CEQ's Connaughton discusses admin's current and future clean energy policies

With Congress' upcoming shift in power, the future of climate and air pollution legislation remains uncertain. During today's E&ETV Event Coverage, Council on Environmental Quality Chairman James Connaughton discusses the Bush administration's current clean energy policies and looks ahead to policies on air pollution and climate change for the next two years. Connaughton talks about the administration's hopes for the lame-duck session, including passage of offshore drilling legislation. He also discusses why he thinks it is important for the Bush administration to be granted the authority to redesign the fuel economy program.


Grant Stockdale: Good morning ladies and gentlemen. I'm Grant Stockdale. I want to welcome you to this morning's Energy Newsmaker, hosted by the United States Energy Association and cosponsored by BP America and PricewaterhouseCoopers, who we thank for their long and valuable support. I also want to think C-SPAN for being here and covering this and, of course all of you. Thank you for coming to cover today's event. Today is Tuesday, November 14, 2006. Our guest is James Connaughton, chairman of the White House Council on Environmental Quality. Before I introduce Jim, I want to remind you that two weeks from today, November 28, Steve Johnson, administrator for the EPA, will also be coming over to sit in this chair. As you know, or ground rules are simple. Everything is on the record. Our guest will make a few comments and then that will be followed by your questions. So we hope you'll have a story finished ... after an hour. Now to our guest and the story. Jim Connaughton may be the longest serving, and you have to square me away on this, chairman of the CEQ. Is that true?

James Connaughton: I think that's right, a dubious distinction.

Grant Stockdale: A dubious distinction. And he has certainly had an interesting tenure. I don't know if Jim volunteered for the job, but his volunteerism has certainly been a centerpiece to the administration's approach to environmental policy. Command and control in the form of government regulations has taken a backseat to an approach that Jim would undoubtedly describe as more productive, working with industry to find solutions to environmental challenges. But something happened last week, just happened one week ago today on November 7, the House and Senate returned to Democratic control. And although Jim's focus today is going to be on cleaner energy, and out of appreciation for the past and the way forward, I suspect that that election will color a lot of what's to follow. So I want to welcome you Jim. Thank you so much for being here and the floor is yours.

James Connaughton: Great. Thank you and good morning everybody. I'm glad to be, I think this is my second ...

Grant Stockdale: This is your second time.

James Connaughton: ... my second with the reporter's group.

Grant Stockdale: And in fact I'll tell you the first time was we were just going to a vote on Clean Skies.

James Connaughton: Clear Skies, that's right.

Grant Stockdale: Clear Skies, yeah.

James Connaughton: That's right. Well, it's great to be here again and many familiar faces and a few unfamiliar faces. What I want to do, in about 10 minutes, is give you an overview of where we've come from and where we're going. And then hopefully that will be the foundation for all of your questions. And I really want to put this in the framework of where we are, which is actually a fairly dramatic international consensus on the need for more of an integrated approach to addressing the related challenges of energy security, of combating harmful air pollution that actually hurts people, and dealing with this very important issue of reducing greenhouse gases associated with climate change. I say that because it was at the Gleneagle summit, G8 summit last year, in the shadow of the London subway bombings, that the leaders of the G8 agreed that we need an integrated approach. And I think you saw, as recently as Kofi Annan's editorial that ran earlier this week, you heard from Kofi Annan the same expression of we've now come to this point where we understand the need to deal with these issues in an integrated manner. And then, hopefully, as a result can provide some fairly substantial progress. Energy security is at the forefront of public consciousness, not just in America, but also around the world. Since I sat down with many of you I've been around the world several times, both to Asia and to Europe. And the dominance of security as a policy imperative is really quite remarkable in the time that I've been in this job, in six years. And security focus is not just on the fuel issues, although they're quite profound, this addiction to oil that the President has talked about, but also the competition for natural gas, which then has an effect backward on the place of coal in the power generation mix and the place of renewables. And this expanding interest in renewables, not just on electricity generation side, and then come full circle, now on the fuel side. And so we're seeing this quite remarkable renaissance. And it goes beyond a renaissance, because renaissance suggests sort of a rebirth of old topics. We're actually moving forward into new technologies and areas of investment that are brand new. And so in that sense it's a new era in energy. The way I like to describe it is if the 80s were about labor productivity and the 90s were about the combination between information technology and logistical efficiency, which has given rise to this massive intermodal transportation system we have now, this next many years is all about energy and energy efficiency and the productivity that comes from smarter energy systems. And so I think you saw the capital that went into labor productivity and the capital, the massive capital that was oriented toward information technology is now building up and is orienting itself toward a new era in energy. And it's thrilling, from my perspective. And as a result, we've got a lot of areas to follow. So let's look backward for a second and then we'll look forward. Looking backward we know we can make real progress because we've done it, in America at least. We've cut our air pollution in half since 1970. In fact, 12 percent of that reduction occurred just since 2000. So air pollution is coming down at an increasing rate. Even during a period in which our economy nearly tripled, our vehicle miles nearly tripled, our energy use and population went up by nearly one half. And so the chart that I provided to you shows you this very dramatic picture of reductions in air pollution compared to dramatic growth in energy, population, and transportation. More recent on the public agenda has been greenhouse gas emissions. That really sort of came to the fore in the early 90s. And that picture is also very strong. It's like the early days of attacking air pollution. While the economy has nearly tripled, while we've had this massive population growth and energy use, greenhouse gases have been rising at an average annual rate of about 1 percent. OK? So the rate of increase in greenhouse gases is much lower than the rate of economic growth. And our goal, the administration's goal of course, is to improve that picture, is to further slow down the growth of greenhouse gases compared to economic, population, and energy growth. So as result, since '90 we've seen an increase of greenhouse gas emissions of about 17 percent. This is during a period where the population of the U.S. is now up 15 million people and that's about the population of Sweden and Denmark combined. So we added two whole country's worth of population to the U.S. population. And we added the GDP of Brazil or Russia since 2000. And in this period we've only seen a very incremental increase in greenhouse gases. The next chart sort of describes our goal on greenhouse gases. On air pollution we have solid reduction goals, a 70 percent reduction in coal-fired power plant pollution. And a more than 90 percent reduction in diesel air pollution. Well, we're taking our first major steps on greenhouse gases, which is to improve greenhouse gas intensity by 18 percent over the next decade. And many of you have reported on that, so I won't go into that in great detail, that particular goal. But I did want to highlight today's EIA report, which you may not have seen yet, which will give us the most up-to-date information on 2005 greenhouse gas emissions. The EIA will inform you that greenhouse gas emission growth was lower than average in 2005. While the economy was up 3.2 percent with strong population and job growth, greenhouse gases went up only 0.6 percent. That's compared to a 1 percent annual average. That meant the greenhouse gas intensity actually fell by 2.5 percent, much faster than the President's goal would require, so 2005 was a very strong year. And that's compared to 1.9 percent annual average. And then this is a very important one, industrial CO2 emissions. So those are the emissions that industries directly emit, but also the emissions associated with the energy they consume, was up only 0.3 percent in 2005, which compares to a 1.2 percent annual average. So if you want to look at a different way, the increases in greenhouse gases are largely attributable to more people in bigger homes in more service based jobs traveling greater distances. So to the extent we continue to see growth in greenhouse gases, it's more about consumer energy consumption than industrial energy consumption. Now, how does that compare to the world? The next chart will show you that, we only have information globally through 2004, so in order to compare nation to nation we only have information through 2004. But between 2000 and 2004 the U.S. saw, at one point, 3 percent increase in our greenhouse gases. Compare that to Europe, the EU25 countries increased by 2.1 percent. And the E.U.-15 countries, which are the major economies of Europe, they actually increased their emissions by 2.4 percent. I think it was Germany, the United Kingdom, and Ireland, for example, found a way to reduce their emissions slightly during this period, but the overall E.U. emissions are up. Now I don't say that as a negative comments because actually they're up by only a little amount, which is what we're trying to achieve. We're trying to slow the growth of emissions. And so the U.S. performance compares very favorably to Europe's actual performance. And then the more important figure is on the next chart, which is greenhouse gas emissions intensity. And I think the story there is a very interesting one. Because of our strong economic growth and investment in productivity the efficiency of our production and our output was at 7.5 percent during this period. That compares to Europe, which had about half that rate of improvement. So this efficiency number is a very important one because it shows how much you're improving sort of the quality of life for folks with the minimum, sort of a declining amount of emissions associated with that. And so we have very strong numbers. But here, again, I want to commend the UK. They've had a slightly stronger intensity improvement. That's attributable to their burgeoning service-based economy and the decline of their industrial economy and some other factors. But, again, we're all in the ballpark of making about the same rate of progress. Now why is that important? When I sat down with many of you in 2001 the Energy Information Administration and the International Energy Administration had predicted that by 2025 the major emerging economies of the world would have emissions that exceed those of the developed world. Well, what a difference five years makes. When you look at the most recent international, the IEA projection, International Energy Administration projection, they have predicted that the emerging economies greenhouse gas emissions will exceed those of the major developed countries by 2009. So there's been a dramatic shift in the energy consumption balance and in the emission balance. And that really sets the stage for the future conversation. And what does that look like? In the next slide that I've given you we've just done a rough estimate of the potential for greater investment in more efficient production. And then when you look, the greatest potential resides still in the United States, so we can get a heck of a lot more productive and efficient in China, in South Korea, in Russia, in India. Even Japan, which is highly efficient right now, can realize some very significant improvements in their scenario. And so I present this to you because as we're trying to design future security strategies and future climate strategies understanding sort of the feasibility of improvements is going to be very important to any policymaking, including target setting. So how did we get here? How did we get to this point of sustained progress with, again, very good news on the numbers for 2005? Well, we have a lot of new policy that's unfolded in the last several years. Two dramatic pieces of policy, which tend to be overlooked as climate policy and they actually tend to be overlooked as energy security policy, but they're big, were the tax law changes, which enjoyed bipartisan support, that promoted investment in new, more efficient equipment. So the new rules on expensing of capital goods, of large equipment purchases, and the new rules on dividends, which lowered the costs of the capital that you could raise has created a dramatic increase in U.S. investment in new equipment. So you're replacing the older inefficient stuff with newer, more efficient stuff. Again, a tax policy, not an energy, security or climate policy, but it's having enormous flow-through effects on those issues. The Energy Policy Act of 2005 still misreported as a giveaway to oil and gas. Actually the success of the Energy Policy Act of 2005 was, in fact, that the major subsidies to the fossil fuel industry were eliminated. The package of incentives in that act actually goes to the heart of efficiency and cleaner energy systems. And I'll show you a chart on that in a second. Also, contrary to our host who talked about mandates, the Bush administration has not been shy of supporting mandates where they make sense and can be appropriately designed. We have a 7.5 billion gallon ethanol and bio diesel mandate that came from that act. In fact, we are ahead of schedule in meeting that mandate. So that's very encouraging. In fact, the United States produced and used more renewable fuel last year than any other country. The same is true on appliance and building energy efficiency standards. We had about 15 new mandates for energy efficiency and buildings and appliances in that bill. And we are moving forward aggressively to implement those requirements. And then the third area of mandates is fuel economy. We've done six years worth of fuel the economy standards for SUVs and light trucks, including Hummers for the first time. They were excluded in the past. And we are seeking new legislative authority for passenger car fuel economy improvements, which has been something pending in Congress for five years now. And maybe this upcoming Congress will make the difference in giving us the authority we need to redesign the fuel economy program so we can do it right and get a new requirement up and running for passenger vehicles. I will not spend a lot of time on this next chart. But I just wanted to give you a list to show you the incredible array of incentives, of mandatory programs and partnership programs that we have unleashed in the last several years, ranging from zero emission coal to this remarkable smart way partnership which is trying to approve the efficiency of our transportation system. We are estimating we can get up to more than 30 million tons of CO2 reduced through this partnership, which is about plugging in diesel trucks at night instead of running their engines, more efficient truck and train designs, so they operate more efficiently. And a whole host of infrastructure pieces in partnership with the cities and states that can produce dramatic fuel savings for energy security. And also then the associated greenhouse gas reductions as well as the familiar $34 to $100 tax credit for highly efficient vehicles. And I think people have forgotten that we now have, as a result of the President's policy and the Congress acting in concert with that, up to $4000 available to homeowners for residential solar heating and solar water systems. The federal government is about to dramatically step up its own energy efficiency efforts. We've been very successful in meeting our energy efficiency goals historically and we look forward to setting new goals. So stay tuned for that. Finally, I'll just, again, you can thumb through. We've got our climate vision partnerships with all the major emitting sectors, are now delivering measurable results. You may have seen GAO reporting on that. Some of the sectors are doing better than others. They are all making progress. And we were working on the sectors that require some additional help. But that program is now well established and well underway. And then, of course, we have more than a dozen major technology partnerships internationally, most notably the Asian-Pacific partnership on clean development and climate, which launched 98 new areas of work just a week ago in the eight sectors that are here in your chart. And each one of those areas of work is dedicated to improving the security portfolio of energy use and improving the greenhouse gas portfolio of energy use in the major sectors, especially in India and China, that need the most help; fossil power generation, steel, aluminum, cement manufacturing, and buildings and appliances. So that's the overview. As we look to the future, in the context of the international deliberations, Kyoto deals with greenhouse gases. It does not deal with air pollution. It does not deal with energy security. So we need to find a way to link the other international dialogs in energy, security and air pollution to the framework convention dialogs. We need to find that pathway forward. And I think we now have sufficient experience globally to really zero in on these major sectoral opportunities. I'm going to highlight four for you. They are unquestionably the revamping of our transportation system across the board for greater efficiency and more renewability. We are now finally having a serious conversation about coal and that's going to be very important to get to zero emission coal, with the initial step being highly efficient coal. We've had limited engagement on forests, but I'm hopeful we can put that back on the agenda because there is still huge untapped opportunities for greater ecological benefit as well as greenhouse gas benefit from smarter forestry, both in the developed and developing world. And then this point of consumer use, the rise of greenhouse gases in all projections in the developed world are all about individual consumer choices, energy choices. And that's just a very different puzzle than looking at industrial emissions. And we really need a more focused effort on buildings, appliances and the patterns of personal consumption, which, again, has tended to be overlooked as a policy discussion, if you will, in the climate context. And yet it's fundamental to the quality of urban living. It's fundamental to the energy security sets of issues. And so hopefully, again, we can find a way to address that basket of issues. So I'll stop there and look forward to your questions.

Grant Stockdale: Jim, thank you very much. I want to ask everyone who wants to ask a question to identify yourself by name and organization. Yes?

Darren Hue: Hi, Darren Hue, CongressDaily.

Grant Stockdale: Yes?

Darren Hue: Is it safe to say the administration will oppose any effort by Congress to institute mandatory reductions in the CO2 emissions?

James Connaughton: We have a very strong bipartisan engagement with the Congress on policies that will sensibly tackle energy security and help us reduce air pollution and greenhouse gases. In the past those have included mandates. So as I indicated, we agreed on appliance efficiency standards, which are mandatory. We agreed on renewable fuel mandatory standards. And we also, hopefully, will soon agree on a way forward on mandatory fuel economy standards for passenger vehicles. I would note the administration also strongly backed state based renewable portfolio standards. The President, when he was governor of Texas, signed actually one of the most consequential state mandatory programs to have more renewable sources of electricity. And, in fact, Texas installed, set the record last year for installing wind power as a result of that mandate. Now we believe that's a better mandate at the state level, some extents at the federal level, some extents at the state level. We still have very strong reservations about sort of an over arching, one-size-fits-all mandate for carbon because of some fairly dramatic unintended consequences that would flow from the proposals that have been floated so far. Not the least of which is there's been a huge bipartisan agreement that we need to lower the cost of energy to the consumer, both in terms of fuel and in terms of their home electricity bills. And every bill pending in the Congress right now on carbon would substantially increase the cost to the consumer. So you can't say on the one hand you want to reduce consumer costs and on the other hand say you want to dramatically increase the costs of their energy. That's an inconsistent position to take. And related to that, once you increase that cost of energy the tendency is for energy intensive jobs to move offshore. And not only is that an economic problem, from my perspective it's an environmental one because those jobs and the manufacturing goes to locations in the world that are not as efficient as we are. And the greenhouse gases and air pollution go up, not down. So you will have had a job shift, an economic loss, and you probably will have made the environmental situation worse not better. So we need to be very careful about the design of some of these strategies. I think they've been relatively simple minded so far and have failed to take into account what I really think are unintended consequences. They just haven't been thought through enough.

Grant Stockdale: Yes, next?

Questioner: Is the administration planning any new climate legislation next year?

James Connaughton: Well, first let's talk about the climate legislation that's pending. One is we are looking forward to Congress taking action on the civil nuclear deal with India, which is of enormous importance of sort of resetting our relationship with India and finding a way for India to significantly increase, responsibly, its use of civilian nuclear power. When you look at their energy demands that will otherwise be met by coal, advancing the use of nuclear, responsibly, in India is a huge need. And that will also help reduce their air pollution loads. As I indicated also, finding some bipartisan agreement on CAFE standards for passenger cars would be enormously beneficial from a fuel security perspective, as well as from a greenhouse gas reduction perspective. I would note that our new, we have new mandatory pollution control requirements for diesels. So we have a new clean diesel agenda. And the clean diesel agenda will enable a new era of passenger diesel vehicles which are up to 30 percent more fuel efficient than a passenger gasoline vehicle. And the greenhouse gas profile is about a 20 percent improvement. And so with our new regulatory mandates on clean diesel we can look forward to diesels being reintroduced along with the tax credits that we want Congress to fund in this appropriations cycle to make clean diesels highly attractive to the consumer. So that's another piece of legislation that's important for climate. And then the third that is currently pending is the legislation that will help implement the President's Advanced Energy Initiative that he launched at last year's State of the Union address to wide bipartisan acclaim, as well as wide international acclaim. And that's to be sure that we are getting the resources necessary to hit our goal of commercializing cellulosic ethanol by 2010. We will shortly be issuing the first grants for commercial scale demonstration plants to be built in America, to produce cellulosic ethanol. And for those of you who haven't studied the issue, cellulosic ethanol has a close to zero greenhouse gas profile. So it's just huge from a greenhouse gas perspective. And then, of course, it's fully renewable and it would be produced in America. And so it's also quite dramatic from a fuel economy perspective. So all of that is on the legislative agenda right now and all of that enjoys very broad bipartisan support. And so we want to achieve that before we move to other things.

Grant Stockdale: Yes, next here?

Chris Baltimore: Mr. Chairman, I'm Chris Baltimore with Reuters. I wanted to ask you about the upcoming China trip Secretary Paulson and Secretary Bodman are going across. You mentioned how energy security is at the forefront now. Everyone's talking about it. I kind of understand that energy security means different things to different people. It might mean different things to the United States versus to China. And I just wanted to get you to talk a little bit about how that might factor into the conversations there.

James Connaughton: This is a very consequential meeting coming up and, in some respects, historic when you look at the level of participation; this is the highest levels of each of our government and the breadth of participation. So you will have Hank Paulson and you will have a handful of other Cabinet secretaries meeting in the same room with their counterparts for the first time. Why is that important? The strategic economic component has a very strategic energy component to it and a strategic environmental component to it. And so for me actually it will be a first to be in the same dialog with the econ ministers, the energy ministers and the environment folks, very consequential. Why does that matter? The U.S. is the world's largest economy. China is growing dramatically. And we share the same portfolio of concern just on the energy side. We have a lot of coal that we need to use more cleanly. We have to use much more efficiently. And we have to find a path to zero emission coal. Well, the structure of the economic aspects of that are quite substantial and the effects of that. And it's unquestioned that China is going to use its coal, so we have to find a way to dramatically accelerate this path to more efficient and zero emission coal. So that's an area of focus for me. I mean they will be focused on other subjects of high economic importance, but, again, this is a strategic conversation. This is a way to sort of set aside individual items of conflict and concern and look more strategically at our patterns of energy use, at our patterns of investment. We will be making a strong case that by improving the rule of law, for example, on access to markets, that we can bring a lot more advance technology into the Chinese market faster that will help them reduce the security concerns they have and reduce the environmental footprint. We also have the issue of fuel. You know, we will be competing on the world stage with China for oil. We will be competing on the world stage with China for natural gas. The United States and China competing for oil and natural gas should be a huge concern to the rest of the world because we will tend to outbid the rest of the world for those resources. And the rest of the world does not have indigenous, or much of the rest of the world does not have a lot of indigenous coal and indigenous natural gas. And so one of our issues is how do we make better and more effective use of our own domestic resources, which will be important for the global economy? Which is why, I guess, another important piece of legislation, that we hope will get through the Congress before this one expires, is the offshore energy development legislation. We have a lot of oil and natural gas way offshore that can be tapped with advanced technology and virtually an extremely small environmental footprint or risk. And the more we take advantage of our own resources the more we are helping the global economy in terms of keeping a stable energy profile for economic growth and development. I've given you the energy focus. There will be other focuses to this conversation, but it will be at the very strategic level. And it will also bring a level of, a higher level of accountability to many of the working programs we have going. And that's also going to be important because this work is actually hard. It's not easy. And the notion of bringing ministerial level oversight to some of the working efforts that have been, they've just taken longer than they should, will also hopefully help accelerate progress. In the back.

Elizabeth Showgram: Elizabeth Showgram from National Public Radio. You said you supported a stronger CAFE standard. Would you support a standard of say 40 miles per gallon? And if not, what would you support, what exactly?

James Connaughton: Every year the fleet mixes of the manufacturers changes. And the existing CAFE process, with the reforms we put in place recommended by the National Academy of Sciences, has allowed us to look at the fleets, look at the economics and look at the technology advancements and set very meaningful improvements in fuel economy. And so we would strongly urge the same kind of a process be legislated for passenger cars. What we have found is each year things change significantly. And so I wouldn't want to, what we've been opposed to is arbitrarily setting a number. That was done, for example, for passenger cars back in the 80s. And once the Congress arbitrarily set a number it never changed, which is why we have not seen a real increase in passenger fuel economy standards since the late 80s. And so our view is if we could put it into a better defined legislative requirement and let the experts who know how to do this well set the mark based on the most up to date technology information. We believe we can advance fuel economy faster than an arbitrary number set by Congress. What's that?

Elizabeth Showgram: By how much? Can you give us an idea of what your goal is?

James Connaughton: We can't know until we get the new fleet data and we need the new legislative authority to go out and seek that data. And by that we can then set a standard within a reasonable period of time. But then the goal would be, as we've shown we can do with light trucks, the goal will be then to update that on a regular basis. Now I'll just give the light-truck example. We've proven we can do it. We've issued two now regulatory mandates on light trucks covering seven years of vehicle production. And that is that we set a target of a 15 percent improvement in the fuel efficiency of those vehicles. And because they're larger vehicles, that's a big reduction in fuel use. So we've proven that by using the expert driven process we can set a very aggressive standard. I couldn't tell you what that is for passenger cars today because we have not done the analysis or put, we don't have the data to even generate an analysis that would provide a meaningful figure. We want to be careful that we don't set a standard in a way that will cause a safety penalty. That's something the National Academy of Sciences warned against. And we also wanted to do it in a way that preserves American jobs. We don't want to improve fuel economy on the back of the American auto worker. And so we have found a way with light trucks to address those policy concerns. We believe we can pursue the same approach on passenger cars. So we shouldn't let a magic arbitrary number lose us the opportunity of coming up with an approach that will be sustainable and advance fuel economy in the future. Let me make one more point on this. Five years ago it was inconceivable that we'd be factoring in diesel into fuel economy requirements for vehicles. Now that there's a technology breakthrough that allows us to produce clean passenger diesel vehicles that would affect the expert judgment as to what's attainable in terms of fuel economy. Another reason why we need to resist an arbitrary number set by the Congress, because that kind of a technology breakthrough would then be overshadowed by a specific number set by Congress.

Elizabeth Showgram: Well, specifically on diesel then, the auto industry is not responding very rapidly to that opportunity that you describe very clearly. What can you do in your job in the next two years that would promote these cars to actually be available, these clean diesel cars, for people to actually drive?

James Connaughton: One of the most consequential things that occurred was a performance-based tax credit that was included in the energy policy after 2005, for which diesels are able to qualify at the same time as hybrids. So it was a big deal. The tax credit used only be available to hybrids. But now, if a diesel is just as fuel-efficient as a hybrid it can get the tax credit too. So that's going to be a big market opener. And you already have Mercedes, you have Honda, you have Volkswagen and several other companies now designing diesel product for America to take advantage of those tax credits. And then they're going to retest consumer acceptance after 25 years of really, of America not using very much diesel. You know, by contrast, Europe is 50 percent diesel in the passenger fleets. So even if we made a modest breakthrough in our market on passenger diesels that would have a huge fuel security and greenhouse gas advantage. The other piece is biodiesel. Because there's competition for diesel fuel, it's a high demand worldwide. Biodiesel will help offset some of the demand for the petroleum-based diesel fuel. And so something we are working on right now domestically, and I was just in Europe and we got agreement with the high European commissioners on setting new international standards for biodiesel fuel, so that we can have a common platform so we can get the highly optimized engines that can use both petroleum diesel and all kinds of biodiesel. Now biodiesel, like cellulosic ethanol, has a very good greenhouse gas profile, in addition to its fuel efficiency. So this is how, again, you can see this cascading set of very specific policies that can open up a new market for diesel. And then hopefully all of you can help communicate the significant advantages of diesels for passenger vehicles.

Grant Stockdale: We've got less than 20 minutes to go because Jim's got to get out of here a little early. Yes?

Gerald Carey: Gerald Carey with CLATS. A couple of quick follow-up clarifications, it's close to a zero percent profile for cellulosic ethanol. Is that just consumption or does that include the production process?

James Connaughton: No, it's the full lifecycle. And Iogen, up in Canada, has an analysis they can show you. I've taken a look at it. It looks solid, but if you see some issues with it I'd be interested to know that.

Gerald Carey: You had this chart, real environmental results and you have air pollution down 53 percent, greenhouse gas emissions up 17 percent, close to 17. I don't know how much of that was during the last six years, during the Bush administration. Air pollution went down as a result of command and control regulations. Greenhouse gas emissions rose during a six year, at least the last six years during voluntary programs. At some point will the U.S., do you think, have to actually start reducing its greenhouse gas emissions? When? Can you get there with a command and control? And you talked about the simpleminded programs coming out of the Congress. Can you envision a less simpleminded program?

James Connaughton: On air pollution, actually it's come down as a result of the combination of strategies that I described. It has included both mandatory requirements, it has included significant incentives, and it's also included very consequential partnerships over the last 35 years. If you look at any of the state implementation plans in meeting federal air quality standards you will see huge components of them driven by non-regulatory measures. So, again, I don't want to discount, our history is that actually a portfolio based approach has proven to be a winning approach in first slowing the growth of air pollution, which occurred during the 70s and into the early 80s. We then stopped the growth of air pollution in the 80s and it has been coming down significantly since. So I would expect the same kind of trajectory on greenhouse gases. And the President made that clear all the way back in 2002. Just as with air pollution, you know, we started many decades later on greenhouse gases, step one is to slow the growth. Step two is to stop the growth. And step three is to ultimately reverse the growth. I can't tell you where that curve will turn. I couldn't have told you in 1970 when we first started tackling air pollution. I can say with great confidence though, if you look at these investment pathways that I've just described, the trend is heading exactly in the direction that we'd want it to end. We are not falling back. We are moving forward. And so, especially because the energy security and energy cost issues are going to continue to dominate that will further help us deal with the greenhouse gas issues, just on market forces alone, before you get to these mandates I've talked about and these other incentives and partnership programs I've talked about.

Gerald Carey: Ultimately, there have to be mandates.

James Connaughton: Well, there are ready are mandates. And so you're saying ultimately, well, there have to be. There already are mandates that contribute to this goal. The question is, everyone keeps chasing this, what I call this false dichotomy. That if you're not doing an economy wide, one size mandate that you're not taking action. And that's just patently ridiculous. If you look at the agenda of action just domestically supported bipartisan basis, and you compare that to what's going on in Asia and Europe we have dozens and dozens of new policies unfolding all around the globe tackling this issue. And that includes mandatory ones. By contrast, Europe right now does not have mandatory fuel economy standards. They are now considering it for the first time and modeling it on the U.S. program that President Bush re-established. So we have to get past this mythology of action versus inaction and begin to focus on real areas of progress.

Grant Stockdale: Yes, let's go here.

Tina Sealy: Tina Sealey with Bloomberg News. Last week a member of your staff sent an e-mail to a member of Barbara Boxer's staff seeking some dialogue on global warming. I wonder if you could explain a little bit the rationale behind that and what you hope to come out of it. And secondly, I wondered if you have any expectations that in the remaining two years the president will be compelled to veto a bill that puts mandatory caps on carbon dioxide emissions?

James Connaughton: Well, first, not a week goes by when we are not having some kind of conversation with somebody on the Hill, somebody in the private sector, somebody in the NGO community, somebody internationally, on climate change. And my CEQ staffer had met Bettina, who works for Senator Boxer in Europe when he was working in Europe. And they have been in touch, just as we're in touch with staff and with members of Congress on this issue on a regular basis. So there should be no novelty in the fact that we have communication. As many of you reported, it was just within the last couple of months that I gave quite substantial testimony on the Hill, in both the House and Senate. It went on for 70 pages, some of it, on the various climate programs. And there was all kinds of staff to staff follow up on those issues, not just the Senator Boxer's staff, but with, you know, we've heard from Senator Waxman's people and, of course, on the Republican side as well. So you should look at that as being very consistent with the course of our ongoing conversations on this issue.

Grant Stockdale: Yes?

Tina Sealy: Do you expect the president to have to veto legislation?

James Connaughton: We have been very pleased that the Congress has been pursuing a strategy on climate that is very closely aligned with the President's strategy. And so we look forward to continuing to see legislation emerge from the Congress that's very consistent with the policy goals that the President has set. We will not support a climate policy that obtains emissions by putting large amounts of Americans out of work. And, especially, when those emissions will merely get transferred to another country and we will not have addressed the climate problem. We will continue to focus on both administrative approaches and legislative approaches that help us reduce greenhouse gas emissions in a way that adds to economic growth rather than subtracts from economic growth.

Grant Stockdale: Yes, here?

Darren Samuelsohn: Darren Samuelsohn from Greenwire. Listening to you talk about CAFE and climate change, it doesn't sound like you've changed much since the outcome of last week's midterm elections in terms of what your positions were on climate change and what your positions were on CAFE previously. How has the administration's environment and energy policies changed by the Democrats taking control? And do you see the administration making any major changes in light of what you've been doing for the last six years?

James Connaughton: Well, actually the Congress has advanced substantially and has been quite responsive to the major initiatives that the president's proposed. And, again, the list that I've provided you just shows you a cascading list of broad bipartisan advancement, including lots of new items, not the least of which was the Advanced Energy Initiative last year. So when you say is our policy changing? Well, actually the answer is our policy has consistently been changing because every year we have added new initiatives. And every year those initiatives have preceded either administratively or through the Congress and we've received quite significant support. So would I expect to see further evolution in advancement of energy security and climate policy on the legislative side? Absolutely. And would I expect to see this common ground continue to emerge in the Congress? There's no question. That's the only way you can get this complicated issue moving forward. You need to find that common ground in the center that is focused on energy security, that's focused on protecting the pocketbooks of consumers in terms of their energy costs, and that's focused on the application of technology through smart economic policy and smart environmental policy, that assures that reductions actually occur in country. And so when you look at the makeup of Congress, we'll be very curious to see the shifts, to see the extent of shifts on some of these issues. But I think at the moment the jury is out on where the shift will go behind any particular policy. And so we'll have to see how that unfolds.

Grant Stockdale: We have not quite 10 minutes left. Yes, here?

Jeff Carlton: Jeff Carlton at CQ. You mentioned this idea that we need to accelerate the shift towards zero emission coal. I'm just taking that as an example. It's going to be almost impossible to ever get to zero emission coal without it being more expensive than standard coal. I mean most of the experts agree on that. You're going to have to have, in some way you're going to have to put a price on carbon if you want it to become an economic endeavor. So what I'm curious about is do you see a time and a place when you're going to put a price on carbon or when you're going to have to have some kind of mandatory controls in order to make it an economic system, or a market driven system instead of one that's being driven by subsidies and tax breaks?

James Connaughton: Well, first of all, there is a price on carbon and it's called energy costs. And we just saw, dramatically, in the last two years, the effect of that price on carbon, on our economy, and on consumer choice. And so I find it fascinating when people suggest there is no price on carbon. That's just factually untrue. It's also the case that if I'm paying two dollars for my energy and I can find a way to cut it down to one dollar, that's just as valuable as forcing my energy price up to three dollars in order to cut it back to two. So the notion is if there's savings to be had by reducing energy consumption and improving efficiency, those savings are better off from low prices to lower prices, rather than charging the extra, charging me more for my energy in order to get me to save money on energy. And, again, that's where this inconsistency lies in some of the expressions ...

Jeff Carlton: But the goal is to go from zero, from current coal to zero emission coal. The energy costs are going to be equal on those two. If you want to shift towards zero emission coal it's going to cost more than regular coal, depending on what the cost of coal is, right?

James Connaughton: So now let's focus on coal. One of the unintended consequences of some of the legislative proposals out there is it would actually, because we have not yet proven the technology on zero emission coal the compliance choice would be to shift out of coal. And your only available base load source right now, in near time, is natural gas. And this group knows as well as any group what a huge effect on the economy and on the consumers, especially poor consumers and fixed income consumers, is of a dramatic increase in their natural gas prices. All right, we've gone through this a couple of times now and I think we kind of get the point. We have to be very careful, and that's an unintended consequence of putting an unreasonable carbon constraint on coal generation, right now. What we have to do is we have to, one, we have the subsidies, so we have nearly $3 billion going into clean coal programs. And by the way, a huge shift has occurred just in the last five years. Our clean coal programs are now almost exclusively carbon programs. It used to be air pollution. Right, it used to be sulfur dioxide and nitrogen oxide and mercury, other aspects of clean coal. The entire research budget is shifting to carbon. This has been a huge unheralded shift. So we need to prove up the technology at a commercial demonstration scale in order to make the judgment that you've just indicated. We can't set a rational policy until we get that commercial level experience. Now what the Bush administration has done is we have dramatically ramped up both the effort to get that experience, and also shorten the time frame in which we'll have that information, upon which we can make some sensible policy. So not only are we building FutureGen, whose goal is to create a zero emission coal-fired power plant at the same net cost as a conventional clean coal plant, right? That's the goal and to do that by 2012. We also have, in the energy bill, new investment tax credits and new loan guarantees that will go toward taking advantage of what we can do between now and then, which is making coal a heck of a lot more efficient. If we could get even a 10 percent greater efficiency in coal using conventional technology or, even better yet, the advanced technologies like gasification, that could pay for itself. Right? This is your question. The efficiency gains by themselves could pay for the added cost of the technology. We just have to prove that. This is a new technology. It's really expensive to install. But if we prove that, that all the sudden changes that cost differential you talked about. If the U.S. can do a dozen of those and China does a half dozen and Europe does a half dozen, all in the same roughly small period of time, we can change the landscape for coal. That's what we have to focus on. I would also note, because those of you who've reported on New Source Review, it still baffles me why we have not had a declaration of victory. Every major coal-fired power plant is now going to have to address its air pollution. And they're going to spend about $50 billion doing it through this market based cap-and-trade system. Now that the retrofits are going to occur, the continued opposition to letting these power plants get on with efficiency upgrades right away, just baffles me. And let me put that a different way. Every major coal-fired utility is sitting on a project that will improve their efficiency, but because of NSR they aren't pursuing it. And so they're going to wait until they make the big investment in their air pollution control retrofit. I think it's time to declare a victory on the air pollution side of this issue and let these guys make investments they could make tomorrow to dramatically improve their efficiency while they're planning for these pollution control retrofits. And I hope we can find some common ground on that point. Now, especially after we're passed this political, you know, this sort of highly politicized environment, it only makes sense to let our own power plants improve their efficiency starting right away rather than waiting until they do their pollution control retrofit.

Grant Stockdale: We only have a few minutes left. Let's try to get someone who hasn't had one. Yes, back here?

Jeff Young: Hi, Jeff Young with Living on Earth. Not to beat a dead horse too much here, but back to climate change. Of course, there have been these rumors that we might hear some dramatic shift in policy from the administration, perhaps as soon as the State of Union address. Can you just, in clear language, put those rumors to rest and say no such change is afoot?

James Connaughton: We have been very consistent with the strategy the President outlined starting in 2002. And we've been very consistent year by year of adding new initiatives to help not only meet the President's goal of improving greenhouse gas intensity by 18 percent by 2012, but actually establishing a dialogue internationally that sustainable will work. And so you're asking me to say that we're not going to continue our efforts on improving our policy path and that's just not the case. We've been consistent about adding policies across the board. What shape those take I can't say because I couldn't have said it three years ago. Three years ago I couldn't have told you we were going to launch the Advanced Energy Initiative in the State of the Union because we were very focused on hydrogen and some other issues at that time. And then we added in cellulosic ethanol and some of the new solar and wind processes. There's a big push right now on fuels and the whole fuel set of issues, so that's not surprising to anybody. And there's pending legislation related to fuels in the Advanced Energy Initiative. People keep looking for some grand announcement and they're not paying attention to the incredible announcements that have already been made and will continue to be made. So you can continue to expect the President to pursue an aggressive policy agenda on improving our energy security, on lowering the cost of energy to consumers and finding sensible strategies on greenhouse gases.

Grant Stockdale: One quick final question, yes, over here?

John Carey: John Carey from Business Week magazine. It just seems to me you're being disingenuous about saying there's a price on carbon when we're really talking about the price of carbon emissions. And this comes up in the context of the question because even if you do FutureGen and prove it's more efficient, it still will cost to sequester the carbon. You don't get any efficiency gains from the sequestration. Without a price of carbon added to it, how does one provide incentives to take that added step of sequestration?

James Connaughton: OK, the zero emission endgame is highly costly right now. And there's nobody that should suggest imposing that cost on the electricity consumer. I mean it's more than $150 a ton. Some estimates are even greater than that. That's because we have no experience with it. There is a huge opportunity that remains in the U.S. and around the world to reduce carbon emissions at a profit. Everyone keeps talking about imposing a cost. And there is just a huge untapped energy reserve in efficiency around the world that venture capitalists, government policymakers at state and local levels, and industry and consumers across the board are now realizing. All right? Our view is let's start there first. Let's start at the place where we can dramatically reduce emissions at a profit. That tends to attract a lot of interested people. Then there's a second category. There's a category of policies that can be undertaken and quantified to improve human health and that's the whole air pollution bundle of policies. Well, some of the strategies for improving human health through air pollution reduction involve efficiency and can be justified on efficiency or energy security grounds. Harder to quantify, but you can make some pretty sensible policy judgments on that too. So that's the second basket. Let's look at that. That's of high appeal to our international partners, especially the major developing countries like China and India. Why are they in the Asia-Pacific partnership? Because it explicitly focuses on energy security and human health issues, which are of paramount domestic importance to them. And at the same time, then we can tackle greenhouse gases. Then the third bundle is the way to reduce omissions that actually come at a net cost to an economy. And, again, our preference is let's wait on those. To the extent that we want to experiment at the margin, let's do a subsidy approach or a technology driven approach so we can actually get a better sense of those costs rather than, again, rather than trying to do it in this arbitrary way. We do not have to punish our way to progress. We can incentivize our way to progress. We can inspire and set in place the technological efforts that will give us long lasting solutions. And so that's what we're focused on.

Questioner: Do you think the efforts in the local governments are making a difference on climate change?

Grant Stockdale: That will be the last question.

James Connaughton: Yes. The local government efforts are critically important because many of the strategies that will have long lasting value are strategies at the local infrastructure level, transportation systems, building codes and standards and designs, patterns of development. Obviously we'd like to see sort of a renaissance our urban centers, because urban centers are very eco-efficient and they're very greenhouse gas efficient. Sprawl is not as good from a greenhouse gas perspective. So these are the strategies that are actually largely driven by local communities. And, actually, the government has, the federal government has very little role in them, which is why, again, we have embraced most of the state strategies.

Questioner: What about California?

James Connaughton: The strategies that California is pursuing that do not get reported on are quite important and quite useful. The one that does get reported on, the greenhouse gases legislation, we'll have to see how it unfolds. The Legislature set a target and there are no programs to implement the target. California has had mixed success in meeting its own legislative targets, if air pollution is an example. California still fails, Southern California still fails to meet their air quality requirements consistently and there's no reasonable projection that they will in the future. And so what I imagine will happen in California, as they design their program, you will see a portfolio approach. It will have some mandates. It'll have some incentives. And it'll have some voluntary initiatives just like the federal approach, when you get right down to it. And I can imagine California's progress will be in line with the progress that we see in much of the rest of the country, not withstanding the rhetoric. And that's a good thing. That's not a bad thing.

Grant Stockdale: James Connaughton is one of the hardest working guys I know and one of the busiest. He's got to leave. We want to thank you. It's our honor and privilege to have you here with us today and we want you to come back. Thank you, Jim.

James Connaughton: Thank you so much.

Grant Stockdale: Appreciate it.

[End of Audio]



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