Hearing of the Energy and Environment Subcommittee of the House Comittee on Energy and Commerce. Subject: The Role of Offsets in Climate Legislation. Chaired by: Rep. Edward Markey (D-MA)

Statement

REP. MARKEY: (In progress) -- reduce compliance costs. Unlike price caps, they can do that while achieving needed emissions reductions. As a result, offsets can act as a bridge, allowing us to take on tougher, near-term emission reduction targets than might otherwise be possible.

That can give us time to develop the low carbon technologies that we need. Offsets can also provide an opportunity for key stakeholders outside the energy and industrial sectors, like farmers and foresters, to get in the game on climate change. They can help fund activities like tropical forest conservation that have environmental benefits going beyond climate change. And finally, a properly designed offset program can provide a powerful lever to get major developing countries to take action on climate change.

For all these reasons, offsets play a key role in the blueprint for legislative action recently put forward by the U.S. Climate Action Partnership, which as you all know, includes a range of leading U.S. businesses and environmental organizations. Offsets are a part of every existing cap and trade system. They're also a part of virtually every piece of proposed climate legislation, including my iCAP bill that I introduced last year.

Having said all that, offsets raise a number of real concerns that must be addressed. The first is the risk that some offsets could turn out to be hot air. Several of our witnesses today have testified that this has happened under the Kyoto protocol's Clean Development Mechanism. It surely is happening in the unregulated voluntary carbon market, as I learned last Congress when I held the first congressional hearing on that market in the Select Committee on Energy Independence and Global Warming. If offsets fail to deliver real reductions in global warming pollution, they will compromise the emissions cap. That is unacceptable given the urgency of the climate crisis.

There should be no debate that if we are to include offsets in climate legislation, they must be subject to conservative, science based standards. Rigorous monitoring and verification requirements must also be applied. We should be every bit as concerned with offset quality as we are with enforcement of pollution controls. For that reason, I strongly support the concept of an independent science advisory committee to oversee the development, implementation, and periodic updating of an offsets program.

Offset quality isn't the only thing at stake here. If we rely too heavily on offsets, we will not drive the technology transformation that we need. Necessity is the mother of invention. If we dull the incentive for innovation, we will not get the deep cuts in emissions that science tells us we need. We will also miss a crucial opportunity. If we don't spark a clean energy revolution here in America, we'll be left behind in the global competition for the clean tech market. For all these reasons, we need to strike a balance between strong targets and timetables for emission reductions and an appropriate but limited role for offsets in helping to meet them. These are complex issues, but I believe that they can be addressed in a way that strikes the right balance.

We have an outstanding panel here this morning to help us to do just that. We welcome them here today. And let me turn and recognize the ranking member of the subcommittee, the gentleman from Michigan, Mr. Upton.

REP. FRED UPTON (R-MI): Well, thank you, Mr. Chairman. I too want to thank our witnesses for joining us this morning. The cap-and- trade plans that we've seen so far rely, to varying degrees, on carbon offsets, both international as well as domestic. For example, the U.S. cap, who testified before the committee a month ago, is calling for a 1.5 billion metric ton of domestic and 1.5 billion metric tons of inter-nation offsets. The theory behind those offsets is that they decrease emissions from uncapped sectors, allowing greater emissions from capped sectors. In theory, this is a zero sum game.

In 2008, the offset market in developing countries derived from the UN Framework on Climate Change was over $12 billion. And these offsets have been subject to criticism on the grounds that projects have not achieved real emission reductions. The role of offsets in climate change legislation could mean a multibillion dollar windfall for China and other countries that won't necessarily be subject themselves to a cap on carbon. In exchange for those billions, there may not be any real emissions reductions. It defies reality that we are even considering spending money on offsets to offshore countries as their own economy is certainly hemorrhaging, particularly in Michigan.

We should be investing in our own infrastructure here at home. Last year, Congress got a taste of what the carbon offset market was all about. The CAO of the House cut an $89,000 check out of the taxpayers' checkbook to buy carbon credits. And some of that money went to farmers in North Dakota for tilling practices that apparently they were already using. According to the Center for American Progress, a group that strongly supports climate legislation, it didn't change much behavior that wasn't going to happen anyway. It just demonstrated why offsets are controversial and possibly pointless. That is a waste of taxpayer money.

In conclusion, there are a number of problem with the carbon offset markets, both in the U.S. and abroad that need to be examined and addressed. If we're relying on offsets, we must ensure that the money spent on offsets is having a real, tangible, and verifiable environmental benefit that would not have otherwise occurred. Seeing the issues that we've had with our voluntary domestic carbon market, I could only imagine how these issues will be compounded when the value of potential offsets increases and we're relying on verifying offsets in the developing world. I look forward to the testimony today, and I yield back.

REP. MARKEY: Great. The gentleman's times has expired. The chair recognizes the gentlelady from California, Ms. Capps, for an opening statement.

REP. LOIS CAPPS (D-CA): Thank you, Mr. Chairman. But in the interest of more question time, I will pass.

REP. MARKEY: Thank you. The chair recognizes the gentleman from Utah, Mr. Matheson.

REP. JIM MATHESON (D-UT): (Off mike.)

REP. MARKEY: The chair recognizes the gentleman from Georgia, Mr. Barrow.

REP. JOHN BARROW (D-GA): (Off mike.)

REP. MARKEY: The chair recognizes the gentlelady from California, Ms. Matsui.

REP. DORIS MATSUI (D-CA): Thank you, Mr. Chairman. I'm very pleased to be here today, and thank you for your continued focus on climate change and your efforts to craft a comprehensive bill. I'd like to also thank today's participants and panelists. We all appreciate your time and expertise on these matters, and I'll only take a minute so we can get to your important testimony.

I'm glad that we're here to explore the concept of offsets. I feel that this idea has merit and could be an effective tool in order to reduce harmful greenhouse gas emissions. However, I look forward to hearing the true facts today. While offsets could be a way for our nation and our plane to reduce emissions, I want to make sure that any offset provisions truly work. I want to ensure that we're actually helping our planet and not simply moving the goal post.

In California, we've made it very clear that all offsets must be real, permanent, quantifiable, verifiable, enforceable, and additional. These should be federal requirements as well. I strongly believe that offset projects must have rigorous scientific backing and actually provide a quantifiable benefit to the planet. I hope our witnesses today can help us all understand how offsets can help and potentially hurt our legislative efforts. With that, once again, Mr. Chairman, thank you for highlighting this important issue. I yield back.

REP. MARKEY: Great. The gentlelady's time has expired. The chair recognizes the gentleman from Illinois, Mr. Shimkus.

REP. JOHN SHIMKUS (R-IL): Thank you, Mr. Chairman. First, a question -- do you know when the cameras in this committee room will get fixed? I've never known you to be camera shy. This hearing and these climate change hearings are too important for the cameras in this committee room not to work, so that the public and this country can see the debate on these issues on climate change. And this is not the first hearing we've had where the cameras have not worked. Can you tell us when the committee leadership might get around to fixing these cameras?

REP. MARKEY: Well, honestly, I did not know that the cameras weren't working.

REP. SHIMKUS: I knew you didn't know. (Laughing.)

REP. MARKEY: And so --

REP. SHIMKUS: But if you look right there, they're turned facing each other.

REP. MARKEY: I can see that right now, and they look -- it looks like they're very interested -- (crosstalk).

REP. SHIMKUS: I think I've got your attention.

REP. MARKEY: But the good news is, is that there is an audio cast, okay. Now, I --

REP. SHIMKUS: That's not the same.

REP. MARKEY: I agree it's not the same, okay. So let's just agree on this, okay, especially in a carbon offset hearing, okay. This is very important, because the interest in this is about as high as watching grass grown, okay.

REP. SHIMKUS: I disagree. I --

REP. MARKEY: And literally, that's what this is about.

(Laughter.)

REP. SHIMKUS: I --

REP. MARKEY: It's about where we can watch grass grow or trees grow. (Crosstalk) --

REP. SHIMKUS: Well, after you hear my opening statement, you will have a -- (crosstalk).

REP. MARKEY: No -- (crosstalk). Honestly, you've drawn my attention to it. After 22 years as the ranking member on the Telecommunications Committee or chairman --

REP. SHIMKUS: You never had tech -- (crosstalk).

REP. MARKEY: -- I have a high interest -- I have a high, high interest in ensuring that there is full video coverage transmitted around the world and hopefully into the cosmos, so it can be preserved forever and circulating for eons this hearing. And I promise you that I will do my best to find the television technician to be able to fix this camera problem, which I did not know existed. And I'm glad that you brought it to my attention, and we'll do it as quickly as possible.

REP. SHIMKUS: Thank you, Mr. Chairman. This -- (inaudible) -- policy, my time is out, but can I --

(Laughter.)

REP. MARKEY: I can grant you an opening statement offset, okay, for --

(Laughter.)

-- the inquiry, which you made, and the chair is willing to recognize the gentleman for -- (crosstalk).

REP. SHIMKUS: Thank you, Mr. Chairman, and I appreciate that. But no one is assuring my mine workers an offset on their jobs. And we can laugh all we want, but as we've shown, 1,000 mine workers lost their job the last time this House passed an air quality bill -- 1,000 Peabody #10, Kincaid, Illinois. Just check the records. So we can joke all we want, but a climate change cap-and-trade provision is going to be deadly to the fossil fuel industry in this country.

And that needs to be exposed publically, and it needs to use the full capacity of C-SPAN to do that. And I wouldn't want to say that there was an intentional use of not having C-SPAN coverage, but I will tell you it is unique that someone who has been so versed in using new media, that this is now, I think, the second climate change hearing where we haven't had coverage. So, I mean, all kidding aside, I'm taking this debate very seriously, because I've seen the job loss and job dislocation.

And I want to highlight, this is part of the hypocrisy index that we're seeing coming from this congressional leadership and this administration. First, they want to cut the deficit in half in the first term, and they add $1.5 trillion to the national debt in six weeks. Then they don't want to accept -- and the president will not sign bills that have earmarks. However, he's probably going to sign this omnibus bill that has 9,000 earmarks. I think there's some hypocrisy.

Finally, as it relates to this provision and this bill, the president promises a 95 percent tax cut for all Americans, but climate change and his budget will create a tax increase on average citizens, an average of $700 a year to $1200 a year. Now, that dwarfs to the $400 tax cut that we just have gotten in the stimulus bill. So there is a hypocrisy here. As I said last year on this debate, the congressional majority that attacked NIMIX, a trading floor for distortion of the cost of energy, are now going to empower a new exchange on climate and carbon to do this.

So I think this is very serious. Again, I would challenge you to get this -- get your leadership to get this on C-SPAN, so we can fully inform the public. I yield back my time.

REP. MARKEY: I thank the gentleman. Just a little historical background on the whole issue of C-SPAN. This was an issue that was raised by Albert Gore and myself and others back in 1978 and '79 with Speaker O'Neill, who had an initial reluctance to broadcast these hearings. But having been pressed by a small number of us that really wanted to see televised congressional deliberations, he acceded to that request. It took three years for the Senate to finally accept that as well, and they did so because of the amount of attention which the House received from the public coverage of the hearings.

So since I was one of the initiators of the coverage, and the senior members at that time were not interested in it, I can promise you that it is my intention, and I'm sure Chairman Waxman's attention as well, that whatever technical problem exists be corrected as soon as possible. And we will do that. And I can give --

REP. SHIMKUS: Thank you, Mr. Chairman.

REP. MARKEY: -- I can give the gentleman my word on that. Let me turn then and recognize the gentleman from Texas, Mr. Green.

REP. GENE GREEN (D-TX): (Off mike) -- Mr. Dingell.

REP. MARKEY: I'm sorry. I did not see Mr. Dingell. But the chair recognizes the gentleman from Michigan, Mr. Dingell.

REP. JOHN DINGELL (D-MI): Well, I thank both of my colleagues, and I thank my friend from Texas, Mr. Green, who is always a gentleman and gracious in all ways. Mr. Chairman, thank you for holding this important hearing. I commend you for building a strong record and for making a strong case for swift and well thought out action on climate change. It is crucial that we find a way to reduce greenhouse gas emissions to avoid dangerous harm to this planet. It is also crucial that we do so in a way that protects our economy, a very difficult task but one which is doable with proper effort by this committee and by proper leadership from you and your colleagues here.

I've heard from industry that allowing some use of offsets is the best way to control the cost of a climate change program. With this statement I agree. I would note that EPA's analysis of the Lieberman-Warner Bill bears this out. It projected that the use of offsets could decrease allowance prices by up to seven folds if offsets were allowed and properly used. Last year, when my good friend, Mr. Boucher, and I put forward a draft comprehensive cap-and- trade bill, we included in the draft an offset program that would allow offsets to be used for up to 5 percent of each entity's compliance at the start of the program, increasing to up to 35 percent after 2025.

I would note that this bill is available to this subcommittee as it goes about its business. And I would note that this bill, or the suggested draft, contains matters which are approved by both environmentalists and by industry. And indeed, the draft is one which makes great good sense from the viewpoints of both sides. Other groups, including U.S. CAP, a coalition of industry and environmental groups, have called for the greater use of offsets, particularly in the early part of the cap-and-trade program, to keep allowance prices at levels necessary to avoid economic harm to our economy and to our industries.

I welcome and encourage this debate, and I urge this committee to consider the views of U.S. CAP and others who believe that offsets are a useful and a necessary tool. And in encouraging this debate, I do so because when Mr. Boucher and I introduced our draft, this is exactly the kind of feedback that we hoped to get. It is also essential that the use of offsets maintains the integrity of emission reductions. That is why our discussion draft would require that offsets be vigorously verified for quality and regularly assessed to ensure that they are quantifiable, permanent, and enforceable.

I urge the committee to keep this thought in mind, because there is a fine possibility here for rascality and misbehavior. I will also note that in the prepared testimony today by our witness from GAO, Mr. John Stephenson, the Director of Natural Resources and Environment, the GAO encourages Congress to establish one, clear rules for offsets compliance; two, procedures to account and compensate for uncertainty; three, a standardized registry for tracking the creation and ownership of offsets; and four, procedures for amending the offset rules as new information becomes available.

The draft submitted by Mr. Boucher and I achieved all of these recommendations, because we had great apprehensions about this. And I encourage members of this committee to explore the carbon offset program that we've set forward when considering cap and trade legislation in this Congress. I look forward to hearing from our witness today as we explore this important issue in more depth. Thank you, Mr. Chairman.

REP. MARKEY: The gentleman's time has expired. The chair recognizes the gentleman from Texas, Mr. Barton.

REP. JOE BARTON (R-TX): All right. Thank you, Mr. Chairman and thank our witnesses for being here today. This is an important hearing, the role of offsets in climate change legislation. I'm not sure we need climate change legislation, as you well know, Mr. Chairman. But if we do need it, offsets might be something we could do, theoretically, if they work, which I don't think they do in Europe, and that's what we're going to talk about.

The European Union has been trying something called the Emissions Trading Scheme and their corresponding Clean Development Mechanism. And from what I can tell, it has cost them jobs, and I think it's cost them credibility. Their sale of these credits seems to be almost impossible to verify, and they don't seem to actually be resulting in reducing emissions.

Last December, the Government Accountability Office released a report about their ETS and CDS international carbon offset scheme. I also, several years ago along with Mr. Whitfield of Kentucky, asked the GAO to examine how well the ETS and the CDM actually controlled greenhouse gases and whether available information substantiates the net benefits of the program. Our intention in requesting the GAO's assessment of their lessons from the international experience is that their experiences should apply to upcoming congressional deliberation of these carbon energy rationing schemes. That is the purpose of your hearing today. And again, I commend you for that.

What the GAO found is that they could not substantiate -- I want to repeat, could not substantiate either emissions reductions or clear economic benefits and that the negative economic effects could occur if the EU further reduced emissions allowances. This GAO report, in my mind, raises serious doubts about the effectiveness of any carbon emissions reduction scheme. If nothing else, the failure of the ETS and CDM show that the federal government shouldn't have spent taxpayer dollars on uncertain and unverified benefits.

The GAO found that the CDM's impact on emissions reductions and sustainable development has been limited and that it is, and quote, "nearly impossible," end quote, to ensure that international offset projects are additional to what would happen anyway absent the offset subsidy. The use of carbon offsets in a cap-and-trade system can undermine the system's integrity, because it's simply not possible to ensure that these credits represent a real, measurable, and long-term reduction in emissions. In a companion report, the GAO found that there was wide variability in the quality of the offsets. The incomplete and conflicting data on the use of the offsets and the multitude of quality assurance mechanisms severely limited the market's transparency.

Just as an aside, Mr. Chairman, I'm sure you know that the congressional purchase of offsets that Speaker Pelosi initiated several years ago has been suspended for the very reason that they can't guarantee that the offsets are really what they appear to be. What the American people need to know right now is not another murky financial market to lose their hard earned dollars. Indeed, it would be more than ironic if we in the Congress this year have a hand in creating a derivatives market for carbon offsets on the heels of what I consider to be a total meltdown that we've just seen in the world of financial derivatives.

Aside from the financial concerns, if the goal of a cap-and- trade tax plan is to reduce greenhouse gas emissions, the GAO found the use offsets could actually undermine achievement of emissions reduction goals and delay technological development. In the European Union, with its costly cap-and-trade tax scheme and offsets market, it decreased its CO2 emissions on paper by point three-tenths of 1 percent. In contrast, here in the United States where we don't do any of that, our CO2 emissions have been reduced by double the amount of point six-tenths of 1 percent.

Since the GAO report appeared on the scene, I have heard a lot of back peddling and sugar coating from proponents of the cap-and- trade regime, Europeans and Americans alike. All of a sudden, they say this ETS/CDM scheme is just a pilot program, or it's just a dress rehearsal. Proponents claim that now that EU countries have learned their lessons they really will get reductions in CO2 and they really will have something to show their citizens after they spend all their money on the past offsets and allowance program. This PR campaign to greenwash the failure of the ETS and CDM further underscores concerns that we should have about not following Europe's course as it creates a potential economic disaster for its citizens.

I guess, Mr. Chairman, you could say I'm undecided about the benefits of this particular scheme. And I do really appreciate you holding a hearing on it.

REP. MARKEY: I thank the gentleman. I thank the gentleman for keeping an open mind on this issue. Thank you.

(Laughter.)

The chair recognizes the gentleman from Texas, Mr. Green.

REP. GENE GREEN (D-TX): Thank you, Mr. Chairman. And I appreciate you not only having this hearing but our series of hearings on climate change and the solutions we have. Today's hearing reflects on the critical role that cost containment mechanisms must play in any congressional efforts to reduce greenhouse gas emissions.

Many governmental and private sector studies have concluded that efforts to reduce carbon emissions will have substantial costs to our economy. President Obama's 2009 budget, for example, assumes a cap- and-trade program that reduces greenhouse gases 83 percent below 2005 levels will generate $645 billion to the Treasury over 10 years. Any cap-and-trade program must include an honest discussion on how to reduce the regulatory costs of compliance for both businesses and consumers while protecting the environmental integrity of the program. Most legislative proposals permit regulated entities to purchase carbon offsets or greenhouse gas emission reductions in one place to make up for the emissions elsewhere, in lieu of reducing on-site emissions or purchasing additional emission allowances.

Carbon offsets are currently utilized under the European Union's Emissions Trading Scheme, ETS, through the Clean Development Mechanism, CDM, a Kyoto program permitting nations with binding emission limits, enact emission reduction projects in developing countries without emission limits. The EU's experience with CDM provides a valuable insight in the potential benefits in limits of carbon offsets within a U.S. climate program. Most experts agree that carbon offsets, to be effective, must be additional, quantifiable, real, and permanent. Disagreement lies in what defines these key terms to ensure that offsets aren't simply phantom reductions that can be gained by savvy entities or carbon market players. Congress must also pay careful attention on how to best structure the carbon offset approval and management processed to establish offset limits and price volatility mechanisms and encourage developing countries to transition from offsets to binding emission targets.

I look forward to our testimony today. I guess my concern is coming from Houston, Texas and the home of what used to be Enron. We watched a transmission and energy company turn into a trading company. And, as my colleague from Texas mentioned, we're seeing the trading in financial services actually the tail wagging the dog and the same thing we could see this. And we have to get it right. I don't want five or 10 years from now a committee in Congress sitting there and saying, okay, who voted for the 2009 bill similar to what we did to the 1999 bill to free up the flexibility that we're seeing the financial industry and see all the problems that it's wrecking havoc on.

So Mr. Chairman, I appreciate it. We need to learn from the mis-experience of the European example and see if we can make it work. And I yield back my time.

REP. MARKEY: The gentleman's time has expired. The chair recognizes the gentleman from Texas, Mr. Burgess.

REP. MICHAEL BURGESS (R-TX): I thank the gentleman. A simple trip to the search engine of choice on the Internet and typing in the phrase "carbon offset fraud" will give you tens of thousands of websites, news stories, YouTube clips, all discussing the idea that carbon offset programs are, indeed, as Chairman Dingell alluded to, a fertile field for dishonest minds. So I'm interested to hear from our witnesses today and hear what they have to say about including the carbon offset programs in the committee's cap-and-trade legislation.

Now, according to the August 2000 State Report from the General Accountability Office, which has been referenced several times this morning, over 600 organizations develop market or sell offsets in the United States with a wide range of prices, transaction types, and projects. One thing that remains constant among the 600 organization is the lack of the ability to verify the validity and effectiveness of these offset plans. In fact, we are still trying to verify the validity of the carbon indulgences past purchase by the House of Representatives in November of 2007.

I understand that the offsets have to be, as has been earlier pointed out, real surplus, quantifiable, verifiable, and enforceable to be credible. But I frankly cannot understand why they also need to be international. How are international carbon offsets useful when the carbon producing sources are local?

In my area, the Dallas-Fort Worth area of Texas, we have some of the most significant traffic congestion in the world, and as a consequence, are brushing up against non attainment for air quality standards several days a year. We work on these issues locally in order to improve air quality for the people who live and work in the area, but we certainly don't throw a tarp over grass clippings in a third world country to excuse the emissions that we create from sitting in traffic on Interstate Highway 35 through the center of my district. I'm going to maintain a healthy skepticism of any legislation or company that advocates for an international carbon offset program.

Mr. Chairman, in just the brief time I have remaining, I would also just add my concern to that of Mr. Shimkus. We are fixing to pass one of the largest tax increases on the middle class and lower levels of earning in this country. And I think it is only appropriate that American people be able to see what we're doing under the cover of darkness. I'll yield back.

REP. MARKEY: The gentleman's time has expired. The chair recognizes the gentleman from Texas, Mr. Gonzalez.

REP. CHARLES GONZALEZ (D-TX): (Off mike.)

REP. MARKEY: The chair recognizes the gentlelady from Wisconsin, Ms. Baldwin.

REP. TAMMY BALDWIN (D-WI): Thank you, Mr. Chairman. Today's hearing brings us to the core of -- excuse me. Today's hearing brings us to the core of one of the issues we'll be tackling in a cap-and- trade bill. Offsets are important to a greenhouse gas reduction program, both because of the cost containment benefits and the environmental benefits that occur even beyond those of emissions reductions.

Given my state's significant industrial base, along with our wealth of forested and agricultural lands, Wisconsin has a substantial interest in a successful offset program. Offsets have the ability to lower our compliance costs, provide investments in the resources of our state and region and ensure that we meet greenhouse emissions targets. Specifically, we must give serious consideration to investments in offsets projects such as those that capture methane from landfills, invest in agricultural conservation, implement energy efficiency technologies, and protect or plant trees through various forestry projects.

With regard to the potential for increasing carbon sequestration through forestry and agricultural practices, early indications suggest that by extending rotations in Wisconsin's forests and continuous no- till of cultivated crop land, Wisconsin could provide about 16 million metric tons of additional carbon sequestration, with a price of carbon at $20 per ton of CO2. This amount would account for approximately 13 percent of Wisconsin's total emissions and could vary depending on many factors.

Plus, there are additional benefits that can be achieved through use of offsets, clean water, air quality improvement, watershed stabilization, biodiversity, and wildlife habitat protection, and preservation of agricultural land and farming, to name just a few. Let me conclude by saying that while an offset program is important, it can only be truly successful if emissions reductions are real, verifiable, additional, permanent, and enforceable. I look forward to hearing how we can design a system that meets all of these criteria. Thank you, Mr. Chairman, I yield back the balance of my time.

REP. MARKEY: The gentlelady's time has expired. The chair recognizes the gentleman from Pennsylvania, Mr. Pitts.

REP. JOSEPH PITTS (R-PA): Thank you, Mr. Chairman. I'd like to thank you for convening this hearing today on such an important issue. Like all of us, I believe we should work to decrease the amount of greenhouse gas emissions into our atmosphere. Many of us are concerned, however, about the economic impact of legislation that could be passed to curb emissions like a cap-and-trade bill. We are also concerned about the role offsets that may be included in a possible cap-and-trade bill.

On September 18 of 2008, Mr. Orszag, President Obama's OMB director, testified that, quote, "Decreasing emissions would also impose costs on the economy. Must of those costs will be passed along to consumers in the form of higher prices for energy and energy intensive goods," end quote. I do not believe that we should pass a cap-and-trade bill that will harm our already damaged economy and those least able to withstand more economic pressure; regular Americans who are struggling to make ends meet during this recession.

In regard to offsets, there have been widespread reports that organizations are paying for reductions that do not actually take place. In addition, some offsets result in a reduction in emissions that would have taken place regardless of someone paying vast sums of money for the offset to occur. Former Director of Global Warming for the Sierra Club, Dan Becker, has been quoted saying, quote, "On the one hand, there is potential benefit of educating people through offsets. On the other hand, if people view offsets like Papal indulgences that allow you to continue to pollute, then it's probably not a good idea," end quote.

Therefore, as this committee considers climate change legislation, I believe it would be prudent for us to not only consider the economic impact of climate change legislation but also each component's effectiveness. I look forward to hearing our witnesses today, and I thank you and yield back.

REP. MARKEY: The gentleman's time has expired. The chair recognizes the gentleman from Virginia, Mr. Boucher.

REP. RICK BOUCHER (D-VA): Thank you very much, Mr. Chairman. And I want to thank our witnesses for taking part in our conversation today. It's possible to create a program that reduces greenhouse gas emissions substantially and at the same time is not economically disruptive. But those two goals can only simultaneously be met if there is a sufficient availability of offsets operating outside the cap.

Nowhere is that reality better illustrated than in the context of utilities that consume fossil fuels; 52 percent of electricity in the United States is coal-fired. And the technology to enable coal to be combusted without emitting carbon dioxide is still under development. And even if we accelerate the funding for the development of that technology, which I will be urging that we do as part of our cap-and-trade measure, it's estimated that the technology will not be fully deployed until about 2025.

If we require large reductions in emissions in the time between the effective date of the measure and that 2025 date, the utilities that are consuming coal, about half of all utilities today, would default to the next least expensive fuel, and that fuel is natural gas, a fuel that is already in short supply in this country. And if we had half of electric utilities defaulting to natural gas, there would be a tremendous spike in natural gas prices, and that would cause deep economic pain across the entire economy. At the present time, 58 percent of American homes are heated with natural gas, and the range of industries, from chemicals to agriculture and others, are heavily natural gas dependent. True economic dislocation would occur.

The answer is to have a generous availability of offsets. And the legislation which I joined with chairman Dingell last fall in publishing on our committee's website contains that reasonable offset availability. I was pleased to note that the blueprint put forward by the U.S. CAP Group, and know we'll be hearing about that from our witnesses today, also contains an appropriate availability of offsets. As I recall, their number is it is 1.5 billion tons, both domestically and internationally on an annual basis. That would make sure that we can take carbon dioxide reductions in the near term and that in doing so we do not have national economic disruption.

Thank you, Mr. Chairman. I yield back my time.

REP. MARKEY: The gentleman's time has expired. The chair recognizes the gentleman from Louisiana, Mr. Scalise.

REP. STEVE SCALISE (R-LA): Thank you, Mr. Chairman. I look forward to hearing from our panel as we discuss the role of climate change in offsets. I think the GAO report raises some serious concerns. Other reports have raised serious concerns, questions about cost effectiveness and integrity of the European Union's Emissions Trading Scheme as well as international carbon offset schemes.

I'm sure to those who stand to profit from the trading of offsets and the lucrative fees that go along with it, the idea of some of these emissions trading exchanges might sound very interesting to them. But I think we also have to look at the other side and the cost that goes along with it. To many of us, the term "cap-and-trade" is nothing more than a code word for a tax increase on energy use. And I think if you look in the president's executive budget that was submitted last week, over $640 billion in new taxes are expected to be created from a cap-and-trade scheme. And what does this mean to our economy? What does this mean to our job market at a time when we surely don't want to be hurting our economy and sending more jobs overseas?

I think all of these issues need to be considered in the broader context of number one, the effectiveness of studying the European model, and I'm sure we're going to be hearing a lot about that; but also the adverse effects on our economy as well as to every consumer in this country that may think that they're not going to be paying higher taxes when they realize that that $640 billion in new taxes is going to be hitting those very middle class people and lower middle class people, people at the bottom of the rung, who can least afford to pay it. So I think we need to consider all of these in the broader context as we're discussing this issue. And I look forward to hearing the rest of the panel discuss those as well. I yield back.

REP. MARKEY: The gentleman's time has expired. The chair recognizes the gentleman from North Carolina, Mr. Butterfield.

REP. G.K. BUTTERFIELD (D-NC): Thank you very much, Mr. Chairman, for convening this important hearing today. And I certainly thank the six witnesses for their anticipated testimony. Mr. Chairman, I agree with my colleagues that it's appropriate for us to begin to have this conversation and to develop a generous system of offsets that would be real, that would be verifiable, permanent, efficient, and effectively monitored.

My desire to support his concept stems not only from a desire to provide cost containment measures in the bill but also to provide an economic opportunity for districts like mine, which I refer to as an offset rich district in Northeastern North Carolina.

Methane digestion on large livestock operations could be a credible and useful offset in not only removing a harmful gas from the air but also using methane for electricity on the farm and eventually on the grid. There are nearly 350,000 hogs and pigs being raised in my district, and this represents a clear, clear opportunity for these farmers to become part of the green solution. And North Carolina has extensive forestry resources, with nearly 60 percent of our state's 33 million acres considered to be forest land, including foresting provisions into offset regimes will be dually beneficial. It will have two benefits, because the potential includes not only reducing deforestation emissions but also the potential for increased sequestration through afforestation, reforestation and forest management.

And so this is an important conversation. And I thank you, Mr. Chairman, for your leadership on this incredibly important issue. I yield back.

REP. MARKEY: I thank the gentleman. The chair recognizes the gentleman from Texas, Mr. Hall.

REP. RALPH HALL (R-TX): I thank you, Mr. Chairman. And as we listen to these six folks here to give us their opinion, suggestions, I won't waste a lot of their time, because I'll get right to the point. On the role of offsets as a cost control mechanism under the cap-and-trade regulatory scheme, and I won't go into what it does to our economy or the energy needs or accumulation of debt, or as the gentleman just spoke there, of new taxes. But former Chairman Barton pretty well spoke my feelings on it. He said he had a questionable -- at best, he was questionable. Dr. Burgess said he had a lack of optimism.

I'll just be plain about it. As I listen to this and how offsets are going to be sold on emissions trading exchanges and all that, I say, Mr. Chairman, to you, my friend, and a guy I admire and respect and differ with, I say the same thing that a loan officer from Prudential told me one time when I asked for a loan for one of my companies. I listen to your outrageous proposals with an open mind.

(Laughter.)

That gets about as plain as I can say it, and I yield back my time.

REP. MARKEY: I thank the gentleman very much. My goal is for us to make that loan possible, though. Just so you know, I'm going to be working on that. And the chair recognizes the gentleman from Washington State, Mr. Inslee.

REP. JAY INSLEE (D-WA): Just two points, first, we're now starting a serious discussion of a cap-and-trade bill, and I think we will hear a lot of my friends across the aisle simultaneously talking about their desire to cut CO2 emissions and their abject refusal to embrace a cap-and-trade bill. And I just hope that during this debate those who do express a desire to deal with this issue will come forward with ideas about how to deal with it. You can't beat something with nothing. We're putting forth a cap-and-trade bill which is an honest attempt to deal with this issue. And I hope that we can welcome positive ideas from the other side of the aisle.

Second point, I would hope that our panelists could answer today is a fundamental question I have about offsets. If a polluting industry in the United States buys an offset to engage in a contract an owner in a Brazilian forest not to cut down 100 acres of trees to use the sequestration asset of those trees, how can we be assured that his neighbor or his other 100 acres just don't get cut down so we get no additional benefit? The only way I could see that this would actually be credible is if in fact we buy down the quota, if you will, of Brazil, where we essentially reduce the otherwise allowed CO2 emissions or a total deforestation acreage provision wherein we in fact get additional protection. I don't see any other way to do it, and I hope the panelists will address that issue. Thank you.

REP. MARKEY: The gentleman's time has expired. The chair recognizes the gentleman from Kentucky, Mr. Whitfield.

REP. ED WHITFIELD (R-KY): (Off mike.)

REP. MARKEY: The chair recognizes the gentleman from Oklahoma, Mr. Sullivan.

REP. JOHN SULLIVAN (R-OK): (Off mike.)

REP. MARKEY: The chair does not observe any other members seeking recognition for the purpose of making an opening statement. We'll turn to our witnesses. Our first witness this morning is Mr. John Stephenson. He is the director of Natural Resources and Environment at the United States Government Accountability Office. He has assisted Congress immensely over the years in various GAO investigations, including his recent reports on the voluntary carbon offset market and the Kyoto protocol's Clean Development Mechanism. Thank you for joining us, Mr. Stephenson. Whenever you are ready, please begin.

JOHN STEPHENSON: Thank you, Mr. Chairman and Mr. Upton and other members of the subcommittee. I'm here today to talk about the potential role of carbon offsets and climate change legislation. My testimony is drawn from two of our recently issue reports, one, lessons learned from voluntary carbon offset markets in the U.S.; and the other the European Union's mandatory market implemented under Kyoto protocol's Clean Development Mechanism.

REP. MARKEY: Could you just move that microphone just down a little bit lower? Okay, great.

MR. STEPHENSON: Mr. Dingell and Mr. Barton have already done a good job of summarizing those two reports, but I'm going to do my take on it anyway. The existing U.S. market is considered voluntary because we do not yet have a national limit or a cap on greenhouse gas emissions. The CDM, on the other hand, is a program that allows EU countries under the Kyoto protocol to partially meet their emissions targets by investing in offset projects in developing countries like China. Our reports identify challenges with ensuring the credibility of offsets in both markets and matters for the Congress to consider as it moves forward in developing climate change legislation.

Carbon offsets are reductions of a greenhouse gas from an activity in one place to compensate for emissions occurring elsewhere. Because the cost of creating an offset can be less than that of requiring regulated entities to make reductions themselves, carbon offsets can be a useful cost containment mechanism in a mandatory emissions reduction program. For example, a regulated coal burning power plant might choose to invest in projects to reduce carbon emissions off-site rather than make reductions itself or trade with another entity.

However, the use of offsets, whether for voluntary or compliance purposes, presents numerous challenges. First, carbon offsets are difficult to characterize and evaluate, since they can involve different activities, definitions, greenhouse gases, quality assurance practices, and timeframes. We found that this was particularly true in the voluntary offset market in the U.S., which is not regulated, lacks transparency, and provides offset purchasers with limited evidence of a project's quality and integrity.

Second, ensuring the credibility of offsets is challenging because there is no reliable way to determine whether the underlying project is additional to a business as usual scenario. In other words, it's difficult, if not impossible, to know whether a project might have gone forward anyway. Because all offset projects involve estimating reductions in the future, relative to projects of a business as usual condition, all estimates and projections are inherently uncertain.

Third, offsets involve environmental and economic tradeoffs. For example, offsets could lower the cost of a future U.S. cap-and- trade program but could also undermine its effectiveness if the offsets do not represent real reductions. Our work has raised questions about the credibility of offsets in the voluntary market and identified cases where CDM offsets lack credibility.

In the case of the CDM, offsets have provided cost containment for entities regulated by the EU cap-and-trade program by enabling them to use offsets for partial compliance with the program.

However, the CDM's effects on emissions are uncertain because of challenges in ensuring the credibility of offsets. In addition, the project approval process is lengthy and resource intensive, which significantly limits the program's scale and cost effectiveness.

Nonetheless, an international offset program like the CDM can provide incentives for developing countries to participate in global efforts to reduce emissions. In fact, developing countries may not have signed Kyoto without the CDM. This is important, because any meaningful effort to limit the harmful effects of climate change will require substantial international cooperation.

To the extent that the Congress chooses to develop a program that limits greenhouse gas emissions, allowing the use of carbon offsets for compliance, it may wish to establish one, clear rules about the types of offset projects that regulated entities can use for compliance, as well as standardized quality assurance mechanisms for these allowable project types; two, procedures to account and compensate for the inherent uncertainty associated with offset projects, such as discounting or overall limits to the use of carbon for compliance. A standardized registry for tracking the creation and ownership of offsets will also be needed, and lastly, procedures for amending the offset rules, quality assurance mechanisms, and registry based on experience and the availability of new information over time.

The fact that the EU, even with extensive quality assurance procedures, had credibility problems with some CDM offsets illustrates the potential for offsets to undermine the integrity of a cap-and- trade system. Given these challenges, it may useful to consider the merits of offsets relative to other cost containment mechanisms as we go forward. Mr. Chairman, that concludes my statement. I'll be happy to answer questions at the appropriate time.

REP. MARKEY: Thank you, Mr. Stephenson, very much. Our next witness is Gary Gero. He is the president of the Climate Action Reserve. His organization is a recognized leader in the development of offset protocols and standards, and he is an expert in this field. So we welcome you, sir. Whenever you're ready, please begin. Please move the microphone in a little bit closer.

GARY GERO: Thank you, and good morning, Chairman Markey, honorable members of the committee. I thank you for the opportunity to be here today, and I thank you for your attention to this important topic. My name is Gary Gero. I'm the president of the California Climate Action Registry, a 501(c)(3) nonprofit organization.

The California Registry was created in 2001 by the State of California to provide regulatory quality greenhouse gas accounting standards and public registration of greenhouse gas emissions data. We were established specifically for the purpose of recognizing and encouraging early voluntary actions to address the serious threat of climate change. We are today a fully independent, national, environmental nonprofit organization that is guided by a board of directors comprised of leaders from government, business, and the environmental community.

Since our beginning, we have developed and become widely recognized for our expertise in rigorous and accurate greenhouse gas accounting. More recently, we have applied this expertise to create and operate a greenhouse gas emission reduction credit or offsets registry. This offsets registry is known as the Climate Action Reserve, and to date, more than 40 emission reduction projects from 18 U.S. states have been submitted to it. Additionally, the states of California and Pennsylvania have formally recognized our standards for quantifying early voluntary actions.

The Climate Action Reserve provides several tests to ensure the environmental integrity of the offsets that we register. First, we develop and implement standardized, performance-based protocols to quantify a project's greenhouse gas emission reductions. These protocols are the accounting standards that we use to ensure that the emission reductions are real and that they are accurate. Included in these are methods for demonstrating that a project would not have happened anyway, that is that the project is surplus or additional. Our protocols also specify mechanisms for ensuring the permanence of sequestration offsets.

Second, we actively manage an independent, third-party verification program to ensure that our standards are being met. As you well know, strong rules are meaningless without strong enforcement. As part of this, we work with the American National Standards Institute to train, accredit, and assiduously oversee verifiers. Third, we oversee a robust offset registration, serialization, and tracking system to ensure ownership and prevent double counting. Indeed, we create a unique serial number of every ton of emission reductions so that ownership can be clearly established. These are elements of our program's contractual standards, which are necessary to ensure that the offsets are enforceable.

So I've described what we do. But let me take a second to say what we do not do, because I think that too can inform good program design. To avoid real or even perceived conflicts of interest, we do not fund or otherwise develop emission reduction projects, nor do we serve as an exchange for offset credits or otherwise engage in financial transactions concerning such credits. Further, we are not an advocacy organization. As an environmental nonprofit organization, our public benefit mission is to ensure that when an emission reduction is reported, there is certainty that is truly resulted in a benefit to the environment.

Let me briefly describe the four guiding principles that are the core to our efforts and that are vital to ensuring the integrity of any offsets program. The first clearly is accuracy, which is to ensure that measurement estimation techniques and emission factors reflect best available science. The second is conservativeness. Despite best efforts or sometimes for reasons of practicality, there are times where there is some uncertainty with regard to the quantification of emission reductions. In such cases, the guiding principle that we rely on is conservativeness, so that emission reductions are not overestimated.

The third is transparency. Transparency ensures that outside observers have unhindered access to all aspects of our work, so that they may gauge themselves with accuracy and with credibility. And finally, practicality -- notwithstanding our other guiding principles, the Reserve recognizes that for a program to function effectively, it must not simply be an academic exercise. Instead, it must incorporate a common sense approach and be practical. It is important that any offsets program only be as complex as is necessary to retain its rigor and its credibility but no more so.

So let me conclude with this. I believe that the experience of the Climate Action Reserve has clearly demonstrated that it is possible to design and implement and effective, credible, and practical offsets program. I thank you for the opportunity to be here today, and I'm happy to answer any questions you may have.

REP. MARKEY: Thank you, Mr. Gero, very much. Our next witness is Ms. Emily Figdor, who is the Director of the Federal Global Warming Program at Environmental America. We welcome you, Ms. Figdor, and whenever you're ready, please begin.

MS. FIGDOR: Thanks so much for the opportunity to share my views regarding the role of carbon offsets in climate legislation. My name is Emily Figdor, and I am the Director of the Federal Global Warming Program at Environment America. Environment America is a federation of state-based, citizen funded environmental advocacy organizations with more than 750,000 members and activists in all 50 states.

Last week, President Obama issued a historic call for Congress to send in legislation that quote, "places a market based cap on carbon pollution and drives the production of more renewable energy in America." The central objective of such legislation must be to reduce global warming emissions fast enough to avoid dangerous impacts, such as a massive rise in sea levels that would inundate coastal areas.

To avoid what some climate scientists call the tipping point, our view is that the United States must cut its global warming emissions by at least 25 percent below 1990 levels by 2020 and by at least 80 percent below 1990 levels by 2050. The number one imperative of U.S. climate policy must be to achieve science based cuts in pollution. Offsets, however, provide less certain reductions in emissions, thus jeopardizing our ability to achieve pollution reduction targets. This is because emission allowances and offsets are fundamentally different. An allowance represents a unit of emissions. If a facility decides to emit carbon dioxide, it must hold an allowance. An offset, on the other hand, represents a unit of pollution not emitted.

It is of equal value to an allowance only if it can be judged with certainty that the pollution would have been emitted but was not and that the emission reduction resulted from the incentive provided by the offset.

To illustrate the difference, consider two people trying to lose weight. One person decides to meticulously count the calories of the foods he eats, with the goal of reducing his intake each day. The second person, however, counts the calories of the foods he thinks he would have eaten but did not because he was on a diet. You can imagine which of these two will be more likely to actually shed a few pounds. Or consider a situation in which rising natural resource prices bring an industrial facility abroad to the verge of shut down, a step that would reduce emissions. A U.S. utility might agree to pay the factory owner if she shuts down the facility, thus generating offsets that the utility can use to expand its operations.

The key question is would the factory have shut down anyway? If the answer is yes, no additional emission reductions have been gained. Indeed, the offset program would result in an increase in overall emissions versus business as usual.

Determining additionality requires crystal ball gazing and so it's impossible to know with certainties. At the same time, the worthwhile goals promoted by many offset proponents to protect tropical forests and sequester more carbon in plants and soils in the United States can be achieved without jeopardizing the environmental integrity of the overall program. Specifically Congress could set aside a small portion of auction revenue for these two purposes.

Emission reductions from these set aside programs would be in addition to those required by cap sectors under the cap and trade program. As a result, problems such as leakage and additionality would not jeopardize our pollution reduction goals.

Because offsets deliver less certain emission reductions, they should not be included in climate legislation. Nonetheless, if offsets are in fact considered, the levels of the caps on pollution must be stringent enough and the offsets limited enough to minimize the impact that lower certainty emission reductions has on our ability to achieve pollution reduction targets.

Offsets should be strictly limited to no more than five percent of the allowances as proposed by Representatives Dingell and Boucher in the early years of the offset program in their draft climate bill. Unlike in their bill however, this percentage should not increase over time, unless and until offsets can be proven to deliver equivalent emission reductions to actions taken within the bounds of the cap and trade program.

To provide the highest quality offsets possible, Congress should require EPA to consult an independent science advisory board in establishing and periodically reviewing domestic and international offset programs. In addition, due to the inherent problems in determining additionality, Congress should discount offset credits.

Finally if international offsets are permitted, national level accounting and administrative methods should be required and there should be some conditionality on their use to enable the program to serve as a lever to encourage developing countries to substantially reduce their emissions below business as usual.

In conclusion, the central objective of U.S. climate policy must be to reduce global warming emissions fast enough to avoid dangerous impacts. Because offsets provide less certain reductions in emissions, they would jeopardize our ability to achieve pollution reduction targets and should not be included in climate legislation.

Thank you.

REP. MARKEY: Thank you, Ms. Figdor very much.

Our next witness is Mr. Graeme Martin. He is the manager of business development of environmental products for Shell Energy North America. We welcome you, sir, whenever you're ready please begin.

MR. MARTIN: Well good morning Chairman Markey and members of the subcommittee. Thank you for the opportunity to be here today. It's a real honor.

REP. MARKEY: Could you move the microphone over just a little bit?

MR. MARTIN: Shell was one of the first integrated oil companies to acknowledge the impact of human activity on the climate and we believe now is the time to act. The longer we delay, the more stringent the needed measures, and the more expensive the compliance, and in particular Shell supports cap and trade as the surest way to reduce CO2.

We're members of the U.S. climate action partnership and we help write the blueprint for legislative actions. Shell and USCAP believe offsets are critical to managing the cost of a cap and trade program, especially in its early years. In Shell's trade and experience the more offsets you have, the lower the average cost of compliance. So for this reason, USCAP's offset recommendations are integral to USCAP support for the aggressive environmental targets referenced in the blue print.

The USCAP and Shell recommend a limit of one and a half billion tons of domestic and one and a half billion tons of international offsets as we've already heard with an initial annual limit set at two billion tons combined. The call for a carbon market board to set the annual limits on offsets, this board will use that authority to avoid economic calm from excessively high announced prices or increases in the price of natural gas due to fuel switching.

In addition to cost containment, there are other compelling reasons to use offsets. First, offsets actually reduce emissions. The climate doesn't care where the CO2 is reduced, reductions from anywhere in the world have the same impact. And some other cost containment measures may not actually deliver that environmental result.

Second, offsets deliver an environmental value in addition to the CO2 reduction, including improving habitat, water quality, and biodiversity at the site where the offsets are created.

Third, offsets drive the deployment of technology at its most reasonable cost. Affordable offsets help companies like ours in the early years invest in the climate technologies that they know they'll need in the later years when the targets are much steeper. Shell believes that several key technologies at commercial scale are going to be needed to address climate change including carbon capturing and sequestration and cellulosic ethanol. We're working hard to develop these technologies.

Fourth, offsets help prevent the so-called dash to gas. Without offsets companies may be forced to switch from CO2 intensive fuels like coal to cleaner fuels like natural gas and a move like this could sharply drive up the cost of natural gas, harm the economy, businesses and consumers.

Fifth and finally international offsets are an excellent tool to encourage developing countries to reduce their own CO2 emissions. We know it will be a long time before cap and trade covers all of the economy in all parts of the world, but we still need to introduce emission reductions into the developing world if we really want to tackle climate change. The quality offsets are a good way to encourage this.

USCAP and Shell call for quality offsets developed to strict standards. We recognize problems with the current international offset system, and we fully support reform of the clean development mechanisms. We strongly believe the offsets should be environmentally additional, permanent, measurable, verifiable, and enforceable as we've heard, and Shell is working closely with organizations like the California Climate Action Registry to cross these well classes offset protocols.

We support USCAP's call for the EPA to set a transparent process for crafting offset standards. We believe the EPA should certify these offsets, and we'd like to see the U.S. engage assertively in international climate dialogues and lead the effort to reform the international offset program to U.S. standards. We strongly prefer to see one, common, internationally accepted standard for oil offsets.

So in summary, abundant quality offsets are key to achieving these stringent targets at the lowest possible cost to the economy. I thank you for your time and happy to answer any questions.

REP. MARKEY: Thank you Mr. Martin very much.

Our next witness is Ambassador Stuart Eizenstat. He is a partner at the Law Firm of Covington and Burling and focuses on international trade and dispute resolution. He was the lead U.S. climate negotiator during the Clinton Administration and has served in several roles in the federal government including ambassador to the European Union and Deputy Secretary of the Treasury. He is here today on behalf of the forest carbon dialogue. We welcome you Ambassador Eizenstat.

MR. EIZENSTAT: Thank you, Mr. Chairman, Mr. Upton I'm here today on behalf of the forest carbon dialogue which is a unique environmental corporate coalition dedicated to provide domestic and international forest carbon provisions and any U.S. climate legislation.

We cannot solve climate change without forests. Deforestation contributes --

REP. MARKEY: Mr. Ambassador, could you move the microphone in just a little bit closer?

MR. EIZENSTAT: Deforestation contributes some 20 percent of all greenhouse gas emissions, more than all the transportation modes in the world. More than cars, trucks, trains and planes together. Deforestation accounts for the fact that Brazil and Indonesia are the fourth and firth largest carbon dioxide emitters. Forests also have the potential to address cost effectively up to half of all of human caused emissions. The use of forest credits in climate change legislation would accomplish two goals at the same time.

First they would provide American regulated corporations and entities a cost effective way to meet emissions targets. The greatest threat to passage of cap and trade legislation as shown by the Senate debate last year is concern about costs, particularly now at a time of economic weakness. Offsets addresses that.

The second benefit, one I saw clearly at Kyoto, is it can tangibly encourage developing countries to take actions to deal with climate change and break the China-led phalanx of united opposition to action on climate change by giving the developing world engaged in this process and creating at the same time a more level playing field for U.S. industry.

There are also multiple co-benefits to a robust forest provision in legislation. Biodiversity and environmental protection is one. Tropical forests are home to half of the world's species who will be protected. They help restore degraded lands and watersheds. The reduce soil erosion and provide clean water and overt draughts and crop failures.

Second, they contribute to sustainable development. 80 percent of the world's rural poor in developing countries depend for their livelihood on forests. Cutting them down at the rate we're doing which is one football field per second means that the rural poor will be deprived of a place to live and that's why the third benefit is a security benefit,.

U.S. military experts in a recent report indicated that fragile societies will become even more unstable and a new mass movement of eco-migrants will occur bringing vast human and economic cost to our doorstep. Forest can help avoid that. There have been path breaking economic analysis recently by Sir Nicholas Stern and by the Eliasch report for the UK government by McKinsey and by Lawrence Berkeley Laboratories, all setting forth in detail the critical role forest and land use can plan in cost effective ways to deal with climate change.

They also document that the incentives to cut forests are so great, they're so tremendous, cut them, plant soybeans and export them, that you have to create robust incentives to avoid that incentive to cut. Once they're gone, they're gone forever. This is not like Weyerhouser replacing its forest on a regular basis with seedlings.

The costs are anywhere from $5 to $10 billion according the Stern report to the 2008 Eliasch report which says $20 to $30 billion. You cannot create those kinds of incentives by foreign assistance alone. You need market mechanisms to mobilize the power and disciplines of markets to offset the tremendous pressures to cut.

Now there is a new world out there, developing countries who were not at Kyoto willing to play are willing to do so. For example, the common market for Eastern and Southern Africa, COMESA with some 17 countries, the coalition of rain forest countries, all are saying their contribution to dealing with climate change will be to avoid deforestation if they're provided incentives to doing so and they must have because the incentives to cut are absolutely so enormous.

This is not a way of avoiding action, it indeed it occurs it will encourage more aggressive action. Brazil announced just a few months ago, Mr. Chairman and members of the Committee, its first ever target to cut the massive rate of deforestation of the Amazon by 70 percent over the next decade. The reason why if you look at the top five countries in emissions, Indonesia and Brazil are in the top five, isn't because of their industrialization, it's not because of their cars, it's because they're cutting their forest down. Just this week, this very week, Indonesia applied for a world bank program supporting developing nation efforts to fight deforestation and earn money through the sale of tradable forest credits.

Now I'd like to deal very quickly with the questions that have just been asked. There are obvious questions. President Reagan said when he was dealing with the Soviets on arms control, trust but verify. There is verification here and let me go into it very quickly. Credits generated from national and subnational reductions in deforestation can be and are being as we speak verified on the basis of objective, transparent, open access remote sensing data. What that means is satellite telemetry has improved so substantially Google can look into neighborhoods and into forests. A partnership announced this very week between Cisco and NASA and Brazil's INEP(ph) are making available free on the internet a national baseline that can be created for forests with on the ground monitoring and scientific evaluation to provide certainty about the level and change of the forest carbon content in our forests. The Eliasch report just a few months ago for the U.K. stated the monitoring emissions from forests based on satellite telemetry is more reliable than monitoring emissions from any other sector.

In addition, national forest baselines and national accounting frameworks can be developed that are critical to make these forest carbon markets integral. Any reductions below that national baseline are real reductions, not false reductions. There also are a variety of insurance mechanisms, Mr. Chairman and members of the Committee, that can be put in place. Buffer funds and buffer zones in which a percentage of carbon credits and/or forest themselves can be held in reserve in case there's any change in policy or forest fires.

In addition, actual insurance products are being developed now by the insurance industry and the World Bank. Liability clauses can provide additional insurance, and leakage can be dealt with through the market price of the credit discounted if the credit is less valuable. Offset credits would be available only if an entire country's rate of emissions from a protected sector falls below a particular established baseline.

REP. MARKEY: If you could summarize Mr. Eizenstat.

MR. EIZENSTAT: Therefore, there are ways to deal with these questions but there is no time for delay. If we dilly-dally on this, these forests will be gone by the time we implement this and we will not be able to deal with 20 percent of the problem that is existing now in CO2 incentives. It's urgent to act now, we can solve this problem. This is a cost effective way both for U.S. companies and to incentive developing countries that haven't been willing to play before.

REP. MARKEY: Thank you, Ambassador Eizenstat, very much. Our final witness is Dr. Michael Wara who is the assistant professor at Stanford Law School. His research focuses on the emerging global carbon market. We welcome you, sir, whenever you're ready, please begin.

MR. WARA: Mr. Chairman, and members of the subcommittee, I'm honored to appear before you and grateful to have the opportunity to talk about my perspective on the performance to date and the potential role of international offset programs in U.S. climate policy.

REP. MARKEY: If you could speak up just a little bit.

MR. MARA: Sure. At the outset I want to emphasize that while my remarks and my written testimony are relatively critical these clean development mechanisms performance to date, I remain a proponent of emissions trading in general because emissions trading creates appropriate incentives to internalize costs of climate change for firms and because it has at least the potential to substantially reduce the societal costs of addressing climate change. We cannot afford to neglect the climate change problem any longer, but neither can we afford to ignore the present and future costs of addressing the problem.

I'm not a proponent of the use of offsets for cost control purposes within such emissions trading systems; however given that offsets are likely to used for cost control, there is much that can be learned from the experience to date in the international system to both increase the environmental credibility of international offsets within a U.S. system, and to increase the administration efficiency and transparency and perceived fairness of a U.S. program. All offset systems face a trade off between quality of the environmental auditing processes used to verify that real reductions occurred, and the transaction costs and risks that offset project developers face. This trade off intention and how it's resolved essentially determines the number of offsets that are brought to market and potential ability of the system to create cost control for the emissions trading regime at large.

Assessing whether or not a carbon offset represents a real reduction below what otherwise would have occurred or is essentially in any way credit is an incredibly difficult regulatory problem and practice. And I would argue that the CDM has not had a very high level of success in resolving this thorny issue. I think there are two major reasons for this.

First, is a poor administrative legal system that is not terribly transparent and provides cover for both changes in policy and for politicized decision making.

The second is the incredibly broad scope of the CDM. In particular the fact that it includes offset project types whose, where additionality assessment is intrinsically difficult to evaluate. And where as a consequence project proponents can easily misrepresent financial, technological, and regulatory barriers to a project in order to create the impression that additionality exists when in fact it does not.

So what can the U.S. do? I think the U.S. can do a lot to address these issues in a future program. In particular because as EPA and EIA have demonstrated in their modeling result, in order to apply to create effective cost control, the U.S. is going to likely be compelled to purchase large numbers of international offsets. We have and will become likely the largest buyer of international offsets globally. We have the opportunity to exert significant influence on the design of the international program and should do so and we should do it three important ways.

The first is to push for administrative legal reforms of the clean development mechanism or whatever follows it. In particular, we need to professionalize the offset regulator. Right now, the regulators are part time volunteer political appointees.

We need to remove conflicts of interest which currently are faced by the third party verifiers, essentially the auditors and fact checkers of the system that these conflicts of interest are pervasive and lead to flawed analysis.

Third, we need to force regulators to justify their decision making and to explain changes from past precedent, even if they aren't bound by that past precedent.

A second major area of reform that I would argue the U.S. should pursue is to limit U.S. purchase of offsets to those sectors where evaluation of project level of additionality is relatively straightforward. We should stay away in particular from sectors where evaluation of weather and emission reduction would have occurred otherwise is a very difficult question to determine. Those sectors can be addressed but not at the project level. There's an important role for the U.S. to pursue in developing sectoral approaches to those sectors, especially the energy sector and also I would argue the forest sector. In the energy sector it's because additionality is a difficult problem to assess and the forest sector the concern is the leakage as much as additionality. The idea that Member Inslee pointed to that how do we know that forest reserve here doesn't lead to forest cut down somewhere else? The appropriate answer there are national baselines.

Finally, the U.S. must make clear that offsets are a temporary solution to developing country greenhouse gas emissions. We need to provide both positive and negative incentives for major developing countries to accept caps in the medium term. I argue that these incentives should include a timeframe for phase out of U.S. offset purchases, and as a carrot to induce a cap to be accepted, guarantees of full market access to U.S. emissions trading markets for countries that do accept caps.

Mr. Chairman, that concludes my statement. I'll be happy to answer questions at the appropriate time.

REP. MARKEY: Thank you very much. We'll now turn to questions from the subcommittee members and the chair will recognize himself for a first round.

I'd like to ask first a yes or no question to all six of you and that's on the merit of establishing an independent science advisory committee to help guide EPA's development, implementation, and updating of an offset program. Would you support the inclusion of such a mechanism inside a federal climate piece of legislation put on the president's desk and independent science advisory committee to guide EPA's deliberations?

Mr. Stephenson?

MR. STEPHENSON: That's not really a yes or no question but yes if it's part of an overall verification scheme for offset programs.

REP. MARKEY: All right. Yes, Mr. Gero.

MR. GERO: And with caveat that we don't take advocacy positions I think that any stakeholder group including scientists is important to ensure the credibility of offsets.

REP. MARKEY: Okay. Thank you.

Ms. Figdor?

MS. FIGDOR: Mr. Chairman, by all means yes and I would add that this body and independent science advisory board should be the ones who are determining what types of projects, if any offsets are allowed, what types of offset projects would be allowed.

REP. MARKEY: Thank you. Mr. Martin.

MR. MARTIN: Yes, and I'd encourage that committee to engage in the international level as well.

REP. MARKEY: Okay. Thank you. Mr. Eizenstat?

MR. EIZENSTAT: Yes.

REP. MARKEY: Yes. Mr. Garo?

MR. GARO: I agree. I think it's essential.

REP. MARKEY: Okay. Next I'd like to focus on the potential role of international offsets in U.S. climate legislation. We don't want international offsets to become some kind of a welfare system. To get the kind of global emission reductions we need, we have to encourage major developing countries to take broad action on climate change. Several of you have testified about the potential to use access to U.S. carbon market as a lever to encourage such action. You've mentioned the idea of moving to sectoral instead of project based offsets and you've also talked about requiring developing countries to take on progressively greater domestic commitment as a condition of being able to sell offsets into the U.S. market.

I'd like to ask you to expand upon your views on that subject. We'll begin with you Dr. Wara, then we'll come back to you Ambassador Eizenstat.

MR. WARA: Well, let's see, international offsets are --

REP. MARKEY: Could you speak up a little bit please?

MR. WARA: Sorry. International offsets are, have been historically an important part of encouraging developing country engagement in international frameworks to address climate change. There's no question about that. But in the long run, offsets only engage at the margin. They're not likely to lead to the truly substantial reductions and really alteration development path that we need to accomplish in developing countries in order to fully address this issue and to make U.S. efforts worthwhile.

In that context, and especially in sectors, I would argue sectors where regulation plays an important role and I would, what I mean by that is in particular the energy sector in developing countries. I think we need to really focus on talking to the regulator to address policies that discourage greenhouse gas emissions rather than simply focusing at the project level at the power plant level because in many respects the power plants do what the regulators tell them to.

REP. MARKEY: Ambassador Eizenstat.

MR. EIZENSTAT: International credits are absolutely essential. They're essential number one to incentivize developing countries to finally participate in the process when they will not initially take economy wide cap and trade limits of their own.

Number two, Mr. Upton, this is not, sir, a transfer of U.S. tax payer dollars to developing countries. This is a private sector decision by a private U.S. company that may wish to reduce its cost to compliance by purchasing an international credit. It is not the transfer of a U.S. tax based dollar.

Number three, there have been discussions about the EUETS, I was ambassador to the EU and the CDM. The CDM was something we reluctantly agreed to because it was the only way at the time to get China, India and the developing countries to agree at all. It is a bureaucratic nightmare. It's nothing like the kind of market based system we're talking about now internationally. It should not be used as a model. The Europeans and the ETS don't believe in offsets, they don't believe in reducing the cost on industry, that's their problem. We should care about reducing the cost in industry, but we won't get a bill.

So international offsets incentivize developing countries, they provide a market mechanism and they reduce the cost for U.S. companies to comply and they are verifiable.

REP. MARKEY: Okay. My time has expired. The Chair recognizes the gentleman from Michigan, Mr. Upton.

REP. UPTON: Thank you, Mr. Chair. I have a whole series of questions and I want to focus a little bit on what the EU does. They as I understand it can do offsets both within the EU as well as international, is that right? Collect international offsets as well as get offsets from within the EU itself?

MR. : They can through the CDM mechanism --

REP. UPTON: Right.

MR. : -- as I said the CDM mechanism is an inherently flawed mechanism.

REP. UPTON: And --

MR. : Well the offsets are only for developing countries.

REP. UPTON: Right. And the offsets outside of the EU are only for developing countries?

MR. : That's right.

REP. UPTON: Can't do it within the EU.

MR. : That's correct. There are no --

REP. UPTON: They can't, they cannot do offsets within the EU?

MR. : Correct.

MR. : Correct.

MR. : They can have internal trading, emissions trading --

REP. UPTON: Right.

MR. : -- within the EU, within the 27 but they can only do offsets outside.

REP. UPTON: What lesson might we learn from the example that we used, that I referenced in my opening statement as it related to the $90,000 in essence was sent to North Dakota for no til for an offset from the U.S. capital funds here, from, in terms of reliability, would they have done that otherwise? I mean, that's an essential ingredient that has to be part of any, any definition in fact that we would make sure that it was going to be done and perhaps outside of what would have been done otherwise.

MR. : The additionality, Congressman Upton, in terms of the forestry sector, is absolutely clear and the reason is this, the incentives to cut forests in developing countries are so enormous that the notion that somehow they would stop doing it absent these incentives just doesn't have any credibility at all. They are cutting them down as I indicated at the rate of one football field a second because there's such tremendous incentives to cut and plant and export. So we're not dealing at least in the forestry sector with an additionality problem.

REP. UPTON: Now China was in Dr. Wara's testimony, got about four, nearly five billion Euros for emission reductions. China at the same time as you know, particularly as we look at deforestation in Africa is part of the clear cutting along the eastern Mozambique, all those countries, what would me -- I mean here China's the beneficiary of this and at the same time they're a major force in deforesting the world's forests as it relates to carbon.

MR. : The reason is that the CDM is a project by project concept which does not provide real incentives for avoided deforestation. You need a full market based mechanism which provides billions of dollars through the private market to pride those incentives. The notion of an individual project here and there in China or in Indonesia is going to have any impact simply doesn't do the job.

REP. UPTON: Dr. Wara, in your testimony you said that the, you indicated that you thought that the offset that paid China nearly five billion Euros could have been for less than 100 million Euros.

MR. WARA: Right.

REP. UPTON: Get into that a little bit.

MR. WARA: Yeah, sure. So the issue there has to do with what are known as the industrial gas projects in the CDM which are projects that capture process emissions from industrial facilities that emit gases that are many times more harmful, thousands of times more harmful than carbon dioxide. And the fact of the matter is that those emissions have been captured voluntarily by some manufacturers in the U.S., DuPont for one for many years now, and the factories in China that were emitting these emissions because they had no incentive to capture them. It does cost money. And DuPont, I think, does this for (grand ?) value in the U.S. because they care about their environmental and sustainability portfolio.

But in China there was no incentive to capture the emissions. The cost to capture is incredibly low, and yet the market price of the credits is so high that effectively these factories make now more money from capturing emissions than they do from manufacturing the products that they were created to produce.

REP. MARKEY: The gentle lady from California Ms. Capps is recognized for seven minutes.

REP. LOIS CAPPS(D-CA): Thank you, Mr. Chairman and thank you for acknowledging that I have a couple of extra minutes.

I have three questions to ask three different people so we'll have to keep the answers I suppose a little short.

I'll start with you Ms. Figdor. We have discussed today the various merits and drawbacks of including offsets in climate change legislation, a complex topic and if we include offsets in climate change legislation we have to make sure we do it right. I've gotten that message from all of you I believe. As we explore the topic further, I'm concerned about propels that have emerged to use our oceans as placed to sequester carbon. Ms. Figdor, what might be the consequences of using the oceans for carbon sequestration? And do you think these techniques such as iron fertilization should be considered as potential offsets in climate legislation?

MS. FIGDOR: Thank you. I absolutely do not believe that ocean fertilization should be considered as a potential project type, able to receive offsets under a cap and trade bill. Ocean fertilization is not a proven method of sequestering CO2. According to the intergovernmental panel on climate change, they have called the technology quote, "largely speculative and unproven and with the risk of unknown side effects".

So in fact creating an offsets market could have a very perverse incentive. First of all not actually resulting in real verifiable cuts in emissions or reductions in pulling carbon out of the atmosphere. And in addition it could have very serious repercussions that we're currently not aware of. So this is one of the worst ideas in terms of types of offset projects.

REP. CAPPS: Thank you. I wanted to get that on the record.

Ambassador Eizenstat, I have visited the Brazilian Amazon and I've seen firsthand myself the destruction brought by deforestation and I've also noted the wide variety of groups that have been making efforts to protect these forests and their biodiversity including through the extensive development aid. You've been very strong in your need, statement of need for doing these kinds of things under a market framework. You say the incentives are completely realigned for developing countries. What I'd like to ask about, you can expound on that for a minute if you'd like to, but I'm very concerned of the timing being what it is about the period before cap and trade program could be up and running. Are there steps we should take immediately to assist in developing countries in controlling deforestation while the other programs are underway?

MR. EIZENSTAT: Well time is really running against us as you indicate. Brazil just made this announcement a few weeks ago about taking a first ever cut in their massive rate of deforestation. I mean, what we can try to do is through diplomatic means ask them in effect to stop and implement already the commitment they've made in return for which there would be an effect an early action credit, something that could be credited against their action at a later point in time.

So that we want to do that frankly with companies as well. I'm on the board of the Chicago Climate Exchange and they have a verifiable system. If you have early action credits for companies, that should be a part of any legislation so that companies are incentivized before the legislation pass, it may be a year or two before this --

REP. CAPPS: Right.

MR. EIZENSTAT: -- and then even then there'll be an implementation phase.

So I think providing these kind of early action credits for countries like Brazil or for companies would be an integral way to try to encourage them to act now and not wait until this carbon market gets established several years from now.

REP. CAPPS: Thank you. I appreciate that very much. Thank you, Ambassador.

Now I'll finish my question time with you, Mr. Gero. Last winter, the, and I'm a California representative, the California Climate Action Registry verified emission reductions from the Garcia River Forest Project in California. This is a joint project of the conservation fund and the nature conservancy and PG&E. PG&E announced purchase of 200,000 tons over five years for its climate smart program. There's been a lot of debate over the success of voluntary carbon markets. The Garcia River Project is an example of a successful, I hope you agree, a voluntary carbon market. Would you tell us or share with us what made this program work where others have failed? And then follow it up with what lessons can be learned and applied at the federal level by such voluntary efforts?

And if there's time I'll ask other people to join in as well.

MR. GERO: Thank you for that question and the Garcia River Project is I think a prime example of the kind of activity that the carbon market, the voluntary and ultimately a regulatory carbon market could incentivize. Here the incentive provided by the offset allowed the nature conservancy and the conservation fund to buy land that it would have otherwise been developed and put it under a sustainable management plan. Without protocols, we were able to quantify what the distinction was or the delta was between sort of standard practice business as usual, what would have occurred on that land, in fact the management plan that the conservation fund implemented.

Based on those standards, and those standards are performance based, we were able to generate credits as a result of the verification of that activity. Our standards are written by stakeholder groups that include scientists, industry, academics, and others and I think that that's a model that can be used in the federal system as well that you need to have all the stakeholders around the table deciding on what are good credible standards.

I think the other thing that the Garcia River Project points out is that openness and transparency is important. Absolutely every step of the way with that project, stakeholders were engaged, people were able to see what was going on, what the management plan was, what the rules were, what the verification activities were, and ultimately when that project was verified, those credits were issued on a serialized basis so that when PG&E and others purchased them, it's clear who owns those credits.

And I think that all goes to creating a credible system.

REP. CAPPS: And so you would say, you would suggest by this that projects like the Garcia River Forest could serve as examples and models, that we don't have to start from scratch, we can look to the voluntary sector or the private sector as we seek to develop past ways to federal regulations.

MR. GERO: Absolutely. I think that a lot of good, existing infrastructure has been created in California through the California Climate Action Registry. Our protocols on our system I believe are world class and those, that infrastructure and those systems can and should inform a federal system.

REP. CAPPS: Thank you very much Mr. --

REP. MARKEY: Gentle lady's time has expired. The Chair recognizes the gentleman from Texas, Mr. Barton.

REP. JOE BARTON (R-TX): Thank you, Mr. Chairman. I'm in an obviously a dilemma here. I don't believe we have a need for a cap and trade program but I will admit that if we're going to have a cap and trade program and you can figure out a way to make an offset program work, it would be a good thing. So I could go either way on this. I could try to define a program that is really tough, but if you implement it correctly it would work, or I could try to implement a program that is so lax that it on paper works but doesn't cost anything and makes it easier to comply with. So you put me in a real box here, Mr. Chairman.

(Laughter.)

I do want to compliment Mr. Stephenson on his educational choice. I, too, went to Perdue and got a Master of Science degree in industrial administration and you've got I think an industrial management or industrial engineering degree.

So I appreciate that.

Mr. Stephenson, is it fair to say that the studies that the GAO has conducted so far on these offset programs, if I had to just put it in a one sentence conclusion, the existing programs just don't work and are almost impossible to make work?

MR. STEPHENSON: That's been the case with the CDM. It is a pilot program, they are addressing problems, they're trying to get it right the next time. But the problems of trying to determine what someone's going to do in the future is different than it's doing today. It's just an insurmountable barrier quite frankly and the bureaucracy to verify that in fact that's happening would be pretty large.

REP. BARTON: And Mr. Eizenstat, Ambassador Eizenstat, first of all thank you for testifying, it's really good to have somebody with your expertise and credibility before the panel. As I understand your testimony again I try to simplify things so that if I can understand it, hopefully other people can, too, because I'm a pretty good case and since I'm probably below average in ability to understand these things, if we keep --

REP. MARKEY: Can I just, you wouldn't have gotten into the program at Perdue if that was the case so -- (laughter) -- that's what I was going to say.

REP. BARTON: Well they always --

REP. MARKEY: Problem is he's very humble but he's proud of his humility.

(Cross talk.)

REP. BARTON: Maybe they had, you know, they may have had a Texas set aside for all --

(Laughter.)

You never know. If you prevent a forest from being cut down, you get the benefit of keeping the (sink ?) which sequesters CO2 plus the benefit of not, the deforestation releasing greenhouses gases, is that correct? You get a double benefit?

MR. EIZENSTAT: You get a double benefit.

REP. BARTON: Okay. And I do --

MR. EIZENSTAT: It absorbs carbon, and if you cut them, it releases carbon.

REP. BARTON: Now I am told that these -- the whole issue of deforestation project is extremely complicated to verify. So my question to you would be under international law, would it be possible for multinational corporations, consortiums or sovereign nations to purchase forests to prevent the deforestation of that forest and also keep the carbon sync in place, would that be possible?

MR. EIZENSTAT: First of all in terms of your own humility, I've had the privilege of testifying before you many times, this is not, you're not one of the cases of Lake Waybegone (ph) where all the children are above average, I can assure you of that.

REP. BARTON: (Laughs.)

MR. EIZENSTAT: The GAO study first of all dealt only with voluntary markets and with a highly flawed CDM process. With respect to the international markets that you're talking about, if you have a combination of highly sophisticated satellite telemetry, plus on the ground monitoring, you have a high degree of verification that countries will not be cheating and if they do, you set up a mechanism in which you hold back say 20 or 25 percent of the credits, you bank them in effect, or you hold back the economic benefits that would occur so that if there's a change in policy, if there's an effort to cut back a forest in another way you can see it from above, you can monitor it form below, and you draw down that credit against them if they attempt to do so.

Now in many cases, the people who will manage these forests will be private companies and private sector entities who will go to Brazil and say look, we will manage this for you for a fee and it will work that way. But again --

REP. BARTON: One more question to ask and I know --

MR. EIZENSTAT: Yes.

REP. BARTON: -- my time's about, I want to ask Mr. Gero, your job in California is to try to verify these offset programs are real, is that correct? I mean your organization's?

MR. GERO: That's correct.

REP. BARTON: You're doing the best you can to really try to make sure it works. I want to ask you a specific question. If I move to California and I purchase an existing coal fired power plant and replaced it with an equivalent megawatt output nuclear power plant, would that qualify as an offset program?

MR. GERO: Under our protocols, no. We don't have a protocol specifically for that activity. Our program has developed set of protocols for specific activities, these are programmatic protocols, we don't have one for field shifting.

REP. BARTON: Hmm. Okay.

Thank you, Mr. Chairman.

REP. MARKEY: Gentleman's time has expired. The Chair recognizes the gentleman from Utah, Mr. Matheson.

REP. MATHESON: Thank you, Mr. Chairman.

The EPA estimates that the forestry and agricultural sectors can offset as much as 12 percent of this country's total annual emissions. So this sounds like an opportunity to reduce emissions more cheaply if these are real offsets. But I'm concerned that an offset market could end up being just another subsidy program for certain parts of our economy like the Farm Bill. There are certain interests in this country that are going to view this and look to take advantage of it and I think it's really important as if we're going to design some type of offset system that we make sure it's structured in a way where it does not just become another subsidy program.

So everyone here said they need to be measurable, verifiable and forcible. That seems to make sense but I just think we need to put that in the context of how a lot of people will look to game this system if it isn't set up right. Just think of all the --

REP. MATHESON: It also seems clear from the testimony that designing this type of program's going to require some pretty complex and serious scientific and technical questions about how to measure changes in emissions. If we don't have a verifiable system in place, we're going to have a situation where a company can sell low priced offsets that don't really have any integrity and in the competitive marketplace because they're so low priced, the other company that's trying to do the right thing and will have a higher price is going to be left out of luck.

So those are sort of general concerns that I have in terms of how you're going to structure some type of offset program.

I wanted to ask the panel, it's been discussed that the notion of creating a board of scientists to provide input on design and review of offset projects just to make sure we hold everyone to the right standards, but I'm interested if people have other comments about what model we should have in mind for this board, why it should be housed at the EPA and not another federal agencies and if someone wants to respond to that line of questioning.

MS. FIGDOR: I'd be happy to let me start off. The EPA currently for setting national MBN(?) air quality standards seeks the advice of SACA(?) chartered science advisory board an independent board that over the years has proved very successful in providing EPA the latest science and technical information needed to set our air quality standards.

I believe that model has worked very well and could be a model for use in an offsets program if such a program is formed. And then it should first and foremost be housed at EPA because the goal of this program is to reduce global warming emissions, it's an environmental goal and the environmental agency should be in the lead in actually -- certainly consulting with other agencies as well but should be the lead in establishing and monitoring the system.

MR. : I would just double that EPA as responsible for the Clean Air Act, it already has a clean air advisory committee that does things like this, so it makes sense that that would be the place to start.

REP. MATHESON: Okay. Seems to me -- oh, go ahead.

MR. : Sir, I agree that it needs to be with the EPA but to the extent you're right, some of these issues are very technical and it requires specific knowledge in very diverse areas from forestry to agricultural methane, et cetera. To the extent that you can engage the private sector to get all of that expertise I think is a win for both sides.

MR. : The advisory boards are made up of many private sector participants and academic participants as well.

REP. MATHESON: Does that model that we've done in terms of the clean air advisory committee, I mean does it set up in a way that I think this should be set up where in addition to taking scientific opinions and we also ought to have on the ground experience and actually be out in the field measuring to make sure this is working, is that type of model going to accomplish this, those goals I just mentioned that on the ground focus as well?

MR. : Yeah, I can take a shot at that one. I think that you need both or actually all of those activities. So one you need strong standards as you've said that are written by a group of stakeholders to bring them credibility. But then those standards when they're implemented do need to be verified on the ground in each project. And that's where you go out and you measure, you look at metering equipment, if it's a forest you actually do plot samples and measure trees. You make sure that the project is in fact performing in accordance with the standards, and only then do you issue any credits. They're always on an ex-post basis that is activity reductions that have actually occurred in the previous year, not on a future basis. So you know for certain that those are real emission reductions.

REP. MATHESON: Okay. So we got, we set the standards and then we go on the ground to verify it and then my next question is once we've set the standards and we're verifying what's going on, then we learn from experience how does that board then, how can it be structured so it's going to maybe add to the list of acceptable offsets or remove items from the list that don't work? Is there a way to structure the board to make sure it has that type of flexibility?

MR. : I think that's absolutely vital, in fact that's part of the program that we've developed. None of our standards or protocols are static documents, they're all dynamic documents that learn from experience and from the state of science as science progresses. So you do need to regularly review and update the protocols themselves. I think that without that you've got a program that is stuck in the mud essentially.

MR. : Let me just say that the board is sort of a test of reasonableness but it's not the implementer. You still are going to need an army of estimators and verifiers and monitors to make sure that any offsets would remain viable and in place for many years.

MR. : Right. I think the last point on that is that additionality itself changes over time so something that is additional today that is surplus today when you're looking at standards two years from now or three years from now when you do an assessment, if that activity has become commonplace, that is no longer additional and you're right, there is a process for removing that from the list.

REP. MATHESON: How do we make sure under this structure, on a going forward basis, how do you make sure you prevent the marketing of questionable offsets in the market as we go on over time? There are going to be vendors all over the place, I understand, have I got a deal for you, so how do we ensure that we don't, you know, how do we screen out those questionable offsets?

MR. : The model that we think about and we use this analogy a lot is either an organic seal of approval so there's some federal standard that says here is an offset that has an organic seal of approval or a UL listing which is a certified offset credit that has met some standards set forth by the U.S. government. Any other credits that are sold out there are sold without that seal and it's buyer beware.

REP. MATHESON: Thanks, Mr. Chairman.

REP. MARKEY: The gentleman's time has expired. The Chair recognizes the gentleman from Illinois, Mr. Shimkus.

REP. SHIMKUS (R-IL): Thank you, Mr. Chairman. Last year we had a hearing called the cost of inaction and I asked the panel is there a cost of increased energy in a climate change bill? And I've asked you yes or no answer will this increase energy costs? Dr. Wara why don't we go first and just go down the panel.

MR. WARA: I think the honest answer is yes.

REP. SHIMKUS: Thank you.

MR. WARA: That is likely.

REP. SHIMKUS: Ambassador?

MR. EIZENSTAT: Yes, but very --

REP. SHIMKUS: Thank you.

MR. EIZENSTAT: -- minimally -- excuse me --

REP. SHIMKUS: Thank you.

MR. EIZENSTAT: -- (inaudible) --

REP. SHIMKUS: Mr. Martin?

MR. MARTIN: With all due respect, it's not a yes and no question.

REP. SHIMKUS: Quickly.

MR. MARTIN: Yes, the offsets are there to contain the costs.

REP. SHIMKUS: Thank you. Because we're putting a prize to carbon is what we're doing and if the major 50 percent of electricity today is carbon, you're going to add more costs so I mean I think the answer's pretty clear.

Ms. Figdor?

MS. FIGDOR: It absolutely depends on how you structure the program if you invest heavily in energy efficiency, you can actually --

REP. SHIMKUS: Well just to the basic question. Will energy costs go up?

MS. FIGDOR: It depends on how you structure the program.

REP. SHIMKUS: So you can't give us a yes or no?

MS. FIGDOR: It really depends on the --

REP. SHIMKUS: Okay. Mr. Gero?

MR. GERO: It's not my area of expertise, I really can't comment.

REP. SHIMKUS: Okay. Has energy costs gone up in, you know, California being one of the highest energy cost states in the nation, is energy costs up in California?

MR. GERO: We don't have a cap and trade program in place today, so --

REP. SHIMKUS: No, I was just -- Mr. Stephenson.

MR. STEPHENSON: It's impossible to give you a yes or no but --

REP. SHIMKUS: And you shouldn't really as a GAO, you know.

MR. STEPHENSON: Thanks.

REP. SHIMKUS: Let me refer Mr. Chairman, if I can add to the record an editorial from the Detroit News from yesterday, cap and trade plan will sink Michigan. President Obama's proposed cap and trade system on greenhouse gas emission is a giant economic dagger aimed at the nation's heartland, particularly Michigan. It is a multi-billion dollar tax hike on everything that Michigan does, including making things, driving cars, and burning coal. So if I could submit that for the record, I would like to do that.

REP. MARKEY: It will be included in the record without objection.

REP. SHIMKUS: If we're going to monetize the cost of carbon and we've had all these problems with the CDM and these voluntary systems, why not a carbon tax? Mr. Martin?

MR. MARTIN: I'll take a stab at that one. Sir, the difference between a carbon tax and a cap and trade program is the cap and trade program gives you environmental certainty, it tells you what your emissions are going to be over time. With the carbon tax you have certainty over the price, but you don't know what results --

REP. SHIMKUS: So you don't trust the government that's collecting the tax to use the money to mitigate the climate issues, I mean, that's really the debate?

MR. MARTIN: It's not so much that you just don't know how much effect --

REP. SHIMKUS: Well no I think --

MR. MARTIN: -- the price will have.

REP. SHIMKUS: -- let's propose this. We have a presidential budget that has $646 billion in it for in essence this cap and trade program, would it be intellectually dishonest if not every single dollar of that tax would go to mitigate the effects of climate?

Mr. Wara? We have great experience in this committee about us passing on taxes and not using the money for what its intended purposes, i.e. the nuclear waste fund is a perfect example. If we are in a position of raising taxes on the American people using that to help mitigate the carbon emissions in the atmosphere and not using that money to do that, would you not say that that's being dishonest to the citizens of this country?

MR. WARA: I think the important thing to recognize is that a carbon tax, the point of a carbon tax is to, and sometimes raise the costs of emitting greenhouse gases.

REP. SHIMKUS: Correct.

MR. WARA: And that is accomplishing its objective. What you do with the money, whether you rebate it to consumers or to citizens or use it on other initiatives is a question of how you want to distribute the cost of the program across society.

The same thing is true of a cap and trade however. Depending on how you choose to distribute allowances you can significantly impact the distributive effects of a climate policy program to make it actually progressive rather than regressive.

REP. SHIMKUS: Anyone else?

MR. EIZENSTAT: Yes.

REP. SHIMKUS: Ambassador?

MR. EIZENSTAT: Yes, Congressman, my view is that under a cap and trade program with the revenues that are mentioned in the president's budget that the overwhelming majority of that should be rebated back to industry and to consumers so that you offset the additional --

REP. SHIMKUS: Yeah, and I would agree, I would go further. I would say not the overwhelming, I would say all. I would say all. And hopefully some of that overwhelming will address the cost per individual. We have this great debate and I'll be, I'll close with this, Mr. Chairman, I see my time is short, the 95 percent of Americans got a tax cut. Woo-hoo. $400 a year. Cap and trade evaluation costs $700 a year. So maybe that additional $300 would go to mitigate the increased costs to the individual that's not a break even based upon this tax relief, but I would pose a question that if the revenue is not to mitigate climate, then we're just going down another failed experience of the nuclear waste fund.

I yield back.

REP. MARKEY: The gentleman's time has expired.

The Chair recognizes the gentleman from Georgia, Mr. Barrow.

REP. BARROW: Thank you Mr. Chairman.

Ambassador Eizenstat, you don't know this but you're sort of a hero of mine. I've been watching you for a long time from something of a distance. The first time we met was the last time we met. It was at the Democratic National Convention in New York in 1976 when you were transitioning the incoming administration of then president elect or soon to be president elect Jimmy Carter.

You've got a great client at this hearing and I know they've got a great lawyer. I want to ask you to kind of trade places with me and try and represent my client in this offset debate a little bit and try and help me understand what's in it for the folks in Georgia. And here's the impression I get from reading the testimony, from hearing the statements, and my understanding so far and this is the case that's most powerfully made by you, it seems to me and the way I would state it is not getting developing countries to go down the road, to go down the trail that our forefathers blazed when they cleared this continent. It gives us a whole lot more bang for our offset buck, does a whole lot more good, easiest to do and you know, easiest to monitor, easiest to verify, easiest to measure, easiest to avoid leakage, all of these things seem to point in the direction of your client, the interest that you serve, playing a very large role in this.

By contrast, I represent a lot of folks in a part of the country where things like RPS are going to result in a whole lot of money being paid if not by tax payers then by rate payers who are very much the same group of people I might add, going to other parts of the country and I want to know what's in it for us.

If you fly over Georgia, you'll see that all of our forested land is laid out in nice, neat little rows because what looks like forest is really just stands of crops to be harvested. They are planted to be cut. So, what is in it for Georgia? What do we get out of this?

MR. EIZENSTAT: First of all, good land use planning should also be rewarded in the legislation in terms of no-till farming and the like. Number two, companies in your district and in districts throughout our state, the state that I grew up in, and yours, would have the same benefit as companies throughout the country. They are going to be under an obligation under cap and trade bill to reduce their emissions.

This affords them a less costly way of achieving their goal.

REP. BARROW: But if I could speak --

MR. EIZENSTAT: Yes?

REP. DEAL: If I could speak for the skeptics' caucus here amongst us, the leakage problems are the greatest, the measuring problems are the greatest, the verifiability problems are the greatest, the -- what is the highest -- what's the best outcome we're likely to get out of this as a practical matter, given the relative complexities of our situation as opposed to the pristine simplicity of the interest you're trying to represent?

MR. EIZENSTAT: Well, first of all, I don't believe there is a problem with verifiability. As I indicated, I think that the combination of establishing a national baseline, which should be required for a developing country, satellite telemetry, on the ground monitoring, all of those can assure that we have a verifiable credit that can be purchased by a company in your district to reduce the cost of their compliance. I believe firmly we're not going to be able to pass us a piece of legislation that doesn't have effective cost reductions tied into it so that it is a very effective way for companies in your district to be able to comply at reduced cost.

REP. BARROW: Well, that's usually important to me, so I want to try and pose my own yes and no question to other members of the panel. Is there anybody on the panel here who doubts that we can get -- that we can participate in Georgia every bit as much as they can any place else, for an offset program? What are the problems that would affect our land use in seventh generation managed land like my family's got in Oglethorpe county, Georgia, as opposed to not cutting down (old growth ?) forest in far parts of the world?

MR. EIZENSTAT: I for one will say absolutely that Georgia and other parts of the United States, the vast majority of the United States are probably going to benefit greatly by an offsets program because offsets apply in sectors that are not likely to be capped, and agriculture and forestry are not likely to be capped sectors.

REP. BARROW: I got an impression, one of the reasons why it's not going to be capped is because it's so hard to manage in the first place. So hard to establish that, you know, it's hard to bring in --

MR. EIZENSTAT: It's hard to regulate, from an emissions reduction standpoint, but it's not hard necessarily, to write good, strong rules to ensure that project is additional, that it's verified, and that in fact the ownership is clear and permanent.

REP. BARROW: Anybody on the -- is everybody on the panel agreed that it's essential that we be able to participate in this at home as well, that we be able to offset right here and right now?

MS. FIGDOR: I would say not through an offset program, but you can achieve the conservation goals that you're discussing by creating a fund for, domestically, to sequester, to improve the sequestration of carbon in plants and soils. That could -- that fund would be created through auction revenue and would be a very important part of the solution of achieving the deep, long term reductions in emissions that the science shows are needed. So I believe it's a very important part of the solution, but shouldn't be done through offsets, because then it's done at the expense of actually achieving with certainty, the cuts that -- emissions that science shows are needed. It should be done in addition to the cuts from large sources, like power plants.

REP. BARROW: Anybody else on the panel got anything to offer that I can take back home?

MR. : I was just going to say that you can -- if you auction the credits under a cap and trade program, there's going to be revenue generation that could be used for incentives. That's a separate argument from whether offsets should be part of a cap and trade program or not.

MR. : The only point I'd add is that, and I don't know the specifics of Georgia per se, but in Alberta, they have a greenhouse gas market, and one of the offset projects that they have is this no- till agriculture. So from an area that is also heavily farmed, that is one way of reducing emissions, and it seems to be working.

REP. BARROW: Thank you. Mr. Chairman, I yield back.

REP. MARKEY: The gentlemen, time has expired. There are three roll calls on the house floor right now, and I think we'll be well advised just to take a brief recess until approximately five minutes past twelve, at which point we will reconvene the hearing and recognize the members. So, with that we will stand in recess.

(Recess.)

MR. : (In progress) -- in the energy sector in China, particularly with the construction of natural gas fire power plants, which have, essentially, all gained registration -- (inaudible) -- , which is the precursor to getting credits issued. I think there are real questions about whether those plants would have been built anyway, and in that context, I think Europe is paying for things that would have happened anyway, because they're in the interest -- in China's energy security and national security interests.

REP. : Thank you.

REP. MARKEY: The gentleman's time is expired. The chair recognizes the gentleman from Washington state, Mr. Inslee.

REP. INSLEE: Excuse me if some of you've gone through this exercise before, but we have to do this every hearing, it seems, which is to compare the cost of the status quo, which is inaction and continued climatic change and all that portends, with the cost of action, which is curtailing CO2 emissions. You were asked a question by Mr. Shimkus about the costs associated with this. Many of us, including (Lord ?) Stern (sp) who has done the most authoritative research on this, have concluded that the costs of inaction will greatly exceed by a factor of five the cost of action associated with a well-designed CO2 emissions plan globally. I think he put the figure at five percent reduction of GDP if we do not act on this.

It is my belief that a well-crafted plan will actually cost less in comparison to the costs associated with inaction, with the damages to U.S. economy associated with that. I'll just go down the row and ask if people agree or disagree, or have no opinion on that. Doctor?

MR. WARA: Agree.

MR. : One hundred percent agree.

MR. : Agree.

MS. FIGDOR: Chairman, we agree.

MR. : Absolutely agree.

MR. : I agree. In fact, the reinsurers in the insurance market in climate change have already recognized the value of inaction in their premiums that they charge.

REP. INSLEE: So, let me say that those who opposed, this is just one congressman talking for a moment, those who will make the most noise saying that this program's going to cost U.S. economy, will cost five times more than those of us who want to engage in action. That is a bold statement; I think it can be backed up. The shoe will be on the other foot during this debate, and so let the discussion begin.

I want to ask about the general idea of offsets in a forest setting. My take on this is that the only way to really have a long term credible program is to make sure we get additionality in saving forests, and the only way to do that is to have a national, nation-by- nation program to assure that when we buy forestation, we in fact get more forestation in the nation, not just the individual plot of land. The reason is, if we buy a plot of land, we buy a life time easement, or permanent easement, and our next door neighbor just clear cuts his land, you haven't got anything for your money.

So, Ambassador Eizenstat, I read your testimony, I didn't get to hear it, but I read your testimony, and I sort of understand you saying we need to start into that process, but we can start before we have those in place. Could you elaborate on that?

AMB. EIZENSTAT: Yes, sir. We should not look at the different modes of dealing with avoided deforestation and cutting forests as oppositional to each other. We, for example, can have set asides, we can have foreign assistance that can prepare countries to develop their monitoring systems, we can have the forest credits that we've been talking about internationally, and consider all of those together, not an either/or. We will need all of those.

Second, I want to emphasize very strongly, these are highly verifiable. The Eliasch report that just came up from the U.K. said that it is easier to verify forest carbons emissions than it is other emissions, and the reason is the combination of satellite telemetry, which is now highly developed, being used by Brazil. NASA and Cisco just announced this week a joint venture on that. You've got Google and others who really have that capacity. You combine that with on the ground monitoring, and a national baseline. You allow a set aside, so you say, "We're not going to include 100 percent of forests. Let's take into account there may be a fire. There may be policy changes. And you bank that so that -- and bank it and insure it, so that if there's a problem, you've got a safety valve involved as well.

You combine along with that and you've got a highly verifiable system. We need to start on that immediately, and we can start on it again by market readiness, by ODA, by set asides, all of those things are necessary in addition to the carbon credits working together to provide an incentive not to cut the forests, and again, you know, I really feel so strongly about this, because we are cutting these forests down, Mr. Inslee, at the rate of one football field a second. Once these forests are gone, they're gone forever. The habitats are gone, the people who depend on them, the rural poor in these developing countries will have to migrate, we will start a terrible cycle.

REP. INSLEE: Thank you.

REP. MARKEY: The gentlemen's the time is expired. I know, Mr. Eizenstat, you wanted to add one more thought that you had.

AMB. EIZENSTAT: I'm sorry to the committee, I have to leave. I wanted to make a couple of points. The first is the point I was just making to Mr. Inslee, we should not look at these things as being whether you're for foreign assistance, whether you're for set asides, whether you're for carbon markets. The amount of money that needs to be aggregated, private sector money that needs to be aggregated to provide the incentive for countries that have every incentive to cut these forests is enormous, so we should be looking at all combined as a way of doing it.

Second, these credits would only be provided after performance is demonstrated, not before. They have to demonstrate over a period of years that they're not cutting their forests down. Only then do they get their credits. And, again, we can use insurance schemes, set asides, banking of credits and zones in the forest to make sure that if they slide back that they pay a price for it. All of these together are necessary, and then last on the EU.

The EU, Mr. Stephenson. I can tell you from experience having been ambassador there, having been in Kyoto, they don't believe in market mechanisms. Period. And that's one of the problems they have with forestry credits. They just don't. Now, they're coming around to it because their industries are also saying, "We can't afford this 20-20-20 target unless we have offsets." So they are moving, but they just have a mentality against market mechanisms that thankfully we don't have in this country.

REP. MARKEY: Thank you, Mr. Eizenstat, and we thank all of you for your excellent testimony today. It's going to be very helpful to us in the formulation of the -- of the draft legislation which we are putting together right now towards the goal of passing legislation by Memorial Day. We thank you all.

This hearing is adjourned.

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