US Senate Committee on Environment and Public Works
Hearing on Voluntary Activities to Reduce the Emission of Greenhouse Gases
Wednesday, March 24, 1999
9:30 a.m., SD-406

Opening Statements:

Sen. John H. Chafee, Rhode Island
Sen. George V. Voinovich, Ohio
Sen. Max Baucus, Montana
Sen. Joseph I. Lieberman, Connecticut

Witness List:

Eileen Claussen
Executive Director
Pew Center on Global Climate Change
Arlington, VA

Dale Landgren
Vice President for Business Planning
Wisconsin Electric Power Company
Milwaukee, WI

Richard Sandor
Chief Executive Officer
Environmental Financial Products
Chicago, IL

Tia Nelson
Deputy Director, Climate Change Program
The Nature Conservancy
Arlington, VA

John Passacantando
Executive Director
Ozone Action

Raymond Keating
Chief Economist
Small Business Survival Committee

Statement by Senator John H. Chafee (Rhode Island)

Today's hearing has been called to receive testimony on voluntary greenhouse gas mitigation projects performed by U.S. firms. Specifically, we hope to learn more about the challenging set of legal, policy, and technical issues surrounding the proposed crediting of these voluntary environmental transactions.

It sounds so simple to arrange for governmental certification of legitimate, voluntary emissions reductions. Companies that have taken (or are interested in taking) voluntary steps to reduce or sequester greenhouse gases have come to the Congress to secure legal assurance that such actions would count in the event that the U.S. decides to establish a regulatory program.

Why shouldn't the government provide a safe haven for entities that have moved forward to: improve the efficiency of generating and delivering electricity, increase the use of renewables, manage forest and crop lands in a sustainable way, or manufacture new consumer products that require less power to function?

As a general principle, not too many oppose this. But there are a few who contend that this crediting endeavor is pointless without the imposition of regulation without the ratification of the Kyoto Protocol and its cap on emissions. This could not be more untrue. Just ask the leading decision makers in industry what they would pay for certainty. Legal certainty that their self-determined course to lower greenhouse gas outputs will not put their organization at a disadvantage relative to competitors who have done nothing.

I am the first to admit that there are legitimate and tough policy issues that will require work. To ensure both the environmental and economic integrity of this program, we must ensure that the government credits are issued only for verifiable actions that contribute to climate stabilization.

The alternative to this path is to do nothing. To do nothing to protect businesses, to do nothing to create incentives, to do nothing to begin dealing with what could turn out to be a substantial environmental and economic problem."

Opening Statement by Senator George V. Voinovich (Ohio)

Mr. Chairman, I want to thank you for conducting this hearing today to discuss how to create incentives and remove barriers for companies that voluntarily reduce their greenhouse gas emissions.

As you know, I signed on as an original co-sponsor to your Credit for Voluntary Reductions Act, S. 547. I believe this is a good starting point for discussions on how to give credit to companies that have decided to invest in opportunities to reduce or sequester greenhouse gas emissions. I look forward to working with you to address concerns that have been raised about the specifics in the bill. But again, I commend you and Senators Baucus and Lieberman and others for taking the lead on this important issue.

I think the purpose of providing a credit program is to remove uncertainty for companies that initiate voluntary greenhouse gas mitigation projects. Currently, companies are uncertain how their efforts will be treated if there is a future regulatory program to reduce greenhouse gas emissions.

For instance, if regulations are put in place in the future, companies that reduce their emissions now need assurances that they would receive credit for their actions. Otherwise they might be forced to make additional and more costly reductions while companies that didn't act early on could make their target at lower costs. This scenario penalizes companies that took the initiative to reduce their emissions early on and puts them at a competitive disadvantage to those that, for whatever reasons, chose to wait. Voluntary action, without a system of credit, can act as a disadvantage to companies that act now to reduce their emissions.

As you know, during the 105th Congress, the Senate voted 95 to zero that the U.S. should not be a signatory to any protocol that would result in serious harm to the U.S. economy or require developed countries to limit or reduce emissions unless such an agreement also requires developing countries to limit or reduce emissions within the same compliance period.

I strongly agree with this rationale. We should not put the U.S. in an economic or competitive disadvantage when other countries are not required to reduce emissions as well.

I do not believe that creating a credit system for voluntary reductions means that we are trying to implement the 1997 Kyoto Protocol or some other regulatory measure prior to Senate ratification. We are trying to create a voluntary program that creates incentives and reduces uncertainty in the future for companies that act now to reduce their emissions. I believe that if business is willing to voluntarily invest in measures that reduce greenhouse gases, and protect our forests and agriculture, then Congress should put in place a framework that rewards those actions.

In addition, we are trying to create a program that would allow companies that don't have the resources to reduce emissions now to be able to buy credits from companies that had the means to make those investments now.

Thank you, Mr. Chairman. I look forward to hearing today's panelists.

Statement of Senator Max Baucus (Montana)

This hearing is about how the free market can help us face the challenge of climate change. Some people don't think these gases are a problem. They'd rather do nothing.

But, I've heard from lots of experts and scientists and I'm convinced that the continued growth in emissions of greenhouse gases is a risk with potentially serious consequences, like changes in growing season, violent weather extremes, and melting glaciers.

I believe it is prudent to take common sense steps to deal with this risk now. That's why this hearing is important. If we get it right, we can use the marketplace to harness people's ingenuity and reduce greenhouse gases.

We got it right when we set up the sulfur allowance trading system in the Clean Air Act. That worked better and more efficiently than anyone expected.

There's no guarantee this kind of approach will work with greenhouse gases, but it might.

If we design it right, it will be like an insurance policy. It won't cost much, but it will help protect our economy and the environment.

A lot of the discussion so far has focused on manufacturing companies and utilities. But the agriculture and forestry sectors could well benefit from this approach. They could generate credits and income by removing carbon from the atmosphere and locking it up in soils and trees.

Today's witnesses can help us refine the concept of credit trading so it can work for everyone, not just big sophisticated companies. They can also tell us about what kinds of information we'll need to make sure we get real reductions.

I thank the Chairman for his leadership in this area (Senator Lieberman too) and for starting us on the path of positive, constructive steps we can take to reduce the threat from climate change.

Statement of Senator Joe Lieberman (Connecticut)

Thank you, Mr. Chairman, for holding this hearing and for taking an active leadership role on this difficult but important issue. Since last October, when I joined with you and Senator Mack in introducing credit for early action legislation in the Senate for the first time, there has been active debate about the concept and policy choices involved Ems new idea. The number of original cosponsors on the Credit for Voluntary Early Action Act, which we recently reintroduced in this session, has grown to 12 -- six Republicans and six Democrats. While we may not all agree on the extent of the problem of global climate change, we all support the use of market mechanisms to solve environmental problems and ~ want to encourage the environmental ethic that is developing in industry.

The sooner we begin to act, the sooner we turn the challenge of climate change into an opportunity to use one of our most valuable resources -- American ingenuity -- to help us sustain an economy that is vibrant, growing and sustainable, while we make our air healthier to breath and safer to live in. Early actions to address climate change enjoy the distinct environmental and economic advantages of achieving near-term greenhouse gas emissions reductions while extending the period of time in which our companies and communities can innovate to maximize efficiency and minimize costs of protecting the environment.

Time is a relevant factor in the debate about global warming. Between 1990, when nations of the world agreed we should attempt to stabilize greenhouse gas emissions levels, and 1997, U.S. greenhouse gas emissions increased 11% according to the EPA. The U.S. Energy Information Administration predicts that if we continue to pursue a "business as usual path," our contribution to global greenhouse gas pollution will nearly double by 2020 to 145% of 1990 levels. Since greenhouse gases remain in the atmosphere for generations, the longer we wait to reduce our emissions, the more drastic and difficult our future efforts will have to be to address the problem.

Greenhouse gas pollution is a major and growing problem. Emissions of greenhouse gases, due in substantial part to the combustion of fossil fuels, are causing greenhouse concentrations in the atmosphere to rise faster and higher than they would naturally. More than 2,500 of the world's best scientific and technical experts have concluded that this trend is likely to increase the Earth's temperature by 2-6 degrees in the 21st Century with serious impacts on the global environment.

While it is difficult to link specific weather events to global climate change, the extreme weather we have seen in the past year is consistent with what scientists predict under current models of global warming. Last year in our country, severe drought in the South and West had devastating effects on agricultural production. Wildfires in Florida consumed roughly half a million acres burning timber, worth more than $300 million dollars. Flooding in Texas and Mexico claimed lives and devastated communities. Record temperatures in Texas were so high that sections of Interstate Highway 35 melted.

Underscoring the importance of confronting the problem of climate change, the American Geophysical Union, a professional society comprised of 35,000 geoscientists, recently stated that "present understanding of the Earth climate system provides a compelling basis for legitimate public concern-over ... increased concentrations of greenhouse gases."

Since we introduced this voluntary early action bill, climate change discussions have heated up and many stakeholders have expressed their desire to constructively participate in this important debate. Big businesses such as BP/Amoco, Shell, Lockheed Martin, and United Technologies are finding ways to contribute solutions by improving energy efficiency and reducing emissions. Communities are also showing leadership. For example, the International Council for Local Environmental Initiatives has helped more than 48 American cities and counties that are committed to climate change protection, to undertake local action plans to achieve voluntary emissions reduction goals. Part of our responsibility as legislators is to make sure that we recognize and encourage these acts of good environmental citizenship. We must not inadvertently discourage or penalize early actions that are good for companies, communities, and the environment.

I hope that our panels today will focus not on the science of climate change nor on the specifics of our legislation but on the concept of crediting voluntary early actions to control U.S. greenhouse gas emissions. This hearing provides an opportunity to learn from one another as we discuss the arguments for and against providing credits to those who take voluntary early actions to address climate change. This discussion should pave the way for improving our bill so that it delivers on the promise embodied in the idea of credit for voluntary early action to break the current legislative stalemate on this increasingly critical global environmental problem. I look forward to hearing from our witnesses. Thank you.

TESTIMONY OF EILEEN CLAUSSEN
EXECUTIVE DIRECTOR, THE PEW CENTER ON GLOBAL CLIMATE CHANGE
BEFORE THE SENATE COMMITTEE ON THE ENVIRONMENT AND PUBLIC WORKS
MARCH 24, 1999

Mr. Chairman, Senator Baucus, and members of the Committee, thank you for your invitation to testify this morning on voluntary efforts to reduce greenhouse gas emissions. The Pew Center on Global Climate Change was founded in the belief that our generation's challenge will be to address global climate change while sustaining a growing global economy. To ensure that future generations enjoy a healthy environment and sound economy, it is imperative that we address the issue of climate change. And there is no better place for us to begin than with early action to reduce greenhouse gas emissions.

Mr. Chairman, throughout your career, you have been at the forefront of the movement to protect and enhance our nation's environment and natural resources. Your recent decision to retire from the Senate at the end of your current term represents a profound loss to the Senate and to our country. It will also be a profound loss in the field of climate change where leadership will be vitally needed, and where your vision and pragmatism will be sorely missed.

I am the Executive Director of the Pew Center on Global Climate Change, an organization founded by the Pew Charitable Trusts to work constructively on the climate change issue and to put forward meaningful and credible information and analyses to help us forge a consensus for action. The Pew Center and its Business Environmental Leadership Council were established in May 1998. While Council members serve as active participants and advisors to the Pew Center, we do not accept financial contributions from these or any other corporations. We formed the Business Environmental Leadership Council because we believe that the business community is ready and willing to provide the impetus to move forward on the issue of climate change. The Council consists of over twenty of the nation's and world's largest corporations. Together, the annual revenues of these companies total more than $550 billion dollars. Total employment for the companies is well over 1 1/2 million people.

The Pew Center and its Business Council accept the views of most scientists that enough is known about the science and environmental impacts of climate change for us to begin to take actions to address the problem. We recognize that the concentration of greenhouse gases is steadily increasing, and that these gases will remain in our atmosphere for many years -- in some cases, for thousands of years. The current scientific consensus indicates that greenhouse gases generated by human activities could increase the temperature of the earth's atmosphere by 1.8 to 6 degrees Fahrenheit over the next 100 years with potentially serious impacts on the global environment.

Concern over changes occurring to the earth's climate led to United States' ratification of the Rio Framework Convention on Climate Change in 1992. This Convention calls upon our nation to voluntarily reduce our emissions of greenhouse gases to 1990 levels by the year 2000. We will not come close to meeting our obligations under the Rio Convention, nor will many of the other industrialized nations who accepted the same voluntary target. And while we debate the reasons for our failure to meet our Rio obligations, our emissions continue to increase, and the global concentrations of greenhouse gases continue on their inexorable upward path.

For this reason, we do not believe that action on climate change should be delayed until we are satisfied with the progress that has been made on this issue internationally. Instead, we believe that companies can and should take concrete steps now in the U.S. and abroad to assess their opportunities for emission reductions and establish and meet emission reduction objectives.

The companies of the Pew Business Environmental Leadership Council support the view that they should act now, not later. Perhaps some examples of current company efforts would be instructive. BP Amoco, for example, has established a target to reduce its greenhouse gas emissions by 10 percent from a 1990 baseline by 2010. These reductions will be measured using established protocols and will be verified by external observers. BP Amoco has also created a pilot project for internal emissions trading. This allows individual business units to find the lowest cost way of meeting the company-wide target. At this stage, twelve business units are involved in this internal trading program, and five trades have occurred. The program will expand to include all the activities of BP Amoco over the next eighteen months.

Another of our companies, American Electric Power (AEP), has implemented Climate Challenge programs that fall into four main categories: improvements in the efficiency of generating and delivering electricity; increasing the use and output of its non-fossil fuel plants; establishing energy conservation programs at AEP facilities and for its customers; and sequestering carbon in forests. The total cumulative effect of these actions will be the avoidance of approximately 10 million tons of carbon dioxide that would otherwise have been emitted into the atmosphere.

In one of the more innovative programs designed to reduce carbon emissions, AEP joined with BP Amoco, The Nature Conservancy, PacifiCorp and the Bolivian Friends of Nature Foundation to establish the Noel Kempff Mercado Climate Action Project in December 1996. The primary goal of this project is to preserve threatened tropical forests in the Province of Santa Cruz, Bolivia, thereby protecting its rich biological diversity and reducing releases of carbon dioxide into the atmosphere. The Noel Kempff Mercado Climate Action Project was approved by the US Initiative on Joint Implementation in December 1996.

Other ambitious examples from Business Council companies include the program of United Technologies which will, by 2007, reduce its energy and water consumption per dollar of sales by 25 percent below 1997 levels, with approximately the same reduction in emissions that cause climate change. This program is global in scope, covering 229 facilities in 36 countries, including 96 in the U.S. DuPont will, by 2000, cut its annual global greenhouse gas emissions by about 45 percent below 1991 levels. Shell International aims to reduce greenhouse gas emissions by 10 percent below 1990 levels by 2002. Since 1990 Baxter International has reduced the global warming impact of its emissions by 81 percent. Baxter also has a goal to improve their energy efficiency 10 percent per unit of production by the year 2005, based on 1996 levels of production. In 1995, Entergy committed to eliminating over four million tons of carbon dioxide emissions per year through 2000.

Regardless of the outcome of negotiations on an international climate change agreement, the members of the Business Council will continue to move forward, because they believe that this is a serious issue that demands a serious response. These programs will include internal audits of their emissions, the establishment of baselines, and the implementation of programs to reduce their greenhouse gas emissions.

The Pew Center recognizes that the nations of the world unanimously adopted the Kyoto Protocol and that this Protocol has already been signed by 84 countries. We believe that this Protocol represents a first step. But we also believe that more must be done to fully design and implement the market-based mechanisms that were adopted in principle in the Protocol. Further, the present Protocol does not ensure the participation of many important countries, and this omission must be remedied if we are to meet our environmental and economic objectives. However, we do not know when this will occur.

But we do expect that at some point in the future, the United States will ratify a climate change treaty that includes a binding commitment to reduce emissions of greenhouse gases. And while our companies are already taking voluntary actions to reduce their emissions, they also want to ensure that they will receive credit for these actions under any future climate change treaty, particularly since many of these actions are and were undertaken at the request of the U.S. government to fulfill the goal of the Framework Convention on Climate Change.

But the issue is not primarily one of getting credit or providing incentives to act early. The key issue is one of eliminating disincentives: voluntary action, in the absence of credit, can work to the disadvantage of companies who act early to reduce their emissions. It is clearly not in our interest for companies that do the right thing by voluntarily attempting to slow the rate of greenhouse gases entering our atmosphere to be penalized and economically harmed for their efforts.

How could this happen? It is because companies typically delay the most expensive steps until the most cost effective options have been undertaken. Consider the following scenario. One company acts early, and begins by first making the most cost effective reductions. Its competitor does nothing, and continues to emit greenhouse gases. After a number of years, a binding treaty is ratified by the United States. Both companies are now asked to make the same level of reductions. However, if the company who acted early has not received credit for its reductions, its emissions baseline will be set at its new lower level, and it will be required to make additional and more costly expenditures. The competitor, who did nothing, can now meet its emissions target with lower cost reductions, resulting in a competitive advantage. The company who acted early is penalized. And for that reason, many companies may choose not to act early and voluntarily. Without credit for early action, there is a disincentive to act before rules are in place. Thus credit for early action is not just an issue of providing incentives for early emission reductions. It also removes the disincentives that penalize companies that recognize and work to ameliorate the threat that greenhouse gases pose to our atmosphere.

Solving this problem requires leadership from Congress. An analysis undertaken by the Pew Center and published in October 1998 finds that federal agencies do not have sufficient legal authority to provide the certainty that firms need to make significant early investments. Congress must provide the legislative framework to remove the disincentives to early action. Such a legislative framework would also demonstrate that the United States takes its commitments under the Framework Convention seriously, and that we, as the nation with the world's highest emissions, are committed to addressing the problem of climate change.

While the Center does not take a position on the merits of any particular bill, we believe there are a number of issues that must be addressed in such a legislative framework. We would like to stress the following:

* Credits should only be provided for actions that are real and verifiable. Verifiability means that reductions must be measured and monitored using standardized measurement techniques. Any system that is adopted should reward virtuous actors -- not those who engage in sham or paper reductions, or who "game" and manipulate the system. Paper reductions could occur if companies are allowed to count the same reduction twice, or to report a reduction at one facility, while transferring the production -- and the emissions -- to another facility. There can be no effective credit for early action program if we are not committed to establishing a robust and rigorous monitoring and verification effort.

* The program should be simple and flexible. Participation in a system of credit for early action would be voluntary, but it is in our collective interest to be inclusive, so that many businesses are encouraged to mitigate and reduce their emissions. Companies in sectors that are experiencing high growth must be accommodated as must those who produce products, be they autos or appliances, that use significant quantities of energy. We must also keep transaction costs to a minimum, so that the costs of participation do not exceed the benefits to the participants.

* The legislative framework should not prejudge the future national implementation scheme. We are not at a point now where we can predict the design of the program that will be implemented in the United States to meet a future international obligation. Any system for credit for early voluntary action should therefore be designed to operate within the framework of any likely domestic regulatory or tax program that might be fashioned to control domestic greenhouse gas emissions. It should also be accompanied by, and integrated into, a set of policies that stimulate early action, including fiscal policies and funding for research and development.

* Domestic action should be the primary emphasis, but verifiable international projects should be included. The framework should focus primarily on domestic early action, but should also consider provisions related to international actions that comply with accepted international standards. International projects may earn credits for reductions achieved after the year 2000 under the Clean Development Mechanism. These should clearly be incorporated into any early action crediting framework. The small number of projects already accepted into the U.S. Initiative on Joint Implementation that achieved reductions prior to 2000, and meet rigorous standards for verification and monitoring, should also be recognized.

* The legislative framework should not over-mortgage the U.S. greenhouse gas allocation. The Kyoto Protocol, in its current form, does not contain any incentives to act early. As long as this remains a feature of a future international control regime, credits allocated for early domestic reductions will have to come out of any U.S. allocation granted under a treaty. Therefore, careful consideration needs to be given to the impact of an early credit program on the availability of credits to those who choose not to participate in the early action initiative. Allocating too many credits too early could significantly increase the difficulty of complying with a regulatory regime. On the other hand, removing the disincentives for early action is the objective of an early action program. The design of the program should balance these two objectives, perhaps through the establishment of reasonable baselines.

The Pew Center and its Business Environmental Leadership Council believe climate change is serious business, and that early action is smart business. Our effort is founded on the belief that enough is known about the science and environmental impacts of climate change for us to take action now to address its consequences. Awarding credit for early action is an important first step in what we believe will be a long and intense effort.

STATEMENT OF DALE A. LANDGREN
ASSISTANT VICE PRESIDENT OF BUSINESS PLANNING
WISCONSIN ELECTRIC POWER COMPANY
BEFORE THE UNITED STATES SENATE COMMITTEE ON ENVIRONMENT AND PUBLIC WORKS
March 24, 1999

Mr. Chairman and Members of the Committee:

Good morning. My name is Dale Landgren. I am Assistant Vice President of Business Planning for Wisconsin Electric Power Company. I appreciate the opportunity to appear before you today to express Wisconsin Electric's support for the concept of credit for early and voluntary greenhouse gas reduction actions, and to encourage Congress to enact legislation that establishes a program to provide credit to companies that undertake voluntary actions to reduce greenhouse gas emissions.

Wisconsin Electric, a subsidiary of Wisconsin Energy Corporation, is headquartered in Milwaukee. Wisconsin Electric provides electricity, natural gas and/or steam service to approximately 2.3 million people in a 12,000 square mile service area which includes southeastern Wisconsin (including the Milwaukee area), the Appleton area, the Prairie du Chien area, and in northeastern Wisconsin and Michigan's Upper Peninsula. Our electric energy mix is 67% coal, 24% nuclear, 2% renewable including hydro, 1% natural gas/oil and 6 % purchased power.

Mr. Chairman, let me commend you for your leadership on this issue, and for holding this hearing and beginning a dialogue. As I stated earlier, I am here today to express my company's support for the concept of credit for early action. We do not believe this support binds us to support the Kyoto Protocol or any other greenhouse gas action. We view a credit for early action program simply as an insurance policy in the event that a domestic or international program to reduce greenhouse gas emissions is implemented. Congress should view the credit for early action concept in the same way ... as an insurance policy where there is zero cost for the premium.

Wisconsin Electric is a strong proponent of options and flexibility based on business strategies - rather than political strategies - to address the global climate change issue in the context of modernizing the energy industry.

Clearly there are strong positions on both sides of the climate change debate. Finding common ground on the issues and reaching consensus on a policy solution will be a very difficult task, at best. Wisconsin Electric could enter the debate on whether or not the climate is changing and what should be done. But, instead of focusing on reasons why we should oppose the Kyoto Protocol or a possible climate change mandate, Wisconsin Electric is trying to find ways that we can prosper from any climate change policy. While we are not advocating such a policy, based on a number of issues including the environmental regulation trend and the public perception on the climate change issue, we do believe there will be a future mandate to reduce greenhouse gases. I don't wish to debate this point; I am simply stating my company's belief. As a result of this belief, we are acting now to position ourselves to prosper in the future. We are undertaking voluntary greenhouse gas reduction measures for the following reasons:

-- Experience - We are experimenting now to determine what works and what doesn't. Acting now gives us invaluable experience for the future.

-- Customers - We are responding to our customers' desire to be an environmentally sound company. Their interest in a clean environment and their willingness to personally get involved is evidenced by our successful green pricing program.

-- Trading - We have had a very successful experience as a trader of sulfur dioxide credits and believe we can be as successful and prosperous under a future trading regime for greenhouse gases. Profit - We are working now to determine how to be profitable in the future if greenhouse gas emissions reductions are required. Corporate Citizenship - Wisconsin Electric pledges environmental accountability and includes environmental factors as an integral part of our planning and operating decisions.

Wisconsin Electric has a long-standing commitment to the environment as part of our business strategy. Despite the scientific uncertainty surrounding the climate change issue, we believe it is appropriate to start moving toward stabilization, then reduction of greenhouse gases. At a minimum, we should explore and expand low- and no-cost strategies to reduce, avoid or sequester greenhouse gas emissions. We believe it is important to develop reasonable solutions to address the climate change issue in the context of modernizing the energy industry. Thus, we are working to develop strategies that integrate environmental, economic and energy goals, and assure that the energy industry has as many options as possible - including non-emitting nuclear power -- to meet any potential greenhouse gas reduction goals.

Currently, there is no legal framework regarding the treatment of early greenhouse gas reductions or credit for these early actions. This uncertainty is inhibiting companies from investing in greenhouse gas reduction activities and projects. Wisconsin Electric supports establishment of a program that guarantees credit that can be applied against a future requirement ... should there be one. Appropriate credit for these early actions is necessary to account for the investments that have already been made. Disallowing these credits puts the "good actors" at an economic disadvantage in attempting to meet any future potential greenhouse gas limits since the next tier of options is more costly than options available to companies that choose to wait for mandates. In addition, impending competition in the electric utility industry increases the importance of making sound strategic investment decisions now.

Wisconsin Electric is an active participant in ongoing efforts to address the climate change issue. Through our efforts, we lead by example, proactively implementing greenhouse gas reduction strategies through a variety of programs such as carbon sequestration and coal-to-gas repowering projects, a successful green pricing program and participation in the Climate Challenge program. Wisconsin Electric has undertaken and continues to pursue voluntary efforts to reduce greenhouse gas emissions. We should be given credit for these actions and not be penalized for our good deeds in any subsequent climate program.

A brief summary of our voluntary efforts to reduce greenhouse gas emissions follows.

Joint Implementation (JI) Projects

Wisconsin Electric is a partner in two projects approved by the United States Initiative on Joint Implementation (USIJI). The USIJI encourages U.S. private-sector investment and innovation in developing and disseminating technologies and procedures to reduce or sequester greenhouse gas emissions; promotes cost-effective projects that encourage technology cooperation and sustainable development projects in developing countries and emerging economies; and promotes a broad range of projects to test and evaluate methodologies for measuring, tracking and verifying costs and benefits of JI projects. The JI concept was introduced in 1992 during the negotiations leading up to the Rio Earth Summit.

Joint implementation projects involve a collaborative effort between entities from two or more countries to mitigate greenhouse gas emissions. This approach enables these entities to achieve greenhouse gas reductions at a lower cost than would otherwise be possible. JI projects can take the form of emission reduction efforts (e.g., energy efficiency or renewable energy) or can involve protection and enhancement of greenhouse gas sinks (e.g., forests, grass lands, or coral reefs).

Wisconsin Electric has supported the JI concept since its introduction. In 1994, we submitted two proposals in the first round of the USIJI solicitation. Of the thirty proposals submitted, both of our projects were among the seven approved. Our projects demonstrate the two types of greenhouse gas mitigation strategies I previously discussed:

Decin Project - The Decin Project is an energy efficiency/emission reduction project that involves the replacement of inefficient, highly polluting district heating boilers at the Bynov District Heating Plant with high efficiency, natural gas-fired internal combustion engines. An important strategy in reducing greenhouse gas emission in the face of growing demand for energy is to produce and use energy as efficiently as possible.

The Decin Project is a partnership with the City of Decin in the Czech Republic, Wisconsin Electric and two other U.S. energy companies. Development of the project was coordinated by the Center for Clean Air Policy. Each energy company partner provided to the City of Decin an interest-free loan, which enabled the City to secure the additional required financing from sources within the Czech Republic.

The project was developed in response to the local need for air quality improvement coupled with the global goal of reducing greenhouse gas emissions. Through the energy efficiency improvements and the switch to natural gas, carbon dioxide emissions are reduced by about 8,000 metric tons annually, along with reductions in nitrogen oxides, sulfur dioxide, particulates and ozone emissions, and reductions in energy consumption of over 30%.

The Decin Project is a first-of-its-kind joint implementation pilot project, which serves as a model for other efforts. The project has encouraged the Czech government to become increasingly involved in domestic and international global climate issues. And while the City of Decin was keenly interested in improving local air quality and reducing air emissions, it was only through development of this project that they learned of the opportunity to achieve these goals through focusing on greenhouse gas emissions. Bynov plant operators use state-of-the-art equipment and provide educational opportunities and experience for other communities interested in improving air quality. It also demonstrates the ability of voluntary partnerships in market-based initiatives to accomplish environmental goals cost-effectively.

Rio Bravo Project - The Rio Bravo Project is a carbon sequestration project that consists of two components: the purchase and protection of endangered tropical forests in Belize, Central America; and development and implementation of a sustainable forestry management program that will increase the total pool of sequestered carbon in a 120,000 acre area. The size of the original project has been more than doubled due to the recent acquisition of an additional parcel of contiguous land. Wisconsin Electric played a significant role in accomplishing this expansion.

The Rio Bravo Carbon Sequestration Project is a partnership with Programme for Belize (PfB), The Nature Conservancy, Wisconsin Electric, and several other energy companies. Development of the project was coordinated by Wisconsin Electric.

The forest land purchased as part of the project was threatened by imminent conversion to intensive agricultural land. By retaining the parcel in its native forest cover and combining its acreage with adjoining forested lands, an area large enough to implement a sustainable forestry program has been created. Retaining the forest cover and natural habitat it provides also satisfies the need to conserve the region's biodiversity.

The Rio Bravo project will realize carbon benefits over 40-plus years of 2.4 million tons of carbon. Through its management and preservation aspects, the project has many direct and indirect benefits to the people and natural resources of Belize.

Although some have suggested that forestry initiatives be discounted as a climate change mitigation strategy, our efforts in Rio Bravo prove that measurable and verifiable results can be demonstrated and documented.

We believe that all types of JI projects - including energy efficiency, carbon sequestration and renewable energy - should receive full credit, including credit for early actions.

While we are aware that there are new opportunities for investments and participation in joint implementation projects, the lack of certainty over credit for early action causes us some reluctance to pursue these opportunities.

"Energy for Tomorrow" Renewable Energy Program

Green pricing of electricity is a concept that allows individual consumers to vote on the environment with their purchase of electricity. With approximately 8,500 green pricing subscribers, Wisconsin Electric's "Energy for Tomorrow" renewable energy program is the largest and most successful of its kind in this country. Since its inception, the program has offset CO₂ emissions by over 40,000 tons.

The program was launched in 1996 in response to increased customer interest in reducing dependence on fossil fuels like coal and natural gas and a growing public awareness of the benefits of using renewable resources to generate electricity. This voluntary program allows our customers to personally and positively impact the environment by electing to purchase electricity generated from renewable resources. Power for the Energy for Tomorrow program comes from a combination of biomass and hydroelectric facilities. This year we are building two utility scale wind turbines that will be on line by the end of June, and we are evaluating opportunities for additional sources of renewable based generation.

One aim of the Energy for Tomorrow program is to help expand the market for renewables, which will prompt more investment and technological developments that will further decrease the costs.

Climate Challenge Program

As a participant in the U.S. Department of Energy's (DOE) voluntary Climate Challenge Program, Wisconsin Electric has successfully implemented a wide range of climate change initiatives. The Climate Challenge program, established in 1994,is a joint, voluntary partnership of the electric utility industry and the DOE to reduce, avoid or sequester greenhouse gas emissions. The Climate Challenge Program is the world's most successful voluntary greenhouse gas reduction initiative.

As one of the original 30 electric utilities that signed a Climate Challenge Participation Accord with DOE in 1995, Wisconsin Electric agreed to cut annual greenhouse gas emissions by 16% from what would occur absent these actions. We will achieve a cumulative total of 10-14 million tons of voluntary reductions between 1995 and 2000.

Our commitment calls for using a broad array of approaches to reduce greenhouse gases, including innovative energy efficiency measures, beneficial ash use, carbon sequestration and alternative fuels. In addition to the initiatives I have already described, a few examples of our projects and actions include:

-- Providing demand-side management (DSM) programs to assist customers in using electrical and natural gas energy more efficiently.

-- Improving energy efficiency at all fossil fuel power plants, maintaining hydroelectric operations and improving output and net capacity at our Point Beach Nuclear Plant.

-- Developing or supporting cost-effective waste-to-energy projects through such activities as purchasing electricity generated from landfill gas. Maximizing utilization of our fly ash by actively seeking opportunities to market ash for use in other products primarily within the construction industry.

-- Providing assistance in the conversion of motor vehicles to dual fuel (Compressed Natural Gas/gasoline) capability. Reducing transmission and distribution system line losses by such actions as upgrading low voltage lines to higher voltages and improving operating equipment.

We are well-positioned to meet our Climate Challenge Participation Accord commitments, and have implemented many promising approaches for carbon dioxide reductions and mitigation that can be replicated across industry sectors and across international borders.

Credit for Early Action-- Basic Principles

Following the Rio Earth Summit in 1992, Wisconsin Electric anticipated proposals for greenhouse gas limits and began investing in voluntary greenhouse gas reduction programs.

Providing credit for these early actions is appropriate and necessary to account for the investments that have already been made. As I mentioned earlier, Wisconsin Electric supports the concept of credit for early actions in the event that a domestic or international program to reduce greenhouse gas emissions is implemented.

Wisconsin Electric believes that any program to provide credit for early action should include the following:

Credit to companies that made commitments under the voluntary Climate Challenge Program and under the United States Initiative on Joint Implementation program. A certification process that provides clear and consistent standards for determining early reduction credits; such standards should prohibit double counting of emissions reductions (crediting of the same emission reduction to multiple parties). Allowance for the use of third party verification firms, at a company's option, to certify reductions. Provisions that address displacement of emissions (a.k.a. "leakage") as a necessary component to ensure the integrity of the program.

-- A simple mechanism to account for changes of ownership, and provisions that establish baselines for new sources that want to participate in the credit for early action program. Annual accounting for credits earned to better facilitate the formation of a viable market for emission reductions.

Conclusion

As I stated earlier, Wisconsin Electric believes it is appropriate to start moving toward stabilization, then reduction of greenhouse gases. We have undertaken and continue to pursue opportunities to voluntarily reduce greenhouse gas emissions through low- and no-cost strategies. We believe this is the right thing to do. However, the lack of assurance that credit will be provided for our voluntary actions to reduce greenhouse gas emissions causes us to be reluctant to pursue additional reduction activities.

Wisconsin Electric believes that if a program to reduce greenhouse gas emissions is implemented either nationally or internationally, then we should not be penalized for the early, voluntary actions that we have undertaken. Congress should enact legislation to establish a credit for early and voluntary greenhouse gas reduction program to provide the assurance we need in the event that a greenhouse gas mitigation program is implemented.

Mr. Chairman, thank you again for the opportunity to appear before you today.

Statement to the Senate Environment and Public Works Committee
March 24, 1999 Hearing on Credit for Voluntary Early Actions
Dr. Richard L. Sandor
Chairman and Chief Executive Officer, Environmental Financial Products LLC

Mr. Chairman, thank you for inviting our participation in today's hearing. Our company, Environmental Financial Products, is a small business dedicated to designing, launching and trading new market mechanisms. We have had some success with new financial and agricultural markets, and over the past ten years we have had the privilege of helping the U.S. sulfur dioxide allowance market take root and succeed.

While a serving as a director of the Chicago Board of Trade, I encouraged the exchange to support the SO₂ emission allowance market. The EPA ultimately selected the CBOT to administer its annual allowance auctions. The results of the seventh auction were announced today in Chicago today. The success of that program truly represents a milestone in environmental and financial history. It gave us faster-than-required pollution cuts at far lower cost than predicted. This success has been realized despite the predictions of the naysayers. We were told the sulfur program would never work. We heard: "its too complicated, it will cost too much, its too hard to measure, utilities don’t know how to trade, where will the price data come from?" Despite this huge success, those of us who believe we can harness a market to protect against global climate change are now hearing the same protests. People have not learned the lesson: never sell short America’s entrepreneurial ingenuity.

The success of emissions trading is further proof that the private sector brings forth enormous creativity in solving social problems if we introduce a profit motive and a price signal. The Credit for Voluntary Early Actions bill offers just the sort of signal that will unleash the creativity and innovation needed to prevent, at low cost, the economic damage that sudden climate changes threaten to bring.

In anticipation of opportunities to export credits for greenhouse gas cuts, we have been working with a wide range of businesses, most of them small ones, that are eager to act for the good for the environment while doing well for themselves. We work with farmers and foresters, with entrepreneurs who collect landfill and coalbed methane to produce electricity, and with large electric power companies. All these businesses are prepared to cut and capture even more greenhouse gas emissions if we give them a signal. These businesses are ready to take action, and they view the emerging international carbon credit market as a new business line. It is not just the producers of carbon credits who will gain. We will see a wide range of new opportunities for small businesses in the fields of new energy efficiency technologies, remote sensing, carbon certification, soil testing, project finance and trading. Credit for Voluntary Early Actions is the positive signal needed to unleash this new economic sector.

By getting us moving sooner, we can further cut the cost of the global climate insurance policy that the public wants. My company’s high-end estimate of the cost of cutting net GHG emissions 7% below 1990 yield a cost to the U.S. comparable to raising gasoline prices by a nickel per gallon. If we implement the proposed legislation, we will stimulate early action and innovation, which will help us realize the even lower costs that we believe a trading system will produce.

Of course, these low costs do not take into account the wide range of additional environmental benefits that emerge from cutting and capturing greenhouse gases. We are likely to also realize improved air quality in our cities, making it easier for children with asthma to enjoy the outdoor activities most of us take for granted. Expanding our forests will give more families a chance to enjoy hunting and hiking. Fishermen win because no-till farming and capturing carbon through grass and tree plantings will improve water quality in our rivers and lakes. The benefits that hunters, hikers and fishermen bring to small businesses in our rural economies are enormous.

Mr. Chairman, thank you again. We encourage the Committee to contribute to a safer future for the planet and cleaner future for our country by moving this bill forward.

Creating a Market for Carbon Emissions: Opportunities for U.S. Farmers

Richard L. Sandor and Jerry R. Skees

Reducing greenhouse gases has become a major international objective. While the international community debates the Kyoto protocol, a number of countries have already announced that they will reduce greenhouse gases. The November 1998 Buenos Aires meeting on the Kyoto Protocol helped advance the trading approach as one means for reducing greenhouse gases. Since carbon dioxide is a major greenhouse gas, creating a market for carbon emissions is under consideration. Should such a market evolve, U.S. farmers could be big winners.

Even though some in the scientific community do not believe carbon emissions contribute to global warming, everyone agrees carbon emissions are increasing rapidly. Since it is possible that carbon emissions increase the likelihood of significant climate change, a market should be at the top of the list of policy options to cost-effectively manage emissions. In effect, a carbon trading system may be cheap insurance against potentially large societal problems.

Sulfur Emissions Trading Paves the Way

Emission allowance trading is a straightforward concept that is already operational on a national scale. The U.S. sulfur dioxide emissions market provides a good example. Congress placed an overall restriction on power plant emissions nationwide, effectively allowing power plants to comply by either 1) investing in cleaner fuels or pollution control technologies or 2) buying extra emissions rights from another power plant that made extraordinary emission cuts. Buying excess rights from a more efficient power plant allows the older and less efficient plant to meet its obligations at lower cost to consumers. In short, trading emissions permits allows industry to meet emissions goals in a least cost way.

Title IV of the 1990 Clean Air Act Amendments cleared the way for trading sulfur emissions among 110 power plants. During the debate on this legislation, experts estimated that these emission rights would command a very high premium. Some initial estimates ran as high as $1500 per ton. Hahn and May report several pre-1992 estimates of forecasted per ton prices for sulfur emission allowances, ranging from $309 (Resource Data International) to $981 (United Mine Workers). In 1998, the Chicago Board of Trade (CBOT) auctioned off a large number of allowances at an average price of $115. Carlson et. al. argue that many factors, in addition to trading of emissions rights, created low prices of sulfur emission allowances: improved technologies for burning low sulfur coal, improvements in electrical generating efficiency, and lower fuel costs.

Evaluations of the sulfur emissions trading program suggest that it has been a success. By 1998 actual sulfur emissions averaged 30 percent below the allowable level. There has also been steady growth in the inter-utility trading of allowances from 700,000 tons in 1995 to 2.8 million in 1997. The full effects of the trading have not been realized as the market is still adjusting to this new innovation. Carlson et. al. estimate that this innovation will save $784 million annually beginning in the year 2000. Further, they estimate the net cost of the cap and trade system is 43 percent of the estimated costs under a command and control system.

The Potential of Carbon Trades for U.S. Agriculture

If a market evolves for greenhouse gas emissions, those who are now contributing to carbon emissions may be willing to pay others to sequester carbon (remove it from the atmosphere) as a permanent offset to emissions, or as a means of buying time to invest in technologies needed to reduce emissions. When sequestering carbon costs less than reducing carbon emissions, the carbon market would provide a more efficient solution. Firms would likely use a combination of reductions in emissions and offsets with carbon trades.

A market would also motivate technological improvements to both sequester carbon and reduce emissions. For example, if prices signal farmers to sequester additional carbon, the market would respond with new technologies. Price incentives would encourage bio-engineering plants that more efficiently and effectively sequester carbon. Most soil organic carbon is in the upper meter of soil. Could plants with deeper roots sequester more carbon to deeper levels?

The agricultural sector provides a number of effective alternatives for sequestering carbon. Forests and cropland offer the most promise. A large number of solutions will be needed to offset the increase in carbon emissions, and a market offers the best way to orchestrate them. Agronomists (Lal et. al) estimate the overall potential for carbon sequestration using U.S. cropland at 120-270 million metric tons of carbon per year (MMTC/yr). Around 100 MMTC/yr would come from increased use of Best Management Practices (BMPs). The remainder comes largely from acreage conversion and bio-fuels. Worldwide carbon emissions are growing by about 3,000 MMTC/yr. The U.S. emissions target under the Kyoto protocol is roughly 600 MMTC/yr below the level projected by 2010 under current trends. Thus, U.S. cropland could be used to reduce the projected annual world increase in carbon by about 7 percent, or about 30 percent of the U.S. share under the Kyoto protocol.

Most soils have a capacity for sequestering additional carbon. Tilling the soil, however, releases carbon into the atmosphere. Lal et al. report that Corn Belt soils likely have about 61 percent of the carbon that was present in 1907. Minimum and no-till systems can sequester more carbon. In 1997, about 37 percent of the arable land in the U.S. was under conservation tillage. Lal et. al estimate that using more BMPs (primarily reduced and minimum tillage systems) could sequester 5000 MMTC in cropland soils over the next 50 years. That converts to 100 MMTC/yr via wider use of BMPs, while other options offer the possibility of up to an additional 100 MMTC/yr.

Estimates of the value of carbon emissions allowances range from $15 per ton (Council of Economic Advisers) to $348 per ton (Energy Information Administration). Based on early market signals, Environmental Financial Products is using market values between $20 and $30 per ton of carbon. Without a market to trade carbon emissions, the lower prices (and the lower mitigation cost to society) will not be possible.

Using the low-end estimates of $20 to $30 per ton, paying farmers to sequester 200 MMTC/yr could add $4 to $6 billion of gross income to the farm economy – and possibly up to 10 percent of typical net farm income. The market for carbon could be a major supplement to the Conservation Reserve Program and, if managed properly, opportunities in the international carbon market could soften farm income cycles by taking land out of crop production and putting it into conservation uses when relative prices favor carbon sequestering over food production.

BMP's increase the agronomic productivity of U.S. cropland, reduce soil erosion, and improve water quality and wildlife habitat. Thus, BMP’s help both the global and local environments. The local benefits are consistent with the goals of the much discussed ‘green support payments’ (Lynch and Smith). However, rather than using taxpayer dollars, this green support payment could evolve in a marketplace with more diligent monitoring and enforcement. Paying farmers to sequester carbon will heighten the stakes for verification that farmers make changes in their farming practices or that they are actually sequestering more carbon.

Lal et. al. estimate the long-term nutrient value of an additional ton of soil organic carbon at $200. A ton of soil organic carbon can be added in 4-5 years. In 4-5 years the value of some of the country’s most productive farmland could increase 10 to 15 percent. In summary, a carbon market could increase both income and net worth in the farming community by 10 percent or more.

Leading scientists expect that climate change brought about by increased greenhouse gases may bring more extreme droughts and floods. Thus, American farmers can not only sell a new "crop" in the international environmental service market, but also help solve, at least in a marginal way, long-term weather problems affecting farming.

Implementing a Carbon Emissions Allowance Trading Program

A number of factors must be considered when designing a market for carbon emissions. In contrast to the sulfur market, carbon emission sources are less concentrated. In addition, sulfur could be reduced only by cutting emissions. A carbon market, on the other hand, may work through both outright reductions and sequestration. Considerable care must be taken to assure that incentives do not encourage farmers or others to change the baseline used to reward additional carbon sequestered. For example, in the short run a farmer or forester could release more carbon via changed practices so that they are ready to gain more when trading begins.

Low-cost systems to measure carbon in the soils are becoming more feasible. As the market develops, new technologies should emerge to make this task economically feasible. Lal et. al have provided estimates of the existing soil organic carbon for the lower 48 states, but improved estimates are needed. The existing base of carbon needs to be mapped. Only additional tons of carbon that are added to the baseline should be eligible for the market.

While many will get bogged down worrying about monitoring how much additional carbon is sequestered on an individual field, there are more effective means for monitoring and verification. Consider the opportunity for farmer cooperatives, grain merchandizers, biotech firms, and almost any agribusiness. Any of these firms could become a wholesaler for carbon sequestering. Estimates of the amount of carbon actually in the soil on an individual parcel may be flawed. However, the error likely has typical statistical properties and conventional statistics apply – estimating many individual parcels and aggregating them into one measurement will improve the estimate considerably. The agribusiness firm would be responsible for monitoring the individual farmers, possibly with some advisory role from USDA on adoption of BMPs. Under this system farmers could be rewarded for adopting BMPs and the agribusiness firm would be rewarded based on estimates of actual carbon sequestered.

Sandor, a student of the history of markets, has been heavily involved in inventing a number of new markets. He postulates a simple seven-stage process for market development:

--a structural economic change that creates a demand for new services; the creation of uniform standards for a commodity or security; the development of a legal instrument which provides evidence of ownership; the development of informal spot markets (for immediate delivery) and forward markets (non-standardized agreements for future delivery) in commodities and securities where "receipts" of ownership are traded; the emergence of securities and commodities exchanges; the creation of organized futures markets (standardized contracts for future delivery on organized exchanges) and options markets (rights but not guarantees for future delivery) in commodities and securities; and (7) the proliferation of over-the-counter markets (p.2).

Based on this experience, Sandor develops recommendations for implementing an international pilot program for carbon emissions trading. An international pilot is in keeping with the Kyoto protocol which, during the first phase, puts the burden on developed economies. With trading, those in developed countries would also have the option of involving developing countries by funding low-cost emission reduction projects and by helping developing countries finance their efforts to prevent destruction of existing forests.

An effective carbon emissions market must have a clearly defined tradable commodity for greenhouse gas emissions - the standard measure to be traded must be agreed. An oversight body is needed, along with emissions baselines and clearly specified allocation and monitoring procedures. Once these standards are in place, existing exchanges and trading systems can be used to facilitate trades. Widely accepted standards will increase the credibility of the trades and help standardize the legal mechanics more quickly. All of these steps will lower the transaction costs in the new market.

With standardization and use of existing exchanges and trading systems, a carbon emissions market is very asible. If we can trade corn on the Chicago Board of Trade, we can trade carbon. A system of quotes, hedging, and options will evolve. The market for carbon trades is, if fact, already evolving (Sandor). Niagara Mohawk (an electric power company in New York) and Arizona Public Service completed a swap of carbon offsets for sulfur dioxide emission allowances in 1996. Environmental Financial Products purchased rainforest protection carbon offsets from the Republic of Costa Rica in 1997. A subsequent 1.1 million acre program also includes assurance from the Costa Rican government that the area will be placed in a national preserve. In 1998, the Japan-based Sumitomo began converting coal-fired electric power plants in Russia to natural gas to earn carbon offsets.

The road to price discovery is being built. A market for carbon reduction services is now emerging. Carbon markets are being designed in the United Kingdom on the International Petroleum Exchange and in Australia at the Sydney Futures Exchange. Major companies such as United Technologies, British Petroleum and Royal Dutch Shell have also committed to large and early reductions in their own greenhouse gas emissions. Therefore, regardless of whether the U.S. approves the treaty, firms in other countries may soon be willing to pay American farmers to sequester carbon. U.S. action to limit net carbon emissions would help make the benefits and incentives to U.S. agriculture even greater.

Carbon trading is feasible. The prospects of a market will increase this feasibility as new investments are made in technologies and research needed to monitor and standardize carbon measurement. Active trading of carbon could prove an inexpensive insurance policy against the unknown problems that may emerge because of the rapid increase in global carbon emissions. An effective and efficient market-based solution will become even more important as governments around the world tighten restrictions on carbon emissions. U.S. farmers are well-positioned to help in sequestering more carbon. While helping to clean up the air, the benefits to the sector could be substantial. Farm income and land values should both increase. Local soil, water, and wildlife should benefit. All the while, carbon trading could also make the sector more resilient to other forces that have persistently created cycles in farm income through a market-based CRP program.

For more information

Carlson, Curtis, Dallas Burtraw, Maureen Cropper, and Karen L. Palmer. Sulfur Dioxide Controls by Electric Utilities: What are the Gains from Trade? Resources for the Future Discussion Paper, July 1998:98-44.

Energy Information Administration What Does the Kyoto Protocol Mean to U.S. Energy Markets and the U.S. Economy. October, 1998.

Money to Burn? The Economist. 344(1997): 86.

Hahn, Robert W., and Carol A. May, The Behavior of the Allowance Market: Theory and Evidence, The Electricity Journal, March 1994, 7:2, 28-37.

Lal, R., J.M. Kimble, R.F. Follett, and C.V. Cole. The Potential of U.S. Cropland to Sequester carbon and Mitigate the Greenhouse Effect. Ann Arbor: Sleeping Bear Press, 1998.

Lynch, Sarah and Katherine R. Smith. Lean, Mean and Green…Designing Farm Support Programs in a New Era. Policy Studies Program Report No. 3, Henry A. Wallace Institute For Alternative Agriculture, December 1994.

Sandor, Richard L. The Role of the United States in International Environmental Policy. Presentation to the White House Conference on Climate Change. Washington, D.C. 6 Oct. 1997.

Walsh, Michael J. Potential for Derivative Instruments on Sulfur Dioxide Emission Reduction Credits, Derivatives Quarterly, Vol. 1, No. 1, pp. 1-8, Fall 1994.

Dr. Richard Sandor is CEO of Environmental Financial Products, L.L.C. and Dr. Jerry Skees is professor of agricultural economics, at the University of Kentucky.

This article emerged from two presentations by Dr. Richard Sandor. First, at Monsanto in St. Louis, Mo. and then at the University of Kentucky (UK) as the fall seminar of Gamma Sigma Delta. Dr. Sandor expresses his appreciation to Dr. Bruno Alesii, agronomic systems manager at Monsanto, and Dean Oran Little of the College of Agriculture, University of Kentucky. Both authors are also grateful for reviews of this article provided by Dr. Craig Infanger, Dr. Barry.

STATEMENT of TIA NELSON
Deputy Director, Climate Change Program, The Nature Conservancy
Before the Senate Committee on Environment and Public Works
United States Senate
March 24, 1999

My name is Tia Nelson. I am Deputy Director of the Climate Change Program at The Nature Conservancy. The Nature Conservancy is a non-profit conservation organization founded in 1951. The Conservancy's mission is to protect rare and endangered plants, animals, and natural communities that represent the diversity of life on Earth by protecting the lands and waters they need to survive. Throughout its history, the Conservancy has protected more than 10 million acres of land in North America and millions more in Latin America, Asia, and the Pacific. The Nature Conservancy owns or manages approximately 2 million acres in the United States, comprising the largest system of private nature preserves in the world. Although it is known primarily as the organization that buys land to create nature preserves, the Conservancy also engages in many other conservation activities such as purchasing or holding conservation easements, working with private landowners to improve land management practices, and working with local communities to help them determine their environmental future. Internationally we work with in-country conservation partners, local governments, multilateral institutions, U.S. government agencies, and private sector firms to foster support for conservation and develop additional sources of funding. The Conservancy has more than 900,000 members and has at least one office in every state and in many other countries.

I am happy to be here today to discuss the concept of credit for voluntary early action and the Conservancy's experience in developing carbon sequestration projects as a climate change mitigation strategy. We believe that a well crafted early action bill can be a critical and cost effective step in the process of slowing the build-up of greenhouse gases in the atmosphere while achieving other important societal benefits. In particular, the Conservancy hopes that any early action legislation will contain scientifically valid, credible carbon sequestration provisions that will provide incentives for projects which slow or reverse the pace of deforestation of sensitive environmental areas in both the U.S and abroad, and encourage better forestry and agricultural management practices.

Deforestation and land degradation account for more than 20% of the annual greenhouse gas emissions and thus is an important component of any effort to address the threats of climate change. We believe that carbon sequestration, properly designed, can achieve real and measurable greenhouse gas benefits while protecting biodiversity and enhancing sustainable development. There are also important opportunities in the agricultural sector. Dr. Rattan Lal, a leading expert of soil science at Ohio State University, states that 116 million tons of carbon is released into the atmosphere each year from conventional agricultural activities in the U.S. Through better soil conservation practices such as reduced tillage, we have the potential to conserve substantial amounts of soil carbon, and reward farmers for good agricultural practices. We commend Senator Chafee and his co-sponsors for introducing legislation to start the process of creating these incentives.

The Conservancy's experience with carbon sequestration projects, funded voluntarily by private companies, has shown us the potential inherent in this mechanism. Our experience in developing and helping implement these types of projects has convinced us that we can meet the technical challenges of demonstrating and quantifying carbon sequestration benefits. Projects developed by the Conservancy to slow the release of carbon dioxide and enhance carbon reserves into the atmosphere are protecting two of the most important natural areas in the world, sequestering over 20 millions tons of carbon in a cost-effective manner and helping local communities develop their economies in a sustainable way. Governmental action to provide companies with clear incentives in this area could have dramatic positive results for greenhouse gas reductions and mitigation as well as other environmental benefits by encouraging more of these types of investments.

I would like tell you about several of our projects in order to help you understand the potential that we believe could lie in well-crafted incentives for carbon sequestration projects. Our first project is in the country of Belize and was carried out with significant support from Wisconsin Energy, a company that is represented here today. Wisconsin Energy approached The Nature Conservancy in 1994 with the idea of undertaking a project that would demonstrate the potential of forest conservation and sustainable forest management to address the build-up of greenhouse gases. Both the company and The Conservancy were aware that, according to experts such as the World Resources Institute, forests act as both a source of CO₂ emissions and also as an important carbon "sink", absorbing atmospheric CO₂ concentrations through the process of photosynthesis and storing it as biomass --both above and below ground. The volume of carbon stored by forestland increases as the volume of biomass increases.

The Conservancy has long sought the protection of the rainforests of central and western Belize for conservation activities. This is one of the world's hotspots of biodiversity. These forests are home to 70 different mammals (including several cat species like the jaguar and howler monkeys), 340 species of birds (many of which spend their summers in the U.S) and 240 different species of trees. Unfortunately, these forests are being bulldozed, burned and converted to agricultural fields in many areas. The result is a significant emission of carbon dioxide into the atmosphere as well as a tremendous loss of biodiversity.

In 1995, a 14,000-acre parcel of rainforest was put up for sale by a local land owner. The leading bidder was a local farm interest that intended to use the land for soybean production. Instead, Wisconsin Energy and other companies - Cinergy, Detroit Edison, PacifiCorp, and Utilitree Carbon Company - gave the Conservancy and its Belizean partner, Programme for Belize, $2.6 million. With this funding Programme for Belize was able to purchase the land and set aside funding for its management. Special care was taken to ensure that the potential for "leakage" of benefits was adequately addressed through project design. Funding also allowed for a small-scale sustainable forestry operation, certified by the Forest Stewardship Council, as well as community education programs. This provided jobs and income for the local population. In 1998, with additional funding from Wisconsin Energy and Suncor, a Canadian oil company, the Conservancy and Programme for Belize were able to purchase an additional parcel of land and add it to the holdings managed under the carbon sequestration project. In all, $5.6 million has been generated for this project. This would not have been possible without investments from companies seeking to demonstrate the validity of this mechanism through the U.S. government's initiative on Joint Implementation. Our estimate is that, if the area purchased had been converted to agriculture instead of maintained as an intact forest, the additional carbon dioxide released into the atmosphere and the decrease in carbon stored would total 2.4 million tons over the next 40 years. This estimate is based on an analysis undertaken by the Winrock International Institute for Agricultural Development, a non-profit organization with considerable expertise in carbon measurement. Winrock was retained to develop a system to measure the greenhouse gas benefits of the project. The monitoring protocol involved the use of permanent sample plots in which carbon from soil, trees and leaves is measured and analyzed in laboratories. Thus, the actual carbon sequestered by the project, which is registered with the U.S. Initiative on Joint Implementation, is backed by a scientifically rigorous measurement system.

Our second and largest project to-date is the Noel Kempff Climate Action Project in Bolivia. This $10 million project, supported by American Electric Power, PacifiCorp, and BP Amoco, has been used to retire forestry concessions in one of the most biologically diverse areas in Latin America. This allowed the Bolivian government to double the size of the Noel Kempff National Park, a long-time goal. While much of the rainforest in Bolivia has been destroyed by unsustainable forestry practices, Noel Kempff has now been expanded by 1.5 million acres and is protected by one of the best-funded management programs in the region. In addition to funding the retirement of forestry concessions and the establishment of a permanent endowment for the park, funding also has been used to rehabilitate a local school and health facility and to provide capital to local communities for sustainable economic development projects.

The carbon sequestered by the project has been estimated using scientifically rigorous methodology developed by Winrock. Of the $10 million project budget, nearly $2 million is for monitoring and verification of greenhouse gas benefits. Our current estimate is that the project will reduce, avoid or mitigate 15 million tons of carbon in the next 30 years. This amount is equal to the lifetime emissions of approximately 850,000 cars. These estimates will be verified periodically over the life of the project by on-the-ground measurement. The project and its monitoring and verification protocol is viewed as an important model in demonstrating scientifically valid carbon measurements.

In addition to these two projects, The Nature Conservancy is working closely with other companies to encourage support for other carbon sequestration projects domestically and internationally that can help achieve climate change mitigation and conservation benefits. We know from these discussions that many companies are hesitant to commit to this kind of investment without assurances that these investments will be recognized. It is important to remember that the size of these investments vastly exceeds traditional corporate giving for conservation purposes and that the companies which have been involved to date have done so in an effort to help develop new cost-effective mechanisms for climate mitigation. They have been leading by doing.

We believe the potential to expand this mechanism to slow the build-up of greenhouse gases, preserve carbon sinks and simultaneously achieve conservation goals will not be achieved unless the U.S. government offers some incentives and clear guidelines to companies prepared to act now. Without clear rules, companies which have acted responsibly and made investments in slowing the build-up of greenhouse gases will be treated the same as those which ignored the problem. We believe this would be a mistake, and a lost opportunity.

As I have noted earlier, the Conservancy strongly favors the inclusion of carbon sequestration provisions in any early action program. We do encourage legislators to move carefully in creating such provisions so as to create measurable greenhouse gas benefits and improvements in the ways in which lands are managed and to avoid the creation of perverse incentives that might have a counter-productive impact. Some principals we think the committee should keep in mind are:

* All projects should be subjected to rigorous monitoring and verification and transparent reporting.

* Credits for forest conservation should take into account potential displacement of these benefits to other areas, to ensure that "leakage" is addressed.

* Carbon sequestration provisions under early action should be awarded for additional changes in land management above and beyond current practices. There should be no credit in cases where landowners deforest land and then engage in tree planting. Neither should credits be accrued for business as usual scenarios.

* International projects screened by the joint implementation program should be eligible for early action credits. The key sources of emissions from the land use sector stem from deforestation of the tropics. Companies should have an incentive to help address this issue.

With these principles, we believe that carbon sequestration projects can play an important role in an early action program. We thank you for the opportunity to present our views here and look forward to providing the committee with whatever assistance we can as it continues its work.

Statement of John Passacantando, Ozone Action

Senator Chafee, Senator Baucus, and members of the Committee, Thank you for the invitation to be here today. My name is John Passacantando, Executive Director of Ozone Action. Ozone Action is a six-year-old non-profit organization dedicated to working on the atmospheric threats of global warming and ozone depletion. Our mission is one of public education, spreading the word on the science of global warming, and helping to build the public constituency for leadership to address these global threats.

Facing the threat of global warming, this Committee must decide whether to address the root of the problem or simply to treat its symptoms. I am here today to challenge this Committee to do the former by passing a bill that will start U.S. industries on a path to greater efficiency, less pollution, and put the U.S. in a leadership role as the key exporters of the new and exciting energy efficient technologies that are beginning to emerge. I am also here to warn you against taking the Band-Aid approach to global warming that S.547 now presents.

Any doctor, when treating a patient with high cholesterol, will likely prescribe some type of medication. But no responsible doctor would limit his treatment to just medication. He would insist that the patient address the source of his cholesterol problem by changing his eating and exercise habits. To do anything less would be not only irresponsible, but obviously dangerous to the patient's health. It is widely recognized that one of the inherent dangers in our ever-advancing medical technologies is the belief that there will always be some pill, whether it is for cholesterol, dieting, blood pressure, or otherwise that will solve our problem so that we won't have to change our habits.

In many ways, our global climate shows the symptoms of an ailing patient. Scientists around the world recognize that our glaciers are retreating, our ice caps are thinning, our seas our rising, our violent storms increasing, and rising temperatures are breaking records that go back to the middle ages. To pass S.547 as it currently stands would be like giving this sick patient a pill without addressing the source of the problem -- escalating emissions of CO₂ from the burning of fossil fuels. Just as it would have been irresponsible for the doctor in the cholesterol analogy to send his patient off without changing the habits that caused his problem, it would be irresponsible for this Committee to pass a bill that allows companies to continue increasing their emissions while being rewarded for everything from creating tree plantations to unverifiable, self-reported projects almost a decade old.

Our country's history of strong environmental regulation and economic prosperity is the clearest indicator that properly crafted regulations can provide incentives for the innovations that drive our markets. Michael Porter, Harvard Business School professor and former member of President Reagan's Commission on Industrial Competitiveness notes in his most recent book that "the data clearly show that the costs of addressing environmental regulations can be minimized, if not eliminated, through innovation that delivers other competitive benefits." He goes on to suggest that we should "focus, then, on relaxing the trade-off between environmental protection and competitiveness by encouraging innovation and resource productivity."

Like Porter, I do not come at these issues purely as an environmental advocate. While it is my duty as the leader of an environmental organization that focuses on atmospheric protection to speak as one, my background is in business, economics and Wall Street. I spent eight years of my career in decidedly non-environmental roles, and for a majority of that period, working for Jude Wanniski, the high priest of supply-side economics. That is to say, I believe in a very careful use of government intervention, and am as suspicious of corporate welfare as any conservative.

The history of environmental legislation in the United States is one of the government continually raising environmental standards, usually over the strong objections of the affected industries, only to have those standards met by creative innovations that come in at a fraction of the initially projected costs or even as new profit centers for these industries. The Clean Air Act, removing lead from gasoline, phasing out ozone depleting chemicals are just a few of the examples.

The fight against global warming is no different than these other efforts - it's just larger. Cheap and abundant fossil fuels have been important to our economic growth. But so have intelligence, technology and innovation. The most recalcitrant companies are still fighting even the thought that human actions may be contributing to global warming. Meanwhile, the most innovative companies are investing in highly efficient technologies for cars, buildings and homes.

Overall, S.547 is a failure in that it does not promote innovation and resource productivity. Instead, the bill rewards our biggest polluting companies even if they make no changes whatsoever. It also has the potential to pre-empt real emissions reductions, just as a mandate is emerging from the American people, increasingly concerned about global warming.

Specific flaws with S. 547 include:

1605(b) credits: The bill allows for the issuing of emissions credits for past voluntary emissions reductions reported to the Department of Energy (1605(b)). These projects simply cannot be given credit without a tight screen to rule out unverifiable projects (according to the General Accounting Office, more than 1,800 claims under 1605(b) during 1994-1996 have at best a "moderate" level of accuracy) those with negative environmental impacts or those that would have taken place anyway in the course of normal business. Perhaps more importantly, these unverifiable 1605(b) credits could completely offset emissions reductions targets adopted by the U.S., (credits claimed under just two years of 1605(b) reporting represent 80 percent of U.S. emissions reductions requirement). Furthermore, according to the non-profit National Environmental Trust, just a handful of companies reporting under 1605(b) could potentially get credits worth $11 billion for questionable global warming pollution reduction cuts.

A great example of the flawed accounting within the 1605(b) program is in a submission from General Motors. GM filed for 1605(b) credits for reduced emissions of their portion in the U.S. vehicle fleet. Twenty-five percent of the reductions GM claimed came not from efficiency improvements, but simply because they didn't sell as many cars and trucks -- their fleet diminished. Awarding credits for lost market share amounts to no more than corporate welfare, a handout to big business.

Nuclear incentives: Sen. Wyden, in his letter supporting the bill, eloquently outlined many of the problems that are embedded in the bill as presently drafted. He drew specific attention to the incentives this bill could provide for increased use of nuclear power and the inadequacy of many of the 1605(b) reported projects. For example, sixty percent of Southern Company's 1605(b) projects are nuclear plant upgrades and increased output from nuclear plants. To further subsidize this moribund industry in the name of global warming, would exacerbate an existing problem, and one the American public has resoundingly rejected. While nuclear energy does not omit carbon, it is unacceptable to trade one environmental threat for another.

International projects: By allowing for the granting of credits for overseas greenhouse gas abatement efforts, this bill diverts the focus from innovative investments at home where they are most needed. It instead relies on difficult-to-measure efforts in the developing world, many of which these companies are undertaking as profitable business investments anyway. In addition, there is great potential to corrupt the international negotiation process, as it will be done ahead of the global effort to create the framework for cooperation within the Kyoto Protocol. For example, S. 547 allows a double standard in which U.S. corporations can get credit for reducing emissions overseas but do not get penalized for increasing emissions overseas.

Sinks: Carbon absorbing "sinks" projects should be left out of the early credit discussion at least until the international scientific body, the Intergovernmental Panel on Climate Change completes its study in the year 2000 and defines the way sinks will be dealt with under the Kyoto Protocol. The science must drive the policy, not the other way around. Any U.S. credits for such actions promised prior to that report have great potential to set false expectations for companies or even to put the U.S. in a position of advocating a less rigorous accounting for these projects. If you can find a way to protect our forests and stop global warming, terrific. But if you are encouraging polluters to offset their emissions by putting their own fences around existing forests or for planting tree plantations destined for the paper mill, then the bill has no environmental integrity. Regardless, to ensure environmental integrity, policy decisions must be based on scientific decisions that are not yet available.

Additionally, as sinks are related to agriculture, it is one thing to promote no regrets measures to insure sustainable farming practices designed, in part, to build up the organic matter in the soils - a process which helps the soil hold more carbon dioxide. However, it is troublesome if false hopes are created that companies will be able to offset their emissions through a change in practices in the agricultural sector. In our opinion, including soil-based sinks could create false hopes and the potential for greater backlash down the road if the international community decides not to include soils in the Kyoto Protocol. There are so many other benefits of soil conservation and other sustainable agricultural practices; there must be a better way to provide incentives for this behavior.

There are other flaws as well. Among them are: any early action program must be capped to provide security that the credits given out prior to a Kyoto Protocol compliance period do not overwhelm and obviate any action during that period; instances where more than one entity might claim credit for the very same action must be avoided; and a static baseline as presently stipulated in the bill is not aggressive enough. A steadily declining baseline target would both encourage real progress and weed out and discourage business-as-usual emissions reductions.

Until these flaws are fixed, any future efforts to lower industrial emissions of greenhouse gases will be met with the cry of "I already gave at the office." Passing the bill before you as a means to combat global warming is like a doctor combating a patient's high cholesterol by giving him a pill and then treating him to a steak and fries dinner. Our global climate deserves better treatment.

In 1960, President Kennedy said, "It is time for a new generation of leadership, to cope with new problems and new opportunities. For there is a new world to be won." His words are as true today as they were almost forty years ago. Today's new world will not be won if we cling to old technologies at the expense of our environment and fail to promote the innovations our companies need to be competitive internationally. The challenge before this Committee is to pass a bill that will address the source of global warming so that the US will continue to lead tomorrow as we have led in the past in both environmental protection and economic strength.

STATEMENT FOR THE RECORD BY RAYMOND J. KEATING
CHIEF ECONOMIST, SMALL BUSINESS SURVIVAL COMMITTEE
for the HEARING ON PROPOSED FORMAL RECOGNITION OR CREDITING OF VOLUNTARY GREENHOUSE GAS MITIGATION ACTIVITIES
COMMITTEE ON ENVIRONMENT AND PUBLIC WORKS
UNITED STATES SENATE CHAIRMAN, JOHN H. CHAFEE
MARCH 24, 1999

Thank you Mr. Chairman and Members of the Committee for the opportunity to testify today. I am Raymond J. Keating, chief economist for the Small Business Survival Committee (SBSC). SBSC is a nonpartisan, nonprofit small business advocacy group with more than 50,000 members across the nation.

As explained in many of our publications, articles and in previous congressional testimony, SBSC opposes the Kyoto Protocol to the United Nations Framework Convention on Climate Change for a variety of reasons, including, and primarily due to, the significant costs it would impose on small businesses, consumers and the U.S. economy in general, as well as the competitive disadvantage U.S. small businesses would face versus exempted international businesses in most other countries.

As noted in the invitation letter for this hearing to SBSC from the Committee Chairman and Ranking Minority Member, what we have been asked to specifically address today are the issues related to "formal recognition or crediting of voluntary greenhouse gas mitigation activities." These fundamental issues, for example, are raised by the proposed "Credit for Voluntary Reductions Act" (S.547).

First, we need to understand, or come to agree on what these credits would be used for. Obviously, the credits would only have meaning and value under the Kyoto Protocol or some similar regulatory regime which would implement an emissions "cap and trade" system. Otherwise, the entire early credit endeavor would be pointless. Therefore, we must take a look at how emissions trading would likely work, and what problems it presents.

Under the Kyoto Protocol, the U.S. would be obliged to reduce so-called greenhouse gas emissions mainly CO₂ to 7 percent below 1990 levels by 2012. That would require dramatic reductions in energy usage. One method for reducing energy consumption and emissions would be an emissions trading program whereby the government would cap emissions, and then ration or auction off credits equivalent to certain levels of emissions. (Under S.547, for example, a "greenhouse gas reduction credit" means an authorization to emit 1 metric ton of greenhouse gas.) The credits would be tradable. For example, nations or companies seeking to maintain current or expand emissions would buy credits from nations or companies cutting their emissions and not needing the credits.

U.S. Assistant Secretary of State Melinda Kimble, a top climate negotiator, told Reuters (October 21, 1998), "In the United States, first and foremost domestic action is going to be a trading system."

Trading emission credits is called a market-based system, but in fact, it has very little to do with markets. It is merely another regulatory system for shifting around massive government-imposed costs. The government would place severe restrictions on CO₂ emissions and therefore on energy consumption and economic activity then implement a kind of shell game to shift around and attempt to hide the enormous costs.

Massive problems exist with such a system.

-- Costly and Stealthy. A "cap and trade" system does the same amount of damage to small businesses, consumers and the economy as do overt energy taxes, but in a dangerously stealthy manner. In a 1994 document, the Environmental Protection Agency reportedly noted the problems facing an overt energy tax, and then cynically declared: "A cap would likely not be as unpopular as a tax, since people are generally less familiar with the concept." Like other forms of regulation, the exact costs would remain largely a mystery to consumers, but nonetheless they would be paying in the form of increased costs, lost GDP, and lost jobs.

-- Impossible Enforcement. The most daunting problem with an emissions trading regulatory system is compliance. In summary, countless dollars would be spent in pursuit of an impossible compliance goal.

Administration of this treaty would require monitoring all sources of emissions, and comparing those results with permissible credit amounts. Environmental bureaucrats would have to monitor both stationary and mobile sources of emissions. Stationary sources would be bad enough think of the number of business, nonprofit and governmental facilities that would be under surveillance but remember there are more than 200 million motor vehicles in use in the U.S. today.

Now, take this scenario, and apply it internationally. The complexity, costs and extent of government intrusiveness grow exponentially. After all, the U.S. cannot even successfully monitor chemical and nuclear weapons activities in Iraq, never mind global monitoring of practically all economic activity. This would require either a massive international environmental police-like force sticking their noses into private-sector and public-sector ventures nation by nation, or extensive domestic regulation under the assumption that each nation will be equally faithful and efficient in their monitoring activities. Either route is naive and costly, but be sure that our Environmental Protection Agency our likely Kyoto Protocol regulator will be the most aggressive enforcer.

-- Developing Nations. If this treaty is meant to be taken seriously, then developing nations eventually must be brought into the fold. Currently, developing nations are excluded from emissions caps.

An exclusion for developing nations would provide them with a tremendous economic advantage, allowing them to attract industries, businesses and jobs away from nations forced to impose draconian costs under the treaty. Obviously, this cannot stand.

But what would happen if developing nations are placed under the Global Warming Treaty emissions caps? Imagine the insurmountable obstacles involved in monitoring emissions in many Third World nations where it can be a formidable task just to feed the populace. If imposed and somehow enforced, limiting emissions in such nations would sentence millions of people to permanent poverty.

-- Small Business at a Disadvantage. Under emissions trading, smaller enterprises would be at a distinct disadvantage as bidding domestically and/or internationally raises the price of credits. As is the case with other forms of regulation, these added costs will hit smaller ventures hardest. Many small businesses operate on the slimmest of margins, and simply would be unable to play the credits game. As it stands now, most small businesses find it daunting to comply with the hundreds of laws and regulations required under all levels of government. In addition, basic business matters require their hour-by-hour, day-to-day attention.

The credits game will be viewed by most as being the domain of big business, or be construed as some complex and vague program that offers no or little current quantifiable benefit in running their day-to-day operations. In addition, the high-risk nature of smaller, entrepreneurial firms require the opportunity to make substantial returns.

The Kyoto treaty and emissions trading raise costs, and therefore reduce potential returns, which means that many start-ups, innovative, potentially high-growth enterprises would be nipped in the bud.

Indeed, it certainly does not take an active imagination to see mature, entrenched large enterprises gaining a clear advantage over smaller businesses under an emissions trading regulatory system. For large firms with greater ability including the necessary capital to survive the added costs of playing the credits game will actually face reduced competition from smaller upstarts who will not survive.

Trading emission credits merely would shift the costs of the Kyoto Protocol around, but certainly would not make them disappear. The economic costs and dislocations promise to be severe.

Having noted the many problems with emissions trading, it becomes obvious that any kind of early action to reduce emissions so-called "voluntary" or not of such a system manages to only make matters worse. For example:

-- The federal government would most likely enter into early implementation agreements with large, established businesses who have the legal expertise, technical abilities, and discretionary capital to undertake early actions. This level of resources would naturally give an advantage to big business to become "volunteers" in an early action program. And since there would only be so many credits to go around under the Kyoto Protocol or a national cap as part of a domestic program, those who did not participate in early actions would suffer accordingly. Small and mid-sized businesses would bear a heavy burden in 2008 and beyond.

-- Politics no doubt would play a major part of this early implementation program. For example, S.547 would authorize "the President to enter into binding agreements under which entities operating in the United States will receive credit, usable in any future domestic program that requires mitigation of greenhouse gas emissions, for voluntary mitigation actions taken before the end of the credit period."

Those with political connections and lobbying clout would have the clear advantage when it comes to entering into early implementation agreements, at the expense of the non-politically connected, i.e., smaller enterprises. Even if so-called "pooling" is allowed whereby a group of participants act as one participant for purposes of early action its usefulness would be quite limited. For example, established, politically connected businesses would have absolutely no incentives to pool with other firms. Why would they? For the rest, the costs of organizing in terms of dollars, time, personnel, education, etc. would be formidable.

As noted earlier, most business owners struggle day after day for long hours to keep their business going, or hopefully growing constantly assessing the best way to serve their customers, to keep their employees productive and happy, and to project where their market is headed. These are the folks that will not have the ability to play the politics of credits for early action, and they then will be the ones most savaged by the costs of the Kyoto Protocol, or any other domestic initiative to reduce greenhouse emissions, or another domestic regulatory regime developed to manage, monitor and attempt to reduce emissions.

-- Mature businesses in predictable industries would more easily participate in early implementation than would small, high-growth businesses in new, dynamic and far less predictable industries. None of us really know what the new businesses and industries of tomorrow will be. But we do know that under a credit for early action plan, they will be especially hurt, as they obviously cannot take advantage of early action.

-- Credits for early implementation would establish a strong special-interest group favoring Kyoto implementation or a comparable domestic regulatory program. Credits potentially worth untold millions of dollars would act as powerful incentives to push and lobby for treaty ratification, or some type of regulatory structure that would give value to such credits. In other words, without a program to give value to such credits they would be worthless. I believe this would effectively split some of the business community in its opposition to the Kyoto Protocol pitting many large companies with a special interest in seeing the treaty and its trading scheme become reality, against a far more dispersed opposition overwhelmingly populated by small and mid-sized firms. Already, whatever ruptures that exist in the business community over whether the Kyoto Protocol should be implemented or not are largely based on whether certain industry sectors believe they can take advantage of the new regulatory structure. For example, it is no surprise that we see renewable energy companies and large corporations with vast natural gas reserves cheerfully supporting Kyoto or a similar domestic version of it.

Emissions caps on nations effectively are caps on economic growth. As entrepreneurs try to start up and grow businesses, they will be at a severe disadvantage in securing credits in a highly political system, and then will be hurt as the prices of domestically and/or internationally traded credits rise. Naturally, there is a trade-off between risks and potential rewards. The higher costs resulting from the Kyoto Protocol would mean reduced rewards, and therefore, less risk taking. Less risk taking means slower economic growth and reduced job creation.

Especially from the small business perspective, early action credits are a bad deal. The economics of the Kyoto Protocol or a similar program, including its emissions trading scheme, are dismal. Congress should not be looking for ways to advance Kyoto and its attendant implementation schemes, but instead should be stating quite clearly that it will not ratify this costly, misguided, and highly dubious treaty.

As a final point, it is well worth noting the increasing energy efficiency in the United States brought about mainly by businesses and entrepreneurs without any such draconian measures along the lines of a Kyoto Protocol. For example, between 1970 and 1996, total energy consumption increased by 41%, while our economy more than doubled in real terms over the same period. Indeed, the private sector possesses every incentive to become more and more efficient in terms of energy usage.

Once again, thank you for allowing me to testify today, and I would be glad to answer any of your questions.