DLC: Domestic Emissions Trading of Greenhouse Gas Credits

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How a Domestic Greenhouse Gas Emissions Trading Market Could Work in Practice

	Energy & Environment
		Climate Change

PPI | Transcript | March 3, 2000
Domestic Emissions Trading of Greenhouse Gas Credits
A Progressive Policy Institute Roundtable Discussion

Agenda

I. Welcome and Introduction
Debra Knopman, PPI Center for Innovation and the Environment

II. Opening Remarks
Senator Joseph Lieberman (D-CT)

III. Presentations by Panelists
Dan Lashof, Natural Resources Defense Council
Joe Goffman, Environmental Defense
John Palmisano, Enron Corporation
Jon Naimon, Light Green Advisors
Ray Kopp, Resources for the Future
Sue Gander, Center for Clean Air Policy

IV. Discussion

V. Wrap Up and Adjourn

MS. KNOPMAN: We'd like to get this morning's event started. We thank everybody for coming here. We have a full program, and I just want to make sure that not only will you hear the speakers make their brief presentations, but you'll also have a chance to ask some questions.

I'm going to immediately turn over the podium to Senator Joe Lieberman, a man who needs no introduction.

SENATOR JOSEPH LIEBERMAN [D-CN]: Well, thank you for that lovely introduction. [Laughter.]

Thanks, Debra. I'm delighted to be here. I'm wearing not only my senatorial hat, but my hat as chair of the Democratic Leadership Council and, of course, the Progressive Policy Institute. I'm particularly proud of the work that you, Debra, and the Center for Innovation and the Environment at PPI are doing.

There was an article, I guess in the Post, earlier this week or last week about Vice President Gore, and there was a line in it that really troubled me. It said that some people were arguing with him that he should not be talking too much about his lifelong commitment to the environment because it might upset some New Democrats, or it wasn't consistent with the New Democratic approach, which is outrageously wrong, because New Democrats have consistently, and of course the Center is an example and Debra's work, been committed to environmental protection and to finding new methods to achieve our traditional goals that could bring a consensus together and could create progress.

Actually, we always talk about the three core New Democratic values of opportunity, responsibility and community. And environmental protection generally, and particularly the question of climate change, certainly involves responsibility and community. That is, we all have the opportunity for the individual and the governments to live, to do business, et cetera, et cetera. But we also have a responsibility to act in a way that doesn't do damage to the community, both present and future. So I think our commitment here and our record are strong. And I think this morning is an important indication of that.

On the question of global climate change, global warming, sadly up to this point the political discussion has consisted primarily of, you guessed it, hot air. Too often I think we've been sidetracked by bogus claims from climate change deniers who simply refuse to accept what seems to me to be increasingly conclusive scientific evidence. And too often we've been caught up "knocking down" wild predictions about the economic implications of the Kyoto Protocol for the United States. As a result, we've made very, very little progress in honoring our commitments to counteract this global threat.

Under the terms of the framework convention on climate change, which has been ratified by the United States and 179 other countries, we pledged to stabilize greenhouse gas emissions at 1990 levels in this year, 2000. And today the reality is that we are far from reaching that goal. Experts are projecting that we will be roughly 70% above those levels at the end of this year. In fact, one could argue that we're actually going backward on this problem. Not only have we done little to encourage American companies to reduce their emissions, but Congress has actually been busy adding legislative, statutory roadblocks. On more than one occasion, there have been efforts to attach riders to appropriation bills that would actually prohibit our negotiators and agencies from engaging in diplomatic efforts, in some cases even fact-finding efforts to ensure a cost-effective solution to the problem of global warming.

There's a real need to regain our focus here as policymakers, legislators, business people, or just plain interested citizens. It's time, I think, to turn our attention to the difficult details about how best to craft our domestic response to global warming. One piece of that agenda should be investing in improved energy efficiency and providing tax incentives to advance cleaner technologies. And there are parts of that in the president's budget. And I think in light of the escalating price of energy, we may actually have a chance to do something on that in this budgetary year.

But the much harder work will need to go into the development of a fair, comprehensive, national emissions reduction program. And I think there's an opportunity here this morning to begin, I'd like to say continue, but really I think in some senses begin a constructive dialogue, once again, on that challenge. I'm here, like most of you, to learn. I'm going to stay, as long as my schedule allows me to, to listen.

But I do want to offer just a few observations on the matter of costs here, since concerns about the economic impact of what we do to deal with global warming will and naturally should be a priority concern of any discussion of domestic action. And we have to recognize here, those of us who support action, that compliance will not be cheap. But we also have to recognize and argue, I think, that there are serious, substantial costs to inaction and noncompliance. And one is the cost of creating a kind of regulatory, statutory limbo for businesses.

Senator Chafee and I, a dear late colleague, offered legislation last year, as I guess most of you know, that tried to reduce that uncertainty by creating a system of credits for early voluntary action. And that uncertainty, I think, makes it hard for companies to time and prioritize their investments here.

Another cost can be expressed, of course, in human terms. The impact of global climate change is very real in dollars lost to sea level rise and the economic consequences of that, to changing patterns of insect-borne diseases, the human and economic consequences of that, the drought and other extreme weather experiences that will come with global warming. Any time we evaluate how much society can or should bear under any given program that addresses climate change, we can't lose sight of what we lose by doing nothing.

I'd also like to point out that while Congress bickers at the edge of this issue and does nothing, there are encouraging signs of more substantive and consequential approaches to the problem elsewhere. In fact, many companies and, indeed, other countries are already gaining on-the-ground experience with the specific notion of emissions trading. Companies such as Intel and Johnson & Johnson have developed some very interesting and progressive internal emissions trading programs through which they will submit their reductions to outside auditors to ensure that the emission reductions are real and that they are verifiable. BP-Amoco, Royal Dutch Shell, and DuPont have agreed to reach emission reductions targets across all of their international facilities through similar trading programs. Companies such as Zahren Alternative Power and Tokyo Electric Power Company already engage in carbon emissions trades with Canada and Australia. And countries such as Canada and Slovakia are putting forward their own domestic emissions trading proposals. These are very substantial and encouraging steps forward outside of the U.S., and some in the private sector within the U.S.

And they indicate, I think, that the pertinent question here is not whether international emissions trading will become a reality, but how we, in the U.S., can position ourselves to gain the most from it and to be part of it. If we keep on the current track, it seems to me that the train is going to leave the station without us on it.

Finally, I just wanted to say a word about how U.S. emissions trading relates to what the rest of the world is doing. When the Kyoto Protocol was negotiated, and a bunch of us here were there and remember it well, and they were tough negotiations, the American delegation secured a number of important victories. The inclusion of international emissions trading as a core component of the protocol was among them. This was an American idea, and it was hard fought for in the face of strong opposition from other countries. Negotiators have continued to work on developing the so-called flexibility mechanisms in more detail in preparation for the next conference of parties this November by engaging in a vigorous national dialogue about our domestic strategy for reducing greenhouse gas emissions. We in the U.S. will be better positioned to ensure that the final treaty not only achieves a reduction of greenhouse gas emissions, but complements our own national interests.

Now, we all know that these are very complicated issues; they're not simple. They're not simple scientifically or politically. And we need to get them right. The people assembled here this morning are not only extremely informed and able, but they are brave enough to tackle some of the most challenging questions we need to face, such as how do we ensure that there are comprehensive, equitable reductions of greenhouse gases throughout the economy and across the nation? How do we make the system workable, effective and fair? How do we begin to ramp down our own emissions, our domestic emissions in a way that doesn't shock our economy as dramatically as some of our critics foretell? And what can we learn from our experience in other trading programs? How do we apply that learning to a global pollutant like carbon dioxide?

I look forward to hearing from the participants. Again, I thank Deb and the Center for Innovation and the Environment at PPI for convening this forum. I hope that we can all more actively share more ideas in the months ahead, and I hope that that sharing actually generates some substantive action here on Capitol Hill.

Thank you very, very much.

(Applause.)

MS. KNOPMAN: Thank you. I would like to move ahead now, and I'd just like to very briefly set the stage for the panel discussions. Echoing the Senator's remarks, we're really attempting today to redirect the debate toward a constructive discussion about how the U.S. could move forward on a market-based pathway toward achieving real reductions in greenhouse gas emissions without economic disruption. And we really hope to begin building a center for this debate, where it belongs.

Panelist Jon Naimon and I co-authored a PPI report on how to build a domestic emissions trading market, which can be found on the table out there. I hope you all have had a chance to look at it. This morning PPI is also releasing an additional backgrounder to supplement that earlier paper that lays out some additional policy options on how a domestic emissions trading market would work in practice.

Just in brief, the PPI proposal sets caps on overall domestic emissions of carbon dioxide -- other greenhouse gases would be added later -- based on year 2000 levels. The cap would be reduced 1 percent each year thereafter. The government would initially allocate most of the emissions credits, but eventually lead into an auction and expand the kind of greenhouse gas emissions that could be traded. The auction would be phased in over time.

The PPI proposal is designed to work across the entire economy, not just energy producers. It's also designed to spread the costs of reductions over time to avoid disruptions. Further, it avoids reliance on international organizations and developing country actions in the near-term.

Now, we'll get started on the panel itself. Our panelists will speak in the order listed on the agenda. Each speaker, I am confident, will rise to the challenge of holding their prepared remarks to five to seven minutes to allow time for questions and discussion.

Our first two speakers, Jon Naimon and Ray Kopp, will in some ways set the table for our other speakers as they lay out two alternative approaches to achieving real reductions in U.S. greenhouse gas emissions. I'll just note that each of our speakers may remain at their seats, or if they would like to use the podium, they are certainly welcome to.

Jon Naimon is a co-founder of Light Green Advisors, which is a Seattle-based investment advisory firm specializing in constructing portfolios of environmental leadership companies. He will elaborate on the thinking behind the PPI proposal.

MR. NAIMON: Thank you, and I appreciate your collective interest in this topic.

As Debra said, Light Green Advisors is an investment advisor that focuses on investment in companies that are environmental leaders. We believe that the global climate change issue is a real issue, and we are interested in continuing to invest in environmental leaders in all sectors of the economy. We are different than some social responsibility investment firms in that we do invest in heavy industry, including the energy industry. And so we have an interest in ensuring that whatever solution is adopted within the United States, is not only market friendly, but friendly to companies within the energy industry, in particular that it's practical and doesn't reflect net taxation of the industry. I think all of us know that past efforts to increase energy taxes have been politically unsuccessful, and therefore, we don't think that the energy tax option is either practical or relevant to the debate.

What I'd like to do is talk a little bit about the principles behind the proposal and why we think the PPI proposal is a reasonable basis for discussion for development of the U.S. emissions trading market. I'm also going to spend some time talking about the hole in the doughnut: what the proposal is not, and how it contrasts with some other approaches to environmental protection that have not been as market-friendly.

The first feature of the proposal which is important is that the trading mechanism provides a means for companies that reduce their emissions to obtain payment from other companies for that reduction. Being paid is more important to companies than any other form of recognition from the government. Similar to the toys in your attic, which have no value until there's an E-Bay site which allows you to auction them off, a lot of energy efficient opportunities exist at companies throughout the economy. There's no particular reason, if they're not core businesses, why companies should make the effort to exploit those energy efficiency opportunities. There are some very low cost opportunities to reduce greenhouse gas emissions, and an inter-sector market which allows trading between sectors, including the commercial sector and the industrial sector as well as the energy supply sector, will allow these opportunities to be used.

The second aspect of this proposal which I think is innovative is its reliance upon the Internet and the information marketplace. The Toxic Release Inventory has led to a greater reduction in toxic chemical emissions per unit of revenue by U.S. firms than the environmental laws which preceded it for the previous 20 years. In our estimation, the ability of the public to find out about the actual emissions of companies engendered a tremendous change and an increasing efficiency of a lot of companies. We think a similar reduction in carbon intensity could happen if greenhouse gas emissions were made available on the web. The PPI proposal is very innovative in that it takes advantage of both the power of the "cap and trade" approach, which was pioneered with the sulfur dioxide issue, and also the power of the Internet and the information marketplace, the glass houses.

And finally, I would like to talk about several things that this proposal isn't and why I think, as a result, it's more attractive both to companies and to long-term investors who are both interested in the environment and who are also interested in having their companies be economically healthy. The proposal does not require set technical standards for what companies need to do. It does not get the government in the business of selecting technologies and providing tax credits for discrete technologies, and thus distorting the investment decisions of companies. It doesn't require precipitous action which would cause companies to write off assets faster than otherwise. It does not force one sector to take it on the chin. Efforts in the past to force one industry to be responsible for our society's collective emissions have fallen by the wayside, not only because people don't care about everyone else, but because on a basic level, it's not fair. The greenhouse gas issue is unique in that the sources are very diverse, including all of us who use energy in our daily lives.

Another way that this proposal is unique is that it doesn't carve out and exempt the government. The government is the largest energy consumer in the United States and among the only energy consumers with no effective reason to conserve. This proposal would impose on the largest energy consumer in the United States the same type of burdens that it would impose on companies, and that increases its fairness and proportionately reduces the impact on the private sector.

Another important aspect of this is that it permits the involvement of financial concerns, third parties, and individual consumers who, as a group, are a tremendous source of greenhouse gas emissions, and who offer, though their behavior changes, a greater opportunity for lower cost emissions than attempts to essentially force a single sector to change how they do business.

Moving on in terms of the hole in the doughnut that defines this proposal, it doesn't provide for retroactive liability to companies for their involvement in the carbon fuel sector. It is not a Trojan Horse for efforts to bring in other social programs like job training programs, labor programs, income redistribution. It essentially gets the government out of the business of recycling energy revenues and allows companies to transact business with financial third parties and with each other to pay the lowest price possible for greenhouse gas emission reduction.

One of the things that this proposal does not feature, which I think will make it more attractive to many companies, is that it doesn't have the government involved in guessing the price of reduction. The experience that we've had outside of trading programs demonstrated conclusively, in our estimation, that efforts by governments and think tanks, and even trade associations, to estimate the cost of compliance were inaccurate that there are a lot of cheaper ways of obtaining emission savings that emerge, if you're allowed to trade. This proposal doesn't rely on the government setting those prices, guessing those prices, but simply having a much more limited function of setting the rules for the marketplace, and setting an environmental goal that companies can achieve.

Many leading companies already have been doing energy conservation efforts that are far in excess of the 1 percent per year proposed here. As a result, this proposal seems to me to be one that's reasonable and one that's easily obtainable by U.S. companies. And finally, I would just note that climate change is a complicated issue.

The involvement of smaller sources, consumers in particular, is the next frontier of environmental protection, because that's moving a step away from our historical view of industry as those people wearing the "black hats" and consumers as those innocent individuals wearing the "white hats" who are subjected to this terrible environmental burden. And although it's more complicated to develop systems that accommodate consumer actions, the Internet and information technology essentially allow us to do so in the context of a self-regulating system. And although it's complicated, it's a little bit like flying airplanes, they are safer than the alternative.

Thanks.

MS. KNOPMAN: Ray Kopp is director and senior fellow in the Quality of the Environment Division at Resources for the Future. Ray will present an alternative approach to the downstream emission proposal that we just heard Jon talk about.

MR. KOPP: Thank you, Debra, and PPI for giving me this opportunity to come and discuss their proposal and to tell you a little bit about the proposal at Resources for the Future. For those of you that are not familiar with Resources for the Future, we are a 50-plus year old, Washington-based research institute. We're not an advocacy organization. We're a group of mostly social scientists who are concerned with policy revolving around environment and natural resources. Starting probably three or three-and-a-half years or so ago, we involved ourselves with climate change policy, which as we know is kind of the mother of all environmental policies. It's an extremely difficult issue.

And we crafted a domestic action program for the U.S., which shares, as you're going to see, many similarities to the proposal you just heard put forward by PPI. And as you read their documentation on their web site compared to our own proposal, you will see there are several common themes. The most important of which are those already outlined by the Senator, that an American domestic program ought to be fair, and we'll talk about that in a little bit, and ought to be comprehensive in the sense that it covers all targeted emissions and greenhouse gas emissions. A primary focus ought to be that it's protective of the U.S. economy. We're experiencing one of the largest expansions in the economy, we're all reaping the benefits of that, and we certainly don't want to do anything that's going to destroy that growth pattern for the future. So we want to think comprehensive, we want to think fair, and we want to think protective of the U.S. economy.

So I'll just briefly outline this program, which turns out to be quite simple in its elements. Comprehensive, how are we going to control greenhouse gases in general? We're going to start by controlling carbon emissions, which, as you know, are the bulk of the greenhouse gas emissions in the U.S. We want to control all carbon in the economy, so what we're proposing, just as PPI, is a "cap and trade" program very similar to our sulfur dioxide emissions trading program that's being discussed elsewhere in the world. A domestic "cap and trade" program will target emissions, where the initial allocation of permits is at 1990 levels. That's the first distinction, PPI is 2000. We're at 1990 levels, again, the idea here is to be consistent with the Kyoto convention, again, and the Senator mentioned that the U.S. already has committed to stabilize its own domestic emissions at 1990. So it seems that's a reasonable target to start with.

Any "cap and trade" system, as you know, begins with an allocation of permits. We know how those permits were allocated in the sulfur trading program; it's a large political process. Eventually, they were grandfathered back to the utilities. When you do that you transfer a very valuable asset to a portion of the economy. What we're suggesting, as PPI is, that those permits in this case should be auctioned off. An auction generates a revenue stream, that revenue stream can be substantial depending upon the value of permits traded in the auction.

A fundamental component of the proposal that we're putting forth, again, for fairness reasons and for equity reasons, is that the bulk of that money is returned per capita to U.S. residents. One way may be the way the State of Alaska returns oil revenues to individuals in Alaska. There's some analogy there. The idea is that 75 percent of this money goes back to households. Why? Because households are going to bear some of the compliance costs associated with the price of the permit in the form of higher energy costs; they will end up having to pay more for the part that they consume. So, to give that money back to households seems like a way to be fair and equitable, when you're dealing with low income households which will perhaps be hardest hit. Twenty five percent of the revenue is reserved and sent back to governors of states. The idea there being also that some states may be particularly carbon-intensive, in producing carbon, or carbon-intensive in consuming carbon. And over a transition period of several years, that money would help them adjust to any possible event or dislocations that are taken into account. So the revenues would be returned to households and to states.

The third portion of this is now, how do we make sure we're comprehensive and we try to be fair, all sources of carbon are treated equally, the revenues are returned. How does this mechanism actually take place to be sure that you capture all that carbon? The permits are required for the initial transaction of carbon in the economy. This is a differentiation between what's called an upstream approach and downstream approach. "Upstream" there are points of carbon transaction, there are coal plants and coal mines, the processing plant; crude petroleum comes into a dock and enters into the petroleum refining systems; the natural gas comes out of a well before it goes into the transmission system. At that point, there's perhaps 2000 entities that control carbon in the economy. Those are the entities that are required to have carbon permits. So we're not talking about a massively intrusive program of permitting every single emission of carbon. We're talking about individuals responsible for the entry of carbon into the economy for combustion; that's where the permits are required.

The real important part of this is that while many of us believe that carbon reductions are going to be inexpensive to obtain, there are many of us who don't believe that's the case. Surely there are cheap reductions, I don't know how many there are, how many tons you're going to be able to reduce at a low price, many in industry think it's going to be incredibly expensive to reduce carbon emissions to 1990 levels. To reduce that uncertainty and to ensure that the economy does not bear an undue burden, we're suggesting that the price of these targeted permits, in the first year of this program which will be, say, 2002, be capped at $25 a ton. What that simply means, if the auction price rises above $25 a ton, the U.S. Treasury steps forward and supplies additional permits at $25 a ton to meet demand. Every year that price rises by 7 percent in real terms. So after about five or six years, that price is now $35 a ton rather than $25 a ton.

You may never get to this price cap. I mean, if you believe, as a lot of models are suggesting, to hit 1990 levels given our current business-as-usual plans, you may view that price as considerably below $25. The purpose here is to provide certainty to all members of the economy as to what this program could ultimately cost. We hope it's going to cost a lot less than that, but the certainty is a very important part of this, assuring the robust growth of the U.S. economy.

So to sum this up quickly, it's an upstream program that captures all carbon in the economy immediately. There are means to expand this to other greenhouse gases in a fairly straightforward manner. It auctions the permits. The revenues from those auctions are returned to households to help them deal with the increased price of carbon in fuels, and there is an assurance mechanism here for the U.S. economy that this control of greenhouse gases will not cost amounts of money which would do any serious damage to the U.S. economy.

Thank you.

MS. KNOPMAN: Joe Goffman is a senior attorney at Environmental Defense, formerly known as the Environmental Defense Fund.

MR. GOFFMAN: Thank you very much. Thank you, Senator Lieberman, and Debra for making this opportunity available. Some of you may be curious as to why EDF changed its name. Last year we worked very closely with Senator Lieberman on his early credit bill, and found that that was not a universally loved proposal in the environmental community, and so we thought if we dropped the word "Fund" from our title we could slink off and return to fight another day.

I guess I'm tempted to say, "not to worry Senator, I'm sure that you can also enter the federal policy wonk protection program will help you." I think what Senator Lieberman and Senator Chafee did in introducing the early credit legislation last year, what PPI has proposed in terms of a downstream "cap and trade" program, and what RFF has proposed in terms of a so-called upstream "cap and trade" program have, from the perspective of people who think like Environmental Defense does, created a fabulous feast in terms of a very constructive menu of ideas, moving forward in the near term on the climate problem.

Knowing myself, knowing Ray and the other speakers as I do, I'm a little nervous that the next 20 minutes could turn this feast into a food fight. In fact, a couple of years ago the CEO of EDF, then EDF, Fred Krupp, and Ray were both in a front page New York Times article hurling epithets at each other about the RFF cost cap proposal. And I think Ray even used a food metaphor to describe Fred's position on this. But my preference obviously is to enjoy the feast and not start a food fight.

I think, in fact, that all three proposals are individually and together extremely important, because of the uniform or common elements that they capture. Indeed, we could have a food fight about the voluntary nature of the Chafee-Lieberman bill, which again EDF did support, and continues to support, versus the mandatory nature of the other programs. We could have a great row about upstream versus downstream allocation, we could get into a discussion of political science, while weighing the difference between auctioning allowances or allocating them to existing stakeholders. And Ray and I, ourselves, could put on a 12-round match about the importance or the effect of the cost cap in the RFF proposal. I think if we did that we could probably entertain you exceedingly in the next little bit of time. But, we really wouldn't be doing much of a service to the understanding in the policy community about what these proposals really represent.

And they really represent two principles that ought to be immutable in moving forward in the design of strategies and initiatives to manage greenhouse gases in our domestic economy. They capture two principles, which as Jon suggested, were quite successfully embodied in the design of the SO2 program. The first principle, of course, is putting a cap on total actual emissions. The RFF proposal implements this cap at the upstream end, if you will, by putting a total budget on the amount of carbon going into the economy. The PPI proposal implements that budget on the emissions side. And the specs of the Chafee-Lieberman program also use exactly the same template of requiring voluntary participants in the early credit program to meet an individual emissions budget, and only if they could meet that budget and beat it could they earn credit.

This approach, as I said, was reflected in the acid rain program, which not only has demonstrated a substantial amount of cost savings because of the trading elements, but also has produced a distinctively important set of environmental benefits, in the form of early, accelerated emissions reductions in SO2. In the first four or five years of the program, SO2 sources have been achieving more reductions than Congress required, as a result of the interaction between the cap and the ability to trade emissions allowances. In fact, what we have seen is a substantial amount of banking of the extra emissions reductions, which at the same time creates the environmental benefit of more reductions than required, but also provided a critical jumpstart of the cost savings process that an emissions trading market can deliver.

And I would argue that all three proposals, even as I listen to their differences, again, the Chafee- Lieberman voluntary action proposal, the upstream proposal, and the downstream proposal of RFF and PPI respectively, have at their core the capacity to deliver exactly the same set of outcomes. I'm not sure exactly how to choose between and among them. I would have to say that from an environmental perspective, if the votes were there to carry a mandatory proposal of the nature of the PPI or RFF proposal, we at Environmental Defense certainly support that. On the other hand, it seems to me that between those two proposals, we're more likely, and, I'm guessing, the environmental community and the public and other interests that form the constituency for this kind of program, would end up supporting the PPI proposal, for the simple fact that in and of itself, on its face, it delivers a high degree of certainty, almost absolute certainty, that we will get the emissions reductions that are promised, and at the same time, because it is a pure emissions trading program, without the potentially disruptive element of a legislatively set price cap, because it's a pure emissions trading program, it may actually, albeit counter-intuitively, create, in the emissions trading market, a greater capacity to produce continual cost savings, and in the end be cheaper for the economy.

Again, we could go on at great length with the panel here in teasing out the exquisite differences in these different approaches. But I think at this point, creating a common understanding that would allow a broad group of the policy community to move forward is critical in order to really keep all three proposals on the table and try to develop an almost synergistic relationship between them along their common lines.

Thanks a lot.

MS. KNOPMAN: Thanks, Joe.

John Palmisano is Director of Environmental Policy and Compliance at the Enron Corporation.

MR. PALMISANO: I'll choose to sit and I'll choose to be brief.

Let me make some quick comments on the general subject of early crediting. Sometimes we confuse the words "crediting," "allowance trading," and "emissions trading." In fact, in the PPI paper, "credit" is used when the right word should be "quota," "allowance," or "allocation." Clarity in language is important because credit and allowance systems develop according to different regulatory paths.

Both "credit" trading systems and "quota" trading systems produce very good environmental and economic results, end of story. However, with these programs, we are creating property rights, we are creating money, and that's a fact. The companies that will receive the allocations are going to have an off-book asset, and that is a fact too. That is why care in describing these systems is important we are creating the environmental equivalent of money.

I'd commend everyone to look at the Heinz Center study that was done about two- and-a-half years ago. This study was funded by a variety of different sources and looked at, among other issues, the question of what the potential windfall profits could be for selected companies and sectors. No company today has greenhouse gas credits or quotas on their financial books, to the best of my knowledge. Greenhouse gas quotas will be an off-book asset, so some companies are going to get a windfall financial gain.

Is that a bad thing? I don't think so, because in the long run we're probably going to achieve a good environmental outcome. However, in the short-run, a lot of money on the table certainly attracts lots of people's interest. That's the political reality in the world that I live in. And when you're allocating a $100 billion pie, or in fact, a potentially larger pie than that, even a small slice of that pie is pretty valuable.

Let me speak quickly about the whole issue of early crediting, then I'll get to the PPI and RFF proposals. First, a general observation, unwise early crediting is probably the greatest threat to a domestic greenhouse gas emission trading system. What do I mean by that? Notice the modifier "unwise." When companies start developing their own emissions trading program, they are printing their own money, right? That's what we're talking about here. And the question comes up: against what baseline are you creating your "credits," and the allocations? When we talk about the fact that there have been emissions trades, one has to ask against what rules were these trades applied. "Credits" can only be obtained when a firm does better than its regulatory obligation. Since no firm today has a legally defined greenhouse gas control obligation, no firm can create domestic "credits!" Firms, however, can create emission reductions, but reductions do not automatically become "credits." Firms are now trading reductions with the hope that they become tradable credits. Thus strong vested interests develop to support already achieved reductions. These interests can be in conflict with the efficiency and equity needs of an official, legally binding, future regulatory system. Think like businessmen. In business you have to be very careful about what's backing up the "emissions credit" money.

Another potential problem with some early crediting programs, and it's a corollary to the credit-integrity problem, is whether the implied status quo has changed. My company is thinking about developing an emissions trading program, and we're looking at that quite seriously. Imagine we do develop an early trading program and so does a second, third, and fourth company. We all might trade within our own companies before regulations are developed. What happens when we say, "Maybe we should be trading among ourselves?" Imagine Enron and Exxon, and many other big companies start early greenhouse gas trading among ourselves, before regulations are developed. And now we have $100 billion or maybe $500 billion worth of companies trading among ourselves. Well, that looks like a potentially powerful political coalition that would certainly be interested in "grandfathering" ourselves into having official emission credits instead of just reductions, right? Then other companies, non-early traders, might have to buy their way into the future regulatory system at some later point in time because the "early credits" came out of the non-participants future greenhouse gas budgets. I'm not suggesting any malevolence; I'm not suggesting anything really, other than looking before one leaps into a complex regulatory system that creates what is akin to money. This is a simple issue of looking before one leaps.

Now, let me speak to the proposals that are before us. They are very interesting and I wish there would be more dialogue, serious dialogue, and serious analysis of these proposals. Most importantly, not just economic analysis, but also looking at the realpolitik of the situation. I used to work at U.S. EPA and some other people here also did. It takes at least five years for U.S. EPA to get out a major regulation. That's warp speed. That's fast. Are we talking about an "early" program, or are we talking about a regular regulatory program? Moreover, five years is when you don't have a couple hundred million dollars on the table. Therefore, whatever is developed, it has to be lean and mean and get out there fast, because the proposed regulation could be tied up forever.

Look at the litigation we have right now in the Northeast dealing with nitrogen oxides. It's a DNA molecule twisted upon itself. There probably aren't 20 attorneys in the country who really understand the issue, and the amount of money on the table is much smaller than the amount of money on the table associated with greenhouse gas trading.

Consistency with existing programs is another issue. The NOx trading program in the Northeast will probably be extended to the Midwest. The SOx and NOx trading programs are run in a slightly different way than are total loadings programs; the SOx and NOx trading programs referred to before use a rate-based approach. Most people imagine a greenhouse gas trading program to be a total loadings program. Consistency among programs is important; I would certainly like to speak extensively to people in the power industry to see how you integrate these different approaches. I'm not saying it's a problem and I'm not saying it's a facilitator. Nevertheless, linkages among different emission control programs might be very important.

Another point is to look at business realities. The energy business is changing so fast we're all getting whiplash. One analyst has talked about 50 big generating companies in 5 years; there could be 30 companies in 5 years. What kind of a market do you have when it's oligopolized? This is a serious question. It is a different kind of market than when you have 1000 small little actors out there instead of 30. A program that works for 1000 actors could have unintended consequences for 30 actors, consequences that you can't imagine right now.

Also, look at the way the power industry and the fuel industry is working today. Many companies use long-term power contracts and long-term fuel contracts. What happens when an implied tax is imposed upstream or downstream? How many billions of dollars of force majeure provisions would you trigger and could we have contracts severed if an implied tax for greenhouse gas was not contemplated by existing contracts? Will such actions create chaos in the fuel industry, chaos in the power trading industry, or price spikes? I don't know, but that is a serious question, because 10 years ago we didn't have this problem. Ten years ago the simple solution to adding environmental costs was just "pass it through to the rate payer." That's what many state Public Service Commissions did. I shouldn't say that, but in many cases that is what PSCs did. It was kind of a simple model that traded off certain benefits against other benefits associated with having a regulated monopoly. That was the regulatory compact that we had.

But today, we live with a competitive fuel and power industry. And there are long-term power contracts that are indexed against fuel contracts, and fuel contracts connected to power. In addition, there's a lot of money in energy derivatives that are providing good environmental benefits and good energy benefits for everybody in this room. Power prices have gotten lower, service is better, but still, what would happen if and when we develop a greenhouse gas control program?

These are serious questions, and there needs to be more than one businessperson at the table. There needs to be more than one or two people who understands more than just the Clean Air Act, because we're talking about complicated energy issues, and we're moving rapidly to a new energy paradigm, not only in the United States, but internationally.

So let me put it together. We support baseline protection in any early crediting program, baseline protection! No good deed should be punished, but the question is how do you structure a baseline protection program. I think everybody would agree to that. There are some issues where you have agreement and some issues where there is disagreement. I'd like to know what percentage of the population believes good deeds should be punished. A very small percent. So if we cannot create a baseline protection program, it's probably going to be a lot more difficult to carve up $100 billion.

When we think about the different kinds of crediting and allocation programs we have to be honest with ourselves and honest with the public. We are creating rights to pollute and I don't have a problem with that, because we're going to create those rights pollute, and we're going to reduce them in number and reduce them, and reduce them, until we achieve our environmental objectives. But, we can't camouflage "rights" with clever words.

Lastly, we clearly support truth in trading. Trades that take place today, I believe, should be consistent with the Kyoto Protocol. Since there are no domestic programs anywhere in the world, there is some danger in developing a domestic program after implied trades have been given legal status, and we have to be honest with ourselves and honest with the public.

The worst thing we could do is oversell emissions trading. Emissions trading is not a cure for baldness, psoriasis, or cancer, or anything like that. But it does produce really, really good environmental and economic results. And "hyping" it up too much could be deleterious in the long run.

Thank you.

MS. KNOPMAN: Thanks, John.

Dan Lashof is a senior scientist with the Natural Resources Defense Council.

MR. LASHOF: Thank you very much. As the previous speaker just said, I really welcome this opportunity, and the discussion that's been engendered by both the PPI proposal, the RFF proposal, and the other proposals that have been mentioned. I agree with a lot of what has been said previously. Although there are no food analogies, I do want to take another cut at the common elements, and also some additional principles that we want to look at in trying to figure out how to combine these elements, and ultimately be successful. And I also want to put on the table as part of that discussion the elements that are in another piece of legislation that Senator Lieberman has sponsored, the Jeffords-Lieberman Clean Energy Bill, which is targeted at the power sector, but also has I think some very interesting things in it for this discussion that I'll come back to in a moment.

Both the PPI and the RFF proposals have three common elements to start with. They've have been mentioned just very briefly. They start now. I think that's important. We don't want to wait until 2008 to get started. They set mandatory requirements. We've been discussing the role of voluntary programs. Clearly, voluntary initiatives have a role, and initiatives such as the IBM and Johnson & Johnson climate savers commitments that were announced this week are helpful and move us forward. Baseline protection is important, but I think both as Joe Goffman and Senator Lieberman learned, it can be much more complicated to design a credible voluntary credit program, than it can be to design a mandatory program, putting politics aside. In terms of the administrative side, the design of the program is actually much more challenging, for some of the reasons John mentioned.

The third element that's common in these proposals is they phase in more stringent requirements over time. They do that in different ways. The PPI proposal does it by having a cap that's an absolute cap, but that phases down over a period of time. The RFF proposal does it with a cap that starts at a lower level, but it has a price cap that goes up over time. Both of them are mechanisms for phasing in the stringency of the program. Again, I think, as Joe said, we'd prefer one which gives you a certainty of environmental outcome, and maybe phase it in through lowering the cap. But, again, they're both trying to get at the same goal.

Now, other principles that I think are important as we figure out how to put together the different elements that are on the table, into something that can work both politically and economically, as Ray mentioned, we should be as comprehensive as possible. For example, the RFF proposal starts at the beginning by ensuring that all fossil fuel carbon entering the economy is covered, and I think that's a very important element of that proposal.

Second, I think it's important to combine both supply side and end use measures. We need to have a price incentive that arises from an overall cap on the system, on which we can trade. But, at the same time it's very important to have strategies to overcome the barriers to end use efficiency that Senator Lieberman talked about, opportunities Jon Naimon talked about, to encourage those things. For example, there's an element in the Jeffords- Lieberman Clean Energy Act, that complements emission caps from the power sector, with the system benefits fund, which is designed to explicitly go after breaking down the barriers to energy efficiency at the customer level. That's one way to combine those elements that I think is attractive.

Third, as also mentioned previously, the allocation of the emission allowances needs to be done fairly. Now, each of the proposals that we talked about does that in a different way. Certainly, the auctioning approach of the RFF proposal is by definition fair, in the allocation outcome. People pay what they think the permits are worth. Of course, the fairness of that proposal would be driven, really, in the political process by how the revenues are returned. The RFF proposal does this with rebate checks. That's a good starting point. But I don't think anybody expects that by the time we get through the process it will look that simple. So fairness can be done that way, depending on how the revenues are recycled.

In the PPI proposal I think there's an important element of the transition that's envisioned, starting with allocating to companies based on their current emissions, but phasing that out over a period of time. It provides a way to move companies, not shock them from where they are today, but also not give them a permanent asset, which I don't think would be fair.

Now, the Jeffords-Lieberman approach takes an approach to allocation, I think it's been less a part of the debate, but in some ways it's familiar. It allocates allowances based on electricity generation in that sector. By doing that it combines the merits of an emission cap, with the many features of what are more traditional performance standards, because you don't get a permanent allocation or permanent rights to pollute, but the allowances you get are based on the service you're providing to society, the electricity you produce. And it's done in a dynamic way, rather than in a fixed way, the way it was done in the sulfur program. And as John Palmisano said, the sulfur program was fine at the time, in an era of regulated monopoly facilities. That kind of grandfathered permanent allocation I don't believe is appropriate in the new era of more competitive markets.

So I think all these approaches have merit. One thing that they have in common is that none of them provide permanent grandfathering, and I think that's important, because although such an approach may have some short-term political appeal, to buy in certain fuel interests that might be resistant, I think in the end that it would create a huge windfall that would be seen as unfair, and would not be politically sustainable.

So again, just to close, I welcome this discussion. I think that as we move forward we'll find creative ways to combine elements from all of these proposals, and find a way to move forward. And I'm very encouraged by the discussion that we've started here.

MS. KNOPMAN : Sue Gander. Sue Gander is a senior policy analyst with the Center for Clean Air Policy.

MS. GANDER: I'm glad to be here and get a chance to kind of wrap up what we've heard already. When PPI asked us to speak here this morning, they gave us instructions to address whether, when and how to created a domestic greenhouse trading program. That's a lot to cover in seven minutes or even 10 minutes. But, I do want to touch a little bit on each of those questions. The Center, just to give you a little background on who we are, has been working on the issue of emissions trading for quite a while. We were very active in the development of the acid rain trading program, and we've worked extensively on issues since then. And we've been very active on climate, because we see that as one of the most pressing issues that really needs to be addressed.

To that end we've been working both internationally and domestically to try to see what can be some solutions that we can come up with on this. A lot of what I'll talk about, in terms of domestic approaches, stem from a process that we've been sponsoring since late 1996, with a broad stakeholder group of industry, governmental, environmental and academic folks, to look at the question of how would you put together a greenhouse gas emissions trading program, and what would the implications be. I brought along a bunch of reports that speak to some of those questions, and also cover that in the presentation provided. What I'm going to end up doing, is just to kind of skip through to see the highlights that I want you to walk away with. But, I welcome questions on that.

Just turning to the question of whether we should be looking at this action, I think the push for trying to do something on climate change is growing. One recent example that I'll point to is that at the last meeting of the World Economic Forum, back in January, a group of over 100 economists and world business leaders cited climate change as the number one pressing issue for the world, and I think also interestingly noted that it was an issue in which business could most effectively adopt a leadership role. So I think that's important to note in terms of whether we should be addressing this problem. I think the message is clearly out there that we should.

In terms of when to act, I just think it's important to point to, as the Senator did and a number of others, that people are already acting. There are a number of countries throughout the world that are looking at developing domestic trading programs, businesses are starting to do trades, states are forming registries. I think it's appropriate that we start to look now at what the U.S. is going to do.

In terms of considering how to create a U.S. program, I think trading in general, as you've heard from many of the panelists, is an approach that holds a lot of promise in terms of cost effectiveness, in terms of environmental credibility. And I think that's the reason why you hear a lot of similar remarks in terms of that approach. That being said, there certainly are differences in terms of how to approach it. And the differences between upstream, and downstream, and grandfathering, and auctioning I think are very important ones to consider. I hope that over the course of the next year, and years ahead that we can, as policymakers, start to look more into that.

Let me just skip to where the Center has come out on this issue, based on the last couple of years of this dialogue process that we've sponsored and we continue to work on. We looked at downstream, we looked at upstream, we looked at auction, we looked at grandfathering, and in terms of the best approach from our perspective, the upstream with the auction is the one that we recommend, and the one that many of the folks in our group, although not everyone, see as being the most appropriate place to start.

I mention that because it has four aspects that we think are important. Full coverage of carbon emissions, getting everyone into the system. It's simple to administer, you've got 2000 sources, versus a downstream program which has literally millions of sources. You could reduce that to maybe hundreds of thousands, but the scale that you're talking about there is very important. It sends a clear signal to the leaders that they need to start taking account of their carbon emissions. And it also generates revenues, which are important, not only to address the equity issues, but also be able to have funds to use in a number of different ways, for investment in R&D, to help compensate affected industries, et cetera. So that's the approach that we're very interested in working on.

Let me just note to that ideal I think there certainly is a dose of reality that we need to consider. The one that we brought up earlier is that a big hurdle to the discussion that we've had thus far is the question of how much something like this is going to cost. I think that has really served as a barrier to moving ahead. The price ceiling element that's included in the RFF proposal that Ray talked about, we think is an important element, in terms of a near-term option for going forward that can help us address that problem, and help us move on to an ultimate program.

The other point that I think is important for the near-term consideration is the idea that you do have a number of different industries out there that are really grappling with the idea of what they should do in terms of addressing climate change, and really looking for some more certainty -- in particular the power plant industry. They've got a number of different pollutants, either going to be regulated in the near-term, or in the sort of mid- term. And given that CO2 has an umbrella pollutant aspect to it, they're really interested in knowing: What do I need to be doing in terms of addressing that pollutant as well? I think it's important to be able to answer that question in the near term so that we can develop the most effective program going forward.

Let me just conclude on the point of whether, when, and how to act. I want to stress that I think the whether, I would hope, is already answered. Europe and a number of other countries, businesses are already doing greenhouse gas trading, and I think the U.S. really risks being caught in a competitive disadvantage not to go through that same process and have a serious discussion about what needs to take place. In terms of when, again, I think what Dan said, the answer should be now. We need to start turning the tide on emissions growth, and start to address this problem. And then the how, the ideal approach, as you've heard echoed here today, is a "cap and trade," and we would see the most effective approach with allowance auctions done upstream, and revenue recycling.

I'll stop there and leave time for questions.

MS. KNOPMAN: I want to thank each of our speakers. They did rise to the occasion and kept their presentations crisp. It does leave us time for questions. If you need to leave now, feel free to. But, I'll just ask if you are going to ask a question, when you stand up if you'll identify yourself, and if you're affiliated with an organization just say what that might be.

QUESTION: [Inaudible.] [The question related to the efficacy of accelerated depreciation on capital investments and tax credits as a means of stimulating new energy technologies.]

MR. NAIMON: In Congress' wisdom in the past, Congress has taken on the task of guessing which technologies should be used to accomplish different types of social goals. And in my personal view, Congress hasn't been very successful in allocating capital resources relative to the private sector. So, I increasingly think that it's more appropriate for Congress to set an environmental objective and companies to determine how to allocate their capital to get there. In many cases, I think that you'll find that there are non-capital intensive solutions to the problem, such as switching to natural gas. That will be many orders of magnitude cheaper than the types of solutions that could be captured at any point in time by the government.

If you look at the energy sector, we had the synthetic fuels effort in the past, which I think very well demonstrated that guessing which technologies should be used and which features of the tax code to change are not easy to do from the government's perspective. That was largely unsuccessful, and the market is just a better way of addressing the problem.

But the government does have a role in setting the ground rules, in setting the baseline conditions of the set-asides -- that's very important -- but not in figuring out whether you should be making a particular capital investment, or whether you should be changing your operating practices, you should be changing your routing software for your cars, and not buying a new set of engines. There's a much greater potential for the system to be gamed by companies that know how to work the tax code.

MS. KNOPMAN : Thank you.