produce far cleaner internal 
combustion engines. Thus, a clear, aggressive standard provided better 
existing technology and accelerated the development of a new industry.
    As discussed in my written testimony, a Renewable Portfolio 
Standard (RPS) provides one of the best means to use the market to spur 
a larger clean energy component in our energy mix. An RPS is 
legislation which places an ``obligation'' on all sellers of power to 
the retail market to demonstrate through ownership of ``renewable 
energy credits'' that they have supported the production of a certain 
amount of electricity from qualifying renewable sources. These credits 
can come from either their own renewable power generating facilities, 
buying renewable power from other sources, or simply buying renewable 
energy credits. A renewable energy credit represents the environmental 
value of the kilowatt-hours generated from renewables, with the market 
price set through the flexible trading of these credits. The purpose of 
the RPS is to open the markets to clean energy production by ensuring 
the swift penetration of renewable energy into competitive electricity 
markets so as to bring down the costs until such a purchase obligation 
is no longer necessary.
    An RPS has now been signed into law by at least 10 states: Arizona, 
Connecticut, Maine, Massachusetts, Nevada, New Jersey, New Mexico, 
Pennsylvania, Texas, and Wisconsin. Minnesota and Iowa also have a 
minimum renewables requirement similar to an RPS. Bills that include an 
RPS are pending in several other states. Although 12 States is a good 
start it is difficult to determine how many will ultimately pass 
comprehensive and effective RPS laws. If the number of states remain 
small then the U.S. will ultimately miss or greatly delay the 
opportunity to build a sizable market for renewables. Only with a 
healthy and significant renewable energy market can this industry 
become commercially viable, so that we may all benefit from the energy 
security and environmental quality that renewable energy can provide.
    A national market for clean energy will have a dramatic impact on 
driving down the costs of renewable energy technologies and moving 
these technologies fully into the marketplace. A patchwork of state 
policies would simply not be able to achieve this goal. In addition, 
state RPS policies have so far differed substantially from each other. 
This could cause significant market inefficiencies negating the cost 
savings that a more comprehensive, streamlined, market-based federal 
RPS package would give.
    Second, not every state program is set up effectively. A successful 
RPS requires several critical components. These include:

   The obligation to buy renewables must apply equally to all 
        sellers of electricity

   There must be a system of tradable renewable energy credits 
        this will achieve the renewables goal at least cost

   Demand must outstrip supply by setting the obligation at 
        either the level of existing renewables, increasing it from 
        that point; or by excluding existing renewables; or by using 
        separate tiers for existing and new renewables

   The obligation must rise gradually and predictably to ensure 
        a stable market

   Stiff penalties must be imposed on market players that do 
        not comply with the obligation to buy renewables; the penalty 
        must significantly exceed the cost of compliance

   Requirements for new renewables should begin at least two 
        years after all regulations are final to allow time for 
        competition among all potential suppliers

   The RPS must be long term, continuing until renewable kWh 
        prices drop to competitive market levels at which point the RPS 
        will sunset

   Qualifying renewables must be limited to those that need 
        market support (i.e., not large hydropower) and meet certain 
        clean environmental criteria

   There must be flexibility for meeting the obligation, with a 
        limited period for making up shortfalls, a system of credit 
        banking, and an exemption provision for the case of extreme 
        events.

    If any of these above criteria are not properly detailed in RPS 
legislation then the program will likely be either ineffective or 
operate suboptimally. To date, except for Texas, each of the states 
mentioned above have left out some number of these critical elements 
and consequently their RPS programs are not proving as successful as 
they should be at encouraging renewables growth. Such a track record is 
worrisome if an RPS is to promote the level of renewable energy growth 
that we need in this country to achieve a sustainable clean energy 
future.
    It is for these reasons that I strongly recommend the 
implementation of a federal RPS that incorporates at a minimum all the 
elements listed above.
    An RPS represents one of the best uses of true market forces, where 
policy sets the standard but economic competition is used to meet that 
target. The many economic, environmental, health, and social benefits 
of clean energy generation makes this a natural area for federal 
legislative action.
    NIST, working with the Department of Energy and the U. S EPA and 
Department of Commerce could, as indicated above, set clear standards 
for a clean energy component, and work to certify and support the 
development of new renewable energy technologies.
                                 ______
                                 
    Response to Written Questions Submitted by Hon. John McCain to 
                          Dr. Daniel M. Kammen

Question 1. You mentioned in your written statement that some of the 
options for achieving energy supply and demand balance have not been 
given adequate attention. What are some of those options.
    Answer. A number of policies are available to increase the supply 
of renewable energy. Among the most logical to support are: (1) a 
Renewable Energy Portfolio Standard, RPS, (as discussed above); (2) 
consistent cost accounting across technologies that reflect the true 
social cost of energy, including the health, security, and 
environmental impacts.
    (1) As indicated in my testimony, an RPS (for example 10% in 2010, 
rising to 20% in 2020) takes advantage of market forces to open 
historically biased energy markets to competition, while at the same 
time putting a premium on clean energy. This makes economic, security, 
and environmental sense.
    (2) Consistent accounting, involving the life-cycle costs of 
different energy options, has not been practiced in the past, yet 
provide the best mechanism for inter-technology comparisons between 
both fossil-fuel and alternative energy technologies.

Question 2. Does your industry use some standard evaluation metric such 
as kilowatt hour per dollar invested, whereby we can evaluate their 
different technologies on a common basis.
    Answer. As indicated above (item 2) consistent comparisons between 
energy technologies has not been widely practiced, largely due to: (1) 
the hidden subsidies inherent in many fossil fuel as well as nuclear 
energy technologies; and (2) the lack of accounting for so-called 
`externalities' of air and water quality, health, and energy security 
(import dependence). A national study--conducted by the National 
Academy or by an inter-agency team, could provide the basis to provide 
the sort of consistent measurement metric that you describe. I strongly 
support such an initiative.

Question 3. In your testimony, you state that the current focus on 
energy issues has, ``fostered an ill-founded rush for `quick fix' 
solutions that `will ultimately do the country more harm than good'.'' 
Could you please explain how concerns about an energy crisis can end up 
actually hurting efforts to study renewable energy sources?
    Answer. There are two aspects of the current `energy crisis' that 
have ironically discouraged investment in clean energy options:
    (1) In the rush to address the energy crisis, expansion of gas-
fired electricity capacity has been pushed by a number of political 
figures. Over 90% of new power plants planned in the Western U.S., for 
example, are set to be gas fired. This represents a huge over-
investment in a single energy source, both on economic and energy 
security grounds. This expansion of gas-fired generation locks-in one 
technology, possibly for decades, and crowds out renewable energy 
technologies, even those that are lower cost on a life-cycle basis. 
This is bad economics and bad policy. Energy diversity is the most 
critically needed change in the energy economy.
    (2) The U.S. energy R&D budget is relatively small given the 
central role of energy to the U.S. economy. Over-emphasis on energy 
sector--such as gas--restricts the support available for R&D in other 
areas. We have seen this time and time again in U.S. energy policy 
(see, for example, Margolis and Kammen, 1999). A logical, and 
economically prudent, approach, would be to use the sort of market-
based approach to diversity the energy mix that could be achieved with 
an aggressive Renewable Energy Portfolio Standard (RPS) that I describe 
in my written testimony, or through the sort of life-cycle cost 
accounting and comparisons discussed above.

Margolis, R. and Kammen, D. M. (1999) ``Underinvestment: The energy 
    technology and R&D policy challenge,'' Science, 285, 690-692. WWW: 
    http://socrates.
    berkeley.edu/rael/Margolis&Kammen-Science-R&D.pdf.

Question 4. Your testimony highlights a recent revolution in the cost 
and technologies for renewable energy resources. Could you please 
explain the factors that created this revolution?
    Answer. The last decade has seen dramatic decreases in cost, and 
increases in performance, of solar, wind, and biomass energy 
technologies, as well as in hybrid vehicles, energy efficient lighting 
and fuel cells. In each case, a mixture of technology push and demand 
pull policies has created the opportunity and facilitated market growth 
for a new, clean technology. In the U.S. and overseas, in fact, we have 
seen that a combination of `technology push' (i.e. support for R&D) and 
`demand pull' (i.e. domestic and overseas technology education and 
market support) provide the best recipe for economic expansion. Clean 
energy technologies are no exception, and, in fact, show far larger 
returns on the investment than do older technologies such as fossil-
fuels. In a recent paper, I detail the benefits that the U.S. has 
achieved through this sort of integrated technology policy in the 
energy efficiency as well as the renewable energy sector (Duke and 
Kammen, 1999).

Duke, R. D., and Kammen, D. M. (1999) ``The economics of energy market 
    transformation initiatives,'' The Energy Journal, 20 (4), 15-64. 
    WWW: http://socrates.
    berkeley.edu/dkammen/dukekammen.pdf.
                                 ______
                                 
    Response to Written Questions Submitted by Hon. John McCain to 
                             Maureen Koetz

Question 1. If a favorable decision is reached on the long-term storage 
of spent fuel at Yucca Mountain, what would that mean for the nuclear 
industry?
    Answer. The Nuclear Energy Institute agrees with the views of 
Nuclear Regulatory Commission Chairman Richard Merserve that ``purely 
from a technical perspective, . . . the establishment of a disposal 
site need not be a precondition for new construction.'' NEI also holds 
the view that establishment of a used fuel repository is not a 
precondition for increased output from existing facilities, completion 
of partially constructed facilities for future operation, or plant 
relicensing. Several facilities have already been issued 20-year 
extensions on their licenses, and during the 1990's, the increased 
output from existing nuclear facilities was the equivalent of building 
22 new 1000-megawatt reactors and running them at 90 percent capacity. 
Neither enhancement of nuclear operations created an adverse effect on 
our ability to manage used fuel.
    Ongoing nuclear fuel management practices represent one of the most 
successful solid waste management systems ever implemented for an 
industrial process involving hazardous material, and these successful 
efforts will continue through on-site pool and dry cask storage while a 
long-term geologic repository is made ready. However, the industry also 
believes that a centralized repository to hold used fuel and other by-
product nuclear materials must proceed with all deliberate speed. Since 
1983, American electricity consumers have committed almost $18 billion 
to the Nuclear Waste Fund specifically to finance the federal 
management of used fuel, including $458 million by the ratepayers of 
Arizona. The Fund has a balance of about $10 billion, which must be 
made available for facility construction and operation.
    Nuclear plant owners and operators are currently unfairly 
disadvantaged by the failure of the federal government to meet its 
obligations under the Nuclear Waste Policy Act to begin removal of used 
fuel from commercial facilities by 1998. These utilities and their 
customers have paid for a centralized facility, yet continue to have to 
pay for on-site storage as well. As competition develops in the 
electricity market, forcing double payments of this kind act as a 
hidden tax by the federal government on one of the cleanest forms of 
electricity available, distorting the market, and potentially 
undermining our future contribution to meeting environmental goals like 
managing the risk of climate change.
    The Federal government's failure to meet its obligation could also 
expose a fundamental hypocrisy in our support for environmental 
protection goals and principles. All our waste management laws and 
programs are based on the premise that hazardous material should only 
remain on a production site long enough to be accumulated, packaged, 
and manifested--it should then be brought to a centralized facility 
where it can be best treated, stored or disposed of. For every other 
hazardous material handled in the United States, centralized facilities 
(usually designated as hazardous waste landfills) are open and 
operating in order to best protect the environment. In some cases, 
keeping hazardous material on a production site in excess of 90 days 
constitutes a violation of federal law. These other hazardous materials 
are routinely transported on public roads through populated areas in 
containers far less robust that those used to transport spent fuel. Our 
waste management programs should not have two inconsistent systems for 
managing hazardous materials simply to satisfy political preferences at 
the expense of effective environmental protection.
    The failure to complete and open a hazardous materials center for 
used radioactive fuel creates uncertainty in the future development of 
nuclear plants, threatens continued operation if states act politically 
to limit onsite storage, and undermines effective management of all 
hazardous materials nationwide. It also casts an unnecessary shadow on 
the single most effective technology available for eliminating 
greenhouse gas emissions that also supports economic growth. And 
although not a direct issue for commercial plant operation, the absence 
of a long-term disposal site can interfere with meeting cleanup 
deadlines at weapons complex facilities.
    A favorable decision at Yucca Mountain would mean electricity 
consumers would finally get what they paid for, but more importantly, 
our nation would have a complete program that ensures environmental and 
health protection in the management of used fuel and other radioactive 
materials. It will also support the continued availability of a major 
tool to maintain our air quality.

Question 2. Can you comment on the status of standardized reactor 
designs? Is there a need for additional research?
    Answer. The United States has always been the world leader in 
nuclear technologies. The industry has been working to set the stage 
for construction of new advanced design nuclear plants that will have 
more automatic safety systems and will be even more reliable and 
economical.
    The NRC already has certified three such designs. Two units using a 
design by General Electric have been built and are setting world-class 
performance records in Japan, while others of this design are under 
construction in Japan and Taiwan. A variation of another certified 
design is being developed in Korea.
    There are three additional reactor designs that are being studied 
for possible future use. The Pebble Bed Modular Reactor is currently 
undergoing feasibility studies in South Africa, and Westinghouse is 
determining whether to proceed with formal NRC review of its AP-1000 
concept--a larger-scaled version of the already approved AP 600. In 
addition, General Atomics is considering commercialization of a gas-
cooled reactor being developed that uses plutonium fuel from stockpiles 
of Russian weapons.
    Beyond advanced reactor designs, industry executives have come 
together--contributing personnel, funding and guidance--to develop a 
plan that will mark a clear path for new nuclear plant orders. This 
plan for the future considers safety standards and objectives; NRC 
licensing requirements; policy and legislative implications; capital 
investment needs and changing business conditions. This effort is tied 
to the nuclear industry goal of building 50,000 megawatts of new 
capacity by the year 2020 in support of efforts to protect air quality 
and curb greenhouse gas emissions while maintaining a reliable 
electricity supply. Notably, developing 50,000 megawatts of new nuclear 
will only hold constant our current level of 30 percent emission-free 
electricity to support current and future emission control goals.
    The ability to bring new nuclear plants to market in a timely 
manner must be demonstrated, however. The licensing process for future 
plants was laid out in the 1992 Energy Policy Act and has the potential 
to correct problems of the past. In particular, it allows for early 
resolution of safety and siting issues, and ample opportunities for 
public involvement, well in advance of large capital investments. There 
is a role for the Federal Government in assuring that the first-time 
implementation of this process does, in fact, meet the intent of 
Congress and the needs of the industry, regulators, and the public. 
Experience with certification of the three existing advanced reactor 
designs has shown the effectiveness of DOE-industry cost sharing. A 
similar effort to demonstrate the siting and plant licensing process 
would resolve many open questions and expedite business decisions to 
order new nuclear plants.
    Research will remain key to achieving these goals. The United 
States Government has a right to be proud of its long history 
supporting scientific research and development. A key part of U.S. 
success in the world economy is the result of technical advancements 
that were translated into commercial applications to advance our 
knowledge, standards of living, longevity, protection of the 
environment, and support democratic and free market principles around 
the world. For these reasons, we should always support research to 
advance technology and the human condition. In the case of nuclear 
electricity, advanced reactors, improved fuel designs, and operational 
enhancements all stem from research and development. Continuing this 
effort is one of the recommendations on future R&D by the President's 
Committee of Advisors on Science and Technology (PCAST).
    Our nation's research in nuclear energy has paid dividends in many 
categories for over four decades. Past research investment has improved 
safety, reliability, fuel and operational efficiency, and proliferation 
resistance at commercial electricity plants. Nuclear research also 
supports our weapons programs to promote national security, reduce 
nuclear proliferation, and improve waste management practices at 
defense nuclear sites. Advanced designs are needed in international 
markets, creating trade and technology transfer benefits for both the 
United States and emerging economies in need of safe, environmentally 
sound electricity production.
    But perhaps the largest dividend paid by nuclear research has been 
clean air. On an annual basis, generating electricity from nuclear 
reactors instead of alternative baseload sources prevents or avoids 
over 4 million tons of sulfur dioxide emissions, 2 million tons of 
nitrogen oxide emissions, 174 million tons of carbon (or 1 trillion 
pounds of carbon dioxide), particulate matter and mercury. This benefit 
cannot be duplicated or replaced. To maintain the contribution from 
this secure, emission-free source, developing advanced, standardized 
reactor designs for the immediate- and long-term must remain a key 
component of the energy/environmental policy of the United States over 
the next several decades. Research should not only continue, but 
expand.

Question 3. You have testified that U.S. policy originally envisioned 
recycling reactor fuel to separate out small volumes of waste, and that 
research continues on recycling fuel. Could you please describe the 
status of this research, when a program for recycling reactor fuel 
might be implemented, and how greatly a recycling program would reduce 
nuclear waste?
    Answer. President Bush's National Energy Policy proposes to 
reconsider the option to recycle nuclear fuel. In 1977, President Jimmy 
Carter effectively banned civil reprocessing indefinitely in the United 
States to discourage other countries from similar programs, but this 
policy failed. President Ronald Reagan lifted the ban on commercial 
reprocessing in 1981, but by that time, abundant uranium resources had 
been found, the cost of recycled fuel far exceeded the cost of new 
fuel, and projections of uranium demand were falling due to plant 
cancellations. World uranium supplies are currently estimated to last 
175 years without accounting for further exploration of anticipated 
reserves. However, growing electricity needs around the world, 
especially for cleaner fuel supplies, may lead to an increased rate of 
use for new fuel.
    Ensuring sustainable development--coupled with the need to conserve 
fossil alternatives, such as gas, that supply other industrial and 
residential applications--may requiring more use of recycled as well as 
new uranium fuel in the long-term. According to British Nuclear Fuels, 
Ltd, a recycling company in Britain, 97% of fuel can be recycled and 
each ton reused saves about 100,000 barrels of oil. Recycling could 
increase the energy extracted from nuclear fuel by factors of 10-100, 
while at the same time reducing the volume of residual wastes that 
would eventually have to be stored in geologic repositories.
    Two major areas of research are currently ongoing to improve the 
fuel recycling processes: electrometallurgical/pyroprocessing 
technology at Argonne National Laboratory, that would separate usable 
fuel material from wastes without producing weapons-usable plutonium; 
and transmutation of waste products to reduce residual radioactivity. 
Both are still in very preliminary stages of research.
    However, the potential advantages of fuel recycling must be 
balanced against the overall economics of the fuel cycle, and the 
safety, radioactive emission, and proliferation potential inherent in 
fuel recycling technology. NEI strongly believes that the commercial 
nuclear fuel cycle should not create an unacceptable future 
proliferation risk. Advanced recycling technology may improve upon the 
proliferation resistance of the once-through commercial nuclear fuel 
cycle and further reduce the potential for diversion of nuclear 
materials for non-peaceful purposes. Innovations and improvements 
developed in the United States can improve recycling processes in 
countries where recycled fuel is used. However, in both once-through or 
recycled fuel systems, a geologic repository will be needed to provide 
a safe storage and disposal facility as part of the nuclear waste 
management system.
    According to the Nuclear Energy Agency (NEA) in Paris, the concept 
of separation and transmutation of radioactive waste products should be 
explored and has the potential to contribute to the improved management 
of radioactive waste by reducing the proportion of long-lived isotopes 
it contains. Again, NEA is clear that it should not be considered as an 
alternative to deep geological disposal, and should not be presented as 
such. In addition, recycled materials will always create a certain 
amount of residue that can only be managed in a long-term repository. 
So irrespective of whether fuel recycling is pursued, geologic storage 
capability is always necessary.

Is the commercial industry prepared to deal with the security concerns 
surrounding the reprocessing of spent fuel?
    Answer. Fuel recycling would only occur in the United States when 
economical to do so for electricity ratepayers. If recycled fuel were 
to be used, all the facilities used in the recycling process would be 
scrutinized and licensed by the Nuclear Regulatory Commission with all 
necessary safeguards in place. Experience with fuel recycling in France 
and Great Britain has demonstrated that a safe and proliferation-
resistant system is both possible and successful.

Question 4. What levels of operations efficiency have been achieved by 
the nuclear industry to increase production at existing plants? How 
much more can be achieved?
    Answer. The 103 nuclear plants in the United States produced 755 
billion kilowatt hours in 2000, 20 percent of the nation's electricity. 
Since 1980, the capacity factor (or efficiency rate of plant 
utilization) has increased from 57 to 89.6 percent. Since 1990, the 
increased output at nuclear facilities has been the equivalent of 
building 22 additional 1000 megawatt plants with no significant adverse 
impacts to the environment (please see attached charts). This increase 
satisfied 22 percent of the growth in U.S. electricity demand over that 
time period.
    It is expected that anywhere from 10-12,000 additional megawatts of 
output are still available from existing plants through additional 
operation efficiencies and capacity uprates.

Question 5. One of the public's major concerns about nuclear energy is 
safety, especially after Three-Mile Island, Chernobyl, and recent 
problems at Japanese nuclear facilities. Could you briefly describe 
what safety precautions are taken by American nuclear reactor operators 
to ensure safety in the United States?
    Answer. Safety is ensured at nuclear power plants in the United 
States according to four interlocking steps:

          1. extensive government regulations have been established to 
        protect the public,

          2. nuclear plants are built according to designs that meet 
        the regulations,

          3. owners are required to operate the plants according to 
        approved specifications and abide by strict controls on 
        changing the designs, and

          4. regulators monitor operations and compliance with 
        regulations through resident inspectors stationed at every 
        site.

    Multiple redundant safety systems. Nuclear plants are designed 
according to a ``defense in depth'' philosophy that requires redundant, 
diverse, reliable safety systems. Two or more safety systems perform 
key functions independently, such that, if one fails, there is always 
another to back it up, providing continuous protection.
    Highly reliable automated safety systems. A nuclear plant has 
numerous built-in sensors to watch temperature, pressure, water level, 
and other indicators important to safety. The sensors are connected to 
control and protection systems that adjust or shut down the plant, 
immediately and automatically, when pre-set safety parameters are 
approached or breached.
    Physical barriers safely contain radiation and provide emergency 
protection. Beginning with the nuclear fuel itself, fuel pellets are 
ceramic, locking inside the radioactive byproducts of the fission 
reaction. Three physical barriers are engineered to provide formidable 
defense-in-depth against the uncontrolled release of radiation. First, 
the fuel pellets are sealed inside rods made of special metal designed 
to contain fission products. Next, the fuel rod assemblies are 
contained within a large, thick steel reactor vessel. Lastly, the 
reactor vessel and extensive safety and steam generation equipment are 
enclosed, in turn, in a massive, reinforced steel and concrete 
structure, the ``containment,'' whose walls are three to four feet 
thick. The containment ensures that the Chernobyl accident of 1986 a 
substantial radiation leak could not occur in the United States.
    Multiple controls on the chain reaction. Control rods present in 
the reactor are adjusted to regulate the reaction by absorbing 
neutrons. In addition, the water level inside the reactor also 
moderates the reaction. Water ordinarily facilitates the reaction, but 
the greater the reaction and the greater the heat produced, the more 
water is turned to steam, leaving less to promote the reaction. In this 
way, the reaction is automatically moderated. Moreover, if the water 
were ever lost, multiple emergency cooling systems would activate to 
make up the water loss and keep the reactor from overheating.
    Long-term maintenance for plant safety. Nuclear plant owners are 
continually implementing ``life cycle management,'' a long-term plan 
for maintaining the plant's systems, structures, and components in good 
working order. Preventive maintenance consists of routine, scheduled 
activities to keep a plant's safety as well as non-safety equipment 
running or capable of functioning if needed. With more than 35 years of 
experience, plant operators have learned how systems wear and can 
refurbish or replace the vast majority before they fail. Corrective 
maintenance is performed on equipment that fails routine testing, 
breaks down during operation, or does not perform adequately. When the 
operation of an important component degrades or fails, plant operators 
conduct detailed, root-cause analyses, take corrective action, and 
share the lessons learned with all other plant operators throughout the 
industry and with regulators.
    Plant fire protection receives special focus. Consistent with the 
``defense in depth'' safety philosophy, there are multiple approaches 
to fire protection at a nuclear plant. Prevention programs, such as 
administrative procedures, inspections, and employee training, ensure 
the safe control of combustible materials and ignition sources. 
Detection and suppression systems and trained personnel are ready to 
control and extinguish quickly any fire that might occur. Plant design, 
intended to minimize the effect of fires on essential functions, 
specifies some combination of combustible-free separation, fire 
barrier, and fire detection and suppression systems between one set of 
systems and its back-up set.
    Industry-wide personnel training program for safe plant operation. 
Through the Institute of Nuclear Power Operations (INPO), the nuclear 
energy industry maintains a comprehensive system of training and 
qualification for all key positions at nuclear power plants. Workers 
involved in operations, maintenance, and other technical areas undergo 
periodic training and assessment. INPO developed industry-wide training 
and qualification guidelines and established procedures and criteria 
for training program accreditation. The National Academy for Nuclear 
Training integrates and standardizes the training efforts of INPO and 
all U.S. nuclear plant owners and operators. Each plant training 
program must renew its accreditation every four years. In addition, the 
NRC routinely monitors plant training programs and administers initial 
licensing examinations for plant operators.
    Plant security protects against sabotage. Plant security resources 
and procedures are designed to prevent a hypothetical intrusion 
involving a paramilitary force armed with automatic weapons and 
explosives. Security measures include physical barriers and illuminated 
isolation zones; well-trained and well-equipped guards; surveillance 
and patrols of the perimeter fence; search of all entering vehicles and 
persons; intrusion detection aids, such as closed-circuit television 
and alarm devices; bullet-resisting barriers to critical areas; a 
contingency reaction force; coordinated emergency plans with off-site 
police, fire, and emergency management organizations; and regular 
drills and periodic procedural reviews. Employees undergo a variety of 
tests and record checks before obtaining various levels of security 
clearance, which is controlled by electronic key cards. Employees with 
unescorted access are subject to continual behavioral observation 
programs.
    Technical Specifications, which are part of the operating license, 
place limits on how long key portions of safety systems can be out of 
service before the plant must be shutdown. In addition, technical 
specifications also require extensive surveillance tests at specified 
intervals to ensure that key safety systems are capable of performing 
their intended safety functions.
    Reactor Oversight Process is an extensive performance monitoring 
program conducted by the NRC to ensure that licensees are performing to 
high standards of safety in seven key areas: minimizing initiating 
events, ensuring safety systems are capable of performing their 
function; ensuring the barriers to radionuclide release are maintained; 
establishing an effective emergency plan capability; controlling public 
radiation exposures from routine operations are maintained well within 
Federal standards; ensuring occupational radiation exposure is 
minimized and ensuring strict security measures are maintained. The 
baseline program includes approximately 2500 NRC inspection hours at 
each facility per year. The process considers the safety significance 
of identified performance issues and precipitates increased inspection 
activity based on the safety significance until the performance issue 
is corrected.




                                 ______
                                 
 Response to Written Questions Submitted by Hon. Ernest F. Hollings to 
                           William T. Miller

Question 1. What are the current limiting factors for producing 
hydrogen?
    Answer. Hydrogen production from fossil fuels is not an issue. 
Hydrogen for International Fuel Cells' (IFC) installed base of 220 
stationary 200 kW PC25TM fuel cell power plants is derived 
from hydrocarbon feedstocks such as natural gas, propane and methane by 
using proprietary fuel processing technology.
    For mobile fuel cell applications, IFC is working with the 
Department of Energy to develop fuel-processing capability onboard the 
automobile. This will enable vehicles to use pump grade gasoline in 
combination with fuel cells as a transition strategy until the 
necessary hydrogen infrastructure is in place.
    Ultimately, the most cost-effective and environmentally sound 
approach is to fuel the vehicle directly with hydrogen and avoid 
carrying fuel-processing capability onboard the vehicle. This would 
require introduction of on-site fuel processors with hydrogen storage 
and dispensing capability. IFC believes that transit buses and 
government and private fleet vehicles offer the strategic path for 
deployment of the necessary hydrogen infrastructure since these 
vehicles return to a central location each day.
    In the long term, to achieve the maximum environmental benefit of 
fuel cells, we need to develop technology that can produce hydrogen 
from renewable energy sources instead of fossil fuels for stationary 
and mobile fuel cell applications.

Question 2. Where could Congress direct our efforts to support 
increasing the supply of hydrogen?
    Answer. In general, Congress can help increase the supply of 
hydrogen by providing funding for hydrogen research programs that 
reduce fuel cell manufacturing costs and improve performance and 
efficiency. Funding for small fleet demonstrations is also necessary to 
document the operability, durability and viability of fuel cell powered 
vehicles.
    Hydrogen fleet vehicle demonstration and development programs in 
both the government (including the military) and private sector could 
also be used to stimulate the market for hydrogen through government 
procurement of fleet vehicles powered by hydrogen. In addition, there's 
an important role for Congress in helping to educate the public 
concerning the safe use of hydrogen and the development of necessary 
codes and technical standards.
    Legislation currently pending before the Senate addresses these 
needed programs. The Energy Independence Act of 2001 (S. 883) includes 
provisions that would create hydrogen fuel cell demonstration programs 
for commercial, residential and transportation applications including 
buses. In addition, S. 883 provides grants for state and local 
governments to deploy fuel cell technology and directs the federal 
purchase of fuel cells for stationary use and development of plans for 
deployment of fuel cells in federal vehicle fleets.
    The Hydrogen Future Act (S. 1053) also provides a roadmap for 
needed hydrogen research, development and demonstration initiatives. 
Section 9 of S. 1053 lays out a strategy for the establishment of 
hydrogen power parks that integrates the use of stationary and mobile 
fuel cells. Under this concept, hydrogen fueled fuel cell power plants 
would be installed and generate electricity until the market for 
hydrogen vehicles matures.
    In addition, Congress can provide incentives to the hydrogen 
producers as fuel cell vehicle deployment becomes imminent to encourage 
the expansion of hydrogen production capacity and retail distribution 
outlets.

Question 3. Is using hydrogen as a fuel source such a high-cost option 
that it will never make sense on a large-scale? Alternately, are 
current fuel sources ``good enough,'' especially when compared to other 
types of power production?
    Answer. Hydrogen is not a high cost fuel option. In recent 
analyses, conducted by a study team at Directed Technologies 
Incorporated, it was shown that for fuel cell vehicles hydrogen is the 
least cost fuel option when compared with gasoline and methanol. The 
cost of hydrogen use was calculated to be ``about 2.6 cents/mile.'' The 
study, sponsored by the U.S. Department of Energy and the Ford Motor 
Company, is reported in the ``International Journal of Hydrogen 
Energy'' 25 (2000) pages 551-567.
    The study also concluded that hydrogen is the preferred fuel in 
terms of:

          1) Least infrastructure cost per vehicle. Specifically the 
        authors note: ``Gasoline was projected to require the greatest 
        infrastructure cost in the form of relatively expensive and 
        complex onboard fuel processor systems that have a capacity 
        factor of less than 1%.''
          2) Greatest greenhouse gas reduction;
          3) Near elimination of oil consumption; and,
          4) Achieving a sustainable energy future for the 
        transportation sector since hydrogen can be produced from wind, 
        photovoltaic, solar thermal, hydroelectric, biomass or 
        municipal solid waste sources.
                                 ______
                                 
    Response to Written Questions Submitted by Hon. John McCain to 
                           William T. Miller

Question 1. You mentioned that fuel cell technology produces 60% more 
electricity per pound of carbon dioxide emitted than the average U.S. 
combustion based power-generating system. How does fuel cell technology 
compare to some of the other technologies discussed here today?
    Answer. Attached is a chart (Attachment A) that shows the 
comparison of fuel cells versus various technologies including the 
average U.S. fossil fuel plant, microturbines and combined cycle gas 
turbines. Nuclear, solar and wind technologies produce no carbon 
dioxide emissions, but are not applicable to the diverse applications 
that fuel cells can serve including distributed generation capability 
for residential and commercial power requirements as well as powering 
cars, trucks and buses. In addition, fuel cells can operate regardless 
of time of day or weather conditions and have no significant hazardous 
disposal issues. In fact, fuel cells can compliment wind, solar and 
nuclear technologies through a hydrogen storage mechanism.

Question 2. What is the most limiting barrier to the widespread 
commercialization of fuel cells? Are there regulatory barriers which 
the government can address?
    Answer. The cost of fuel cells has been one of the greatest 
impediments to their commercial use. However, the costs have been 
reduced dramatically in the past two decades. The space shuttle fuel 
cells, developed in the late 1970s by International Fuel Cells (IFC), 
cost roughly $600,000 per kW. IFC's PC25 commercial stationary unit, 
which was developed in the early 1990s, has an installed cost today of 
$4,500 per kilowatt.
    IFC and other fuel cell companies are now developing new fuel cells 
that are smaller, lighter and cheaper to produce. This new technology, 
along with higher production volume, should help reduce the cost of 
fuel cell power plants by two-thirds by 2003, from $4,500 a kilowatt to 
$1,500. Legislation proposed in the 107th Congress (S. 828/H.R. 1275) 
to provide a $1,000 per kilowatt tax credit for stationary fuel cells 
is a critical strategy for helping to reduce costs and thereby increase 
volume which will accelerate the commercialization of fuel cell 
technology.
    In addition there are a number of regulatory barriers faced by fuel 
cells as a distributed generation technology that need to be overcome. 
IFC recommends that the federal government:

   Adopt a common technical standard for interconnection of 
        small power generation devices to the U.S. utility system based 
        on the Institute for Electrical and Electronic Engineers' 
        (IEEE) 1547 recommendation.

   Establish streamlined procedures and appropriate exemptions 
        for smaller sized fuel cell units.

   Minimize the competitive impact of exit fees and stand-by 
        charges.

   Standardize user fees for Independent Power Producers (IPPS) 
        in the same geographic region.

   Require states to ensure that the ``buy'' and ``sell'' rates 
        of power are the same for any given time of day or year.

Question 3. You have highlighted a number of examples of research to 
put fuel cell technology into cars, such as the IFC/Hyundai Santa Fe 
vehicle. When do you believe that fuel cell technology will be ready 
for widespread use in automobiles? What will be the added cost to 
consumers of buying cars with fuel cell technology?
    Answer. We believe fuel cells will be widely available for personal 
automobiles by the end of the decade.
    The ultimate goal is to ensure that consumers see no initial 
purchase price or operating characteristic differences between the cars 
they operate today and fuel cell powered vehicles. In order to achieve 
this goal, the fuel cell power plant must cost less than $50 per 
kilowatt. The achievement of this goal is the challenge we face.
                                 ______
                                 
  Response to Written Questions Submitted by Hon. Olympia J. Snowe to 
                           William T. Miller

Question 1. Other than cost, what barriers must fuel cells overcome to 
increase their usage?
    Answer. In addition to the cost barriers, there are a number of 
regulatory challenges faced by fuel cells as a distributed generation 
technology that need to be overcome. IFC recommends that the federal 
government:

   Adopt a common technical standard for interconnection of 
        small power generation devices to the U.S. utility system based 
        on the Institute for Electrical and Electronic Engineers' 
        (IEEE) 1547 recommendation.

   Establish streamlined procedures and appropriate exemptions 
        for smaller sized fuel cell units.

   Minimize the competitive impact of exit fees and stand-by 
        charges.

   Standardize user fees for Independent Power Producers (IPPS) 
        in the same geographic region.

   Require states to ensure that the ``buy'' and ``sell'' rates 
        of power are the same for any given time of day or year.

Question 2. Besides a tax credit, what other methods would you 
recommend to provide economic incentives for fuel cell use?
    Answer. IFC supports enactment of a five-year $1,000 per kilowatt 
tax credit up to one third of the cost of the equipment for stationary 
fuel cells. (See Attachments B and C for details.) This will enable 
homeowners and business property owners to invest in the technology, 
increase volumes and bring costs down to accelerate the 
commercialization of fuel cell technology. In addition, financial 
incentives are needed for non-tax paying entities such as federal and 
municipal government facilities, schools and non-profit organizations. 
IFC supports continuation and expansion of the existing DOD/DOE fuel 
cell buydown grant program for public sector and non-profit 
organization investment in fuel cell technology as outlined in 
Attachment D. An $18 million FY 2002 DOD appropriation is being sought 
for this initiative as indicated in the attachment.

                                                       Attachment A




                                                       Attachment B
 Why Should Congress and the Administration Support a Stationary Fuel 
                            Cell Tax Credit?
Overview
    A fuel cell is a device that uses any hydrogen-rich fuel to 
generate electricity and thermal energy through an electrochemical 
process at high efficiency and near zero emissions. Fuel cell 
developers, component suppliers, utilities and other parties with an 
interest in clean distributed generation technology are working 
together to enact tax credit legislation that will accelerate 
commercialization of a wide range of fuel cell technologies.

Credit Description
    The $1000 per kilowatt credit will be applicable for purchasers of 
all types and sizes of stationary fuel cell systems. It will be 
available for five years, January 1, 2002-December 31, 2006, at which 
point fuel cell manufacturers should be able to produce a product at 
market entry cost. The credit does not specify input fuels, 
applications or system sizes so a diverse group of customers can take 
short-term advantage of the credit to deploy a wide range of fuel cell 
equipment.
Why is a fuel cell tax credit necessary?
   A credit will allow access to fuel cells by more customers 
        NOW when there is a grave need for reliable power in many parts 
        of the country.

   A credit will speed market introduction of fuel cell 
        systems.

   A credit will create an incentive for prospective customers, 
        thus increasing volume and reducing manufacturing costs. As 
        with any new technology, price per unit decreases as volume of 
        production increases.

   A credit will speed the development of a manufacturing base 
        of component and sub-system suppliers.

Benefits of Speeding Market Introduction through Tax Legislation
   Because fuel cell systems operate without combustion, they 
        are one of the cleanest means of generating electricity.

   While energy efficiency varies among the different fuel cell 
        technologies, fuel cells are one of the most energy efficient 
        means of converting fossil and renewable fuels into electricity 
        developed to date.

   Fuel cell systems can provide very reliable, uninterruptible 
        power. For example, fuel cells in an integrated power supply 
        system can deliver ``six nines'' or 99.9999% reliability. Thus 
        fuel cells are very attractive for applications that are highly 
        sensitive to power grid transmission problems such as 
        distortions or power interruptions.

   As a distributed generation technology, fuel cells address 
        the immediate need for secure and adequate energy supplies, 
        while reducing grid demand and increasing grid flexibility.

   Installation of fuel cell systems provides consumer choice 
        in fuel selection and permits siting in remote locations that 
        are ``off grid.''

   Fuel cell systems can be used by electric utilities to fill 
        load pockets when and where new large-scale power plants are 
        impractical or cannot be sited.

   Fuel cell systems, as a distributed generation resource, 
        avoid costly and environmentally problematic installation of 
        transmission and distribution systems.

Cost
    The five-year budgetary impact of the credit is less than $500 
million.

                                                       Attachment C
   Key Elements of a Fuel Cell Tax Credit for Stationary Applications

Overview
    The goal of the stationary fuel cell tax credit is to create an 
incentive for the purchase of fuel cells for residential and commercial 
use. The prompt deployment of such equipment will generate 
environmental benefits, provide a reliable source of power for 
homeowners and businesses, reduce our nation's dependence on foreign 
oil supplies, help commercialize clean technology, enhance U.S. 
technology leadership and create economic benefits for the nation.
    Fuel cell tax credit proposals should be designed to benefit a wide 
range of potential fuel cell customers and manufacturers. They should 
therefore be all-inclusive without discriminating between different 
kilowatt sized units, type of technology, application, fuel source or 
other criteria. Efforts should be made to keep the proposals as simple 
as possible to aid in effective implementation. In addition, the 
proposals should strike a balance between ensuring the level of tax 
credit provided represents a meaningful incentive that will stimulate 
purchase and deployment of the technology while minimizing the 
budgetary impact.
    The following are specific elements suggested for consideration and 
inclusion:

Coverage
    U.S. business and residential taxpayers that purchase fuel cell 
systems for stationary commercial and residential applications should 
be eligible for the credit.

Basis for credit
    The credit should be based on a ``per kilowatt'' approach with no 
distinction made for the size of unit.

Access to credit
    No allocation of credit should be made to specific categories of 
fuel cells on an annual or total basis.

Fuel Source
    No premium or penalty should be imposed based on the fuel source.

Definition of stationary fuel cell power plant
    The term `fuel cell power plant' should be defined as ``an 
integrated system comprised of a fuel cell stack assembly, and 
associated balance of plant components that converts a fuel into 
electricity using electrochemical means.''

Co-generation
    No co-generation requirement should be imposed since not all fuel 
cell technologies offer an effective option for co-generation.

Efficiency
    No efficiency criteria should be imposed. Fuel cell systems in the 
early stages of development, such as residential sized units, cannot 
predict the efficiency level at this time. Establishing arbitrary 
efficiency criteria could exclude early models for this important 
application, which are exactly the units that require incentives. 
Efficiency levels will vary based on whether proton exchange membrane, 
phosphoric acid, solid oxide or molten carbonate fuel cell technology 
is used. Designing fuel cell systems to maximize efficiency may require 
tradeoffs resulting in more complicated, higher cost, less fuel 
flexible and less durable units.

Floor/ceiling
    No minimum or maximum kilowatt size criteria should be imposed.

Amount of Credit
    $1,000 per kW for all qualifying fuel cell power plants. A five-
year program with a $500 million budgetary impact is proposed.

Duration
    1/1/02-12/31/06.

                                                       Attachment D

               The Stationary Fuel Cell Incentive Program

Background
    The Departments of Defense (DoD) and Energy (DOE) have 
cooperatively supported the development and commercialization of 
domestic stationary fuel cell systems since 1996. In 1995 Congress 
appropriated funds for the DoD Office of the Assistant Secretary for 
Economic Security for a competitive, cost-shared, near-term Climate 
Change Fuel Cell Program (H.R. 103-747).
    The Program grants funds to fuel cell power plant buyers to reduce 
the high initial cost of early production systems, providing up to 
$1,000 per kilowatt of power plant capacity not to exceed one-third of 
total program costs, inclusive of capital cost, installation and pre-
commercial operation. For the program's six years, the grant program 
significantly aided commercialization of the first generation of fuel 
cell systems as intended by the Congress.

Benefits of the Program
    The fuel cell grant program has expedited market introduction of 
early fuel cell systems. Production quantities are low and first time 
costs (e.g. engineering, manufacturing facilities, tooling) are high, 
yielding high early unit capital costs. The grant program has 
facilitated an increase in manufacturing quantities thereby reducing 
unit cost and enabling early adopters to participate in demonstrations 
and field trials. Lastly, federal participation in fuel cell 
demonstrations and field trials has encouraged, in some cases, 
supplemental support from state agencies or electric utilities, further 
reducing costs. In virtually all cases, fuel cell projects would not be 
possible without the grant program support.

Requested Action
    $18 million in FY 2002 funding is being sought for the fuel cell 
grant program at $1,000 per kW capacity. This level of funding is 
needed to support the growing number of fuel cell technologies and 
manufacturers that are bringing new fuel cell products to market. The 
criteria used to select applications for a program grant should be 
identical to that used in the last year of the program's operation.
    The key criteria include, but are not limited to: demonstration by 
applicant of a commitment to purchase and use fuel cell power plants 
with a rated capacity of at least 1 kW; power plants purchased before 
September, 2000 are not eligible; grants awarded consistent with the 
amount of funding available; applicants must comply with all National 
Environmental Policy Act and other applicable regulatory requirements; 
signed contract within 60 calendar days of being notified of award 
required; first payment to applicant (70%) made after applicant submits 
a signed factory or site acceptance test form; second payment (30%) 
dispersed after receipt of acceptable report covering a year of fuel 
cell operation; applicants cannot be fuel cell vendors, manufacturers 
or developers; priority given to projects using DoD installations; all 
fuel cell technologies are eligible; no restrictions on fuel type; 
applicant's fuel cell vendor must offer commercial warranty for one 
calendar year of operation; and, it is desirable to select for award a 
group of projects representing diverse sizes, applications, fuels and 
locations.
Anticipated Program Benefits
    Presently there are several fuel cell technologies completing 
advanced development and nearing commercial readiness. Over a dozen 
U.S. fuel cell manufacturers will field products that qualify for 
program grants. The fuel cell grant program has enjoyed bipartisan 
Congressional support for many years. Continuation of this initiative 
will benefit the nation by accelerating deployment of environmentally 
benign, reliable, distributed generation technologies to provide needed 
new electricity capacity.

                                 ______
                                 
    Response to Written Questions Submitted by Hon. John McCain to 
                         Dr. Richard L. Sandor

Question 1. You mentioned that the Chicago Climate Exchange will focus 
on downstream sources of carbon dioxide emissions. How does this 
approach compare with other trading systems?
    Answer. Various market architecture design options were considered 
in our research study. A market could include emission limits taken by 
fossil fuel producers and processors--the ``upstream'' entities in the 
carbon emissions cycle--or by major ``downstream'' sources that burn 
fossil fuels, such as electric power generators, factories, and 
transport firms. An ``intermediary'' level approach could focus on 
firms that produce energy consuming devices, such as automobiles, or 
other intermediaries such as fuel distributors. Based on responsiveness 
(the ability of participants to directly cut emissions), administrative 
costs and existence of successful precedents, the recommended approach 
is a predominantly ``downstream'' approach. Accordingly, the research 
findings suggest the CCX should aim to include participation by large 
emission sources at the downstream level (e.g. power plants, 
refineries, factories, vehicle fleets).

Question 2. Can you discuss some the non compliance penalties for the 
participants in your exchange?
    Answer. We are discussing with this issue with the participating 
companies. While we believe it will be critically important to 
establish clear consequences if a participating company does meet its 
commitments, the nature of a pilot market allows us to consider a 
variety of options.

Question 3. How important are mandatory emissions reductions to the 
future of the Chicago Climate Exchange?
    Answer. The effectiveness of the market, and realization of its 
environmental objectives, depends critically on the voluntary 
acceptance of specified emission reduction objectives. Action by a 
government authority to mandate reductions is not necessary for the 
Chicago Climate Exchange to realize its objectives.

Question 4. You have mentioned the need for a registry and best 
practices for measuring and calculating emissions. Can a government 
support registry and standardized methods for measuring and reporting 
emissions help both your trading exchange and others like it?
    Answer. Yes, both these sorts of efforts can help.

Question 5. In order to join the Chicago Climate Exchange, a company 
must meet requirements to cut its 1999 levels. Have any members of the 
Chicago Climate Exchange expressed concerns that reductions in 
emissions might hurt the economic well-being of the companies, or lead 
to reduced profits and unemployed workers?
    Answer. No, we have not heard these concerns voiced in discussions 
with industry.

Question 6. The Chicago Climate Exchange program will exist until 2005. 
What will your plans be after it has ended? Do you intend to extend or 
enlarge the program?
    Answer. We expect to enlarge the program over time, and, at this 
time, we would expect to extend the program past the 2005 timeframe. 
Enlargement to allow participation throughout the NAFTA region (U.S., 
Canada and Mexico), and to allow offsets from mitigation projects in 
additional developing countries, is anticipated.

Question 7. One important aspect of the Chicago Climate Exchange is its 
emissions registry. Could you briefly explain how it will work, and how 
that you will ensure that companies comply with it?
    Answer. The registry records holdings and transfers of emission 
allowances and offsets, and these data will be matched with emissions 
data that are reported by the participants. Like all aspects of the 
Chicago Climate Exchange, we intend for the program to govern itself in 
a manner analogous to the various existing self-regulatory 
organizations (SROs) such as commodity futures exchanges. This 
mechanism would provide procedures for addressing instances when 
members fail to meet the commitments taken upon becoming a member.

                                 ______
                                 
Prepared Statement of William C. Coleman, President and Chief Executive 
                Officer, Hancock Natural Resource Group
 Key Principles for Carbon Sequestration Component of a U.S. National 
                 Climate Change Action Registry Design

A. General Points
          1. The registry should create confidence in the business 
        community that any legally registered credits will apply 
        against any subsequent national regulation of carbon dioxide 
        emissions
          2. The registry should create a standardized definition and 
        measures for ensuring that all tons of carbon dioxide whether 
        from sequestration, certified reductions or other offsets are 
        treating as equal and exchangeable.
          3. The registry should be voluntary, but should create limits 
        on what types offsets and credits will be included in the 
        registry.
          4. For carbon sequestration, the concepts of additionality, 
        permanence and leakage should be addressed.

B. Specific Points
          1. Modular design, with standards established for each 
        module. For Sinks the modules could be:

                  i. Reforestation
                  ii. Agricultural soil sequestration
                  iii. Extending carbon sequestration in existing 
                forests
                  iv. Conservation of forests with documented threats 
                of deforestation

          2. Each form of offset should have sufficient rigour in its 
        definition, baseline, measurement accuracy, inventory control, 
        and verification to be fungible. In other words a tonne of any 
        form of sequestration must meet a threshold which makes it the 
        same as any other tonne.
          3. Addresses permanence by linkage of credits to pools or 
        entities that can demonstrate the rights or ownership of carbon 
        in the areas having been used as the basis for registration. 
        This means that an entity who wishes to produce carbon credits 
        from forests, must have some demonstration of unique ownership, 
        and carries the ongoing responsibility for those credits. While 
        the total stock of carbon can vary from place to place the sum 
        of the carbon stocks, minus any baseline stocks, must be 
        protected or offsets purchased.
          4. Addresses sustainable development by having the 
        endorsement of the government in the country where the project 
        is located.
          5. Addresses additionality as follows:

                  i. For reforestation, must provide air photos to 
                demonstrate that the area was cleared land, under non-
                forest land use before reforestation
                  ii. For agricultural soil sequestration, must 
                demonstrate statistically the soil carbon content to a 
                depth of 1 m. Credits are provided only for 
                statistically demonstrated increases.
                  iii. For existing forests, must identify the land 
                area concerned and present a statistically robust 
                estimate of carbon stocks.
                  iv. For conserving forests threatened by 
                deforestation, this must be substantially documented, 
                independently reviewed on a case by case basis, 
                endorsed by the national and/or sub-national government 
                authorities and then protected. In these areas, the 
                issue of leakage must be specifically addressed. If 
                ever in the future the forests are cleared or otherwise 
                impacted these credits must be fully bought out of the 
                system. These forests are the most difficult to 
                integrate into the system, as they are based on some 
                intangible decisions. These forests must also address 
                the issue of leakage, where protecting one area simply 
                leads to accelerated deforestation elsewhere.

          6. Baseline year: This should be 1990, or point of project 
        commencement. Where land use change is occurring, the year 1990 
        should be used to prevent clearing and reforesting of forest 
        being eligible for crediting
          7. Definition of product. A standard based on an 
        Environmental Management System or Total Quality Management 
        System can be used for each form of sequestration credit. These 
        systems require documentation of policies, planning, inventory, 
        modelling, continuous improvement systems, etc. They can be the 
        basis of verification and auditing of carbon stocks.
          8. The product is a tonne of sequestration, vintaged by the 
        year in which it is activated, and serialized. The tonnes are 
        certified by the registry based on independent verification of 
        the estimates by accredited third parties.
          9. The registry must list serial numbers of tonnes, by 
        vintage years, and additionally indicate the land base 
        associated with those tonnes. It should encourage pooling, by 
        also ensure that the linkage between which tonnes link to which 
        land pool is clear. It should also provide for extinguishment 
        of the tonnes in emissions trading, `green product' promotions, 
        or other purposes.
          10. The governance of the system should be based on a 
        steering committee of government, business, academics and 
        conservation movement specialists in this area. The steering 
        committee would endorse the standards for each module, would 
        accredit verifiers, would accredit carbon pool managers, would 
        oversee registry operations, would resolve disputes, and would 
        approve policies for ongoing auditing of the carbon stocks in 
        the registry. The steering committee could be appointed by the 
        Secretary of Commerce or another government figure.
          11. Ultimately the register should include both emissions and 
        all forms of offsets in a fully fungible system that would 
        underpin regulation and/or trading.
          12. Entities placing offsets into the registry, must also be 
        accredited by the steering committee. The key criteria would be 
        expertise, systems, financial solvency, and good character.
          13. In the event that a carbon pool manager became bankrupt, 
        the registry would immediately take control of the carbon 
        rights associated with the pool.
          14. The ultimate accountability for the carbon stocks and the 
        credits is with the carbon pool manager. Any decision by the 
        steering committee, subject to appeal, can require the carbon 
        pool manager to make good on carbon stock shortfalls, or 
        provide additional documentation or reverification of the 
        carbon stocks at any time.
          15. The steering committee, subject to government approval, 
        may also enter into bi-lateral arrangements with carbon pools 
        in other countries or with international carbon pools, assuming 
        accounting, verification, documentation and third party 
        government endorsement.
          16. In the event that the government changes rules or 
        standards in a way that impacts negatively on the carbon pool 
        managers, compensation will be payable.
          17. The operation of the registry will be funded by 
        government for a five year trial period, and then the registry 
        will fund its own operations by a fee for registration of new 
        credits.
                                 ______
                                 
             Prepared Statement of The Pacific Forest Trust

    The Pacific Forest Trust (PFT) commends Chairman Hollings and the 
members of the Commerce, Science and Transportation Committee for 
addressing the extremely important topic of climate change and policy 
options to address this growing problem. A variety of actions may be 
taken to ameliorate global warming, and PFT believes that U.S. forests 
can and should play a role in this process, as their management and 
loss contribute to the problem. An effective way that forests may 
contribute to the solution is in the context of a carbon market.
    PFT is a problem-solving nonprofit organization dedicated to the 
nationwide preservation of privately owned productive forestlands 
through, among other things, the use of market-based conservation 
incentives. We collaborate with forest landowners, forest managers, 
policymakers and the public to ensure that private, working \1\ forests 
are preserved and sustained for all the values that they provide. We 
support and recommend the establishment of a carbon trading market that 
includes the forestry sector. Such a market would reward forest 
landowners for the climate service that their forests provide and 
encourage owners to keep their forests as forests.
---------------------------------------------------------------------------
    \1\ Working forests are those that undergo harvest and 
regeneration.
---------------------------------------------------------------------------
Background
    Between 1982 and 1997, the United States lost over 21.5 million 
acres of private forestlands to other uses. In California alone, over 
60,000 acres of forestland were lost annually to non-forest uses 
between 1992 and 1997. During the same timeframe, Georgia lost almost 
60,000 acres of private forestland annually. Similar statistics are 
reflected among privately owned forestland in the most productive 
timber areas of the United States. While approximately 22 million acres 
of forestland have been replanted, these forests are much younger than 
the forestland being lost, and have negative or lower carbon stocks 
than the forests which were lost.
    Over the years, the average age of working forestlands has also 
become increasingly younger. In large part, this decline in age is due 
to the increasing need to generate economic returns on shorter and 
shorter harvest and regeneration cycles. For example, in the Pacific 
Northwest, the average age of harvest of commercial species has 
declined from 80 to 40 years and less.
    These trends of permanent forest loss and declining forest age 
signify that the forestlands of the U.S. are a declining carbon sink 
and contribute significantly to the release of carbon dioxide into the 
atmosphere. Therefore, they are also contributing to global warming, as 
carbon dioxide is a greenhouse gas. Forests absorb carbon dioxide from 
the atmosphere and store it as carbon in their biomass. When forests 
are converted to other uses, the carbon stored in the forest biomass, 
is released into the atmosphere both immediately and over time. Thus, 
the growing loss of private forestland means that declining amounts of 
carbon are being stored on the ground and significant amounts of carbon 
are being released into the atmosphere. Even carbon stores in wood 
products are released over time through decay at an average rate of 2% 
annually. Likewise, the declining average age of harvest rotations 
means that less carbon is being stored in forests than in the past, as 
older forests store more carbon than younger forests. While younger 
forests may, on average, grow at faster rates than older forests, older 
forests have greater stocks, storing more carbon per acre than younger 
ones.

The Benefits of a Forest Carbon Market in the United States
    The establishment of a forest carbon market would create the 
private financial incentive to conserve forests and prevent carbon 
loss. A carbon market, whether voluntary or established through 
regulation, would monetize the carbon stored in forest biomass, as 
other carbon dioxide emission sectors would seek to meet their emission 
reduction goals through the purchase of emission offsets or carbon 
``credits'' from entities that are able to provide these credits. 
Private forest landowners can accommodate buyers by selling their 
forest carbon stores as credits to buyers and maintaining these forest 
carbon stores over time. This will ensure forest conservation and 
stewardship. The added carbon value to forestland thus creates a new 
forest economy.
    The inclusion of the forestry sector in a carbon trading market 
must be done with the right rules, so that real positive impacts are 
achieved in the atmosphere and on the ground. To ensure the quality of 
``credits'' derived from such actions, a standardized carbon accounting 
system must be adopted. Such ``generally accepted accounting 
principles,'' similar to GAAP used by American business, should use 
annual debits and credits and adjust appropriately for risk. The 
establishment of broadly accepted rules governing the accounting system 
will also help ensure that credits developed in the U.S. will be 
accepted in other carbon markets. Such rules should include the 
following:

   Additionality: Carbon sequestration gains must be additional 
        to those that would have accrued from conventional, or 
        ``business-as-usual'' forest management. This assures net gains 
        in forest carbon stores.

   Permanence: To earn credits in the carbon accounting system, 
        forests must be managed for the permanent sequestration of 
        carbon. This ensures that tons stored today are not released 
        again and that forest loss is not simply delayed for a time.

   Verifiability: The forest carbon accounting system must be 
        accurate and must ensure timely third-party verification of 
        forest carbon gains and losses. Without this, carbon credits 
        will lack credibility.

   Co-benefits: Forest carbon projects must avoid environmental 
        harm and result in environmental and social co-benefits, such 
        as habitat restoration, biodiversity enhancement, watershed 
        protection and sustainable timber economies. Natural forest 
        management achieves these co-benefits and should be credited, 
        as should reforestation of previously cleared forest areas. On 
        the other hand, since the conversion of non-forest native 
        ecosystems, i.e., wetlands or grasslands, to forest plantations 
        results in loss of other critical environmental values, this 
        activity should not be eligible for credit.

    While there has been a growing awareness of the role that forests 
in the tropics may play in forest carbon transactions, it should be 
emphasized that such transactions are very feasible in the United 
States. In fact domestic transactions offer greater security as there 
is generally more scientific and legal certainty in the United States 
than there is abroad.
    PFT's recent sale of forest carbon credits to the Green Mountain 
Energy Company is an illustration of a cost-effective and 
scientifically credible forest carbon transaction in the U.S. Last 
fall, Green Mountain purchased carbon credits secured by PFT's 
forestland conservation easements so that they could offset half of 
their annual operational carbon dioxide emissions. These credits are 
the result of forest management practices that exceed business as usual 
practices (i.e. federal state and local land use laws and regulations) 
and thus, achieve real results in the atmosphere and on the ground. 
These credits are also permanent, as they represent the permanent 
storage of additional forest carbon, secured legally by a perpetual 
conservation easement.
    PFT acts as a third party verifier, as we monitor the forestland 
easements to ensure that landowners comply with the easement terms and 
forest carbon stores are additional and permanent. Our monitoring of 
the easement is based on sound science and reassures Green Mountain of 
the credibility of their emissions reductions.
    A forest carbon market would not only create a new forest economy, 
but it would also achieve multiple conservation co-benefits. As more 
forest is preserved and grows older, forest biodiversity is enhanced--
making forests more resilient. In addition, older preserved forests 
provide habitat for endangered species and enhance water quality. 
Forest landowners would be encouraged to provide these additional 
conservation benefits if they received an economic benefit in return, 
and a carbon market can provide such dividends.
    Thank you for the opportunity to submit this testimony, and we hope 
to continue informing this process so that the benefits of a forest 
carbon market may be realized.