Cap and Trade: Trial and Error – and Pitfalls     Print Email
Wednesday, 04 November 2009

Transatlantic Perspectives on Market Mechanisms for Curbing Carbon Emissions

A Roundtable on Energy and the Environment Joelle Attinger, EI President: Effective market mechanisms to curb carbon emissions are central to efforts to stem global warming, as both the United States record on limiting carbon dioxide emissions and Europe’s Emissions Trading System so amply demonstrate.  Yet, on both sides of the Atlantic, the debate continues on the role that carbon taxes can play as both as a supplement or an alternative to the cap-and-trade system.

Indeed, France will join five other European countries next year in imposing a carbon tax, and the European Commission has raised the issue of a Europe-wide carbon tax on fuel.  As the United States Congress struggles to formulate climate change legislation, cap-and-trade, however, remains central to the discussions, although strong voices continue to argue for the inclusion of a carbon tax.

We have a very notable group of experts gathered here with us this morning to discuss the promises and the challenges of both mechanisms.  Peter Zapfel, Assistant to the Deputy Director General of DG Environment at the European Commission; Anne Lammila, Deputy Chief of Mission at the Embassy of Finland; and Sylvain Garnaud, President of the Cement Division at Lafarge North America, Inc.  They will offer their perspectives in our first session on transatlantic policy options.  After our break, Dr. William Ferretti, Vice president of the Chicago Climate Exchange; Kevin James, Vice President of Climate Change Capital; and James Handley of the Carbon Tax Center will address the practicalities of these mechanisms.

I do want to take a moment to thank the European Commission for their support of our work and to recognize Malachy Hargadon, environment counselor at the Commission’s Delegation here in Washington.  I also want to take this opportunity to congratulate Malachy and you, Mr. Zapfel, on the successful ratification of the Lisbon Treaty.  It has been a very long road but it is a truly historic milestone. I would also like to recognize the generous support and partnership in our environmental programs with the United Nations Foundation, represented here today by Mark Hopkins, Director for International Energy Efficiency at the Foundation, who will be moderating our discussions.

And finally, I want to thank Lafarge North America for their support and engagement in the work of the European Institute and recognize Sylvain Garnaud, president, and Craig Campbell, Vice President for Environment and Government Affairs.

Peter Zapfel:  I will outline six points. One, there continues to be split views about what targets should be pursued in the Europe and U.S. in the medium to long term, what climate targets.  Second, we see, over time, increasing convergence or, if not, a total convergence on what we expect developing countries to contribute to mitigation efforts.  I think that has been a major contention. Three, we see a remarkable degree of convergence on what instruments we should make our main instruments to use for climate mitigation.   Four, we are converging around the carbon market rather than the carbon tax – a convergence of the instrument choice that offers the prospect of integrating the European and U.S. carbon markets towards a transatlantic carbon market. Five, there are some obstacles once we have U.S. Congress legislating on the climate.  There are surely some obstacles to early integration of those markets, but none of them seem to me insurmountable. Six, Copenhagen, which is very high on the agenda this year in Europe, which I think is less of a factor here in the U.S., as I observed from conversations I have here on a regular basis, there is more of a focus of the Hill, as one says here, this year and on Congress.  Copenhagen is crucially important for climate policy, but in a narrow sense, on these instruments that we’re discussing, the carbon market, the European Delegation does not go to Copenhagen to negotiate the future of the carbon market there.  These are some interrelated but separate tracks on which the Copenhagen track is running on the carbon market track and I think that’s also important.

On the first point, what targets should Europe and U.S. pursue, we see differences.  I think one way to distinguish what we have seen over the last one or two decades is there is a very different notion on the importance of an internationally-binding target, a target binding towards the international community, with Europe with so much heavy emphasis under the United States.  When it comes to the ambition level of those targets over time, the medium versus the long term, I think what you have seen in Europe, the policy developed in Europe is a policy of sustained credulism versus in the U.S.  I see a discussion which is the ambition level is driven by the technological progress with electives.  What I mean with this is in Europe, if you look at how did Europe react to the Kyoto discussion when U.S. said it would not pursue Kyoto, we know we have to do our bit in terms of global mitigation efforts.  We start in a moderate way but we need to give sustained signals, policy continuity that this is a long-term problem and over time, we will have to go for more and more ambitious targets.

We had a wide consensus in Europe on ratifying the Kyoto Protocol.  We didn’t have the kind of process that you see again here like yesterday in the Environment and Public Works Committee, where you have the Republicans not even showing up to a discussion of the Climate Bill.  We have a broad societal consensus we need to do our bit for climate change independent on -- to some extent, independent on how fast the international community is moving.  We have a very different sense of the debate here in the United States, where there is a reluctance in the beginning, where there’s a bit more the search for the perfect international treaty before you actually got to get started.

I think in a way and to characterize a bit of the danger of -- this is over-characterization -- I think what I hear time and again in Europe is the way that the U.S. looks at target setting for itself is the U.S. is basically trying to postpone to start solving the problem.  While what I hear time and again here in the U.S., the EU aims for unrealistic targets in the short term.  I think this divide is still there that also, you see now in the perception of targets pursued in the congressional bills and the short term.  So on target-setting, there is less of a convergence than in other areas.

On the second point, we are converging on what we’re expecting China, India and others to do.  There is no full convergence there but we are moving in the right direction.  We have been very strong on the way to Copenhagen.  We want to see those low-carbon growth plans or low-carbon development strategies elaborated by developing countries.  The U.S. administration, also the Congress, keeps on pursuing a more and more ambitious line on some of those issues.  But if you look at it, if you turn back the clock ten or 15 years, we are basically converging on that area and I think that’s a very important point.

On the instruments, I would like to expose you to what I call the five or six-cycle theory on the instruments debate on carbon taxes versus carbon trading. We have a convergence that we need to work with an economic instrument for cost efficiency considerations: combating climate change is a huge challenge and we need to use the most efficient instruments.  But the economists that have debated for the last two or three decades what’s better, tax approach or a trading approach, and I’m fairly confident they will continue to debate for the next three or four decades what is better. Meantime, people like us in the political system need to take decisions.

Here is my five-year-cycle theory.  First step in time is 1992: the EU goes to Rio de Janeiro for the Earth Summit, with a proposal by the Commission to put in place a carbon and energy tax in Europe and with the proposal that we should work towards a tax approach internationally, with the U.S. administration rejecting the tax approach there. Then, we turn the clock forward five years in time, 1997.  The U.S. administration goes to Kyoto with a kind of a “take-it-or-leave-it” attitude.  We’d like to have this international flexible market mechanism enshrined in the Kyoto Protocol: If others don’t accept, we don’t accept the Kyoto Protocol.  The European elegation, starting with a bit of trading and hot air, is very reluctant, very hesitant, but signs on in the end to the approach.  So we have first step, Europe arguing for taxes, U.S. saying no.  Second step, five years later, the U.S. delegation in favor of a carbon market, Europe very reluctant, signing on very reluctantly.

Turn the clock forward six years, from 1997 to 2003, the European institutions legislates on the EU ETS Directive, which provides the legal foundation for a continent-wide application of the carbon market in Europe.  At the same time, it’s the biggest application ever of the cap-and-trade instrument anywhere in the world.  We’ve learned a great deal from existing experience in the U.S. for air pollutant markets, but we have taken in Europe basically this instrument to a new dimension, a 27-country system, we have basically, after being reluctant six years ago, we have become the leading practitioner in the carbon market.But now, the irony kicks in.  In the meantime, you have to Bush administration in the U.S. and we hear the message that carbon market is not the way to go.  So the one who was the leading advocate to put this notion into the Kyoto Protocol then turns around into the leading skeptic on it, 2003.

So now, forward another six years in time, 2009, the European carbon market is more or less settled.  It has gone through some motions.  It has been substantially reformed at the end of last year as part of the climate and energy package, with new changes and new architecture kicking in at the start of phase three in 2013.  It’s settled.  It’s a more and more mature and well developed policy in Europe now.  And U.S. Congress, the House of Representatives, first time ever, supporting a bill that foresees a big part use of cap-and-trade scheme for 85 percent of the emissions in the U.S.  So that’s what I mean with this historic convergence and practice and what policy choice we’re coming down to.  Not mandated by an international agreement, not coordination, no negotiation between the two major economic blocs, but out of sovereign choices, we come down to go the same route in terms of what instrument we make our main instrument.

And then I’d like to turn the clock forward by another six years and put forward what the Commission has suggested in a paper earlier this year.  What we are striving for, as we see all the major economies and the OECD countries, it’s not just the United States.  If you look to Australia, Japan, New Zealand, at some stage, following the U.S. process also, Canada, we see within the OECD world the emergence of those sovereign decisions to put in place cap-and-trade systems, which offers the perspective to create an OECD-wide carbon market, and we’ve given 2015 as a target date, which is not to comply with the six-year-cycle theory, the five or six-year-cycle theory that I have outlined to you, but you see how this can continue.  And then we have another five years later, 2020, we’d also like to have China and India and others in this international carbon market.

Anyway, so now that we have both come down and I know the jury is still a bit out.  The process is going on on the Hill.  But now that we’re coming down, make the carbon market on both sides of the Atlantic our main instrument, we have this perspective of working towards a transatlantic carbon market.  What I’d like to say on this is, in the first place, as I see and observe and try to inform this very intense debate this year here in Washington on carbon market design, the European experience, which was a very lively experience over the first five years of the scheme, offers a lot of experience that can inform the process here, and I see also that it does inform the process, we are a real-life policy laboratory where you can pull on something that even we initially designed our system, we could not draw on it.

And I say this also for another reason because I sometimes see and hear and witness that the European experience is portrayed in a very selective way here.  I think going first makes you learn some of the lessons and going second gives you the benefit of avoiding some of the negative lessons and building on the positive lessons, and I think instead of being overcritical about the European experience in the first five years, use it as a very pragmatic, a very useful experiment that the U.S. legislators can draw upon.

Will we make it to integrate the two markets?  In the end, let me start with some caricature.  The way I usually speak to this is once we have the U.S. carbon market legislated by Congress, linking carbon markets is a bit like a marriage.  It’s something where you need to take a decision.  Do you engage with the other partner or not?  I hear some people discussing we will have five, six, seven years lengthy debate of negotiating to make our systems the same.  But at some state, we will have to make a decision.  Do we engage with the other partner and do we link up the systems?  Do we recognize another country’s allowances or not?

We don’t have a fully formulated policy.  We don’t have a formulated policy what we would like to see in the U.S. carbon market design and that’s for a very good reason.  But I’d like to share with you the three issues that I see in European public opinion, which European public opinion is most sensitive about, what we will look at once we have a U.S. piece of carbon market legislation.  And those three pieces are, on the one hand, the ambition level of the emissions cap, and that links back to the first point I made about the targets in the medium term.  Do we assess the U.S. cap, in other words, 2020 as a genuine and additional effort, a real effort of bringing down emissions?  And there is as much analysis as also perception there in this decision.

The second point is a very, very -- let’s say, I think if you normally look at what does Europe and what does U.S. stand for, it’s a kind of an ironic debate we have in the debate about whether there should be features in the U.S. carbon market legislation that allows governments, the public authorities to intervene and correct the outcome of the market.  Safety valves, price caps, price floors, price colors, as they are called now.  

In Europe, we have a very strong belief that we should let the market work.  Governments, authorities, legislators design a market, a framework of the market, but then, we should let the market work and not correct the outcome of the market.  In the middle or in between, we will have periodic revision and potentially change of the rules with a lead time, but not overnight or not ad hoc interventions into the carbon market.  That’s an issue that I think you, if you follow the debate here, you see what is under discussion here, that could be a sensitive issue in terms of integrating our markets.

And the third point, I think, which is a difficult one but again, also not insurmountable, is how do we deal and what view do we take on the use and the conditions under which we use domestic and international offsets, domestic offsets, air culture, forestry, international offsets, to see the Clean Development Mechanism potential reformed versions of such international offset mechanisms.

So last but not least, sixth point, Copenhagen, as I said, is an extremely important process this year.  But the way that we see this development, on the one hand, Copenhagen is the international framework for the efforts we’re undertaking, including for the carbon market.  The integration of carbon markets as they develop in the OECD world is something that we would like to see on a separate track from the international climate agreement.  The carbon market bid of Copenhagen is the CDM, the Clean Development Mechanism Potential Reforms, the creation of a sectoral crediting mechanism.

But the core of the cap-and-trade programs, those are programs that are developed out of domestic or regional legislation in Europe and the integration of those markets we’d also like to keep separate from the UN process.  Why?  I think there is a very simple reason for that.  If we have a U.S. piece of congressional legislation on a cap-and-trade program, if we want to integrate our markets, this is a decision between the EU and the U.S.  This is not a decision where we need the UN to be involved under what conditions we integrate our markets.  It’s something that two sovereign actors, to the extent that the EU is a single sovereign actor, something that we should sort out together.  So those are the points I wanted to make and I’m looking forward to the rest of the debate.  Thank you.

Anne Lammila:   I’m the deputy chief of mission of Finland and I was asked to speak here because the Swedes were too busy.  I am seeing that there’s the Council of Energy, which is having its meeting today.

First of all, I would like to tell you with a few words what type of a member country of the European Union Finland is.  We are not the easiest case climate-wise because we are a very northern country and it’s very cold up there and we have to build our houses very well isolated.  We are using a lot of energy and not only because of housing but also because our industry structure is like that.  We have a paper pulp and steel industry.

On the other side, Finland, Finnish companies, Finnish citizens are used to using energy very efficiently and that has helped us a lot during these times when there is a lot of pressure to put into force reduction of emissions.  So as a member of the European Union, Finland has taken it very seriously and we have put into -- we have implemented the EU’s common climate change policies.  

Sometimes, it’s very hard.  For example, the renewable energy side, we are already having 30 percent of our energy use produced by renewable energies.  So the target for 2050 is that 60 percent of all used energy in Finland will be produced with renewable energies.  So that means that in 2050, we should have renewable energy which would equal 13 nuclear power stations.  So that’s a lot of -- that describes what type of effort we are doing.

The Finnish government adopted a climate and energy strategy in autumn 2008, and that was exactly to implement the EU’s targets, which are, of course, our targets.  So in the short run, we think the strategy which sets out targets of reduction in emissions, promotion of renewable energy, enhancing the efficiency of energy consumption, they are very hard targets.  They might slow our economic growth.  They might increase unemployment rate.  But in the long run, we think everything will turn out more positive.  The strategy also aims to improve the self -- the degree of self-sufficiency in energy use and also, it tries to enhance delivery reliability.

In Finland, we think that price signal is an efficient tool for guiding behavior.  Emission trading sets a price on emissions, thus, it encourages actors to opt for low-emission alternatives.  And in sectors outside emissions trading schemes, a similar outcome can be sought by the means of taxation.  We think that the EURA [phonetic] is a very good consultant, especially when combined with other steering measures, such as awareness raising.

As a continuation to the strategy, Finland adopted, only two weeks ago, in October 2009, the Foresight Report on Long-Term Climate and Energy Policy, and it sets a target to reduce Finland’s greenhouse gas emissions by at least 80 percent from the 1990 level by 2050, and it marks out the road to a low-carbon Finland in 2050.  We aim to be a bioeconomy, to say it nicely.

So what does it mean?  It means we have understood that the problem is very grave so there have to be very strong measures.  We have sectoral targets about housing, building, industry, transportation, agriculture, energy use in households.  We think that the EU norms are extremely useful because they give sticks and carrots to national measures.  We think that incentives are needed.  Investment support to renewable energy producers can be useful.  We try to create a system of guaranteed price for producers of wind power and biogas.  Those are areas where energy production is not steady so guaranteed prices are a good option.

The main aim is to prevent average temperature to rise more than two grades Celsius.  And what is very -- why are we having a foresight report?  It is because we realize that investment decisions that are made today, they will create the conditions for industries, for power stations that will be functioning in 2050.  So it’s important to act now because 2050 is here much sooner than we think.

Mr. Zapfel mentioned that one of the guiding principles, which is that the market should be the ones that they should be left to act freely.  We totally agree but we think at the same time that the state role should be quite strong, and it is to give incentives and also to give sticks.  So governments are in a position to create favorable conditions for private investments that produce low emissions [indiscernible].

Mr. Zapfel was mentioning about there was this question in trading or taxing.  Well, Finland does both, as other European states as well.  So let me go through how we have done that.  We’ve been doing that for quite a while.  So the main instrument used in Finland is the European Union’s emission trading scheme.  In addition, there are domestic policies and measures, such as promoting energy conservation and use of renewable energy sources.  And Finland utilizes also the flexible mechanism or the Kyoto Protocol that were mentioned, such as Joint Implementation and the Clean Development Mechanism.  And there is also the side which helps us maybe is that what I mentioned earlier, that Finnish companies are used to think of using efficiently energy resources.  We are so far away up in the north and we cannot waste the energy we have, and that helps, of course.

So about Clean Development Mechanism, we have used them a lot.  Just to give you a few examples around the world, Finland is implementing a landfill project in Jordan.  There’s a bilateral waste management project under preparation in Nepal.  In Central America, we have an energy partnership program focusing on the production of renewable energy.  That has been a very successful example of how to use the flexible mechanisms of Kyoto.  And we have a similar program on renewable energies under preparation for Southern Africa and the Mekong Region in Southeast Asia.

There is a government budget for the acquisition of emission credits.  It’s calculated to be €100 million, which is quite a big money in Finland.  And we have an inter-administration body which implements the Finnish carbon procurement program.  It’s quite a laborious job.  I’ve seen those people who are working on that, buying carbon emissions, and to be able to do that, you need to have a lot of expertise and a lot of time.  So altogether, having done those CDM projects and JI, Joint Implementation projects, Finland has reached its target of 7 megatons for the Kyoto period by 2010 next year.

Then, about carbon tax, Finland was the first country to adopt a carbon tax.  That was in 1990, and it set a level of $1.45 per metric ton of carbon dioxide.  According to the Finnish government studies, the CO2 emissions are five percent lower than they would be without the tax.  The government says that the tax has stimulated investment in renewable energy, such as biomass gasification.  However, our industry representatives claim that this tax is just another way to increase budget revenues, so there is both skepticism and optimism in the air.  

But we also tax energy and the current energy taxation system has been used since 1997.  Energy taxes are excise taxes, which are levied on transport and heating fuels and electricity.  In addition to energy tax, a security of supply fees is charged on energy products.  Energy taxation, as a matter of fact, is a major source of financing for the state.

In addition, to be a fiscal impact, energy taxation, is a key instrument of energy and environmental policy.  As such, it is used to curb the growth of energy consumption while guiding energy generation and use toward alternatives that cause lower emissions.  Electricity is taxed during the consumption phase.  The fuels used for power generation are tax exempt.  Electricity tax has been divided into two taxation categories.  The lower of which, Category 2 tax, is paid by industry and professional market gardeners [sounds like].  Other consumers pay the higher category tax.

Then I would just like to mention a very practical example of what Finland is doing in the U.S.  So we have our embassy building.  It was built in the mid-’90s, at the time when nobody spoke about energy efficiency or building houses which would be emission free.  Nevertheless, we have taken efforts to make our embassy green.  So we took a series of energy efficiency measures and as a result, our building was awarded the EPA’s Energy Star in September 2008, and that was the first Energy Star label to be given to an embassy in the United States.  And it was more significant to our mind because our building is not new.  It’s always easier with new buildings.  And we are aiming higher.  Our next goal is to achieve the U.S. Green Building Council’s LEED certification for existing buildings, and that will happen most probably in the beginning of next year.

Finland, the government, the people, we are all convinced that something has to be done.  Also, our companies, they have understood that and that’s why we have gone forward with the taxes and we have gone forward with trading systems.  We think it’s time to act now.

Sylvain Garnaud (Lafarge):  Before introducing briefly the position of Lafarge on this question of tax versus carbon cap-and-trade, let me give you some background about our industry and on Lafarge as well.  Cement, maybe not everybody knows that it is a key ingredient of concrete and it represents about ten percent of concrete.  And concrete is, after water, the second most used material in the world.  And to give you an idea, on average, Chinese use about three cubic meters of concrete per year, which is an enormous amount.  Concrete is a very cheap material which you find in all countries and it’s very efficient in terms of sulfur emissions in comparison with other industrial building materials like brick or steel.  But cement, which is ten percent of concrete, because of the large quantity used across the world and because of its highly energy-intensive production process, is a large source of CO2 emissions.  It represents in mature countries about two percent of the CO2 emissions, including everything, and five percent on average in the world because in the developing countries, the percentage is higher.

Beside that, the cement industry has other important characteristics.  First, it’s mostly an emerging world industry.  Fifty percent of the world market for cement is in China.  Another 32 percent is in other developing countries and then only 18 percent is in the developed world, and that includes not only the EU and the U.S. but also Japan, Australia, and other countries like these.  So we cannot address the issue of the cement CO2 emissions just by looking at the EU and the U.S.

Also, because the price of cement is low, it has the highest CO2 content per dollar value compared to other construction materials, and it means that the cost of CO2, whatever the way to tax it or to trade it, is more important to the cement industry than to any other industry.  Cement is also highly exposed to international trade.  If I take the example of the U.S. in 2006-2007, about 20 percent of all cement consumed in the U.S. was imported from countries as far as China, Korea, but also Greece and Turkey, and of course, with these international trades come transport, and with this transport comes also CO2.  And in general, when you bring a ton of cement from China to the U.S., you add another 15 percent to the CO2 of this ton of cement.

And finally, producing cement requires heavy investment.  If you build a cement plant in the U.S., the cost of this plant will represent about five years of the turnover that you will make with this plant.  Not five years as a profit, five years as a turnover.  And therefore, it’s a very long-term investment and what is very important for us is to have a long-term visibility about what conditions and the costs in the future.  All of these, of course, all of those characteristics have a strong influence on our views on the CO2 schemes.

So that’s in this context that Lafarge, who is the leader of the cement industry worldwide, has been, in the late ’90s, the first in our industry to recognize the need to reduce our CO2 emissions.  We felt that we could not continue and neglect this CO2 issue because it was starting to become an increasing issue and Kyoto was here already.  I will come back later to the public commitments that we made at that time.  But the key is that we fully support, as an industry, which is directly concerned by this issue, we fully support the force of the governments to reduce CO2 emissions.  And our focus is to ensure that the reduction schemes have two characteristics.  One is that it gives us the visibility and the predictability necessary to invest to both follow the market growth and reduce our CO2 emissions.  And second, that it doesn’t create a competitive disadvantage between producing countries, so as long as the rule of the game is the same or similar for everybody, we don’t have an issue with that.

Now, coming directly to the question of cap-and-trade versus carbon tax, in the EU, the principle of cap-and-trade mechanism has been decided very early in the, as you mentioned, in the late ’90s.  And our focus there has not been at all to discuss between cap-and-trade and/or carbon tax but more to concentrate on our need for a level playing field with countries outside the EU and to have this long-term visibility.  It’s still today our focus and we see in Europe no interest in opening a debate on carbon tax for industrial companies like ours.  We have an established ETS which address, to a large extent, our requirement of visibility and level playing field so we can live with this and we feel that reopening this debate will just make life more unpredictable.

In the U.S., to the contrary, one could argue that the debate is not concluded and there are still amendments for it in the Senate with carbon tax and it’s still not clear.  And here, as far as we as an industry or company are concerned, of course, we have no ambition to decide the law of the U.S., of course, but we just have a small view.  And again, the choice between tax and cap-and-trade is not our key concern and we are not economists so we have no ambition to keep discussing it for the next 30 years and probably, you’re optimistic about it.  However, there are a few points that we would consider in comparing the two systems.

The first one, and for me, the most important, is that because the EU is clearly cap-and-trade, if the U.S. goes for cap-and-trade, the likely consequence is that cap-and-trade will be dominant and it will be the rule of the game for the years to come across the mature countries.  And therefore, it will bring a worldwide coherent scheme and some clarity about the future as well.  To the contrary, if the U.S. chooses a tax approach, the debate will start and we will have two competing approaches and the other countries will not know what to do and in terms of visibility, that’s certainly not a good outcome.  So for us, that may be the key point.

Of course, when you read what the economists write, you see that it’s often said that tax give much better visibility on the cost of CO2.  However, and to the contrary, when we look at the ETS in Europe and the way it has worked, and I think it was in the spring of 2006, I think, especially, where the price of CO2 went from more than €30.00 to about a couple of euros within a week, something like this.  You could argue that this is not a very good functioning.  And there are other examples of ETS here in the U.S., which all show some erratic moves.  But we think that those erratic moves can be sorted out and they are more linked with speculation and poor market functioning much more than linked to the principle of this cap-and-trade system.

And so in terms of visibility, tax may be better but we think it can be sorted out.  And we think also that the ETS market, as you mentioned, Mr. Zapfel, is that the beginning was really a trial and error and a learning experience.  And now, we think they are more efficient and they will become progressively more efficient so we don’t feel that this will be an issue for the future.  So for the long term, no big issue for us, no big difference for us between cap-and-trade and tax.

To the contrary, we think that cap-and-trade and tax can be complementary in some way.  For a large industry [indiscernible] like us, which represent an average in the mature countries about 20 to 30 percent of the emissions, cap-and-trade is, for us, a reasonably good solution, but it’s only 20 to 30 percent of the emissions.  There is a lot of it.  A lot of the other emissions are much more difficult to track and to cover by such a complex mechanism that is cap-and-trade.  And in this case, because, of course, as an industrial company, we are very keen to see an incentive to reduce CO2 emission, to reduce 100 percent of the CO2 emission, not just the 20 or 30 percent which comes from industry.  We would see as possibly a good idea to look at carbon tax for the other CO2 emissions and that are things which are done in some countries, maybe Finland, but also some Canadian provinces already.

So this is our position.  We think that the more quickly we go to a system which is compatible between the EU and the U.S., the better we are off and for us, that’s a key criteria.  And also, we favor this complementary system for the other CO2 emissions.

Maybe one specific comment about what I mentioned earlier about a level playing field.  The European Union has adjusted, has adopted some form of protection for the energy incentive and trade-exposed industries.  The U.S. is considering similar provisions in the laws which are considered at the moment.  And for us, this is an extremely important point not only for the long term but also for the short term and for the transition period where those laws are put in place in the mature countries without having something similar, yet in most, in China, for example, or in most developing countries, because this is, for us, the key threat for our industry, much more than the principle of having such CO2 emission.

So this leads me to my last point, is that reducing CO2 emissions from the cement industry cannot be a matter only for the EU and the U.S. because we address only 20 percent of the problem.  And for example, a company like us, we have made in 2001 a very public commitment as part of our partnership with the WWF, which is a double commitment.  Worldwide, wherever we are in the world, that’s China, that can be Zambia, Nigeria, we reduce our specific emissions by 20 percent from 1990 to 2010.  So it’s a specific reduction, not an absolute amount reduction because in those markets, the markets are growing and we are in 2009, at the end of 2009, and we are now at 18.4 reduction, so we have 1.6 percent further reduction to do next year and we are confident that we will do it.

But we have on top of this a commitment specifically for mature countries where we have committed for the same period, this same 20-year period, from ’90 to 2010, to reach a ten percent absolute reduction in those countries.  And at the end of 2008, we are at minus 12.5 percent, so we are getting there.  And many of our competitors are now following us.  

And the last point I wanted to mention to you is something called the Cement Industry Sustainability Initiative, which is an initiative, a voluntary initiative of many of the largest cement players in the world to reduce the emissions of the cement sector across the world, not only in the mature countries.  This is called the CSI, Cement Sustainability Initiative and it’s based on, for mature countries, regulating absolute and limiting absolute CO2 emissions exactly along the lines followed by the EU and the U.S., for example, but also for developing countries.  Proposing to those countries, specifically for the cement sector, to put in place a target of CO2 emissions per ton.  That means that the proposal is not to limit their production of cement but to improve the efficiency of their production so that they can still grow and develop their countries but together with a local policy, for example, to develop biomass or to promote more efficient consumption of energy.  

So this is, for us, a very important point for the future and it goes along with what I mentioned earlier about the level playing field, and we are quite optimistic about it.  At the moment, all the cement players who have joined the Cement Sustainability Initiative represent 40 percent of the world capacity of cement production and that includes three large Chinese players and that’s very recent.  And for us, the fact that those three large Chinese players, who, by the way, the three of them together represent ten percent of the world cement capacity is not nothing.  The fact that they joined us very recently, we see it as a very strong sign that the Chinese government, who controls those three companies, is taking the matter very seriously.  So that’s what I wanted to say.  Thank you.

Mark Hopkins (UN Foundation): In some ways, this has evolved into a debate not on whether cap-and-trade or carbon tax is appropriate because I guess in some ways, the deal has been done in favor not of tax but for a trading system. We’ll see.

A couple of things I want to ask. go to Europe at least once a month.  And over the past couple of years, you can’t go there without noticing the incredible difference in the perspective of governments and people about this issue.  This issue of climate change is in every newspaper.  It’s on TV.  It’s in the debate all the time and people are quite aware of it and leaders speak about it. Chancellor Merkel just came here and addressed Congress on it. No U.S. president has ever gone on to public or on television and explain climate change to the American people.  Bill Clinton spoke on it one time in Australia.  He went to Australia to talk about climate change. So it somewhat make sense that many people here in this country are somewhat skeptical, to say the least, on this issue.  And so maybe just a question, do our European colleagues notice that difference and what are their thoughts and recommendations for the U.S., given that we are tend to not want to impose extra cost, taxes, et cetera, and regulate and all that?  What are their thoughts on that?

Second, this came up just briefly: in the cap-and-trade system and the carbon credit, it is a commodity.  And in commodity markets, maybe natural gas is a good example, the price, by definition, will ramp up and it will ramp down. So one of the potential impacts is that we are putting in place a system which will be very volatile over time and is not -- while it was designed to very much address the concerns of the business community to have a market mechanism, it doesn’t necessarily give you as clear a planning horizon as a specific tax you know is going to be there over time.  The price might go up and down.  

Peter Zapfel:  Let me tackle the second question because I know that’s one of the issues where I think there is a bit of -- still a lack of understanding what has happened in the Europe on the volatility.  I think in the first place, what I see here in the debate in the U.S. when I talk to people on the Hill, talk to stakeholders, volatility has almost become a bad word in the debate about carbon markets.  But let’s take a step back and let’s remind ourselves in a market economy what is the function of prices.  Prices have a signaling effect and they are there and they change over time that we have efficient production and consumption decisions.  So you wouldn’t have if you just have a rigid system of kind of a blind pricing.  It’s a very different approach that we are in.

I think what the colleague across the table has referred to that the drop in the price in 2006 was for a very specific number of reasons, which I could elaborate you but I won’t in the interest of time.  I’m happy to do that bilaterally.  In essence, I see more and more people, the empirical analysis that is done on that now, the carbon market, carbon price is not more volatile now that more systems get settled down and some of the other prices.  It’s in fact a very unique combination of function, of factors on the outside that led to a significant degree of volatility.

I think what we need to keep in mind is, and I think that’s where we need to get more sophisticated in the debate, there is one type of volatility which we need to have and which we shouldn’t suppress.  If we try to solve the problem that we put too many greenhouse gases into the atmosphere so it’s a contrary problem.  And how much of a price incentive we need that we get in that the level of abatement we are looking for will change in a number of -- with many changes over time with economic growth, with technological innovation, with some of those things.  So if we have sufficient technological breakthrough, we can reduce with a new way of reducing emissions which is less costly than other things, of course, that should have a dampening effect on the carbon price.  And that’s one of the very reasons why we have come down to use the carbon market rather than the tax system.

Let me try to elaborate this also.  If you look at it as we have now gone through the economic recession, what would have happened, and I thought for myself at some stage, what would have happened, what kind of a reaction I would have gotten, me and colleagues in [indiscernible] would have got if we have a carbon tax in place in Europe, let’s say for 30 years, a ton of CO2 and then we have the economic and financial crisis hitting us.  What has happened in the carbon market, we’ve seen a decline of the carbon market and that’s natural because with the recession, economic activity is reduced.  There is low CO2 emission by itself so we need less of a price signal to reach our target, the emissions cap that we have set ourselves.

But if in such a situation we have a carbon tax in place, I think Lafarge and other companies and associations would have come to us, say, in the recession have such a price signal, such a high carbon price that’s too difficult and need some temporary relief, you would have a very different reaction.  So I think what the carbon market is doing, as the economy is going through the natural cycles, the carbon market is I think what we call is anticyclical.  So when the economy is down, you have a lower carbon price and it helps sustain the recovery.  When the economy is growing very fast, you have an unbalanced, somewhat higher carbon price and there is also dampening of the economy.  So what do you do is other macroeconomic and fiscal policy instruments.  I think the macroeconomists call it automatic stabilizers and the carbon prices acting a bit like an automatic stabilizer, which I think is something that we’ve seen works in practice.  One could have theorized that this is something that would work with we’ve seen.  

I think we have an excellent example recently in Europe that this effect is happening in practice and that’s one of the many things where I say the European experience can inform that debate here and also to the extent that there are still these discussions here, which I see, I don’t think it’s as strong as one might think the discussion of a carbon market versus a trading scheme for businesses.  The carbon market has a very different impact in an economic recession than a carbon tax with a fixed price level has.  

Anne Lammila:  I wanted to comment on your comment that everybody is speaking about climate change in Europe and I think it is very true.  For our prime minister, it’s the priority number one.  So when he was speaking to the Parliament when presenting the Foresight Report, what he said was that to attack climate change, it is the biggest reality in politics.  About some European thoughts on carbon tax: we want to tell U.S. leaders that we think it’s very much a question of competitiveness.  At least if the U.S. companies want to sell something in Europe, they have to take into account that people don’t want to buy products which are not green, which have not been produced in a clean matter.  Another thing is predictability, as Mr. Garnaud was mentioning.  For companies, it’s really important that rules of the game are the same.  And I’m sure that that would suit American companies as well.  As a matter of fact, I think California, while they are doing that all the time, they are demanding for more norms and more rules to put all companies on the same level and then that they know what is demanded from them.  So they know about the legislation which is coming and if everybody is on the same footing, I mean, it’s just a reality that should be taken into account, as Mr. Garnaud said.

About cement, I’m sorry to inform you, in Finland, we are building a lot of houses of cement.  But what the prime minister is saying now is that we should turn much more on wood.  So that’s a bit of a not-so-good news for your company.  Sorry for that.

C. Boyden Gray (former ambassador):  I want to put on the table, as we’re talking about trading versus tax, I couldn’t disagree with anything that Peter has said, including the fact that the market in Europe has stabilized.  It started out on a bad footing because you didn’t have the same baseline information that we had for our earlier regulation for acid rain.  We had that info; you didn’t; you now have it; the price stabilized.  Of course, the price goes down when the economy goes down, but it will come back up.

The problem in the United States is, and I take the point that no President have spoken out about it, but there is enough anger, push, intensity on our side as 9/11 terrorist events to frame this issue still as one of energy security. If you look at the bills pending in the Senate, they don’t actually mention the word “climate” anymore.  It’s all about clean energy.  Now, what does that tell you about our priorities in this country?  There’s nothing wrong with that: you can get there either way.

The point I want to put on the table, the reason why it’s so difficult to do anything here, is because we’ve done something that Europe hasn’t done, may do but has not yet done, and we’ve never done in this country before and no one’s ever done it before with any trading regime, whether it’s acid rain or any other emissions-trading system. That is this: we have introduced this notion of an auction, which is what really creates the commodity of systemic risk.  I mean imagine the Kerry-Boxer Bill having to have a provision that says that there should be a carbon oversight board to reduce systemic risk.  I mean why create it to start with?  Why are we talking about creating great systemic risks?  I don’t think anyone views the European Trading System as creating a systemic risk for the European economy, but we are headed down the path of creating a huge new systemic risk for the U.S. economy and it’s totally untried and it doesn’t make any sense and no bill, in my opinion, and this is just my opinion.  I was at a meeting yesterday with Tim Wirth with the UN Foundation.  He’s throwing up his hands and saying as long as there is an auction, nothing will ever happen in this country.  So take the auction out.  That’s my provocative statement and I say take it out because we’ve never had one in.

Roger Cochetti (consultant):  My question is: what sort of European experience in this area can be an elment in the U.S. policy debate? At least one of the reasons for instability in U.S. policy in this area is the fact that there are probably at least four different objectives that are conflated in the energy/climate debate that’s taking place in the Congress, two of them cited by Ambassador Gray. One is energy independence, which we’ve had as various Presidents’ national goals since the 1970’s, and you can achieve energy independence with or without carbon reductions, and people take different views on that.  Second is obviously carbon emissions and the impact on global warming.  The third is new-technology jobs, and you could theoretically achieve new-technology jobs with or without either of the two other objectives.  And well, at least there are those three and probably other different objectives.

There are analogues to them, I think, in the European experience.  Energy independence from Russian natural gas has got to be a consideration which could be accomplished with or without carbon reductions.  Energy jobs could be accomplished with or without the others.  And I’m just curious as to how deep the European consensus is to permit all of these issues to be conflated into the carbon issue because that’s clearly not the case in the United States.  There are significant political elements that support energy independence as a standalone policy objective, quite independent of carbon reductions.

Peter Zapfel:  I think we have had the same debate, in a certain sense, in Europe, with the key issue being the hurdle that you have to take is whether you decide as a society whether you want to price carbon.  Carbon has not a price if there is no government policy.  And once you go into pricing carbon, you have to take a high hurdle.  You take, in a sense, a paradigm shift in one of the major ways how you manage government policy coming in making a resource scarce that isn’t scarce before.  

And I think the best way you see this that we had the same in debate in Europe is if you look at the notion, if you would have gone to Europe five years ago and you would have asked a couple of people there, people who follow the debate what, in their assessment, would be a high carbon price, and if you would have gone, would go to Europe now and ask the very same people what, in their view, is a high carbon price, you would get a very different answer.  I think five years ago, people would have told you about €15-€20 is a very high carbon price.  Now, we have had the recession kicking in.  The price is around €14 and we have quite a few voices say the price signal is not high enough.  We have even some people even calling that, some people suggesting we should have some measures now to address this in the short term.  So the perception of what is a high price signal, of what is a high price is changing over time.  And if you look at those three issues, energy independence, reducing carbon emissions, and technology, well, I think you can always identify conflicts between those areas.  

In essence, if you reduce your carbon emissions, you make yourself less dependent.  You make yourself leaner in terms of the energy consumption and cleaner in terms of the energy consumption.  And climate mitigation policies also seem very much as innovation policies as developing the technologies of the future at this stage.  So I think at a very high level, those three areas are no longer seen as conflicts at this stage in Europe but as more of a symbiotic relationship.  I call it a symbiotic triangle maybe and not so much that those conflict with each other.  Of course, there are some issues like how do we deal with natural gas and with Russia, but in essence, the leaner we get now and the more energy efficient our economy gets, the less of a problem it is, but it will also be always be, to some extent, a problem.

Allow me also to briefly comment on this issue about shouldn’t the U.S. legislature just trump the idea of pursuing auctions and go for all three allocations?  I think that’s, in a way, a political temptation and that’s also a part of what helps in getting political acceptance, and we have seen the same kind of approaches in our debate on the climate and energy package last year.  But I think at the same time, what we’ve also seen in Europe, there’s a real issue if you move beyond the energy-intensive industries, if you go to the power sectors, the real issue, the three allocations has made, in the early days, the carbon market, an extremely unpopular instrument in the light of public appreciation.  I think when you were -- in your time and process, I think you have been also exposed to that kind of debate, the windfall profits debate.

I think there is one piece of advice I think I could give to people here in the U.S. and I think the U.S. power industry has also realized what could be a short-term gain can be, in the midterm, a very big reputational problem that the power sector is learning itself.  And I think with hindsight, European power companies, well, they gain out of the day, earned their windfall profits in the early years of the system.  Some of them I’ve heard them when I talk to them bilaterally came back to us.  I mean they feel kind of -- they feel that for the reputation of them of good stakeholders in society, they haven’t done themselves a service by receiving lots of allowances for free.  And that’s one of the reasons why we had this very strong consensus that when it comes to the power sector, beyond 2012, we are in a world where there are no longer free allowances to the power sector.  Of course, it can do that in variations as it’s discussed here.  You don’t give it to the power generators but you give it to other people in the economic cycle and you would still have reallocation but not with the generators.  But I think we are going the auctioning route.  I reckon it’s the first of large-scale of environmental auctions but it’s one of the things we’re also working very actively at this stage to make it work.  It’s a bit of a challenge but I think we’ll make it work.  And I can also see you have directory auctions here which are much smaller than what we are doing.  Auctioning is a viable alternative to how to get the allowances into the market and makes the process in some instances a lot, lot simpler.

C. Boyden Gray:  I just want to have a brief response.  The bad reputation the power companies got in Europe stemmed from what I had said was the problem initially, which you, I think, acknowledged, is that there was no allocation.  You didn’t have baseline information.  The power companies got too much and they got windfall profits.  The acid rain system on which the European system is based never had windfall profits for the power companies.  It was aimed only at power companies.  There were no windfall profits because we had baseline information, precise, down to the individual ton and there were no windfall profits. But if we have auctions, there will be a huge windfall for Wall Street.  And if you want to know why a lot of Midwestern Senators will not adopt this legislation is they will not allow Wall Street to rip off America one more time.  I’m sorry to get emotional about it.

Anne Lammila:  Well, speaking about energy independence, which is a very tough issue here, well, as I mentioned, I only used a different word, which was “self-sufficiency,” so in Finland, what we think is that having more renewable energies in use will increase jobs because many times, the renewable energies are being produced or used in remote areas.  So for example, if we choose to increase the amount of forest converted chips, that’s in the countryside people producing those, the same with wind power -- normally, we don’t put wind power stations very near to urban centers but we put them further away -- so we do think that there is a lot to gain.  And as a matter of fact, we are building right now a whole new industry, which is clean tech industry.  Instead of having old-type production, we are having new and there is a huge demand on those products, so we see it kind of positively.

Of course, this doesn’t happen just like that.  We think that it’s very important that the whole society adapts to the new reality.  So to be able to have green jobs, you need to have people educated for that.  So that means really big changes in what pupils are taught in schools, in universities, and how the companies educate their people.  But there’s a lot to be done.  You just have to think about it, how to do that.

And speaking about developing countries, we think that it’s really important to look at women’s role because they are in key positions in many decisions that are taken, how to use energy, what type of energy to use.  And that is a challenge also and we are glad that Secretary Clinton took it up.  We do too.

Participant (Commission Delegation): I just want to come back on the point which you raised first about whether climate change is being discussed at all.  I certainly have the impression that climate change is in every single newspaper.  It’s on every single TV, with the commercials.  It’s on radio.  We’re getting it all the time.  So it’s not that it’s not there, and I’ll come back to that in a moment.  What is true is perhaps, as Ambassador said, is not being always discussed about in terms of climate change and this talk of whether it’s energy security and energy independence.

On the energy independence issue, Peter put it in a context associating this with reduced emissions and technological advances, and that’s right.  The concerns I have about the debate here in the United States is that it’s put in terms of energy independence and energy security.  But the problem with that is, logically, you can take that to an extent and be energy independent, energy secure based on fossil fuels, and so it is not being honest with the people of America that that is all you need to do and I wish that would be a different state of play in this country.

I’ll just finish with commenting in the light of the comments made about a president speaking about climate change and Angela Merkel’s visit yesterday.  If President Obama went to Europe and spoke to the European Parliament on climate change and if he went to 27 member states and spoke on climate change, he would get 28 standing ovations for what he would say about it, given his commitment to dealing with this.  What was frustrating to me yesterday was Angela Merkel spoke about climate change to Congress and she got half a standing ovation.  And that’s the problem in the United States or part of the problem that we need to see a greater push to convince the people who vote the politicians, the politicians from both sides of the aisle in the U.S., get it in a way which is much more similar to the united approach across all political parties in the European Union that climate change is a clear and present danger.  It needs to be dealt with now and let’s get on with it.

Dan Morgan (journalist):  I just wanted to maybe go a little further in the political landscape. To us over here, it’s very confusing with how climate change policy is being made when you have the EU, of course, the Commission, and you have 27 governments, plus large powerful interest groups, the automobile companies, and how do they intersect with all this?  What’s the pressure point for them?  And I’d also be interested, because it’s such a powerful interest group here, to hear a little bit about what the voice of agriculture is on this issue in the EU. It’s a political question.  It’s not really -- I’m not asking for you the details of this but is there a form, is there an agricultural position on climate change?

Peter Zapfel:  How does the European Union work, act in terms of climate change? I think what we are seeing is we have also been just divided as you have here about what is “federal” and what is “local” or what is EU and what is individual countries.  And I think what we have more in terms of recognition of climate change being a global problem, some of the solutions in this should more be tackled at the European level than by 27 member states going off in different directions and doing different things while we look for a healthy mix, in the way that it has emerged now, for those industries that we have on our carbon market which compete at the European level and even beyond the European level which have a perspective beyond national borders, the instruments are developed at the European level.  And for some of the other parts of the emissions, including agriculture, it’s more an issue of national policymaking.

I think one thing in terms of how do stakeholders play a part of is I think you heard -- I think in a best way, what you heard from Lafarge is a very good way of how you’re summarizing it.  I think once companies accept the necessity to address the greenhouse gas emissions, what we hear, I think, on a constant basis is this issue.  This is a long-term issue.  This is a big issue for the business environment in which we operate.  We want a stable and predictable regulatory framework. I think if you live in an environment where after every four or five years, an election cycle where the type of regulation you’re exposed to could change completely and where you have a big divide between the left and the right in terms of what kind of climate policies are pursued, this is not something I hear the Europe business calling for.  They want to have a longer term framework.  They know this is something they need to address and locking in the regulation for some period of time.  Not being exposed to changes every couple of years is something they increasingly appreciate.  I think that’s still a bit different here, the type of debate here and the left/right debate.  I see this and other -- I mean you see this also playing out in Australia, the change between the Howard and the Rudd government.  I think that’s something when business accepts the necessity to act, they bring this kind of vision to the policymaking, not change completely things after every couple of years time to render stability.

The issue about agriculture is a much smaller issue in Europe than it is here.  If you ask me about it, I haven’t figured out yet why agriculture is not such a big issue in Europe as it is, than it is here.  But it’s the only thing I can say in terms of agriculture lobbyists.  Agriculture stakeholders have so far not been very active in that debate, and maybe one reason this could be is because we have this long established bonds.  The longest established European policy we have is the Common Agricultural Policy, which has a side effect.  Some of the measures we have done have produced some of, delivered greenhouse gas benefits, some reductions in greenhouse gas emissions, so this sector has made a contribution but the sector as such is not as active in the debate as it has become here.  Thus, for example, nobody in Europe asks for agricultural offsets to be recognized in the European carbon market in terms of the level of intensity that you have to debate here.  I think that’s how I try to give you a reply to your set of questions.

Anne Lammila:  Ithink you asked about if there’s political discussion about the need of reducing emissions.  I think in the Parliament, there is a wide agreement that we need to reduce emissions.  Although there are a lot of discussions about how to do that and for example, in Finland, I think in many other countries too, there is this question can renewable energies really be that rapidly being developed?  And there is a lot of skepticism about that.  And many would favor to build more nuclear power stations, which, of course, don’t emit any carbon dioxide.  So in that case, there is a very big political debate on that.

Then about agriculture, there’s, at least in our case, agricultural production is harmful for nature and the use of pesticides, et cetera.  This far, in Finland, we have only voluntary measures but there is a discussion need if the farmers really should be -- if they should have some compulsory measures that they should take or not.  But as Mr. Zapfel mentioned, the share of agriculture in our economy is, of course, quite reduced.

Joëlle Attinger: I’d like to welcome our speakers for this second session, which is really The Carbon Market in Practice.  Dr. William Ferretti, Vice President of the Chicago Climate Exchange, welcome to the European Institute.  Thank you for coming.  Kevin James, Vice President of Carbon Finance, Climate Change Capital. And we have James Handley from the Carbon Tax Center.

But before we start this session, I thought it would be well worth turning back to Ambassador Gray and talk a bit about the position which he has on the viability of an auction for permits for carbon emissions and why you feel that it is something that should be off the table.  

C. Boyden Gray:  And it’s entirely possible I’m wrong so with all these professional traders up here, I’m sure that I will be corrected.  But the main point is, what I said before, we’ve had successful trading regimes starting, and this is what the Foreign Affairs Magazine points out in today’s, this current issue, the model for all of this was lead phase down and the acid rain program.  In the 1990 Clean Air Act amendments, they were not auctions.  They’re very successful.  

It was followed by the second phase of an acid rain phase-down -- no auction. It was very successful. No auction.  You can have a robust market.  Sulfur dioxide (the cause of acid rain)is traded in Chicago over the Chicago Mercantile Exchange.  I know something about the markets because one of Dan Morgan’s and our best friends became the first acid rain SO2 allowance trader and made quite a bit of money on doing this until Cantor-Fitzgerald and Enron and all the big boys came in and turned it into more of a commodity market and as margins got squeezed, so he left.  But it was very competitive.  It works very well, as does the European Trading System.

Now, what’s an auction, which would be a new element - never done before?  Well, it puts out into the marketplace many, many more allowances to be manipulated and speculated upon.  I don’t know if anyone can see this little chart here, but what happens with the current system in Europe and the United States, they are ever reducing levels and imposed by legislation.  You go from theoretically, hypothetically 500 million tons down to 450 down to 400 to 350.  And if utility A can’t meet its reduction obligations, it buys the reductions from utility B, who may have over-controlled.  And the market is just a little bit over and above the mandated level and trades may be in the range of three million.  

Now, when you auction the whole thing off, you put $3 trillion of allowances.  You just flood the marketplace with them and in comes Wall Street and, oh, what a time they are going to have with this.  And the politicians like it because this $3 trillion worth of allowances that they can hand out for favors, which are many, which they are happily doing at the moment, making a total mash of everything by handing out this to that and that to this, and this industry complains that they didn’t get enough and that industry complains they didn’t get enough. So the politicians go back and forth, and back and forth, and trade allowances back and forth, and it’s kind of an ugly sight and it’s got people very nervous and of course, the Republicans call it, probably accurately, a tax.  

And I think you can’t impose in a recession, even if you could impose it in a boom time, you certainly can’t impose in a recession a $3 trillion tax.  You just can’t do it politically.  And that’s what this is.  It’s a $3 trillion tax.  And you can talk as the politicians, “Oh, we’re going to get it back to the consumer,” but you look at the legislation and you read it line by line, and not very much is ever going to get back to the consumer because the politicians are going to play with it and give it to whoever their favorite group is.  And this is greatly complicating matters.  

And if you had any doubt about where it’s headed, read an op-ed written by the junior senator from New York about two weeks ago in the Wall Street Journal, where she describes the savior, the bailout of New York will be this, will be the auction.  That is how New York is going to get bailed out.  And there are enough people in the Midwest who are already angry enough with the bailout of Wall Street and I don’t think they’re going to adopt another one.  The Democrats aren’t.  There are enough Democrats who won’t do it and of course, the Republicans were able to call it a tax, which, of course, it is, and that is why it’s so politically difficult.  

I don’t think, for example, that when a utility has to go out and buy, will have to under an auction system, go and buy the allowances that it needs to stay in business that they really view themselves as totally illegal.  And that’s what it implies.  In order to stay in business, you have to go out and buy enough to stay in business.  And the concept of that is also a little counterintuitive, I think.

If you look at the separate world of Montreal Protocol, the ozone-depleting substances, which, by the way, have produced far more reductions and this is going to blow your mind, but the Montreal Protocol has produced how many times the reductions of Kyoto?  Would anyone care to guess?  Twenty.  Twenty.  Twenty times.  And the acceleration, which is under negotiation now in Egypt, will produce three to five times anything Copenhagen would do by 2020.  But none of this is done by an auction.  

And if you talk to someone who manufactures CFCs [gases used, for example, in old refrigerators], these refrigerants, it is really offensive to them to be viewed as being a total legal entity that has to buy from the marketplace the right to stay in business.  And they would happily pay for the reductions they have to do, but to say that they get a windfall is, I think, wrong.  Duke Power, for example, had to spend $6 billion to comply with the acid rain requirements.  To call that a windfall doesn’t go over too well when you talk to the Duke Power shareholders.  To call a $6 billion expenditure a windfall is a bit of a stretch.  

And so that is why I think an auction should not be used.  The fact that it might get used in Europe in the future on a member state by member state basis, we’ll see.  We’ll see what they do and how it works.  But I don’t think we should be basing a U.S. policy on something the Europeans might do and might not do successfully.  There are going to be plenty of opportunities for traders to make lots of money in a system without an auction.  

Now, why do we have this?  Originally, somewhere between acid rain and climate legislation, academic economics community decided in papers that were being exchanged well below the radar screen of anybody in this room, including me; I never knew these things were being written there; academic papers being exchanged, it came to the conclusion that an auction was, in a pure economic sense, a better way to go if you just could do it in isolation from all the politics.  That may be true that it would be better economic if you could pull it off in the absence of any politics.  But unfortunately, we do live in a political world.

Peter Zapfel:  Yes, I’d like to respond briefly to this.  I think that calls for a lot further debate but, in fact, I want to make two points on that.  First, I think in Europe, power companies got emission allowances worth billions of Euros.  They get them for free. The way the system works, that leaders to higher power prices. So that’s what’s causing Europe windfall profits.  And the decision has been made in Europe to no longer give away carbon allowances for [free] to power companies. So, do you give that asset value of the carbon allowances to shareholders of power companies or do you give that asset value to society to dispose of it?  And that’s the very decision that we have made in Europe.  This is not an open debate.  Come 2013, we will auction about one billion allowances per year collectively across the European carbon market. We already have some auctions now. They are small, about 70-80 million allowances a year, but the new system has been decided, the rules are worked out and the system will start in two or three years time. Really the question is: “Do you give the asset value of the carbon allowances to shareholders of companies or do you give them to society?”  And I’m sure if you would go the 100 percent free-allocation rule, you’ll have the same debate here in a few years time.  And I think it’s not a black-and-white debate -- all auctioning or all free.  It’s a question of finding a sensible combination.  I think in Europe we found a sensible combination.

Another thing, this auction is not so big as you suggested.  Last year, we had an annual turnover in EU allowances of three billion.  That market is a secondary one, and our market will keep on growing.  So if you bring one billion allowances into the market by an auction, that contrasts with the current figure of three billion. This is not so much bigger – it’s just adding a primary market segment to the very well-established and liquid secondary market.   

I know there’s some psychology around this auctioning debate about the possibility of market abuse by speculators. But I think we should also keep things down to earth and compare figures about what it means for the market. Auctioning is a reality very soon in Europe and it is one way of bringing allowances into the market for companies and sectors which can easily pass on the carbon volume to enterprises in way that  it’s really society rather than shareholders who benefit from the carbon value.

William Nitze (energy businessman): I just have a few comments in response to Boyden’s remarks.  First, I am a Duke shareholder and Duke’s return, from a shareholder point of view, has been unsatisfactory, but I don’t think that that’s the main reason why it’s been unsatisfactory.  There are other reasons I can think of.  Two, the bills that are being designed in both the House and the Senate have considerable buffers against what I think the real problem is.  I think the political problem to which Boyden refers is that people in the Midwest and the Southeast and some other parts of the country are used to very low electricity rates based on electricity production from “grandfathered” pulverized coal plants. I have just returned from Birmingham, Alabama and I actually went by the Alabama Power Building, and Alabama Power delivers electricity to its customers at a very low rate.  I don’t know exactly what it is but I’m guessing it’s around 5¢ or 6¢ per kilowatt hour, which is at least 40 percent less than here in Washington D.C.  And I can understand why rate payers, who are used to those low rates, would not want to pay a penny or two higher in order to deal with the climate problem.

Now, the way these bills have been designed is to cushion that rather modest increase in rates in two ways.  First, companies get considerable flexibility as to how to use allowances.  Only a portion of the allowances would be auctioned under either bill, and the likelihood is it’s going to be a small portion, perhaps rising in the future.  And secondly, there is a provision for substantial offsets whereby companies can further cushion any price signal by buying emission reductions from projects domestically and abroad.

And if you look at this rather nice graph in the handout, Figure 1, you will see that through 2030, U.S. emissions will actually rise and the initial reductions achieved under the bills are achieved because of a very substantial investment in offsets.  Now, that raises issues of its own in terms of additionality, but there are two billion tons of offsets that are built into these bills, precisely to deal with the political problem of cushioning rate payers in parts of the country getting cheap coal-fired electricity against rapid price increases.

My own view is there’s no free lunch here and people in Ohio and Alabama and Georgia and elsewhere are going to, over time, have to pay more for their electricity because they’ve been receiving a huge environmental subsidy.  Now, if I were elected to Congress from those states, I might want to defer the pain as long as possible, and there is a lot of deferral built into this legislation.

But ultimately, there’s just no way of dealing with this problem unless there is a real economic incentive expressed through rates to shift away from subsidized fossil fuel-fired electricity and it has to be done at some point and in my view, it should start sooner rather than later.  But I think the politics will work their way through, through these offsets and through the way allowances are handled under the bills, and I’m hopeful that a compromise bill will make it through.

Mark Hopkins:  Now we’re going to hear from people who are actually doing this out in the private sector.  

William Ferretti (Chicago Climate Exchange):  I thought I’d describe for you the work that we’ve been doing at the Chicago Climate Exchange and, by way of extension, then talk a little bit about the rest of the carbon market in the United States.  I’ll give you a kind of perspective on size and performance and how it’s working as perhaps as an insight to what the design and architecture for a national mandate here in the United States might be.

First, let me describe what the Chicago Climate Exchange is.  We are an exchange, a Chicago-based exchange.  We’re not the Chicago Mercantile Exchange.  We are separate from them.  They are a competitor of ours.  But we were established in 2003 and we administer a cap-and-trade program to reduce greenhouse gas emissions.  It’s a voluntary program but it is legally binding.  Entities join the exchange.  They sign a legally binding contract to abide by the rules of the exchange, and central to those rules is an emissions-reduction schedule of achieving six percent reductions in emissions by the year 2010, and that’s measured against a baseline of the year 2000.  

We cover all six greenhouse gases in the program.  Companies are -- and it’s not limited to companies.  I’ll describe the types of members that we do have involved in the exchange.  And every year, the entity, as cap-and-trade tends to be designed, has an emissions target that they have to meet.  If they exceed that target, meaning that they have actually brought their emissions down below that target, then they have allowances available to them that they can offer for trade or they can bank forward for use in future years’ compliance.  If they fall short of that target, then they’re obliged by the rules of the exchange to have to buy allowances from another entity that’s participating in this program.

And there are two sources of those allowances that they can acquire.  One would be allowances from other emitting members that have achieved surpluses by nature of the fact that they’ve reduced below their targets and are willing to sell them.  Or they can purchase offset credits that are registered also on the Chicago Climate Exchange, and I’ll talk a little bit more about offsets on CCX in a little bit.

All of these emissions activities, emissions reductions activities are subject to third-party verification, starting with the baselines of our emitting members.  They have to provide records of, in the case of non-utility members, they have to provide records of their fossil fuel consumption and other process inputs that would lead to the release of greenhouse gases.  Those are audited by an entity here in the United States called the Financial Industry Regulatory Authority or FINRA.  It’s a private sector entity but it was created out of a 1930’s act of the United States Congress.  And FINRA serves as the private sector regulator, if you will, or oversight body for the U.S. financial industry.  And we went to FINRA, who most recently was headed by Mary Schapiro, who is now President Obama’s head of the Securities Exchange Commission now.  We went to them and asked them to function as our regulator in the absence of a national mandatory program.

And then each year, our members, our emitting members have to supply a report again on their consumption, and these consumption figures are converted into greenhouse gas equivalents using standard conversion factors that have been published by entities like the IPCC and World Resources Institute to true themselves up so that we know what their position is with regards to how well they did against their target and whether they’re in a buy position or a sell position for their allowances.

Offsets are subject also to third-party verification, and we start with science-based, peer-reviewed protocols that are performance-based.  The entity has to register and have those projects verified in advance before offset credits are awarded to the entity.  We have provisions to hold back offsets to create an insurance pool in the event that there is a so-called reversal in the activity, so we have built-in mechanisms to protect against those kinds of issues.  And so that provides the basis for our exchange.

Who is participating?  It’s a voluntary program and I think it’s noteworthy to recognize the kinds of players that are involved in this exchange.  We have over 17 percent of the Dow Jones industrial companies participating on this exchange, companies like DuPont, United Technologies Corporation, Ford Motor Company, Fortune 100 companies like Honeywell, Abbott Laboratories, companies that you would not expect and are not likely to come under the regulatory umbrella of a national program like the Bank of America and a major grocery chain here in the United States called Safeway.  

We also have other entities that have joined and are participating in this program in the cap-and-trade program.  We have governmental bodies here in the United States.  The State of Illinois and the State of New Mexico have joined.  Gov. Richardson from New Mexico has committed his state’s operations to abide by this cap-and-trade program.  We have cities and counties.  We have universities that have joined as well, all taking on this six-percent-by-2010 verification regime cap-and-trade program.

I wanted to talk about offsets because offsets are an important component of our program.  As Mr. Nitze has pointed out, they are going to be an important part of a national program here in the United States and it’s going to engage sectors that are not likely to be covered by the cap-and-trade legislation, and most noteworthy among those sectors are the farm and forest community here in the United States.  Just to give you some perspective again, we’ve got over 9,000 farmers today in the United States that are enrolled in our agricultural offset program on the Chicago Climate Exchange.  That’s about 16 million acres of farmland and small forest holdings in the United States, landowners that are participating in our carbon sequestration programs either in our conservation tillage program, where farmers sign on to make a commitment to practice what’s called continuous no-till, which is a practice where they only lightly plow the soil and has the beneficial effect of holding carbon in the soil. Also, reforestation and best sustainable forest management practices on small holdings can have benefits.  

In addition to that, we have other entities that are capturing methane, for example, from municipal solid waste landfills, from coal mines, from dairy operations and livestock operations that are earning offset credits as they capture a very potent greenhouse gas, methane, from being released into the atmosphere.  We have offset credits for the destruction of ozone-depleting substances and renewable energy and energy-efficiency projects as well.  All this provides a body of liquidity in our market that creates for a very effective marketplace, price discovery, and efficient transactions.

I’ll give you an idea of size of our market and the U.S. market in general.  Our cap, if you will, or the total of our baselines of our members, is about 600 million metric tons.  There is only one mandatory greenhouse gas cap-and-trade program in existence in the United States right now.  It’s a regional program called the Regional Greenhouse Gas Initiative that covers the ten states in the northeastern part of our country.  The cap for that particular program is 170 million metric tons.  And again, to give you a point of reference, the German national allocation for the country of Germany is about just under 500 million metric tons.  So to give you a point of comparison, the CCX baseline or cap, if you will, is about 600 million metric tons.  Germany is at about 500 million tons, ReGGIe at about 170 million tons.  That’s in contrast to a total U.S. expected baseline or cap of somewhere around six billion metric tons.  So we’re a small fish in that large pond of six billion but we’re not insignificant in terms of size compared to other mandatory programs that are out there today.

Another way to look at it is what’s our trading volumes look like?  What do our trading volumes look like relative to, for example, Europe?  We have a wholly-owned subsidiary, the European Climate Exchange based in London.  That is one of the major markets for transacting EUAs and CERs, futures contracts and options on those allowances in the EU system.  On our market, our average daily volumes are about 1,600 contracts a day.  That’s about 1.6 million metric tons per day that are transacted on our European Climate Exchange.  We’re talking about 15,000 contracts versus 1,600 contracts that are traded today for a total of about 18 million metric tons traded per day versus 1.6 million.  So again, orders of magnitude differentiate between a voluntary and a mandatory market?

Why would anybody participate in something like this here in the United States today?  There is a whole variety of reasons.  But entities are -- the entities that I have described are in this market today for a number of reasons.  They want to get ready for what they expect to be a federal mandatory program.  They want to put the systems in place to be able to measure, monitor their emissions, hold themselves accountable to third-party verification, and implement strategic thinking, strategic planning systems to be able to use that information along with the carbon price that is discovered through our exchange to help them make decisions about what’s the best option for meeting their compliance requirements, to either make an actual reduction through some kind of technology or process change or to buy an allowance for compliance purposes.  

So they’re doing it to get ready.  They’re doing it to protect shareholder value, to enhance shareholder value or to protect shareholders against risk.  Public companies in the United States, as it’s true around the world, are undergoing a considerable amount of scrutiny right now by shareholders demanding that these companies provide an accounting for their so-called carbon footprint and an accounting of how they are managing those carbon emissions.  And so companies are participating in our market to, again, to demonstrate their accountability to their stakeholders, to their shareholders, their board members and so on.

And last but not least, there are entities that have joined the exchange because it provides them with an opportunity to monetize the reductions that they’ve actually achieved.  There is no other way here in the United States to be able to do that and so we’ve had entities simply joining because they know they’ve been able to make reductions and they want to have an opportunity to be able to sell those reductions.

I failed to mention that another major sector that’s represented among our membership is the utility sector in the United States.  And I talked about our manufacturing and non-manufacturing members, but we also have 20 percent of the largest CO2-emitting utilities that are members of the Chicago Climate Exchange.

So that’s a little bit about what we’re doing.  We think there has been a compelling business case for entities to join and they have been joining since 2003.  That baseline that I described has been growing over time.  That’s not where we started.  That’s where we are today.  And it’s all about, again, getting ready and being in the best competitive position that these entities can place themselves in when a mandatory program comes into play, and I think it’s fair to say that the debate about whether there’s going to be a mandate in the United States is over.  It’s only a matter of when that mandate will be imposed and what the precise architecture of that mandate will look like.

I’ll stop there with my description.  And just to offer a couple, just a couple of quick comments on auctions, to Ambassador Gray’s point, I’ll add an elaboration.  There is a mandatory carbon market in the United States today that does use auctions.  That’s the Regional Greenhouse Gas Initiative.  All the allowances being issued under that particular program are done by auction.  We are trading futures contracts on those allowances, those auctioned allowances on our sister exchange, which is regulated by the Commodity Futures Trading Commission where we trade futures contracts on ReGGIe, on the SO2-Acid Rain program that the Ambassador mentioned, as well as the NOx program.  And there’s a high degree of liquidity in that particular marketplace even with the auction in place.

And then the last point I’ll make is that in the bills that are being entertained in Congress, Waxman-Markey and the so-called Kerry-Boxer Bills in the Senate, there are provisions to phase in auctions over time, that while allocations will start at a very high level of so-called free or grandfathered allocations in the early years of the law, there is ramping up of where more and more of those allowances would be auctioned over time so there are provisions to create kind of hybrid circumstances where you’ve got free allocation trending towards auction over time and then you’ve got the hard full auction model of ReGGIe.  

Kevin James (Climate Change Capital):  We’re a London-based investment manager.  I think we still have the claim to fame of operating the largest private carbon fund in the world and we predominantly go around to developing countries and try to develop, either through the clean development mechanism or the joint implementation process projects, to reduce greenhouse gas emissions and bring those projects and resulting credits delivered through the UN framework back to buyers in Europe and Japan and elsewhere.  They are looking for reductions.  And I thought I’d share a little bit of practical perspective of how that process is working.  And back to Bill’s point, I think all the projections and discussions that, from both Europe and the U.S., in terms of coming anywhere close to meeting the targets that people are talking about at a reasonable price, include a very large component of emission reductions coming from overseas and developing countries.

I would say the good news is there are a lot of opportunities and we find those on a regular basis.  I think there are a couple of points that I’d like to bring up that are areas of concern from our perspective in terms of the ability of this international market to deliver these types of credit, the volumes and the types of credits and the quality of credits that people are looking for to meet these environmental goals and cost containment goals.

So I think the first point I think is that, as we’re looking forward, that I think is a little bit scary, just based on a couple of recent conversations some of my colleagues have had in the various negotiation sub-meetings that are going on for Copenhagen, that there is an expectation obviously, as everybody has heard, for some of the larger economies to take on their own targets and to meet certain targets.  And I would say that that process is relatively advanced in certain cases.  I think what hasn’t been discussed and I think will dramatically affect what happens in the U.S. and Europe going forward is the fact that these countries both have to meet their targets that they’re talking about putting forward as well as provide additional stream of emission reduction credits to help bring down the costs of compliance in Europe and the U.S. and elsewhere.  

And I think this is something that a lot of people have not given a whole lot of thought to.  I think if you’d ask a typical Brazilian negotiator for their country on this issue, they would assume that any emission reductions they are creating through CDM or another framework would count towards their emission reduction goals.  Whereas if you talk to someone on the other side of the table in Europe and the U.S., it would be very obvious to them that those emission reductions would be completely separate from them meeting their emission reduction targets.

And so I think this is an issue that will come to bear in these processes as we get down and also I think dramatically affect the availability of these emission reduction offsets to, in fact, meet these both environmental and cost containment goals that people have put in place.  So I think that’s something to think about.  I think the additional component in this, from a very practical perspective, if you at all follow the predictions of carbon credits coming through, specifically the CDM mechanism from different agencies that try to predict the flow of credits and the availability and the volume of credits, what you’ll find is that they are constantly revising down their predictions of the volumes and quantities of credits that are available to be delivered into the various markets.  And I think if you’d ask most people in my business, you go out and try to develop these projects and register them, they probably without a doubt say that the main bottleneck in that process is the UN agency that manages and operates and sort of is the gatekeeper for these credits.

And so you have a situation where you can see in the negotiation project there is a sort of impending traffic accident where you have this expectation of a large number of high quality of credits and a framework structure that, in theory, allows private capital to flow into different countries to find the cheapest and best and most effective ways to reduce greenhouse gas emissions and yet, the actual implementation and practical formulation of those credits is stuck in a system that’s I think very poorly operating at this point.  And while reforms have been made and suggested and there is definitely a slow steady improvement of the process, it’s still I think woefully inadequate to meet the demands of, the future demands that this system is going to be, that would be placed on the system.  So I think you have that issue that needs to be really addressed if you’re going to see the kinds of offsets coming out of these systems that people are expecting.

And then also, I think everybody, at the beginning of the Kyoto process, was very nervous that there would be a lot of “hot air,” and I think the jury is probably still a little bit out.  I think most people would agree that there has been, and especially in the last six months, a tremendous inflow of hot air from Eastern European countries with little or no environmental benefit and you’ve actually seen that pretty dramatically affecting the price of carbon credits on the various exchanges.

And so that’s something that I think is going to need to be dealt with because obviously, looking to the success of any carbon market, and there are two things that obviously you need, you need some sort of price signals and certainties and you need some sort of clarity of the process and clarity of the flow of credits.  And I think these are two things that need to be rapidly addressed in a much more significant way than people have been talking about to date.

There have been some very good suggestions, I think.  I just recently saw a note from the U.S. State Department about some interest they would have in trying to reform the process and allow more types of projects and streamline the process using benchmarks and some other different mechanisms that people have been advocating for quite some time.  But I think in general, the good news is, as I started out with this, that there are a tremendous number of inexpensive offsets to be had but for the ability of the system to manage, control the quality, and deliver those offsets in a timely fashion.

In general, the process has done what it’s supposed to do, which is energize innovation private capital to spur this kind of activities.  You’ve seen I think some innovative technologies being pushed into developing countries that would never have even been considered.  There have definitely been some projects that folks would have been much happier regulating out of existence as opposed to providing credits for.  But in general, the system and the framework is there to successfully engage developing countries in this process, but I think that there is a definite need for some reforms and for some real discussions about what the ability is of these current systems as they are currently constructed and future systems to actually deliver on the promise of these low-cost offsets that will both meet the environmental goals and the cost containment goals that people have projected into their models.  So I think I’ll end there and if anybody has any questions.

James Handley (Carbon Tax Center):  I guess the subheading for this panel discussion is the practical realities for carbon trading.  My answer is, they are [very complex]. I was also amused by the comment that Boyden Gray mentioned from Senator Gillibrand, where she was pointing out that carbon trading could be the salvation of Wall Street.  That’s, I think, more truthful than she probably intended it to be.  And regardless of whether there’s an auction or not in the Kerry-Boxer or Waxman-Markey Bill, there will be trading and the Goldman Sachs folks of the world are just salivating to get a piece of that market.  And I’ve heard Senator Dorgan, for example, get up on the floor of the Senate and also in the Energy and Natural Resources Committee, and he says, “I want no part of Wall Street setting the carbon price,” which gets back to points made a moment ago.  

The most important thing that the U.S. has to decide is that we’re going to price carbon.  We have not done that.  We have not set a mechanism to put a price on carbon is a way to drive innovation and put the resources, the investment capital into low-carbon energy to green energy to the future of energy in our country and in the world.  So the price makes a big difference and the main idea is one that goes all the way back to Al Gore’s book, “Earth in the Balance”.  This is the 1990 edition. Now he is now considered an advocate for cap-and-trade, but I will take you back to his earlier statement about this in the book: When asked, “What if we lowered the tax on work and simultaneously raised it on the burning of fossil fuels?” he answered: “It is entirely possible to change the tax code in a way that keeps the total amount of taxes at the same level, avoids unfairness and regressivity, but discourages the constant creation of massive amounts of pollution. Accordingly, I propose a CO2 tax which is completely offset by decreases in other taxes.”

That is exactly the proposal that the Carbon Tax Center advocates.  This would eliminate the carbon market and we like the Larson Bill the best, which sets a very predictable price.  He starts at $15 a ton CO2 and ramps it up each year after that.  The money in his bill is 85 percent recycled to households by raising the exemption on payroll taxes.  So that eliminates the inherent regressivity in a carbon tax and we’re talking about -- when we talk about a carbon tax, let me just explain what I mean.

It’s an upstream tax imposed at the first point of sale on coal, oil, and natural gas in proportion to their carbon content.  So it’s basically an advanced pollution fee that’s paid at the point of sale, expecting that those products will eventually end up in the earth’s atmosphere, and it works its way through the economy.  So no person and no individual household is going to get a bill that says, “Here is your carbon tax bill,” but the effect is as the price rises, products that involve the use of those goods will increase, including, for example, electricity.  And it’s very important that people see that the electricity price, for at least coal-generated electricity, is going up in a predictable way because that creates an incentive for efficiency.  And for example, a decision to buy a new refrigerator that you might postpone for ten years because, “Hey, the old one works,” suddenly becomes much more attractive because you know not only is the carbon price there today but it’s going up a little bit every year and I can actually do a calculation.  The salesman can come to the door and say, “Here is how much you’re going to save on your electric bill when you buy this new refrigerator or insulate your house or put in new windows.”  And the same kind of logic applies to the business community and the similar logic applies to the investment in coal-fired power plants.

Once there is a carbon price, the investment capital isn’t going to go into coal-fired power plants.  And I’ll discuss carbon capture and sequestration if somebody wants to talk about that.  I have a degree in chemical engineering and I’m an extremely skeptical observer of the discussion about carbon capture and sequestration.  I don’t believe that it will be done in an economical or timely way so the investment in that area is, in my view, a very misplaced discussion.  And one of the bad parts of the Waxman-Markey and Kerry-Boxer Bill is that they’re putting a lot of stock in technology that I don’t think will provide an answer.

But anyway, predictable price says invest in wind energy.  Don’t invest in coal-fired power plants.  So the money starts going in that direction.  We recently briefed one of Senator Dorgan’s staffers and pointed out that North Dakota can supply 60 percent of the United States’ electricity demand using wind power.  But that won’t happen without a carbon price.  And the more predictable that price is, without the volatility and the economists would call it noise.  Volatility is a noise.

It deters the actual needed investment in green energy because it says if you’re an investor in wind farms, for example, I don’t know what the carbon price is going to be.  It might be here.  It might be here.  I guess I have to assume the low number and see if I can get a return on investment at that point.  I can’t bet on the high number.

So the range of volatility, and in my materials here, you’ll see that figure that someone referred to earlier, figure 1, which shows the -- I’m sorry.  No, it’s at the back of your packet.  You’ll see the blog article which shows the EU’s price range since 2005 and I’m not finding my copy but yes, there it is.  That’s right.

If you find this one, look at that graph just for a moment.  That is a very attractive scenario for Wall Street.  Gillibrand isn’t kidding.  This kind of volatility makes traders rich.  This is where you can make hedging instruments and derivatives really pay off.  But this really kills it if you’re trying to build a wind farm in North Dakota because you don’t know what the carbon price is going to be and you can’t decide whether to get into that market.  And the bank is not going to lend you the money to do that investment.  So this is good news for Wall Street but it’s bad news for green energy.

So our proposal is set a carbon price so we know where it is.  And you heard the discussion earlier about price discovery.  Well, price discovery, a market is a very inefficient and costly way to discover a price for a commodity whose supply we’re going to artificially constrain to create a carbon market.  We’re basically saying there’ll be less carbon emitted and then there will be a rent on this scarcity.  Economists call this a scarcity rent and that’s what creates the market price and that’s what creates the market price.

But what we don’t really know is how much carbon we need to reduce -- how much of a trajectory we actually have to reduce, what price actually is needed.  So the thing to do is start with a price, a predictable price and set one that you know is on a reasonable trajectory to get you to the emissions reductions that you need and start moving.  Adjustments can be made later.

This second graph that I provided here is a trajectory of prices -- I’m sorry, of emissions reductions with the Larson Bill.  The blue bottom graph shows what happens if you put a $15 a ton price on CO2 and ramp it up $10 a year going forward.  The second line is Waxman-Markey without offsets.  That’s using this Congressional Budget Office’s estimate of what the actual price would be if you take the offsets out of the game, and they were estimating $26 a ton in ten years.  That’s not a very significant carbon price when you think about that.  It adds up to about 2.5¢ a gallon of gasoline and it’s about three-quarters of a penny to a dollar so it’s just under 2¢ a kilowatt hour added to electricity rates, which, as we heard in the South and in the Plains, are roughly are roughly around 5¢.  In this area, we’re paying closer to 10¢ a kilowatt hour.

And the Waxman-Markey, if you include offsets, is the red line, which is essentially flat and the top line is the No-Action alternative.  Concerning the subject of offsets, the Michael Wara paper that someone pulled out earlier, which has the parabolic graph on there, shows the effect of offsets.  And if you look at the current bills that are being proposed, the offsets, someone mentioned a figure of six billion tons per year in the United States CO2 emitted, the offsets comprise roughly two billion tons and that’s per year.  What that means is if the offsets are available, which they may or may not be, but if they are fully utilized, there will be no need for domestic reductions through at least 2030.  Now, it may be that the supply that they have estimated, two billion tons, just won’t materialize and then you may actually have a real carbon price and there may actually be a need for reductions in the United States.

But to the extent that there is an offset market and it’s available and it’s cheaper than making allowances in the United States, you can look at the Waxman-Markey or the Kerry-Boxer Bills as ways to tax U.S. consumers and use the money to find offsets, many of which are overseas and some of which would be in the United States.  And I’ll leave it at that and take questions.

William Nitze:  A question.  I’m actually a fledgling participant in the offset business and we’re buying offsets only from gold standard projects.  And those offsets, even ones of very recent vintage, are relatively cheap today because the market is depressed.  You can get top quality CDM-certifiable offsets for $6-7 a ton today if you participate skillfully in the market.

But my question is that price is bound to rise as the global economy recovers and as demand for offsets increases and the U.S. legislation, if it passes, will be a driving force behind that demand?  So how do you see standards for offsets so that you have real additionality, real accountability, real transparency influencing the future market, and in particular, influencing available supply and the political debate around the issue of additionality?

Kevin James:  Yes, I think that’s a really critical question because I think one of the major hindrances of supply at this point within the CDM process is one, the types of projects that are allowable are sort of are regulated by a process of writing methodologies to sort of allow a type of offset to become a valid type of offset.  And this process takes anywhere from one to two years of time back and forth with a UN bureaucratic group called the methodology panel.  And that methodology panel then passes it to what’s not supposed to be but in fact plainly is a very political body called the executive board.  And the executive board, with little or no technical expertise, can reject a methodology out of hand simply because it doesn’t like the type of offset.

And so you have a situation where the way that the process is structured and then just decides basically the quantity of credits that are available and then the issue of certifying those through that same executive board is extremely difficult and this additionality question is front and center in those discussions.  I think depending on how the U.S. decides to implement but this, it will make a big difference on the availability and obviously price of any offset credits.  From what we’ve heard, the U.S. has and is both advocating this internationally and domestically, is to look more at benchmarking, to look more at allowing certain types of projects to be automatically approved based on the technology and/or the level of benchmark without dealing with this question of additionality and basically streamlining the process so the quantity of credits is much more clear and front and center at the beginning.

William Nitze:  A follow-up question.  The issue of REDD, reforestation, I think there is a political deal brewing coming out of Copenhagen, which is that countries with potentially large quantities of forest offsets, like Brazil or Indonesia or the Congo Basin countries, will want a significant volume of forestry-based offsets in the system because that will ensure a flow of funds in their direction and soften the blow of any constraints that they have to accept under a climate treaty.

But the methodology questions with forestry are extremely severe.  There was a recent analysis of a forestry project in Bolivia where the actual provable tons reduced was a small fraction of what was anticipated when the project was set up, and this was a high quality project involving a famous forestry reserve in Northern Bolivia.  I wonder if anybody could comment on this issue because here again, politics may drive bad offsets on a very big scale.

Peter Zapfel:  I can say a few things about this because I can represent the European Commission.  As an institution, it has, for years, said we need to take a conservative stance to what extent we create tradable forestry credits and we integrate them in the carbon market.  I think we constantly are being questioned.  Actually, when we, last year, did the climate and energy package, we actually even had U.S. lawyers coming over to lobby the European Parliament that they shouldn’t accept the Commission’s stance and forestry credit should be accepted in a carbon market.  Our official line is we need -- the fact that we created REDD, and I think REDD will be created as part of the Copenhagen deal, the jury is still out to what extent and at what stage those should become credits that are traded in the market.

Forestry is an important mitigation measure.  Forestry is something that we in Europe, in the first place, also look to support with public financial flows to those countries who can reduce deforestation.  We need to look -- we have to have quite some methodological challenges.  We need to look at the latest stage to what extent we create those credits and in particular, we have reserved ourselves very clear to what extent we will recognize them in the European carbon market.

I think the debate here is somewhat different.  I think one thing that we continue to be concerned about, if you have some of those as your statements, some of those credits, where the methodologies haven’t been sorted out, if you recognize them too early in the carbon market, if companies pile them up and use them for compliance and then it turns out those reductions haven’t been good reductions, you can create some very negative reputational effects for the overall policy.

And that’s what we’ve been saying for a long time.  That’s what we have been -- I think there is, of course, the commercial interest there to develop those credits.  But one needs to balance all those considerations and in essence, what we are saying, the recognition of forestry credits, potential deforestation credits in all European carbon market legislation is an issue that’s for us a post-2020 issue.

What we could start doing as a result of Copenhagen, use such forestry reductions, deforestation reductions for government commitments.  And a bit, like it has been outlined with the Finnish government is doing because governments are subject to different types of controls and they have higher hurdles of what kind of quality of reduction stable to use for complying with their commitments on a future commitment.

But if you put them into simply into a market context, companies go for the cheapest compliance option.  If it’s a forestry credit, they will try to procure whatever they can get and it can have a real setback in terms of social acceptability, public acceptability of carbon markets.

I know this is a different advice than you’d normally hear here but I’m glad that you raised that point.  I think that’s an issue.  We don’t preclude that we should have tradable credits, forestry credits but there is a lot more work that needs to be done before we can actually go into this issue of looking at it and there’s actually something that’s also shared.  It’s not on the commission line but when our environment ministers last met two weeks ago, they said the recognition of forestry credits is something that we need to look at into medium to long term, and they added up about five or six conditions to it that we need to have a look at before we take the actual decision.

C. Boyden Gray:  One thing, if you don’t know about it, that you might want to look at is modeling that Microsoft has come up with at a lab in London or in Cambridge.  And it’s incredibly powerful and if you add, match that up with Google Earth and what they can do to photograph what’s actually happening, I think, I mean, I’m just totally stunned.  I’ve been there and seen it and I’m just encouraging for you to send someone there to take a look.  It is pinpoint accurate in predicting the past, which a lot of climate models can’t really do.  But they do pinpoint accurately forecasts of the past and I think it’s a very useful device.

But I have a question about what happens if the two U.S.-EU markets are linked and there is the availability of, say, I know it’s capped at the moment independently, but say it’s unlimited the access to our agricultural offsets, our reforestation, our carbon sinks.  I don’t know whether Dan Morgan knows.  He probably knows much more about this than I do.  But the people at EPA who do this tell me that there is almost enough in our own Ag sector to offset everything without going internationally.  And my question is would Europe really permit the flow of European industrial funds into our Ag sector because they may be the cheapest offsets that would be available [indiscernible].

Peter Zapfel:  It’s not the first time that I get this question here on this side of the Atlantic. I can’t give you a definitive answer.  I think what I would say is that it is one of the three issues that I think are the most important issues for finding acceptability on both sides of the Atlantic to connect and integrate our carbon markets is to have a common view on how we deal with both domestic and international offsets.  That’s actually a critical question.

From a political point of view, European public opinion will look at it like this: “fine if you want to make agriculture and forestry offsets a major component of your domestic offset program, but the burden of proof that these are robust credits, based on robust methodologies, is on you to make the case that these are good rules.  That’s an answer we have been giving for the last three or four years in that regard.

It’s an important stance that we are taking, as I said also on the forestry: we’re not precluding it but at the same time, we need to do this in such a way that this is credible. Also on the the U.S. side of the Atlantic, if that you don’t put money into something that gets you in the limelight of negative headlines.  We have a carbon market, our public has supported it, our democracy has produced it.  But if you go towards the carbon market, you will need over time, to keep public acceptability, to sort out some of those questions.  And I think there is a lot of work to be done.  We have done a lot of work on some of the other areas.  Introducing the carbon market at continental scale is not an easy issue.

The other point I should add here, when you say when we get the questions why are we in Europe not interested in agriculture and forestry offsets, if you look at the European continent, the geography of Europe, there is a lot less potential in Europe for reductions in the agriculture and forestry sector.  And that’s why we’re also making this point that we are not precluding this, but we are not the ones who have put, will put a lot of resources and make those and make those kind of mechanisms workable.  If you can, if the U.S. can prove to us that those are robust rules, they don’t need leaders to do it and undermining the environmental integrity of what we’re working towards, I think a case can be made that we can link our markets under such conditions.  But work, the methodological challenges need to be overcome and I think there is quite a bit of work left in that regard.

Dan Morgan: This follows up on the offset question.  I’ve been out talking to some of the farmers that were mentioned, the 9,000 farmers who were selling -- I talked to some who were selling the range management conservation offsets and others who were selling the no-till or continuous no-till offsets.  They’re not very happy campers right now because they went into the market last year when it was about over $7 a ton and they’re now saying that the market has tanked and is virtually moribund and that these offsets are worth about ten cents a ton now.  They’re worried about what a cap-and-trade system will be like and whether these offsets are really going to be worth anything in a cap-and-trade system.

But at the same time, there are some interesting sort of political issues involved because you have the -- clearly, agriculture is going to be a key player in deciding whether we have the legislation and there is a lot of enthusiasm about these offsets out there and they’re saying that it really -- they could incentivize better farming practices that you could see a massive improvement in the way people farm if these incentives are good enough and allowed to sort of take root.  But they feel that they’re not respected, that the offsets are not being respected in Congress and particularly in the environmental community.

There is a lot of skepticism about whether how much additionality they’re really giving and how much -- and to the extent to which they could has been mentioned just now about whether they could sort of overwhelm the system.  There could be so many offsets out there that they become so cheap that nothing much really happens.  So I would like to ask you, if possible, if you could talk about this from the perspective of the Chicago Climate Exchange.

William Ferretti:  Let me try to address some of those things.  The prices of allowances and credits on CCX have dropped precipitously largely due to the regulatory uncertainty about the future of those allowances.  There are provisions in Waxman-Markey and in Kerry-Boxer to provide for recognition for early action.  It’s the general title.  But those titles are still not sufficiently defined to give enough of a signal to the  marketplace about what allowances, what credits will be recognized under that early action regime.

There is some distinction being made between programs that were established by state or tribal authority and then all everybody else that’s considered to be an other if you weren’t established by state and tribal authority.  And there is some perception out there that the state and tribals are definite and that everybody else is subject to further consideration by the EPA.  And so until those kinds of uncertainties get sorted out, we’re seeing what you would expect to see in the marketplace, a softening of prices.

As to the question about overwhelming the market, we find this kind of a puzzling discussion.  Somebody, I mean, it was mentioned that the bills have allocated, Waxman-Markey and Kerry-Boxer are both allocating about two billion tons of offsets.  There’s a different split between the two bills in terms of how many for domestic offsets, how many for international.  But quite frankly, we’re hard-pressed to envision how you’re going to come up with, say, a billion tons or a billion and a half tons, depending on which bill you’re looking at, of domestic offsets that would fill that pool anywhere in the near future, in the early years or even into the interim years of -- the middle years of a cap-and-trade program.

The EPA and the U.S. Department of Agriculture are going to be given direction through these bills, with guidance about how they’re going to establish protocols, how they are going to determine questions of additionality, how they are going to address issues of reversal, how they are going to address issues of verification.  There are going to be established standards that projects are going to, all projects are going to have to meet, thresholds that they’re going to have to meet.  And even if you build a performance-based system that, like Kevin was talking about, where projects can come in a more streamlined fashion, for example, than through the CDM process, we still don’t see that two billion-ton pool being filled any time soon, let alone lapping over and being available to the European market.  So we think that’s maybe down the road but certainly not a near-term concern.

William Nitze:  We actually have a little family farm in Maryland and these issues and these issues come up directly in terms of our management of the farm.  First, we receive conservation reserve set aside monies.  The U.S. Department of Agriculture pays us three times as much per acre not to farm as we can get from the best contract farmer that we’re able to find, at least two and a half times, and we’re very grateful to the taxpayer.

And we have set aside a number of acres and natural grasses and some weeds are growing and some acres are set aside for reforestation.  Now, the whole purpose of this program has nothing to do with climate change directly.  It has a great deal to do with protecting watersheds, avoiding or minimizing loss of topsoil, and frankly, reducing direct agricultural subsidies, because if you take marginal acreage out of production, that reduces pressure on your agricultural subsidy program, which is a major irritant in trade relations around the world.

So what we do under this program is, in my view, not in any way “”additional, and it seems to me that judgment should apply across the country.  Now, secondly, low-till, we do practice low-till but for a very good reason.  Low-till has proven extremely effective in minimizing topsoil loss.  And if you’ve got the kind of hard clay soils that you have in southern Maryland, that’s very important because good topsoil is scarce and you do get enough wind and water erosions so that you want to preserve it any way you can, and low-till serves that purpose very nicely.

There are other practices to avoid a topsoil loss.  Planting hedgerows in the Midwest is one: We don’t want another Dust Bowl.  But my general point is the great bulk of the activities the U.S. agricultural sector is going to undertake to avoid topsoil loss, preserve productivity, meet other environmental and social goals are not additional, and I don’t see any way of getting around this.  Even reforestation is going to happen for productivity and watershed protection reasons that have nothing directly to do with climate change.  So this is to reinforce the point that’s just been made.  I don’t think there is going to be a huge flood of offsets from good farming practices because I don’t think an additionality test can be met.

Kevin James:  This [agricultural] sector I think was well thought off at the beginning of the CDM process and I think a number of companies found out the hard way that what Bill said is exactly right.  It’s very hard to A) manage a process, B) collect data and actually implement processes in the agricultural sector.  And finally, it’s hard to prove additionality and a number of companies went bankrupt in that process, so for a variety of reasons, but those definitely were a part of the mix.

And that raises the obvious political problem, which is that without strong guarantees that agriculture is going to be able to participate and make a lot of money out of this legislation, its chances are more limited for passage.

Mark Hopkins:  Kevin, I’m just sort of curious.  You mentioned various projects of the CDM process.  Can you give us an idea of what a couple of projects that you know, you’re sitting there and somebody comes in, you know, “Oh, this is a no-brainer.  We can get this right through,” and then some that come through, some ideas or projects in which might be good on the surface in terms of clean energy and those sorts of things but don’t stand a chance of getting through the process?

Kevin James:  Yes, I mean probably, the silver bullet that you have if you’re looking at a project is something called financial additionality, where you can actually prove that the value from the carbon price actually tilts the IRR of that project from something either below a reasonable hurdle rate or not at all profitable to something that is.  And so you have certain abatement technologies and certain -- I mean I can make a list of different technologies, but you have certain technologies that clearly would not be profitable for anybody to install but for the carbon.

And then you have this sort of large category of others, including, for example, wind, which everybody would say that’s a great thing to do, but a lot of the wind projects that have been developed in China over the last couple of years are actually coming under a lot of scrutiny on the additionality issue because the government there is promoting this anyway.  There are subsidies already in place and so you have a lot of wind projects that you could say are a big part of reducing the climate picture in China not making the cut.  And there is I mean a lot of uncertainty around that going into it because two years ago, you would have said a Chinese wind project would be a very attractive likely project to get through.

So there are shifting sands.  There are some projects that you can say, going into the process, are pretty much a lock for getting through.  And then there are projects where you know anecdotally that they are clearly additional but it’s very hard to demonstrate that to the executive board because in a lot of cases, in developing countries, you’re dealing with companies that have no access to financing or public companies in governments that have no ability to come up with budget money to do improvements.

Now, one example, I do a lot of work in the gas distribution and transmission sector in a large part of the former Soviet Union and these systems were built 40 years ago.  They haven’t done -- spent dollar one to upgrade them but the projects on a financial basis are very attractive.  I mean you’d think that they could, in effect, go in and upgrade these systems relatively effectively, but they have absolutely no access to the credit markets.  They have no ability to fund these themselves.  And so we’ve had had some success in making those cases that there’s definitely a lot of risk upfront in the project.  You have to build that risk into the price and to the entire project’s structure.

C. Boyden Gray:  It may very well be, Bill, that the farm practices are not additional for purposes of, say, trading, but I surely hope that because they might be occurring anyway for good farming reasons that the reductions in fact get logged and counted in the U.S. side.  In the same way, the CFC Montreal Protocol reductions shouldn’t really be tradable into a CO2 market because they’re going to happen anyway.  But one of the problems with that is they have gotten lost and they don’t count.  It’s as though a 20X reduction of Kyoto never took place.  And I hope that the political system doesn’t let that happen to the farming reductions, which are potentially huge, as they appear to have happened with the CFC reductions.

Peter Zapfel:  I’d like to put one on the table which I wanted to qualify as a personal opinion, so it’s not for printing in the Washington Post tomorrow, because I’ve heard this for a number of years with talking to people here.  At this point, there will be no way that the U.S. climate legislation will be adopted without the farm state votes and the farm and the agriculture sector needs to be integrated into the carbon market.

We had similar hurdles to overcome in Europe and I think sometimes, I think one probably needs to kind of think a bit outside the box and come up with other solutions that help you, in a sense, to square the circle.  In that context, one thing I’ve been, myself have been thinking about, and it’s somehow building up on the carbon market, we felt at this stage we are not sure that methodologically, you can do it.  You can have the integration as an offset in the carbon market.

One way you could go about it is if you use some of the auction revenue you get out of selling allowances.  You put this somewhere and you use this for creating incentives for reductions in the farming sector, which don’t have to direct link to the carbon market but you actually use some of the revenue you earmark out of the carbon market for such practices.  You allow yourself to develop some of the methodologies.  If you get things wrong, you do not create reputational effects on the carbon market.  You have time to sort it out.

And in those categories of agriculture or forestry reductions where they’re now more confident that you can handle the methodology, over time, you can start formally integrating it as offset categories in the carbon market.  I think that’s a kind of squaring the circle away forward that I could see that it’s something that I think some people are contemplating this here.

I don’t think that it has made it yet in some of the congressional draft legislation, but that’s a way of I think winning some of the farm state votes that you need and at the same time, not exposing the carbon market to the risk of some of those practices, which you can’t handle the methodology from day one.

Participant: You’re right.  There is a program written into the current legislation that would address, would provide financial incentives to farms for undertaking practices that, the language is something to the effect, would not qualify as offset activity.  So there are provisions being built in into the rule.  I mean we’re generally in agreement with Bill’s point.  I don’t know that I would be as expansive as he was about the rule.  We think there is an opportunity for agricultural practices to qualify as offset activities and they will be part -- our expectation is that they will be part of a national mandatory program, but there are also going to be this incentives program, but at least right now, it’s in the proposals.

William Nitze: I just made the mistake of actually printing the EPA’s ”final rule” on greenhouse gas reporting.  It’s as thick as the Chicago Yellow Pages and considerably more dense and I haven’t even begun to read it.  But I wonder if someone else has actually read this “final rule” which would be a great burden, and could comment on what it says about the agricultural sector.

C. Boyden Gray:  My understanding of that rule is it applies to emitting sources of 25,000 tons and more, so there are going to be only a few very big farms that are going to fall under that – just large-scale, so-called livestock operations or animal production operations that are emitting methane, but that’s I think the limitation of it. I have read it.I am really strange in this regard.  I view reading EPA material as invigorating, it really sparked up a particularly dreary weekend for me. I didn’t know whether it was a caricature or a parody of itself or not, but it does limit the reporting requirements and whatever rules will have to be developed to sources that emit 25,000 tons or more, which just excludes just about everybody in farm country.

Now, the statute says 250 tons.  That’s what the statute says.  Now, you might ask yourself, “How do you rewrite the statute to go from 250 tons to 25,000 tons?”  That’s a very interesting question.  And I found great amusement in hearing the explanation for it in this rule. What EPA has done is look at this and said, For Title V permit today gives reporting requirements that would involve about 60,000 companies. Under a strictly applied law, it would rise to six million that would have to report.  At that rate, it would be the 22nd century before EPA climbed out from underneath the paperwork.  So what does EPA do?  EPA says, “That’s absurd.” It is absurd.  And so they are going to apply the most esoteric doctrine of judicial construction I never heard of called the theory of absurd results.  That is, if, to implement a statute, creates absurdities, you rewrite the statute, as much as you have to, to avoid the absurdities.

Now, people say that this is absurd and that it won’t survive in court, although I have gone through all this and I’m quite convinced that it’s a viable doctrine, as absurd as it may seem on the surface of it.  People say it’s not going to survive, and the Washington Post, sort of threatening Congress, said, “This will be an unholy mess” and we can’t cope with this and says that the Clean Air Act, because of this problem (which EPA is going to solve by the doctrine of absurd results, but this is before they came out with the doctrine). So the Post said that the  Clean Air Act is therefore, “breathtakingly unsuited” to deal with climate change.  Breathtakingly unsuited.  Now, I scratched my head as a lawyer and I say, you know, that’s about equivalent of saying that the Supreme Court’s five to four decision was “breathtakingly unsuited” to have been issued.  And since I don’t think the Supreme Court is going to want to be described as “breathtakingly unsuited” to its task, I take this to mean that the Supreme Court basically will bless the doctrine of absurd results.  And so I am quite confident that the EPA rule will survive judicial challenge.  That’s my little rant for now.

Mark Hopkins: I would just comment that I think this issue of offsets is just enormously important.  I just spent last week in Ghana at a biofuels/bioenergy conference.  And several -- you know, there, 85 percent of the arable land in Ghana is non -- is not in production.  They don’t really chop down forests.  They just have a lot of savannah that is not used and their production per hectare is one quarter what it is in the UK through bad farming practice, et cetera, tremendous opportunities, and of course, they’re at this conference, these issues of, “Oh, well, after Copenhagen, these financial flows will come and look at the developing nations.”  So the idea which the West proposes in which, “Oh, well, this won’t be government money, this will be business financial flows,” through this is met with enormous skepticism.

And the minister or the executive secretary of the Ghana Energy Commission said to me at lunch, “You know, the only thing, this additionality test,” he said, “Here in Ghana, nothing happens that you could consider to be -- that would impact that test except for continuing poverty.”  That is going to go on and on unless we can get some support here as the financial community or financial situation is so desperate, and in the developing world, it is a very difficult situation now.

So I hope -- I think Kevin’s and the different thoughts here on additionality is just a very important thing because the eventual Copenhagen agreement, this is a critical issue to help out the developing world and how are those financial flows going to do and then how are they going to be able to, with a limited capacity, accomplish this.

Joelle Attinger: Thank you all for coming.  The work that the European Institute does on the environment, does on the absolute necessity for the public and private sector to work together in shaping the solutions to what faces us is really critical.




 
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Infrastructure Planning and Financing: Lessons from Europe and the United States

The University of Maryland has received a Jean Monnet grant from the EU to conduct a series of policy exchanges between Europe and the US on filling infrastructure needs and the utility of public/private partnerships as the financing mechanism. If interested in participating in or receiving more information about these exchanges, please contact Rye McKenzie (rmckenzi@umd.edu).

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