March 24, 1999 Hearing on Credit for Voluntary Early Actions

Dr. Richard L. Sandor

Chairman and Chief Executive Officer, Environmental Financial Products LLC

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

In 1991, while serving as a director of the Chicago Board of Trade, I encouraged the exchange to support the SO₂ emission allowance market. The EPA ultimately selected the CBOT to administer its annual allowance auctions. The results of the seventh auction were announced today in Chicago. The success of that program truly represents a milestone in environmental and financial history. It gave us faster-than-required pollution cuts at far lower cost than predicted. This success has been realized despite the predictions of the naysayers. We were told the sulfur program would never work. We heard: "its too complicated, it will cost too much, its too hard to measure, utilities don’t know how to trade, where will the price data come from?" Despite the huge success of the sulfur trading program, those of us who believe we can harness a market to protect against global climate change are now hearing the same protests. People have not learned the lesson: never sell short America’s entrepreneurial ingenuity.

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

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

Credit for Voluntary Early Actions is the positive signal needed to unleash this new economic sector. We believe that there are three critical components that must be addressed to create a viable greenhouse gas emissions trading system: (1) the development of a homogeneous or fungible greenhouse gas trading unit; (2) a legal instrument or quasi-property right that permits simple conveyance of ownership and; (3) a process for monitoring and verification of emission reductions and sequestration. In addition, the proposed legislation should provide a "no regrets" component that lets those who voluntarily cut and capture emissions know that their early action would not count against them if future regulations are adopted. Such an Early Action bill would provide a common standard that will give American businesses a uniform yardstick if they wish to participate in the various carbon trading programs now emerging at the international, state and local levels. In conclusion, we would urge that the legislation be implemented using rigorous measurement standards, and that credits be granted only to well documented cases of emission cuts and sink enhancement.

By getting us moving sooner, we can further cut the cost of the global climate insurance policy that the public wants. I should note that some of the model-driven cost estimates for cutting U.S. net emissions that are put forth by consultants such as Wharton Econometrics Forecasting and Charles River Associates run completely counter to all the evidence available in the real world. Their estimates range from $100 to $300 per ton carbon. Our estimate indicates that cutting net U.S. GHG emissions 7% below 1990 would cost $20 per ton carbon and would involve redeployment of resources worth $12 billion per year, which is 2.5% of the annual U.S. energy bill. This is also less than one-tenth of one percent of national income in 2010 (i.e. gross domestic product, conservatively projected). Resources shifted to greenhouse gas mitigation do not evaporate into thin air. They will be invested in energy efficiency and process changes that will cut energy bills, and will flow to U.S. businesses that can cut and capture emissions at low cost.

The largest new business opportunity for Americans has been given little attention. The science tells us (and the Kyoto Protocol recognized) that we need to slow the increase in net greenhouse gas emissions. This means both cutting emissions and capturing carbon from the atmosphere by enhancing carbon sinks. A recent study by the American Farm Bureau Federation that examined only the potential cost increases to farmers used the American Petroleum Institute/Wharton Econometrics conclusion that energy prices would increase 50%, which they equate to a carbon permit price of $200 per ton. If those studies were consistent, the same price would be applied when analyzing the impacts on revenues from carbon sequestration. The scientific literature reports that adoption by U.S. farmers of best management practices for soils and use of biomass fuels, when combined with relatively modest amounts of reforestation, can capture 300 million tons of carbon per year. If carbon prices really were $200 per ton, annual revenues from sequestering 300 million tons would be $60 billion, which is 142% of U.S. net farm income. It is our firm conviction that the $200 price is completely out of the question. Using a more realistic estimate of $20 per ton means the carbon market could provide $6 billion per year in new income, which is 14% of net farm income. Thus it is critical that soil and forest sinks be recognized in the legislation. Doing so will stimulate the needed advances in monitoring and verification of carbon sinks. However, it should be recognized that there are numerous examples where limitations on the science of monitoring and verification did not prevent the emergence of successful markets.

Parenthetically, it should be noted that the 300 million tons of carbon that can be sequestered by the farm and forestry sector would cover half the projected U.S. emissions gap under Kyoto. Alternatively American farmers and foresters could export carbon credits to Europe and cover the entire European Community emissions gap. These exports would significantly reduce the U.S. trade deficit.

Attached for the record is an article that will appear in the forthcoming edition of Choices magazine, a publication of the American Agricultural Economics Association. The article, which I co-authored with Dr. Jerry Skees of the University of Kentucky, provides further details on the scale of the opportunity for U.S. farmers in the emerging international carbon market.

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

Independent of the Kyoto Protocol, and independent of the climate change science, the Early Action bill is an intelligent step forward. It is clear that many countries around the world will adopt greenhouse gas cap and trade programs. We cannot pass-up the opportunity to give American industry, farmers and foresters a strong foundation for selling into these new markets. America’s capital and agricultural markets are the envy of the world. This bill will allow us to combine the best of these two global powerhouses and keep the U.S. in the lead in setting the standards for the emerging international carbon trading system.

Mr. Chairman, thank you again. We encourage the Committee to move this bill forward. Its passage will lead to major new opportunities for American business while to contributing to a safer future for the planet and cleaner future for our country.