Clean Development and Climate

Proceedings:

Steven Hayward:  Take your seats.  We will begin.  I want to welcome all of you to the American Enterprise Institute.  I’m Steve Hayward, a resident scholar here.  And we decided to invite Jim to come here today for the following reason.  We appear to be entering what looks like campaign season over climate change, and we thought it will be worthwhile to take stock of several aspects of this issue that routinely escape notice.  It is a thing about a lot of issues these days, but especially on climate change that the public seems to think that in the absence of an omnibus climate policy bill signed in a high-profile ceremony in the White House lawn, that “nothing” is happening on climate change in the United States. 

Well, lately, I have been reflecting on the following data points, and I apologize, Jim, if I’m sort of intruding on your territory a little bit because I see the charts you passed out.  Between 1990, the baseline here for Kyoto and today, the US economy has grown about 54–55 percent.  Our greenhouse gas emissions have risen during that period by 16 percent, and what that translates to is a reduction in greenhouse gas intensity.  The amount of greenhouse gas is emitted per dollar of GDP of about 20 percent; a figure that turns out to be comparable or superior to most other industrialized nations. 

For example, if you look at Canada, whose economy - well, not population - grew proportionately to the United States, its greenhouse gas emissions rose something like 22 percent, and their greenhouse gas intensity fell by 18 percent, a little less than ours.  Japan, which everyone knows has had a flat economy over the last 15 years or so, their greenhouse gas emissions rose nine percent, and their greenhouse gas emissions intensity changed zero, zilch.  No movement at all. 

But when you contemplate these trends, and when you look at developing nations like China and India and Brazil, whose greenhouse gas emissions intensity has been going the opposite direction even as they are emphasizing ethanol, you begin to perceive that there is more going on in heaven and earth than is dreamt of in newspaper editorials.  And so here to dilate [sounds like] on this and other aspects of climate action is Jim Connaughton, who I’m sure most of you know, is the chairman of the Council on Environmental Quality, a post he has served in since the beginning of the Bush administration. 

There is a short summary of his biography in the packet and the papers you might have picked up out upfront, so I will not repeat it other than to say that his complete biography, which is available on the White House website, reveals a wealth of experience in nitty-gritty technical details of environmental management, the kind of roll-up-your-sleeves work that is necessary to solve environmental problems in the real world. 

So with that, Jim, press the white button, and the floor is yours.

James Connaughton:  Thank you, Steve.  Thanks, Steve, and good afternoon everybody.  Thanks for coming out.  Nice to see some familiar faces.  I think I need to call one out in particular, Bryan Hannegan, CEQ alum, who just is making his way out into the world.  But he was very instrumental, not just the climate dialogue, clean development dialogue, but also the Energy Bill of 2005 and a lot of the policy that is now unfolding this year, actually with a remarkable degree of bipartisan interests, and dare I say in some areas, bipartisan consensus, which is really what my talk today is going to be about. 

You were all familiar with the phrase, “What part of ‘no’ do you not understand?”  When it comes to the issue of climate change, I think the question is best asked, “What is the part of ‘yes’ do you not understand?”  And so the thesis where my remarks this afternoon is really centered on what is actually occurring around the world and the remarkable degree of consensus on the scope of action that can be undertaken reasonably, remarkable consensus on the places where that action can occur now and where it might occur in the future, remarkable consensus on the types of arrangements that the government-to-government level and the private-sector-to-private-sector level that need to be further amplified or interconnected and to go to the base, and remarkable consensus - so we need to get on with it. 

We are not really debating “the science” anymore.  The discussion is moved to the, if you will, the outcomes.  The real issues are the magnitude, the effects, and the human interaction with respect to both the contribution to the warming side of things in climate change, as well as the contribution of human action in mitigating or adapting to such changes.  And so we are really into the meat of the discussion, and yet so much of the sort of top-level media and politics is still stuck in a kind of a 10-year-old rut of the sort of more polar questions.  And I thought I would begin with just an anecdote. 

I had the great fortune of being able to go to the Royal Society in London in December, and what was styled a debate with Sir David King, Tony Blair’s science advisor, as many of you are familiar with him and his writings in this area.  Now, same with style as a debate, if you have never been to the Royal Society, it was a thrill, Isaac Newton, and all that.  And they set it up as 30 minutes of presentation by one, 30 minutes of presentation by the other, an hour of questions, dinner, and then a free-for-all hour of questions after dinner.  So it is three full hours of discussion and with about 500 of some of the world’s best brainiacs.  And so it was a lot a fun. 

Well, the evening went on and it was a long evening, three hours, and we were talking a lot.  But the second to the last question of the evening, after much alcohol had been imbibed, the second to the last question went to Sir David King.  And it came from somebody from the media, and said, “Sir David King…” and I will not do the British accent, but the words were, “Sir David King, I’m a bit baffled.  I have been sitting here for the last three hours now and during the course of that three hours, I have heard nothing from you but an extended statement of the problem.” 

And he said, “Now, that does not baffle me so much, what really baffles me is I spent three hours listening to Mr. Connaughton giving me an endless list of the solutions.”  “Sir David King, do you have any solutions to offer?”  Now, if you are going to debate, of course, you say, “Victory.”  Okay, but the more important thing was his answer, which was, “Well, yes, I agree with all the solutions Mr. Connaughton has been describing.”  Okay, and at that the crowd erupted in a great cheer, infused by alcohol, of course.  But it made a central point.  There was not a disagreement between us even though this was styled as a debate.  And the real challenge for us is how we can maximize and amplify these areas of real opportunity, and so that is why I want to roll through with you today, take a chunk of time, but hopefully leave ample time for not just questions but perhaps a discussion of ideas because we need all kinds of new and good ideas. 

So first, let me just state the obvious.  Climate change is a serious issue that warrants a serious and sensible action.  That is where everybody is.  Serious actions need to be serious but they also need to be sensible.  We are seeing, the President has dedicated to climate science and research, we have got more than $5 billion annually.  So if you add that up, we put about just, the Bush administration has put about $26 billion of taxpayer money in the science and technology, and that is producing a lot of information.  And it is really addressing some of the key questions that the National Academy of Scientists gave us five years ago in a report commissioned by President Bush, and we are learning a lot more. 

The most recent product of that just occurred, the first of 20, and we see in it some good narrowing of uncertainties; that is exactly what we are hoping for when it comes to temperature trends and its future projections, and we are going to continue that work product.  I think there is broad consensus, bipartisan, at this level of investment in the science, so you can expect in the next five years another $20 billion or so.  And that is serious, serious money.  But the money on science and the money on technology research is a very small piece of the action. 

As we look forward, look around the world, there are various estimates.  But you are talking about $30 to $50 trillion of largely private sector investment in energy and infrastructure around the world to meet projected demand growth.  I mean, I see lots of different ranges, but it is on the umpteenth trillion dollars.  That is a huge amount of money, and so the question that is in front of us is what technology is being installed when, what is the nature of it?  What is it doing in terms of advancing and enhancing clean developments in helping us to mitigate air pollution in greenhouse gases?  So that is the question before us. 

Now, to figure that out, how do we look at that multi-trillion dollar chunk of money rather than what we typically focus on which is the taxpayer expenditure?  It is important to see where we are, and that is where - Steve, I will not spend a lot of time - but I’ll just give you the quick picture to make the point.  As it happens, we were seeing, and this is a snapshot, 2000-2004, you can pick any period you want.  So it is just for illustrative purposes.  But what you are seeing is the major developed economies of the world are about in the same place in anyone of the snapshot points in terms of actual emissions.  Some are increasing slightly.  Some are decreasing slightly.  No one is decreasing massively unless you cannot look the way [indiscernible] which is a five percent decrease.  But this is what is actually occurring. 

Now, I want to contrast this with Kyoto targets because the Kyoto creates a false benchmark.  So if you measure yourself against the arbitrative target you accepted in Kyoto, this chart looks different, all right?  But this is what is actually occurring and that is what is important to look at.  These are actual emissions.  Now this is all well and good, but this does not tell the best story in terms of understanding where the most meaningful and ultimately the desirable progress you want.  The real story is in intensity.  And if you look at the intensity picture, this is exactly what we were hoping to see when we started our process five years ago. 

You are looking at intensity improvements.  You are ranging in the field of… really the field of 10 percent range among the major developed economies.  These economies with very sophisticated infrastructure and systems engaged in the process of capital stock turnover.  And interestingly, the United States is ahead in intensity over the EU25, EU15.  I think Steve made the point about Japan.  There is a little bit of a correlation.  It is not the only one in terms of economic growth because if your economy is flat, you tend not to get investment and new infrastructure that is more efficient. 

And so, there is a bit of a correlation there.  It is also the case that intensity recognizes, if you will, and rewards.  So a good thing about the intensity metric, it rewards economically valuable activity that does not require a lot of energy or greenhouse gases.  So in America, we are enjoying a huge growth in the service-based sectors, which consume less energy per unit of economic output.  So those are the two things that are good.  Intensity emphasizes the two good outcomes you want to see, which is greater efficiency and productivity, and more economic output that requires less energy and less emission therefore.  And so that is what intensity rewards. 

Now, what intensity does not reward as much, this metric, it does not reward economic decline as a way of cutting emissions, all right?  So that is why if you look at the earlier chart you might see flat emissions in the country.  And part of that would be attributable to the economic decline. 

Now that is not a strategy that anybody really wants to support.  It is what led to Russia’s currently wonderful profile, with the collapse of their economy, they are now well below their Kyoto targets.  Well, that is not something they intentionally wanted to do to meet Kyoto.  In fact, if they had the choice, they would have preferred not to have seen their economy tank.  The same is true in Eastern Europe.  And so intensity does not reward that because if the economy declines, well then, so do the gases but that it is back out of the equation. 

The other thing intensity does not reward in this globalized world, it does not reward as much with the other bad outcome, which is leakage due to simply moving your energy-intensive activity from one country to another country.  And that is why intensity is a more useful benchmark, not the only one but the most useful one.  Because when we shut down a lot of commodity chemical production in Louisiana, like we did a couple of years ago, and shipped it offshore to India, well, that economic output also gets subtracted from this equation. 

Now again, we do not want to see or get credit for outsourcing as a way of “reducing emissions” because, of course, we did not actually reduce emissions.  The commodity chemical manufacturing went from Louisiana to India with the air pollution, and the greenhouse gases associated with that production still went up into the atmosphere, all right?  So that is not their good economic outcome nor is it a good environmental outcome.  It just moved the problem from one place to the other.  So that is why intensity is the most useful.  But again I want to underline, this is a positive story and this is what we want to capitalize on, these winning solutions of less intensive economic activity, and then, of course, greater efficiency and productivity. 

Now, how do we get there?  Well, here is the other interesting point of consensus.  This is what the President has set to say, “By researching, by developing, by promoting new technologies across the world, all nations including the developing countries can advance economically are slowing the growth in global greenhouse gases and avoid pollutants that undermine public health.  All of us can use the power of human ingenuity to improve the environment for generations to come.”  Well, Tony Blair had this to say, “Just as science and technology has given us the evidence to measure the danger of climate change, so it can help us find safety from it. 

The potential for innovation, for scientific discovery enhance of course your business investment and growth is enormous.  With the right framework for action, the very act of solving it, can unleash a new and benign commercial for us to take action forward providing jobs, technology has been [indiscernible] a new business opportunities as well as protecting the world we live in.” 

Former Vice President Al Gore, “The US can strengthen our economy with the new generation of advanced technologies, create millions of new jobs, and inspire the role of the bold and moral vision of humankind’s future.”  And of course, Senator John McCain, “New technologies hold great promise.  We need to revise our innovation systems so that we have policies in place that will encourage the marketplace to embrace more ideas originating research labs.  Together, we can rekindle the spirit of creativity, define affordable solutions to the looming climate problem.”  I could have interchanged any of those names on any quote. 

Now, these are the accurate quotes.  But I could have interchanged any of them because everyone’s head is in the same place on this.  As much as again, you hear polarization, everyone’s head is on the same place on this.  But what is the challenge that lies ahead of us?  Well, the picture is pretty plain.  Ten years sooner than we thought, five years ago, the major emerging economies, greenhouse gases are going to exceed those of the developed worlds.  It was not too long ago when we thought that would occur in 2020.  Now it looks like it will occur in 2010. 

Now, in part this is a problem we want to have, all right?  Let's say that from the perspective of the reason for this is a massive economic growth and opportunity in the developing world is lifting people out of poverty.  And so we should not overlook the fact that there are huge human welfare gains that are coming from these increasing problems on the climate side, on the greenhouse gas side, and that you may have to look at it that straightforwardly.  And our answer is not to say that in the developing world you can no longer develop.  That would be morally wrong.  We all aspire to greater human welfare, a greater public health. 

By the way, this picture looks kind of similar when you look at good old-fashioned air pollution, the kind that actually harms people today.  And if any of you have been to China, you will know what I’m talking about.  Beijing looks like Baltimore, too, when I was a kid living across the street from Sunny [sounds like] Service Station.  And so, this is the dimension that is in front of us. 

Now, here is the opportunity.  And this is again, illustrative from the energy outlook, the opportunity is in 2002, you can see carbon dioxide intensity and again, you can do a similar profile in air pollution.  And then this is the EIA’s projection of what we might hope for by 2025 in terms of improving intensity.  Well, if you look at the former Soviet Union states, Russia, South Korea, Eastern Europe, Canada, China, you see these enormous opportunities for improvements in efficiency and productivity.  Well, that translates to enormous reductions in greenhouse gases and air pollution.  But on an intensity basis, on this positive basis, it is politically supportable. 

And so this is what we are trying to lean ourselves into.  Steve gave Japan some grief.  I would note Japan is incredibly energy and greenhouse gas intensive already.  So for them to go the next little bit is a huge amount of effort.  They got a lot of nuclear; they are very efficient.  Whereas, a country like China is grossly inefficient.  And the US is sort of two-thirds of the way in the efficiency pack.

And so in terms of what we expect of each other, we can expect similar ratios of effort, if you will, but of different magnitude in terms of specific outcomes.  But this is where the opportunity lies.  Now there is no disagreement on that, by the way.  The real challenge for us then is how we put it in a framework.  How we put this into a framework that can accelerate progress toward pushing those bars down.  In fact, hopefully, below the projections because the projections change every year and they improve every year. 

So how do we do that?  Well, we believe the Bush administration, and it is no longer our sole belief, it is the belief of the G8, as well as many of the developing worlds, that we need to reintegrate our major policy drivers.  Economic growth, energy security, improve your quality in human health, are currently the strongest and ultimately most sustainable policy drivers for action.  CO2 is an important piece of that equation.  But if you look at what countries are actually focused on, politically and economically, what they are actually focused on in their policy debates, and it is true here in the US, economic growth first and foremost. 

Increasingly national security is a very dominant factor in the energy equation in national security.  And it is still the case, that good old-fashioned air pollution is a dominant issue.  In America, we have a regulatory program to cut air pollution, like $50 billion of regulatory mandate.  China, in their new five-year plan, is committed to cutting air pollution by 46 percent, so perhaps by 46 percent from the power plants. 

If you look in Japan, I was in Japan and met with them on climate.  But what was on the front pages of the newspaper, everyday I was there, was the air pollution blowing across from China.  The same was true when I was in South Korea.  I was there for three days, everyday, top of the fold in the newspaper was the issue of air pollution blowing across from China.  Not climate change.  Not carbon dioxide.

So again, I want to sort of just continue to underline this point.  There are big policy drivers out there that are complimentary to a climate strategy.  And if we can focus on all of them in a bundle, we can make some pretty substantial progress and commitments and policy initiatives.  I will take, for example, when I was in China, it was very clear when I met with their senior leadership.  It was very clear where these issues ranked in terms of where their focus is.  And if they are focused on economic growth, if they are focused on national security related to their energy use, well, if you start talking to them on those terms, the door opens wide.  If you start talking to them in terms of a sort a CO2 lead vision, to that lens and carbon constraints, they tend to push you off to official number 185. 

Okay?  And so we are dealing with the realities of how we position ourselves in a winning conversation where we can make great advantage on all fronts.  Now, this should be an obvious point, but just like whatever happened to air pollution, which is still a dominant issue in developing countries and in the developed world, poverty is still the overarching central social way of framing this when you are talking in the developing world. 

India just made a presentation at the climate meetings this past week and said again what they said back in ’92, and what they said in the relation to get a protocol, and what they said for the last three years.  India said, “We are trying to lift people out of poverty, so talk to us about that and everything else will flow from that.”  But it is also the case if we do not have a path that lifts people out of poverty.  We do not get the investment in this newer, neater, but more expensive technology.  And so we have to begin the conversation with the major developing countries with their central mission of social welfare and lifting people out of poverty. 

Again, in the economic flows with the rule of law, it is necessary to support the investment in these technologies that will make a difference.  In that way we can accelerate their path to the kind of quality of life that we enjoy here today.  The industrial revolution in America was 140 years to this point of massive air pollution reduction and of nearing stabilization of greenhouse gases.  If that is our picture, how can the China picture be 40 years rather than 140 years?  And I think that is something we can work on.  We can expect and help drive.  I would know. 

We have a bit of a challenge.  Kyoto is singularly focused on greenhouse gases and so the people at the table are not the people who are the leaders in their governments.  So their private sector on this other basket of issues - energy security, national security, economic developments, air pollution reduction even - it is different characters at the table.  And Kyoto defines it through the lens of CO2, primarily, when the conversation is much broader than that.  So there is a bit of structural challenge of Kyoto. 

Interestingly, that was the message in Johannesburg at the World Summit on Sustainable Development back in 2002.  The developing country showed up with a vengeance and said, “Hey, all these talk about all these developed country issues is wonderful,” but we are still focused on poverty and when you look at the sustainable development agenda, what are its focus themes?  Cleaner energy, access to modern sanitation and clean drinking water, improved health care systems, more productive and environmentally benign agricultural systems, and natural resource conservation promoting biodiversity.  That is what came out of the sustainable development conversation. 

Now by the way, each one of those has very significant opportunities for mitigating the growth of greenhouse gases.  But the lens through which the world spoke in Johannesburg was the lens of development and sustainable development.  Now it should come as no surprise that when that begins to take hold, the leaders begin to get and so the G8 last year, under Tony Blair’s leadership, by the way his strong leadership, really turned the corner.  And the G8 leaders, along with the five major developing countries - China, India, Brazil, South Africa - the G8 leaders agreed that we have to reintegrate these issues:  Energy security, clean development, and climate. 

And that is now the operating theme of the G8 on this basket.  From the leaders, now, they are still working on its way to their bureaucracies, but that was a watershed moment and if you have not read the speeches of Tony Blair, the last couple of them in particular, you need to.  He has laid out a very thoughtful exposition on the path forward, and I just want to commend that to you.  Now that then translates into other partnerships.  Asia-Pacific partnership is explicitly predicated on this integrated notion and in fact, the Asia-Pacific partners turned it around.  The G8s had climate, clean energy, and I think sustainable developments.  The Asia Pacific turned that around, which is clean development and climate. 

Just to give you a sense of the dominant force was in that discussion.  But all of these, by the way, are what I call back to the future.  Everything I have just told you is embedded in the 1992 UN Framework Convention on Climate Change.  So we are basically going back to the roots where there are key provisions put in at the insistence of the developing world that says, “Hey, we need to grow, we need you to work with us in partnership in opening markets.  I may need to look at this in a much broader way.”  That is in the framework convention.  So I call it sort of the overlooked aspects of the framework convention.  Well, all of these discussions are re-infusing those aspects of this original and thoughtful document. 

So let’s dig into another layer then.  Let’s go a layer lower.  Where do we focus our effort?  Well, we believe we should focus on the most beneficial rather than the most costly solutions.  Now, again, that should be a statement of the obvious and yet somehow the public policy debate forgets that.  There are three essential baskets of policies on which we can make real progress on cutting air pollution and reducing greenhouse gases. 

One, our measures, policies, private sector activity, that produces a profit, and there is a boatload of those, huge amount of those.  You would not expect to $35 trillion-plus investment in the coming decades at no profit.  So there is a boatload of profit to be made in this arena. 

The second is places where we can produce more quantifiable benefits than costs and certainly the US and Europe, in particular, are very sophisticated now at doing the math on human health benefits and natural resource benefits of air pollution control.  It is why we can justify the most single most expensive regulatory mandate in clear air history, which is this $50 billion mandate on power plants because that is justified by over $100 billion in health benefits.  The Chinese and Indians are not good in doing that math yet, but they are paying for a lot of that social health welfare. 

You know these expenditures, and it is going to be kind of important to them.  And so, by the way, there is a boatload of activity in the air pollution and other areas that we can quantify health benefits that also then produce tangible mitigation of greenhouse gases.  So a big boatload, it is like the smaller boatload but real. 

And then the third, those measures that would produce reductions at a loss or commuted in that cost.  Again those are the ones that have tended to be emphasized.  And then when you look at those, there are three tools for dealing with non-economically rational outcomes or social welfare rational outcomes.  There are three tools.  Incentives are one way to break the margin.  The second is partnerships.  You are sort of investing in the future to risk management scenario.  And the third is mandates. 

So within the costly approach, our overemphasis tended to be in the public in the grand political sphere on mandates.  If you look at reality, I’ll show that in a second, all the actions in the incentives and partnerships in terms of what is really occurring as opposed to the rhetoric and so we are dipping into measures that commuted at the near term loss or commuted in a net cost, but we are banking on the future.  But again, there are incentives of partnerships where the real discussion is, not mandates.  To which that I say, my European colleagues always tell me that we can make progress without hurting our economy and you all heard that.  Everyone says that.  We can make progress, not hurting economy to which the response has to be great.  We agree. 

Let’s work on those, all right?  And part of that is looking at sort of non-obvious but more immediate opportunities, non-CO2 greenhouse gases.  There is a lot to be done profitably in human health on things like methane.  Some of the more interesting gases that have high greenhouse gas profiles where we made huge progress.  In the US, we have a net reduction of methane, which is 20 more times more powerful than CO2.  We have it because folks are making a ton of money capturing it and converting it to clean energy. 

There is one example, a biological sequestration.  We have a huge ecosystem agenda to try to get nonproductive farming land out of production and back into ecosystem restoration.  Well, there are enormous greenhouse gas biological sequestration benefits of that, and you can demonstrate that, and it is for good reasons economically and good reasons from a sort of tangible ecosystems health perspective and, of course, efficiency. 

Efficiency, efficiency, efficiency.  There will always be an opportunity for efficiency improvements.  And so it is just a question of the even flow of that.  So with that as a backdrop, let me now spend a few minutes on the reality at home, again, to try to drive this now into quite intangible specifics and then the reality internationally. 

So first, federal.  Federal side.  We have a broad portfolio of actions.  They include incentives.  They include partnerships.  They include mandates.  I’m very tired of the expression that the Bush administration approach is purely voluntary or the US approach is purely voluntary.  That would be false.  As it happens, we have a range of initiatives and we have added massively to them since 2001.  So I’m going to highlight for legislation, highlight out of the dozens of major programs, some good examples.

And then I want to end with market forces, which is something I have not mentioned yet.  But here we have a goal.  We have a goal of an 18 percent improvement in greenhouse gas intensity.  In 2001, the energy information administration said, the best we could do under a high-technology scenario, this is in 2001, the best we could do was a 14 percent improvement in intensity by 2012.  Now, when the EIA does these projections, they do not take into account what could be.  They only take into account what is.  And of course, as policy makers, as political actors, our whole mission is to find what can be.  And by the way, markets are really good at that, too, without the government having any role. 

And so you have these two big players - the market and the federal government - that can change those kinds of projections.  As it happens, the information I showed you before puts us on the path of about a 20, probably 24 percent improvement of intensity, if we stay at this rate.  We do not know if we will, but if we stay at this rate.  EIA would not have predicted that in 2001.  The same could be said in Europe.  So we always know there is going to be some difference between our projections and what we can achieve and it cuts both ways.  So how do we just get in the middle of that and be reasonably ambitious?  And that is why we picked that target. 

Now, as it happens, we have not seen climate legislation.  We go back to Steve’s point that has the name climate legislation on it and yet we have seen a massive amount since 2001, bipartisan in some cases, consensus legislation that goes directly to the heart of mitigating greenhouse gases as well as energy security and air pollution reduction.  I’ll begin with last year’s energy bill.  The bill is a giveaway to big oil and gas, which actually ended up not being.  The energy bill was a massive climate bill.  We begin on the incentive side.  It had more than $11 billion of incentives that go toward a wide range of issues, tax incentives for highly fuel-efficient vehicles, wind, solar, geothermal, biodiesel, and other clean energy systems.  It puts us on track to meet the President’s commitment of $2 billion plus for clean coal. 

This is a massive incentive bill.  In fact, the industries that are benefiting from this bill are the green industries, not the big oil and gas companies.  That does not happen.  The incentives that went to oil and gas companies were offset by a nearly $3 billion new fee or tax on them, which was not put on the other sectors.  So our public policy process and our media processes have a hard time catching up with the fact that things can change.  The House bill was a massive subsidy bill for petrochemical.  That is what the House bill was.  The Senate bill was not.  The Senate bill is the one that prevailed. 

And by the way, those are the policies that President Bush had been calling for four years.  You go back to our national energy plan.  Every one of these major incentive programs was outlined as being necessary and was part also of our climate action program.  So we are very happy to see that enacted in the law in a strong bipartisan way.  Importantly, it also includes nuclear.  And so are the aggressors second on nuclear, it is now becoming accepted that you cannot be serious about developments, you cannot be serious about promoting human health through cleaner air, and you are definitely not serious about meeting any greenhouse gases unless nuclear is back on the table as part of the mix. 

It is not the only piece, but as part of the mix.  And we are delighted that the US Congress, bipartisan, acknowledged that and we are even more delighted that countries like Canada, Australia, South Korea, even Japan, even Germany - and stay tuned for the UK - are now having a conversation about nuclear again after more than a generation.  We can do nuclear a heck of a lot better and the way you do it a heck of a lot better is create a future for the industry rather than create a past for the industry.  And by creating a stable platform for the prospect of nuclear, you will get more investment in the solutions, the way solutions, and in particular the waste management solutions as well as the proliferation solutions.  When nuclear treated as a legacy issue to be cleaned up and put away, well then, it becomes a government welfare program.  That is the choice.  If the world speaks in favor of more secured nuclear, I think we will begin to see a real prospect over the next generation. 

Now importantly, the energy bill had two big mandates in it.  It actually had, I guess, 16 big mandates.  One was a $7 billion gallon mandatory renewable fuel standard.  Good old-fashioned mandate.  They will shout.  Now some of the AEI people are not happy with that.  I recognize it.  But for those of you who want to see mandates, well, there is one and it is a big one.  The energy bill also legislated with the administration support.  Fifteen new mandatory efficiency standards.  Again, good old-fashioned mandates.  Even as the Department of Energy is finally moving forward, and I would note they were delayed, but they are finally reformed on their own administrative side on new efficiency standards.  Importantly, the energy bill also had authority to set up new international climate partnerships, which also is an amendment to the energy bill that enjoyed broad bipartisan support as well as a host of other industrial, commercial, and technology research. 

Now, that is the energy bill.  If you look at what is coming up and being debated on the Hill right now, would you not know we have the advanced energy initiative, which is a focus on moving from ethanol, the cellulosic ethanol, which has a wonderful greenhouse gas profile.  It is nearly a complete offset as well as pushing the envelope on advance hybrids including the opportunity for plug-in hybrids where you can go from advance hybrid that might get you a 30 percent improvement in fuel efficiency to a plug-in system that would get you, depending on your [indiscernible], 90 plus percent improvement in fuel efficiency. 

So that is what is being debated right now.  And then we have the global nuclear energy partnership, which is enjoying increasing interest on the Hill, and who would have thought that here we are five years later, finally, with the Congress agreeing, we hope, to give us authority to reform the CAFE system and move on with a more forward-looking approach and market-driven approach to setting fuel economy standards. 

Now, that is just in the energy equation, but do not lose sight.  Congress gave us authority for the federal government to enter into energy savings performance contracts.  Now, what are those do you say?  Instead of going to appropriators to try to get them to give us money to replace old energy systems of federal facilities, which they do not do, they gave us the authority to have the private sector pay to install the equipment and share the savings.  So the net savings to the taxpayer and at no cost to the budget, we are engaged in a massive upgrade of federal operations.  Projections for what we can see, you got a mass of savings to the taxpayer, but projections.  And again, we do not know ‘til the program is really on its way, we could see more than a 40 million metric ton equivalent of reduction of greenhouse gases for federal facilities alone as we utilized this authority. 

Again, that is a projection.  We are doing all the math.  We are trying to get all the contracts in place.  But that gives you a sense of the range.  To put that in perspective, the Kyoto countries will get about a 500 million metric ton reduction of CO2 if they met their targets, which they are not.  But if they did, so this is one-tenth, maybe one-twentieth, just from one program with federal facilities alone, they come as a profit, okay?  So that is the kind of thing we can do if we sit down and roll up our sleeves and figure it out. 

Farm Bill conservation programs, you may not be aware, but there is $40 billion flowing to our farmers for conservation on their less productive working lands.  A huge portion of that, we are going to regrow in force to grasslands for biosequestration.  And explicitly in the grant programs now is sequestration as a performance objective for those grants and of course then we have the budget, things like hydrogen fusion, these longer term bets, well, they are back on the table again.  With the US fully engaged in the effort to advance fusion energy having sat on the sidelines for many years. 

And then the one I want to highlight most, my favorite and least regarded, the new rules on expensing and dividends and the congressional, the recent extension of those bipartisan, are central to making progress in mitigating greenhouse gases.  Why is that?  It is called capital stock turnover.  If you can increase, if you can shorten the time of deductibility of a major capital expense, you buy the new thing rather than pay to maintain the old inefficient thing. 

And if you look at the figures on capital equipment purchases in America, in the last two years, with these rules on expensing of dividends with lower cost of capital, there are massive orders underway right now and the planning, and by the way, we are just two years into it.  And these are big planning cycles economically and extending that was important because you only get from here to there if people replace the old stuff with the new stuff.  And if the tax law creates an incentive to hang on to the old stuff, we are not doing anybody any favors. 

Now our challenge is how to quantify the cost of a link in terms to do the math from the capital cost of purchase to just how much air pollution the greenhouse gases has reduced.  But this is an issue we need to focus on.  In fact, I want to encourage AEI, perhaps to take that up as a challenge and an opportunity.  We should be able to quantify and see the benefits of these economic changes. 

Finally, let me just zip through some of the agency programs.  We have climate leaders.  I keep hearing only a handful of businesses are acting, you hear that a lot.  Climate leaders have 70 major companies.  And these are the big ones, all taking specific greenhouse gas mitigation targets in respect to their facilities.  And the climate vision has a 14 of the major sectors plus the business roundtable, each of which have put forth plans by which they have made specific commitments to reduce greenhouse gases. 

Now, this is working bottom up.  This is sitting with the sector and saying, “What can you achieve and what is reasonably aggressive beyond what you think you can achieve, and let’s work on orienting our strategies toward doing that.”  As it happens, by the way, this is the exact same approach that Japan employs.  Japan does not impose greenhouse gas mandates on their industrial sectors.  They have a 10-year-old program, five years older than ours.  They have a 10-year-old program that is the basis of their national regime with respect to greenhouse gases at their industrial enterprises.  And so again, when people say Japan is engaged in Kyoto, well, they are engaged with the exact same program that we are engaged with, which is the kind of alignment that we like to see. 

But I would note, natural gas start is a very successful EPA program, got us to the point, where we have lower natural gas emissions, methane emissions today than we did in 1990, and this was just creating partnerships, just marrying technology providers with people who could use this technology to capture natural gas at coalfields, leaky natural gas production in distribution systems and landfills and agricultural operations.  And we are just at the surface of the opportunity there.  I mean, there are tens of thousands of these projects all around the world.  Well, we have shown how, we know how to do it, so how do we get those projects to flow internationally? 

Smart way transportation.  Turning off diesel trucks at night rather than having them run their big diesel engines all night long and chew up $30 to $40 with the diesel fuel, simply to power a heater, or run a radio.  We are working on a major infrastructure transformation as designed in a way that hopefully will be profitable to turn off trucks, and I think ultimately shifts at night, so we just do not waste all that fuel.  That is not something, that is just to roll up your sleeves and get the right people in the right room and figure out some of the technical standards or regulatory impediments and clear them out and create this outcome.  That is hard work, but it is real.  Again, we can replicate that all over the world. 

Clean diesel.  We have now created a solid platform with certainty and, of course, for those of you who do not know, if you drive off the lot tomorrow with a clean diesel vehicle, you are getting a 30 percent improvement in fuel economy without the government never having said a word.  That is a huge opportunity with the car that performs better.

And, of course, flipping to biodiesel, now you are really cooking both literally and figuratively.  And this is a huge opportunity for America, even if we achieve half the percentage of uptake of clean powerful diesel vehicles in America that Europe enjoys today.  I mean that is massive amounts of fuel in CO2 emissions that are being avoided. 

And the list goes on.  And yet, I read today in the Washington Post, the Bush administration is doing nothing about climate change.  Nothing.  And that is word you hear.  Nothing.  It was in editorial, shows up in all the rhetoric, nothing.  When you take the first Bush administration, you take the incredible programs put in place by the Clinton administration, and you take the massive programs.  So we put on top of that.  The US is doing more than any other nation in actuality in terms of its scope, its breadth, and the financial commitment, and yet we are doing nothing.  But curiously, you hear from politicians who voted on all these initiatives I just described to you.  So at the same time they are voting on the initiatives, they are making a difference.  They are saying, “We collectively are doing nothing.” 

Again it is a very, very bizarre disconnect.  So now I’ll just quickly touch on the states.  The rhetorical flourishes of the states that you read about are much less interesting than where the states are really making action.  There are infrastructure improvements, they redesigned their cities, there are cleaner buildings, there are new building codes and standards.  These are all the meat of work that is making our cities and housing stock more eco-efficient.  And yet, you will read about this large, the greenhouse gas mandate in California or the ready system in New England which to date, and maybe they will transform themselves, but to date, have not delivered yet.  They purport to deliver, but when you go to the brass tax, I’m going to be watching to see if they actually imposed a cost on their economies. 

And what is happening is all the political actors do what they are very good at doing.  They make the big rhetorical flourish and then they begin to recalibrate.  And they begin to recalibrate back to an arrangement that is much more economically rational, having gotten the credit for the big rhetorical flourish, and we are seeing that in New England right now.  They are cutting the deals.  You are seeing exactly what has happened with Europe with their trading system.  The allocations are going out, and basically they are hedging to doing a sort of a flat growth approach, and nobody is going to feel pain, but also will try to put a limit on our growth. 

Now that becomes an issue for us if it is impeding growth nationwide.  But if New England does not want to grow their energy infrastructure bigger and buy electrons from outside of New England, well, that is their choice.  But do not take credit for the greenhouse gas emissions by buying the electrons from outside your region.  So I’m hopeful if they just further designed their strategy, that they actually use some fairly straightforward math, so they are only taking credit for the reductions that are occurring within their region because of actions in the region.  And that is what you need to watch for.   You have to watch the leakage issue, and you have to watch for the fuzzy math.  But I would know, all of those, the destructions from what the states are actually doing, which is usually consequential, as they try to refurbish their infrastructure. 

Now, I just want to conclude this piece by saying everything I have talked about is all well and good but, markets are still the biggest and best dynamic, and consumer choice is still the biggest and best dynamic.  And as it happens, the recent strongly worded sentiments of sediments from the ad campaign that is out there and even the website associated with Vice President Gore’s new movie, when you look at those websites and you get beyond the statement of the problem, which is quite significant and severe.  When you look at what the websites tell Americans to do, there is actually consensus.  This is about consumer choice.  And I have to know it. 

I encourage you to go to them because they give the very advice that I have been giving.  And by the way, that US government websites had been giving for more than five years:  energy efficient light bulbs, energy-efficient homes.  Figure it out the fuel economy of your vehicle when you make those choices.  I mean, so when you look at what advice is actually being given about the solutions even by those with the strongest rhetoric on this issue, the advice lines up nearly perfectly.  In fact, I would know, the EPA website gives more advice than these NGO websites, the DOE websites, the Energy Hog website gives more advice than these websites.  I think they did a smart thing.  They focused on five things the public might do.  And so I think that was smart marketing-wise. 

But interestingly, the emphasis is on consumer choice, where it resides best.  And with the power of the IT revolution and the transformation of new capital investment into modern energy systems, we are going to see a marriage like we have never seen before.  These things that are going to occur that we cannot predict, this interaction between IT and new lean manufacturing operations, the interaction between IT and new agriculture operations, no-till sort of precise fertilization with IT mapping on a three-centimeter square to ensure there is no runoff and also then no emissions.  I mean this is at hand, just that farmers need the money to buy the new equipment and plug it into their home PCs.  This is a transformation we cannot begin to understand in terms of its breadth and scope, but we certainly can work to facilitate it. 

And that brings me to the profile future need, if I can get this to go forward, I do not know if I will.  Well, I cannot.  The profile for future need.  Again, the word out there on the street is industry needs to do more.

Steven Hayward:  Is that the right one?  Sorry.  There is one more.

James Connaughton:  No, one more and then another one. 

Steven Hayward:  I think the old-fashioned way.

James Connaughton:  Okay, there we go.  Industry needs to do more.  How many times have you heard that?  As it happens, the industrial emissions, so those that they directly emit and those attributable to them for their energy use, on a profile basis, industrial emissions in America are largely flat since 1990.  There is updated information here, too, but I only had ‘til 2002 for this slide.  But they are largely flat even with very significant new industrial output in America. 

We have enjoyed a great increase in industrial output, and that is because of global competition.  We got to stay lean and mean with everything else our industries are burdened with.  They are just a heck of a lot more efficient producers.  The rise in greenhouse gases in America is associated with more people, driving more vehicles, greater distances to their service-based jobs, in their bigger commercial office buildings, back to the home on which there are two [indiscernible] families who put a new edition. 

Okay, with all electronic gizmos that goes with that - now that is all about consumers, in which case industry is not the problem here.  Industry is the solution.  And we need to be sure to orient our policies to allow for more investment in the innovative products.  They are going to enable these residential, commercial, and transportation side of equation to make dramatic strides just as our industrial organizations have made strides. 

The picture looks just the same in Europe, in Japan, in Australia.  It is a little more balanced.  If you know, “balance” is the wrong word.  It is a little more even in the major developing countries.  But the opportunity for industry in developing countries is quite profound just from the efficiency perspective, and we know it because we did here, in America.  But you need to understand this picture because for all the talks of imposing a carbon mandate on industrial enterprises, you are missing the lion’s share of where the need is.  So you are basically passing the buck and we need different, more proactive solutions and largely market-based solutions. 

Now, how do we take this internationally?  This is a big challenge, and let me just give a few words on international, then wrap it up.  Internationally, we cannot sustain a conversation that is going to make real progress, continuing the process of 189 countries with largely climate specialists and environment ministers trying to negotiate treaty-based outcomes.  But those are important, so media few people out there do not say, “I’m just [indiscernible].”  That is important, but it is grotesquely insufficient because the real conversation that needs to occur is in the conversation among about 15 to 25 countries that bear the most significant carbon load, and largely because their economies are reliant on coal and petrol-based energy sources. 

The people that need to be in the room are not the climate specialists who have won the debate; we need to do action, nor the environment ministers.  None of them really sort of control or intersect with the sectors in a meaningful way in their home countries on the choices and decisions that need to follow to make real progress.  So we need to focus this broader effort around the smaller group of countries and enable that kind of a conversation to occur. 

Now, I say this because that point is already agreed to.  When you talk to outside commenters, the various NGOs who are doing these analyses on next steps under Kyoto and you talk to groups.  I mean, all the analyses lead to the same conclusion.  It is 15 to 25 countries and everywhere you will see it in writing and they need to get on with it, as it happens in the hallways and backrooms of the Kyoto process.  That is what everyone is saying. 

Now, they then end up back in the room with 189 ministers trying to negotiate two sentences, okay, and it takes two years.  But in the backrooms, it is these conversations that are going on.  It is the major [indiscernible] countries trying to figure out how they can make real progress together.  So our view is, well, let’s have that conversation.  Tony Blair’s got it.  He has created this G8 plus five group, and that is having a good dialogue.  But we need to even get drill down even deeper and begin to look at sectors among these countries for these opportunities. 

And we also need to move beyond what we call dubious low-yield strategies.  Too much of the infrastructure, while well-intentioned, promotes leakage.  In fact, I have been pleased to see the Europeans beginning to a get a little bit squeamish about buying Russian hot air.  They send millions of dollars, tens of millions of dollars to Russia, and gain credits for reductions that already occurred because of Russia’s field economy.  It makes sense if you are in a carbon-constrained world, you cannot meet your targets.  You are looking for anyway to do it, but we can afford now to step back and be more honest about our accounting and more modest while ambitious about our goals and be and do it right.  We have learned now enough of the 10 years to do it right.  And so this leakage and hot air issue, we can move beyond that and should. 

Bad accounting, same thing.  The US just issued new 1605(b) guidelines that are real math and we have really moved the measurement bar one step forward, and everybody can take advantage of that.  And hopefully, we will see better accounting so we do not get as much fuzzy math, because we need good math so we can find the highest yield outcomes.  And then high transactions costs on low yield projects, there is no way… even if the clean development mechanism was a success, and you saw 2,000 projects - you see a few dozen right now - these 2,000 projects are… it flees back on the massive investment that is going to make a difference here, and so we put a ton of government work, lawyer work, NGO work into these clean development projects.  But at the end of the day they are inconsequential component of the investments dream that is going to make a difference. 

And so, we just need to say that is good learning.  But if we are not mass producing outcomes, like mass producing methane, proper methane capture projects, we are really missing the real opportunities.  And that is why that internationally these partnerships matter.  The Asia-Pacific partnership is a good example.  It is not the only example.  Six countries, 50 percent of the world’s emissions, 50 percent of the world’s economy, 50 percent of the world’s fossil energy use, that is a lot of half with just six countries. 

But we are engaged in a hard discussion with eight task forces trying to look inside of each of these bundles - cleaner fossil, renewable energy, power generation steel, aluminum, cement, coal mining, buildings, and appliances.  We are trying to look inside of each of these bundles for shared opportunities and the potential for mass-produced outcomes.  Again, I give you the methane example.  We have done hundreds of projects in America.  We can do thousands internationally.  We just have to get out of the way and make it happen.  And then that leads me to my concluding point, which is everything I have said has been about mitigation.  If you are talking about clean development adaptation as a central, a priority, because even as we affect mitigation, we still do not know what consequence that will have and the fact is the earth is warming, and there will be consequences from that warming.  And so we ask on you to get off the stick and start focusing on adaptation, which could promote resilience and more resilient communities that tend to be more economically thriving communities.  And so, there is a net virtual feedback loop there as well. 

So that is my presentation and I look forward to your questions and comments.

Steven Hayward:  Thank you, Jim.  We have got about half-an-hour for questions and comments.  Let me take a stab at the first one.  No one ever wants to ask the first question with the iron law of conferences and seminars, so I'm trying prompt people with this one.  The faction of environmentalists who emphasize deep emission cuts sooner rather than later.  I think I might raise the following objection.  I think it will go something like this.  It is not clear to all the things you described put us on the glide pass so to speak to greenhouse gas stabilization level, say 50 years down the road.  I mean is there a different sort of general answer to that or any specific estimates or how does it all come together or assumptions on what future breakpoints we might see that start to bend the curve in a more dramatic way?

James Connaughton:  The answer to that question is, there is no answer to that question.  You could set a goal 50 years out and you have no awareness today whether that goal was above the mark, below the mark, or right on the mark.  You can also pretend what the energy and development future will look like, but history shows us that even on a five-year time scale we cannot do that and capture the real gains and then the surprise losses. 

And so, I mean in one sense I'm suggesting a more modest but more realistic perspective, which is, let's array the opportunities that we know about and the ones we can hope for.  And figure out, do what we have like we do elsewhere in our societies, figure out where the best opportunities lie, in a better weight that is occurring.  Why is it that the methane in the markets is now taking hold of more than 14 countries?  Because they are all interested in plugging the leaking natural gas systems.  They were not 10 years ago.  But, by the way, that is where you can get political heft, you can get private sector heft, and there is great NGO participant phase into that. 

But then even on the aspirational, zero-emission coal, there is this wonderful alignment of the most activist environmental groups, right?  And the most economically hard-nosed fossil fuel actors, right?  Sitting in the same room saying how do we create a pathway to the accelerated [indiscernible], you need to be approved first, and then deployment of coal technology that could be sequestration capable, okay?  That is an alignment that you would not even imagine 15 years ago and yet it is occurring today. 

And so, I think, we are better off backing up and saying… for methane, we set a goal of 50 million metric-ton reduction.  But we set it because we sat there and do the math and said, “Where is the opportunity?  How much money will it take?  Were there regulatory barriers?”  So what can we reasonably expect to achieve if we succeed in breaking those barriers. 

Now, that is also something you can sell.  The methane in the markets partnership, in fact it was announced across the street when I gave a speech here 18 months ago, that made news internationally.  It made news for one day.  And it was heralded as a wonderful partnership.  And why was it one-day news?  Because there was no conflict; it was a good thing.  And yet the flow from that, EPA just announced with Caterpillar and major deal with China to capture methane from a coal mine, $54 million project, profitable, which either capture methane from one of the big mines, it is approved up to doing this on the grand scale basis.  Did you read about that today?  Did they show up in any of the newspapers?  No.  But this is where the action is and is occurring without a treaty agreement because China has no commitment under Kyoto.

Steven Hayward:  Okay.  Let's turn to audience questions.  Wait for the microphone to come to you.  Where is… Tom, where are you, Tom?  Well, although, since you are on this side, I'm going to call first and then you, and then Jim.  I think I will just let you call on questionnaires.

James Connaughton:  Okay.

Steven Hayward:  And then if you would, please identify yourself.  We are in a webcast or something going.

David Doniger:  Hi Jim.

James Connaughton:  Hey, David.

David Doniger:  It is David Doniger from Natural Resources Defense Council.  And Steven asked the first question that I would have asked so I get to ask a different one.  I suppose that the point that I would make to start with and then ask your reaction.  You talked a good deal of market-based solutions.  Is it what is missing here?  Something that would significantly create a joint interest in developed countries and developing in moving to an order of magnitude higher investment in these clean technologies and would not that be supplied by the kind of discipline of a market-based cap set at some appropriate level that applies here and drives investment here and applies at least to some of the key sectors and some of the developing countries.  And before I turn that question over, I would suggest my own answer to that.  I mean, it seems to me the difference between where we were at the end of the Clinton administration when the United States was trying to sell that vision of how to do climate solution to an unwilling world and now is that, most of the other countries really do understand now the opportunity in a market-based mechanisms to move a great deal of money into clean development.  My impression is that what you are doing more valuable is really small potatoes compared to what needs to be done.

James Connaughton:  I'm a strong proponent of market instruments in their full variety.  And I'm a strong advocate on cap and trade where it makes sense where it would deliver capably.  And then I think the US, the benefit of the Kyoto conversation was getting that concept ingrained worldwide because it is forced thinking even beyond cap-and-trade systems toward market-based instruments.  And so I think that was a great success of the 1990s dialogue, and now it is an embedded accepted wisdom. 

Now the problem, and here is where the problem lies, the imperatives especially in the developing countries like China and India, and these major merging economies is the last thing their interest has been talking about is a carbon mandate on themselves.  So they are happy to be the beneficiary of carbon transfers.  But those transfers will ultimately fail.  They will be tiny in relation to what these countries are actually focused on, which is getting the energy of any stripe to lift their people out of poverty.  And they are working on everything in those countries just as we have in America. 

It is also the sort of a fact that energy comes at a cost.  So they are already the price on carbon, if you will, is already enormous in relation to any of these proposals for caps.  And the incentive to cut or to make great more - to the conservation to make more efficient use of fossil, the incentive is already with us in the marketplace.  In fact, I guess ironically, the price of carbon-based fuel today is higher than the worst-case projections of a Kyoto would have imposed. 

And what I find interesting about that in the number of plans, I find it fascinating that those that wanted to see those high gas prices, high oil prices, high coal prices, are now complaining that the prices are so high.  And so there is a huge element of our political class that are up there just beating the drum on how high energy prices are, when yet they are the ones who advocated for the very policies that would have driven them and how to begin with, and then there was a piling on. 

So for the very same members of that political grouping while they are complaining about the high-energy prices and want us to us, the Bush administration, to lower them if we could.  At the same time, they are voting in favor of all the policies that will drive the energy prices up in further.  So there is a massive political disconnect on rhetoric and on the use of these instruments.  And so in my view, because I'm a pragmatist, is push that all to the side, and let's sit down and try and figure out where the greatest need is.  We have coal mining in the Asia-Pacific partnership.  If people said coal mining, you are not getting a lot of carbon reduction for coal mining.  We did coal mining because China has… their mines are blowing up and they are killing a lot of coal miners.  That is what they care about as it happens. 

The solution is to capture methane and responsibly regulate it and you do not kill your miners.  You get a huge greenhouse gas benefit.  But the policy impaired of China is not that.  It is the safety of their workers finally.  And so, that is the conversation they want to have.  They do not want to talk about in reality.  They do not want to talk about this erection of a massive regime. 

One other point I will make is this.  You will always have winners and losers in this greenhouse gas allocation regime.  And the ambition well [indiscernible] and intellectually wonderful, these are academically [indiscernible], has far exceeded our capacity to actually realistically pull it off - at least for the moment.  We do not have an accounting system for greenhouse gas reduction.  It comes close on what we have for acid rain.  For acid rain, we can put people in jail for noncompliance and so you better have a good accounting system.

 We are not close to that on greenhouse gases and hopefully we are getting there, but why are we trying to artificially drive a mechanism that is going after a small wedge when we can be looking at these bigger opportunities of removing barriers, and I would conclude with that.  The barriers to these investments are much more consequential and require more effort than negotiating a carbon cap.  A carbon cap will not get China to change its intellectual property theft, okay, sitting down and walking through the hard-nosed facts that if they are going to spend a $100 billion on energy systems next year, I'm just making that up, but a $100 billion next year, and they do not give us rule of law and intellectual property protection they will buy five-year-old technology from us.  That is less efficient than our best technology. 

Now we can sit down and then do the math and show them if you are protected intellectual property rights you would get GE’s gasification system.  And that will give you all these benefits.  But until you, you make sure that investment by our private sectors is going to have a meaningful payoff.  You are not going to see that.  That is a very tangible conservation that will open up doors.  A carbon cap is not going to change.  It is not going to change those obstacles.

Steven Hayward:  A quick point of clarification, maybe you can help me a little about this.  My impression that although a lot of people were screaming about high gas prices right now, that most environmentalists have been notably silent about it.  They have been complaining on that, too.  And my impression is that for obvious reasons that we think about it for a moment.  Okay, I will not touch that.

James Connaughton:  No, I do not.  I will state the obvious.  I mean, the environmental groups are silent about it.  By the way, for the same reason that the folks like and organizations like AEI and other market-based folks are celebrating the fact that this, a market force of supply and demand is forcing decisions about new or more efficient supply as well as more consumption and reduction.  I mean, so there is an affinity there except there is a difference in lever.  The market-based folks there say, “Let the market work that out”.  Many of the environmental groups, not all, but many of them would say, “We need to tell the market what to do.”  And so that is where I think that disconnect comes.

Steven Hayward:  I promised this gentleman his second question and then I will let you follow your post.

Male Voice 1:  [indiscernible] independent.  I'm kind of amazed that the energy deductibility issue is probably ever talked about.  You basically can write off any energy that you use in the business.  With the travel deduction, for example, you get $0.45 to $0.50 per mile deduction.  You travel 20 miles, you get a $10 deduction.  You get a $2 tax savings for $3 of gas.  Now, that never gets said in the whole national debate in national discussion at least, and I find it amazing.  If we are not energy crisis or a near crisis, does that not require a complete review of total energy policy including all tax policy and I'm not just talking about gasoline taxes or whatever. 

I'm saying all tax policy should be reviewed.  It should be on the table.  And this does not even get mentioned.  You are better off just lowering tax rates, getting rid of the deductions, letting businesses pay $3 a gallon instead of $1 a gallon.

James Connaughton:  A few comments, one, you are right.  You do not see that discussed anywhere.  I have not seen it in the media.  I have not seen in any policy form in which I have had a discussion.  If somebody else has heard it, let me know.  But good one.  Very interesting.  The way we have to look at it is in the broader macroeconomic sense, which is that deduction has been in place, capital infrastructures oriented around it and the percentage applicability that does not change. 

Now that gas prices served can have 50 percent higher than where they were, there is a marginal increase in the deductibility, but gas prices are still significantly higher than they were.  So I come back to… I do not care whether the gas is $3 or $1 or $2.  There is still an economic reason to try to cut it by 50 percent if you can.  And so since these artificially inflate price to drive changes.  I do not think it is a good idea.  If you have a reason for… I did energy management consulting, and it did not matter what the price was.  If there is an opportunity to profitably cut the energy use, we run after it. 

And so I think too much emphasis still has placed and let’s force people to make these choices, but you raised an important point about some of the potential for offsetting incentive structures and that is a re-struggle with the, for example, the CAFE system.  If you buy a hybrid vehicle, you can feel very virtuous.  I think hybrids are great.  But the problem with the CAFE structures if you buy that hybrid vehicle which are really doing is enabling somebody else to buy a less efficient passenger car because there is offsetting CAFE credits for that choice.  And so you have it really driven fleet fuel economy because a regulatory system that was… again, well-intentioned, but just fundamentally flawed in its design. 

So I think if you have got more of those by the way, I would be happy to hear them.  Yes.  So I would be really happy to hear them because that is what we really have to zero in on now.  Dan.

Donald Elliot:  Donald Elliot, Wilkie, Farr and Gallagher.  Jim, I was delighted to hear about a lot of these things many of which I did not know about.  And I think we can all applaud them.  And I wanted to ask you a question about the electric utility sector, which I think is a major contributor, not the only one.  And I know the administration has been making major investments in developing the next generation, the future gen project and so on. 

My question is how do you move that from demonstrations projects to actual commercial implementation without some kind of a regulatory signal of the sort that Dave Doniger was talking about because I see electric utilities investing billions of dollars in upgrading an equated pulverized coal plants?  I think the administration in the care rule did really a brilliant thing with regard to mercury in terms of setting some targets 10 years in the future, and I understand that the cost of that control technology has come way down.  So at some point, how do we go from a demonstration project to a commercial implementation making the technology less expensive without sending some kind of long-term regulatory signal of the sort that Dave was talking about and when is the right time to do that?

James Connaughton:  We have to look at the opportunity in its sort of market and regulatory sequence.  So we would be careful about for the reasons just highlighted by the prior questionnaire.  So let's take a look the situation.  In the late 1990s, more than 80 percent of new utilities built were natural gas.  Because there was no future for coal for a variety of reasons when natural gas is cheap, the technology was highly clean.  It cost - you can put a natural gas unit, install it in one year without having to undergo to a lengthy permit process.  I mean lots of reasons.  But there were also, if you just said and when asked, there is no future for coal and if there is no future for coal, who in their right minds are going to invest in a really expensive coal. 

Okay.  So that was late ’90s.  Enter 2001, we know there is a big clean air requirement coming and we know is we got on to put on the utilities.  The question for us was how can we design this strategy that will create a growth opportunity for coal economically with a massive air pollution reduction outcome for coal and have the compliant choice be stay with coal, okay?  Because if you overheat the regulatory mandate, you are going to switch out the coal to other sources just because it is cheaper and more certain to comply.  And that is a really sweet spot we are trying to hit with nitrogen oxide, sulfur dioxide, and mercury for coal. 

Now, why is that important?  I have never read about this in any of the papers in any of the real analysis.  Why is that important?  We are now in a path where utility executives can now say, “I'm going to spend several hundred million dollars, in some cases over billion dollars, building an advanced clean coal facility,” even though a natural gas would be $200 million.  Because they are willing that all of, because coal is reliable, it is affordable, it is domestically secure.  For all those reasons, they now can do the math and say, “Well, it is a justifiable expenditure to do this billion dollar investment in really clean coal, because I do not have a future that seems reliable. 

Now, if you do not get that decision made, you do not get the jump to low carboners, it is the carbon sequestration-ready coal.  Because if they do not make the jump for the air pollution reasons, they are not going to make it for the carbon reasons, and that is why I think there is a little bit of disconnect in the reality of the market place, versus the aspirations of trying to send the market signal.  If you put a carbon mandate on the electricity generation sector, that carbon mandate is going to drive them out of this big unreliable permanent threatening, because it is hard to get permits, investments, and really expensive coal.  And then we are back where we began with, which is the government, the taxpayer, spending money trying to invent clean coal systems because the private sectors are not putting money into it.  Let alone building it.  So it is a question of when you are ready. 

Now, the way the world works is interesting.  So let's say we get… before we turn my future gen, which is government building one plan of modest size.  Well, there are now proposals for eight to twelve private sector created gasification units.  And what the executives are trying to figure out is how do they justify hat extra $100 million to work on the carbon piece.  The first $900 million is worth it.  It compares favorable to your conventional advanced clean coal.  And how do we justify that extra $100 million? 

Now, that is where we can zero in our partnership effort, our government subsidy effort if you will, and now of the sense having the one modest coal plant, we might have a platform level of eight, maybe 12.  But it requires us having a constructive conversation.  I can just assure you, though.  You put a carbon cap on and that $100 million disappears.  We are back to natural gas and pass to the fuel cost of the consumer.  So that is why we need to be careful.  Why is this an imperative?  China is not going to figure this out.  Let alone protect the intellectual property rights right now.  And if we do not figure it out faster, China is going to install billions and billions of dollars of coal fire power plants on 10-year-old in the last year’s technology.  So we need to do it faster in America. 

So it is important to line up the incentives.  And so that is what we are in for and that is why we have to be careful.  It is too easy to say, “Oh, if you just cut the carbon, they will solve the carbon problem.”  They will not.  Yes, by the way, when we figured it out and we figured out how to lower the costs, and the looks have been ranged and we can line up health benefits, other social benefits, and economic benefits, well, then a mandate may be perfectly appropriate.  But we can quantify and justify it.  We cannot today.  We can with air pollution.  We cannot with carbon.  So that is what we are looking at and so you got to bear with the process.  But it is pretty exciting.

Sue Simon:  I'm Sue Simon, Capital Insights Group.  I have a question based on the diminutive [sounds like]… been on the hearings earlier about with utility executives that came in and talked about a lot of things in terms of a global warming.  But they also, I think Ceros [sounds like] from Exelon and Duke, said 20 states are more thinking about capping emissions, carbon dioxide emissions.  This is going to get out of hand.  Why do we not just… if we are going to end up with a federal, some kind of federal center, we are really going to have that instead of try as in other ways state setting your own regulation on cars or whatever it is.  We really ought to cut that off and just deal with it in Washington on a federal basis.  Do you have a notion about that?

James Connaughton:  Yup.  That is the even flow of the federalist discussion always.  When and what point is the federal government stepped in and take over in the marketplace of policy experiments the states are engaged in?  It has been with us since the founding of the nation.  So you need to start there. 

Second, the distinct minority of business leaders who are being proactive in approach falls squarely in the group of winners, those who are on the winning side of the carbon cap equation.  And that by the way, that is great.  It is an important group.  It is nice to have winners.  But as responsible policy makers, we have to be worried about the dislocated effects on the losers in that equation. 

My favorite anecdote that relates to that is the nuclear power guys who are just desperate to find… they think world market justified five years ago.  They are now.  But they were just desperate and they wanted to get credits.  They wanted the coal guys when we did allocations on air pollution credits.  They want to get credits because there is zero emission.  When really, by then getting credits, all that meant was the coal guys had to pay them a tax for the privilege of using coal.  Now, what was crazy as that is they are talking of maybe a billion dollars with the credits.  But none are paying attention to the fact that the Bush administration was opposing a pretty hefty $50 billion regulatory mandate on them and that was enough to level the playing field, and so there is a certain factor, when there is a market, there are people who want to profit from it and want a rent seek-off [sounds like] of it.  And that is what that dialogue is about. 

But one other point on the Domenici bill, I mean dialogue… let me back it up a step though.  When you look at Senator Domenici’s bill and how it actually would, if it were implemented, its goal in terms of greenhouse gas reduction was in the same ballpark as the President’s goal.  This is another consensus point.  So I credit the conversation with getting a broad bipartisan agreement that we should be looking at about an 18 percent intensity improvement between now and 2012 when you do the math on the Domenici bill.  That shows, again, which is actually occurring as more of a sense of reality of what we are capable of achieving. 

Now, because of some other mechanisms in the Domenici bill, the reality would have been about a 12 percent improvement of intensity.  But we already passed that.  To which the question becomes then why do we need a mandate?  If we are already exceeding the goal you desire to achieve through this combination of measures that are targeted, why are you then imposing a mandate to deliver an outcome that you are not going to get?  And so that could be some of our classic public policy dialogues.  So people just want to say we are mandating because it is good.  It earns points.  Mandates make a lot of sense sometimes.  Sometimes they do not.  In the back.

Ken Green:  Hi, Jim.  I'm Ken Green, AEI.  You mentioned that there are three main ways to go about things incentives, partnerships, and mandates.  I was interested in hearing about is what I would think is a possible fourth way which is deregulatory approach that eliminates barriers to modernization other than the taxes you mentioned.  There are a lot of regulatory infrastructure constraints on change.  Could you talk a bit about what elements of deregulatory approach the administration has taken?

James Connaughton:  Yes.  Let me iterate first.  I know that there are three government tools and send us partnerships and mandates, but I did conclude by saying the most powerful force in the markets.  So that is not a governmental tool.  That is a government get-out-of-the-way tool, if you will.  Well, I will give you examples. 

Trade barriers.  Every major lead to the road has said we need to zero out trade out barriers and environmental goods, technology to services, has not happened yet.  We keep saying we want to do it.  It does not happen yet.  And then we debate in the OECD and had to narrow the definition so that less people take and get advantage of free trade and technologies.  They are going to make a huge human welfare solution.  Huge.  If we did that, that alone will unleash a huge infusion of technology investments around the world, just that one step. 

Intellectual property rights protection.  It is a fact.  We do not protect intellectual property rights.  We sell you our old junk.  We do not sell you the new most profitable stuff.  Okay.  Rule of law in protecting market transactions could make it, again, the scale of this we cannot quantify it because we all have the barriers.  But I qualitatively believe based on good personal experience that it is much more enormous than many of these other little programs we are working on.  Huge opportunity. 

Regulatory barriers.  We have this completely nonsensical opposition to the equipment replacement rule that EPI put out that would have enabled all of our industrial infrastructure, utilities, refineries, manufacturers to make efficiency upgrades at their facility by replacing old parts with new parts allegedly being decried as a clean air rollback.  Which, of course, is completely fictional because we have new air quality standards, the states are writing plans, a brand new federal mandates, they are going to cut the air pollution. 

So air pollution is coming down big time.  And yet nobody will let the initial investment be made in efficiency upgrades and hundreds of millions of dollars are sitting on the table that would improve our energy security and reduce our greenhouse gas emissions and they are being held up at a very [audio skips] of greenhouse gas emission reductions.  Again, on the political sphere, just because it is convenience to call the clean air rollback and therefore it is and it is just patently false.  They are just four big-ticket examples.  Again, the pale of comparison of these 20 million projects here, and these little projects here and there.

Steven Hayward:  One more question.

James Connaughton:  One more, right here.

Male Voice 2:  I'm [indiscernible] Dean Scott.  I'm [indiscernible] reporter with BNA’s Daily Environment Report.  I thought I would ask you if you could just address, I think, two of the main criticisms - there are others - but from the environmental groups as far as the administration’s policies and its approach.  One would be that a lot of the money that has gone into a lot of these projects was a sort of an extension of approaches that were started by the Clinton administration and Bush one, so there is in their opinion a lot of new money.  Or I know that you have often talked about the $3 billion or $5 billion in terms of new money or what the administration is doing now, also if you can elaborate a little bit about why that is a distinction from what was funded before? 

And I also wondered if you could talk for just a moment about this issue of greenhouse gas intensity.  I'm wondering if prior to this administration, if there was a reason why, in my recollection, prior administrations did not talk about intensity in terms as a measurement of other pollution and why you may or may not think that is relevant to talk about, say, sulfur dioxide or something that has been around for a long time?

James Connaughton:  On your first question, I mean, the assertion is demonstrably false, and I just gave you a small subset in my remarks, and by the way small subset of the new initiatives launched by most by President Bush, which by the way built on very substantial initiatives in the Clinton administration as well as the first Bush administration.  So this is a continuum, but this is a greatly expanding orbit.  But I also want to underline, I just highlighted the government programs. 

What we are trying to do, now you get to the money point, first of all is completely nonsensical.  If you took the rhetoric that said, “President Bush is doing nothing on climate.”  What that means is we abandoned all climate programs. So that is first and foremost.  And we zeroed out the climate-related budget, right if you take the rhetoric at face value and not just for preposterous as it happens.  And by the way, these investments are cumulative.  Every year you put $2 billion into technology.  That is $2 billion more research.  You are not sort of sustaining a program.  You are forgetting to brand all new research for that actually $2 billion.  The same thing is true on $3 billion; $2 billion in science, $3 billion in technology.  But as I indicated, you are missing the money.  The real money is in the private sector. 

And what is interesting is - I will give an example - we are working to get the budget for the Asia-Pacific partnership.  There is a budget of $52 million.  The purpose of which is to enable and open up markets to billions of dollars of private sector investment.  And that is what has to happen if we want to make real progress.  The government is not going to pay for the outcome.  It never has and it will never will.  It did not on air pollution.  It does not on safety.  It is the private sector through lots of investments that pays for these outcomes and so that the allegation also misses the point there. 

When you talk about pollution and intensity, when it came to air pollution until recently you typically did not get this… the global marketplace is wide open now.  And so the leakage issue was not as dominant when it came to air pollution, as it is, when it comes to carbon.  In part because we have calibrated air pollution strategies to keep pace with the development of technology, so we do not overlook the requirements, right?  They are reasonable pays.  Also, because human health benefits and so you can go straight at it. 

But when it comes to carbon, what we found is by focusing on intensity we can find the lowest hanging fruit for outcomes.  It does not diminish the importance of counting absolute reductions.  That is why I put that up there too; you always want to know where you actually are in real terms, nor is it diminished by the way the importance of looking at energy per unit of population because we use a lot of energy per person in America in the developing world. 

So there is a sort of an equity factor that you need to understand in making your choices.  So what I found, though, is interesting intensity was strongly discussed in that period between 1992 and 2007 when Kyoto resigned, and when the literature looked at the intensity several at least one NGO I know of and who has talked about intensity as a way of figuring out success not to the exclusion of the others, but intensity… it is not [indiscernible].  So I guess it is the other “B”.  The President has pushed it to the forefront, but this is a well-established concept for figuring out what was… you had a quantified success in a way that emphasizes good outcomes and deemphasizes bad choices.  By that, we will have to conclude it.

Steven Hayward:  We will.  We have run over time.  Thank you, Jim, very much.  I assume he will stick around for a moment or two for test questions or anybody who really wants to.  Yes.  Great. 

Thanks.  Thank you all for coming here.