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CHINA'S ENERGY CONSUMPTION AND OPPORTUNITIES FOR U

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					 CHINA'S ENERGY CONSUMPTION AND OPPORTUNITIES FOR
  U.S.-CHINA COOPERATION TO ADDRESS THE EFFECTS OF
                 CHINA'S ENERGY USE
                      _________

                                   THURSDAY, JUNE 14, 2007


  U.S.-CHINA ECONOMIC AND SECURITY REVIEW COMMISSION
                                    Washington, D.C.



           T h e C o mmi s s i o n me t i n R o o m 3 8 5 , R u s s e l l S e n a t e O f f i c e
B u i l d i n g , Wa s h i n g t o n , D . C . a t 9 : 0 7 a . m. , C h a i r ma n C a r o l y n
B a r t h o l o me w ,    Vice         C h a i r ma n   Daniel        A.      Blumenthal,             and
C o m mi s s i o n e r s R i c h a r d D’ A ma t o , D e n n i s C . Sh e a a n d Pe t e r V i d e n i e k s
(Hearing Cochairs), presiding.


             OPENING STATEMENT OF CHAIRMAN CAROLYN
                          BARTHOLOMEW

           C H A I R M A N B A R T H O L O M E W: G o o d mo r n i n g , e v e r y o n e . We 'l l
go ahead and get started.                            We a r e w a i t i n g f o r o n e o f o u r o t h er
w i t ne s s e s t o a r r i v e , b ut w e t h o u g h t w e w o u l d d o o u r o p e n i n g
s t a t e me n t s .
           We l c o me t o t h e f o u r t h h e a r i n g o f t h e U . S . - C h i n a E c o n o mi c a n d
S e c u r i t y R e v i e w Co m mi s s i o n ' s 2 0 0 7 r e p o r t i n g c y c l e . We a r e v e r y
p l e a s e d t h a t y o u c ou l d j o i n u s t o d a y .
           A t t o d a y 's h e a r i n g , w e a r e c o n t i n u i n g t h e C o m m i s s i o n ' s
a s s e s s me n t o f U . S . - C h i n a r e l a t i o n s b y e x p l o r i n g a t o p i c t h a t h a s b e e n
at the forefront of recent bilateral dialogues--energy--one of the areas
C o n g r e s s ma n d a t e d t h e C o mm i s s i o n t o e x p l o r e .
           T o d a y 's h e a r i n g w i l l a s s e s s t h e i mp a c t o f C h i n a ' s r i s i n g e n e r g y
c o n s u mp t i o n o n U . S . s e c u r i t y a n d a c c e s s t o e ne r g y s u ppl i e s . We w i l l
e x a mi n e t h i s i s s u e o f e n e r g y s e c u r i t y f r o m s t r a t e g i c a n d e n v i r o n me n t a l
p e r s p e c t i v e s t h a t w e h o p e w i l l a l l ow t h e C o m mi s s i o n t o g a i n a b r o a d e r
u n d e r s t a n d i n g o f t h e i mp l i c a t i o n s o f C h i n a 's g r o w i n g e n e r g y
c o n s u mp t i o n .
           T h e de t e r i o r a t i n g s t a t e o f C h i na 's e n vi r on me n t h a s c o n s e q u e n c e s
for people around the world. During this hearing, we hope to hear
s u g g e s t i on s o f s t r a t e gi e s f o r mi t i g a t i n g a n y n e g a t i v e e f f e c t s o f C h i n a ' s
e n e r g y u s e o n U . S . e n e r g y s e c u r i t y a n d t o t h e e n v i r o n me n t a n d f o r
e x p l o r i n g n e w o p p o r t u n i t i e s fo r U . S . - Ch i n a c o o p e r a t i o n o n e n e r g y .
           L a t e r t o d a y a n d t o mo r r o w , k e y o f f i c i a l s f r o m e x e c u t i v e b r a n c h
a g e n c i e s , a r e p r e s e n t a t i v e o f t h e L a w r e n c e L i v e r mo r e N a t i o n a l
L a b o r a t o r y a n d e x p e r t w i t n e s s e s f r o m t h e p r i v a t e s e c t or a n d a c a d e mi a
w i l l o f f e r t h e i r v i e w s a n d a d v i c e o n e n e r g y a n d e n v i r o n me n t i s s u e s .
           I a m l o o k i n g f o r w a r d t o t h e t e s ti mo n y o f o u r w i t n e s s e s a n d t o t h e
insight they will provide.
           C o m mi s s i o n V i c e Ch a i r ma n D a n B l u me n t h a l i s s e r v i n g a s o n e o f
t h e f o u r c o c h a i r s f o r t o d a y 's h e a r i n g . I ' l l t u r n t h e p r o c e e d i n g s o v e r t o
h i m f o r h i s o p e n i n g r e ma r k s . B u t fi r s t I w a n t t o e x p r e s s a p p r e c i a t i o n
t o h i m a n d t o t h e o t h e r t h r e e h e a ri n g c o c h a i r s , C o m mi s s i o n e r s R i c h a r d
D 'A ma t o , D e n n i s S h e a , a n d P e t e V i d e n i e k s , f o r t h e i r w o r k i n
a s s e mb l i ng t hi s i mp o r t a nt h e a r i ng .
           We l c o me a g a i n t o a l l o f y o u . T h a n k y o u f o r y o u r i nt e r e s t i n t h e
C o m mi s s i o n 's w o r k .
[The statement follows:]

           P r e p a r e d S t a t e m e n t o f C h a i r m a n C a r o l y n B a r t h o l om e w

         Good morning and welcome to the fourth hearing of the U.S.-China Economic and Security
Review Commission’s 2007 reporting cycle. We are pleased that you could join us today.
         At today’s hearing, we are continuing the Commission’s assessment of U.S.-China relations by
exploring a topic that has been at the forefront of recent bilateral dialogues—energy, one of the areas
Congress mandated the Commission to explore. Today’s hearing will assess the impact of China’s rising
energy consumption on U.S. security and access to energy supplies. The Commission will examine this
issue of energy security from strategic and environmental perspectives that we hope will allow the
Commission to gain a broader understanding of the implications of China’s growing energy consumption.
The deteriorating state of China’s environment has consequences for people around the world. During this
hearing, we hope to hear suggestions of strategies for mitigating any negative effects of China’s energy use
on U.S. energy security and the environment, and for exploring new opportunities for U.S.-China
cooperation on energy.
         Later today and tomorrow, key officials from Executive Branch agencies, a representative of a
Lawrence Livermore National Laboratory, and expert witnesses from the private sector and academia will
offer their views and advice on energy and environment issues. I am looking forward to the testimony of
our witnesses and to the insight they will provide.
         Commission Vice Chairman Daniel Blumenthal is serving as one of the co-chairs for today’s
hearing. I’ll now turn the proceedings over to him for his opening remarks. First I want to express
appreciation to him and the other three hearing co-chairs, Commissioners Richard D’Amato, Dennis Shea,
and Peter Videnieks, for their work in assembling this important hearing.
         Welcome again to all of you and thank you for your interest in the Commission’s work.




       OPENING STATEMENT OF VICE CHAIRMAN DANIEL A.
                      BLUMENTHAL
                          - 2 -
            VICE CHAIRMAN BLUMENTHAL:                                           T h a n k y o u v e r y mu c h ,
M a d a m C h a i r ma n . G o o d mo r n i n g t o a l l a n d w e l c o me t o t h e U . S . - Ch i n a
C o m mi s s i o n H e a r i n g o n En e r g y C o n s u mp t i o n a n d O p p o r t u n i t i e s t o
M i t i ga t e t h e E f f e c t s o f C h i n a ' s E n e r g y U s e .
            A s t h e c h a i r ma n me n t i o n e d i n h e r r e ma r k s , t h i s h e a r i n g w i l l
a d d r e s s t h e t r e n d s a n d i mp a c t o f C h i n a 's e n e r g y c o n s u mp t i o n , t h e
s t r a t e g i c a n d e n v i r o n me n t a l c o n s e q u e n c e s o f t h a t e n e r g y u s e a n d
s t r a t e gi e s f o r a d d r e s s i n g t h e s e e f f e c t s , a s w e l l a s U . S . - C h i na
c o o p e r a t i v e p r o g r a ms o n e n e r g y a n d o n t h e e n v i r o n me n t .
            I t i s i mp o r t a n t a s we b e g i n t o a s s e s s t he i mp a c t o f C h i n a 's e n e r gy
u s e t ha t w e r e me m b e r t h a t a s t a bl e e ne r g y s up pl y i s i n e xt r i c a b l y l i n k e d
t o e c o n o mi c d e v e l o p me n t . A s C h i na c o nt i nu e s i t s mi gr a t i on f r om a
s u b s i s t e n c e a g r a r i a n e co n o my t o a g l o b a l i n d u st r i a l p o w e r h o u s e , i t c a n
do so only with a stable energy supply and adequate energy
infrastructure.
            A l t h o u g h mo s t o f C h i n a 's e n e r g y c o me s f r o m d o me s t i c c o a l
s u p p l i e s , i t s r e l ia n c e u p o n o i l i mp o r t s h a s b e e n g r o w i n g q u i t e r a p i d l y .
Chinese leaders view this dependence as a source of energy insecurity,
e s p e c i a l l y a s C h i n a mu s t r e l y u p o n t h e U . S . p r o t e c t i o n o f s e a l a n e s t o
ensure the safe transport of oil supplies from Africa and the Middle
East.
            T o mi t i g a t e t hi s i ns e c ur i t y , C h i n a a pp e a r s t o b e u s i n g a w h o l e
h o s t o f i t s n a t i o n a l p o we r , d i p l o ma t i c , p o l i t i c a l , e c o n o mi c , a s w e l l a s
mi l i t a r y , t o e n s ur e a s t a b l e e ne r g y s u p pl y .
            C h i n a c ul t i va t e s r e l a t i on s hi ps w i t h C e n t r a l A s i a , A f r i c a n , a n d
M i d d l e Ea s t e r n n a t i o n s a n d u s e s d e v e l o p me n t a i d a n d e c o n o mi c
policies to help open doors, as well as investing in countries with
u n f a v o r a bl e i nt e r na t i o n a l r e p u t a t i o ns w h e r e We s t e r n c o mp a n i e s a r e
e i t h e r pr oh i bi t e d f r o m i n v e s t i n g o r c h o o s e n o t t o i n v e s t .
            M o s t d i s t u r b i n g t o d a y i s C h i n a ' s c o n t i n u e d p r o mi s e a n d
c o n t i n u e d p r o v i s i o n o f a i d a n d s u p p o r t t o Su d a n w h e r e t h e h u ma n
r i gh t s s i t u a t i o n i s q u i t e a t r o c i o u s .
            E n e r g y n o t o n l y h a s a f f e c t e d C h i n a 's f o r e i g n r e l at i o n s , b u t a l s o
a p p e a r s t o b e a f f e c t i n g t h e c o u r s e o f i t s mi l i t a r y mo d e r n i z a t i o n . T h e
C o m mi s s i o n w a s p l e a s e d w i t h t h e o p e n n e s s o f t h e P e o p l e ' s L i b e r a t i o n
A r my w h e n w e w e n t t o C h i na t o d i s c u s s i s s ue s o f mi l i t a r y
mo d e r n i z a t i o n . We w e r e v e r y p l e a s e d w i t h t h e C h i n e s e mi l i t a r y ' s
o p e n n e s s a b o u t i t s r o l e i n t h e f u t ur e i n p r o t e c t i n g t h e C h i n e s e o i l
supply.
            I l o o k f o r w a r d t o h e a r i n g a b o u t t h e e n v i r o n me n t a l a n d s t r a t e g i c
c o n s e q u e n c e s o f C h i n a 's e n e r g y u s e a n d a n y s u g g e s t i o n s f o r h o w t h e
U . S . c a n b e s t a d dr e s s t he s e i s s u e s i n w a y s t h a t a v o i d c o n f l i c t a n d
confrontation.
                                                      - 3 -
         Thank you today to our witnesses for appearing and for providing
y o u r i n s i g h t s a n d e x p e r t i s e t o t h e C o m mi s s i o n a n d t h a n k y o u v e r y
mu c h t o my f e l l o w c o m mi s s i o n e r s w h o a r e c o c ha i r i ng t h i s h e a r i n g , a n d
I ' m g o i n g t o p a s s i t o n t o C o m mi s s i o n e r V i d e n i e k s f o r h i s o p e n i n g
r e ma r k s .
[The statement follows:]

      Prepared Statement of Vice Chairman Daniel A. Blumenthal

          Good morning, and welcome to the U.S.-China Commission hearing on “China’s Energy
Consumption and Opportunities to Mitigate the Effects of China’s Energy Use.” As the Chairman
mentioned in her remarks, this hearing will address the trends and impact of China's energy consumption;
the strategic and environmental consequences of that energy use; strategies for addressing these effects; and
U.S.-China cooperative programs on energy and the environment.
          It is important as we begin to assess the impact of China’s energy use that we remember a stable
energy supply is inextricably linked to economic development. As China continues its truly remarkable
migration from a subsistence agrarian economy to a global industrial powerhouse,, it can do so only with a
stable energy supply and an adequate energy infrastructure that supports the entire country. Although most
of China’s energy comes from domestic coal supplies, its reliance upon oil imports has been growing
rapidly. Chinese leaders view this dependence as a source of energy insecurity, especially as China must
rely on U.S. protection of sea lanes to ensure the safe transport of its oil supplies from Africa and the
Middle East. To mitigate this insecurity, China appears to be using both soft power and hard power
strategies to ensure a stable supply.
          China is cultivating relationships with Central Asian, African, and Middle Eastern nations and
using development aid, debt relief, and other instruments to open doors. Chinese national oil companies
are actively seeking equity stakes in oil production, often in countries with high political risk and
unfavorable international reputations where Western companies either are prohibited from investing or
choose not to invest. Most disturbing is China’s continued promise of aid and support to Sudan, where
China has a significant oil investment, despite the genocide occurring in the Darfur region.
          Energy not only has affected China’s foreign relations, but also appears to be affecting the course
of its military modernization. During a Commission meeting with officers from the People’s Liberation
Army Academy of Military Sciences, officers acknowledged the role of the military in protecting China’s
development, and specifically its energy supplies. China’s military modernization has the objective not
only of preventing Taiwan from declaring independence, but also of ensuring that China’s development
stays on course. This goal can be linked to the development of a blue water navy, a reluctance or refusal to
resolve territorial claims in the South China Sea and East China Sea, and the expansion of China’s military
presence in Asia and around the world.
          In addition to the concerns about the environmental effects of China’s energy use that will be
highlighted at this hearing, I believe it is just as important to consider the impact that energy has on China’s
relationships around the world in places that affect U.S. security interests, namely Iran, Sudan, and
Venezuela, and the effect of China’s energy use on its military modernization and strategy. I look forward
to hearing about the environmental and strategic consequences of China’s energy use and any suggestions
for how the United States can best address these issues in ways that avoids confrontation.
          Thank you to our witnesses today for appearing and for providing your insights into the questions
raised by the Commission. At this time, I’ll turn the microphone to Commissioner and Co-chair for today’s
session Peter Videnieks for his opening remarks.


OPENING STATEMENT OF COMMISSIONER PETER VIDENIEKS

         HEARING COCHAIR VIDENIEKS:                                 T h a n k y o u , V i c e C h a i r ma n
                            - 4 -
B l u me n t ha l , a n d pl e a s e l e t me e x t e nd my w e l c o me t o a l l o f t h e p e o pl e
w h o j o i n u s t o d a y . Y o u r r e ma r k s f o c u s e d o n t h e s t r a t e gi c a n d mi l i t a r y
i mp a c t s of C h i n a 's e n e r g y u s e . I w o u l d l i k e t o h i g h l i gh t i n my o p e n i n g
s t a t e me n t t h e e n e r g y s e c u r i t y v u l ne r a b i l i t y o f t h e U . S . r e s ul t i ng f r o m
i t s d e p e n d e n c e o n o i l a n d g a s i mp o r t s .
            T h i s d e p e n d e n c e c a n b e mi t i g a t e d b y d e v e l o p i n g f u e l s t ha t o f f e r
a l t e r n a t i v e s t o o i l a n d n a t u r a l g as , o n e o f t h o s e b e i n g c l e a n c o a l
produced with clean coal technology.
            T h e U . S . h a s t h e l a r g e s t a mo u n t o f c o a l r e s e r v e s i n t h e w o r l d , 2 7
percent of global supplies. Currently, coal provides 23 percent of our
e n e r g y c o n s u mp t i o n c o mp a r e d t o n e a r l y t w o - t h i r d s t h a t C h i n a
c o n s u me s . A l mo s t 9 2 p e r c e n t o f a l l c o a l c o n s u me d i n t h e U . S . fu e l s
t h e e l e c t r i c p o w e r s e c t o r . O u r r e l i a nc e u p o n o i l a s a f u e l s o u r c e i s s t i l l
s i g ni f i c a nt l y gr e a t e r t h a n C h i n a 's o i l c o n s u mp t i o n - - I 'm s a y i n g i t i s a n d
probably will stay so--both in absolute and per capita figures.
            T h e U . S . c o n s u me s a p p r o x i ma t e l y 2 0 mi l l i o n b a r r e l s o f o i l p e r
d a y . I n 2 0 0 6 , C h i n a c o n s u me d a p p r o x i ma t e l y a t h i r d o f t h a t , o r 7 . 4
mi l l i o n ba r r e l s pe r d a y . T he ma j o r i t y o f t he p e t r ol e u m c o n s u me d i n
t h e U . S . i s i mp o r t e d , a p p r o x i ma t e l y 6 0 p e r c e n t o f o u r n e t i mp o r t s i n
2005.
            If the U.S. supply were to be interrupted, the nation could tap
i n t o o u r St r a t e g i c Pe t r o l e u m R e s e r v e , b u t a l t h o u g h i t h o l d s a l mo s t 7 0 0
mi l l i o n b a r r e l s , t h a t i s e q u i v a l e n t t o o n l y 3 5 d a y s o f c u r r e n t
c o n s u mp t i o n a n d p r o v i d e s o n l y 5 6 d a y s o f c u r r e n t i mp o r t p r o t e c t i o n .
            O n c e t h i s r e s e r v e w e r e t o be e x ha u s t e d , w e wo u l d be f a c e d wi t h
a c h a l l e n g e h o w t o s u p p l y o u r e n e r g y n e e ds . So me e v e n e s t i ma t e t h a t
i n t h e e v e n t t h a t t h e U . S . h a d t o r e l y t o t a l l y o n d o me s t i c p e t r o l e u m
r e s e r v e s , a t t h e c u r r e n t r a t e o f u s e , w e 'd b e o u t o f o i l i n f o u r o r f i v e
years.
            I n C h i n a , i n a d d i t i o n t o e n e r g y s e c u r i t y c o n c e r n s , t h e r e 's a g r e a t
a n d g r o wi n g c o n c e r n a b o u t e n v i r o n me n t a l e f f e c t s o f C h i n a ' s c o a l
c o n s u mp t i o n , c o n c e r n s a b o u t p u b l ic h e a l t h , a i r q u a l i t y a n d c a r b o n
d i o x i d e e mi s s i o n s t h a t c o n t r i b u t e t o g l o b a l w a r mi n g .
            C h i n a r e l i e s o n c o a l f o r d o me s t i c a n d i n du s t r i a l e l e c t r i c i t y
p r o d u c t i o n , b u t t o d a t e , e n v i r o n me n t a l c o n t r o l s h a v e b e e n i n e f f e c t i v e
in controlling pollution.                            T h e p r o b l e ms r e s u l t i n g f r o m C h i n a 's
i n c r e a s e d e n e r g y i n t e n s i t y a n d i n e f f i c i e nt c oa l b ur ni ng a n d a U . S .
i n c r e a s i n g d e p e n d e n c e o n i mp o r t e d p e t r o l e u m p r o v i d e t h e U . S . a n d
C h i n a w i t h a u n i q u e o p p o r t u n i t y t o e n g a g e i n t h e j o i n t d e v e l o p me n t
a n d u s e of c l e a n c o a l t e c h no l o gi e s t ha t u t i l i z e c o a l s u p p l i e s a v a i l a b l e
in great quantities in both countries.
            B u t t h e e mp h a s i s h e r e s h o u l d b e o n c l e a n . T h i s a p p r o a c h c o u l d
ma k e a s i g n i f i c a n t c o n t r i b u t i o n t o a d d r e s s i n g o u r o w n d o me s t i c a l
strategic concerns about the possibility of our oil supply being cut off
                                                        - 5 -
during a crisis and also to the reduction of the pollution produced by
C h i n a 's c u r r e n t me t h o d s o f c o a l c o n s u mp t i o n .
            T h i s C o m mi s s i o n i s ma n d a t e d b y C o n g r e s s t o i n v e s t i g a t e a n d
p r o v i d e a n a d v i s o r y r e p o r t r e g a r di ng t h e e f f e c t o f t he l a r g e a n d
g r o w i n g e c o n o my o f t h e P e o p l e 's R e pu b l i c o f Ch i n a o n t h e f i n i t e w o r l d
fossil energy supplies and the role we could play, the U.S., including
j o i n t r e s e a r c h a n d d e v e l o p me n t e f f o r t s a n d t e c h n o l o g i c a l a s s i s t a n c e i n
i n f l u e n c i n g t h e e n e r g y p o l i c y o f t h e P RC .
            I h o p e t h a t t h r o u g h t h e c o u r s e o f t h i s h e a r i n g , w e w i l l h e a r t he
opinions of experts on how to positively influence the energy policy of
t h e P R C a n d w h a t t y p e s o f j o i n t r e s e a r c h a n d d e v e l o p me n t p r o j e c t s c a n
be pursued to reduce our dependence on oil and gas.
            A n d o f c o u r s e w e we l c o me t h e c o m me n t s o f t o d a y 's w i t n e s s e s .
[The statement follows:]

             P r e p a r e d S t a t e m e n t o f C o m mi s s i o n e r P e t e r V i d e n i e k s
                                            Hearing Cochair

          Thank you, distinguished panelists and Vice Chairman Blumenthal, and please let me extend my
welcome to all who join us today. Vice Chairman Blumenthal’s remarks focused on the strategic and
military impacts of China’s energy use. I would like to highlight in my opening statement that the energy
security vulnerability of the United States resulting from its dependence on oil and gas imports can be
mitigated by developing fuels that offer an alternative to oil and natural gas—one of those being clean coal
produced by clean coal technology.
          The United States has the largest amount of coal reserves in the world—27 percent of global
supplies. Currently, coal provides about 23 percent of energy consumed by the United States, compared to
nearly two-thirds of the energy China’s consumes. Almost 92 percent of all coal consumed in the U.S.
fuels the electric power sector. U.S. reliance upon oil as a fuel source is still significantly greater than
China’s oil consumption, both in absolute and per capita figures. The United States consumes
approximately 20 million barrels per day and in 2006 China consumed approximately 7.4 million barrels
per day. And the majority of the petroleum consumed in the United States is imported – approximately 59
percent in net imports in 2005. Were the U.S. supply to be interrupted, the nation could initially tap into
the U.S. strategic petroleum reserve. But, although it holds almost 700 million barrels, that is equivalent to
only 35 days of current consumption and provides only 56 days of current import protection. Once that
supply is exhausted, we would be faced with a daunting challenge of how to supply America’s energy
needs. Some estimate that in the event that the U.S. had to rely on domestic petroleum reserves only, at the
current rate of usage, we’d be out of oil in four years.
          In China, in addition to energy security concerns, there is great and growing concern about the
environmental effects of China’s coal consumption – concerns about public health, air quality, and carbon
dioxide emissions that contribute to global warming. China relies upon coal for domestic and industrial
electricity production, but to date environmental controls have been ineffective in controlling pollution.
The problems resulting from China’s increasing energy intensity and inefficient coal burning and U.S.
increasing dependence on imported petroleum provide the U.S. and China with a unique opportunity to
engage in the joint development and use of clean coal technologies that utilize coal supplies available in
both countries but also greatly reduce air emissions and other pollutants. This approach could make a
significant contribution to addressing our own domestic strategic concerns about the possibility of our oil
supply being cut off during a crisis and also to reducing the pollution produced by China’s current methods
of coal consumption.
          The U.S.-China Commission is mandated by the U.S. Congress to investigate and provide an
advisory report regarding the effect of the large and growing economy of the People's Republic of China on
                                                        - 6 -
world energy supplies and the role the United States can play, including joint research and development
efforts and technological assistance, in influencing the energy policy of the People's Republic of China. I
hope that through the course of this hearing we will hear the opinions of experts on how to positively
influence the energy policy of the People’s Republic of China and what types of joint research and
development projects can be pursued to reduce our dependence upon oil and gas.



                 PANEL I: ADMINISTRATION PERSPECTIVES

            V I C E C H A I R M A N B L U M E N T H A L : T h a n k y o u . We 'l l b e g i n
with Ms. Ayres.
            We 'r e g o i n g t o a s k y o u t o k e e p y o u r c o m me n t s t o s e v e n mi n u t e s
e a c h a n d t h e n w e 'r e g o i n g t o h a v e a mp l e t i me f o r q u e s t i o n s a nd t h e
discussion.
            I ' m v e r y h a p p y t o i n t r o d u c e t h e f i r s t p a n e l : As s i s t a n t Se c r e t a r y
o f E n e r gy f o r P o l i c y a n d I n t e r n a t i o na l A f f a i r s , K a r e n H a r b e r t ; a n d
A s s i s t a n t A d mi n i s t r a t or o f I n t e r n a t i o n a l A f f a i r s a t t h e E P A , J u d i t h
Ayres.
            M s . H a r b e r t i s t h e As s i s t a nt S e c r e t a r y f o r P ol i c y a n d
I n t e r n a t i o n a l A f f a i r s a t t h e D e p a r t me n t o f E n e r g y . H e r o f f i c e i s t h e
p r i ma r y p o l i c y a d v i s o r t o t he S e c r e t a r y a nd t h e De p a r t me n t o n
d o me s t i c a n d i nt e r n a t i o na l e n e r g y i ss u e s , n e w p o l i c y i n i t i a t i v e s , a n d
i mp l e me n t a t i on o f t h e N a t i o n a l E n e r g y P o l i c y .
            I n t h a t c a p a c i t y , s h e n e go t ia t e s a n d ma n a g e s b i l a t e r a l a n d
mu l t i l a t e r a l a g r e e m e n t s w i t h o t h e r coun t r i e s a n d i n t e r na t i o n a l a g e nc i es
t o f u r t h e r e n e r g y s e c u r i t y a n d r e s e a r c h a n d d e v e l o p me n t a c t i v i t i e s .
S h e i s a l s o V i c e C ha i r ma n o f t h e I n t e r n a t i o n a l E n e r g y Ag e n c y . We ' v e
very pleased to have her today.
            J u d i t h A y r e s i s t h e A s s i s t a n t A d mi n i s t r a t o r o f t h e U . S . EP A f o r
I n t e r n a t i o n a l A f f a i r s . S h e w a s u n a n i mo u s l y c o n f i r me d b y t h e U . S .
S e n a t e i n A u g u s t 2 0 0 1 . I n h e r c a p a ci t y , s h e s e r v e s a s t h e a d v i s o r t o
t h e E P A A d mi n i s t r a t or o n i nt e r n a t i o n al a f f a i r s a n d o v e r s e e s p r o g r a ms
i n o v e r 5 0 c o u n t r i e s a s w e l l a s i ni t i a t i v e s o n t r a de a n d i n v e s t me n t
p u r s u a n t t o t h e T r a d e P ro mo t i o n A u t h o r i t y A c t .
            T h a n k y o u b o t h f o r j o i n i n g u s a n d , a s I s a i d , we 'l l b e g i n w i t h M s .
A y r e s a n d mo v e o n t o M s . H a r b e r t .




       STATEMENT OF THE HONORABLE JUDITH E. AYERS,
  A S S I S T A N T A D M I N I S T R A T O R , O FF I C E O F I N T E R N A T I O N A L
    AFFAIRS, U.S. ENVIRONMENTAL PROTECTION AGENCY
                                                       - 7 -
                                            W A S H I NG T O N , D. C .

              M S . A Y R E S : G o o d mo r n i n g . M a d a m C h a i r , M r . Vi c e C h a i r ,
me mb e r s o f t h e C o m mi s s i o n , t h a n k y o u f o r t h e i n v i t a t i o n t o a p p e a r
today to discuss the United States environmental policy approach to
C h i n a , s p e c i fi c a l l y E P A ' s a p p r o a c h t o c o l l a b o r a t i o n w i t h C h i n a t o
a d d r e s s a i r p o l l u t i o n e mi s s i o n s .
              I s h a l l f i r s t a d d r e s s e n v i r o n me n t a l c o n c e r n s r e g a r d i n g a i r q u a l i t y
r e s u l t i n g f r o m r a p i d e c o n o m i c a n d e n e r g y g e n e r a t i on i n C h i n a . I s h a l l
t h e n di s c u s s t he w o r k E P A i s d o i n g wi t h C hi n a i n a n e f f o r t t o a l l e vi a t e
t h e c o n s e q u e n c e s o f t he r e s u l t i n g p o l l u t i o n w h i c h i mp a c t b o t h C h i n a
a n d p a r t s o f t h e r es t o f t h e wo r l d .
              I s h a l l t h e n c o m me n t u p o n E P A 's p l a n s t o e n h a n c e i t s
c o o p e r a t i o n w i t h C h i n a a n d f i n a l l y o n t he n e c e s s i t y t o c o o r d i n a t e
w i t hi n t h e i nt e r n a t i o n a l c o mmu n i t y .
              T h e s t e a d y e x p a n s i o n o f C h i n a 's e c o n o my h a s b e e n w e l l
d o c u me n t e d . T h e C h i n e s e e c o n o my t o d a y i s r o u g h l y t e n t i me s l a r g e r
t h a n i t wa s i n t h e e a r l y '8 0 s . S i n c e 1 9 8 8 , C h i n a 's g r o s s d o m e s t i c
p r o d u c t g r o w t h h a s a v e r a g e d 8 . 5 p e r c e n t w i t h a n e s t i ma t e d G D P o f 2 . 5
t r i l l i o n i n 2 0 0 6 . Ch i n a r a n k s i n t h e w o r l d b e h i n d t h e U n i t e d S t a t e s ,
J a p a n a n d G e r ma n y o n l y .
              S i n c e 2 0 0 0 , e l e c t r i c i t y g e n e r a t i o n f r o m f o s s i l fu e l s h a s i n c r e a s e d
o v e r 1 4 p e r c e n t a n n u a l l y. C h i n a 's e c o n o my i s b e c o mi n g mo r e , n o t
l e s s , e ne r g y i n t e ns i ve .              Th i s r a p i d g r o w t h a n d t h e c o r r e s p o n d i n g
d e ma n d i n e n e r g y c o n s u mp t i o n h a s i nc r e a s e d e mi s s i o n s o f p r i o r i t y a i r
pollutants and greenhouse gases.
              O n e o f EP A 's c l o s e s t p a r t n e r s i n C h i n a , t h e S t a t e E n vi r o n me n t a l
P r o t e c t i o n A d mi n i s t r a t i o n , o r S E P A , e s t i m a t e s t ha t e n v i r o nme n t a l
degradation costs China eight to 13 percent of its annual GDP. Air
p o l l u t i o n a l o n e i s e s t i ma t e d t o c a u s e e c o n o mi c d a ma g e e q u i v a l e n t t o
t w o t o f o u r p e r ce n t o f a n n u a l G D P .
              China          relies         on         coal-fired           p o we r      plants         to      generate
a p p r o x i ma t e l y 7 0 t o 7 5 p e r ce n t o f i t s e l e c t r i c i t y . I t i s of t e n r e p or t e d
t h a t C h i na e x pe c t s t o c o mmi s s i o n a n e w c o a l b ur n i n g p o w e r pl a nt
e v e r y w e e k o v e r t h e n e x t t w o t o t h r e e ye a r s .
              T h e s e p l a n t s h a v e l i mi t e d c o n t r o l f o r s u l f u r d i o x i d e a n d n i t r o g e n
oxides.              In addition, based on projections by China's Ministry of
C o m m u n i c a t i o n s , t h e n u mb e r s o f v e h i c l e s o n C h i n a ' s r o a d s w i l l
i n c r e a s e fr o m r o u g h l y 2 5 mi l l i o n t o d a y t o 1 4 0 mi l l i o n b y 2 0 2 0 .
              A s a r e s ul t , a i r q ua l i t y i n ma n y c i t i e s i n C h i n a i s p o o r a n d t h e
C h i n e s e f a c e ma j o r c h a l l e n g e s i n r e d u c i n g p o l l u t i o n t o h e a l t h y l e v e l s .
T h e a ve r a g e c o nc e n t r a t i o n of f i n e p ar t i c u l a t e p o l l u t i o n i n B e i j i n g i s
s e v e n t i m e s t h e a m b i e nt s t a nd a r d s e t by t he U . S . E P A .
              T h e Wo r l d H e a l t h O r g a n i z a t i o n e s t i m a t e d i n 2 0 0 2 t h a t c u r r e n t
                                                          - 8 -
o u t d o o r a i r p o l l u t i o n l e v e l s c o u ld b e r e s p o n s i b l e f o r o v e r 3 0 0 , 0 0 0
p r e ma t u r e d e a t h s i n C h i n a .
            D u e t o he a v y r e l i a n c e o n u n c o nt r ol l e d c oa l - f i r e d po w e r pl a nt s ,
C h i n a i s o n e o f t he w o r l d 's l a r g e st e mi t t e r s o f s u l f u r d i o x i d e a n d
me r c u r y . T h e s e e mi s s i o n s a f f e c t t h e e n v i r o n m e n t w i t h i n C h i n a a n d
h a v e s i g n i f i c a n t i mp l i c a t i o n s t h r o u g h o u t t h e E a s t A s i a r e g i o n a n d e v e n
i n t h e U ni t e d St a t e s d u e t o t he l o n g - r a n g e t r a n s p o r t o f a i r p o l l u t a n t s .
            A c c o r d i n g t o t h e I n t e r n a t i o n a l Ene r g y A g e n c y, C h i n a wi l l i n t h e
n e a r f u t u r e s u r p a s s t h e U n i t e d S t a t e s a s t h e w o r l d 's l a r g e s t e mi t t e r o f
greenhouse gases.
            Indeed, China would appear to have no easy solutions to its
e n v i r o n me n t a l c h a l l e n g e s , b u t i t s l e a d e r s a r e l o o k i n g t o i n t e r n a t i o n a l
p a r t n e r s fo r h e l p . E P A h a s c o l l a b o r a t e d w i t h t h e C h i n e s e g o v e r n me n t
o n i n n o v a t i v e a p p r o a c h e s i n c l u d i n g t h o s e o f ma r k e t me c h a n i s ms t o
a d d r e s s b o t h e n e r g y a n d e n v i r o n me n t a l c o n c e r n s .
            Productive collaboration has been achieved through agency to
mi n i s t r y a g r e e me n t s , mu l t i l a t e r a l ef f o r t s s u c h a s t he A s i a P a c i f i c
P a r t n e r s h i p o n C l e a n D e v e l o p me n t an d C l i ma t e , o r m o r e b r o a d l y ,
t h r o u g h t h e U . S . - Ch i n a S t r at e g i c E c o n o mi c D i a l o g u e .
            M a n y o f E P A 's p r o g r a ms i n C h i n a a r e c o n d u c t e d w i t h i n t h e
f r a me w o r k o f a 2 0 0 0 3 M e mo r a n d u m o f U n d e r s t a n d i n g w i t h C h i n a 's
S t a t e E n v i r o n me n t a l P r o t e c t i o n A d mi n i s t r a t i o n . T h e M O U e s t a b l i s h e d
a me c h a n i s m f o r t h e U . S . a n d C h i n a t o d e t e r mi n e s t r a t e g i c
e n v i r o n me n t a l o b j e c t i v e s a n d t o c o o r d i n a t e e n vi r o n me n t a l a c t i vi t i e s .
            A mo n g t h e ma n y i n i t i at i v e s E P A h a s u n d e r t a k e n u n d e r t h i s M O U
i s o n e wo r k i n g t o d e v e l o p a n d d i s s e mi n a t e s o l ut i o ns t o r e d uc e a i r
pollution from home cooking and heating.
            A s e c o n d i s a p a r t n e r s h i p wi t h t h e S h a n g h a i Po r t t o a s s e s s a i r
q u a l i t y m a n a g e me n t . T h i s s c i e n c e - b a s e d a i r q u a l i t y t e c h n o l o g y w i l l
a l l o w t he p e o pl e of S h a n g ha i t o be ma d e a w a r e o f a i r q u a l i t y wi t h i n
t h e e n vi r on s .
            I n N o v e mb e r 2 0 0 6 , w o r k i n g i n p a r t n e r s h i p w i t h t h e B e i j i n g
E n v i r o n m e n t a l Pr o t e c t i o n A g e n c y a n d S E P A , E P A j o i n t l y l a u n c h e d a
p r oj e c t on t h e r e t r o f i t o f c i t y b u s e s . I t i s h o pe d t h a t t hi s p r oj e c t w i l l
c a r r y ov e r , n ot o nl y w i t hi n t h e c i t y o f B e i j i n g w i t h p o s s i b l e p o s i t i v e
r a mi f i c a t i o n s f o r t h e O l y mp i c s b u t a l s o t h r o u g ho u t t h e c o u n t r y .
            L a s t s u m me r , E P A a n d t h e A s i a D e v e l o p me n t B a n k s i g n e d a
l e t t e r o f i n t e n t w h i c h b o t h s i d e s e x p e c t w i l l e n h a n c e o u r mu t u a l w o r k
in China.
            M u l t i l a t e r a l e f f o r t s a r e i mp o r t a n t . I h a v e me n t i o n e d t h e A s i a
P a c i fi c P a r t n e r s h i p . Y o u ma y b e f a mi l i a r w i t h t h i s . T h e A s i a P a c i f i c
P a r t n e r s h i p i s a p u b l i c - p r i v a t e p ar t n e r s h i p o f s i x n a t i o n s - - Ch i n a ,
Australia, China, India, Japan and the Republic of Korea, and of course
t h e U n i t e d S t a t e s - - c o m mi t t e d t o e x p l o r i n g n e w me c h a n i s ms t o me e t
                                                        - 9 -
n a t i o n a l p o l l u t i o n r e d u c t i o n , e n e r g y s ec u r i t y a n d c l i ma t e c h a n g e g o a l s
i n w a y s t h a t r e d u c e p o v e r t y a n d p r o m o t e e c o n o mi c d e v e l o p me n t .
            I s ha l l mo v e a h e a d i n t he t i me r e ma i n i n g t o d i s c u s s t h e S t r a t e g i c
E c o n o mi c D i a l o g u e . A t t h e l a s t me e t i n g o f t h e S t r at e g i c E c o n o mi c
D i a l o g u e w h i c h w a s h e l d h e r e i n Wa s h i n g t o n a b o u t a mo n t h a g o , EP A
a n d t h e Ch i n e s e c o u n t e r p a r t s h a v e c o l l a b o r a t e d o n f o u r p r o j e c t s .
            T h e f i r s t i s a j o i n t s t u d y , w h i c h i s d e s i g n e d t o e v a l u a t e t he
e n v i r o n me n t a l e c o n o mi c a n d h u ma n h e a l t h c o s t s o f v a r i o u s p o l i c y
a p p r o a c h e s f o r s a v i n g e n e r g y a n d c o n t r o l l i n g e mi s s i o n s f r o m t h e
Chinese and U.S. power sectors.
            T h i s a l l o w s t h e U n i t e d S t a t e s t o w o r k w i t h C h i n a i n f i r s t c o mi n g
up with a plan, which is, as we all are aware, a preferred way of doing
business in China.
            T h e s e c o n d d e l i v e r a bl e f r o m t h e S t r a t e g i c Ec o n o mi c D i a l o g u e
a d d r e s s e s e n e r g y e f f i c i e nt of f i c e p r o d u c t s . T h e E n e r g y S t a r P r o g r a m
w e h a v e a t t h e E n v i r o n me n t a l P r o t e ct i on A g e n c y l a s t ye a r a l o ne s a v e d
t h e e q u i v a l e n t g r e e n h o u s e g a s e mi s s i o n s w h i c h e q u a t e t o t h e e mi s s i o n s
t h a t w o u l d r e s ul t fr o m 2 5 mi l l i o n a u t o mo b i l e s o n t h e h i g h w a y. W e
a l s o f o u n d t h a t t h e r e w as a u t i l i t y s a v i n g s o f $ 1 4 b i l l i o n . S o t h i s
p r o g r a m i s s o me t h i n g w e 'r e w o r k i ng w i t h wi t h t h e C hi n e s e .
            T h e t hi r d i s a c oa l mi n e me t h a n e pr o j e c t , a c a pt u r e p r oj e c t . T he
f o u r t h i s a l o w s u l f u r f u e l p o l i c y f o r C h i n a . A c o m me n t o n l o w s u l f u r
fuel--we here in the United States have adopted a low sulfur fuel
policy and the data shows us that regarding the positive health and
e n v i r o n me n t a l b e n e f i t s , i t i s p r o b ab l y t h e mo s t s i n g ul a r po s i t i ve a c t i on
t h a t E P A h a s b e e n a b l e t o t a k e o v e r t h e y e a r s t o i mp r o v e p u b l i c h e a l t h
a n d t h e e n v i r o n me n t . I s e e t h a t t h e c l o c k i s t i c k i n g s o I w i l l - -
            V I C E C H A I R M A N B L U M E N T H A L : We 'r e o n t h e h o n o r s y s t e m
since we have--
            M S . A Y R E S : I s ha l l a bi d e b y t he r ul e s , b ut I a m c o mp e l l e d t o
ma k e a c o m me n t o n mu l t i l a t e r a l i s m. I w i l l ma k e t w o c o m me n t s . O n e
o n e n f o r c e me n t a n d c o mp l i a nc e a n d o ne o n mu l t i l a t e r a l i s m .
            M a n y c r i t i c a l e n v i r o n me n t a l d e c i s i o n s i n C h i n a a r e ma d e a t t he
p r o v i n c i a l o r l o c a l l e v el b y o f f i c i a l s w i t h l i t tl e o r n o e n v i r o n me n t a l
training or responsibility. EPA's colleagues at SEPA are too few to
o v e r s e e mo r e t h a n a h a n d f u l o f s u c h d e c i s i o n s . E P A a n d t h e A s i a
D e v e l o p m e n t Ba n k h a v e be e n a s ke d b y S EP A t o fa c i l i t a t e t h e
e s t a b l i s h me n t o f s i x r e g i o n a l s u p e r v i s i o n c e n t e r s t h a t w i l l c r e a t e a n e w
level of SEPA oversight.
            T h e s e ne w c e n t e r s ma y a l s o s e r ve a s t r a i ni n g pl a t f o r ms f o r w h i c h
S E P A c a n b u i l d e nf o r c e me n t c a p a c i t y a t t h e r e g i o n a l l e v e l a n d l o c a l
l e ve l s w h i l e e n ga g i n g mo r e a c t i ve l y w i t h i mp o r t a n t s t a k e h o l d e r s
outside the national government.
            H o w e v e r , o n e mu s t n o t e t h a t t he i n s t i t u t i o n a l s t r u c t u r e i n v o l v e d
                                                       - 10 -
i n e ns u r i ng c o mp l i a n c e w i t h C h i n a 's e n e r g y a n d e n v i r o n me n t a l g o a l s i s
s o me w h a t f l u i d . O u r p l a n s f o r e n v ir o n me n t a l c o o p e r a t i o n w i t h C h i n a
will need to adapt to new policies and structures. I refer here to
C h i n a ' s J u n e 4 a n n o u n c e me n t o f me a s u r e s t o r e d u c e g r e e n h o u s e g a s
e mi s s i o n s , a n d l a s t mo n t h ' s r e p o r t o f a n e w l e a d i n g g r o u p t o a d d r e s s
e n e r g y e ff i c i e n c y a n d e mi s s i o n s r e d u c t i o n s .
            N e x t s u m me r 's B e i j i n g O l y mp i c s w i l l a l s o a f f e c t C h i n a ' s
w i l l i n gn e s s t o pr i or i t i z e p r og r e s s o n c l e a n a i r i n i t i a t i v e s .
            R e g a r d i n g mu l t i l a t e r a l i s m, C h i n a ' s e n v i r o n me n t a l p e r f o r m a n c e i s
b e i n g c l o s e l y mo n i t o r e d b o t h b y o t h e r c o u n t r i e s a n d i n t e r n a t i o n a l
organizations around the world.
            C h i n a h a s s a i d t h e y a r e e n g a g e d i n s o me 8 0 i n t e r n a t i o n a l
b i l a t e r a l e n v i r o n m e n t a l a g r e e me n t s .         But ironically there is scant
c o o r d i n a t i o n a mo n g t h e 8 0 n a t i o n s o u t si d e o f f o r ma l i z e d i n t e r n a t i o n a l
partnerships.
            In conclusion, EPA believes that it is in the best interest of both
t h e U n i t e d S t a t e s a n d C h i n a t o w o r k t o ge t he r t o a d d r e s s t h e
e n v i r o n me n t a l c h a l l e n g e s r e s u l t i ng f r o m C h i n a 's s i g n i f i c a n t e c o n o mi c
g r o w t h a n d e n e r g y c o n s u mp t i o n .
            I n f a c t , t h e c o m m o n i n t e r e s t s t he U n i t e d S t a t e s a n d C h i n a s h a r e
i n p r o mo t i n g g o o d e n v i r o n me n t a l p r a c t i c e s a n d s u s t a i n a b l e e n e r g y
p o l i c i e s ma k e t h e s e a mo n g s t t h e mo s t p r o mi s i n g a n d i mp o r t a n t a r e a s
for collaboration.
            Thank you.
[ T h e s t a t e me n t f o l l o w s : ] 1

     VICE CHAIRMAN BLUMENTHAL:                                              T h a n k y o u v e r y mu c h , M s .
Ayres, and over to you, Ms. Harbert.

      STATEMENT OF THE HONORABLE KAREN A. HARBERT
        ASSISTANT SECRETARY, OFFICE OF POLICY AND
    INTERNATIONAL AFFAIRS, U.S. DEPARTMENT OF ENERGY
                     W A S H I NG T O N , D. C .

          M S . H A R B E R T : G o o d mo r n i n g , M a d a m C h a i r w o ma n a n d M r .
V i c e C h a i r ma n a n d me mb e r s o f t h e C o m mi s s i o n . I 'm p l e a s e d t o b e
h e r e t o d a y , t o o f f e r t e s t i mo n y . T h e l a s t t i me w e w e r e h e r e w a s i n
February 2007, and we also had the opportunity to testify here in
A u g u s t o f 2 0 0 6 , a n d i n l i g h t o f t h e d e p t h a n d b r e a d t h o f t h a t t e s t i mo n y
w h i c h o u t l i n e d i n s o me d e t a i l o ur e n e r g y c o o p e r a t i o n , I p r o p o s e t o d o
s o me t h i n g a l i t t l e bi t d i f f e r e n t t o da y w h i c h i s t o t r y a n d b e b r i e f a n d
l e a v e t i me f o r Q s a n d A s .

1
    Click here to read the prepared testimony of Assistant Secretary Judith E. Ayers
                                           - 11 -
            I w o u l d l i k e t o s u b mi t my w r i t t e n t e s t i mo n y f o r t h e r e c o r d a n d
a l s o a M a y 2 2 DO E r e p o r t t h a t s um ma r i z e s o u r e n e r g y c o o p e r a t i o n
w h i c h s h o u l d s e r v e t h e C o mm i s s i o n 's i n t e r e s t s v e r y w e l l .
            I w a n t t o r e i t e r a t e f i r s t o u r o v e r a l l g o a l wi t h C h i n a - - w h y w e
h a v e e l e c t e d e n g a g e me n t v e r s u s i s o l a t i o n a n d i t 's p r i n c i p a l l y w h y i t i s
i mp o r t a nt a n d w h a t a r e a s s p e c i f i c a l l y w e t h i n k w e c a n ma k e a
d i f f e r e n c e t o e n h a n c e o u r e n e r g y s e c ur i t y , o u r c o l l e c t i v e e n v i r o n me n t a l
s t e w a r d s h i p a n d h o w t o s u s t a i n e c o n o mi c g r o w t h .
            J u s t a f e w f a c t s , a n d I k n o w y o u ' r e w e l l a c q u a i n t e d wi t h i t , b u t I
t h i n k t hi s i s i mp o r t a n t a s a ba c k dr o p t o w h y w e a r e a c t i v e l y e n g a g i n g
i n C h i n a . A s g l o b a l e n e r g y c o n s u mp t i o n w i l l i n c r e a s e b y r o u g h l y 5 0
p e r c e n t b e t w e e n n o w a n d 2 0 3 0 , 7 0 p e r c e n t o f t h a t g r o wt h i s g o i n g t o
c o me f r o m t h e d e v e l o p i n g w o r l d a nd 3 0 p e r c e n t o f t ha t g r o w t h w i l l
c o me f r o m C h i n a .
            C h i n a i s t h e s e c o n d - l a r g e s t c o n s u me r o f e n e r g y . C h i n a c o n s u me d
4 0 p e r c e n t l e s s e n e r g y t ha n t h e U . S . i n 2 0 04 , b u t b y 2 0 3 0 , i t w i l l
c o n s u me 1 1 p e r c e n t mo r e t h a n t he U n i t e d S t a t e s .                       Right now it
c o n s u me s a b o u t 7 . 5 mi l l i o n b a r r e l s o f o i l p e r d a y a n d b y 2 0 3 0 , t h a t
will double to 15 million barrels of oil per day.
            O f t h a t o i l , i n d u s t r y u s e s 7 0 p e r c e nt o f t ha t o i l a n d t h e i n du s t r i a l
s e c t o r i n C h i na i s g r o wi n g a n d w i l l c o n t i n u e t o g r o w . C h i n a o n l y
b e c a me a n i mp o r t e r o f oi l 15 y e a r s a g o . I t i mp o r t e d a bo u t t w o pe r c e n t
o f i t s o i l i n 1 9 9 3 . B y 2 0 0 4 , i t w a s i mp o r t i n g 4 3 p e r c e n t o f i t s o i l . I t
i s b e c o mi n g i mp o r t d e p e n d e n t , j u s t l i k e t h e U n i t e d S t a t e s i s i mp o r t
dependent.
            I t i s t h e s i n g l e- l a r g e s t c o n s u me r a n d p r o d u c e r o f c o a l a n d i s t h e
second-largest producer of hydroelectric power. As Ms. Ayres has
s a i d , C h i n a h a s 2 5 mi l l i o n c a r s o n t h e r o a d t o d a y , a n d b y 2 0 2 0 , i t 's
p r oj e c t e d t o ha v e a l mo s t 1 5 0 mi l l i o n c a r s .
            T h e r e a r e s o me e s t i ma t e s t h a t a s h i g h a s 3 0 0 mi l l i o n v e h i c l e s i f
y o u a c c o u n t f o r l i g h t t r u c k s a n d h e a v y - d u t y v e h i c l e s . Wh e r e i s t h at
s t e e l g o i n g t o c o m e f r o m? Wh e r e i s t h a t f u e l g o i n g t o c o me f r o m?
Wh e r e i s t h a t i n f r a s t r u c t ur e g o i n g t o c o me f r o m a n d t h e e n e r gy t o
actually construct that infrastructure?
            In 1990, only 11.5 percent of the population had air-
conditioners.                 By 2003, 62 percent of the population had air-
conditioners. 40.5 percent of China's population lives in urban areas,
and that will increase to about 55 to 60 percent by 2020. An urban
d w e l l e r us e s 35 t i me s t h e e n e r g y t h a n o f a r ur a l r e s i d e n t .
            S o t h os e a r e s o me s t a r k f a c t s . Th a t 's w h y w e e l e c t t o e n g a g e
r a t h e r t ha n i s ol a t e C h i n a . C h i n a i s c l e a r l y he a vi l y r e l i a nt o n f o s s i l
f u e l a s i s t h e U n i t e d S t a t e s , a n d i t wi l l h a ve a ma j o r i mp a c t o n t h e
g l o b a l e n v i r o n me n t . B y 2 0 3 0 , e n e r g y - r e l a t e d c a r b o n d i o x i d e e mi s s i o n s
f r o m C h i n a a r e p r o j e c t e d t o a c c o u n t f o r 2 6 p e r c e n t o f t h e w o r l d 's t o t a l
                                                       - 12 -
a n d p r o j e c t e d t o e x c e e d U . S . e mi s s i o n s b e f o r e 2 0 1 0 , a n d b y 4 1 . 4
percent by 2030.
            S o w h a t d o e s t hi s me a n ? I t me a n s t h a t w e mu s t e n ga g e C hi na
a n d f i n d w a y s t o h a v e t h e m b e c o me a r e s p o n s i b l e s t a k e h o l d e r i n t h e
i n t e r n a t i on a l e c o nomy a n d t he g l o b a l e n e r g y s y s t e m.
            T h a t i s w h y i n t h e l a s t t w o y e a r s , o u r Se c r e t a r y h a s b e e n t o
C h i n a o nc e , I 'v e be e n t hr e e t i me s , m y D e p u t y h a s b e e n t w o t i me s , i s
c u r r e n t l y o n h e r wa y b a c k f r o m C h i na . T h e Ch i n e s e h a v e b e e n h e r e
f o u r t i me s . T h a t i s j u s t o n e n e r gy p o l i c y i s s u e s a l o n e . T h a t i s n o t
t e c h n i c a l e x c h a n g e s . I t 's a t v e r y s en i o r l e v e l s . S o w e 'v e h a d t e n b a c k
a n d f o r t h s i n j u s t t h e l a s t 2 4 mo n t h s a l o n e .
            T h e r e a r e l o t s o f d i f f e r e n t wa y s w e e n g a g e . We 'v e t e s t i f i e d t o
t h o s e b e fo r e , w h e t h e r i t 's o u r E n e r g y P o l i c y D i a l o g u e , t h e St r a t e g ic
E c o n o mi c D i a l o g u e , a n d t h e A s i a Pa c i fi c P a r t n e r s h i p . We h a v e a
w h o l e a l ph a b e t s o up - - I P H E , C S L F - - I c o u l d g o o n a n d j u s t d a z e y o u
w i t h a c r o n y ms , b u t I w o n 't .
            O u r v i e w i s i t d o e s n ' t ma t t e r u n d er w h a t c h a p e a u , i t ma t t e r s t h a t
w e 'r e g e t t i ng r e s ul t s , a n d w e 'v e c h o s e n ve r y s p e c i f i c a r e a s t o g e t
r e s u l t s . T h e f i r s t i s i n c o a l , f o s s i l f u e l s , f o s s i l e n e r g y . I t ' s a d o mi n a n t
p l a ye r i n t h e i r e n e r g y ma r k e t ; i t 's a d o mi n a n t p l a y e r i n o u r s . We h a v e
t o c r a c k t h e c o de o n a d va nc e d c o a l t e c h n ol o gy h e r e i n t hi s c o un t r y ,
a n d w e wa n t t o p a r t n e r w i t h C h i n a t o d o i t . I t 's i n o u r i n t e r e s t ; i t 's i n
t h e i r i nt e r e s t .
            T h e y ha ve e l e c t e d t o j oi n us i n t h e Fut u r e G e n pr o j e c t h e r e i n t h e
U n i t e d S t a t e s w h i c h w i l l b e t h e f i r s t e mi s s i ons f r e e c oa l - f i r e d po w e r
p l a n t e v e r b u i l t , a n d t h e y w i l l b e p a r t o f t h e g o v e r n me n t s t e e r i n g
c o m mi t t e e a n d o b s e r v i n g h o w w e a c t u a l l y c o n s t r u c t t h i s . I n d i a , I ' m
pleased to say, as is Japan and South Korea.
            B u t i t 's v e r y i mp o r t a n t t h a t t h e y p a r t n e r wi t h u s a l o n g t h e w a y .
T h e r e 's a h u g e ma r k e t f o r Ame r i c a n t e c h n o l o g y i n a d v a n c e d c l e a n c o a l
t e c h n ol o gy i n C hi n a a s t he y s e e k t o b ui l d o u t t h e i r e l e c t r i c i t y
i n f r a s t r u c t u r e . We h o p e t o c a p i t a l i z e o n a d v a n c e d c o a l t e c h n o l o g y t o
e x p a n d o u r ma r k e t s f o r o u r c o mp a n i e s , h e l p t h e m b e c o me
e n v i r o n me n t a l l y r e s p o n s i bl e u s e r s o f t h e i r c o a l a n d h e l p t h e m me e t
their electricity needs.
            Energy efficiency and renewable energy. Biofuels can play an
e x t r e me l y i mp o r t a nt r o l e i n me e t i n g t h e i r t r a n s p o r t a t i o n f u e l n e e ds . I t
c e r t a i nl y i s b e c o mi n g a mu c h mo r e i mp o r t a n t p l a ye r he r e i n t h e U n i t e d
S t a t e s . We h a v e a n i n t e r e s t i n h e l pi n g t h e m d e f i n e w h a t t y p e o f a r o l e
biofuels can play in China.
            I'm pleased to say that we just had a big delegation from China
out to our National Renewable Energy Laboratory out in Golden,
C o l o r a d o , a n d t h e y b e c a me a c u t e l y a w a r e t ha t t h e r e 's a l o t mo r e w o r k
to be done to understand what role biofuels can play in China.
                                                       - 13 -
            I t h a s a v e r y d i v e r s e a g r i c u l t u r a l e n v i r o n me n t i n C h i n a , a s w e d o
h e r e , a n d w e 'r e l o o k i n g a t d i f f e r e n t f e e d s t o c k s s o t h a t w e h a v e
d i f f e r e n t a v a i l a b i l i t i e s o f b i o f u e l s . We ' r e g o i n g t o h e l p t h e m f i n d o u t
w h a t i s t he p r o b a bi l i t y o f e x p a n d i n g t h e u s e o f b i o f u e l s a n d w h a t t y p e
of feedstocks they can use there.
            We 'r e g o i n g t o h e l p t h e m l o o k a t i n d u s t r i a l e f f i c i e nc y . As I s a i d
7 0 p e r c e nt o f t h e oi l t h e y us e i s i n t h e i r i n d u s t r i a l s e c t o r . We h a v e a
p r o g r a m h e r e i n t h e U n i t e d S t a t e s wh e r e w e h a v e a u d i t e d 2 0 0 o f t h e
mo s t e n e r g y i n t e n s i v e i n d u s t r i e s h er e t o h e l p t h e m u n d e r s t a n d h o w
t h e y c a n s a v e e n e r g y . T h a t i s a c t u a l l y p r o fi t - mo t i v a t i n g f o r t h e m. I t
s a v e s t h e m mo n e y . A n d w e w a n t t o d o t h a t w i t h C hi n a , s o t h a t t h e y
w i l l h a v e a c o r e o f a u d it or s t h a t c a n go o ut t o t h e i r i n d u s t r i e s a n d h e l p
t h e m s a v e e n e r g y s o t ha t t h e y c a n a ct ua l l y be c ome b e t t er u s e r s o f c l e a n
energy.
            T h a t 's a n i mp o r t a n t t h e me t ha t c a me o u t o f t h e S t r a t e g i c
E c o n o mi c D i a l o g u e w h i c h i s h o w w e c a n w o r k w i t h C h i na t o a c t u a l l y
lower tariff and non-tariff barriers to clean energy goods and services.
We a r e o n l y h u r t i n g o u r s e l v e s b y ma k i n g t h e s e t h i ng s , w h i c h a r e g o o d
f o r t h e e n v i r o n me n t a n d g o o d f o r c le a n e n e r g y , mo r e e x p e n s i v e , n o t
just for ourselves and for China, but for the rest of the developing
world as well.
            So we in China will be helping to lead the way within the Doha
round to actually get this at the top of the list and have this addressed
i n t h e n e g o t i a t i o n s u p c o mi n g .
            Nuclear energy.                        C h i n a i s e mb a r k i n g o n a v e r y a g g r e s s i v e
e x p a n s i o n o f n u c l e a r p o w e r . We a r e v e r y p l e a s e d a b o u t t h a t . I t i s a
c l e a n s o u r c e o f e n e r g y . I t i s a n o p p o r t u n i t y f o r U . S . ma n u f a c t u r e r s , a n
o p p o r t u n i t y f o r U . S . c o mp a n i e s , a n d s o w e a r e v e r y s u p p o r t i v e o f t h e i r
e x p a n s i o n . W e a r e a l s o v e r y s u p p o r t i v e o f t h e i r c o m mi t me n t n o w t o
j o i n us i n t he Pr e s i d e nt 's I n i t i a t i ve o n t h e G l o b a l Nu c l e a r E ne r g y
Partnership.
            We h a d a mi n i s t e r i a l me e t i n g o f fi v e c o u n t r i e s h e r e t h e d a y
b e f o r e t he S t r a t e gi c E c o n o m i c Di a l o g u e , a n d t h e C h i n e s e h a ve a gr e e d
t o b e c o m e f u l l p a r t n e r s i n t h i s lo n g - t e r m v i s i o n o f h o w w e 'r e g o i n g t o
t r a n s f o r m t h e w o r l d 's u s e o f n u c l e a r e n e r g y o v e r t h e l o n g t e r m t o ma k e
i t p r o l i f e r a t i o n r e s i s t a n t , t o ma k e t h e f u e l a v a i l a b l e a n d t o f i n d w a y s t o
b r i n g i t b a c k , r e c y c l e i t a n d ma k e i t un a t t r a c t i ve t o p o t e nt i a l t e r r o r i s t s .
            I ' d b e r e mi s s i f I d i d n ' t t a l k a b o u t s t r a t e g i c o i l s t o c k p i l e s . I
c a me i n a t t h e e n d o f y o u r s t a t e me nt , M r . C o mmi s s i o n e r , i n w h i c h y o u
w e r e t a l ki n g a bo u t t h e i mp o r t a n c e o f t h e u s e o f o i l a n d w h a t wo u l d
h a p p e n i n a d i s r u p t i o n . We h a v e b ee n v e r y i n t e n t o n h a v i n g C h i n a a s
i t b e c o me s a c e nt r a l c h a ra c t e r i n t h e e n e r g y ma r k e t t o b u i l d a S t r a t e g i c
Petroleum Reserve.
            T h e y h a v e e mb a r k e d o n s u c h a p r o g r a m; t h e y h a v e f o u r s i t e s t h a t
                                                       - 14 -
t h e y h a v e s e l e c t e d a r o u n d C h i n a . T h e y 'r e b u i l di n g t hi s i n t h r e e p h a s e s .
Wh a t w e mo s t l y a r e c o n c e r n e d a b o u t i s t h e w a y t h e y wi l l u s e t h e i r
Strategic Petroleum Reserve. It is very appetizing, very attractive to
u s e s u c h r e s o ur c e s t o mi t i g a t e p r i c e h i ke s .
            We i n t h i s c o u n t r y u s e i t t o mi t i g a t e s u p p l y di s r u p t i o n s , w h i c h i s
a g o o d t h i n g f o r t h e g l o b a l e n e r g y ma r k e t , a s w e u s e d i t i n t h e w a k e s
o f H u r r i c a n e s K a t r i n a a n d R i t a . S o w e a r e w o r k i ng w i t h t he m v e r y
c l o s e l y t o h e l p t h e m u n d e r s t a n d t he v a l u e o f a S t r a t e g i c P e t r o l e u m
Reserve to be used only in the case of a supply disruption.
            We j u s t h a d t h e m o u t t o o u r S P R s i t e i n B r y a n M o u n d , T e x a s .
They were very interested in how to do this in underground salt
c a v e r n s , a n d w e w i l l p ur s u e t h a t e n g a g e me n t w i t h t h e m i n m a n y
d i f f e r e nt f o r a i n c l u d i n g i n my c a p a c i t y a t t he I nt e r n a t i on a l E ne r g y
A g e n c y a n d i n v i t i ng t he m t o p a r t i c i p a t e wi t h us i n s u p p l y d i s r u p t i o n
s c e na r i o s a n d i n t h e a c t u a l r e g ul a t o r y a n d l e ga l f r a me w o r k t o g ov e r n
that.
            M y l a s t p o i n t i s o n c l i ma t e c ha n g e . C l i ma t e c ha n g e w a s a
c e n t r a l p o i n t o f t h e r e c e n t G 8 me e t i n g . B e f o r e t h e G 8 me e t i n g , t h e
P r e s i d e n t ma d e a v e r y , v e r y i mp o r t a n t a n n o u n c e me n t , a n i n v i t a t i o n t o
e s t a b l i s h a n e w f r a me w o r k g o i n g f o r wa r d a ft e r t h e K y o t o P r o t o c o l i n
2 0 1 2 , a p o s t - K y o t o f r a me w o r k f o r t h e w o r l d .
            We a r e on a n a mb i t i o u s pr og r a m h e r e i n t he U n i t e d S t a t e s t o
r e d u c e o u r g r e e n h o u s e g a s i n t e n s i t y b y 1 8 p e r c e n t b y 2 0 1 2 . W e 'v e
s p e nt $ 3 7 b i l l i o n t o a c t u a l l y a c hi e ve t h o s e t e c h n o l o g i e s t h a t w i l l h e l p
u s s o l v e t h e c l i ma t e c h a n g e c ha l l e n g e .          In 2006, we reduced our
e mi s s i o n s b y 1 . 3 p e r c e nt i n t hi s c ou n t r y , des p i t e h a v i n g e c o n o mi c
g r o w t h . We a r e p r o v i n g t o t h e w o r l d y o u c a n h a v e e c o n o mi c g r o w t h
a n d s t i l l b e a g o o d en v i r o n me n t a l s t e w a r d .
            H o w e v e r , u s a c t i n g a l o n e w i l l n o t s o l v e t h e c l i ma t e c h a n g e
c h a l l e n g e . We mu s t h a v e c o u n t r i e s l i k e C h i n a a n d I n d i a a t t h e t a b l e
b e c a u s e ov e r t h e l on g t e r m, w h i l e t he i n d u s t r i a l i z e d w or l d i s a b l e a n d
w i l l t a k e i t s s h a r e o f t h e r e sp o n s i b i l i t y , we h a v e t o h a v e t h e
developing world at the table. Otherwise, all the steps we take will
not succeed.
            S o t h e Pr e s i d e n t h a s i s s u e d a n i n v i t a t i o n . He i s e x c i t e d a b o u t
t a k i n g t h e l e a d e r s h i p a n d i n v o l v i n g C h i n a i n a n u p c o mi n g s u m m i t i n
t h e U n i t e d S t a t e s t h a t w il l br i ng t h e l a r ge s t e mi t t e r s i nc l u d i n g C h i n a t o
e s t a b l i s h a w a y f o r w a r d o v e r t h e n e x t 1 8 mo n t h s t o a dd r e s s g r e e n h o u s e
g a s e mi s s i o n s , t o a d d r e s s t h e c l i ma te c ha n g e c h a l l e n ge t og e t h e r , t o
e s t a b l i s h a g o a l o f h o w w e 'r e g o i n g t o d o t h a t , a n d e s t a b l i s h n a t i o n a l
c o m mi t me n t s t o me e t t h a t g oa l .
            So China has to be a part of that and we will engage very
i n t e n s e l y o v e r t h e n e x t 1 8 mo n t h s t o g e t t h i s t o a p oi nt w h e r e Ch i n a
a n d I n d i a a n d o t h e r s c a n j o i n u s a n d n o t s a c r i f i c e e c o n o mi c g r o wt h ,
                                                     - 15 -
i mp r o v e e n v i r o n me n t a l s u s t a i n a b i li t y , a n d c e r t a i n l y ma k e a s t e p
forward on energy security.
            So I leave all the alphabet soup of the different ways that we
e n g a ge w i t h C h i na t o q u e s t i on s a n d a ns w e r s , b ut l e t me j u s t s a y t ha t i t
i s u n a v o i d a b l e t h a t o u r e c o n o mi e s a r e i nt e r t w i n e d , t ha t o ur e ne r g y
s e c u r i t y i s i n t e r t w i n e d , a n d c e r t a i n l y t h a t o u r e n v i r o n me n t i s
i n t e r t w i n e d , w h i c h i s w h y we w i l l c o n t i n u e t o e ng a g e a n d e n g a g e mu c h
mo r e a g gr e s s i ve l y o v e r t he s h o r t an d me d i u m t e r m t o h a v e C h i n a a n d
t h e U . S . u n d e r s t a n d e a c h o t h e r b e t t e r , h a v e mo r e c o m mo n p o l i c y
f r a me w o r k s , a n d t o f i n d w a y s f o r o ur s c i e n t i s t s a n d o u r p o l i c y ma k e r s
t o i n c r e a s e t h e i r c o o p e r a t i o n t o s o l v e c o m mo n c h a l l e n g e s .
            Thank you.
[ T h e s t a t e me n t f o l l o w s : ] 2

                   P A N E L I : D i s c u s s i o n , Q u e s t i o ns a n d A n s we r s

            V I C E C H A I R M A N B L U M E N T H A L : T h a n k y o u v e r y mu c h t o
b o t h o f y o u . I 'l l t a k e t h e f i r s t q u e st i o n . T h e f i r s t q u e st i o n I h a v e i s o n
t h e p r o l i fe r a t i o n - r e s i s t a n t p i e c e o f t he n u c l ea r e q u a t i o n .
            T h e r e s e e ms t o b e t w o p a r t s t o t ha t . O n e i s C h i n a 's o w n a t t e mp t s
t o u p g r a de i t , w h i c h t he y we r e v e r y c l e a r w i t h us w h e n w e w e r e t h e r e a
f e w w e e ks a g o.               They want to be more serious about their own
strategic weapons capability, and so obviously that's a concern for the
U n i t e d S t a t e s . We ' r e ve r y i nt e r e s t e d i n t he f u s i o n b e t w e e n t he c i vi l i a n
n u c l e a r s e c t o r a n d t h e m i l i t a r y s e c t o r a n d a n y i n s i g h t s y o u 'd h a v e o n
h o w t o ma k e o u r c o o p e r a t i o n p r o l i fe r a t i o n r e s i s t a n t i n t h a t r e g a r d .
            T h e o t h e r o n e i s t h e o u t w a r d p r ol i f e r a t i o n pr ob l e m. A s C h i na
s t i l l h a s p r o b l e ms i n t h a t r e g a r d , t h a t w e 'v e h e a r d a b o u t i n t e s t i mo n y
o v e r t h e l a s t f e w y e a r s , I ’ d b e i nt e r e s t e d i n h e a r i n g h o w y o u a r e
ma k i n g s a f e g u a r d s s i n c e w e 'r e g o i n g f o r w a r d a g g r e s s i v e l y o n n u c l e a r
c o o p e r a t i o n , w i t h r e g a r d s t o o u t w a r d p r o l i f e r a t i o n a s w e l l o f d i f f e r e nt
t y p e s o f c i v i l i a n n u c l e a r ma t e r i a l ?
            M S . H A R B E R T : L e t me f i r s t s a y w e a r e , a s I i n d i c a t e d , v e r y
s u p p o r t i v e o f t h e e x p a n s i o n o f n u c l e a r p o we r a r o u n d t h e w o r l d , w i t h
t h e c a v e a t t h a t i t 's d o n e , a s y o u s a i d , i n a p r o l i f e r a t i o n r e s i s t a n t
ma n n e r .
            As China looks to build anywhere from 20 to 40 new nuclear
p l a n t s , i t ' s a n o p p o r t u n i t y t o a d d r e s s o u r t r a d e i mb a l a n c e , b u t i t i s a l s o
a n o p p o r t u n i t y f o r o u r mi l i t a r y c o mp l e x e s t o g r e a t l y e n h a n c e t h e i r
c o o p e r a t i o n a s w e l l . T h a t w a s n o t e d i n t o d a y 's Wa s h i n g t o n P o s t , a s a
ma t t e r o f f a c t .
            T h e r e a r e t h o s e t h a t w o u l d l i k e t o s a y t h a t C h i na 's b u i l d- u p i s a

2
    Click here to read the prepared testimony of Assistant Secretary Karen A. Harbert
                                           - 16 -
direct threat; there are others that would like to say this is an
o p p o r t u n i t y t o b e t t e r u n d er s t a n d e a c h o t h er s o t h a t w e h a v e d e e p e n e d
c o o p e r a t i o n . I t h i n k i t 's u n a v o i d a b l e t h a t w e h a v e t o s e e k t h e p a t h o f
deepened cooperation so that we can ensure the world and ourselves
mo s t i mp o r t a nt l y t h a t t he pu r s ui t o f n u c l e a r p o w e r i s b e i n g d o n e i n a
way that is proliferation resistant.
            We h a v e t o f i n d a w a y o v e r t h e l o n g t e r m t o e n s u r e t h i s g r e a t
e x p a ns i on o f n u c l e a r p o w e r , w h i c h w i l l g r e a t l y c o nt r i bu t e t o t h e
c l i ma t e c h a n g e c h a l l e n g e i s d o n e i n a wa y t h a t a d d r e s s e s t h e
reprocessing of nuclear fuel, which is why we invited China and they
h a v e a c c e p t e d t o j oi n t h e G l ob a l N uc l e a r E n e r g y P a r t n er s h i p . We h a v e
to separate the fuel into ways.
            F i r s t o f a l l , i n a n uc l e a r p l a n t , y o u o n l y u s e a b o u t t e n p e r c e n t o f
t h e a v a i l a b l e f u e l a n d y o u s h i p 9 0 p e r c e n t o f i t b a c k . We ' d l i k e t o fi n d
a w a y t o r e c y c l e t ha t , t o s e p a r a t e o u t t h e b a d p a r t s a n d t o b e a b l e t o
t h e n c o n t i n u e t o u s e t h e e x i s t i n g f u e l we h a v e i n a mo r e e f f i c i e n t w a y .
            H a v i n g C h i n a a t t he t a b l e i s v e r y i mp o r t a n t . Th e o t h e r t h i n g w e
d i d r e c e nt l y i s t h a t w e ha v e a t h i ng c a l l e d G e n e r a t i o n I V . I t 's n o t a
U . S . i n i t i a t i v e . I t ' s a w o r l d w i d e i ni t i a t i v e o f 2 1 c o u n t r i e s t h a t a r e
l o o k i n g t o f i n d t h e n e x t a d v a n c e d r e a l l y c om me r c i a l i z e d s ou r c e o f
nuclear energy.
            Right now people are using AP-1000, which is what China has
j u s t s e l e c t e d f r o m We s t i n g h o u s e , a Ge n e r a t i o n I I I a n d a G e n e r a t i o n I I I
P l u s t e c h n o l o g y . G e n e r a t i o n I V g e t s u s t o b e e v e n mo r e e f f i c i e n t , e v e n
mo r e p r ol i f e r a t i o n r e s i s t a n t .     T he y h a v e j oi ne d t h e G e n e r a t i o n I V
F o r u m. I t t a k e s a h i g h l e v e l p o l i ti c a l a n d f i n a n c i a l c o mmi t me n t f r o m
C h i n a , b ut t h e c o un t r i e s t h e ms e l v e s ha v e t o c ome t o a c o n s e n s us t o
invite them to the table.
            We 'v e d e c i de d t h a t i t i s i n o u r c ol l e c t i v e i nt e r e s t t o h a v e t h e m
there, to expose them to the next technology, so that we as a global
n u c l e a r c o m mu n i t y c a n b e a s s u r e d t h a t t h e y p u r s ue t hi s i n a ve r y
r e s p o n s i b l e a n d s a f e ma n n e r .
            A s p a r t o f t h e S E D, o u r N u c l e a r R e g u l a t o r y C o m mi s s i o n s i g n e d
a n a g r e e me n t w i t h C h i na t o i mp r o v e o u r u n d e r s t a n d i n g a n d t h e i r
u n d e r s t a n d i n g o f t h e i mp o r t a n c e a n d t he p r o c e s s o f n u c l ea r s a f e t y a n d
n u c l e a r s a f e g u a r d s . A n d s o I ' m p l e a s e d t h a t t h e N R C a n d t h e i r s i mi l a r
body will encourage increased cooperation and I think over the long
t e r m t h a t w i l l b e a r u s s o me s i g n i f i c a n t f r u i t .
            VICE CHAIRMAN BLUMENTHAL:                                         J u s t a q u i c k f o l l o w - u p.
These are obviously good initiatives and good obligations and so forth,
but even with India, we're going through the problem of ensuring that
c i vi l i a n nu c l e a r u s e i s n ot du a l u s e a n d n o t t r a n s l a t e d t o b u i l d u p t he
strategic arsenal.
            D o w e h a v e c o m m i t m e n t s b y t he C hi n e s e ? D o w e h a v e w a y s t o
                                                     - 17 -
v e r i f y t h a t t h a t ' s n o t g o i n g o n w i t h i n Ch i n a ?
            MS. HARBERT:                       T h i s i s i n s o me w a y s a l i t t l e b i t f o r w a r d
looking since they have only just agreed in this case on the AP-1000,
which is obviously a technology born and bred here in the United
S t a t e s . I t 's b e e n c e r ti f i e d b y t h e N R C a s h a v i n g a p p r o p r i a t e s a f e g u a r d s
i n p l a c e . I t ' s b e e n c e r t i fi e d f o r d e s i g n a n d u s e a b r o a d . S o t h e r e a r e
s i g n i f i c a nt i n t e r na l s a f e g u a r ds .
            I t i s i mp o r t a n t t h a t i t i s a U . S . t e c h n o l o g y t h a t i s b e i n g u t i l i z e d .
We f e e l v e r y s t r o n g l y a b o u t t h a t , t ha t t h a t wi l l p r o v i d e u s a d d i t i o n a l
s e c u r i t y , a n d i t t a k e s c o n s t a n t v i g il a n c e , a n d t h a t 's w h y w e h a v e t h e
I A E A . T h a t 's w h y w e h a v e a l l k i n d s o f d i f f e r e n t me a s u r e s I t h i n k t h at
we can pursue to ensure that.
            B u t i t i s c e r t a i nl y n o t w i t h ou t a g r e a t d e a l o f vi g i l a n c e , t h a t w e
d o n 't g o i n t o t h i s n a i v e , b u t w e d o g o i n t o t h i s k n o w i n g t h a t t h e
e x p a n s i o n o f c i v i l i a n n u c l e a r p o w e r , wh e t h e r i t b e i n I n d i a o r C h i n a o r
i n o t h e r p l a c e s , i s t o t h e w o r l d 's ad v a nt a g e t o me e t t h e h u ge i nc r e a s e i n
d e ma n d , b u t d o i n g i t i n e n v i r o n me n t a l l y s u s t a i n a b l e w a y s .
            S o w e h a v e t o b u i l d i n t h o se s a f e g u a r d s , a n d I t h i n k o v e r t i me
t h e n u c l e a r f r a me w o r k t h a t w e h a v e i n p l a c e w i l l o n l y c o n t i n u e t o g e t
s t r o n g e r b e c a u s e o f t h e n e e d t o i nc r e a s e t h e u s e o f c i v i l i a n n u c l e a r
power. It's in our interest to ensure those safeguards are in place
b e c a u s e o n e a c c i d e n t c o u l d d o o m t he e x p a n s i o n o f n u c l e a r p o w e r , a n d
t h a t i s n o t i n a n y o n e 's i n t e r e s t a n d w e a r e w e l l a w a r e o f t h a t .
            VICE CHAIRMAN BLUMENTHAL:                                          Thank you.               We h a v e
C o m mi s s i o n e r D 'A ma t o .
            H E A R I N G C O C H A I R D ' A M A T O : T h a n k y o u v e r y mu c h , M r .
C h a i r ma n , a n d t h a n k y o u b o t h f o r c o mi n g . I t 's i mp o r t a n t t e s t i m o n y ,
i n t e r e s t i n g t e s t i mo n y . Th e r e a p p e a r s t o b e a s e n s e o f mo v e me n t i n t h e
relationship.                   Wh e t h e r o r n o t t h a t ' s g o i n g t o r e s u l t i n t a n g i b l e
a c hi e ve m e n t s I t hi n k i s w h a t w e 'r e a l l l o o k i n g fo r .
            I w a n t t o a s k y o u b o t h a q u e s t i o n d e a l i n g w i t h c l i ma t e c h a n g e .
We n o w h a v e a r e p o r t f r o m t h e C h i n e s e i n J u n e o f a n a t i o n a l c l i ma t e
c h a n ge p r o g r a m. Wh a t i s e a c h o f y o u r e v a l ua t i on s o r y o u r a ge nc y 's
e v a l u a t i o n o f t h e s t r e n g t h s a n d w e a k n e s s e s o f t h a t p l a n ? Di d t h e
U n i t e d S t a t e s p l a y a r ol e i n d e v e l o p i n g i t ?
            A n d t h e n y o u me n t i o n e d t h e q u e s t i on o f a p o s t - K y o t o f r a me w o r k .
Wo u l d y o u b e a l i t t l e b i t m o r e s p e c i fi c a b o u t w h a t t h e i n g r e d i e n t s o f
t h a t f r a me w o r k wi l l b e ? Y o u c a n s t a r t , S e c re t a r y H a r b e r t .
            M S . H A R B E R T : S u r e . Fi r s t o f a l l , I t h i nk i t 's i mp o r t a n t t ha t
t h e y a c t ua l l y ha v e s a i d s o m e t hi n g a bo u t c l i ma t e c h a ng e , t ha t t he y 'v e
a r t i c u l a t e d a p o l i c y o r a p a t h f o r w a r d o n c l i ma t e c h a n g e . A r e w e
c o mp l e t e l y s u p p o r t i v e o f a l l t h e c o mp o n e n t s ? N o . Wo u l d w e l i k e t o
s e e i t mo r e a g g r e s s i v e ? Y e s .
            T h e y h a ve e l e c t e d t o r e d u c e e n e r g y i n t e n s i t y i n t h e i r F i v e - Y e a r
                                                       - 18 -
E c o n o mi c P l a n . I n t h i s p a r t o f i t , t h e y a r e l o o k i n g t o h y d r o e l e c t r i c
p o w e r , t h e y 'r e l o o k i n g t o n u c l e a r p o we r , a n d t h e y ’ r e l o o k i n g t o e n e r g y
e f f i c i e n c y , a l l g o o d t h i n g s t o a c hi e v e a p os i t i ve c l i ma t e c h a n g e
benefit.
             B u t w e ' d l i k e t o s e e i t g o f u r t h e r . I t hi n k t h e wo r l d w o u l d l i k e t o
s e e i t g o f u r t h e r . We 'r e g o i n g t o w o r k w i t h t h e m t o s e e h o w w e c a n
b r i n g t h e m i n t o a c t ua l l y a c c e pt a gr e a t e r r e s po n s i bi l i t y i n a d d r e s s i ng
t h e c l i ma t e c h a n g e c h a l l e n g e .
             Four or five years ago when it became very apparent that China
w a s g o i n g t o h a v e t o u s e mo r e r e n e w a b l e e n e r g y t o me e t i t s e n e r g y
d e ma n d , t h e y d i d n o t h a v e a l e g a l a n d r e g u l a t o r y f r a me w o r k t o d o s o .
We a s s i s t e d i n t h e a c t u a l dr a f t i n g o f t h a t r e n e wa b l e e n e r g y l a w d i r e c t l y
t o s a y t hi s i s h o w i t w o r k s i n t hi s c o u n t r y , t h i s i s h o w i t w o r k s i n o t h e r
countries, this is how it works in other industrialized versus
i n d u s t r i a l i z i n g n a t i o n s , a n d h e r e 's w h a t y o u 'r e g o i n g t o n e e d t o a t t r a c t
t h e i n v e s t me n t y o u 'r e g o i n g t o n e e d t o a c t ua l l y e xp a n d t he r ol e o f
renewable energy in your country.
             They now are taking it a step further realizing that incentives
a n d o t h e r t y p e s o f t h i n g s t h a t w e u s e i n o u r ma r k e t e c o n o my h e r e ma y
h a v e a r o l e t o p l a y i n C h i n a . Y o u c a n 't j u s t ma n d a t e t h i n g s t o h a p p e n ,
which has been previous practice in China. You actually have to
i n c e n t i v i z e s o me t h i n g s t o h a p p e n . S o y o u 'r e s e e i n g t h e r o l e o f a
ma r k e t e c o n o my n o w t r a n s f e r o v er t o t h e i r e n e r g y e c o n o m y .
             We t h i n k t h a t ' s a g o o d t h i n g t h a t w i l l i n c e n t i v i z e t h e r i g h t
c a p i t a l , t h e r i g h t t e c h n o l o g y , t h e r i g h t A me r i c a n t e c h n o l o g y t o f l o w i n
and help the renewable energy industry expand.
             O n t h e p o s t - 2 0 1 2 K y o t o f r a me w o r k , a s t h e P r e s i d e n t a n n o u n c e d
s e v e r a l d a y s b e f o r e g o i n g t o t h e G 8, i t i s c l e a r t h a t w e , t h e l a r g e s t
e mi t t e r s , h a v e t o do s o me t h i n g v e r y s e r i o u s a bo u t c l i ma t e c h a n ge , a n d
that he is very prepared to take a leadership position in helping the
l a r g e s t e mi t t e r s c o me t o a g r e e me n t o n w h a t a p o s t - 2 0 1 2 Ky o t o
f r a me w o r k w o u l d l o o k l i k e .
             I t h a s t o l o o k l i k e s o me t h i n g t h a t w e w o u l d a g r e e o v e r t h e l o n g
t e r m w h e r e a r e w e t r yi n g t o g e t , w h a t t y pe o f a g o a l a r e w e t r yi n g t o
a c c o mp l i s h?           T h e C a n a d i a n s , t h e J a p a ne s e , t h e E U , t h e y a l l h a ve
d i f f e r i n g v i e w s , b u t i t d oe s n't ma t t e r . We h a v e t o c o me t o a gr e e m e nt
o n a n o v e r a l l g o a l a n d t h e n e a c h c o u n t r y h a s t o h a ve a n a t i on a l
c o m mi t me n t , a n a t i on a l a p pr oa c h t o a c t u a l l y a c c o mp l i s h a g o a l .
             A n d w e c a n 't s i t he r e i n t he U n i t e d S t a t e s o r t h e E U c a n 't s i t
there in the EU and say this is what it has to be for the world.
E v e r y b o d y 's p o p u l a t i o n g r o w t h i s d i f f e r e n t .              Economic growth is
d i f f e r e n t . G e o g r a p h i c a l d i s t r i b u t i o n o f i n d u s t r y i s d i f f e r e n t . We h a v e
t o f i n d a w a y t h a t e a c h c o u n t r y c a n ma k e a s i g n i f i c a n t c o n t r i b u t i o n t h a t
d o e s n o t j e o p a r d i z e e c o n o mi c g r o w t h .
                                                       - 19 -
            We i n t h i s c o u nt r y a r e n ot w i l l i n g t o p u t a r b i t r a r y l i mi t s t h a t w i l l
f o r c e o u r i n d u s t r i e s t o mo v e t o p l a c e s t h a t a r e n o t s u b j e c t t o a n y s o r t
o f c o m mi t me n t o r g o a l . We d o n 't w a n t t o s e e o u r i n d u s t r y mo v e d t o
C h i n a o r I n d i a a n d h a v e t h e m b e e xe mp t u n de r a ny s o r t o f a p o s t - K y o t o
f r a me w o r k . We w a n t t o b r i n g t h e m i n t o t h e s o l u t i o n , n o t l e a v e t h e m
out of the solution.
            A n d s o w e a r e g o i n g t o w o r k v e r y h a r d o v e r t h e n e x t 1 8 mo n t h s
t o b r i ng t h o s e l a r ge e mi t t e r s i n t o a f r a me w o r k t h a t wi l l a l l o w u s t o
e s t a b l i s h a c o m mi t me n t a n d t h a t w e w i l l s e e k t o p u t i n p l a c e a p l e d g e
a n d r e v i e w s y s t e m. I f y o u p l e d g e " x" , w e 'r e g o i n g t o l o o k a t y o u e v e r y
y e a r a n d s a y a r e y o u me e t i n g y o u r g o a l ; a r e y o u me e t i n g y o u r
c o m mi t me n t or n ot ?
            M a y b e y o u w a n t t o c a l l i t t h e s h a me g a me , t h e b l a me g a me ; i t
d o e s n ' t ma t t e r .        At least there will be a way for us to be held
a c c o u n t a b l e c o l l e c t i v e l y i n t h e w or l d t o a d d r e s s c l i ma t e c ha n g e .
            MS. AYRES:                      F o l l o w i n g o n t h e A s s i s t a n t S e c r e t a r y 's v e r y
t h o r o u g h a n s w e r , I w o u l d ma k e o n e m o r e o b s e r v a t i o n . B y 2 0 1 0 , C h i n a
h a s s a i d t h a t i t w i l l r e d u c e e n e r g y c o n s u mp t i o n b y 2 0 p e r c e n t a n d
r e d u c e r e n e w a b l e s b y t e n p e r c e n t , a n d t h e l a n g u a g e i n t h e d o c u me n t
s a y s i t e x p e c t s t a r g e t s w i l l be me t . A g a i n, f o l l o w i n g o n t h e A s s i s t a n t
S e c r e t a r y 's s t a t e me n t , E P A , a l o n g w i t h t h e D e p a r t me n t o f E n e r g y a n d
o t h e r e n t i t i e s i n t h e e x e c u t i ve b r a n c h s t a n d r e a d y t o w o r k n o t o n l y w i t h
C h i n a b u t a l s o w i t h o t h er d e v e l o p i n g c o u nt r i e s a s w e b e g i n t o a d d r e s s
g l o b a l l y t h e w h o l e i s s u e o f g r e e n h o u se g a s e mi s s i o n s .
            HEARING COCHAIR D'AMATO: Yes, thank you. While I think
t h a t t h o s e a r e a l l v e r y w e l l a n d g o o d , I ' m n o t s u r e h o w y o u a c c o mp l i s h
s e t t i n g n a t i o n a l g o a l s w i t h o ut r e l a t i n g i t t o a n i n t e r n a t i o n a l b a s e l i ne . I
t h i n k t h a t 's d i f f i c u l t a t mo s t . I t hi nk t hi s q ue s t i o n o f t h e C h i ne s e
c o m mi t t i ng t o r e du c i ng t h e i r e mi s s i o n s b y - - w h a t d i d y o u s a y - - 2 0
p e r c e n t b y 2 0 1 0 ? T h a t 's a s p e c i f i c g o a l . T h a t c a n b e r e l a t e d t o t h e
U . N . P a n e l b a s e l i n e s . I t s e e ms t o me y o u 'v e g o t t o g e t c r a c k i n g o n t h a t
k i n d o f a s s e s s me n t . O t h e r wi s e , w e c a n 't u n d e r s t a n d w h a t 's h a p p e n i n g
t o o u r i n t e g r a t e d g l o b a l e c o l o g i c a l s y s t e m i n t e r ms o f t e mp e r a t u r e
increases, both air and ocean.
            I f y o u 'r e g o i n g t o h a v e a w o r l d e c o l o g i c a l s y s t e m, y o u c a n 't h a v e
j u s t n a t i o n a l g o a l s n o t r e l a t e d t o a b a s e l i n e . S o i t s e e ms t h a t 's a
p r o b l e m w e h a v e t o w o r k o n i n t e r ms o f t h a t p o s t - K y o t o f r a me w o r k .
            T h e p r o j e c t i o n s i n y o u r t e s t i mo n y , S e c r e t a r y Ha r b e r t , i n t e r ms o f
C h i n a 's c a r b o n d i o x i d e e mi s s i o n s p r oj e c t e d t o e x c e e d U .S . e mi s s i o n s
b y o v e r 4 0 p e r c e n t i n 2 0 3 0 a n d t h e c o mp a r i s o n o f t h a t t o t h e C h i n e s e
g o a l s e e m s t o b e t h e k i n d s o f s p e c i f i c s c e na r i o s t h a t w e ne e d t o e ng a g e
t h e C hi ne s e o n. I s i t y o u r u n d e r s t a n d i n g t h a t t h e C h i n e s e a r e p r e p a r e d
t o s t a r t e n g a g i n g u s o n t h e s e k i n d s o f g o a l s a n d n u mb e r s ?
            M S . H A R B E R T : T h e r e a r e t w o a ns w e r s t o y o u r q u e s t i o n . T h e y
                                                        - 20 -
b o t h r e s u l t i n y e s , b u t I 'l l t e l l y ou , f i r s t o f a l l , t h e y f e e l t h a t t he y n e e d
the technology to address it. I think there is a role for the United
S t a t e s g o v e r n me n t a n d mo r e i mp o r t a n t l y f o r t h e U . S . p r i v a t e s e c t o r t o
p l a y i n me e t i n g t h a t n e e d . Th e r e i s n o w a y t o pu t a f r a m e w o r k o n t o p
o f t h e m t h a t t he y a r e d o o me d t o f a i l .
           HEARING COCHAIR D'AMATO: Right.
           MS. HARBERT: And if they are going to expand the use of
c l e a n c o a l i n t h e i r c o u n t r y , t h e y 'r e e i t h e r g o i n g t o e x a c e r b a t e t h e
c l i ma t e pr o bl e m o r t h e y 'r e go i n g t o c o n t r i b ut e t o i t s r e d u c t i o n . T h e y
have to have clean coal technology to use coal but do it in an
e n v i r o n me n t a l l y s u s t a i n a b l e ma n n e r . S o t h a t 's i n o u r i nt e r e s t s , i t 's i n
t h e i r i nt e r e s t s , t o f i n d a w a y t o d o t ha t .
           If we can collaborate on that, it actually will bring down the cost
o f c l e a n c o a l t e c h n o l o g y w o r l d w i d e . T h e y h a v e a h u g e ma r k e t fo r i t ,
a n d l o o k i n g a t e f f i c i e n c i e s o f s c a l e a n d s i mp l e e c o n o mi cs , i t w i l l t h e n
b e mo r e a f f o r d a b l e f o r o u r c o u n t r y . S o i f w e h a v e m o r e a f f o r d a b l e
c l e a n c o a l t e c h n o l o g y a n d t h e y d o — s i n c e w e 'r e t h e t w o l a r g e s t
e mi t t e r s - - t h a t w i l l b e a s i g ni f i c a nt c o nt r i b ut i on o v e r t i me t o a dd r e s s i n g
t h e c l i ma t e c ha n g e o b j e c t i ve .
           J u s t t o y o u r c o m me n t o n t h e b a s e l i n e . I d o n 't t h i n k a n y b o d y
d i s a g r e e s w i t h t h a t . I t h i n k w h a t i s i mp o r t a n t , t h a t w e s h o u l d a g r e e
these figures alone show us that we can't leave China out. And that's
why the problem with Kyoto is that it leaves the big guys that are
c o mi n g d o w n t h e p i k e o ut o f t h e t e n t , a n d we c a n 't a ff o r d t h a t a n y
l o n g e r . M a y b e t h e r e i s a d i f f e r e n t w a y f o r t h e mo r e i n d u s t r i a l i z e d
nations to help them along and find ways through technology
c o o p e r a t i o n a n d t h r o u g h l e s s s t r i n g e nt g o a l s a n d c o m mi t me n t s a t t h e
e a r l y y e a r s , b ut a fa r mo r e s t r i n g e n t g o a l l at e r o n , t h a t we c a n a c t u a l l y
c o me t o o v e r t h e n e x t s ev e r a l h u n d r e d y e a r s a v e r y , v e r y s o l i d i f i e d a n d
c o mp r e h e n s i ve a ppr o a c h t o c l i ma t e c h a n g e .
           B u t t h e y a r e g oi n g t o n e e d t h e t e c h n ol o g y; t he y 'r e g o i n g t o n e e d
t h e i n s t r u me n t s ; t h e y 'r e n o t g o i n g t o j u s t s h u t d o w n t h e i r e c o n o my t o
a d d r e s s t h e i r e n vi r o n me n t . B u t t h e y ' r e f e e l i n g t h e p a i n . T h e y r e a l i z e
i t h a s a n e c o n o mi c c o s t . H e a l t h c o s t s i n C h i na a r e g o i n g u p . T h e y ' r e
n o t g o i n g u p s i mp l y b e c a u s e t h e y w a n t b e t t e r h e a l t h c a r e . I t ' s b e c a u s e
t h e y 'v e go t e n v i r on me n t a l i s s u e s .
           T h e y ' v e g o t w a t e r i s s u e s . Th e y'v e g o t a n u mb e r o f i s s u e s . T h e
e n e r g y us e i s c ha l l e n gi n g t h e i r e n v i r o n me n t a n d w h e n i t s t a r t s
i mp i n g i n g u p o n t h e i r e c o n o my , t h e y l i s t e n .
           HEARING COCHAIR D'AMATO: Thank you.
           V I C E C H A I R M A N B L U M E N T H A L : D i c k , y o u 'v e g o t f i v e mo r e
mi n u t e s be c a us e - -
           C H A I R M A N B A R T H O L O M E W: B e c a u s e I t h i n k t h i s i s s u e i s s o
i mp o r t a n t I ' m g o i n g t o y i e l d y o u my t i me a n d a d d my n a me t o t h e
                                                      - 21 -
b o t t o m.
           H E A R I N G C O C H A I R D ' A M A T O : M y c ol l e a g u e s a r e l o a n i n g me
t h e i r t i me , w h i c h i s h i g h l y u n u s u a l .
           C H A I R M A N B A R T H O L O M E W: Y e s .
           H E A R I N G C O C H A I R D ' A M A T O : I t h i n k i t 's v e r y i mp o r t a n t ,
v e r y i mp o r t a n t , t h a t y o u d o a c k n o wl e d g e t h e n e e d f o r a b a s e l i n e . I t
s e e ms l o g i c a l o b v i o u s l y t o g e t t o t ha t . We a r e n 't t h e r e y e t w i t h t h e
C h i n e s e o n s u c h a b a s e l i n e . T h a t w o u l d b e a t r e me n d o u s a c h i e v e me n t
i n t e r ms o f t h e d i a l o g u e t h a t w e 'r e e n g a g e d i n .
           N o w , I t h i n k i t 's v e r y i m p o r t a nt a l s o t o h a v e s o me s p e c i f i c
a c h i e v e m e n t s a n d s u c c e s s e s w i t h t h e C h i n e s e on t h e bi g i s s ue s o n t h e
t a b l e b e c a u s e i n m a n y o f t h e i s s u e s w e 'v e d e a l t w i t h , t h i s C o m m i s s i o n
h a s d e a l t w i t h , o ve r t h e l a s t f i v e y e a r s , t h e i s s u e s d o not s e e m t o b e
subject to be resolved.
           We h a v e a s e r i e s o f i r r e s o l v a b l e i s s u e s . T h e c u r r e n c y p r o b l e m,
f o r e x a mp l e , i s o n e o f t h e m. I P R i s a n o t h e r o n e f o r wh i c h we d o n 't
h a v e a s t r o n g r e c o r d o f a c h i e v e me n t a n d s u c c e s s . H o p e f u l l y , n o w i n
this area we can.
           L e t me a s k y o u o n e s p e c i f i c q u e s t i o n i n t e r ms o f s o me o f t h e s e
t e c h n o l o g i e s t h a t y o u me n t i o n a n d c o a l p a r t i c u l a r l y . We 'r e t a l k i n g
a b o u t t he t i me f r a me f o r t h e p o s s i bi l i t y o f f u l l c o m me r c i a l i z a t i on o f
c a pt u r e a n d s t o r a ge te c h n o l o g i e s , s e q u e s t r a t i o n t e c h n o l o g i e s .
           Wh a t c a n y o u s a y a b o u t w h a t y o u a s S e c r e t a r y w o u l d l i k e t o s e e
i n t e r ms o f t h e k i n d o f t i me f r a me t o p u t i n t o p l a c e vi a bl e
c o m me r c i a l i z a t i o n? O r , i f i t 's n o t c o m me r c i a l f r o m t h e p r i v a t e s e c t o r s ,
i t a t l e a s t w o r k s a n d w e c a n b e p u t i n t o p l a c e , w e c a n p ut i t i nt o pl a c e
w i t h r e g a r d t o t h e i r n e w c o a l p l a nt s o n a t i me l y b a s i s o f c a r b o n c a p t u re
and storage technologies?
           M S . H A R B E R T : Tw o d i f f e r e n t c o mp o n e n t s t o t h a t . T h e p r o j e c t
that we are actively working with them on which is the FutureGen
p r o j e c t w i l l a c t u a l l y b e i n o u r v i e w a n d w h a t o u r be s t e s t i ma t e s a r e ,
and our cost and schedule folks tell us, will be 2012. It will be
c o n s t r uc t e d b y 2 012 . Wi l l i t b e c o m m e r c i a l l y vi a bl e i n 20 1 2? N o , t h i s
i s a d e mo n s t r a t i o n p r o j e c t t h a t i s s h o w i n g h o w d i f f e r e n t t e c h n o l o g i e s
all along the chain can be integrated together and have, if successful,
t h e fi r s t e mi s s i o n s f r e e c o a l f i r e d p o we r pl a nt .
           C a r b o n c a p t u r e a n d s t o r a g e i s s o me t h i n g t h a t we a r e w o r k i n g o n .
T h e s e q u e s t r a t i o n o f c a r b o n h a s b e e n u s e d f o r ma n y , ma n y y e a r s i n t h i s
c o u n t r y fo r e n h a n c e d o i l r e c o v e r y .
           HEARING COCHAIR D'AMATO: Right.
           M S . H A R B E R T : Bu t i t h a s n o t b e e n u s e d i n s u c h a w a y t h a t w e
h a v e p u t s u f f i c i e n t C O 2 u n d e r g r o u n d a n d mo n i t o r e d i t t o ma k e s u r e
t h a t t h e r e ' s n o a d v e r s e e f f e c t s t o t h e e n v i r o n me n t o r a ny t h i n g e l s e . S o
w e a r e l o o k i n g , a n d w e a r e a t t h e D e p a r t me n t o f E n e r g y a n d w e h a v e
                                                     - 22 -
mo n e y , a p p r o p r i a t e d mo n i e s , t o a c t ua l l y p u t a b i l l i o n t o n s o f c a r b o n
under the ground and actually observe it. And in seven different types
of geological sequestrations in this country because we need to--the
w o r l d h a s d i f f e r e n t g e o l o g i c a l f o r ma t io n s a s d o w e i n t hi s c o u n t r y , a n d
i t 's n ot g oi n g t o a l l g o i n o n e p l a c e .
            S o w e n e e d t o p ut i t u n de r t h e g r o u n d a n d w e n e e d t o o b s e r v e i t
a n d s e e w h a t h a p p e n s . I f w e l o o k a t w h a t 's h a p p e n i n g w i t h c a r b o n
c a p t u r e a n d s t o r a ge o r c a r b o n c a pt ur e a n d s e q u e s t r a t i o n , w e ' r e l o o k i n g
a t f u n di ng o n t h e o r d e r o f a b o ut $ 1 00 mi l l i o n a ye a r r i g h t no w t o b e
able to capture it and store it.
            C O 2 a t t h e mo me n t i s a l i t t l e e x p e n s i v e . S o t h a t 's a d di n g t o o ur
c o s t s a n d w e 'r e t r y i n g t o f i n d w a y s t o a c t u a l l y g e t s o me o f t h e C O 2 a t
reduced rates where there is a dedicated stream to this stuff so we can
g e t a n d s p e n d mo r e o f t h e mo n e y o n p u t t i n g i t u n de r g r o u n d . B u t w e
have to do capture technology; we have to do storage technology.
            And if you look at one of the ways to do that through the
i n t e gr a t e d g a s i f i c a t i o n c o mb i n e d c y c l e p l a nt , t he w a y w e a r e l o ok i ng a t
i t , w e 'v e g o t t w o o f t h e m r i g h t n o w i n t h i s c o u n t r y . T h e y a r e a t
c o m me r c i a l s c a l e ; t h e y ' r e n o t a t c o m me r c i a l c o s t . A l l o f t h i s , t h e
c h a l l e n g e i s n o t t h a t t he t e c h n o l o g y i s n 't r e a d y - - a n d c a r b o n c a p t u r e
a n d s t o r a g e , i t ' s n o t q u i t e r e a d y - - i t 's t h a t i t ' s n o t v i a b l e a t a c e r t a i n
cost.
            S o w e h a v e t o f i n d w a y s t o ma k e t h i s b e t t e r a n d c h e a p e r . I f
t h i n g s we r e t o g o a l o n g a s w e l o o k a t i t n o w , I d o n 't s e e I G C C
t e c h n ol o gy f u l l y pe n e t r a t e d , f u l l y d e v e l op e d i n t o t h e ma r k e t un t i l
2040, and our job is to try and shave those years off. By cooperating
w i t h a c ou n t r y l i ke C h i n a , wh i c h a c t u a l l y i s v e r y i n t e r e s t e d i n t h i s , a n d
w e c a n bu i l d t he s e o u t a t c om me r c i a l s c a l e a n d mu l t i p l e t i me s , r a t h e r
t h a n j u s t t h e o n e o r t w o w e h a v e he r e , t he n we a c t u a l l y c o u l d s h a v e
years off.
            S o i t h a s a d o me s t i c b e ne f i t a s w el l , t h a t i f w e c a n ut i l i z e t he i r
b i g ma r k e t t o p r o v e s o me t e c h n o l o g i e s , t h e n i t w i l l h av e a d o u b l e b a n g
for the buck, there and here, which is sort of our philosophy in going
i n t o t h i s . I t i s i mp o r t a n t f o r t h e e n v i r o n me n t ; i t ' s i mp o r t a n t f o r o u r
c o m me r c i a l i n t e r e s t s ’ a n d i t 's e q u a l l y i mp o r t a n t i n t r y i n g t o p r o v e t h i s
t e c h n o l o g y a n d s h a v e o f f o u r t i me f r a me . We d o n ' t w a n t t o wa i t u n t i l
2040.
            HEARING COCHAIR D'AMATO: Right.
            M S . H A R B E R T : We w a n t t o f i n d w a y s t h a t o u r mu l t i l a t e r a l
w o r k w i t h o t h e r c o u n t r i e s c a n d i r e c t l y c o nt r i b ut e t o o ur e ne r gy
s e c u r i t y h e r e i n t he U n i t e d S t a t e s .
            HEARING COCHAIR D'AMATO: Thank you. Do you have a
c o m me n t , S e c r e t a r y A y r e s ?
            M S . A Y R E S : T h a n k y o u . J u s t a c o mm e n t o n me t h a n e . M e t h a n e ,
                                                      - 23 -
a s w e k n o w , i s a l s o a g r e e n h o u s e g a s . I t i s 2 3 t i me s mo r e e f f i c i e n t
t h a n c a p t u r i n g c a r b o n d i o x id e . G o i n g t o t h e w h o l e i s s u e o f e n e r g y a n d
c e r t a i nl y t h e i s s u e o f c o a l , i t 's i mp o r t an t t o n ot e t h a t t h e U n i t e d S t a t e s
i s c o l l a b o r a t i n g w i t h C h i n a o n c o a l mi n e me t h a n e r e c o v e r y p r o j e c t s .
             T h e l a r g e s t c o a l mi n e i n t h e w o r l d i s i n C h i n a a n d t h i s l a s t y e a r ,
E P A w o r k e d s u c c e s s f u l l y w i t h C h i n a w i t h C a t e r pi l l a r C or p o r a t i o n
w h i c h s e c u r e d a $ 5 8 mi l l i o n c o n t r a c t f r o m C h i n a t o s u p p l y p o w e r
g e n e r a t i on e q ui p m e n t t o t hi s w o r l d 's l a r g e s t c o a l mi n e .
             T h e f i g u r e s a r e i n t e r e s t i n g . O n c e c o mp l e t e d , a n e s t i ma t e d 4 0
mi l l i o n t o n s e q u i v a l e n t o f c a r b o n d i o x i d e e mi s s i o n s wi l l b e a v o i d e d
o v e r a 2 0 - y e a r p e r i o d , a n d a t t h i s r e c e n t St r a t e g i c Ec o n o mi c D i a l o g u e
me e t i n g , w h i c h A s s i s t a n t S e c r e t a r y Ha r b e r t a n d I b o t h p a r t i c i p a t e d ,
C h i n a c o m mi t t e d t o c o n s t r u c t i n g a n o t h e r 1 5 o f t h e s e k i n d s o f p r o j e c t s ,
with the goal of overcoming barriers to application of this technology
on a nationwide scale.
             S o h e r e i s a n e x a mp l e o f c a pt u r i n g me t h a ne , 2 3 t i me s mo r e
e f f i c i e n t t h a n c a r b on d i o x i d e a t r e t a i n i n g h e a t , a $ 5 8 mi l l i o n c o n t r a c t
with Caterpillar Corporation, with the goal of expanding this
technology around the country.
             Thank you.
             HEARING COCHAIR D'AMATO:                                         Thank you.               Just one
c o m me n t . A q u i c k c o m me n t , M r . C h a i r ma n ?
             V I C E C H A I R M A N B L U M E N T H A L : G o a h e a d . L a s t c o m me n t ,
and then we'll lay him off you.
             H E A R I N G C O C H A I R D 'A M A T O :                   In 2040, if current trends
c o n t i n u e , w e 'r e g o i n g t o b e l i v i n g o n a d i f f e r e n t p l a n e t . S o me p e o p l e
t h i n k w e 'v e g o t a b o u t 2 0 y e a r s t o g e t t h i s u n d e r c o n t r ol . D u r i n g Wo r l d
Wa r I I , w h e n w e w a n t e d t o c r e a t e a n e w s p y p l a n e , we p u t t h e U - 2
f r o m p a p e r t o t a k e o f f o n t h e t a r ma c i n n i n e mo n t h s .
             S o i t s e e ms t o me t h a t w e n e e d t o b e mo r e a g g r e s s i v e a n d w e c a n
b e mo r e a g g r e s s i v e . We 'v e d o n e i t i n t h e p a s t , a n d w e c a n d o i t i n
t e r ms o f t h e s e t e c h n o l o gi e s , t o o . J u s t t h e c o m m e n t t h a t I 'd ma k e .
             V I C E C H A I R M A N B L U M E N T H A L : T h a n k y o u . C o m mi s s i o n e r
Shea.
             H E A R I N G C O C H A I R S H E A : G o o d mo r n i n g . I ma y b e f o l l o w i n g
u p a l i t t l e i t o n w h a t C o m mi s s i o n e r D ' A ma t o h a s s a i d . T h a n k y o u f o r
c o mi n g a n d i t 's r e a l l y g o o d t o h e a r y o u t a l k a b o u t t he i mp o r t a n c e o f
e n g a g e me n t w i t h C h i n a o n t h e i s s u e o f e n e r g y a n d e n v i r o n me n t a l
p r o t e c t i o n. I f t h e r e i s a n y a r e a w h e r e w e c a n c oo p e r a t e , t h i s s e e ms t o
be it.
             I t w a s a l s o g o o d t o h e a r w h a t y o u a r e d o i n g , wh a t t h e
a d mi n i s t r a t i o n i s d o i n g , o n t h e E P A s i d e w i t h E n e r g y St a r a n d t h e l o w
sulfur project and the regional SEPA centers, and on the energy side
w i t h F ut ur e G e n a n d a l l t h e e xc h a n ge s .
                                                     - 24 -
             B u t I g u e s s I 'm e c h o i n g D i c k 's c o m m e n t . I s t h e t h i n k i n g h e r e
c o mp r e h e n s i v e e n o u g h , i ma g i n a t i v e e n o u g h , u r g e n t e n o u g h ? T h e g e n i e
ma y b e o u t o f t h e b o t t l e . C a n w e p u t i t b a c k i n? D o we h a v e a r e a l
s e n s e o f u r g e n c y o n b o t h t h e A me r i ca n s i d e a n d t h e C h i n e s e s i d e i n
r e s p o n d i n g t o t h i s i m p o r t a n t p r o b l e m? I t 's a t o u g h q u e s t i o n .
             M S . H A R B E R T : I t h i n k t h a t w e c er t a i n l y f e e l a d i r e c t s e n s e o f
u r g e n c y a n d o p p o r t u n i t y , q u i t e fr a n k l y , a s t h e t r e n d s a r e c l e a r w h a t t h e
e n e r g y d e ma n d i s , w h a t w i l l b e h a p p en i n g i n t e r ms o f t h e e x p a n s i o n o f
both their transportation and industrial sector.
             I t i s i n c u mb e n t u p o n u s t o e n g a g e mu c h mo r e a g gr e s s i v e l y w i t h
China, to help them understand the benefits of participating in a world
e n e r g y ma r k e t . I h a v e s ai d t hi s be f o r e a n d I s t i l l b e l i e v e i t , t h a t w e
define energy security as having access to an affordable, reliable
supply of energy.
             C h i n a s t i l l d e fi n e s e n e r g y s e c u r i t y d i f f e r e n t l y . T h e y d e f i n e i t a s
owning the access to an affordable reliable supply of energy. And if
y o u ' r e a ma r k e t e c o n o my , y o u b e l i e v e i n h a v i n g a c c e s s t o i t b e c a u s e o i l
i s a f u n g i b l e c o m m o d i t y . I t 's o ut t h e r e , a n d i f y o u d o n 't g e t i t f r o m
one place, you get it from another. It actually affords you a much
mo r e d i v e r s i f i e d b a s e f r o m w h e r e t o g e t i t .
             I f s o me t h i n g h a p p e n s i n " x " p l a c e , y o u 'r e g o i n g t o g e t i t f r o m " y "
place, and it is part of our discussions in helping them to understand
t h e v a l u e o f d e p e n d i n g o n t h e ma r k e t , o f n o t h a v i n g t o f e e l t h a t t h e y
h a v e t o o w n i t . Th e y ' r e n e v e r g o i ng t o o w n t h e r e s o u r c e s t h a t t h e y
n e e d t o f u e l t h e i r e c o n o my . T h e y 'r e g o i n g t o h a v e t o r e l y o n a ma r k e t .
A n d i f y o u r e l y o n a ma r k e t , y o u a c t u a l l y h a v e t o h a v e m a r k e t
p r i n c i p l e s i n p l a c e a t h o me . Y o u h a v e t o r e s p e c t t h e m a b r o a d a n d i t
r e q u i r e s y o u t o b e c o me a v e r y r e s p o n s i b l e ma r k e t p l a y e r .
             S o t h a t 's w h e r e w e 'r e g o i ng . I t c e r t a i nl y i s v e r y t r ue i n t he
e n e r g y a r e a . I t i s o b v i o u s l y t r u e i n t h e a r e a s t h a t w e 'r e n o t h e r e t o
t e s t i f y a b o u t i n t e r ms o f t h e ir e c o n o my , b u t t h e y ' r e v e r y mu c h
i n t e r r e l a t e d . T h e y n e e d t h e e n e r g y t o f u e l t h e i r e c o n o my , a n d a s t h e i r
e c o n o my c o n t i n u e s t o i mp r o v e , e x p a n d a n d mo r e i n c r e a s i n g l y r e l y o n
m a r k e t p r i n c i p l e s , t h e y h a v e t o d o t h e s a me t h i n g i n e n e r g y .
             I f y o u d o t h a t o n e n e r g y , i t w i l l a f f o r d t h e m a mo r e r e l i a b l e
s u p p l y o f e n e r g y a n d f o r ce t h e m i n t o I t h i n k , a nd f o r c e i s p r o b a b l y t o o
s t r o n g o f a w o r d , b u t i n t o a f r a me w o r k w h e r e t h e y a c t u a l l y r e c o g n i z e
t h e i nc r e a s i n g v a l u e o f a d i v e r s i f i e d s o u r c e o f i n v e s t m e n t i n e ne r g y
i n f r a s t r u c t u r e a n d f a r mo r e r e s pe c t f or t h e e n vi r o n me n t . B e c a us e t h e
c o mp a n i e s a nd t he e xp e r t i s e t h a t w i l l f l o w i nt o t he i r c o un t r y w i l l
c e r t a i n l y h a v e r e s p e c t f o r e n v i r o n m e n t al r e g u l a t i o n s a n d t h e r e w i l l b e
o p p o r t u n i t i e s f o r t h o s e t e c h n o l o g i e s a n d t h o s e c o mp a n i e s t h a t a r e
producing these clean energy technologies to grow and prosper there.
             HEARING COCHAIR SHEA: Yes, but the fact is that China is
                                                        - 25 -
going to build a coal-fired plant once a week for the foreseeable
f u t u r e . Y o u me n t i o n e d , M s . A y r e s , t h a t t h e y s e t a n e ne r g y r e d uc t i o n
g o a l o f 2 0 p e r c e n t b y 2 0 1 0 b u t t h e y mi s s e d t h e g o a l fo r 2 0 0 6 , a n d
t h e y 'v e pu b l i c l y a dmi t t e d t h a t .
            Is there a sense of urgency on the Chinese side that we need a
r e v e r s e c o u r s e o r a c h a n g e d c o u r s e on t hi s i s s u e ?
            M S . A Y R E S : I w o u l d s u g g e s t t h e r e a r e a v a r i e t y o f mo t i v a t i n g
f a c t or s on t h e p a r t o f C h i n a a s i t a d dr e s s e s e nv i r o n me n t a l i s s u e s . I t
h a s b e c o me a b u n d a n t l y c l e a r t o t h e Ch i n e s e t h a t a p o o r e n v i r o n me n t i s
a f f e c t i n g t h e i r e c o n o my a n d t h a t t h e d a ma g e t h a t t h e y h a v e d o n e a n d
t h e d e g r a d a t i o n t h a t t h e y n o w mu s t s u f f e r a n d a t t e mp t t o r e me d i a t e i s
h a v i n g e c o n o mi c c o n s e q u e n c e s .
            T h e C hi ne s e c a r e a b o ut t h e i r e co n o my . T h e C h i n e s e a l s o c a r e
a b o u t t h e O l y mp i c s . I t h i n k w e h a v e s e e n a g r e a t d e a l o f mo t i v a t i o n
a n d h a d ma n y p o s i t i ve c o n ve r s a t i o ns w i t h me a s u r a bl e r e s u l t s r e ga r d i ng
b r i n g i n g t h e w o r l d t o C h i n a fo r t h e O l y mp i c s a n d w h e t h e r i t ' s a r e t r o f i t
o f d i e s e l b u s e s o r i t 's l o o k i n g a t a r e a s o f e n e r g y g e n e r a t i o n w i t h i n t h e
c o n f i n e s o f t h e B e i j i n g me t r o p o l i t a n a r e a , w e 'v e h a d s o me v e r y g o o d
conversations.
            I t hi n k i t 's i mp o r t a n t t o k n ow t h a t t he U . S . a p pr o a c h t o C h i n a , a s
o u r a p p r o a c h o f t e n w i t h o t h e r c o u nt r i e s , i s f r o m t h e E n v i r o n me n t a l
P r o t e c t i on A g e n c y, w e a r e t h e p r e mi e r e n vi r on me n t a l mi n i s t r y i n t he
world.            We 'r e t h e o l d e s t a n d a c k n o w l e d g e d n o t t h r o u g h o u r o w n
a d u l a t i o n b u t t h r o u g h t h e w o r l d 's , t h a t we h a v e t e c h n i c a l c a p a b i l i t i e s
which we are willing to share.
            We a l s o a c k n o wl e d g e t h a t n o t o nl y t h e U n i t e d S t a t e s b u t o t h e r
d e v e l o p e d c o u n t r i e s , o n t h e w a y t o b e c o mi n g d e v e l o p e d c o u n t r i e s ,
ma d e e g r e g i o u s e r r o r s a l o n g t h e wa y . C h i n a a n d o t h e r d e v e l o p i n g
countries would like not to repeat those transgressions. Unfortunately,
i n C h i n a , w e s e e t h a t t h e e c o n o mi c d e v e l o p me n t h a s c a u s e d a v a r i e t y
o f p r o b l e ms .
            Wh a t t h e U n i t e d St a t e s i s doi n g a s f a r a s t h e q u e s t i o n o f b e i n g
i ma g i n a t i v e , b e i n g c o mp r e h e n s i v e , i s t h a t w e a r e s h a r i n g t h o s e l e s s o n s
a n d t h e Ch i n e s e a r e k e e n o n l e a r n i n g t h o s e l e s s o n s , a n d t h i s i s o n e o f
t h e b a s i c u n d e r p i n n i n g s o f t h e S t r a t e g i c E c o n o mi c D i a l o g u e . Wh a t
h a v e w e e x p e r i e n c e d ? Wh a t h a v e w e l e a r n e d? Wh a t c a n w e s h a r e ?
            A n d t h e n t h e l a s t c o m me n t w o u l d s i mp l y b e t h a t t he w o r l d i s
w a t c h i n g . N o t o n l y i s t h e Un i t e d S t a t e s e n g a g i n g w i t h C h i n a , b u t 7 9
o t h e r c o un t r i e s a r e a l s o e n ga g i ng w i t h C h i n a , a n d C h i n a i s v e r y , v e r y
mi n d f u l t h a t t h e w o r l d i s w a t c h i n g h o w t h e y a r e r e s p o n d i n g .
            Thank you.
            V I C E C H A I R M A N B L U M E N T H A L : T h a n k y o u v e r y mu c h . I
w o n d e r i f , w e h a v e a n u mb e r o f q u e s t i o n s r e ma i n i n g , I w o n d e r i f w e
c a n a s k y o u b o t h fo r s o me mo r e t i m e , s o me mo r e o f y o u r t i me , i f w e
                                                     - 26 -
can go a little bit longer than 10:15?
            C H A I R M A N B A R T H O L O M E W: A n y c h a n c e y o u c o u l d s t a y t i l l
10:30?
            MS. HARBERT: Be delighted. I can.
            MS. AYRES: A pleasure.
            VICE CHAIRMAN BLUMENTHAL:                                                 T h a n k y o u v e r y mu c h .
C h a i r ma n B a r t h o l ome w .
            C H A I R M A N B A R T H O L O M E W: T h a n k y o u v e r y mu c h . T h a n k
y o u t o o u r w i t n e s s e s b o t h f o r a p p e a ri n g t o d a y a n d a l s o f o r y o u r s e r v i c e
t o o u r n a t i o n . I t 's a l w a y s w o n d e r f u l , I 'l l s a y , t o h a v e a p a n e l o f w o me n
p a r t i c i p a t i n g . We d o n 't o f t e n g et t h a t s o t h i s i s t e r r i f i c .
            A c o u p l e o f c o m me n t s a n d I h a v e t w o d i f f e r e n t s e t s o f q u e s t i o n s
w h i c h I p r o b a b l y w o n ' t h a v e t i me t o a s k . Wh e n p e o p l e s a y e n g a g e me n t
w i t h C h i n a , t h e r e ' s a n i mp l i c a t i o n t h a t t h e r e a r e p e o p l e o u t t h e r e w h o
a r e s a y i n g w e s h o u l d n 't b e e n g a g i n g w i t h C h i n a o n t h e s e t h i n g s , a n d
t h a t 's j u s t s i mp l y n o t t he c a s e o n t h e s e . S o I a l w a y s f e e l t h e ne e d t o
c o r r e c t t he r e c or d on t ha t .
            I t h i n k t h e q u e s t i o n b e c o me s w h a t i s t h e n a t u r e o f t h e
e n g a g e me n t a n d wh a t 's h a p p e n i n g , w h o 's b e n e f i t i n g ? T h e Ch i n e s e
g o v e r n me n t h a s $ 1 . 2 t r i l l i o n i n f o r e i g n c u r r e n c y r e s e r v e s .                     The
q u e s t i o n t h a t I w o u l d l i k e t o a s k i s i n t he s e j o i n t pr o gr a ms t h a t bo t h
E P A a n d D O E a r e d o i n g , w h o 's b e a r i n g t h e c o s t o f t h a t ? A r e t h e
Chinese contributing financially to it? Obviously they need to be
done, but are they expecting that the United States taxpayer should be
bearing all of the costs of this?
            A n d t h e n , s e c o n d , M s . H a r b e r t , y o u me n t i o n ed s p e c i fi c a l l y , a n d I
was going to ask you about the IEA and your capacity there, but the
d i f f e r e nc e b e t w e e n t h e C h i ne s e w a nt i n g t o o wn t h e r e s o u r c e v e r s u s
g e t t i n g a c c e s s t o t h e r es o ur c e , a nd i t i s u n c l e a r t o me t h a t t h e y
u n d e r s t a n d t h a t t h e y 'r e n o t g o i n g t o b e a b l e t o o w n t h e r e s o u r c e s .
            T h e r e 's a b u y i n g s p r e e t h a t 's g oi n g o n a r o u n d t h e w o r l d . J u s t
r e c e n t l y , t h e C h i n e s e N a t i o n a l A l u mi n u m C o mp a n y h a s b o u g h t a
c o p p e r mi n e i n P e r u . S o t h e y ' r e c e r t a i n l y t r y i n g t o a c q u i r e o w n e r s h i p
o f t h e s e t h i n g s , a n d I t h i n k i f w e 'r e c o u n t i n g o n t h e i r n ot b e i n g a b l e t o
d o i t , t h a t 's g o i n g t o b e a d i ff i c u l t p o l i c y f o r u s .
            S o i n t e r ms o f t h e j oi nt pr o g r a ms , w h o 's b e a r i n g t h e c o s t of
t h e m, a r e t h e C h i n e s e c o n t r i b u t i n g , a nd t h e n i f t h e r e 's a n y c h a n c e , M s .
H a r b e r t , f o r y o u t o t a l k a l i t t l e bi t a b o u t t h e I E A , w h a t d o w e t h i n k
that the Chinese role should be, what is it, and what's the potential?
Thanks.
            M S . A Y R E S : Re ga r di n g t he a ge - o l d q u e s t i o n w h o p a y s , o n e
w o u l d h a v e t o l o o k a t t h e p r o g r a ms w e h a v e w i t h t h e C h i n e s e fr o m a
b i l a t e r a l p e r s p e c t i v e a nd f r o m a m u l t i l a t e r a l p e r s p e c t i v e .            From a
b i l a t e r a l p e r s p e c t i v e , t h e r e i s s h a r e d f i n a n c i a l r e s po n s i bi l i t y . Y e s , t h e
                                                         - 27 -
C h i n e s e d o c o n t r i b u t e . T h e U n i t e d S t a t e s c on t r i b ut e s a n d t he r e a r e
i n t e r n a t i on a l f i n a nc i a l i n s t i t u t i o n s t ha t a r e c on t r i b ut in g , s p e c i f i c a l l y
t h e W o r l d B a n k a n d t h e A s i a D e v e l o p m e n t Ba n k .
            R e g a r di n g mu l t i l a t e r a l c o nt r i bu t i o n s o r mu l t i l a t e r a l pr o g r a ms ,
a g a i n , t h e r e 's a s h a r e d r e s p o n s i b i l i t y a mo n g s t t h e me mb e r s o f t h o s e
p a r t i c ul a r i ni t i a t i v e s s u c h a s t h e A s i a P a c i fi c P a r t ne r s h i p .
            M S . H A R B E R T : Th e r e 's a c o u p l e o f d i f f e r e n t a n s w e r s t o y o u r
q u e s t i o n . I t i s c er t a i n l y a f a c t t h a t I t h i n k t he r e 's a gr e a t d e s i r e o n
b e h a l f o f t h e C h i n e s e t o s e e a n i n d u s t r ia l i z e d v e r s u s i n d u s t r i a l i z i n g
t e c h t r a n s f e r f r a me w o r k w h e r e w e w o u l d p r o v i d e g r e at s u ms o f m o n e y
o r p r o v i d e t h e m g r e a t b ig c o n s t r u c t i o n p r o j e c t s .
            T h i s i s no t a w e a l t h t r a n s f e r a r r a n ge me n t t h a t w e 'r e goi n g t o
h a v e wi t h t h e C hi ne s e . O n t h e t e c h t r a n s f e r s i d e o f t h i n g s , w e h a v e
v e r y s t r i c t I P R s t a n d a r ds i n p l a c e . O n t h e F u t ur e G e n p r o j e c t , f o r
e x a mp l e , t h e y a r e pa y i ng u s $ 1 0 mi l l i o n t o j o i n t h e pr oj e c t , a s i s I n d i a
a n d w i l l K o r e a a n d J a p a n , s o n o b o d y g e t s a f r e e p a s s . I f w e 'r e g o i n g t o
c h a n ge t he w o r l d, w e 'r e g o i n g t o c ha n g e i t t o ge t he r a nd i t c os t s t hi n g s ,
a n d w e a l l h a v e t o h a v e s o m e s k i n i n t h e g a me .
            T h e r e a r e t hi n g s t ha t w e d o w i t h t h e m t h a t i f w e 'r e h e l pi n g t he m
d e s i g n l a w s , e t c e t e r a , i t t a k e s h u ma n t i me , b u t w e 'r e n o t a c t ua l l y
t r a n s f e r r i n g c a p i t a l . We d o n 't s e e t h a t a s a n a d v a n t a g e i n t e r ms o f t h e
w a y t h a t t h e i r e c o n o my i s g r o w i n g . T h e y d o n 't n e e d c a p i t a l ; t he y do
need technology.                       And why we focus so heavily in the Strategic
E c o n o mi c D i a l o g u e o f f i n d i n g a w a y t o r e d u c e t h e c o s t s o f t h e e x i s t i n g
t e c h n ol o gy t o pl a c e s l i k e Ch i n a i n t h e d e v e l o p i n g w o r l d b y r e d u c i n g
the tariffs and the non-tariff barriers.
            We a r e h o p i n g t h a t t h e D o h a r o u n d s u c c e e d s , t h a t w e c a n g e t
t h e s e c l e a n e n e r g y g o o d s a n d s e r v i ce s a n d c l e a n e q u i p me n t a n d g e t
t h e s e c o s t s d o w n s o t h e y c a n p e n e t r a t e a ma r k e t l i ke Ch i n a a n d h e l p
t h e m a d d r e s s t he i r n e e d s , a n d t ha t 's n o t t e c h t r a n s f e r .                       T h a t 's
c o m me r c i a l o p p o r t u n i t y t h a t w i l l h e l p t h e m a c h i e v e t h e i r e n e r g y n e e d s
a n d o u r c o l l e c t i v e e n v ir o n me n t a l n e e d s , s o t h e y a r e p a y i n g t h e i r o w n
w a y i n s ome o f t h e s e t h i ng s .
            T h e n t he r e a r e t hi ng s t ha t a c t ua l l y c o s t n o t h i ng . Wh e n w e g e t
t o g e t h e r a n d w e t a l k a n d we e x p l a i n t o t h e m a b o u t h o w y o u a c t u a l l y
u s e t a x i n c e nt i v e s t o c r e a t e c o n s u me r be h a vi or c h a n ge . H o w we a r e
using our current tax code and whether it be on hybrids or solar or this
o r t h a t , a n d h o w t h a t a c t u a l l y w o r ks a n d t o g e t t he p e op l e w h o a r e
a c t u a l l y mi n i s t e r i n g i t a t t h e t a b l e s o t h e y c a n u n d e r s t a n d b e c a u s e , a s
y o u p o i n t o u t , t h e y mi s s e d t h e i r t a r g e t a n d t h e y k n o w t h e y mi s s e d t h e i r
t a r g e t , a n d t h e y k no w t h a t t h e y c a n 't c o n t i n u e t o p u s h t h e ma n d a t e s o u t
t o t h e p r o v i n c e s a n d j u s t s a y y o u w i l l me e t t h i s o r e l s e .
            T h e y n e e d n e w i n s t r u me n t s a n d t h e y n e e d t e c hn o l o g y . We c a n
h e l p t h e m s h o w t h e ms e l v e s w h a t t he i n s t r u me nt s a r e , w h a t t h e po l i c y
                                                        - 28 -
i n s t r u me n t s a r e , b u t t h e y 'r e a l s o g o i n g t o n e e d t h e t e c h n o l o g y .
            C H A I R M A N B A R T H O L O M E W: I ' m a f r a i d o ur t i me i s u p . C a n I
ask you to respond in writing on the--
            M S . H A R B E R T : O n t h e I E A?
            C H A I R M A N B A R T H O L O M E W: T h e I E A .
            MS. HARBERT: Be delighted.
            C H A I R M A N B A R T H O L O M E W: T h a n k y o u .
            VICE CHAIRMAN BLUMENTHAL:                                                  Okay.             We have
C o m mi s s i o n e r H o u s t o n n e x t .
            C O M M I SS I O N E R H O U S T O N : T h a n k y o u a n d t h a n k s a g a i n t o
b o t h o f y o u f o r b e i n g h e r e t hi s mo r n i ng . I h a ve w h a t I t hi n k i s a r e a l l y
q u i c k q u e s t i o n , M s . A y r e s , f o r y o u . Wh e n w e w e r e r e c e n t l y i n C h i n a ,
i t w a s b r o u g h t t o o u r a t t e n t i o n t h e p r o b l e ms o f t r a n s p o r t a t i o n p o l l u t i o n
i n C h i n a . G o o d s a r e c o mi n g o u t , ma t er i a l s g o i n g i n a l l d a y l o n g o n
freight cars as well as tankers.
            A n d p a r t i c u l a r l y i n s o u t h e r n C h i n a , t h e r e 's a h u g e p r o b l e m w i t h
p o l l u t i o n c o mi n g f r o m t h e t a n k e r s , a nd I w o n d e r e d i f t he r e w a s a n y
kind of dialogue or discussion of best practices from our agencies to
C h i n a on s o me t h i ng s t ha t c a n b e d o n e b o t h f o r t h e r a i l a n d a s w e l l a s
f o r t h e o c e a n t a n k e r s t o r e d uc e t ha t p o l l u t i o n t h a t 's s o p r e v a l e n t fr o m
those?
            MS. AYRES:                      T h e E n v i r o n me n t a l P r o t e c t i o n A g e n c y h a s
i d e nt i f i e d p r e c i s e l y t h e s a me i s s ue . A t t hi s t i me , w e 'r e w i t hi n C h i na
l o o ki n g a t t he t r a ns p o r t a t i o n s e c t o r a t t h i s t i me . A t t hi s t i me , w e 'r e
not looking at the rail sector, but we are looking at the port sector.
And EPA has launched an International Ports Initiative.
            T h e i nt e r n a t i o na l po r t s a r e no t o nl y i n C h i n a , bu t i n ot he r A s i a n
c i t i e s a n d a c t u a l l y o n o u r ow n P a c i f i c c o a s t , a n d w e a r e w o r k i n g w i t h
t h e s hi p pi n g i n du s t r y a nd wi t h v a r i o us p or t f a c i l i t i e s t o l o ok a t f u e l
mi x t u r e s , l o o k a t k i n d s o f e n g i n e s t h a t a r e b e i n g u s e d a n d a t t e mp t i n g
t o a d d r e s s t hi s s p e c i f i c p r o bl e m.
            M S . H A R B E R T : Ca n I j u s t a d d o ne t h i n g b e c a u s e i t a l s o g o e s t o
a n o t h e r c o m mi s s i o n e r ' s q u e s t i o n a b o u t n u c l e a r s a f e t y ?             On ports
s p e c i f i c a l l y , t h e r e i s b e c a u s e o f t h e g r e a t a ct i v i t y i n t h e p o r t s ,
p a r t i c ul a r l y i n a r e a s t ha t y ou j us t p o i n t e d o u t , j u s t t h i s mo n t h , w e i n
p a r t o f t h e D e pa r t me n t s i gn e d a n a g r e e me n t w i t h C hi n a t o i ns t a l l
e q u i p me n t a t s o me o f t h e s e v e r y b u s y p o r t s .
            We 'l l s t a r t w i t h o ne a n d w e 'l l mo v e f r o m t h e r e t o d e t e c t i l l i c i t
s h i p me n t s o f n u c l e a r ma t e r i a l , r a d i o l o g i c a l ma t e r i a l . We h a v e d o n e
t h i s i n a n u mb e r o f c o u n t r i e s w i t h v er y b u s y p o r t s . C h i n a h a s b e e n a n
o u t l i e r . T h e y r e a l i z e i t 's i n t h e i r i nt e r e s t n ot t o a c t u a l l y p a r t i c i p a t e i n
t h e i l l e ga l t r a f f i c ki n g o f r a d i ol o g i c a l ma t e r i a l s . S o t ha t w a s a b i g
b r e a k t h r o u g h o n J u n e 6 , a n d w e ' r e mo v in g u p v e r y q u i c k l y t o h e l p t h e m
e s t a bl i s h a mu c h m o r e s e c u r e p o r t i n fr a s t r u c t u r e .
                                                       - 29 -
            I t d o e s n 't a d d r e s s t h e e n v i r o n me n t a l c o mp o n e n t s , b u t i t d o e s
s o me t h i n g t h a t d i r e c t l y i s o f i n t e r e s t t o o u r n a t i o n a l s e c u r i t y .
            COMMISSIONER HOUSTON: Great. Thank you both.
            VICE CHAIRMAN BLUMENTHAL: Thank you.
            MS. AYRES: And possibly just as a follow-up, I had referenced
i n my r e ma r k s t h e p r o j e c t g o i n g o n i n S h a n g ha i w i t h t hi s s t a t e - of - t h e -
a r t a i r q u a l i t y f o r e c a s ti n g a n d p u b l i c n o t i f i c a ti o n s y s t e m. T h i s i s
p r e c i s e l y t h e s a me s y s t e m t h a t i s u se d i n 3 0 0 c i t i e s h er e i n t h e U n i t e d
States.
            VICE CHAIRMAN BLUMENTHAL:                                           T h a n k y o u v e r y mu c h .
C o m mi s s i o n e r Fi e dl e r .
            C O M M I SS I O N E R F I E D L E R : J u s t a q u i c k q u e s t i o n . I r e a d i n
y o u r t e s t i mo n y , a n d b o t h o f y o u I t hi n k h a v e r e p e a t e d a c o u p l e o f
t i me s , t h a t t h e n a t i o n a l g o v e r n me n t d o e s n 't ma k e a n y d e c i s i o n s o n o r
ma k e ma j o r i mp l e me n t a t i o n d e c i s i o n s o n i t , b u t l o c a l a n d p r o v i n c i al
g o v e r n me n t s d o .           M a j o r p r o b l e m; r i g ht ?        W e h a v e i l l e g a l mi n e s .
S o me o n e w r o t e o r s a i d t ha t a f i f t h o f t h e p o we r p l a n t s a r e u n l i c e n s e d .
I t 's e i t h e r i n y o u r t e s t i mo n y o r s o me b o d y e l s e 's t h i s mo r n i n g .
            T h e r e s e e ms t o b e a h u ge i m p l e me n t a t i o n p r o b l e m t h a t j u s t n o w
e s t a b l i s h i n g a r e g i o na l l e v e l r e g u l a t o r y b o d y mi g h t b e q u i t e
i n s u f f i c i e n t t o g r a b h o l d o f t h e p r o b l em. I s t h e r e a pr o vi n c e i n C h i n a
t h a t i s b e t t e r , ma r k e d l y b e t t e r , t h a n a n y o t h e r i n i t s i mp l e me n t a t i o n o r
a couple?
            M S . H A R B E R T : I w i l l a g r e e wi t h y o u , a n d I s a i d y o u c a n ' t
s i mp l y i s s u e a n e d i c t o r a m a n d a t e a nd e x p e c t i t t o h a p p e n . T h e r e h a s
t o b e t h e e n a b l i n g e n v i r o n me n t f o r c o n f o r mi n g t o t h e ma n d a t e s . O n e
o f t h e p r i n c i pa l p r ob l e ms i s e n f o r c e me n t . T h e r e i s a l a c k o f t h e a bi l i t y
o f e n f o r c e me n t , a n d w h e t he r o ur c o a l pl a nt s a c t u a l l y me e t i ng t h e
e x p e c t e d e n v i r o n me n t a l r e g u l a t i o n s o r t h e y a r e o n l y me e t i n g t h e m
w h e n t he a u d i t or s a r e pr e s e nt a t t he c o a l p l a n t i s a n e x c e l l e n t q u e s t i o n ?
            We 'r e n o t t he r e a l l t he t i me t o s ee . We ' r e l o o k i n g a t t r y i n g t o
h e l p t h e m w i t h r e m o t e s e n s i n g , a n d fi n d i n g w a y s t o a c t u a l l y h a v e a n
e n f o r c e m e n t c a p a b i li t y . I h a v e n o t l o o k e d a t a l l t h e d i f f e r e n t , a t e a c h
p r o v i n c e , w h a t e v e r y b o d y 's c o mp a r a t i v e a d v a n t a g e i s . B u t I wi l l s a y
t h a t t h e B e i j i ng D e v e l op me n t R e f o r m C o m mi s s i o n - - ma y be i t 's b e c a u s e
t h e y ' r e l i t e r a l l y c l o s e r t o t h e n a t i o n a l g o v e r nme n t - - h a s t a k e n t h e i r
ma n d a t e a n d l o o k e d a t i t v e r y s e r i o u s l y o f h o w t h e y c a n b e a mo d e l o f
i mp r o v i n g t h e i r a b i l i t y t o i mp le m e n t t h e n a t i o n a l g o v e r n me n t ' s
expectations, and to do it in a way that actually has local
accountability.
            We h a v e f o l k s t h e r e w o r k i n g wi t h t he B e i j i ng D e ve l o p me n t
R e f o r m C o m mi s s i o n n o w o n h e l p i n g t he m i n t e r p r e t , e n f o r c e , a n d
e x e c u t e t h e s e ma n d a t e s b e c a u s e t h e y f e e l i n s t r u me n t l e s s a s t h e y a r e
g i v e n s o me o f t h e s e ma n d a t e s . S o lo o k i n g a t h o w t h e y c a n d o t h i n g s a t
                                                     - 30 -
the local level.
            O u r s t a t e s d o t h i n g s a t a s t a t e l e v e l , a n d s o w e 'r e l o o k i n g a t
t r yi n g t o e mp o w e r s o me o f t h e s e c o m mi s s i o n s t h a t a r e r e s p o n s i b l e f o r
t h e e x e c u t i o n o f s o me o f t h e s e r e g u l a t i o n s , b u t e n f o r c e me n t ,
r e g u l a t i o n , u n i f o r mi t y , a l l o f t h o s e a r e a p r o b l e m , a n d w e d e a l w i t h i t a
little bit across the board in the SED on IPR, and it's all about
e n f o r c e m e n t , e n f o r c e me n t , e n f o r c e me n t .
            I t 's n o t g o i n g t o b e s o l v e d o v e r n i g h t , b u t t h e r e i s a r e c o g n i t i o n
t h a t w i t h o u t i t , t h e y ' r e n o t g o i n g t o , a n d I d o n 't t h i n k t h a t t h e y e n j o y
c o mi n g i n f r o n t of t h e c a me r a s a n d s a y i n g w e 'v e mi s s e d o u r t a r g e t
a g a i n . T h e y h a v e t o f i n d w a y s . I t 's n o t b y u p p in g t h e ma n d a t e . I t ' s b y
e mp o w e r i n g p e o p l e a n d g i v i n g t h e m m o r e p o l i c y i n s t r u me n t s t o
a c t u a l l y a c h i e v e t h e ma n d a t e. A n d s o I t h i n k t h a t 's a n o p p o r t u n i t y f o r
us quite frankly to help them do that.
            MS. AYRES:                    I w o u l d s i mp l y c o m me n t t h a t t he h e a r t o f a
s u c c e s s f u l r e g u l a t o r y r e g i me i s c o mp l i a n c e a n d e n f o r c e me n t a n d t h a t
t h e C hi ne s e r e a l i z e t h a t t hi s h a s b e e n a w e a k ne s s i n t he i r s y s t e m a n d
w o r k i n g w i t h E PA , t h e A s i a D e v e l o p me n t B a n k a n d t h e Ch i n e s e
g o v e r n me n t , t h e s e s i x r e g i o n a l c e n t e r s a r e g o i n g t o b e s e t u p , a n d t h a t
s e e ms t o b e a p o s i t i v e s t a r t . T h e y h a v e a c k n o w l e d g e d t h a t .
            Regarding the IPR issues, I would note that, in fact, EPA is
e n g a g e d i n d i s c u s s i o n s w i t h t h e C hi n e s e o n v a r i o u s I P R i s s u e s h a v i n g
t o d o w i t h c o n s u me r p r o d u c t s a n d c omp l i a n c e w i t h o ur s t a n d a r d s f o r
products that the Chinese would be sending here.
            C O M M I SS I O N E R F I E D L E R : D o e s a n y l o c a l g o v e r n me n t o t h e r
than Beijing stand out as actor of responsibility here?
            M S . H A R B E R T : I d o n 't w a n t t o s a y n o a n d I d o n ' t w a n t t o s a y
y e s . Wo u l d i t b e a l l r i g h t i f w e g o t b a c k t o y o u a n d s o r t o f g a v e y o u a
better view in that I'm not the best versed on every provincial
g o v e r n me n t 's c a p a b i l i t y , b u t I k n o w t he r e a r e o t h e r s t h a t w o u l d h a v e a
v i e w?
            C O M M I SS I O N E R F I E D L E R : A l l r i g h t .
            M S . A Y R E S : We 'l l j o i n w i t h t h e E n e r g y D e p a r t me n t o n t h a t .
            C O M M I SS I O N E R F I E D L E R : O k a y .
            V I C E C H A I R M A N B L U M E N T H A L : C o m mi s s i o n e r B r o o k e s a n d
t h e n C o m mi s s i o n e r R e i n s c h .
            COMMISSIONER BROOKES: I just have two quick questions--
o n e f o r M s . A y r e s . I l o o k e d t hr o u g h y o u r t e s t i mo n y q u i c k l y , b u t t o
w h a t e xt e n t i s C h i n e s e p ol l u t i o n r e a c h i ng t he U n i t e d S t a t e s a n d w h a t
effect is it having?
            MS. AYRES: The ability of pollution particularly aerosols to
travel across vast distances is very well documented. The ability to
d i s c e r n w i t hi n t h a t mi x w h a t i s c o mi n g f r o m w h e r e i s n o t . S o t h e
t e s t i mo n y c o m me n t s o n p o l l u t i o n c o mi n g f r o m A s i a , f r o m S o u t h A s i a ,
                                                     - 31 -
w e k n o w t h a t i s o c c u r r i n g . We k n o w , b u t w e d o n ' t k n o w e x a c t l y w h a t
c o u nt r i e s t h a t p ol l u t i o n i s c o mi n g f r o m.
            T e c h n i c a l l y a n y t h i n g u n d e r 1 0 0 mic r o n s , a n y p a r t i c u l a r , a e r o s o l
p a r t i c l e , u n d e r 1 0 0 mi c r o s h a s t h e a b i l i t y t o b e t ra n s f e r r e d g l o b a l l y o n
a i r c ur r e nt s .
            C O M M I SS I O N E R B R O O K E S : S o w e k n o w t h a t i t ' s c o m i n g f r o m
o u t s i d e t h e U n i t e d S t a t e s a n d n o t i n d i g e n o u s t o t h e U n i te d S t a t e s ? B u t
w e c a n 't i s o l a t e w he r e i n As i a i t ma y b e c o mi n g f r o m?
            M S . A Y R E S : A t t h i s t i me , w e ' r e u n a b l e w i t h g r e a t a s s u r e d n e s s
keynote the source.
            C O M M I SS I O N E R B R O O K E S : O k a y . T h a n k y o u . M s . H a r b e r t ,
w h e n w e t a l k a b o u t C h i n e s e e n e r g y , i t ' s o f t e n s a i d , a n d i t ma y b e m y t h -
-I am hoping you can distinguish that from fact--that China is often
looking to lock up energy resources at the source, or that's a term
t h a t 's u s e d . D o e s C h i n a p u t a n y o f t h e e n e r g y i t g a i ns f r o m o u t s i d e o f
C h i n a on t h e i nt e r na t i o n a l ma r ke t ?
            I t 's o f t e n s a i d t h a t t h e s e r e s o u r c e s g o d i r e c t l y t o C h i na , b u t i s
a n y o f i t p u t o n t h e i n t e r n a t i o n al m a r k e t , a n d d o y o u k n o w t o w h a t
e x t e n t ove r s e a s Ch i n e s e oi l c o mp a n i e s a r e p u t t i n g e n e r g y o n t h e
i n t e r n a t i on a l ma r k e t ?
            M S . H A R B E R T : O n e o f t h e t h i n g s w e 'r e t r y i n g t o d o w i t h C h i n a
i s t o i mp r o v e t h e i r d a t a s o t h a t t he y c a n s u p p l y i t t o t h e i n t e r n a t i o n a l
ma r k e t , a n d I 'v e g o t t w o s p e c i f i c a n s we r s , s o I ' m n o t d o d g i n g i t .
            O n e o f t h e i s s u e s w e h a v e w i t h t h e i r S t r a t e gi c P e t r ol e um R e s e r ve
i s t o u r g e C h i n a t o t el l t h e g l o b a l w o r l d ma r k e t w h a t y o u 'r e d o i n g , h o w
mu c h a r e y o u t a k i n g o f f t h e ma r k e t , w h e r e a r e y o u t a k i n g i t f r o m t o p u t
i n y o u r St r a t e g i c Pe t r o l e u m R e s e r v e . Y o u d on't n e e d t o i nc r e a s e t h e
c o s t o f o i l j u s t b y n o t t e l l i n g t he ma r k e t , a nd w e 'r e w o r k i n g t hr ou gh
w i t h t h e I E A a n d t h r o u g h t h e J o i n t Oi l D a t a I n i t i a t i v e a t t h e
I n t e r na t i on a l E ne r gy F o r u m t o h e l p t h e m i mp r o v e t he r e l i a bi l i t y a n d
t h e t r a n s pa r e n c y o f t h e i r d a t a .
            H o w mu c h a r e t h e y b u y i n g ? Wh a t a r e t h e y c o n s u mi n g , a l l o f
t h o s e t y p e s o f t h i n g s t h a t a r e a c t u a ll y v e r y i mp o r t a n t f o r g l o b a l e n e r g y
a n a l y s t s , t r a d e r s , b u y e r s , s e l l e r s t o u n d e r s t a n d . S o w e wi l l c o n t i n u e t o
w o r k o n t h a t o v e r t i me .
            T h e a mo u n t o f o i l t h a t t h e y p r o d uc e - - e q u i t y o i l , a s w e c a l l i t - -
a b r o a d i s a b o u t 4 0 0 , 0 0 0 b a r r e l s p e r d a y . T h a t 's w h a t t h e y h a v e i n
t e r ms o f t h e i r o w n e r s h i p o f o i l t h a t t h e y u t i l i z e . T h a t 's a b o u t t w o
p e r c e n t o f U . S . c o n s u mp t i o n o r a b o u t . 5 p e r c e n t o f w o r l d c o n s u mp t i o n .
S o t h o s e t h a t w o u l d a s c r i b e t o Ch i n a b e c o mi n g a h u g e e n e r g y
c o mp e t i t o r t o u s a n d b u y i n g u p a l l t h e a s s e t s , t h e f a c t s s o r t o f d o n 't
bear out.
            We c e r t a i nl y d on 't w a n t t o e n c o u r a ge a n d w e c e r t a i nl y
d i s c o u r a g e C h i n a f r o m in v e s t i n g i n p l a c es t ha t w e t hi n k t h o s e d o l l a r s
                                                       - 32 -
a r e b e i n g u s e d t o p r o p u p r e g i me s t h a t a r e e i t h e r h u m a n r i g h t s
violators or propagators of nuclear weapons.
            We w i l l c o n t i n u e t o e x e r t t r e me n d o u s p r e s s u r e o n C h i n a n o t t o
do that because, going back to what we talked about earlier, there is
v a l u e i n t h e ma r k e t a n d t h a t y o u d on ' t n e e d t o p u t y o u r d o l l a r s i n t o
p l a c e s w h e r e y o u a r e a c t ua l l y p r o p p i n g u p r e g i me s t h a t a r e u n f a v o r a b l e
with the world community. You do not have to force yourself into that
position.
            Secondly, we are trying to work with China about having them
u n d e r s t a n d w h a t a mu l t i n a t i o n a l i n d e p e n d e nt oi l c o mp a ny 's p r i n c i p l e s
and practices are as they invest overseas.                                          O u r o i l c o mp a n i e s ,
A me r i c a n o i l c o mp a n i e s , h a v e a v e r y h i g h r a t e o f c o r p o r a t e
p h i l a n t h r o p y , v e r y h i g h r e g a r d f o r e n v i r o n me n t a l a n d l a b o r l a w s , a n d
t h a t i s s ome t h i n g t h a t w e t hi n k C h i n e s e o i l c o mp a n i e s c o u l d b e n e f i t
from learning, and we will continue to do that.
            S o w e d on 't s e e Ch i n a a s be c o mi n g a c o mp e t i t o r a n d b u y i n g u p
a l l t he r e s o u r c e s , a n d t h a t a l l o f t h e o i l t h a t t he y 'r e g o i n g t o o w n i s
g o i n g t o fl o w b a c k d i r e c t l y t h r o u g h a p i p e l i n e d e d i c a t e d t o C h i n a , b u t
t h e r e i s g r o w i n g d e ma n d f o r C h i n a , a n d s o i n v e s t me n t s a r e b e i n g ma d e
a r o u n d t h e w o r l d i n c l u d i n g a n d i n C an a d a a n d o t h e r p l a c e s w h e r e t h o s e
supplies will go to China.
            T h a t d o e s n 't me a n t h a t i t 's s h o r t i n g o u r ma r k e t .
            C O M M I S S I O N E R B R O O K E S : R i g h t . C a n y o u j u s t a n s w e r my
question?
            M S . H A R B E R T : I f w e d o n ' t g e t i t f r o m " x , " w e 'r e g o i n g t o g e t i t
from "y."
            COMMISSIONER BROOKES:                                   Yes.      You didn't answer my
q u e s t i o n . I s t h e o i l t h a t C h i n a 's o i l c o mp a ni e s a r e p u l l i n g o u t o f t h e
g r o u n d o v e r s e a s g o i n g d i r e c t l y t o Ch i na o r i s s o me o f i t b e i n g p u t o n
t h e i n t e r n a t i o n a l ma r k e t ?
            M S . H A R B E R T : I t 's b o t h .
            COMMISSIONER BROOKES: Both.
            M S . H A R B E R T : I t 's b o t h , b u t i n l a r g e - -
            C O M M I SS I O N E R B R O O K E S : D o y ou k n o w wh a t p e r c e n t a g e i s ?
            M S . H A R B E R T : - - p e r c e n t a g e , i t 's g o i n g b a c k t o C h i n a .
            C O M M I S S I O N E R B R O O K E S : E x c u s e me ?
            M S . H A R B E R T : I n l a r g e p e r c e n t a g e i t i s g o i n g b a c k t o Ch i n a .
            C O M M I S S I O N E R B R O O K E S : C a n y o u p u t a n u mb e r o n t h a t o r
w e d o n ' t h a v e t h a t n u mb e r ?
            M S . H A R B E R T : O f t h e i r e q u i t y o i l , o f w h a t 's g o i n g b a c k t o
China--
            COMMISSIONER BROOKES: Right.
            MS. HARBERT: --of the 400,000 barrels of oil per day, I can
g e t y o u a n e x a c t p e r c e n t a g e , b u t i t wo u l d b e fa i r t o c h a r a c t e r i z e t h a t
                                                    - 33 -
mo s t o f i t i s g o i n g b a c k t o Ch i n a .
            C O M M I S S I O N E R B R O O K E S : B u t s o me o f i t i s b e i n g p u t o n t h e
i n t e r n a t i on a l ma r k e t .
            MS. HARBERT: Yes.
            VICE CHAIRMAN BLUMENTHAL: Thank you.
            M S . H A R B E R T : J u s t s i mp l y b e c a u s e o f t he t r a n s p or t a t i o n c os t s .
I t w o u l d c o s t mo r e t o p u t i t b a c k i nt o C h i n a . T h e y c a n s e l l o n t h e
ma r k e t a n d g e t s o me t h i n g c l o s e r .
            VICE CHAIRMAN BLUMENTHAL:                                             Sure.         C o m mi s s i o n e r
R e i n s c h , y o u h a v e t h e fi n a l , f i n a l w o r d s .
            C O M M I SS I O N E R R E I N S C H : T h a n k y o u . F i r s t , I w a n t t o t h a n k
t h e wi t n e s s e s f o r b e i n g t w o o f t h e mo s t c o mp e t e n t p e o p l e t he
A d mi n i s t r a t i o n h a s s e n t u s . I w i s h t h e y c o u l d c l o n e y o u a l t h o u g h
t h a t 's p r o b a b l y a g a i n s t o n e o f t h e i r o t h e r p o l i c i e s , b u t he r e w e a r e . I
h a v e o n e q u e s t i o n f o r M s . H a r b e r t a n d o n e f o r b ot h o f y o u . M y
q u e s t i o n f o r M s . H a r b e r t i s a c o nt i n u a t i o n o f w h a t M r . B r o o k e s w a s
just talking about. Looking out to 2020 or so, what do you see as the
ma r k e t e f f e c t i n t e r ms o f p r i c e a n d s u p p l y o f t h e i n c r e a s e d d e ma n d b y
b o t h C h i n a a n d I n d i a ? Y o u d o n 't n e e d t o s e p a r a t e t h e m.
            I n p a r t i c u l a r , I 'd l i k e y o u t o c o m me n t o n p r i c e b e c a u s e I d o n 't
think you've said anything about that yet, and on supply you said
s e v e r a l t i me s i f t h e y g e t i t f r o m " x " , w e c a n g e t i t f r om " y . " T h a t
a s s u me s t h e r e ' s a " y , " a n d t h a t a s s u me s t h a t s u p p l y d e v e l o p me n t i s
g o i n g t o k e e p p a c e w i t h d e ma n d d e v e l o p me n t . C a n y o u c o m me n t o n
that looking out ten or 15 years?
            MS. HARBERT: Sure. One thing I have learned in the two and a
h a l f y e a r s i n t h i s j o b , a n d I 'v e l e a r ne d i t f r o m m y b o s s , t he S e c r e t a r y ,
i s n e v e r fo r e c a s t p r i c e b e c a u s e i n v ar i a b l y y o u 'r e g o i n g t o b e w r o n g . I
c a n 't e v e n f o r e c a s t w h a t 's g o i n g t o b e a t t h e e n d o f t h e d a y t o d a y , m u c h
l e s s 2 0 y e a r s fr o m n o w , b u t - -
            C O M M I SS I O N E R R E I N S C H : We l l , t h a t 's a t r i c k q u e s t i o n , b u t
go ahead.
            M S . H A R B E R T : B u t t h a t b e i n g s ai d , I w i l l s a y t h a t t he r e i s
c l e a r l y a v e r y , v e r y t i g h t ma r k e t b e t w e e n s u p pl y a n d d e ma n d . We h a v e
v e r y s m a l l s p a r e c a p a c i t y i n t h e ma r k e t r i g h t n o w . R i g h t n o w i t ' s
a b o ut t h r e e mi l l i on b a r r e l s , b u t i t wa s a s s h o r t a s a m i l l i o n b a r r e l s
earlier this year.
            A s w e l oo k o u t ov e r t i me , i t 's g o i n g t o g e t t i gh t e r , a n d t h e n
t h e r e 's g o i n g t o b e s o me r e l i e f i n t he ma r k e t i n a b o u t e i g h t y e a r s a s
n e w s u p p l y i s b e i n g b r o u g h t o n i n C e n t r a l A s i a a n d i n t h e M i d d l e Ea s t .
T h e S a u d i s a r e c e r t a i n l y ma k i n g a b i g i n v e s t me n t a n d b r i n g i n g n e w
c a p a c i t y o n l i n e a n d ma k i n g a g r e a t e x p a n s i o n o f o i l t h e r e . Th e
C a n a d i a n s a r e ma k i n g a t r e me n d o u s i nv e s t me n t i n t h e o i l s a n d s w h i c h
w i l l d i r e c t l y a f f e c t o u r ma r k e t a s w e a r e t h e i r n a t u r a l ma r k e t f o r t h a t .
                                                     - 34 -
             S o t h e r e i s s i g n i f i c a n t a d d i t i o n a l s u p p l y c o mi n g o n , a n d t h a t 's
n o t w i t h o u t s a y i n g t h a t t h e d e ma n d w o n 't a l s o i n c r e a s e . S o w e 'r e
g o i n g t o b e f o r a l o n g t i me i n t h i s r a z o r t h i n ma r k e t , w h i c h i s w h y i t
ma k e s i t s o i mp o r t a n t f o r di ve r s i f i ca t i o n o f o u r e n e r g y s u p p l y , n o t o n l y
w h e r e we g e t i t f r o m, b u t w h a t t y p e s o f e n e r g y w e u s e , a n d e x p a n d i n g
t h e u s e of n u c l e a r , c l e a n c oa l , r e n e wa b l e s , b e c o mi n g a mo r e e f f i c i e n t
u s e r o f e n e r g y , f i n d i n g w a y s t o e x a c t mo r e e f f i c i e n c y o u t o f o u r
t r a n s p or t a t i on s e c t or , o ut o f o u r b u i l d i n g s e c t o r .
             C h i n a h a s t h e l a r g e s t a mo u n t o f c o n s t r u c t i o n g o i n g o n i n t h e
w o r l d . W e h a v e t o f i n d w a y s f o r t h e m t o b u i l d b u i l d i n g s t h a t a r e mo r e
e f f i c i e n t d a y o n e , n o t t o g o b a c k a n d r e t r o f i t t h e m, b u t t o b ui l d t h o s e
e f f i c i e n c y t h i n g s i n a t t h e v e r y b e g i n n i n g . So i t 's n o t g o i n g t o g e t
e a s i e r , b ut c e r t a i nl y w i t h t he hi g h p r i c e s t h a t w e f i n d o u r s e l ve s i n ,
t h e r e i s a p r o f i t i nc e nt i ve no w f o r a l t e r na t i v e e n e r gi e s a n d e f f i c i e n c i e s
t o b e b r o u g h t t o ma r k e t , w h i c h i s w h a t o v e r t h e s h o r t a n d me d i u m t e r m
is actually going to provide us the relief that we need.
             C O M M I SS I O N E R R E I N S C H : O k a y . T h a n k y o u . Fo r b o t h o f
y o u , I t h i n k , u n l e s s I mi s s e d i t , w e h a v e n 't y e t me n t i o n e d c o a l t o
l i q u i d s t e c h n o l o g y . I s t h a t s o me t h i n g t h a t y o u 'r e d i s c u s s i n g w i t h t h e
C h i n e s e a n d i s t h a t a t e c h n ol o g i c a l a pp r o a c h t h a t 's c o n s i s t e n t a l s o w i t h
y o u r e n v i r o n me n t a l g o a l s ?
             MS. HARBERT: Coal to liquids is a technology, as you know,
t h a t h a s b e e n a r o u n d s i n ce W o r l d Wa r I I . I t w a s d e ve l op e d i n G e r m a n y
w h e n t h e y h a d n o a l t e r n a t i v e s a n d i t 's b e e n u s e d i n S o u t h A f r i c a q u i t e
expansively because they had few alternatives.
             I t i s a p r o v e n t e c h n o l o g y . I t h a s n o t fo u n d i t s w a y t o t h e U n i t e d
S t a t e s b e c a u s e i t 's n o t , w h i l e i t 's t e c h n o l o g i c a l l y v i a b l e , i t 's n o t
c o m me r c i a l l y c o s t c o mp e t i t i v e . T h e r e h a v e b e e n s o me i n d i c a t i o n s t h a t
there will be at least two coal to liquids plants being built in China.
We h a v e y e t t o s e e w h e t h e r t h a t w i l l h a p p e n . T h e p r e s s r e p o r t i n g I
t h i n k t w o w e e k s a g o i n d i c a t e d t h a t o n e o f t h o s e p r o j e c t s w a s o n t he
fringe of being canceled. For what reason, I'm not entirely clear. But
t h e s e a r e c o m me r c i a l t r a n s a c t i o n s t h a t w e c e r t a i n l y a r e n o t g o i n g t o g e t
i n t h e mi dd l e o f .
             A s w e l o o k t o w a r d s w h a t w e , t h e A d mi n i s t r a t i o n h a s p u t f o r w a rd
and what the Congress is currently debating today, we have energy
l e g i s l a t i o n o n t h e fl o o r o f t he S e n a t e , a n d t he Pr e s i d e n t ha s l e g i s l a t i on
h e 's p u t f o r w a r d w i t h a n a l t e r n a t i v e f u e l s s t a n d a r d . T h e r e i s a r ol e f o r
c o a l t o l i q u i d s w i t h c ar b o n c a p t u r e a n d s t o r a g e .
             T h e r e i s r o o m f o r t hi s a l t e r n a t i v e fu e l t o b e b r o u g h t i n t o t h e
ma r k e t pl a c e a s l o ng a s i t d oe s c o n f o r m t o o u r e n v i r o n me n t a l g o a l s a n d
aspirations. The alternative fuels standard that the President put
forward has a credit trading system and coal to liquids with carbon
capture and storage gets a certain compliance value.
                                                      - 35 -
            I t d o e s n o t c o n t e mp l a t e c o a l t o l i q u i d s p l a i n l y b e i ng c o ns i de r e d
p a r t o f t h e ma n d a t e , a n d s o t h e r e i s a n e x p l i c i t d i f f e r e n c e o f h a v i n g
c o a l t o l i q u i d s wi t h c a r b o n c a p t u r e a n d s t o r a g e a n d wi t h o u t c a r b o n
c a p t u r e a n d s t o r a ge . We h a v e n ' t s e e n a n y b i g i n v e s t m e n t s i n c oa l t o
l i q u i d s i n t h i s c o u n t r y a s p e o pl e a r e l o o k i n g t o s e e w h a t o u r
e n v i r o n me n t a l f r a me w o r k w i l l l o o k l i k e , a n d I t hi n k w e ' v e b e e n v e r y
c l e a r i n t h e a l t e r n a t i v e f u e l s t a n d ar d w h e r e we s e e t h a t t e c h n o l o g y
fitting in. It has to have carbon capture and storage along with it in
o r d e r t o b e a p a r t o f t h e ma n d a t e .
            V I C E C H A I R M A N B L U M E N T H A L : Th a n k y o u . We 'r e g o i n g t o
w r a p u p be c a us e - -
            C O M M I SS I O N E R R E I N S C H : T h a n k y o u .
            V I C E C H A I R M A N B L U M E N T H A L : We w a n t t o t h a n k y o u v e r y
mu c h .         Y o u 'v e b e e n t e r r i f i c w i t n e s s e s i n a l o n g l i n e o f g o o d
A d mi n i s t r a t i o n wi t n e s s e s . We 'r e v e r y t ha n k f ul t o t h e A d mi n i s t r a t i on
for sending witnesses.                          We 'r e h o p e f u l t h a t i n t h e f u t u r e , t h e
a d mi n i s t r a t i o n wi l l s e n d w i t n e s s e s . A n d f u t u r e A d mi n i s t r a t i o n s w i l l
c o n t i n u e t o s e n d w i t n e s s es . T h a n k y o u v e r y mu c h .
            M S . H A R B E R T : Th a n k y o u .
            MS. AYRES: Thank you.
            V I C E C H A I R M A N B L U M E N T H A L : We 'r e g o i n g t o t a k e a b o u t
t h r e e mi nu t e s . We ' r e r u n ni ng l a t e , a nd w e 'l l be b a c k i n t h r e e mi n u t e s .
            [ Wh e r e u p o n , a s h o r t r e c e s s wa s t a k e n . ]


     PANEL II: U.S. NATIONAL LABORATORY PERSPECTIVES

           H E A R I N G C O C H A I R V I D E N I E K S : I n o u r n e x t p a n e l , w e 'r e
p l e a s e d t o w e l c o m e D r . J a n e C . S . L o n g f r o m t h e L a w r e n c e Li v e r mo r e
N a t i o n a l L a b o r a t o r y i n Li v e r mo r e , C a l i f o r n i a .
           Dr. Long is currently the Associate Director of Energy and
E n v i r o n m e n t f o r t h e L a b o r a t o r y . P r i or t o t hi s a p p oi n t me n t , D r . L o n g
w o r k e d a t L a w r e n c e B e r k e l e y N a t i o na l L a b o r a t o r y f o r 2 0 y e a r s . D r .
Long's current interests are in an adaptation and reinvention of the
e n e r g y s y s t e m i n r e s p o n s e t o c l i ma t e c h a n g e .
           Additionally, she has conducted research in nuclear waste
s t o r a g e , g e o t h e r ma l r e s e r v o i r s , p e t r o l e u m r e s e r v o i r s a n d c o n t a m i n a t e
transport.
           D r . L o n g h a s b e e n a s k e d t o p r e s e n t t h e L a b o r a t o r y's p e r s p e c t i v e
o n t h e g l o b a l e n e r g y f u t ur e , e x c h a n g e s b e t w e e n t h e L a b o r a t o r y a n d
C h i n a , a n d t h e i mp a c t o f C h i n a ' s g r e e n h o u s e g a s e mi s s i o n s o n U . S . a i r
quality.
           T h a n k y o u v e r y mu c h f o r t e s t i f y i n g t o d a y a n d t a k i n g t h e t r i p o u t
here.
                                                       - 36 -
               STATEMENT OF DR. JANE C.S. LONG
        ASSOCIATE DIRECTOR, ENERGY AND ENVIRONMENT
        DIRECTORATE, LAWRENCE LIVERMORE NATIONAL
            LABORATORY, LIVERMORE, CALIFORNIA

             D R . L O N G : T h a n k y o u , Co m mi s s i o n e r . Th a n k y o u v e r y mu c h ,
M a d a m C h a i r ma n a n d C o m mi s s i o n e r s f o r t h e o p p o r t u n i t y t o t e s t i f y .
I ' m g o i n g t o g i v e y o u a p e r s p e c t i v e f r o m my l a b o r a t o r y , La w r e n c e
L i v e r mo r e N a t i o n a l L a b o r at o r y , a n d a s w e l l I 'l l ma k e a f e w r e m a r k s
a b o u t o u r s i s t e r l a b o r a t o r y , L a w r e n c e B e r k e l e y N a t i o na l L a b or a t o r y .
M a r k Le v i n e f r o m L a w r e n c e B e r k e l e y w a s n o t a b l e t o b e h e r e , b u t h e
d i d s u b mi t s o me w r i t t e n t e s t i mo n y .
             T h e N a t i o n a l L a b s s u p p o r t t h e D e p a r t me n t o f E n e r g y 's s t r a t e g i c
g o a l s f o r e n e r g y a n d e n e r g y s e c u r i t y a n d c l i ma t e , a n d o u r r e s e a r c h
e f f o r t s i n p a r t n e r s h i p wi t h i n d u s t r y a n d u n i v e r s i t i e s a n d i n t e r n a t i o n a l
collaborations are going forward in that regard.
             We a r e i n t e r n a t i o n a l l y k n o w n f o r o u r w o r k i n c l i ma t e . C o mi n g
from our background in weapons testing, we began working on
a t mo s p h e r i c e v e n t s ma n y , m a n y y e a rs a g o , a n d a s a r e s u l t , n o w , w e
h a v e 5 0 a t mo s p h e r i c s c i e n t i s t s a n d w e a r e k n o w n f o r w o r k i n t h e
a t t r i b u t i o n o f c l i ma t e c h a n g e t o h u ma n b e h a v i o r . A s w e l l , w e w o r k e d
on underground testing and that has given us a very good perspective
i n e a r t h s c i e n c e s f o r c o n t a i n me nt o f c a r b o n d i o x i d e a n d u n d e r g r o u n d
processes such as in-situ coal gasification.
             Y o u a s k e d a q u e s t i o n f r o m me , w h a t g u i d e s o u r r e s e a r c h , We
h a v e l o o k e d a t t h e e n t i r e s p e c t r u m o f t h e e n e r gy a n d c l i ma t e p r o bl e m
t o g e t h e r a n d c o n c l u d e d t ha t i f w e w o r k t o ma k e a c a r bon f r e e e ne r g y
s y s t e m, t h a t t h a t w i l l a ut oma t i c a l l y h e l p t o s o l ve t he e n e r g y s e c ur i t y
p r o b l e m.
             S o w e w o r k o n w a y s t o i mp r o v e e f f i c i e n c y , a d d r e n e w a b l e
e n e r g y , s e q u e s t e r c a r b o n , a d d r e n e w a b l e f u e l s , a n d o v e r c o me t h e
difficulties of nuclear power, and in doing those things, we see that we
w i l l t r y t o a c h i e v e a c a r b o n f r e e e n v i r o n me n t , e mi s s i o n f r e e
e n v i r o n me n t , a n d a s w e l l s o l v e t h e e n e r g y s e c u r i t y p r o b l e m.
             We d o n o t h a v e a l o t o f e x p e r i e nc e w i t h C hi n a , b ut w e h a ve
c o m mo n i n t e r e s t s w i t h C h i n a .              I t 's i mp o r t a n t t o n o t e t h a t t h i s
c o l l a b o r a t i o n i s v e r y i mp o r t a n t b e c a u s e t h e c o m mo n i n t e r e s t i n e n e r g y
a n d c l i ma t e t h a t w e h a v e . Th e U . S . c o n s u me s a b o u t 2 5 p e r c e n t o f o u r
energy through the use of coal, but coal accounts for about 40 percent
o f o u r C 0 2 e mi s s i o n s . We u s e 2 5 p e r c e n t o f t h e w o r l d ' s e n e r g y ; C h i n a
u s e s 1 5 . B u t a b o ut 6 0 p e r c e n t o f t h e i r u s e i s c o a l a n d 8 0 p e r c e n t o f
t h e i r e mi s s i o n s c o me f r o m c o a l .
             S o C h i n a a n d t h e U . S . a r e b o t h i mp o r t i n g o i l a n d w e a r e b o t h
                                                       - 37 -
w o r r i e d a b o u t o i l s e c u r i t y . Wi t h t h e i r e x p a n d i n g e c o n o my , t h e y a r e
a c c ou n t i ng f o r 3 8 pe r c e nt o f t h e t o t a l g r o w t h i n o i l d e ma n d w o r l d w i d e .
S o w i t h t h e s e c o mmo n v i t a l i nt e r e s t s , I w o ul d l i k e t o d i s c u s s t h r e e
specific issues.
            F i r s t i s t h a t t h e Na t i o n a l La b s h a v e b e e n w o r k i n g w i t h C h i n a
o v e r s o me t i me o n e n e r g y e f f i c i e nc y , a n d h e r e I 'd l i k e t o me n t i o n , a s I
s a i d I w o u l d , M a r k L e v i n e 's t e s t i mo n y . M a r k h a s w o r k e d e x t e n s i v e l y
i n C h i n a o v e r ma n y y e a r s w i t h ma n y o f t h e i r a g e n c i e s , f o c u s i n g o n
e n e r g y s t a n d a r d s f o r b u i l d i n g s , a p p l i a n c e s t a n d a r ds , l a b e l i n g a n d
i n d u s t r i a l e n e r g y e f f i c i e n c y , a n d f o r s o me 2 0 y e a r s , f r o m a b o u t 1 9 8 0 t o
2 0 0 0 , t h e y ma d e a v e r y s u c c e s s f u l e n e r g y e f f i c i e n c y p r o g r a m, a n d t h e y
l i mi t e d t h e i r e n e r g y g r o wt h b y h a l f o f w h a t t h e i r GD P g r o w t h w a s
during that period.
            B u t s i n c e t h e n t he y f e l l ba c k a n d t h e i r G D P g r o w t h h a s no t b e e n
l e s s t h a n t he i r e ne r g y g r ow t h , a n d i t 's t i me n o w t o r e i n v i g o r a t e a n
e n e r g y e ff i c i e n c y p l a n wi t h C h i n a .
            S e c o n d l y , I t h i n k i t 's r e a l l y i mp o r t a n t t h a t w e w o r k w i t h C h i n a
o n r e d u c i n g g r e e n h o u s e g a s e mi s s i o n s . A s I me n t i o n e d , a b o u t 4 0
p e r c e nt of o u r e mi s s i on s a nd n e a r l y 8 0 p e r c e n t o f t h e i r e mi s s i o ns a r e
d u e t o c o a l , a n d c l e a n c o a l t e c h n ol o g y i n c l u d i n g c ar b o n s e q u e s t r a t i o n
a n d u n d e r g r o u n d c o a l g a s i f i c a t i o n a r e i mp o r t a n t t e c h n o l o g i e s f o r
dealing with this.
            My written testimony discusses this in detail, and I will just
a n s w e r y o u r q u e s t i o n s h e r e a s y o u h a v e t h e m. T h e s e a r e i mp o r t a n t
t e c h n o l o g i e s i f w e ' r e g o in g t o c o n t i n u e t o me e t o u r n e e d s w i t h c o a l a n d
i t r e a l l y d o e s n 't a p p e a r t h a t t h e r e 's a g o o d w a y i n t h e n e x t t e n , 2 0 , 3 0
y e a r s t o a v o i d t h e u s e o f c o a l s o i t 's r e a l l y i mp o r t a n t t h a t w e c h a n g e
t h e w a y we u s e i t .
            T h e r e a r e ma n y i n t e r n a t i o n a l c o l l a b o r a t i o n s i n t h e a r e a o f c o a l
a n d c a r b on s e q ue s t r a t i on , a nd t he r e i s a pr e s s i ng n e e d f or l a r g e - s c a l e
e x p e r i me n t a t i o n .       I t w a s me n t i o n e d b e f o r e t h a t t h e r e a r e s e v e n
partnerships in the United States that are looking at large-scale tests of
c a r b o n s e q u e s t r a t i o n . T he s e t e s t s a r e e x t r e me l y i mp o r t a n t a n d , a s
well, they're needed in China. Both countries would benefit from
p r o g r a ms t o d e mo n s t r a t e u n d e r g r o u n d c o a l g a s i f i c a t i o n a n d
sequestration.
            F i n a l l y , I 'd l i k e t o me n t i o n h u ma n - i n du c e d a t mo s p h e r i c c h a n ge s
that will affect the U.S. and China. Since about 1985, our laboratory
a n d o t h e r l a b o r a t o r i e s h a v e b ee n i n v o l v e d i n a D O E s p o n s o r e d
c o l l a b o r a t i o n o n g l o b a l w a r mi n g . T hi s h a s h a d s e v e r a l p a r t s . O n e
i n t e r e s t i n g p a r t i s t h e C h i n e s e a r e a v e r y l o n g c iv i l i z a t i o n a n d s o t h e y
h a v e t h r o u g h v a r i o u s g o v e r nme n t r e c o r d s , t h e y h av e t h o u s a n d s o f y e a r s
o f c e r t a i n k i n d s o f c l i ma t e d a t a w h i c h b e c a me v e r y a t t r a c t i v e t o o u r
c l i ma t e r e s e a r c h e r s .
                                                     - 38 -
            A s w e l l , t h e C h i n e s e h a d a n a s c e n t c l i ma t e mo d e l i n g p r o g r a m
w h i c h w a s t h e s u b j e c t o f o ur l a b or a t or y 's c o l l a bo r a t i o n w i t h t h e m, a n d
t h e y h a v e mo v e d f o r w a r d v e r y w e l l w i t h t h e i r c l i ma t e mo d e l i n g
p r o g r a m, a n d w e h a v e b e e n v e r y i n v ol v e d i n h e l p i n g t h e m d o t h a t . A s
part of what happened with that collaboration, it grew into an
i n t e r n a t i on a l pr o gr a m a n d t h e i nt er - c o mp a r i s o n o f c l i ma t e mo d e l s ,
w h i c h i s n o w r u n a t o u r l a b o r a t o r y , a n d t h a t i n t e r - c o mp a r i s o n p r o j e c t
c o n t r i b u t e d 3 5 t e r a b y t e s o f d a t a - - t ha t 's t h r e e - an d - a - h a l f L i b r a r i e s o f
Congress--to the IPCC deliberations that resulted in the last 2007
r e p o r t c o n c l u d i n g 9 0 p e r c e nt c e r t a i nt y t h a t c l i ma t e c h a n ge w a s
anthropogenically caused.
            S o t he r oo t s o f t hi s c l i ma t e mo d e l i n t e r c o mp a r i s o n p r o j e c t c a me
o u t o f t h e C h i n a c ol l a b or a t i on . I n a d d i t i o n t o t h a t , r e c e n t w o r k a t o u r
laboratory that is funded by the laboratory--laboratory directed
r e s e a r c h- - h a s b e e n u s i n g t h e c l i ma t e mo d e l s t h a t w e h a v e t o t r a c k b a c k
a i r p o l l u t i o n f r o m t h e U n i t e d S t a t e s t o C hi n a , a n d t hi s v e r y r e c e nt
w o r k j u s t s u b mi t t e d t o Sc i e n c e i n t h e l a s t c o u p l e o f w e e k s h a s s h o w n
t h a t 4 0 p e r c e n t o f t h e a e r o s o l s i n a s p e c i f i c s i t e i n t he S i e r r a w e r e
a t t r i b ut a bl e t o C hi n a , s o me o f t h e m c o mi n g f r o m A f r i c a a c r o s s C hi n a
i n t o t h i s p a r t i c u l a r s i t e , a n d t h a t o n a d a y , o n a p e r i o d o f t i me w h e n
t h e r e w e r e n o d u s t s t o r ms o r a n y o t h e r w a y t o s a y t h a t i t w a s e s p e c i a l l y
h i g h l o a d i n g . S o I t h i nk i t mi g h t b e a f a i r l y t y p i c a l n u mb e r o f 4 0
p e r c e nt .
            S o i n s u m ma r y , I 'd l i ke t o s a y t h a t C h i n a i s a v i t a l a r e a f o r u s t o
c o n t i n ue t o c o l l a bo r a t e wi t h a n d w e h a v e mu t u a l i n t e r e s t s . We h a v e
mu t u a l p r o b l e ms , a n d w e w o u l d b e n e f i t g r e a t l y f r o m s h a r i n g
t e c h n o l o g y a n d s h a r i n g s o me o f t h e s o l u t i o n s .
            T h a n k y o u v e r y mu c h .
[ T h e s t a t e me n t f o l l o w s : ] 3

                  P A N E L I I : Di s c us s i o n , Q u e s t i o n s a nd A n s we r s

          HEARING COCHAIR VIDENIEKS: I'll ask the first question, if
I ma y , M r . B l u me n t h a l .
          VICE CHAIRMAN BLUMENTHAL: Okay.
          H E A R I N G C O C H A I R V I D E N I E K S : I n y o u r p r e p a r e d t e s t i mo n y
y o u me n t i o n e d t h a t C h i n a i s t h e le a d e r i n t h e w o r l d i n u n d e r g r o u n d
c o a l g a s i fi c a t i o n .
          DR. LONG: Yes.
          HEARING COCHAIR VIDENIEKS: Is there reason why here in
t h e U . S . a p p a r e n t l y i t 's n o t t a k e n o f f r a p i d l y o r e i t h e r a r e t h e r e
e c o n o mi c r e a s o n s w h y w e 'r e n o t d o i n g i t ? A p p a r e n t l y t h e r e i s l o w

3
 Click here to read the prepared statement of Dr. Jane C.S. Long
                                        - 39 -
c a pi t a l i nv e s t me n t . T h e r e a r e e qu i p me n t s a v i n g s t h a t c o u l d b e ma d e
a n d t h e c o a l c a n b e r e t r i e v e d w h i c h i s b u r i e d a w a y i n a n u n mi n a b l e
l o c a t i o n a n d s o f o r t h . Wo u l d y o u p l e as e e x p a n d o n t h a t a l i t t l e b i t ?
            D R . L O N G : I t h i n k i t 's a c o mbi n a t i o n o f t h e e c o n o mi c s o f i t
b e f o r e t h e r e w a s t h e c l i ma t e c h a n g e i mp e r a t i ve . S o wi t h t h e c l i ma t e
c h a n g e i mp e r a t i v e , i t b e c o me s mu c h mo r e i nt e r e s t i n g . We l o o k e d a t
t h i s a t o u r l a b o r a t o r y ma n y y e a r s a g o , t e n o r 1 5 y e a r s a g o , a n d a t t h a t
t i me , p e o p l e w a n t e d t o g e t s y n g a s o u t o f u n d e r g r o u n d c oa l g a s i f i c a t i o n
a n d h y d r o g e n w a s p r o d u c e d a t t h e s a me t i me , w h i c h c a u s e d a p r o b l e m.
            N o w , w e h a v e t h e t e c h n o l o g y t o s e p a r a t e t h e s e ga s e s a n d I t h i n k
t h a t g i v e n t h e c l i ma t e i mp e r a t i v e , t he r e s h o u l d b e a r e n e we d i n t e r e s t i n
the United States as well.
            HEARING COCHAIR VIDENIEKS: Just a follow-up question.
C a n y o u c o m me n t o n o r ma y b e s p e c u l a t e a s t o w h a t pr op o r t i o n o f t he
c o a l m i n e s , t h e c o a l p r o d u c t i o n fa c i l i t i e s a r e o w n e d b y t h e p e t r o l e u m
people?
            DR. LONG: In China?
            HEARING COCHAIR VIDENIEKS: In the U.S. and China?
            D R . L O N G : N o , I d o n 't k n o w t h e a n s w e r t o t h a t . I ' m s o r r y .
            H E A R I N G C O C H A I R V I D E N I E K S : O k a y . I t 's a n i n t e r e s t i n g
question to follow on.
            DR. LONG: Yes.
            HEARING COCHAIR VIDENIEKS: Thank you. Anyone else
have questions?
            C O M M I SS I O N E R H O U S T O N : I d o . M a y b e we n e e d t o ma k e a
list.
            H E A R I N G C O C H A I R V I D E N I E K S : Y e s , I ' m s t a r t i n g t o ma k e a
list here.
            COMMISSIONER HOUSTON: I have a fairly quick question
b e c a u s e I d i d n ' t g o t o mi n i n g s c h o ol , a n d I d o n ' t k n o w t o o mu c h a b o u t
c o a l , b u t I u n d e r s t a n d t h e r e 's a d i f f e r e n c e b e t w e e n U . S . c o a l a n d
C h i n e s e c o a l i n t h e n a t ur e o f i t . A n d w h a t i s t h a t d i f f e r e n c e , a n d h o w
does that affect both the energy production in China as well as the
e n v i r o n me n t a l pr ob l e ms t h a t t he y h av e i n C h i n a b e c a u s e o f t h e c o a l
burning that they do?
            D R . L O N G : I ' m n o t t h e r i g h t p e r so n t o a s k a b o u t t h a t , b u t I 'v e
h e a r d t h e s a me t h i n g , a n d I t h i n k i t 's d i r t i e r c o a l , mo r e s u l f u r , mo r e - -
            COMMISSIONER HOUSTON: The Chinese coal is?
            DR. LONG: Yes.
            C O M M I S S I O N E R H O U S T O N : S o i t ' s r e a l l y m o r e i mp o r t a n t i n a
w a y t h e n , I g u e s s , w o u l d b e t h e c o n cl u s i o n f o r t h e m t o p r o c e e d w i t h
c l e a n c o a l t e c h n ol o g y ? Wo u l d t h a t b e a r e a s on a b l e c o n c l u s i o n?
            D R . L O N G : I t ' s i mp o r t a n t f o r b o t h o f u s . S o me c o a l i s w o r s e
t h a n o t h e r s f o r t h e p u r p o s e o f e mi s s i o n s , b u t a l l c o a l i s a t t h e e n d o f
                                                    - 40 -
t h e s p e c t r u m f o r f o s s i l f u e l o f p r o d u c i n g mo r e e mi s s i o n s , mo r e c a r b o n
dioxide per unit of energy than any other form of fossil fuel.
            S o t h e d i f f e r e n c e s b e t w e e n t h e c o a l , I t h i n k , a r e s o me w h a t l e s s
i mp o r t a n t f r o m t h e c l i ma t e p e r s p e c t i v e t h a n t h e f a c t t h a t i t 's c o al
versus oil versus gas versus renewables versus efficiency in reverse
order.
            C O M M I SS I O N E R H O U S T O N : T h a n k y o u .
            H E A R I N G C O C H A I R V I D E N I E K S : C o m mi s s i o n e r B r o o k e s .
            C O M M I SS I O N E R B R O O K E S : T h a n k y o u . Y o u w e r e t a l k i n g a
l i t t l e b i t a b o ut a pr o j e c t i n t h e S i e r r a s , a b o ut bei n g a b l e t o d i s t i n g u i s h
C h i n e s e po l l u t a n t s c o mi n g t o t h e U n i t e d S t a t e s . C o u l d y o u e l a b o r a t e a
l i t t l e bi t mo r e o n t h a t a n d wh e r e t h a t i s a n d w h o 's r u n n i n g t h a t p r o j e c t
a n d w h a t 's y o u r f i n d i n g b e y o n d t h e s e n t e n c e o r t w o y o u g a v e i n y o u r
s t a t e me n t ?
            D R . L O N G : O k a y . S o i t 's a c o l l a b o r a t i v e p r o j e c t w i t h p e o p l e
mo n i t o r i ng a e r o s ol s i n t h e s t a t e , a n d w e c o l l e c t e d t h e d a t a f r o m t h o s e
a e r o s o l s a n d w e a c t u a l l y l o o k e d a t t h e c h e mi c a l s i g n a t u r e s a n d t h e
i s o t o p i c s i g n a t u r e s o f t h e a e r o s o l s , b u t w e 'r e u n a b l e t o d r a w a n y
c o n c l u s i o n s a b o u t w h e r e t h e y c a me f r o m b y l o o k i n g a t t h e c h e mi c a l
signatures or the isotopic signatures of the aerosol particles that were
c o l l e c t e d o v e r t i me i n a s i t e i n t h e S i e r r a s .
            C O M M I S S I O N E R B R O O K E S : Wh e r e i s t h i s i n t h e S i e r r a s ?
            D R . L O N G : I t h i n k i t 's n e a r , I b e l i e v e i t 's n e a r K i n g 's C a n y o n ,
b u t I 'd h a v e t o c h e c k .
            COMMISSIONER BROOKES: Near where?
            D R . L O N G : I b e l i e v e i t ' s n e a r Ki n g 's C a n y o n , b u t I c a n c h e c k
and let you know.
            C O M M I S S I O N E R B R O O K E S : Wh e r e i s t h a t ? Wh a t s t a t e i s i t
in?
            D R . L O N G : C a l i fo r n i a . I c a n g e t y o u t h a t a n s w e r i f y o u 'd l i k e
it.
            COMMISSIONER BROOKES: Okay.
            D R . L O N G : T h e d a t a f r o m t h i s e x p e r i me n t h a s j u s t b e e n
s u b mi t t e d t o S c i e nc e f or p ub l i c a t i o n . T h e y we r e u na b l e , a s I s a i d , t o
f i n d a w a y t o f i n g e r p r i n t t h e a e ro s o l s t h r o u g h a c h e mi c a l ma t c h .
            They were able through a mechanical analysis of looking at all
the airstream data that is transported around the globe and being able
t o t r a c k b a c k w h e r e p a c k e t s o f a i r c a me f r o m a n d h o w mu c h c a me f r o m
w h e r e , t he y w e r e a b l e t o ma t c h t he p a t t e r n o f a e r o s ol c onc e nt r a t i o ns i n
the air, and so they were able to fingerprint it through a concentration
a n a l y s i s t o s h o w t h a t 40 p e r c e nt o f i t c a me f r om C h i n a , a n d s o m e o f
t h a t c a me a c r o s s A f r i c a , u p t h r o u g h C h i n a , t o u s .
            C O M M I SS I O N E R B R O O K E S :                   S o i t 's ha r d t o d i s t i ng u i s h
whether it's African or Chinese?
                                                     - 41 -
           D R . L O N G : I t hi nk t h e y c a n , y e s .
           COMMISSIONER BROOKES: They can.
           DR. LONG: Yes.
           C O M M I S S I O N E R B R O O K E S : Wh a t d i d t h e y s a y - - 4 0 p e r c e n t o f
t h e s e p o l l u t a nt s f o r t h i s o ne s p e c i fi c s a mp l e m a y h a v e o r i g i na t e d i n
China?
           D R . L O N G : C a me t o u s f r o m C h i n a .
           C O M M I S S I O N E R B R O O K E S : H o w v a l i d i s t h a t a s c o mp a r e d t o
t h e a b i l i t y t o i d e n t i f y c h e mi c a l s i g n a t u r e s o r t h e o t h e r w a y s y o u w e r e
talking about? Is this a high level of validity?
           D R . L O N G : I t h i n k i t h a s a h i g h l e v e l o f v a l i d i t y . A s I s a i d , i t 's
h o t o f f t h e p r e s s e s . I ' v e l o o k e d a t t he p a t t e r n c o r r e l a t i on . I t 's ve r y
s t r o n g . I t 's v e r y s t r o n g p a t t e r n ma t c h .
           COMMISSIONER BROOKES:                                      Is that the only place in the
U n i t e d S t a t e s w e 'r e l o o k i n g a t t h i s ?
           D R . L O N G : I d o n 't k n o w t h a t .
           COMMISSIONER BROOKES:                                           Is this southern, northern
C a l i f or n i a , c e nt r a l C a l i f or n i a ?
           DR. LONG:                      I t 's c e nt r a l S i e r r a s s o i t 's i n t h e mi d d l e o f
California in the Sierras, slightly south.                                     I d o n 't k n o w t h a t t h e y 'r e
doing it in other places.                               As I said, this was research that was
l a b o r a t o r y - d i r e c t e d r e s e a r c h . T h e N a t i o n a l La b o r a t o r i e s t a k e a c e r t a i n
proportion of their overhead budget and are allowed to fund research
inside the laboratory.
           T h i s w a s a p r oj e c t p r o p os a l c o mp l e t e d w i t h i n t he l a b or a t or y a n d
funded by the laboratory to do this analysis.
           C O M M I SS I O N E R B R O O K E S : Y e s . M a y b e I ' m w r o n g , b u t i t
s e e ms t h i s c o n t r a s t s w i t h t h e t e s t i mo n y w e j u s t h a d - -
           DR. LONG: Because she didn't--
           COMMISSIONER BROOKES: Maybe it's because they haven't
had access.
           D R . L O N G : I t 's j u s t b r a n d n e w .
           COMMISSIONER BROOKES: Okay.
           D R . L O N G : Y e s . I me a n s h e w o u l d n ’ t h a v e h a d a c c e s s t o t h i s
work.
           VICE CHAIRMAN BLUMENTHAL:                                               T h e U . S . g o v e r n me n t
d o e s n 't a l w a y s c o o r d i n a t e .
           C O M M I SS I O N E R B R O O K E S :                     S o t h i s w a s n 't f u n d e d b y t h e
g o v e r n me n t ; t h i s wa s a l a b o r a t o r y - -
           D R . L O N G : I t i s fu n d e d b y t h e g o v e r n me n t b u t n o t - -
           COMMISSIONER BROOKES: Indirectly. Not directly by the--
           D R . L O N G : I n d i r e c tl y b y t h e g o v e r n me n t , a n d s i n c e t h i s h a s n o t
appeared in any publication yet, she would not have seen it.
           COMMISSIONER BROOKES: Okay. Thank you.
                                                       - 42 -
            HEARING COCHAIR VIDENIEKS:                                             N e xt q u e s t i on i s t o
C h a i r ma n B a r t h o l ome w .
            C H A I R M A N B A R T H O L O M E W: T h a n k y o u v e r y mu c h a n d t h a n k
you, Dr. Long, for appearing here today. I have two questions. One
i s d o y o u t h i n k t h e r e a r e o p p o r t u n i t i e s t o c o l l a b o r a t e o n mo n i t o r i n g t h e
transnational effects of air pollution?
            DR. LONG: Absolutely, yes.
            C H A I R M A N B A R T H O L O M E W: I ' m t r y i n g t o f o l l o w t h i s . I ' m
n o t a s c i e n t i s t a n d I ' m t r y i n g t o f o l lo w e v e n j u s t t h e d i s c u s s i o n h e r e .
We c o u l d w o r k w i t h t h e C h i n e s e t o d e t e r mi n e w h a t i t i s t h a t t h e y'r e
e mi t t i n g a n d w h e r e t h o s e t h i ng s a r e s h ow i n g u p he r e ?
            D R . L O N G : S u r e . F o r e x a m p l e , I w ou l d i ma g i n e t ha t i f w e s t a r t
t o mo n i t o r a e r o s o l s e v e r y w h e r e , t h e n y o u c o u l d b a c k u p t h i s p a t t e r n
a n a l y s i s or me c h a ni c a l a na l ys i s o f w h e r e t h e a e r o s o l s a r e c o m i n g f r o m
w i t h mo r e c h e mi s t r y a n d ma y b e y o u c ou l d d i s c e r n mo r e a b o u t w h a t w a s
going on.
            C H A I R M A N B A R T H O L O M E W:                       W h a t i n c e nt i ve s w ou l d t h e
C h i n e s e g o v e r n me n t h a v e t o p r o v i de i n f o r ma t i o n o n p o l l u t a n t s t h a t a r e
s h o w i n g u p o v e r Ame r i c a n l a n d , f o r e x a mp l e ?
            D R . L O N G : I d o n ' t k n o w t h a t I h a v e a n a n s w e r f o r t h a t . I t 's n o t
c e r t a i n l y my a r e a o f e x p e r t i s e , b u t I k n o w t h e y a r e c o nc e r n e d a b o u t
their air pollution as well.
            C H A I R M A N B A R T H O L O M E W: A n d t h e n a d i f f e r e n t l i n e o f
q u e s t i o n i n g . I 'm i n t e r e s t e d - - y o u t a l k a b o u t t h e C h i n e s e s c i e n t i s t s w h o
h a v e c o me t o L i v e r mo r e , a n d d o y o u h a v e a n y s e n s e - - o b v i o u s l y s c i e n c e
e x i s t s i n t h e r e a l m o f s c i e n t i s t s , b ut we a l l h o p e t h a t s c i e n c e ma k e s i t s
w a y i nt o t h e p o l i c y d e c i s i o n s t h a t a g o v e r n me n t m a k e s - - a n y s e n s e t h a t
t h e w o r k t h a t t h e C h i n e s e s c i e n t i st s w i t h wh o m y o u ' r e w o r k i n g i s
h a v i n g a n i mp a c t o n t he g o ve r n me n t de c i s i o n s ?
            D R . L O N G : N o t f r o m me d i r e c t l y. I h a v e h a d d i s c u s s i o n s w i t h
M a r k Le v i n e a b o u t t h a t . H e 's w o r k e d e x t e n s i v e l y i n C h i n a w i t h ma n y
s c i e n t i s t s a n d I t h i n k h e t a l k s a b o ut h a v i n g g o t t e n a c c e s s i n t h a t t h e
p e o p l e t h a t h e w o r k s w i t h o n e n e r g y d o h a v e s o me i n f l u e n c e o n t h e i r
policy.
                       C H A I R M A N B A R T H O L O M E W:                     I'm asking particularly
b e c a u s e ma n y o f t h e pl a c e s w h e r e t h e s e p e o p l e h a v e c o me f r o m a r e
g o v e r n me n t r u n i n s t i t u t i o n s i n C h i n a .
            DR. LONG: Right.
            C H A I R M A N B A R T H O L O M E W: A n d I j u s t d i d n ' t k n o w i f t h e i r
s c i e n t i s t s w e r e b e i ng mo r e s uc c e s s fu l a t i mp a c t i n g t he i r p o l i c y d e b a t e s
t h a n o u r s s o me t i me s a r e h e r e .
            D R . L O N G : N o , a n d I d o n 't k n o w, b u t I d o t h i n k i t 's i m p o r t a nt
t h a t t h e y 'r e i n v ol ve d i n t h e c l i ma t e a n a l y s i s p r o b l e m b e c a u s e t h e y c a n
b u y i n t o t h e p r o b l e m. I f t h e y 'r e g o i n g t o b u y i n t o t h e s o l u t i o n , I t h i n k
                                                       - 43 -
i t 's i mp o r t a nt t h a t t h e y b u y i n t o a n a l yz i n g t he pr o bl e m.
             C H A I R M A N B A R T H O L O M E W: T h a n k y o u .
             C H A I R M A N B A R T H O L O M E W: C o m mi s s i o n e r D ' A ma t o i s n e x t .
             HEARING COCHAIR D'AMATO: Thank you, Chairman. On the
question of coal sequestration, on our last panel we talked about that
technology being available and online in the year 2012, which bothers
me b e c a us e I t hi nk t h a t w e 'v e b e e n d e mo n s t r a t i ng c e r t a i n a s p e c t s o f
t h i s t e c h n o l o g y a l r e a d y . We 'v e b e e n u s i n g i t f o r c e r t a i n p u r p o s e s
already.
             Do you have any sense of, have you looked at the question of
h o w o n e w o u l d mo v e u p t h e t i me t a b l e o f c o a l s e q u e s t r at i o n t e c h n o l o g y
i n t e r ms o f t h e a bi l i t y t o a gg r e s s iv e l y p u r s u e i t ? Wh a t w o u l d b e t h e
p o t e n t i a l o f a g g r e s s i v e l y p u r s u i n g i t a n d s h o r t e n i n g t h o s e t i me f r a me s ?
             D R . L O N G : T h e r e a r e s o me t i me f r a me s t h a t a r e e x t r e me l y
difficult to shorten, and I would like to say that I think we can shorten
t h e t i me s c a l e s b y t r y i n g mo r e d i f f e r e n t k i n d s o f g e o l og i c s i t u a t i o n s ,
mo r e l a r ge - s c a l e t e s t s . B u t e a c h o f t he s e l a r ge - s c a l e t e s t s t h a t w e h a v e
t o p e r f o r m i n o r d e r t o u n d e r s t a n d h o w s e q ue s t r a t i on i s g o i n g t o w o r k ,
a r e g o i n g t o t a k e a c e r t a i n a mo u n t o f t i me , a n d y o u c a n 't s p e e d t h a t u p .
             So what we really need to do now is have underground
s e q u e s t r a t i o n p i l o t t e s t s t ha t a r e o n t h e o r d e r o f a b o u t a mi l l i o n t o n s a
y e a r , a n d t h a t ' s b e c a u s e t h a t ' s a b o u t ho w mu c h b y o r d e r o f ma g n i t u d e
t h a t a p ow e r pl a nt w o u l d pr od u c e e v e r y y e a r , o ne t o t w o mi l l i o n t on s a
year.
             Wh e n y o u w a n t t o i nj e c t t h a t a mo u n t o f ma t e r i a l u n d e r g r o u n d
i n t o f o r e x a mp l e s a l i n e a q u i f e r s - - a lt h o u g h t h e r e a r e o t h e r s o me o t h e r
p o s s i b l e t a r g e t s - - t h e s a l i n e a q u i f e r s a r e t h e i mp o r t a n t o n e s f o r p o w e r
p r o d u c t i o n - - t h a t a mo u n t o f ma t e r i a l b e i n g p u s h e d u n d e r g r o u n d c r e a t e s
me c h a n i c a l a n d c h e mi c a l c h a n g e s i n t h e u n d e r g r o u n d , a n d t h e
ma g n i t u d e o f t h o s e c h a n g e s i s i mp o r t a n t . T h e p h y s i c a l p h e n o me n a t h a t
o c c u r a r e g o i n g t o b e d i f f e r e n t a t t h a t ma g n i t u de t ha n t h e y a r e w i t h t h e
e x p e r i e n c e t h a t w e 'v e h a d b e f o r e .
             S o y o u r e a l l y h a v e t o s p e n d t i me c h a r a c t e r i z i n g t h e s i t e , a n d
u n d e r s t a n d i n g t h a t s i t e , a n d p l a nn i n g h o w y o u 'r e g o i n g t o d o t h e
i n j e c t i o n . Y o u n e e d t o a c t u a l l y d o t h e i n j e c t i o n . Y o u n e e d t o mo n i t o r .
You need to see if it behaves the way you think it's going to behave,
a n d t h e n y o u n e e d t o s t o p a n d mo n i t o r w h a t h a p p e n s a f t e r y o u s t o p
i n j e c t i n g . A n d y o u mu l t i p l y b y y e a r s f o r e a c h o f t h e s e .
             S o I t h i nk i t 's s e ve n t o t e n y e a r s be f o r e w e kn o w f o r s u r e t h a t
c a r b o n s e q u e s t r a t i o n u n d e r g r o u n d i s a v i a b l e t e c h n o l o g y t o b u y u s t i me
o n t he c l i ma t e p r o bl e m a n d c o n t i n u e t o u s e c o a l . C a n we s p e e d t h a t
up? Yes, in the sense that we could have these very large-scale tests
d o n e i n ma n y p l a c e s . A nd t h a t r e q u i r e s mo n e y , b ut t o a c t u a l l y go
t h r o u g h t h e p r o c e s s o f r e a l l y u n d e r s t a n d i n g w h a t h a p p e n s , y o u h a v e to
                                                      - 44 -
t a k e t h e t i me t o d o i t r i g h t .
             T h e f e a r t h a t p e o p l e h a v e i s t h a t w e 'l l s a y we 'r e g o i ng t o d o
d o z e n s o f t h e s e l a r g e - s c a l e i n j e c t i o n s a n d t h e r e w o n 't b e e n o u g h m o n e y
t o d o t h e m r i g h t . I t 's mo r e i mp o r t a n t t o d o t he m r i g h t t ha n t o do ma n y
o f t h e m. S o f u n d t h e f i r s t o n e c o mp l e t e l y a n d t h e n f u n d t h e s e c o n d
o n e c o mp l e t e l y a nd t h e n f u nd t h e t hi r d o n e c omp l e t e l y , e t c e t e r a . S o
that you get all the data you need to understand what happened when
y o u p u t i t u n d e r g r o u n d . D i d t h e r o c k b r e a k ? Wh a t k i n d o f mi n e r a l s
w e r e f o r me d ? W h e r e d i d i t g o ? Di d i t g e t l o d g e d i n t h e p o u r s ? Di d
t h e s e a l wo r k ?
             A l l o f t h o s e t h i n g s n e e d t o b e d o n e a n d i t j u s t t a k e s t i me . S o i t 's
o n t h e or d e r o f a de c a de b e fo r e y o u r e a l l y u n de r s t a nd ho w t h o s e l a r g e -
s c a l e t e s t s w o r k e d , a n d y o u c a n 't s p e e d t h a t u p .
             H E A R I N G C O C H A I R D ' A M A T O : J u s t a q u i c k f o l l o w- u p . I s i t
y o u r i n s t i n c t fr o m w h a t y o u s a i d t h a t t h e ma g n i t u d e o f t h e a mo u n t o f
c a r b o n h e r e , a r e y o u p e s s i mi s t i c a b o u t o u r a b i l i t y t o d o t h i s i n l a r g e
s c a l e a l o n g w i t h t h e k i n d o f- - t h e e x t e n t t o w hi c h t ha t t he C h i n e s e a r e
g o i n g t o r e l y o n n e w c o a l - fi r e d p o w e r p l a n t s o v e r t h e n e x t c e n t u r y - - o u r
a b i l i t y t o s e q u e s t e r mo s t o f t h a t ?
             D R . L O N G : I ' m n o t p e s s i mi s t i c a b o u t i t , b u t I t h i n k i t 's g o i n g t o
require a price for carbon and it's going to require people agreeing,
p e o pl e w o r ki n g t og e t he r t o l o w e r t h e p r i c e . M o s t o f t h e p r i c e o f t h e
c o s t o f c a r b o n s e q u e s t r a t i o n i s n o t p u t t i n g i t u n d e r g r o u n d . T h a t 's o n l y
about ten percent of the cost. Most of the cost is from the separation
t e c h n o l o g y . D e v e l o p i n g r e a l l y g oo d s e p a r a t i o n t e c h n o l o g y a n d s h a r i n g
t h a t t e c h n o l o g y i s p r o b a b l y g o i n g t o b e t h e k e y p a r t o f ma k i n g t h i s a
useful technology for China.
             C h i n a 's i n t e r e s t s a r e i n d e ve l o p me n t a n d k e e p i n g t h e i r c o s t o f
e n e r g y l o w s o t h a t i t c a n c o n t i n u e t o d e v e l o p e c o n o mi c a l l y a n d t h a t
p i e c e i s r e a l l y i mp o r t a n t . F r o m t h e g e o l o g i c p e r s p e c t i ve i n Ch i n a ,
there are apparently basins where they can sequester CO2. Those
b a s i n s a r e a p p a r e n t l y c l o s e t o p u r e CO 2 s t r e a ms t h a t a r e n o w b e i n g
p r o d u c e d i n C h i n a fr o m f e r t i l i z e r a n d o t h e r ma n u f a c t u r i n g .
             S o t h e y c o u l d g o f o r w a r d w i t h s o me ma j o r u n d e r g r o u n d
s e q u e s t r a t i o n e x p e r i me n t s a t t h i s t i me . S o I 'm n o t p e s s i m i s t i c a b o u t i t
a t a l l . I t hi n k w e h a v e p l e n t y o f g e o l o g i c c a p a c i t y . I t 's g o i n g t o
r e q ui r e ne w i n f r a s t r uc t u r e . T h a t i n f r a s t r u c t u r e i n t h e U n i t e d St a t e s ,
f o r e x a mp l e , i f w e s e q u e s t e r e d a l l t h e c a r b o n d i o x i d e f r o m a l l t h e c o a l -
f i r e d p l a n t s , i s g o i n g t o b e o n t h e o r d e r o f t h e a mo u n t o f i n f r a s t r u c t u r e
w e h a v e fo r t h e o i l a n d g a s i n d u s t r y t o d a y . I t 's n o t a s ma l l t h i n g , b u t
it can be done.
             HEARING COCHAIR D'AMATO: Thank you.
             H E A R I N G C O C H A I R V I D E N I E K S : C o m mi s s i o n e r Fi e d l e r .
             C O M M I SS I O N E R F I E D L E R : I 'l l p a s s f o r t h e mo me n t .
                                                      - 45 -
            H E A R I N G C O C H A I R V I D E N I E K S : C o m mi s s i o n e r B l u me n t h a l .
            V I C E C H A I R M A N B L U M E N T H A L : T h a n k y o u v e r y mu c h . I
h a d a q u e s t i o n r e g a r d i n g t h e mo s t p r o mi s i n g t e c h n o l o g i e s a n d s c i e n c e ,
p a r t i c u l a r l y wi t h r e g a r ds t o s c i e n t i f i c c o o p e r a t io n i n t h e t r a n s p o r t a t i o n
and fuel and oil sector.
            I t s e e ms t h a t w i t h r e g a r d t o t h e c a r b o n i s s u e t h e r e a r e s ome v e r y
i mp r e s s i v e s c i e n t i f i c p r o g r a ms g o i n g o n , b u t t h e g r o w t h t h a t w e h e a r d
b e f o r e o f t h e a u t o mo b i l e a n d t r a n s p o r t a t i o n s e c t o r me a n s t h a t t h e c o a l
p r o g r a ms a r e g o i n g t o d e a l m u c h w i t h t h a t t r e n d .
            A g a i n , h o w y o u t h i n k t h e C h i n e s e ma y g o a b o u t d e a l i n g w i t h t h e
f a c t t ha t t h e t r a ns p o r t a t i o n s e c t or i s g r o w i n g s o l a r ge a n d w h a t t h e
e n v i r o n me n t a l mi t i g a t i o n p o l i c i e s mi g h t b e ?
            D R . L O N G : Y o u ' r e g o i n g t o h e a r fr o m L e e S c h i p p e r a f t e r me . I
d o n 't s e e h i m h e r e y e t , b u t h e i s a n e x p e r t i n t r a ns p o r t a t i o n . I h a v e n o t
looked at the transportation sector per se. They are farther along than
w e a r e i n t e r ms o f t h e ef f i c i e n c y o f t h e i r c a r s .
            I c a n c o m me n t o n t h e r o l e o f u n d e r g r o u n d c o a l g a s i f i c a t i o n c o u l d
b e u s e d t o p r o d u c e f u e l f o r t h e i r t r a ns p o r t a t i o n, a n d i f w e a r e do i n g
t h a t a n d s e q u e s t e r i n g t h e c a r b o n d i o xi d e a l o n g w i t h c o a l g a s i f i c a t i o n ,
t h e n t h e g a s t h a t y o u g et h a s g o t a l o w e r c a r b o n d i o x i d e e mi s s i o n p e r
u n i t e n e r g y t h a n o i l s o t h a t wo u l d b e f a v o r a b l e a s w e l l .
            T h e t h i r d p a r t o f a n y t r a n s p o r t a t i o n p r o b l e m i s t h e v e h i c l e mi l e s
t r a v e l e d , a n d I t h i n k t h e y 'r e g o i n g t o h a v e t o de a l w i t h t h a t a s w e l l a s
w e d o . We h a v e c o m mo n i n t e r e s t s i n t h a t l a r g e l y l a n d u s e p l a n n i n g ,
y o u k n o w , c i t y p l a n n i n g , t r a n s p o r t at i o n p l a n n i n g p r o b l e m i n ma n y
ways that we will share. You have to hit all three to affect the carbon
f o o t p r i n t o f t h e t r a n s p o rt a t i o n s y s t e m- - t h e e f f i c i e n c y o f t h e c a r , t h e
carbon content of the fuel and the driving patterns.
            V I C E C H A I R M A N B L U M E N T H A L : A n d y o u a r e s e e i n g s o me
t r e n d s i n t h o s e d i r e c t i o n s wi t h i n C h i n a ?
            D R . L O N G : N o , I h a v e n 't b e e n l o o k i n g a t t h a t .
            V I C E C H A I R M A N B L U M E N T H A L : O h , y o u 'r e n o t l o o k i n g a t i t .
O k a y . A d i f f e r e n t q u e s t i o n . I w a s s t r u c k b y s o me o f t h e w o r k y o u 'r e
d o i n g o n E a s t A s i a n mo n s o o n w i t h b o t h P R C a n d T a i w a n . I w o n d e r i f
y o u c o u l d e l a b o r a t e o n t h a t w o r k an d e l a b o r a t e s p e c i f i c a l l y o n t h e
e n v i r o n me n t a l i mp a c t s o f t h e mo n so o n s a n d t h e o c e a n o g r a p h i c w o r k
t h a t y o u 'r e d o i n g .
            D R . L O N G : I d o n 't t h i n k I c a n g i v e y o u t o o ma n y s p e c i f i c s
e x c e p t t o s a y t h a t w i t h t h e c omp u t a t i o n a l p o w e r t h a t w e h a v e ,
l a b o r a t o r y i s a b l e t o i n c r e a s e t h e r e s o l u t i o n o f g l o b a l c l i ma t e mo d e l s
t o t h e p o i n t a t w h i c h w e 'r e b e g i n n i n g t o b e a b l e t o s i mu l a t e h u r r i c a n e s
a n d mo n s o o n s , a n d s o w e a r e b e g i n n i n g t o s h o w t h a t i n t h e f u t u r e w i t h
e x t e n s i v e c o mp u t a t i o n , w e 'r e g o i n g t o b e a b l e t o mo d e l t h e o c c u r r e n c e
o f t h o s e mo n s o o n s .
                                                        - 46 -
            J u s t t o g i v e y o u a f e e l i n g f o r w h a t t h a t me a n s , e v e r y t i me y o u
d e c r e a s e t h e r e s o l u t i o n , s ma l l e r p i x e l s o n a c l i ma t e mo d e l , b y a f a c t o r
o f t w o , y o u i n c r e as e t h e c o mp u t a t i o n a l p o w e r r e q u i r e d b y a f a c t o r o f
e i g h t . A s w e l l , i f y o u l o o k a t mo r e a c c u r a t e c o mp u t a t i o n a l me t h o d s ,
y o u c a n i n c r e a s e t h e a mo u n t o f t i me y o u n e e d o n a c o mp u t e r . T h e
l a b or a t or y c u r r e nt l y h a s t h e f a s t e s t c omp u t e r i n t h e w o r l d, B l u e G e ne / L ,
a n d o n t h a t c o mp u t e r w h e n w e ma k e c a l c u l a t i o n s o n t h e o r d e r o f 3 0
k i l o me t e r s i n a p i x e l , w h i c h i s t h e s c a l e o n w h i c h w e c a n s t a r t t o
s i mu l a t e t h o s e mo n s o o n s , i t t a k e s o n e f u l l d a y o f a l l t h e p r o c e s s o r s o n
t h a t c o mp u t e r t o d o t e n y e a r s o f d a t a , t e n y e a r s o f c l i ma t e mo d e l i n g .
            S o w e a r e l o o ki n g n o w a t d e c r e a s i ng t h a t d ow n t o e ve n l o w e r
r e s o l u t i o n w h e r e w e w i l l b e a b l e t o s h o w h o w t h e s e mo n s o o n s a r e
going to be developing.
            VICE CHAIRMAN BLUMENTHAL: Just very quickly. How
h a v e t h e mo n s o o n s , p a r t i c u l a r l y i n T a i w a n , I k n o w t h e y a r e v e r y
f r e q u e n t , a n d e a r t h q u a k e s , a n d s o f o r t h a f f e c t e d t h e e n v i r o n me n t a c r o s s
t h e St r a i t , i n Ta i w a n a n d s o u t h e r n C h i n a ?
            D R . L O N G : I c a n ' t a n s w e r t h a t. I ' m s o r r y . I c a n g e t y o u a n
answer for that if you would like.
            VICE CHAIRMAN BLUMENTHAL: That would be helpful.
            D R . L O N G : O k a y . We c a n , I t hi n k t h e r e a r e p e o p l e t h a t a r e
w o r k i n g o n t h a t a t t h e l a b o r a t o r y , b u t I d o n 't k n o w t h e a n s w e r .
            HEARING COCHAIR VIDENIEKS: The next question goes to
Mr. Shea.
            H E A R I N G C O C H A I R S H E A : T h a n k y o u , Dr . L o n g , f o r b e i n g
here.
            D R . L O N G : Y o u 'r e w e l c o m e .
            HEARING COCHAIR SHEA: One of the great things about
b e i n g o n t h i s C o mmi s s i o n i s y o u g e t t h e s e b r i e f i n g b o o k s t h a t a r e j us t
t h e s e ma m m o t h - -
            DR. LONG: And you read the whole thing.
            HEARING COCHAIR SHEA: I read a lot of it. It was very
i n t e r e s t i ng .    B u t I w a n t t o g e t b a c k t o t hi s t r a c ki ng i s s ue t h a t
C o m mi s s i o n e r Br o o k e s me n t i o n e d . I a p p r e c i a t e t he w o r k t h a t you 'v e
d o n e o n t h e a e r o s o l i s s u e , wh i c h y o u s a y i s r e c e n t w o r k .
            J u s t f o r t h e r e c or d- - t hi s i s n o t r e a l l y a q u e s t i o n - - i t 's m o r e o f a
c o m me n t t o my f e l l o w c o mmi s s i o n e r s . E l i z a be t h Ec o n omy s u b mi t t e d
s o me t e s t i mo n y t o u s w h i c h s a y s t ha t t h e E PA , U . S . E P A , e s t i ma t e s
t h a t o n s o me d a y s f u l l y 2 5 p e r c e nt o f t h e pa r t i c u l a t e s i n t he
a t mo s p h e r e i n L o s A n g e l e s a r e f r o m C h i n a .                   I me n t i o n e d t h a t t o
A d mi n i s t r a t o r A y r e s ; s h e d i s p u t e d t h a t f i g u r e . S h e w a s a w a r e o f t h a t
f i g u r e a n d s a i d w e d o n 't a g r e e w i t h t h a t . We c a n 't r e a l l y c o n f i r m t h a t .
            A n d t h e n s o me w h e r e e l s e i n t h i s b r i e f i n g b o o k , w e h a v e a p i e c e
f r o m D a n i e l R o s e n w h o t e s t i f i e d a t t he l a s t h e a r i n g , a n d T r e v o r
                                                       - 47 -
H o u s e r , w h o s a y s - - a n d h e c i t e s t h e N e w Y o r k T i me s , s o i t mi gh t b e
w r o n g - - i n C a l i f o r n i a , O r e g o n a n d Wa s h i n g t o n , C h i ne s e s u l f ur h a s
r e a c h e d b e t w e e n t e n a n d 1 5 p e r c e n t o f E P A 's a l l o wa b l e l e ve l s i n t h e
mo u n t a i n s , e n o u g h t o b e c o n c e r n e d a b o u t , b u t n o t e n o u g h t o c a u s e a c i d
rain yet.
             S o t h e r e s e e ms t o b e s o me d i s c u s s i o n h e r e a b o u t t r a c k i n g , s o me
i n f o r ma t i o n o u t t h e r e a b o u t t r a c k in g e n v i r o n me n t a l p o l l u t a n t s f r o m
China and how they affect the U.S., and I think we should probably
t a k e a l o o k a t t h i s fu r t h e r a s a C o m mi s s i o n .
             B u t t he q u e s t i on I h a ve i s a f o l l o w - u p t o C o m mi s s i o n e r
D 'A ma t o ' s q u e s t i o n a b o u t c a r b o n s eq u e s t r a t i o n . I 'm n o t a mi n i n g -
e d u c a t e d p e r s o n o r a s ci e nt i s t a t a l l , b ut a s I u n d e r s t a n d i t , y o u
c o mp r e s s t h e g a s .
             DR. LONG: Right.
             HEARING COCHAIR SHEA: And you try to inject it very deep
i n t o t he e a r t h .
             DR. LONG: Right.
             HEARING COCHAIR SHEA: In porous rock.
             DR. LONG: Right.
             H E A R I N G C O C H A I R S H E A : O r c e r t a i n g e o l o g i c a l f o r ma t i o n s .
H a v e w e d o n e i n t h e U n i t e d S t a t e s a n a s s e s s me n t , a ma p o f w h e r e t h i s
t e c h n o l o g y c o u l d w o r k a n d h a v e t he C h i ne s e ma p p e d w h e r e t hi s
technology can work?
             D R . L O N G : T he U n i t e d St a t e s p r o g r a m t h r o u g h t h e D e p a r t me n t
o f E n e r g y h a s s e v e n r e g i o n a l p a r tn e r s h i p s a n d t h e y h a v e r e c e n t l y
c o mp l e t e d a n a t l a s , w h i c h i s a n a s s e s s m e n t o f w h e r e s t or a ge mi g h t be
i n t h e U n i t e d St a t e s .
             I n a d d i t i o n , I t h i n k t h e r e a r e s o me b i l l s c u r r e n t l y i n C o n g r e s s
r i g h t n o w w h i c h w o u l d e x p a n d t h a t a s se ss me n t t o ma k e i t mo r e
d e t a i l e d , mo r e c o m p l e t e .
             T h e C h i n e s e , a s fa r a s I u n d e r s t a n d , a r e w o r k i n g wi t h t h e
A u s t r a l i a n s i n a p r o g r a m t h a t 's , I t h i n k , a b o u t a $ 5 mi l l i o n p r o g r a m t o
a s s e s s s i t e s i n C h i n a , a n d s o me d a t a h a s b e e n c o l l e c t e d a n d a n a l y z e d ,
a n d i n t h e b a c k o f my b r i e fi n g b o o k , y o u 'l l s e e s o me b a s i n s t h a t h a v e
b e e n i de nt i f i e d i n C h i n a t ha t a r e p ot e n t i a l s i t e s , t a r ge t s fo r a s s e s s me n t
o f w h e r e t h e y mi g h t s e q u e s t e r c a r b o n d i o x i d e .
             H E A R I N G C O C H A I R S H E A : F i v e mi l l i o n d o e s n ' t s e e m l i k e a
l o t o f mo n e y .
             DR. LONG: No, it doesn't really take a lot of new data to do the
i n i t i a l a s s e s s me n t b e c a u s e p e o p l e h a v e a l o t o f d a t a t h e y 'v e u s e d fo r
o t h e r p u r p o s e s . Th e y 'v e d o n e g e o l o gi c a n a l y s i s . T h e y 've d r i l l e d h o l e s
f o r w e l l s , f o r w a t e r , f o r o i l . T h e y h a ve e x t e n s i ve d a t a ; i t j u s t n e e d s t o
b e c o l l e c t e d a n d a n a l y z e d t o s o me e x t e n t .
             H E A R I N G C O C H A I R S H E A : S o i n t e r ms o f t h e q u e s t i o n a b o u t
                                                     - 48 -
s p e e d i n g u p t h e i n t r o d u c t i o n o f t h i s t e c h n o l o g y i nt o C h i n a , w o u l d mo r e
a g g r e s s i v e ma p p i n g p r o g r a ms s p e e d i t u p s u b s t a n t i a l l y ?
            D R . L O N G : T h a t w o u l d c e r t a i n l y . Ab s o l ut e l y . I t 's j u s t r e c e nt l y
t h a t I 'v e s e e n t h i s a n a l y s i s s h o w i n g t h a t t h e r e a r e , i n f a c t , b a s i n s
s u i t a b l e f o r c a r b o n s e q ue s t r a t i o n i n C h i n a , a nd i f y o u h a d a s k e d me
l a s t y e a r , I w o u l d h a v e s a i d t h a t t he b e s t o f my k n o w l e d g e , t h e r e a r e n 't
v e r y g o o d l o c a t i o n s i n C h i n a . S o mo r e k n o w l e d g e w o u l d b e e x t r e me l y
h e l p f u l i n u n d e r s t a n d i n g w ha t w a s h a p p e n i n g t h e r e .
            I d o n 't t h i n k t h a t a s s e s s me n t i s a n e x p e n s i v e p a r t o f mo v i n g
f o r w a r d w i t h c a r b o n s e q u e s t r a t i o n . I t d o e s n 't t ak e a l o t o f mo n e y t o
a s s e s s t h e s i t e s a n d h o w mu c h p o t e n t i a l t he y h a v e f o r s e q u e s t e r i n g
carbon dioxide.
            T h e e x pe n s i ve p a r t i s g oi ng t o be t h e s e l a r ge - s c a l e t e s t s t ha t
n e e d t o b e f u n d e d a n d d o n e o v e r s o m e a mo u n t o f t i me , a n d t h e n i n t h e
l o n g t e r m , t h e e x p e n s e wi l l b e t h e s e p a r a t i o n .
            HEARING COCHAIR SHEA: Thank you.
            H E A R I N G C O C H A I R V I D E N I E K S : C o m mi s s i o n e r Fi e d l e r .
            C O M M I SS I O N E R F I E D L E R : I j u s t w a n t e d t o a s k a g e n e r a l
q u e s t i o n a b o u t w i n d - b o r n e p a r t i c u l a te s c o mi n g i n t o t h e U n i t e d S t a t e s ,
a n d me a s u r e s o f o u r o w n r e d u c t i o n , s o t h a t y ou c o u l d n e t o u t a n e w
l a r g e n u mb e r , o r s ma l l n u mb e r , c a u s e d b y e c o n o mi c d e v e l o p me n t , i f
y o u w i l l , n e w e c o n o mi c d ev e l o p me n t i n As i a , n o t n e c e s s a r i l y C h i n a
s p e c i f i c , b e c a u s e t h i s i s a s o r t o f ma c r o n u mb e r , a n d h a s t h e r e b e e n a
h u g e i n c r e a s e , a mo d e s t i n c r e a s e i n w i n d - b o r n e p a r t i c u l a t e s - -
            DR. LONG: From China.
            C O M M I SS I O N E R F I E D L E R : - - f r o m A s i a ? I ' m a v o i d i n g t h e
s i g n a t u r e t e s t o f t h e p a r t i c u l a t e . J u s t g e n er a l l y s p e a k i n g , h a v e w e
g o t t e n a l o t mo r e p o l l u t io n i n t h e U n i t e d S t a t e s - -
            DR. LONG: From China?
            C O M M I SS I O N E R F I E D L E R : - - f r o m A s i a ?
            D R . L O N G : F r o m A s i a . I d o n 't k n o w t h e a n s w e r t o t h a t a n d I
d o n 't k n o w t h a t a n y b o d y h a s s t u d i e d i t . I w o u l d i ma g i n e p e o p l e c o u l d
try to answer that question.                               Through understanding of previous
w e a t h e r d a t a , y o u c o u l d g e t a n a n a l y s i s o f t h a t , b u t I d o n 't k n o w t h e
a n s w e r . I c a n a l s o f i n d o u t i f s o me b o d y e l s e d o e s .
            C O M M I SS I O N E R F I E D L E R : Wo u l d t h a t s k e w o u r a b i l i t y o r
h i n d e r o u r a b i l i t y t o me a s u r e o u r o w n r e d u c t i o n s ? I t w o u l d c e r t a i n l y - -
            C O M M I SS I O N E R B R O O K E S : T h a t ' s w h a t I wa s w o n d e r i n g .
            C O M M I SS I O N E R F I E D L E R : I f y o u c an 't f i g u r e o u t t h e o r i g i n o f
it--
            DR. LONG: Yes, absolutely.
            C O M M I SS I O N E R F I E D L E R : - - w h e t h e r i t 's o u r s o r t h e i r s , t h e n ,
y e s , i t 's a p r o b l e m.
            D R . L O N G : We l l , n o t t o m e n t i o n t he f a c t t ha t i t ma k e s i t v e r y
                                                     - 49 -
h a r d t o r e d u c e o u r a er o s o l l o a d i n g b e c a u s e i f y o u c a n 't c o n t r o l 4 0
p e r c e n t o f i t , t h e r e 's n o t h i n g y o u c a n d o a b o u t 4 0 p e r c e n t o f i t , t h e n
y o u 'r e k i n d o f s t u c k .
            C O M M I SS I O N E R F I E D L E R : I wa s j u s t t r y i n g t o u n d e r s t a n d t h e
overall context--
            D R . L O N G : Y e s , y o u 'r e r i g h t .
            C O M M I SS I O N E R F I E D L E R : - - t h a t we ' r e t a l k i n g a b o u t .
            D R . L O N G : N o , y o u 'r e r i g h t . T h a t ' s a n i mp o r t a n t t h i n g t o
u n d e r s t a n d . I j u s t d o n 't k n o w t h e a n s w e r .
            C O M M I SS I O N E R F I E D L E R : D o y o u t h i n k s o me b o d y h a s g o t
t h a t i n f o r ma t i o n o r i t 's n e v e r b e e n d o n e ?
            DR. LONG:                I d o n 't k n o w i f i t s o me o n e h a s d o n e i t , b u t I t h i n k
i t 's p os s i b l e t o l oo k a t i t b e c a u s e I t h i n k y o u h a v e d a t a f r o m p a s t
t i me s , a n d y o u c a n c o mp a r e i t t o t h e p r e s e n t .
            COMMISSIONER FIEDLER: Right.
            D R . L O N G : I d o n 't k n o w t h a t a n y b o d y h a s d o n e t h a t s t u d y .
            H E A R I N G C O C H A I R V I D E N I E K S : We 'l l s t a r t a s e c o n d r o u n d
t h e n. I 'd l i k e t o k i c k o f f w i t h a qu i c k q ue s t i on i n t h e b e gi nn i n g .
G i v e n t h a t y o u me n t i o n e d t h e r e ' s a t e n y e a r p o s s i b l e d e l a y i n v e r i f y i n g
t h e f e a s i b i l i t y o f s e q u e s t r a t i o n , i s t h e r e a l s o a t i me l a g i n d e t e r mi n i n g
t h e f e a s i bi l i t y o f u n d e r g r o u n d c o a l g a s i f i c a t i o n ?
            D R . L O N G : I w o u l d t h i n k t h a t t h a t 's a s ma l l e r l a g . T h e C h i n e s e
a r e g o i n g a h e a d wi t h a l a r g e u n d e r g r o u n d c o a l g a s i f i c a t i o n p r o j e c t
n o w . S o my g u e s s i s w e 'l l k n o w a l o t a b o u t h o w t o g o f o r w a r d i n
ma y b e l e s s t h a n a d e c a d e , h o w b i g a n i s s u e i t w i l l b e .
            H E A R I N G C O C H A I R V I D E N I E K S : B u t s t i l l y o u 'r e t a l k i n g y e a r s
e v e n t h o u g h c o m me r c i a l l y t h e C h i ne s e a p p a r e n t l y a r e d o i n g i t n o w .
            D R . L O N G : Y e s . I t h i n k y o u c ou l d mo v e a h e a d w i t h t h a t mu c h
mo r e q u i c k l y t h a n c a r b o n d i o x i d e s e q u e s t r a t i o n u n d e r g r o u n d . I d o n 't
t h i n k y o u h a v e t h e s a me d e l a y . T h e r e 's s t i l l g o i n g t o b e e n v i r o n me n t a l
e f f e c t s t h a t y o u 'r e g o i n g t o w o r r y a b o u t , a n d t h a t i s t h e r e a s o n t h a t i t 's
g o i n g t o t a k e a l o n g t i me t o u n d e r s t a n d c a r b o n s e q u es t r a t i o n b e c a u s e
y o u w a n t t o ma k e s u r e t h a t y o u ' r e n o t c r e a t i n g e n v i r o n me n t a l p r o b l e ms
a n d t h e r e a r e s o m e p o t e n t i a l e n v ir on me n t a l p r o bl e ms w i t h c a r b o n
sequestration as well.
            P r o b a b l y o n e o f t h e w o r s t p r o b l e ms t h a t mi g h t o c c u r wo u l d b e
d i s s o l u t i o n o f me t a l s . T hi s i s , h o w e ve r a n a v o i d a b l e p r o b l e m. Wh e n
you put carbon dioxide underground, just like putting carbon dioxide
i n t h e c a r b o n a t e d w a t e r , t h e w a t e r b e c o me s a c i d . Wh e n i t b e c o m e s
a c i d , i t w i l l mo r e r e a d i l y d i s s o l v e me t a l s , f o r e x a mp l e , a n d s o i f y o u
t h e n a r e di s s ol vi n g me t a l s a nd t h e n s ome h o w t h a t w a t e r i s g e t t i n g i n t o
ground water that you want to use for drinking, that's not good.
            B u t b y p u t t i n g t h e c a r b o n d i o x i de d e e p e n o u g h a n d f a r e n o u g h
away from sources of ground water, you can avoid this hazard.
                                                      - 50 -
           S i mi l a r l y , i n u n d e r g r o u n d c o a l g a s i f i c a t i o n , y o u 'r e h a v i n g a l o t
o f f l u i d mo v i n g a r o u n d , h e a t , a n d s o me o f t h a t ma t e r i a l i s t o x i c . Y o u
a r e g o i n g t o wa n t t o k n o w w h e r e i t g o e s .                         But one thing about
u n d e r g r o u n d c o a l g a s i fi c a t i o n i s i t c a n b e s t o p p e d e a s i l y . I f y o u s t o p
p u mp i n g t h e a i r u n d e r g r o u n d a n d y o u s t o p p u mp i n g t h e w a t e r
underground, you stop the process.
           S o I t h i n k i t 's p o s s i b l e t o man a g e a l l o f t h e s e e n g i n e e r i n g
p r o b l e ms , a n d y o u c o u l d mo v e a h e a d w i t h u n d e r g r o u n d c o a l
gasification fairly quickly.
           H E A R I N G C O C H A I R V I D E N I E K S : T h a n k y o u . C o m mi s s i o n e r
D 'A ma t o .
           H E A R I N G C O C H A I R D ' A M A T O : T h a n k y o u , M r . C h a i r ma n .
J u s t o n e q u i c k q u e s t i o n . I d o n 't k n o w i f y o u h a v e t h e a n s w e r t o t h i s ,
b u t l e t 's a s s u me t h a t w e wo u l d g o f o r w a r d w i t h o ne of t h e s e ma j or
s e q u e s t r a t i o n p l a n t s o n t he o r d e r o f w h a t - - a mi l l i o n t o n s p e r y e a r - -
           DR. LONG: Right.
           HEARING COCHAIR D'AMATO: --of CO2 injection. Do you
h a v e a c r u d e a s s e s s me n t o f w h a t t h e c o s t o f t ha t pl a nt w o u l d b e o n a n
annual basis to operate?
           D R . L O N G : T h a t e x p e r i me n t ?
           HEARING COCHAIR D'AMATO: Yes.
           DR. LONG:                   Y e s , I b e l i e v e t ha t e a c h o f t h o s e l a r ge - s c a l e
e x p e r i me n t s wi l l b e a b o u t $ 1 0 0 mi l l i o n .
           H E A R I N G C O C H A I R D ' A M A T O : B u t n o t j u s t t h e e x p e r i me n t .
T h e n y o u p r o v e t h e e x p e r i m e n t i s c or r e c t , y ou w a n t t o p u t t h e p l a n t
into place, what would that cost?
           D R . L O N G : T o d o a f u l l y i nt e g r a t e d p o w e r p r o d u c t i o n a n d
c a r b o n s e q u e s t r a t i o n , r e me m b e r t h a t t h e ma j o r c o s t i s t h e c a p t u r e a n d
the plant.
           HEARING COCHAIR D'AMATO: Separation?
           D R . L O N G : I f y o u 'r e g o i n g t o d o a fu l l y i n t e g r a t e d s y s t e m w i t h
a coal-fired power plant (say IGCC), and all the bells and whistles for
c a r b o n c a p t u r e a n d s e q u e s t r at i o n , t h a t ' s o n t h e o r d e r o f a b i l l i o n o r t w o
billion.
           HEARING COCHAIR D'AMATO: A billion dollars?
           D R . L O N G : Y e s . B u t t h e n y o u 'r e g e t t i n g e l e ct r i c i t y p r o d u c t i o n
from this as well.
           HEARING COCHAIR D'AMATO: Right. For a plant?
           DR. LONG: Right.
           HEARING COCHAIR D'AMATO: A billion?
           DR. LONG: Yes.
           HEARING COCHAIR D'AMATO: Thank you.
                        C O M M I S S I O N E R B R O O K E S : I w o u l d r e c o mme n d t h a t i n
t h e a nn u a l r e po r t t h a t o ne o f t h e t h i ng s w e l o ok a t i s ge t t i n g gr e a t e r
                                                      - 51 -
v i s i b i l i t y o n t hi s i s s u e o f e mi s s i o n s c o mi n g f r o m o u t s i d e t h e c o u n t r y .
             C H A I R M A N B A R T H O L O M E W: I t h i n k w e n e e d t o l o o k a t t h e
p o s s i b i l i t y o f s o me r e s e a r c h .
             COMMISSIONER BROOKES:                                 I j u s t w a n t t o ma k e s u r e w e
r e me mb e r i t .
             C H A I R M A N B A R T H O L O M E W: Y e s .
             C O M M I SS I O N E R B R O O K E S :                  W h e n i t c o me s a r o u n d t o
C o m mi s s i o n r e p o r t i n g t i me , t h a t w e l o o k a t t h i s a n d e n c o u r a g e mo r e
v i s i b i l i t y o n t h i s i s s u e b e c a u s e w e w o n 't b e a b l e t o n e c e s s a r i l y mo n i t o r
our own progress--
             DR. LONG: Right.
             C O M M I SS I O N E R B R O O K E S : - - i f a g o o d d e a l o f t h i s , i f t h i s i s
a c c ur a t e , a n d a g o od d e a l o f t h i s i s c o mi n g f r o m o u t s i d e o f t h e Un i t e d
States.
             C H A I R M A N B A R T H O L O M E W: Y e s , y e s . Th a n k y o u .
             H E A R I N G C O C H A I R V I D E N I E K S : T h a n k y o u v e r y mu c h .
             D R . L O N G : We 'd b e h a p p y t o h e l p .
             V I C E C H A I R M A N B L U M E N T H A L : T h a n k y o u v e r y mu c h , D r .
Long.
             C H A I R M A N B A R T H O L O M E W: Y e s , t h a n k y o u , D r . Lo n g . We
c a n t a k e a b r e a k f o r a f e w mi n u t e s . We 'l l t a k e a t e n mi n u t e b r e a k .
             [ Wh e r e u p o n , a s h o r t r e c e s s wa s t a k e n . ]


PANEL III: CHINESE ENERGY CONSUMPTION PATTERNS AND
            TRENDS: A BASELINE ASSESSMENT

           H E A R I N G C O C H A I R S H E A : We ' l l b e g i n o u r t h i r d p a n e l o f t h e
mo r n i n g . I n o u r t h i r d p a n e l , w e a r e p l e a s e d a n d h o n o r e d t o h a v e t h r e e
experts speak about current trends and patterns in Chinese energy
c o n s u mp t i o n .
           O u r f i r s t s p e a ke r , M r . S a a d R a h i m, i s t h e M a n a g e r o f P F C
E n e r g y 's N a t i o n a l O i l C o mp a n y S t r a t e g i s t p r a c t i c e . H i s p r i ma r y f o c u s
i s ma n a g i n g P F C E n e r g y ' s N a t i o n a l O i l C o m p a n i e s S e r v i c e , w h i c h
a n a l y z e s t h e s t r a t e g i e s , g o a l s a n d o u t l o o k f o r n a t i o n a l o i l c o mp a n i e s
worldwide.
           A l s o j o i n i n g u s t o d a y i s M r . Tr e v o r H o u s e r . M r . H o u s e r i s a
D i r e c t or a t C hi n a S t r a t e g i c A d v i s o r y , w h e r e he l e a ds C S A 's e n e r g y
s e c t o r a c t i v i t i e s . I n h i s w o r k , h e t r a v e l s f r e q u e n t l y t o C hi n a , w h e r e h e
me e t s r e g u l a r l y w i t h g o v e r n me n t o f f i c i a l s , b u s i n e s s l e a d e r s , a c a d e mi c s
a n d N G O s a b o u t e n e r g y d e v e l o p me n t s i n C h i n a .
           Finally, Dr. Lee Schipper, is the Director of Research at
EMBARQ, the World Resources                                      I ns t i t u t e C e n t e r fo r S u s t a i n a b le
T r a n s p o r t . D r . Sc h i p p e r e a r n e d h i s P h . D . i n a s t r o p h y s i c s - - i n t e r e s t i n g - -
                                                        - 52 -
b u t h a s d e v o t e d h i s c a r e e r t o e a r t h l y p r o b l e ms o f t r a n s p o r t , e n e r g y a n d
e n v i r o n me n t . H e c a me t o E M B A R Q a t i t s f o u n d i n g i n A p r i l 2 0 0 2
w h e r e he i s D i r e c t o r o f R e s e a r c h . D r . S c hi p pe r a l s o ha s e x pe r i e n c e
w i t h t he I n t e r n a t i o na l E ne r g y A g e n c y a n d L a w r e n c e B e r ke l e y N a t i o n a l
Laboratory.
           G e n t l e me n , t h a n k y o u f o r j o i n i n g u s t o d a y . W e 'l l b e g i n w i t h t h e
t e s t i mo n y o f M r . Ra h i m.

     STATEMENT OF MR. SAAD RAHIM, MANAGER, COUNTRY
      S T R A T E G I E S G R O U P , P F C E N E R G Y , W A SH I N G TO N , D . C .

             MR. RAHIM:                        Th a n k y o u .       M e mb e r s a n d c o c h a i r s o f t h e
C o m mi s s i o n , t h a n k y o u f o r i n v i t i n g me h e r e t o d a y . A s m e n t i o n e d , my
n a me i s Sa a d Ra h i m. I ' m a M a n a g e r i n t h e Co u n t r y St r a t e g i e s G r o u p
o f P F C E n e r g y . W e 'r e a s t r a t e g i c a dv i s o r y f i r m f o c u s i n g o n e n e r g y a n d
w i t hi n t ha t I c o ve r ma i nl y A s i a , i n a d d i t i o n t o t h e N a t i o n a l O i l
C o mp a n y ' s r o l e . So w e ' v e d o n e a l o t o f w o r k l o o k i n g a t C h i n a a n d
C h i n e s e e n e r g y d e ma n d s .
             I 'v e b e e n a s k e d t o d a y t o pr e s e nt my v i e w s on C h i ne s e e ne r gy
c o n s u mp t i o n p a t t e r n s , a n d I w a n t t o d o s o b y o u t l i n i n g f i r s t t h e
p o l i t i c a l a n d e c o n o mi c c o n t e x t a g a i n s t w h i c h C h i n e s e e n e r g y d e m a n d s
a r e u n f o l d i n g , a n d t h e n f o l lo w i n g t h a t w i t h a d i s c u s s i o n o f s o me o f t h e
s t e p s t h a t t h e C h i n e s e g o v er n me n t i s t a k i n g t o a d d r e s s r a p i d l y r i s i n g
d e ma n d , a n d t h e n f i n a l l y l o o k i n g a t w ha t w e s e e a s t h e p r o j e c t e d f u t u r e
d e ma n d f o r e n e r g y c o n s u mp t i o n i n C h i n a .
             I w o u l d l i k e a t t h i s t i me t o n o t e t h e i n v a l u a b l e c o n t r i b u t i o n s o f
my c o l l e a g u e s , D r . Y a h y a Sa d o w s k i a n d D r . Da v i d G a t e s i n p r e p a r i n g
t h i s a na l ys i s . I 'd l i ke t o be g i n wi t h a n o v e r vi e w o f C h i n a 's e ne r gy
i s s ue s a nd s o me o f t h e s t e p s t ha t a r e b e i n g t a k e n t o a d d r e s s t h a t .
C h i n a 's r a p i d y e t s u s t a i n e d e c o n o mi c g r o w t h o v e r t h e p a s t t w o d e c a d e s
i s o n e o f t h e g r e a t e c o n o mi c a c c o mp l i s h me n t s o f t h e l a s t c e n t u r y .
             Wh i l e g r o w t h h a s , q u o t e - u n q u o t e , " s o l v e d " ma n y o f C h i n a 's
p r o b l e ms , i t h a s a l s o c re a t e d n e w o n e s : ma s s i v e mo v e me n t s o f l a b o r ,
g r o w t h o f i n e q u a l i t y , p o l i t i c a l u nc e r t a i n t y , c ol l a p s e o f pu b l i c s e r vi c e s ,
and other issues.
             O n e o f t h e mo s t i mp o r t a n t o f t h e s e p r o b l e ms i s a r e s o u r c e s
b o t t l e n e c k t h a t t hr e a t e n s t o c o n s t r i ct f u t u r e g r o w t h . C h i n a n e e d s mo r e
s k i l l e d s c i e n t i s t s a n d e n g i n e e r s . I t ne e d s mo r e w a t e r . M o s t o f a l l i t
n e e d s mo r e e ne r g y.
             I n t h e e a r l y 1 9 9 0 s , t h e g o v e r n me n t o f B e i j i n g b e g a n t o p u b l i c l y
a c k n o wl e d g e t h a t i t f a c e d a l o o mi n g e n e r g y c r i s i s . O i l p r o d u c t i o n i n
o i l f i e l d s w a s d e c l i n i n g a n d d e ma n d f o r f u e l w a s g r o wi n g f a s t e r t h a n
new reserves were being discovered.
             S e l f - s u f f i c i e n c y , o n e o f t h e g r e at o bj e c t i v e s o f t h e M a o i s t e r a ,
                                                        - 53 -
w a s n o l o n g e r p o s s i b l e . I n 1 9 9 5 , C h i n a b e c a me a n e t o i l i mp o r t e r a n d
w i l l r e ma i n o n e f o r t h e f o r e s e e a b l e f u t u r e . B y t h e l a s t 1 9 9 0 s , a n e v e n
mo r e s e r i o u s p r o b l e m h a d b e g u n t o ma n i f e s t i t s e l f . A l t h o u g h C h i n a
h a s a mp l e r e s e r v e s f o r c o a l , w h i c h s e r v e s a s t h e p r i ma r y d r i v e r i n t h e
e n e r g y mi x , p r o d u c t i o n w a s i n e f f i c i e nt a n d d e l i v e r i e s w e r e i r r e g u l a r , a
p r o b l e m t h a t h a s c o n t i n u e d a n d h a s b e c o me e x a c e r b a t e d i n t h e 2 0 0 0 s .
           C o mb i n e d w i t h t h e u n d e r d e v e l o p me n t o f i t s n a t u r a l g a s
r e s o u r c e s , t h i s h a s l e d t o b r o w n o u t s , e l e c t r i c i t y r at i o n i n g a n d l o s s e s o f
industrial production.
           T h i s p r o b l e m, t o o , h a d b e e n f o r e s e e n , b u t d i s a g r e e me n t s o v er
h o w t o f i n a n c e a n d o r g a n i z e n e w p l a nt s h a v e p r e v e n t e d i t s r e s o l u t i o n .
           I n 2 0 0 4 , C h i n a 's e n e r g y c r i s i s t o o k o n a n e w f o r m. I n t e r n a t i o n a l
p r i c e s f o r o i l r o s e , b u t s t a t e ma n d a t e d d o me s t i c p r i c e s d i d n o t . T h e
C h i n e s e N O C s , t h e N a t i o n a l O i l C o mpa n i e s , w e r e c a ug h t i n a s c i s s o r
s e t b a s i c a l l y b e t we e n o p p o s i n g p ri c e mo v e m e n t s , c ut b a c k o n t h e
d e l i v e r y o f r e f i n e d p r o d u c t , a n d p a r t i c u l a r l y g a s o l i ne . T h i s l e d t o s p o t
shortages, long lines at gas stations and public protests.
           A s C h i n a h a s be g u n t o r e l y e v e r mo r e o n i mp o r t e d e n e r g y , a n e w
p r o bl e m h a s a l s o p us h e d i t s w a y t o t he t o p o f B e i j i n g 's p o l i c y a g e n d a :
e n e r g y s e c u r i t y . N o w d e p e n d e n t o n o i l i mp o r t s f r o m d i s t a n t r e g i o n s
s u c h a s t h e M i d dl e E a s t B e i j i n g h a s h a d t o w o r r y a b o u t h o w g l o b a l
d e v e l o p me n t s w o u l d a f f e c t t h e p r i ce a n d s u p p l y o f a k e y i n d u s t r i a l
r e s ou r c e .
           Wh a t w o u l d h a p p e n , f o r e x a mp l e , i f r e g i o n a l c o n f l i c t s o b s t r u c t e d
a c c e s s t o P e r s i a n o r A r a bi a n G u l f oil f i e l d s ? Wh a t w o u l d h a p p e n i f
s u p e r p o we r t e n s i o n s , s u c h a s a c o n fr o n t a t i o n i n t h e S t r a i t s o f T a i w a n ,
t e mp t e d a n o u t s i d e p o w e r t o t h r ea t e n C h i n a 's e n e r g y s u p p l y l i n e s
across the Indian Ocean? Or even in the absence of political shocks,
h o w c o u l d C h i n a r e a c t t o g l o b a l s u r g e s o f e n e r g y d e ma n d t h a t r a i s e d
t h e i n t e r na t i o n a l pr i c e o f o i l ?
           F o r o b s e r v e r s i n OE C D c o u n t r i e s , t h e s o l u t i o n t o t h e s e p r o b l e ms
s e e me d ob v i o us . C h i n a s h o u l d d e r e g u l a t e , p r i va t i z e , a n d o pe n t he
ma r k e t , t h e e n e r g y s e c t o r , a l l o wi n g ma r k e t s t o u n d e r t a k e t h e w o r k o f
c o o r d i n a t i n g s u p p l y a n d d e ma n d .
           F o r t he l e a d e r s hi p o f t h e C o m mu n i s t P a r t y o f C h i n a , t h e C P C ,
h o w e v e r , t h i s i s n o t a n a t t r a c t i v e s o l u t i o n , a t l e a s t i n t h e s h o r t t e r m.
           A n i m me d i a t e s h i f t t o a ma r k e t - b a s e d a p p r o a c h t o e n e r g y
p r o b l e ms w o u l d a g g r a v a t e t h e u n e v e n n e s s o f C h i n a 's d e v e l o p me n t .
N e w e n e r g y i n v e s t me n t w o u l d c o n c e n t r a t e i n t h e i n d us t r i a l c o a s t a l
provinces sidestepping the less developed hinterland. Worst, the cost
o f a d j u s t i n g t o a ma r k e t - b a s e d e n e rg y r e g i me w o u l d f a l l h e a v i e s t o n
t h e w o r ki n g c l a s s e s e r a s i ng mu c h o f t h e i nc o me g a i n s t h e y h a v e
e n j o y e d s i n c e t h e l i b e r a l i z a t io n o f t h e e c o n o my b e g a n i n 1 9 7 8 .
           T h e C P C w a s n o t o n l y w o r r i e d t h a t t hi s w a s unf a i r ; i t f e a r e d t h a t
                                                       - 54 -
this could actually be disastrous. Inequality, particularly the gap
b e t w e e n t h e u r b a n a n d r u r a l p o p u l at i o n , i s a l r e a d y t h e s o u r c e o f
ma s s i v e p o l i t i c a l t e ns i o n, a n d r i s i ng i n c o me s h a v e be e n t h e v e r y
f o u n d a t i o n o f t h e C P C ' s l e g i t i ma c y f o l l o w i n g 1 9 7 8 .
             A ma r k e t - b a s e d a pp r o a c h c ou l d t r i g g e r w i d e s p r e a d p r o t e s t s a n d
e v e n a r e v o l u t i o n . E n e r g y p o l i c y h a s t o b e r e c o n c i l e d w i t h B e i j i n g 's
highest policy priority, which is political stability. So China's energy
c r i s i s , w h i c h i s a p p a r e n t l y a n e c o n o mi c o n e , i s a t r o o t a c t u a l l y a
p o l i t i c a l p r o b l e m.
             Y e t i f i m me d i a t e s h o c k t h e ra p y l i b e r a l i z a t i o n p r o v i d e d n o
s o l u t i o n t o C h i n a 's e n e r g y p r o b l e ms , n e i t h e r d i d a p r o g r a m o f r e t u r n t o
M a o 's d o c t r i n e o f s e l f - s u f f i c i e n c y , s i mp l y b e c a u s e t h e r e s o u r c e s a r e n ' t
t h e r e . A l t h o u g h Ch i n a c e r t a i n l y h a s mo r e o i l l e f t i n t h e g r o u n d a n d
B e i j i n g i s p a r t i c u l a r l y h o p e f u l t h a t i t ma y b e a b l e t o m a k e i mp o r t a n t
d i s c o v e r i e s o f f s h o r e , w h i c h i t 's mo v i n g i n t o i n g r e a t e r v o l u me s r i g h t
n o w , e v e n i n t h e m o s t o p t i mi s t i c sc e n a r i o s , t h e r e i sn 't e n o u g h t o ma t c h
t h e d e c l i n e i n r e s e r ve s , mu c h l e s s t o me e t t h e r a p i d gr o wt h o f
i n d u s t r i a l d e ma n d .
             C h i n a 's mo s t u n d e r e x p l o i t e d s o u r c e o f e n e r g y i s p r o b a b l y n a t u r a l
g a s , b u t i t s g a s r e s e r v e s a r e g e n e r a l l y c o n c e nt r a t e d i n p r o vi n c e s di s t a n t
f r o m c o n s u mp t i o n c e n t e r s . G a s c a n b e t r a n s p o r t e d b y c o n s t r u c t i n g
p i p e l i n e s , b u t i t 's a v e r y e x p e n s i ve p r o c e s s t h a t r e qu i r e s c a r e f u l
p l a n n i n g t o ma t c h p r o d u c t i o n w i t h c o n s u mp t i o n .
             I n t e r n a l d e b a t e s , p a r t i c u l a r l y o v e r h o w mu c h t o r e l y u p o n fo r e i g n
i n v e s t o r s , h a v e s l o w e d g r o wt h i n t h i s a r e a . T h e s a me p r o b l e m a f f e c t s
c o a l , o f p r o d u c e r s b e i n g l oc a t e d i n d i f f e r e n t a r e a s f r o m c o n s u me r s , a n d
this prevails in the sector.
             I t 's a l l b e i n g c o mp o u n d e d b y g r o w i n g w o r r i e s a b o u t t h e
e n v i r o n me n t a l a n d h u ma n c o s t s o f r e l i a n c e u p o n c o a l , a s w e ' v e h e a r d
earlier.
             I ' m g o i n g t o s k i p a h e a d a c t u a l l y t o s o me o f t h e p r o g r a ms t h a t
t h e y 'v e c h o s e n t o a d d r e s s t h e e ne r g y c r i s i s .                CPC has chosen to
c o n f r o nt i t s e n e r g y c r i s i s t he s a me wa y i t 's p u r s u e d i n du s t r i a l i z a t i o n ,
w i t h a m i x e d b a s k e t o f t o o l s , n e i t h e r p u r e l y c a p it a l i s t n o r s o c i a l i s t .
A n d t h e o b j e c t i v e o f t h i s a p p r o a c h i s s i mp l e : t o c a pt ur e mo s t of t h e
e f f i c i e n c y g a i n s t h a t c o m e f r o m r e l i a n c e u p o n ma r k e t s w h i l e
p r e s e r v i n g mu c h o f t h e p o l i t i c al s t a b i l i t y ma d e p o s s i b l e b y a n
authoritarian state.
             C h i n a 's e n e r g y po l i c y i s t hus a mi c r oc o s m o f t h e s a me a p p r o a c h
e v i de nt i n C h i na 's w i d e r qu e s t f o r d e v e l o p me n t : t o r e a p t h e i nc o me
b e n e f i t s a v a i l a b l e f r o m p a r t i c i p a t i o n i n g l o b a l ma r k e t s , w h i l e
p r e s e r v i n g t h e p o we r a n d o r d e r e p i t o mi z e d b y t h e L e n i n i s t C P C .
             I n t h e l a s t t w o Fi v e - Y e a r P l a n s , s t a r t i n g w i t h t h e 1 0 t h Fi v e - Y e a r
Plan, 2001 to 2005, you begin to see the outlines of this approach,
                                                       - 55 -
a l t h o u g h i t f i n a l l y b e c a me c o n c r e t e i n t h e 1 1 t h F i v e - Y e a r P l a n , 2 0 0 6 t o
2 0 1 0 , w h e r e H u J i n t a o a n d We n J i a b a o f o u n d a n o p p o r t u n i t y t o
e l a b o r a t e a d i s t i n c t p h i l o s o p h y o f d e v e l o p me n t t h a t w o u l d n o t o n l y
g i v e t h i s p l a n , b u t a l s o t h e 1 2 t h Pl a n , a p o l i t i c a l l e g a c y f o r t h e m.
           T h i s h a s h a d s p e c i f i c i mp l i c a ti o n s f o r t h e e n e r g y s e c t o r . B y
c h o o s i n g t o d e v e l o p t h e h i n t e r l a n d a n d t h e w e s t e r n p r o v i n c e s o f C h i n a,
t h i s h a s r e a l l y c h a n g e d t h e e n e r g y pi c t ur e t he r e i n t h e s e n s e o f n o w
ma s s i v e i n f r a s t r u c t u r e d e v e l o p me n t i s t a ki n g pl a c e i n t he s e pr o vi n c e s
that previously had been neglected, and this has raised questions of
d e l i v e r y , o f s u p p l i e s a n d o f o n g o i n g e c o n o mi c c o n s t r a i n t s .
           I b e l i e v e I ' m r u n n i n g o u t o f t i me h e r e .
           HEARING COCHAIR SHEA: If you want to wrap up, that's fine.
           MR. RAHIM: I will try and wrap up by saying that in the long
t e r m, i f y o u l o o k a t a c o u p l e o f c r i ti c a l n u mb e r s s p e c i fi c a l l y i n t e r ms
o f o i l d e ma n d a n d w h e r e we s e e o i l d e m a n d g o i n g - - a n d I c a n g e t i nt o
t h e s e i n mo r e d e t a i l i n t h e q u e s t i o n a n d a n s w e r p e r i o d - - b u t o i l d e ma n d
a l o ne , e ve n a t a s l o w e r g r ow t h r a t e t h a n we 'v e s e e n i n t h e p a s t f e w
y e a r s , w e 'r e l o o k i n g a t a d d i n g s o me w h e r e o n t h e o r d e r o f a b o u t 5 . 8
mi l l i o n ba r r e l s o f o i l i n d e ma n d b e t w e e n n o w a nd 2 2 2 0 .
           A n d t o p u t t h a t i n p e r s p e c t i v e , i f w e l o o k a t s o me o f t h e l a r g e s t
p r o d u c e r s i n t h e wo r l d , w e 'r e t a l k i n g a b o u t mo r e t h a n t h e c o mb i n e d
v o l u me s o f K u w a i t , t h e U A E , V e n e z u e l a a n d p o t e n t i a l l y e v e n M e x i c o .
[The statement follows:]

       P r e p a r e d S t a t e m e n t o f M r . Sa a d R a h i m , M a na g e r , C o un t r y
               S t r a t e g i e s G r o u p , P F C E n e r g y , W a s h i n g t o n, D . C .

Members and Co-Chairs of the Commission, thank you for inviting me here today. My name is Saad
Rahim, and I am a Manager in the Country Strategies Group of PFC Energy, a strategic advisory firm
focusing on energy. I have been asked to present my views on Chinese Energy Consumption Patterns and
Trends, and will do so by outlining the political and economic context against which China’s energy
demands are unfolding, following that with a discussion of some of the steps the Chinese government is
taking to address rapidly rising demand, and finally outlining what we see as the projected path for future
consumption. I would like to note the invaluable contributions of my colleagues Dr. Yahya Sadowski and
Dr. David Gates in preparing this analysis.

An Overview of China’s Energy Issues and Programs




                                                     - 56 -
Issues

China’s rapid yet sustained economic growth over the past two decades is one of the great economic
accomplishments of the last century. While growth has “solved” many of China’s problems, it has also
created new ones: massive movements of labor; a growth of inequality; political uncertainty; collapse of
some public services (health care), etc. One of the most important of these problems is a resources
bottleneck that threatens to constrict future growth. China needs more skilled scientists and engineers; it
needs more water; and, most of all, it needs more energy.

In the early 1990s, the government in Beijing began to publicly acknowledge that it faced a looming energy
crisis. Oil production in old fields was declining, and demand for fuel was growing faster than new
reserves were being discovered. Self-sufficiency, one of the great objectives of the Maoist era, was no
longer possible. In 1995 China became a net oil importer and will remain one for the foreseeable future.
By the late 1990s an even more serious problem began to manifest itself: although China had ample
reserves of coal, production was inefficient and deliveries were irregular. Combined with the
underdevelopment of its natural gas resources, this led to brownouts, electricity rationing, and losses of
industrial production. This problem too had been foreseen, but disagreements over how to finance and
organize new plants prevented its resolution.

In 2004 China’s energy crisis took a new form. International prices for oil rose; but state-mandated
domestic prices did not. The Chinese NOCs, caught in a set of scissors between opposing price
movements, cut back on the delivery of refined products, particularly gasoline. This led to spot shortages,
long lines at gas stations, and public protests.

As China began to rely ever more on imported energy, a new problem pushed its way to the top of
Beijing’s policy agenda: energy security. Now dependent upon oil imports from distant regions such as the
Middle East, Beijing had to worry about how global developments would affect the price and supply of a
key industrial resource. What would happen if regional conflicts obstructed access to Persian Gulf oil
fields? What would happen if superpower tensions, such as a confrontation in the Straits of Taiwan,
tempted the United States to threaten China’s energy supply lines across the Indian Ocean? Or, even in the
absence of political shocks, how could China react to global surges of energy demand that raised the
international price of oil?

Choices

For observers in the OECD countries, the solution to these problems seemed obvious: China should
deregulate, privatize and open the energy sector, allowing markets to undertake the work of coordinating
supply and demand. For the leadership of the Communist Party of China (CPC), however, this was not an
attractive solution—at least in the short term. An immediate shift to a market-based approach to energy
problems would aggravate the unevenness of China’s development: new energy investment would
concentrate in the industrialized coastal provinces, sidestepping the less developed hinterland. Worse, the
costs of adjusting to a market-based energy regime would fall heaviest on the working classes, erasing
much of the income gains they had enjoyed since the liberalization of the economy began in 1978.

The CPC was not only worried that this was unfair, it feared that it might be disastrous. Inequality,
particularly the gap between the urban and rural population, was already the source of massive political
tension. And rising incomes were the very foundation of the CPC’s legitimacy. A market-based approach
could trigger widespread protests and perhaps even a revolution. Energy policy had to be reconciled with
Beijing’s highest policy priority: political stability. So China’s energy crisis, apparently an economic one,
is at root really a political problem.

Yet if immediate, “shock therapy” liberalization provided no solution to China’s energy problems, neither
did a program of return to Maoist doctrines of self-sufficiency.


                                                 - 57 -
China certainly has more oil left in the ground, and Beijing is particularly hopeful that it may be able to
make important offshore discoveries. But even in the most optimistic scenarios, there is not enough to
match the decline in reserves, much less to meet the rapid growth of industrial demand. China’s most
under-exploited source of energy is probably natural gas. But its gas reserves are generally concentrated in
provinces distant from consumption centers. Gas can be transported by constructing pipelines, of course,
but this is a very expensive process that requires careful planning to match production with consumption.
Internal debates, particularly over how much to rely upon foreign investors, have slowed growth in this
area. The same problem that afflicts coal, of producers being located in different problems from
consumers, prevails in this sector. And it is compounded by growing worries about the environmental and
human costs of reliance upon coal.

In 2000, despite a patina of computers, cell phones, and astronauts, China’s economy still conformed to a
nineteenth-century pattern, fueled by low-wage labor and coal. And the heavy reliance upon coal bred a set
of nineteenth-century health problems: industrial accidents, pollution on a massive scale, and a rapid
growth of lung diseases. Coal is a cheap source of energy for China only because its full human costs are
not reflected in the price per ton. By 2000 Beijing was already scrambling to reduce the human and
environmental costs of its energy industry before they too turned into a spur to political unrest.

By 1997, the CPC had debated these facts and reached the inescapable conclusion: China would have to
accelerate development of all of its energy sources and yet will still have to rely upon growing imports of
oil and natural gas. It embraced a slogan of “going out”: of looking overseas for the capital, technology,
crude oil and gas that it would need to sustain its industrial revolution.

Programs

The CPC has chosen to confront its energy crisis the same way that it has pursued industrialization since
1978: with a mixed basket of tools, neither purely capitalist nor socialist, in a strategy that would have been
equally offensive to Mao or Milton Friedman.

The objective of this approach is simple: to capture most of the efficiency gains that come from reliance
upon markets, while preserving much of the political stability made possible by an authoritarian state.
China’s energy policy is thus a microcosm of the same approach evident in China’s wider quest for
development: to reap the income benefits available from participation in global markets while preserving
the power and order epitomized by the Leninist CPC.

The dangers of this mixed approach are more subtle. The logics of market and command economies tend
to subvert each other. Market signals can tempt producers to ignore political directives, and political
controls can stifle the initiative on which market forces rely. To successfully reconcile these opposing
forces, the CPC would have to monitor their interaction carefully, constantly redressing the balance
between the two.

This means, among other things, that Beijing cannot simply pronounce an energy strategy and then let it
play out. The key to success in a mixed approach lies in continuous micro-interventions, endless
adjustments of policy and personnel, to harmonize the overall process. China has some expertise in this
area. Its entire development strategy, both in agriculture and in industry, has relied upon mixing market
and command mechanisms. Chinese policymakers have learned to be patient and pragmatic, to shepherd
their policy experiments, building on their successes and learning from their failures.

China’s diverse experiments in increasing energy production all reflected three themes that were
proclaimed by then Premier of the State Council, Li Peng, in an important series of speeches during 1997:

       •    First, the inevitability of “going out.” Self-sufficiency was impossible, so China would have to
           learn to not just rely upon foreign sources of oil and gas, but to participate skillfully in
           international energy markets.

                                                 - 58 -
       •   Second, coal was the backbone of China’s energy system and would have to remain central
           despite the high human costs. However, growth should be concentrated in other energy sources,
           as much as possible capping the use of coal and limiting its attendant pollution.

       •    Finally, fostering increased supply is not the only strategy China wields in confronting its
           energy crisis: regulating demand is also a very real alternative. In part, this can be achieved
           through efficiency increases, such as improving insulation standards in buildings and thereby
           reducing heating costs. But it can also be done directly, such as by using taxes to dampen the
           demand for private automobiles and thereby curbing the growth of gasoline consumption.

In the years that followed, China launched a series of major energy initiatives that reflected these doctrines.
It began a series of high-profile mega-projects, such as the West-East natural gas pipeline and the Three
Gorges Dam. These are intended not only to directly ameliorate the problem, but also to stimulate the
interest of private firms in investing in certain areas.

Second, the CPC ordered a massive reorganization of the energy sector in 1998. This was most far
reaching in the oil sector, with the creation of three competing national oil companies (NOCs). These firms
promptly went on a “contract offensive” from Saudi Arabia to Venezuela, buying up overseas assets—both
oilfields and companies (including a bid for Unocal)—which ironically stimulated demand for
hydrocarbons globally. The same year also saw the beginning of a restructuring of the electrical power
industry. Because of the difficulties of successfully regulating this sector (think California), the process
was more protracted. But coal-powered electrical generators are the front line of China’s energy supply, so
when reforms in this area finally take hold they will have a broader impact on energy demand

Third, in 2004-6 the CPC began to reorganize the government in a manner that reflected a move to make
energy supply one of its top priorities. The party released a long-term plan for energy development in
2004. A leading group for energy was established in 2005. New energy regulatory agencies were being
established. A new five-year plan with energy supply as one of its top targets was promulgated. The next
five years should be a period of rapid evolution in China’s energy markets.

Finally, the CPC undertook hundreds of micro-experiments in both new technologies and policy reform.
Shanghai was allowed to develop its own restrictions upon automobile growth. Beijing developed a model
“green community.” Dozens of windpower complexes and solar laboratories were launched. Each of these
experiments was watched to see whether it might reproduced and extended on a national scale.

These experiments, large and small, provided a broad approach through which the CPC thought solutions to
China’s energy crisis might be discovered. No one expected them to be “magic bullets,” to provide an
immediate short-term cure. But over the medium-term different avenues would be explored, successes
expanded and failures rejected, in a learning process that gradually revealed which avenues had the most
potential. Indicating which avenues were most promising and deserved the greatest share of resources was
one of the functions of the five-year planning process. Understanding the Five Year Plans is a critical
component of understanding the underlying forces driving China’s policies towards its energy usage.

Goals and Objectives, Policy Tools and Approaches for China’s Eleventh Five-year Plan

The Political and Economic Context of the 11th Plan

The 10th Plan (2001-2005) was transitional, an effort by then-President Jiang Zemin and then-Premier Zhu
Rongji to secure their legacy while handing the reins of power over to a new team. The 11th Plan (2006-
2010), in contrast, was definitional: an opportunity for Hu Jintao and Wen Jiabao to elaborate a distinct
philosophy of development that would govern not only this plan but the 12th Plan and perhaps its
successors.

Hu and Wen represented a very different group within the party from Jiang’s Shanghai faction.        Members
                                                 - 59 -
of this faction tended to have a more egalitarian perspective than those of the Shanghai group. They too
embraced the model of the “socialist market economy,” but they did not believe that economic growth
alone cured all ills. They worried that unguided growth not only failed to solve the problem of poverty, but
actually aggravated other ills such as pollution and corruption.

Hu propounded a new slogan to epitomize this distinct perspective. Since the reforms of Deng Xiaoping,
the overarching goal of development in China had been to create a “prosperous society” (xiaokang shehui).
In 2003 Hu persuaded the party leadership to agree that the proper objective should be a “harmonious
society” (hexie shehui): one that was not only rich in material terms, but that provided an element of
balance with nature, social justice, and promoted the dignity of all citizens. This shift has had, and will
continue to have, critical implications for the energy sector in China.

The Energy Implications of the 11th Plan

The 11th Plan includes proposals for a variety of “conventional” energy projects, such as a second West-
East gas pipeline and two new massive oil pipelines. (Many of these objectives were already laid out in a
special “Draft Energy Strategy” issued in 2004.) It reiterates the old objectives for increasing the use of
non-coal energy sources (particularly natural gas) and for constructing new power plants to meet spot
shortages. But the plan raises all of these issues to a new level of urgency, and calls for them to be
confronted within the framework of a search for sustainable development.

If it amounts to anything more than rhetoric, China’s search for sustainable development will have
important implications for its energy sector. One of its central tenets is that China cannot meet its energy
needs by increasing supply alone: it must also cap the growth of demand. Beijing took small steps in this
direction immediately after the 11th Plan was issued. It announced a minor increase of gasoline taxes and a
major jump in automobile taxes to 20 percent for vehicles with engines larger than two liters. (Vehicles
already consume about a third of China’s petroleum production.) The campaign to promote sustainability
by encouraging conservation was not confined to energy.

The 11th Plan also mandates serious increases in the efficiency with which energy is used. By 2008 all
vehicles in China will have to meet fuel efficiency standards that are 20 percent more demanding than those
applied in the US. A new code of building standards requires extensive used of natural ventilation, natural
lighting, water recycling, and renewable energy in new structures. The managers of SOEs will have their
promotion prospects scored partly on the basis of improvements in energy efficiency and the government
has targeted the 1000 largest enterprises in the country for inspection of their energy practices.

The CPC hopes that its increased investment in science and technology will pay off in the form of greener
and more renewable energy. China is already one of the world pioneers in the field of micro-hydroelectric
power and low-cost power plant technology. It is putting serious assets behind the development of a fuel-
cell powered car, and is experimenting extensively with solar, wind, tidal, and geothermal energy. Most of
these experiments are long shots. But the one that the Chinese are most serious about is not: current “clean
coal” technologies are too expensive for widespread application in China. So Beijing has launched a crash
program to devise low-cost techniques for the gasification and liquefaction of coal, China’s primary energy
source.

Beijing is particularly interested in more efficient technologies for processing coal because it is the main
source of pollution in China. And pollution is not just a nuisance for the Chinese: it is the source of a major
public health crisis. The Worldwatch Institute estimates that by burning 2.1 billion tons of dirty coal each
year, China generates acid rain and smog that costs $13 billion in crop, forest, and human health losses.
China is home to 16 of the 20 most polluted cities in the planet, and 80 percent of Chinese towns register
sulfur dioxide or nitrogen dioxide levels above those deemed safe by the World Health Organization.
Pollution causes 400,000 premature deaths each year. These problems, compounded by coal mining
disasters and riverine chemical spills, have already triggered massive public protests.
                                                 - 60 -
China’s new pollution control agency, the State Environmental Protection Administration (SEPA), has only
250 staff and is unlikely to turn the country “green” on its own. But environmental issues are a grave
concern at the highest levels of the party and certainly lend force to its quest for energy efficiency. It is not
surprising, then, that the 11th Plan contains only two official quantitative objectives. One is the increase in
GDP. The other is a target for increased energy efficiency. At the moment China generates only 4 percent
of world’s gross domestic product, but it contributes 15 percent of global water consumption, 20 percent of
aluminum, 28 percent of steel, 31 percent of coal, and 50 percent of cement. In creating US$1 worth of
GDP, Chinese producers consume 4.3 times more energy than their counterparts in the US, 7.7 times more
than Germany or France, and 11.5 times that of more than Japan. Thus, the 11th Plan demands that China
consume 20 percent less energy for each unit of GDP by 2010.

Long-term Energy Demand / Supply Prospects for China

Economic Growth
China has consistently been the fastest or one of the fastest growing major countries since the start of the
reform program in the late 1970s. Just how fast is has been growing has long been a matter for debate
among economists, and the recent government report that revised the historical estimates of GDP, while
clearly consistent with established perceptions, will not resolve all of the outstanding issues. The principal
issue – even after the latest revisions - is the reasonableness of the estimates themselves – with many
economists remaining convinced that reported growth rates are understated when the economy is strong,
and overstated when it is weak.
The analysis and forecasts presented below represent PFC Energy’s efforts to incorporate the government’s
latest estimates for GDP including the newly revised data on shares of economic activity by sector. These
new estimates show much higher shares – historically and currently - for the service sector (and much
lower shares for agriculture) and as such, are both directionally correct and important for understanding
what is happening with energy demand. While the adjustments are therefore substantial, sorting out the full
implications for the outlook is still in the preliminary stages and subject to revision. Looking ahead, most
economists would agree that that the Chinese economy will continue to grow very rapidly. But there is less
agreement on how rapidly and how the mix of economic activity will change.


Potential Constraints in Energy Demand
Our base case forecast assumes that real GDP growth in China will gradually slow from the 9.8% per year,
that according to the latest estimates, has been the average over the past twenty five years – and just under
the average for the past three – to 8.2% per year over the balance of the decade and then 7% and 6.4% per
year respectively during the first and second half of the next decade. This assumed slowing of the rate of
growth may turn out to be too severe – or not severe enough, representing the high level of uncertainty that
remains about the actual state of the Chinese economy given the paucity of data and transparency. But it
certainly represents a reasonably likely outcome – one which if approximately correct would be sufficient
to raise the level of real GDP per capita from roughly $1500 US dollars today to more than $3600 dollars in
2020. Lower international resistance to Chinese exports combined with greater success in increasing the
rate of growth in domestic demand would almost certainly result in stronger growth in total and per capita
GDP. Greater international resistance and greater difficulty in stimulating domestic demand would produce
the opposite result. The energy demands resulting from these alternative profiles (and alternative shifts in
the mix of economic activity) have been modeled and the key point is that whatever profile for GDP
growth is assumed, the implication is continued strong growth in China’s requirements for all forms of
energy – including oil and gas.
One primarily economic point regarding these alternative profiles is that if economic growth should turn
out to be substantially slower than assumed in our base case, the government is likely to take action -
including especially tempering the pace of reform – so as to minimize any adverse effects on the country’s

                                                  - 61 -
ability to absorb new entrants to the labor force and / or workers that are still underutilized in agriculture
and the SOEs. (Our working assumption is that the rate of GDP growth at which increasing unemployment
would become a concern such that the government would begin to take countermeasures is about 6%).
Under a slow growth scenario growth rates as reported may not be much lower than assumed in our base
case but the implications for energy demand – especially improvements in energy efficiency could be such
that the reduction in energy demand could be far less than proportional to the reduction in economic
growth.


Energy Demand / Supply
Given the strong growth in China’s economy since the start of reform, the most surprising thing about
China’s energy demand is not how fast it has grown – but how slowly. This point is often missed in
published commentaries in part because – like exports, discussed above - the volumes involved in China
energy are so large. Since 1980 total energy demand in China has grown at an average rate of only 3.9%
per year – which compared to an average rate of growth in GDP of 9.8% per year works out to a long-term
average elasticity of just over .4. A long-term elasticity of .4 is more in line with what would be expected
for a mature western economy and less than half what would be expected for a still emerging market such
as China.
There are several reasons for this low growth rate and low elasticity. One of course is the quality of the
data. Measuring energy use – like measuring economic activity - in an emerging economy such as China is
always a challenge. In China, in particular, energy use can be politically sensitive – especially as relates to
reporting between different level governments. In this context there is no question that some of the
officially reported data are inherently suspect. The most recent example is reporting on coal use in the late
1990s, when lower level governments were almost certainly under reporting their actual production and
consumption so as to appear in compliance with central government directives to limit production from
smaller, more hazardous mines. Support for the conclusion that this was under reporting rather than actual
lower use is the fact that there was no reported offsetting increase in usage of other fuels (substitution) and
no evidence that there was a reduction in economic activity to correspond to the reported reduction in the
amount of energy used.
A second reason for the low growth rate, which is partially fundamental, partially a function of how
elasticities are measured is the large share of residential energy in total energy especially at the start of
reform. Residential energy use in China has grown over the past twenty-five years and PFC expects that it
will continue to grow. But the fact that it was large to begin with and has not grown as rapidly as GDP has
had the effect of slowing the rate of growth in total energy and thus lowering the elasticity of total energy
in relation to GDP as this is traditionally measured. (China’s historically small volumes in transportation
and commercial energy have grown more rapidly but because of their small size, have had almost no effect
on China’s total elasticity).
A third reason, which is almost entirely fundamental, concerns the inefficiency of industrial energy use at
the start of reform. Basically when reform began, use of energy in China’s State Owned Enterprises was
extraordinarily inefficient. There are several reasons for this but the most important is probably the fact that
these enterprises were not charged for their energy use and thus saw no incentive – other than occasional
government exhortations – to use energy more efficiently. With reform there have been two parallel
developments – both of which have resulted in dramatic improvements in this sector. One is shifts in the
mix – so called “indirect conservation” - as lighter, less energy intensive industries, many of which made
up of non–state owned companies have come to account for more and more of China’s industrial activity.
This is conceptually similar to what happened in Japan in the late 1970s following the first oil shock when
production from energy intensive industries such as steel grew more slowly or declined and production
from higher value added, less energy intensive industries such as automobiles and consumer electronics
began to grow more rapidly. The other is changes in production processes – so called “direct conservation”
– as the equipment that was in use at the start of reform was replaced and as more of the production took
place in newer facilities that had more efficient technologies simply as a function of being new.
                                                  - 62 -
These second and third reasons are extremely important for the outlook for energy demand and supply in
China. Residential energy now represents a much smaller share of total energy than it did when reform
began. Similarly energy intensive, heavy industries – especially heavy industries relying on pre-reform
inefficient processes – are a much smaller percentage of industrial energy use than was the case twenty five
years ago. In this context, while there are many reasons including government policy for assuming that
China will be working to limit the future growth in energy consumption, the implication of these historical
trends is that many of the easy improvements in energy efficiency – those resulting from the large shares of
residential and older, less efficient equipment in industry - have already been achieved. Going forward the
likelihood is that future improvements may be more difficult and that as a consequence, future elasticities
may not decline as rapidly as the government and many energy economists are currently assuming. The one
certainty is that total energy per unit of GDP will not continue to decline at the same rate as it has since
reform began.
Our base case forecasts show total primary energy demand in China growing from an estimate of just
under 32 mmboe/d (million barrels oil equivalent per day) in 2005 to 55 mmboe/d in 2020. This would be a
growth rate of 3.7% per year over the full 15-year period and would imply an average elasticity of just over
.50, about .10 higher than the .40 observed since the start of reform. (To put this in perspective the average
elasticity over the past five years was about .70, .20 higher than the current forecast but this is probably
overstated by virtue of what we believe to be under reporting of coal demand / supply in the late 1990s).
Contributing to the forecast growth rate and elasticity, total final consumption – the sum of the five end
uses – transportation, residential, commercial, industrial and other (mainly agriculture and non-energy) - is
expected to grow at an average rate of 3.6% per year, while energy consumption in transformation –
generation of power and district heat – is expected to grow at an average 3.9% per year.
Looking at demand by sector, transportation is expected to grow more rapidly than other end uses. Total
volumes are expected to nearly double from 2.3 mmboe/din 2005 to 5.3 mmboe/d in 2020, for an average
growth rate of 5.7% per year. Much of this growth is expected to be in road transport – trucks, reflecting
ongoing changes in Chinese industry – with greater emphasis on higher value added products and the
inherent advantages of trucks for local distribution of freight – and cars, reflecting the assumed continued
growth in the numbers of cars from the current extremely low base. (Water and rail will remain important
but prospects for growth in these two modes are limited in part by the inherent constraints in these systems.
Air will continue to grow strongly but the base is still extremely small.) While forecast volumes for road
transport have been tempered to reflect concerns regarding the current and future adequacy of China’s road
network – and likely improvements in fuel efficiency, especially if hybrid vehicles become an important
factor in the market, the facts are that if recent performance is an indication, this part of our overall demand
forecast is as likely to be too low rather than too high.
In terms of fuels used in transportation, oil will continue to dominate while electricity will continue to
grow, mainly at the expense of direct use coal in rail. Within the oil category, the mix of fuel products –
gasoline versus ADO (automotive diesel oil) - is a major uncertainty that will be increasingly important
over time. For purposes of this analysis, however, the point is that oil will remain the dominant fuel in
transportation.
Commercial use energy is expected to grow rapidly at 5.3% per year but total volumes are expected to
remain rather small with a forecast increase of 1.0 mmboe/d producing a sectoral total of about 1.8
mmboe/d in 2020. In terms of fuels, electricity and gas are expected to grow relatively rapidly but oil is
expected to retain its traditional dominance.
Industrial energy is expected to grow at about 4.1% per year, thus solidifying its position as the dominant
sector in final consumption. Total volumes are expected to increase from 8.7 mmboe/d in 2005 to 16.0
mmboe/d in 2020.
In terms of fuels, electricity and gas are expected to grow somewhat more rapidly than either coal or oil.
Within the oil category, products like LPG are also expected to grow relatively rapidly. These changes in
the mix of fuels reflect the judgment that Chinese industry will continue to move in the direction of lighter,
higher value added less energy intensive products such as consumer electronics and ceramics. But heavy
                                                  - 63 -
industry including steel will continue to grow and as a result coal and fuel oils are expected to continue to
grow and to retain their dominant positions.
Reflecting its recent performance residential energy is expected to continue to grow rather slowly with an
average growth rate of only 1.1% per year. But this relatively modest growth rate and correspondingly
modest increase in the total (from 6.5 mmboe/d in 2005 to 7.6 mmboe/d in 2020) is a function two rather
divergent patterns: relatively strong growth in the urban areas where population continues to grow at an
average of about 3% per year and little or no growth in the rural areas, where population is flat or in some
cases declining. It is impossible to overstate the importance from an energy standpoint of continued strong
growth in the urban areas where the fundamentals of urban life – apartment living, jobs in factories and
commercial establishments, access to modern appliances - in effect compel a shift to commercial energy
and especially oil, gas and electricity rather than coal or more traditional fuels such as biomass. Biomass
and coal remain the dominant fuels in the rural areas but even here the cleaner commercial fuels are
continuing to penetrate.
Included in the totals for energy consumption for the various end uses discussed above, total electricity
demand is expected to grow at an average rate of 4.8% from 2005 to 2020. This implies an elasticity of
electricity to total GDP of just over .65 (.67), higher than that for total final consumption (.50) but again,
rather low for a country at China’s stage of economic and energy development.
Looking in detail at electricity output / generation by fuel, coal is certain to remain the dominant fuel with a
market share in the mid 70% range – despite the government and utilities’ strong efforts to promote the
development of alternatives. Hydro is expected to remain the second most dominant fuel but its share is
expected to gradually edge downward – from 15-16% now to about 12% - once current major projects are
completed. Nuclear is expected to grow very rapidly especially toward the later half of the outlook as the
options for alternatives continue to narrow. In this context nuclear is assumed to account for about 6% of
China’s power in 2020. Gas is also expected to grow rapidly but given the low start point – and likely
slippage especially if currently planned LNG projects are delayed, its share is likely to remain relatively
modest (3% or so) even in 2020. Oil is expected to account for most of the balance and will continue to
represent about 2% of the total.
Combining the forecasts for fuels by end use sector and the forecasts for fuels for transformation – power
generation and district heat – coal is expected to remain the dominant fuel in China’s overall energy
balance at least through 2020 – and probably many years thereafter. Coal is projected to grow at 3.7% per
year – the same as total primary energy - but given the enormous volumes already being consumed, even
this modest growth rate is enough to raise the total some 13.8 mmboe/d (to 33.1 mmboe/d) by 2020. 33.1
mmboe/d would represent just over 60% of total primary energy.
Continuing to utilize current volumes of coal let alone supply projected growth poses a number of
important challenges ranging from air quality to mine safety to basic logistics – given the current limited
availability of rail facilities to move coal from the mines in the north to industry and utilities in the south.
Lack of water that might be used to wash coal before shipment is another problem. But given the volumes
involved, the clearest implication is the urgent need to pursue all possible options in the areas of energy
conservation and the utilization of alternative fuels including oil, gas and nuclear.
Oil is projected to grow at 4.4% per year that translates to an increase of roughly 5.8 mmboe/d (from 6.4
mmboe/d in 2005 to 12.2 mmboe/d in 2020). 12.2 mmboe/d would represent about a 22% share of total
primary energy. 4.4% and an increase of 5.8 mmboe/d are roughly in line with recent past forecasts by PFC
Energy and reflect a combination of recent performance, the government’s revised estimates for GDP, oil’s
currently unique advantages in transportation, residential use, specialized industry and petrochemicals and
the judgment that with all of the challenges confronting the other energy sources, demand for oil may
continue to grow quite rapidly.
Among the questions that bear on the reasonableness of this forecast, one concerns the government’s future
pricing policy for oil and other fuels. The current forecast assumes that the government will continue to
move toward full cost – rather than directly or indirectly subsidized – pricing, as it has indicated is its
intent, but that its efforts will continue to fall short of this objective. A key reason for this assumption is last
                                                    - 64 -
year’s creation of an energy leading group within the State Council, a structure that among other things,
would appear to give greater voice in energy pricing to consuming industries, rather than leaving this more
or less completely in the hands of the State Development and Reform Commission.
Gas is projected to grow at 5.9% per year. This means an increase of 1.1 mmboe/d between 2005 and 2020
(from just over 0.8 mmboe/d to just under 2.0 mmboe/d). This forecast is somewhat lower than recent past
forecasts by PFC Energy and reflects concerns over government policy and pricing – especially with
respect to LNG. A year ago most forecasters were caught up in the excitement of monthly if not bi-weekly
announcements of new LNG terminals. This year the challenges are clearer – the most important being the
reluctance of consumers to accept prices needed to cover the costs of imported LNG (or pipeline gas) as
long as alternatives such as coal are available at much lower cost. In many respects this is a classic public
good / private good problem with air quality considerations favoring the use of gas but private economics
favoring continued use of coal. But in this case the traditional public / private solution – public intervention
to encourage consumption of gas through government guidance or higher taxes on coal - has not yet
happened and in fact may not happen any time soon. Reasons range from government reluctance to under
cut reform by overriding price based decisions to the involvement of major consumers in policy, pricing
and in the financing of the terminals/regasification facilities. In this regard the most encouraging
development may be recent trends in which south eastern major consumers are having to pay higher prices
for imported coal.

With future production gas somewhat more uncertain than future production of oil, it is reasonable to
consider at least two possible profiles for future production and imports: one profile assumes that gas
production holds constant at roughly current levels while the other assumes that production will increase by
an arbitrary 3% per year. At this point the message is that given what is known today – and given the
limited success that the industry has had to date, it is probably best to assume that China will require a huge
increase in imports – both pipeline and LNG – in order to meet what must be considered a moderate
forecast for end use demand.

Projected growth rates for other fuels – including nuclear and hydro are generally ambitious but given the
current low start points and acknowledged challenges are unlikely to make a material difference in China’s
overall energy picture within the time frame covered by this forecast.

Conclusion

In conclusion, it is clear that China’s energy demands will continue to increase rapidly in coming years. In
fact, in many ways they will rise more rapidly than we have seen in recent years. However, while
unconstrained demand growth will certainly tax the world energy system, there are plenty of opportunities
to help address this issue before it gets out of hand. China is already undertaking a variety of policies
aimed at increasing conservation and efficiency, but there are other opportunities that can be leveraged by
U.S., Japanese and European companies. By helping to introduce the widespread use of hybrid automotive
technology, for example, rapidly increasing projected gasoline demand could be limited to a much lower
amount. Chinese officials realize that it is in their own best interests to limit future energy demand, and
thus are amenable to pragmatic solutions as long as they do not perceive a direct economic threat from
adopting them. There is a risk, however, that moves made by either China or the United States to secure
energy supplies may be misperceived by the other side, a potentially dangerous situation. Unrestricted
competition for energy will lead to volatility in energy markets and may threaten uninterrupted supplies, a
sub-optimal outcome for all. Therefore, it is strongly recommended that the United States make every
effort to engage China on this critical issue, and in doing so help ensure its own energy security for the
future.

     HEARING COCHAIR SHEA:                                     Thank        you,     Mr.     R a h i m.       I
appreciate that. Mr. Houser.

                                                  - 65 -
   STATEMENT OF MR. TREVOR HOUSER, VISITING FELLOW
  COLIN POWELL CENTER FOR POLICY STUDIES; DIRECTOR,
   ENERGY PRACTICE, CHINA STRATEGY ADVISORY, L.L.C.,
                NEW YORK, NEW YORK

           M R . H O U S E R : T h a n k s v e r y mu c h f o r a s k i n g m e t o j o i n y o u h e r e
t o d a y . I s h o u l d a l s o s a y I c o me t o y o u a s a V i s i t i n g F e l l o w a t t h e
C o l i n P o w e l l C e n t e r f o r P o l i c y S t u d i e s i n a d d i t i o n t o my p r i v a t e s e c t o r
advisory work.
           S a a d d i d a g r e a t j o b o f l a y i n g o u t s o me o f t h e po l i c y c ons t r a i n t s
a n d p r i o r i t i e s f a c i n g t h e C h i n e s e l ea d e r s h i p . I 'm g o i n g t o u s e my o r a l
c o m me n t s t o f o c u s o n s o me c h a n g e s h a p p e n i n g i n t h e r e a l e c o n o my i n
C h i n a a n d h o w t h a t 's s h a pi n g t h e n a t u r e o f e n e r g y d e ma n d . I g o i n t o
t h i s i n g r e a t e r d e p t h i n t h e w r i t t e n s t a t e me n t a n d a l s o i n a r e p o r t m y
colleague Dan Rosen and I did for the Peterson Institute last month
w h i c h I t h i n k i s ma y b e i n c l u d e d i n t h e b r i e f i n g b i n d e r s t h e r e .
           O v e r t h e p a s t f i v e y e a r s , t h e e n e r g y p r o f i l e o f C h i n e s e e c o n o mi c
g r o w t h h a s c h a n g e d r a ma t i c a l l y . F r o m 1 9 9 7 t o 2 0 0 1 , e f f i c i e n c y g a i n s
r e a p e d f r o m e c o n o mi c r e f o r ms a l l o we d C h i n a t o g r o w i t s e c o n o my a t
n i n e p e r c e n t a y e a r, w h i l e e n e r g y d e ma n d g r e w a t on l y h a l f t ha t r a t e .
           S i n c e 2 0 0 1 , h o w e v e r , e c o n o mi c g r o w t h h a s c o n t i n u e d a p a c e , b u t
e n e r g y d e ma n d h a s r i s e n b y 1 3 p e r c e n t a y e a r , mo r e t h a n t w i c e a s f a s t
a s a n a l y s t s p r e d i c t e d a t t he t ur n o f t h e c e nt u r y.
           T h i s u p s i d e s u r p r i s e , a s S a a d me n t i o n e d , h a s r e s u l t e d i n e n e r g y
s h o r t a g e s a t h o me , t i g h t o i l a n d g a s ma r k e t s a b r o a d , a n d h a s p l a c e d
C h i n a f r on t a n d c e n t e r i n t he d e ba t e o v e r i nt e r n a t i o na l e n e r g y s e c u r i t y
a n d g l o b a l c l i ma t e c h a n g e .
           Wh a t D a n a n d I f i n d i n o u r r e p o r t i s t h a t c o nt r a r y t o w h a t mo s t
p e o p l e t h i n k , w h a t 's d r i v i n g t h a t s u r g e o f d e ma n d , t h e o n e w e ' v e s e e n
o v e r t h e p a s t f i v e y e a r s , i s n ' t a u t o mo b i l e s a n d a i r c o n d i t i o n e r s . B u t
i t 's i n du s t r y a n d t he r e e me r g e n c e o f h e a v y i n d u s t r y . I t 's s t e e l mi l l s ,
c e me n t k i l n s a n d a l u mi n u m s me l t e r s. We c a l l t h i s i n v e s t me n t - l e d
e n e r g y d e ma n d w h i c h i s C h i n a ' s c u r r e n t e n e r g y c h a l l e n g e .
           C h i n a 's f u t u r e e n e r g y c h a l l e n g e i s c o n s u mp t i o n - l e d d e ma n d ,
a u t o mo b i l e s a n d a i r c o n d i t i o n e r s , a nd D r . S c h i p p e r i s g o i n g t o t a l k
a b o u t t h a t , b u t r i g h t n o w a b o u t t h e c h a l l e n g e c o me s f r o m i n d u s t r y ,
i n d u s t r y t h a t 's r e s p o n s i b l e fo r 7 0 p e r c e n t o f e n e r g y d e ma n d i n C h i n a
today.
           F o r e x a mp l e , t h e i r o n a n d s t e e l s e c t o r a l o n e i s r e s p o n s i b l e f o r 1 6
p e r c e n t o f t h e c o u n t r y 's e n e r g y d e ma n d . A l l t h e h o u s e h o l d s i n t h e
c o u n t r y c o mb i n e d a c c o u n t fo r o n l y t e n p e r c e n t . T h e c h e mi c a l s e c t o r
u s e s mo r e e n e r g y t h a n t h e p r i va t e t r a n s p or t a t i on a n d t h e a l u mi n u m
i n d u s t r y u s e s mo r e e n e r g y t h a n t h e c o m me r c i a l s e c t o r .
           S o a s o p p o s e d t o t h e U . S . , w h e r e w e h a v e a c o n s u me r p r o b l e m,
                                                     - 66 -
i n C h i n a r i g h t n o w t h e y h a v e a p r o d u c e r p r o b l e m, a n d t h i s o f c o u r s e
e x p a n d s i n t o t h e e c o n o mi c r e a l m a s w e l l a s t h e e n e r g y r e a l m. A t o n l y
s i x p e r c e n t o f g l o b a l G D P , C h i n a t o da y a c c o unt s f o r n e a r l y 3 5 p e r c e n t
o f g l o b a l s t e e l p r o d u c t i o n , 2 8 p e rc e n t o f g l o b a l a l u mi n u m p r o d u c t i o n ,
a n d n e a r l y h a l f o f a l l t h e c e me n t a n d f l a t g la s s p r o d u c e d w o r l d w i d e ,
a n d t h i s r e f l e c t s n o t o n l y a g r o w t h i n d o me s t i c d e ma n d f o r t h e s e g o o d s ,
b u t a l s o r e f l e c t s a s h i f t i n C hi n a 's t r a de b a l a nc e .
             F o u r y e a r s a g o , C h i n a ' s s t e e l i mp o r t s e x c e e d e d e x p o r t s b y 4 5 0 % .
L a s t y e a r , e x p o r t s e x c e e d e d i mp o r t s b y a b o u t 2 5 0 p e r c e n t .                  That
t u r n a r o u nd i s r e s po n s i bl e fo r a t hi r d o f C h i n a 's g l o b a l t r a d e s ur p l u s ,
t h e c h a n g e i n t h e me t a l s b a l a n c e f r om n e t i m p o r t e r t o n e t e x p o r t e r , s o
C h i n a i s n o w n ot on l y t he l a r g e s t s t e e l p r o d u c e r i n t h e wo r l d , i t ' s a l s o
the largest steel exporter.
             I n a d d i t i o n , t h e s e e n e r g y i nt e n s i v e i n d u s t r i e s b u i l d t h e
infrastructure                that        facilitates           the      lighter         s i de     of      C h i ne s e
ma n u f a c t u r i n g : t h e p o r t s , t h e h i g h w a y s , t h e b u i l d i n g s , t h e f a c t o r i e s
t h a t a l l o w C h i n a t o ma n u f a c t u r e B a r b i e d o l l s , t e l e v i s i o n s , e l e c t r o n i c s
t h a t g e t s h i p pe d t o t h e U . S . S o w h e t h e r i t 's i n t e r ms o f t h e s t e e l t h a t 's
e x p o r t e d d i r e c t l y , t h e c e me n t p o u r e d f o r h i g h w a y s o r t h e
p e t r o c h e mi c a l s u s e d t o ma k e t o y s , m u c h o f C h i n a 's e n e r g y d e ma n d i s ,
i n f a c t , us e d t o s a t i s f y c o ns u mp t i o n o u t s i d e o f C h i n a ' s b o r d e r s , n o t
least here in the U.S.
             S o t h e n t h e q u e s t i o n i s f r o m a g l o b a l e n e r g y a n d e n v i r o n me n t a l
s t a n d p o i n t , h o w e f f i c i e nt i s t h e e n e r g y u s e i n C h i n a c o mp a r e d t o
e l s e w h e r e a n d f r o m w h a t s o ur c e s i s i t g e n e r a t e d ? We l l , o f c o u r s e , i n
C h i n a i t 's g e n e r a t e d mo s t l y f r o m c o a l . 7 0 p e r c e n t o f t h e c o u n t r y ’ s
energy needs are satisfied with coal, which in 2006 totaled about 2.4
b i l l i o n me t r i c t o n s , mo r e t h a n t wi c e a s mu c h i n t h e U . S. a n d ne a r l y 4 0
p e r c e n t o f g l o b a l c o a l c o n s u mp t i o n t h a t y e a r .
             E v e r y y e a r mo r e a n d mo r e o f t h i s c o a l i s d e l i v e r e d t o t he e nd
u s e r i n t h e f o r m o f e l e c t r i c i t y , d e ma n d f o r w h i c h i s g r o w i n g f a s t . L a s t
y e a r , C h i n a a d d e d o v e r 1 0 0 g i g a w a t t s o f n e w c a p a c i t y , w h i c h i s mo r e
t h a n t he e n t i r e i n s t a l l e d b a s e o f A f r i c a , a n d a g a i n t hi s ye a r w i l l
probably add another 100 gigawatts.
             The options for moving the power sector away from coal are
f a i r l y l i m i t e d . B e i j i ng ha s a mb i t i o u s p l a n s f o r h y d r o , wi n d , n u c l e a r ,
b u t f a c e s b o t h e c o n o mi c a n d p o l i t i c a l h u r d l e s o n a l l t h r e e f r o n t s .
             F o r h y d r o , t h e y ' d l i k e t o s ee c a p a c i t y d o u b l e b y 2 0 2 0 . N o w , t o
reach that target, it would mean building one Three Gorges Dam every
y e a r b e t we e n n o w a n d 2 0 2 0 , w h i c h i s p r o b a b l y n o t p o s s i b l e .
             F o r w i nd a n d n uc l e a r , t h e g o v e r n m e n t h a s s i mi l a r a mb i t i o u s
h o p e s , w h i c h mi g h t b e a c hi e v e d , b u t e v e n u n d e r t h e b e s t c a s e s c e n a r i o
w o u l d a c c o u n t f o r a b o u t s i x p e r c e nt o f i n s t a l l e d c a p a c i t y i n 2 0 2 0 .
             N a t u r a l ga s , w h i c h i s 2 0 p e r c e nt o f p o w e r g e n h e r e i n t h e U . S . ,
                                                       - 67 -
i t ' s l a r g e l y o f f t h e t a bl e i n C h i n a d ue t o c o s t s . L N G c o n t r a c t s h a v e
b e e n s i g n e d . Te r mi n a l s a r e b e i n g c o n s t r u c t e d , b u t p r o s p e c t i v e g a s -
f i r e d p o w e r g e n e r a t i o n h a s t o l i n e u p b e h i n d t h e p e t r o - c h e mi c a l
i n d u s t r y t h a t n e e d s c h e a p g a s t o b e c o mp e t i t i v e w i t h t h e M i d d l e E a s t
a n d b e h i n d r e s i d e n t i a l c o n s u me r s w h o a r e l o o k i n g f o r c l e a n f u e l t o
h e a t t h e i r h o me s a n d t o c o o k t h e i r f o o d .
             I n s h or t , a l t e r n a t i ve p o w e r s o u r c e s i n C h i n a a r e i mp o r t a nt f o r t h e
g l o b a l t u r b i n e ma r k e t , t h e g l o b a l n u c l e a r ma r k e t a n d g l o b a l L N G
ma r k e t , b u t t h e y d o n o t me a n t h a t C h i na i s g oi n g t o b e a b l e t o
s i g n i f i c a n t l y mo v e a w a y f r o m c o a l i n t h e me d i u m t e r m.
             E x p e c t t o s e e C hi na a d d mo r e c o a l - f i r e d po w e r p l a nt s ov e r t h e
n e x t 1 5 ye a r s t h a n e x i s t i n t ot a l i n t he U . S . t o da y .
             In addition, rising oil and gas prices have set off a hunt for coal-
d e r i v e d p e t r o l e u m s u b s t i t ut e s . I n t h e b e g i n n i n g , t h i s c h a r g e w a s l e d b y
B e i j i n g c o n c e r n e d w i t h t he n a t i o n a l s e c u r i t y i mp l i c a t i on s o f C h i n a 's
g r o w i n g d e p e n d e n c e o n i mp o r t e d o i l , b u t w i t h c r u d e n o w a b o v e $ 6 0 a
b a r r e l , t h e ma r k e t d o e s n ' t n e e d a n y h e l p f r o m g o v e r n me n t a n d t h e r e 's a
t o n o f p r o j e c t s o n t h e b o o k s u n d e r d e v e l o p me n t .
             S o me a n a l y s t s e s t i ma t e t h a t t h e p r o d u c t i o n o f c o a l - d e r i v e d
transportation fuels could reach 1.6 million barrels a day by 2020. If
a c h i e v e d , i t w o u l d r e q u i r e a n a d d i t i on a l 4 0 0 mi l l i o n t on s o f c oa l a nd
6 0 0 mi l l i o n t o n s o f w a t e r e a c h y e a r t o p r o d u c e .
             N o w , r e c e n t l y , a f r a i d o f w h a t t hi s me a n s f o r c o a l p r i c e s , w a t e r
s u p p l y , a n d t h e c o u n t r y 's c a r b o n f o o t p r i n t , B e i j i n g 's e n t h u s i a s m h a s
w a n e d , a n d t h e g o v e r n me n t i n r e c e nt w e e k s ha s a c t u a l l y t a ke n s t e p s t o
p u t t h e b r a k e s o n t h e s e p r o j e c t s , p u t a mo r a t or i u m o n t he d e ve l o pme n t
of new coal-to-liquids in China.
             T h e C o m mi s s i o n h a s a s k e d me h o w t h i s r e l i a nc e o n c oa l a f f e c t s
C h i n a ' s o v e r a l l e c o n o mi c h e a l t h . To d a t e , i t 's b e e n s u p p o r t i v e o f
e c o n o mi c g r o w t h . I f C h i n a h a d b e e n f o r c e d t o d o w i t h i mp o r t e d o i l
w h a t i t ' s d o n e w i t h d o me s t i c c o a l , t h e c o u n t r y 's e n e r g y b i l l w o u l d h a v e
e a s i l y d o u b l e d a n d e c o n o mi c g r o w t h wo u l d h a v e n o d o u b t s l o w e d .
             G o i n g f o r w a r d , t h o u g h , o ur v i e w i s t h a t c o a l d e p e n d e n c e p r e s e n t s
mo r e o f a d o w n s i d e r i s k t o g r o w t h a s p r i c e s r i s e a nd t h e a s s o c i a t e d
e n v i r o n me n t a l c o s t s c o me t o b e a r . The r e c e n t s u r g e i n he a v y i n dus t r y
r e s p o n s i b l e f o r t h e c o u n t r y ' s b u r g e o n i n g e n e r g y d e m a n d i s ma d e
p o s s i b l e b y a n u mb e r o f c o s t a d v an t a ge s t ha t C h i n e s e f i r ms e n j o y
r e l a t i ve t o t he i r f or e i g n c o m p e t i t i o n .
             We d e t a i l t h e s e a d v a n t a g e s i n o ur r e p o r t , b u t mo s t i mp o r t a n t a r e
s h o r t c o n s t r u c t i o n t i me s a n d a p p r o v al p r o c e s s e s , c o n c e s s i o n a r y l a n d
p r i c e s a n d a c a p i t a l s y s t e m t h a t 's b i a s e d t o wa r d s t a t e - o w n e d h e a v y
i n d u s t r y t h a t i n t h e a b s e n c e o f r ea l i n t e r e s t r a t e c o mp e t i t i o n f o r
d e p o s i t o r s c a n p r o v i d e mo n e y c h e a p t o l e n d e r s .
             E n e r g y pr i c e s i n a nd o f t he m s e l v e s d on 't a c t u a l l y pr o vi de mu c h
                                                      - 68 -
o f a n a d va n t a g e i n C h i n a . D o me s t i c c o a l a n d e l e c t r i c i t y c o s t s ha v e
l a r g e l y c o n v e r g e d w i t h i n t e r n a t i o n a l l e v e l s, a n d i n ma n y c a s e s ,
C h i n e s e c o mp a n i e s a c t u a l l y p a y h i g h e r p r i c e s t h a n t he ir c o u n t e r p a r t s i n
R u s s i a , Au s t r a l i a a n d e v e n t h e U . S .
            Wh e r e C h i n e s e f i r ms d o h a v e a n a d v a n t a g e i s i n t he
e n v i r o n me n t a l c o s t a s s o c i a t e d w i t h p r o d u c i n g a n d c o n s u mi n g e n e r g y .
F e w C h i ne s e p o we r p l a nt s a nd e v e n f e w e r s t e e l mi l l s a n d c e me n t k i l n s
c o n t r ol po l l u t a n t s e mi t t e d f r o m t h e c o a l t h e y b u r n. Th e c u mu l a t i ve
e f f e c t o f t h i s i s d e c r e a s e d a g r i c ul t u r a l y i e l d s , p r e ma t u r e mo r t a l i t y a n d
c h r o n i c r e s p i r a t o r y p r o b l e ms .
            C h i n a 's c o a s t a l r e s i d e nt s , h ow e v e r , a r e n o w r e a c h i n g a n i n c o me
l e v e l w h e r e t h e i r f o o d a n d s h e l t e r n e e ds a r e me t , a n d t h i n g s l i k e c l e a n
air and water are more valuable.
            T h i s r i s i ng mi d d l e c l a s s i s pu t t i n g p r e s s u r e o n t h e g o ve r nme n t t o
f o r c e i n d u s t r y t o r e d u c e t h e a mo u n t o f p o l l u t i o n i t e mi t s , e v e n i f i t
c o me s a t t h e e x p e n s e o f g r o w t h . I n c o r p o r a t i n g t h e s e e n v i r o n me n t a l
c o s t s i nt o a l r e a dy r i s i n g e n e r g y b i l l s w i l l s ur e l y h u r t t he
c o mp e t i t i v e n e s s o f s o me o f C h i n a 's h e a v y i n d u s t r y . N o w , t h i s c a n b e
e i t h e r a n e t p o s i t i v e o r a n e t n eg a t i ve f o r C hi n e s e e c ono mi c g r ow t h ,
d e p e n d i n g o n h o w t h e g o v e r n m e n t ma n a g e s t he pr o c e s s .
            T h e r e 's b e e n a l o t o f d i s c u s s i o n i n t h e U . S . r e c e n t l y a bo u t h o w t o
r e b a l a n c e C h i n e s e g r o w t h a w a y f r o m i n v e s t me n t t o wa r d s c o n s u mp t i o n ,
a w a y f r o m i n d u s t r y t o w a r d s s e r v i c e s . Wo r r i e d a b o u t t h e n e g a t i v e
i mp a c t s o f t h e c u r r e n t i n v e s t me n t - l e d i n d u s t r y b o o m f r o m e n e r g y
d e ma n d t o e n v i r o n me n t a l d e g r a d a t i o n t o t h e e x p l o d i n g t r a d e s u r p l u s ,
B e i j i n g i s e a g e r t o s e e s u c h r e b a l an c i n g t a ke pl a c e , b ut t h e s t e p s t h e
g o v e r n me n t h a s t a k e n t o d a t e a r e i n s u f f i c i e n t t o b r i n g i t a b o u t i n a n
orderly manner.
            I n t h e i r t i mi d i t y, t h e y r i s k c au s i n g a mo r e a br u pt a d j us t me n t
d o w n t h e r o a d . M a n y i n g o v e r n me n t r e a l i z e t h i s a n d a r e t r y i n g t o
mo v e b e y o n d t r a d i t i o n a l a d mi n i s t r a t i v e a p p r o a c h e s t o r e i n i n g i n
industry.
            M y t i me i s mo r e t h a n e x p i r e d , s o I 'l l w r a p u p . I ' m h a p p y t o g o
i n t o t h e i n t e r n a t i o na l i mp l i c a t i on s , bo t h f o r c l i m a t e c ha n ge a n d e ne r g y
security in the Q&A.
[ T h e s t a t e me n t f o l l o w s : ] 4

      H E A R I N G C O C H A I R S H E A : T h a n k y o u v e r y mu c h , M r . H o u s e r .
Dr. Schipper.

       STATEMENT OF LEE SCHIPPER AND WEI-SHIUEN NG
     DIRECTOR OF RESEARCH, EMBARQ, WORLD RESOURCES

4
    Click here to read the prepared testimony of Mr. Trevor Houser
                                          - 69 -
                             I N S T I T U T E , W A S H I N G TO N , D . C .

            D R . S C H I P P E R : Th a n k y o u a n d I 'l l s p e a k a s f a s t a s my c o l d l e t s
me . T h a n k s . I ' m s u m ma r i z i n g w o r k w e 'v e d o n e i n E M BA R Q w i t h WR I
C e n t e r f o r S u s t a i n a b l e T r a n s p o r t . O u r w o r k i s i n ma n y , ma n y c i t i e s ,
s u p p o r t e d b y t h e S h e l l F o u n d a t i o n , t h e C a t e r pi l l a r F o u n d a t i o n .
A c t u a l l y i t w o r k s wi t h e mp o w e r e d l e a d e r s t o c a t a l y z e s o c i a l , f i n a nc i al
a n d e n v i r o n me n t a l l y s o u n d s o l u t i o n s t o t h e p r o b l e ms o f m o b i l i t y .
            We 'v e w o r k e d a g r e a t d e a l i n S h a n gha i a n d X i 'a n . A n d I wi l l
g i v e y o u h a r d c o p i e s , r e a l h a r d c op i e s o f s o me o f t h e t h i n g s w e 'v e
d o n e , a n d y o u 'l l g e t l i t t l e b r o c h u r e s a b o u t E M BA R Q .
            Everybody talks about the rising need for fuel in China and I
t h i n k a f t e r h e a r i n g t h e pr e vi o u s t w o s p e a ke r s , I ' m a l m o s t a fr a i d t o
ma k e t h i n g s s o u n d w o r s e , b u t I w i l l .
            O u r t he s i s i s t h a t i n s pi t e of C h i n a 's t i n y oi l d e ma n d - - t i n y by
o u r s t a n d a r d s , w e s h a r e t h e c o n ce r n s e x pr e s s e d he r e a b o ut t he
i mp l i c a t i on s o f i mp o r t s o f o i l i n C h i n a a n d t he e x p e n s i v e a l t e r n a t i ve s - -
w e t h i n k t h a t t r a n s p o r t a t i o n i s a mo r e f u n d a me n t a l r o a d b l o c k t o
i mp r o v i n g C h i n a ’ s e n e r g y u s e . Y o u c a n b u i l d f a c t o r i e s ; y o u c a n e x p o r t
d o l l s ; y o u c a n 't r e a l l y c r e a t e s p a c e w h e r e t h e r e i s n o n e , a n d t h e r e i s n ' t
space in Chinese cities.
            I t hi n k t he p o i nt m a d e e a r l i e r t ha t pa r t i c u l a r l y o n c o a s t a l C h i na ,
p e o p l e h a v e mo n e y , t h e y h a v e c a r s . I n my e i g h t y e a r s o f g o i n g b a c k
a n d f o r t h t o S h a n g h a i , I ' v e s e e n i t g o fr o m p a s s i b l e t o i mp a s s i bl e . W e
c a l l t h i s h y p e r mo t o r i z a t io n , n o t b e c a u s e c a r s a r e b a d , b u t b e c a u s e i t
h a p p e n e d s o f a s t , i n h a l f a g e n e r a t i o n , a n d t h e n u mb e r o f p e o p l e
g e t t i n g k n o c k e d o f f t h e r o a d i s r e a l l y , r e a l l y s h o c k i n g , a n d i n my
w r i t t e n t e s t i mo n y t h e f i r s t p i c t u r e i s t h e " N o b i k e " s i g n o n N a n j i n g
R o a d . Ev e n pe d e s t r i a ns l i ke my s e l f t a k e r e a l r i s k s i n t r y i n g t o w a l k
a c r o s s t he s t r e e t i n C h i n a .
            F u e l w i l l e i t h e r c o me f r o m o i l i mp o r t s o r i t w i l l c o me f r o m
s y n t h e t i c s . A s w e d e s c r i b e i n t h e t e s t i mo n y , w e 'v e c o m mi s s i o n e d a
book for Chinese readers in Chinese written by Chinese and non-
C h i n e s e e x p e r t s p a i r e d u p , a n d t h e o u t l o o k fo r a n y t h i n g o t h e r t h a n
c o a l - b a s e d s y n t h e t i c s i s g r i m.
            B u t t h e Ch i n e s e a d mi t w h e n y o u t a l k l o n g e n o u g h t h a t t h e c o a l -
b a s e d s y n t h e t i c s a r e a l s o g o i n g t o b e e x p e n s i ve . I p o i n t t h a t o u t
b e c a u s e i n t he ot he r c h a mb e r o f t hi s o r g a n i z a t i o n , t h e y'r e t a l k i n g a b o u t
s u b s i d i z i n g c o a l - b a s e d s y n t h e t i c s . C h i n a , w e l l , w e 'l l s e e .
            The authorities understand that the alternative is expensive, but
t h e y s t i l l p a y l e s s fo r g a s o l i n e a n d d i e s e l t h a n w e d o , a n d t h e y h a v e n 't
s o r t e d t ha t w h o l e i s s ue o u t o f h o w t o i n t e r n a l i z e e ve n b a s i c m a r ke t
p r i c e s , n o t t o me n t i o n e xt e r na l i t i e s .
            T h e c o s t i n h u ma n t e r ms , i n l u n g t e r ms , h a v i n g g o t t e n s i c k ma n y
                                                      - 70 -
t i me s i n o r di n a r y C h i n e s e c i t i e s f r om b e i n g s t u c k i n t r a f f i c , c o s t i s
v e r y h i g h , b u t t h e r e a l c o s t i s t h e i r r e v e r s i b l e a t t e mp t i n p l a c e s l i ke
B e i j i n g t o s p r a wl , t h i n k i n g t h a t w i l l s o l v e t h e p r o b l e m, a n d a s w e
k n o w f r o m o u r c o n g e s t e d c i t i e s , t h a t d o e s n 't s o l v e t h e p r o b l e m. A s k
anybody on either side of the aisle who has to deal with Northern
V i r g i n i a , a n d o u t e r B e i j i n g a n d n o w P u d o n g , wh i c h wa s e mp t y 3 0 y e a r s
ago, in the east of Shanghai is beginning to look like Tysons Corner.
             C h i n a t h i n k s i t h a s a ma r k e t e c o n o my a n d a l l o f u s w h o g o t h e r e
k n o w t h a t i t 's r e a l l y f u n t o g o t o e i t h e r a f a n c y d e p a r t me n t s t o r e o r
h a g g l e f o r a p i e c e o f a r t , b u t t h e r e a l b l o o d o f t h e ma r k e t e c o no my t h a t
i t t a k e s t o s t e e r c o ns u me r s ' i nv e s t me n t i s n 't n e c e s s a r i l y q u i t e t h e r e .
             We mo d e l e d t h r e e fu t ur e s . I w o n ' t g o i n t o t h e d e t a i l s b e c a u s e o f
l a c k o f t i me . T h e f i r s t wa s b u si n e s s a s u s u a l , a n d b i n g o , w e g e t
w h a t e v e r e l s e g e t s , t w o mi l l i o n b a r r e l s a d a y f o r c a r s i n t h e y e a r 2 0 2 0 .
             T h e n w h e n w e s a i d w h a t a b o ut J a p a n e s e g a s o l i n e p r i c e s a n d
mo d e s t f u e l e c o n o my s t a n d a r d s , a n d I ' m p r o u d t o s a y t h a t my s t u d e n t
F e n g A n i s t h e g u y t h a t t u r n e d t h e t r i c k o n t h e f u e l e c o n o my s t a n d a r d s .
A n d t h a t g e t s y o u t o a b o u t o n e - a n d - a -q u a r t e r mi l l i o n b ar r e l s a d a y , a n d
t h e y c a n s t i c k i n s o me a l t e r n a t i v e s l i k e c o mp r e s s e d n a t u r a l g a s , ma y b e
s o me e l e c t r i c s , b u t t h e c i t i e s a r e s t i l l a w a s h i n t o o ma n y c a r s . O k a y .
             So we said what happens if they really take transport seriously
l i k e v e r y f e w p l a c e s i n t h e w o r l d h a v e d o n e ? O n e p l a c e t h a t 's t r y i n g
n o w i s a s ma l l t o w n n o r t h o f u s c al l e d N e w Y o r k , a n d t h a t 's w h a t y o u
h a v e t o d o t o ma n a g e mi l l i o n s a n d m i l l i o n s o f p e o pl e i n a s ma l l s pa c e .
             First of all, the results of the scenarios are we have about a
d o u b l i n g o f o i l u s e . We h a v e a b o ut a q u a d r u p l i n g i n t o t a l e n e r g y , n o t
a t e n - t u p l i n g . We h a v e a mo d e s t i nc r e a s e i n g r e e n h o u s e g a s e mi s s i o n s .
T h e c a r s a r e s ma l l , s a f e a n d s l o w , a n d o n e o f t h e p r e c e d e n t s f o r t h a t i s
t h e p o p u l a r i t y o f t w o - w h e e l e r s t h r o u g h mo s t o f t h e r e s t o f S o u t h e a s t
A s i a . S o i t 's n o t i mp o s s i b l e g i v e n w h e n y o u h a v e t h e c o n s t r a i n t s t h e y
have.
             You need right pricing; you need congestion pricing; you need to
c h a r g e f o r p a r k i n g ; y o u h a v e t o s t o p t h e P a r i s - s t y l e p a r k i n g t ha t i s n o w
f i l l i n g u p t he s i d e w a l k s i n C h i n a . An d w h i l e p e o pl e t a l k a b o ut Ch i n a
n e e d i n g t e c h n o l o g y , A me r i c a n s h a v e t h e mo s t e f f i c i e n t c a r s i n t h e
w o r l d . Th a t i s w e u s e t h e l e a s t f u e l p e r t o n mi l e b e c a u s e w e h a v e t h e
b i g g e s t c a r s . Wh a t C h i n a d o e s n 't n e e d i s bi g c a r s t ha t a r e e f f i c i e n t . I t
n e e d s f u e l - e c o n o mi c c a r s , a n d s o I w o r r y w h e n p e o pl e t h i n k a b o u t
t e c h n o l o g y w h e n t h e i s s u e i s s ma l l c a r s , s a f e c a r s a n d s l o w c a r s .
             Above all, China also needs a real concept of how to do urban
t r a n s p or t , a n d t h a t i s w ha t h a s e me r g e d i n o u r d i s c u s s i o n s w i t h t h e
l e a d e r s o f X i 'a n a n d S h a n g h a i , p a r t i cu l a r l y i n X i ' a n w h e r e w e g o t t h e
me mb e r s o f t h e P e o p l e 's C o m mi t t e e t o f i g h t a mo n g s t t h e ms e l v e s , a n d
my a s s i s t a n t w a s f r o m S i n g a p o r e . S o I g o t k i n d o f a s b e s t a s I c o u l d .
                                                     - 71 -
            We 'v e n e v e r s e e n t h a t , a n d w h a t t h e y w e r e b a s i c a l l y s a y i n g i s we
d o n 't k n o w r e a l l y w h a t t h e p r o b l e m i s . We d o n 't k n o w w h a t t o d o . At
o n e p oi n t s o me o n e s a i d l e t 's t e a r dow n t h e hi s t o r i c Wa l l ; t h a t w i l l
s o l v e o u r p r o b l e m. A n d t h e n e v e r y b o d y l o o k e d a t h i m i n k i n d o f
h o r r o r b e c a u s e t h a t 's w h a t ma k e s X i 'a n X i 'a n . Y o u c o u l d a l s o p l o w
o v e r t h e T e r r a c o t t a Wa r r i o r s .
            M y v i e w i s t h a t i t 's n o t t o o l a t e f o r Ch i n a t o c h a n g e , t o c h o o s e
r a t h e r . I f y o u l o o k a t o n e o f my g r a p h s , C h i n a h a s t h e c a r o w n e r s h i p
n o w , r o u g h l y w h e r e w e w e r e i n 1 9 20 , 1 9 2 5 , a t h a l f o f o u r i n c o me .
T h a t ' s b e c a u s e c a r s a r e c he a p e r . W h a t t ha t me a n s i s t h e y h a ve 9 0
y e a r s o f o u r e x p e r i e n c e t o s a y he r e 's w h e r e t ha t pa t h go e s . T h e y 'r e
ahead of us, okay.
            A n d i t 's no t my r o l e t o s a y t o t h e C hi n e s e a u t ho r i t i e s he r e 's w h a t
y o u mu s t d o . Wh a t I t h i n k I h a v e t o d o i s s a y y o u mu s t c h o o s e . H e r e
a r e s o me t o ol s ; h e r e a r e s o m e o ut c o me s . We c a n w o r k t h e s e t h i n g s .
That's what we've done. And I can that the leaders of Shanghai and
X i 'a n r e a l l y l o o k u p a n d t a k e n o t i ce w h e n t h e y r e a li z e w h e r e t h e y 'r e
h e a de d .
            F i n a l l y, t h e i s s u e of a s s i s t a nc e . Wh a t c a n t h e U . S . d o ? B e c a u s e
w e w e r e , f o r e x a mp l e , p r i v i l e g e d t o b r i e f t h e h e a d o f E P A l a s t y e a r
b e f o r e h i s f i r s t t r i p . We d o n ' t n e e d t o s u p p o r t e x p o r t s o f e n e r g y -
i n t e n s i v e v e h i c l e s . We d o n ' t n e e d t o s u p p o r t e x p o r t s o f a n e n e r g y -
i n t e n s i v e l i f e s t yl e w h i c h s a ys s o me t h i n g f o r W a l - M a r t a n d t hi n gs l i k e
that.
            I a d mi r e t h e f a c t t h a t I k e a i n S h a n g h a i i s r i g h t b y a t r a n s i t n o d e
r i g h t d o wn t o w n . O k a y . W h a t w e c a n d o i s e x p o r t s o me o f o u r b e s t
thinking that our municipal areas or planning organizations do. We do
h a v e s t a k e h o l d e r i n v o l v e me n t , s o me t hi n g y o u d o n 't h a v e i n C h i n a . W e
do have a way of looking at alternatives to scenarios such as the ones
t h a t I 'v e s h o w n t o d a y . A n d w e b e l i e ve t h a t t h a t k i n d o f w o r k f o l l o w e d
b y s o me r e a l mo n e y t o r e a l l y t e s t t h i n g s , w h e t h e r i t 's v e h i c l e s o r l o w
e n e r g y / l ow i mp a c t t r a n s p or t p a t t e r n s d e mo n s t r a t i o n s , t h a t 's t h e k i n d o f
a thing that will show China, and in a funny way show us, what kinds
o f a l t e r na t i ve s y o u r e a l l y h a v e b e c a us e i t 's n ot t oo l a t e , a n d I t h i n k
w i t h t h os e t o ol s , t he C h i ne s e w i l l n o t o n l y c h o o s e , b ut t he y w i l l c ho o s e
wisely.
            Thank you.
[ T h e s t a t e me n t f o l l o w s : ] 5

                 P A N E L I I I : D i s c us s i o n, Q ue s t i o n s an d A n s we r s

          HEARING             COCHAIR              SHEA:            Thank         you      very      mu c h ,     Dr.

5
    Click here to read the prepared statement of Dr. Lee Schipper and Wei-Shiuen Ng
                                          - 72 -
S c h i p p e r . I 'm g o i n g t o d e fe r my q u e s t i o n a n d s t a r t o f f w i t h V i c e
C h a i r ma n B l u me n t h a l .
            VICE CHAIRMAN BLUMENTHAL: Yes. I have, I suppose I
h a v e t w o , t w o q u e s t i o n s . O n e , I t h i n k t h e y 'r e b o t h d i r e c t e d a t M r .
Houser. The first is in terms of now being a net coal importer, as you
me n t i o n e d , w h a t s u r r o u n d i ng c o u n t r i e s t h a t a c t u a l l y s h a r e l a n d b o r d e r
w i t h C h i n a h a v e c o a l d e p o s i t s a n d c o a l mi n e s t h a t t h e C h i n e s e ma y b e
i n t e r e s t e d i n b u y i n g f r o m, u s i n g ? T h a t 's t h e f i r s t . G o a h e a d a n d
a n s w e r t h a t , a n d I 'l l t h e n a s k t h e o t h e r .
            MR. HOUSER: First, I want to qualify this question as it got a
l o t o f p r e s s t hi s ye a r i n C h i n a a s w e l l a s o u t s i d e o f C h i n a w h e n t h e
c o u nt r y of f i c i a l l y b e c a me a n e t c oa l i mp o r t e r f o r t h e fi r s t t i me . I t ' s
i mp o r t a n t t o q u a l i fy t h e s c a l e , a n d w e 'r e t a l k i n g a b o u t 2 . 4 b i l l i o n t o n s
o f c o a l c o n s u me d e a c h ye a r . T o t a l i mp o r t s t h i s y e a r w i l l ma y b e t o p a
couple hundred million tons.                               S o w h i l e i t 's        i mp a c t i s l a r g e f o r
V i e t n a m , f o r A u s t r a l i a , f o r t h e s ur r o u n d i n g c o u n t r i e s w h o a r e g o i n g t o
s e l l c o a l t o C hi na ; i t 's n ot a f u n d a me n t a l s h i f t i n Ch i n a ' s i m p o r t
d e p e n d e n c y o n c o a l o f a n y s i g n i fi c a n t d e g r e e , a n d i t w o n 't b e f o r a
n u mb e r o f y e a r s .
            I t 's s i g n i fi c a n t i f y o u 'r e G u a n g d o n g p r o v i n c e o n t he c o a s t i n t h e
s o u t h a n d t h e c o s t o f d e l i v e r e d d o me s t i c c o a l i s l i k e $ 7 0 a t o n . Th e n
ma y b e y o u 'r e g o i n g t o i mp o r t b e t t e r t h a n 5 0 p e r c e n t o f y o u r c o a l f r o m
neighboring countries, but for the country as a whole it's not going to
t e r r i bl y s i g n i f i c a nt .
            A s f o r t h e c o u n t r i e s mo s t a f f e c t e d : i t w i l l b e A u s t r a l i a , w h i c h i s
l o a d e d u p a n d r e a d y t o g o a n d s h i p t h e i r c o a l . I t w i l l b e V i e t n a m. I t
w i l l b e I n d o n e s i a a n d i t wi l l b e M on g o l i a . T h e C h i n e s e a r e u p i n
Mongolia every weekend with suitcases full of cash trying to buy coal
mi n e s , a n d t h e M o n g o l i a n s s a n d w i c h e d b e t w e e n R u s s i a a n d C h i n a w i t h
n o p o r t ( t h o u g h t h e y d o h a v e a N a v y - - i t s i t s o n a l a k e - - i t 's o n e f r i g a t e
t h a t s i t s on a l a k e w i t h a n a d mi r a l ) - - t h e y ' r e a l i t t l e wa r y b a s e d o n t h e i r
h i s t o r y o f b e c o mi n g a r e s o u r c e s u p p l y i n g a p p e n d a g e t o t h e i r s o u t h e r n
n e i g h b o r , a n d a r e e a g e r t o b r i n g i n E u r o p e a n a n d U . S . c o mp a n i e s a s a
hedge against that influence. They call it a "third-neighbor policy."
            VICE CHAIRMAN BLUMENTHAL: That question on--
            MR. HOUSER: Yes, sure.
            VICE CHAIRMAN BLUMENTHAL: On the Mongolian question,
a r e t h e y s i mp l y a f r a i d o f b e i n g a r e s o u r c e e x p o r t e r t h r o u g h t h e ma r k et
o r a r e t he y a f r a i d of l a r ge r s t r a t e g i c q u e s t i o n s r e g a r di n g Ch i n e s e , p a s t
experience with China?
            M R . H O U S E R : B o t h . T h e y ' r e a fr a i d e c o n o mi c a l l y o f h a v i n g a
c a p t u r e d ma r k e t . T h e y k n o w t h a t t h e y d o n 't h a v e a p o r t . I t 's e i t h e r g o t
t o g o t h r o u g h C h i n a o r R u s s i a . T h e p ro b l e m i s t h e y ' r e s el l i n g c o a l i n t o
t h e c he a pe s t p a r t of t h e c o un t r y i n I n n e r M o n g o l i a . T h a t 's t h e t r a n s i t
                                                      - 73 -
route. When I talk to the Mongolians, they look at the port price at
$ 6 0 a t o n , a n d t h e y ' r e g e t t i n g f r o m S he n h u a ma y b e e i g h t , n i n e d o l l a r s a
t o n , a n d t h e n S h e n h u a t r u c k s i t 2 0 0 ki l o me t e r s s o u t h o f t h e b o r d e r a n d
s e l l s i n t o t h e i r d i s t r i b u t i o n s y s t e m, a n d t h e M o n g o l i a n s w o r r y t h a t
t h e y ' r e g e t t i n g g o u g e d b e c a u s e t h e y'r e o n l y g e t t i n g e i g ht , n i n e d o l l a r s
a t o n , b u t t h e mi n e mo u t h p r i c e i n I n n e r M o n g o l i a i s o n l y $ 1 2 t o $ 1 5 a
ton. Two-thirds of the cost of coal in China is transport to the coast.
S o t h e y 'r e n o t s e l l i ng i nt o a p a r t i c u l a r l y s w e e t pa r t o f t h e C h i n e s e
ma r k e t .
             S o t he y w a n t t o b e a bl e t o d o mo r e d o w n s t r e a m v a l u e a d d e d ,
ma y b e d o c o a l c o n v e r s i o n , d o p o w e r . T h e y w a nt t h e s a me t hi n g f o r t h e
c o p p e r m i n e s a n d f o r t h e g o l d mi n e s , t o k e e p a s mu c h o f t h e v a l u e
i n s i d e o f t h e c o u n t r y a s p o s s i b l e . T h e n s t r a t e g i c a l l y , y e s , t h e y d o n 't
w a n t t o h a v e a l l o f t h e b i g - - t h e c o p p e r mi n e , t h e O y u T o l g o i d e p o s i t ,
it's huge for Mongolia. This would double the GDP of the country.
S o me o f t h e c o a l p r o j e c t s a r e o f s i mi l a r s c a l e , a n d s o t o h a v e t h a t o n l y
b e d o n e w i t h Ch i n e s e i n v e s t me n t i s a g e o p o l i t i c a l c o n c e r n f o r
Mongolia as well.
             V I C E C H A I R M A N B L U M E N T H A L : I d o n 't k n o w h o w mu c h t i m e
I 'v e g o t l e f t .
             H E A R I N G C O C H A I R S H E A : Y o u ' v e g o t a mi n u t e l e f t .
             VICE CHAIRMAN BLUMENTHAL: Okay. You seem skeptical
a b o u t mo v i n g t h e p o w e r s e c t o r a w a y f r o m c o a l t o s o m e o f t h e o t h e r
t h i n g s w e 'v e h e a r d i n e a r l i e r t e s t i mo n y . Y o u me n t i o n e d h y d r o a n d t h e
p r o bl e ms a n d e x pe n s e w i t h t ha t . W h a t a b o ut t he n uc l e a r pl a n s t ha t
we've heard about?
             M R . H O U S E R : S u r e , t h e r e ' s p la n s t o b u i l d 3 0 g i g s o f n e w
n u c l e a r c a p a c i t y b e t w e e n n o w a n d 2 0 2 0 . A n d i t 's p o s s i b l e t h a t i t c o u l d
happen. Those are ambitious plans. They will account for maybe 30,
40 percent of the global nuclear build-out during that period, so if
y o u 'r e a We s t i n g h o u s e o r y o u 'r e a G E o r y o u 'r e S i e m e n s , i t 's v e r y
i mp o r t a n t t o y o u a s a ma r k e t .
             B u t e v e n a t 3 0 g i g a w a t t s o f n e w c o n s t r u c t i o n , i f w e ge t t o 4 0
g i g a w a t t s o f n u c l e a r c a p a c i t y i n 2 0 2 0 , t h a t 's g o i n g t o b e t h r e e p e r c e n t
o f t o t a l i n s t a l l e d c a p a c i t y . S o t he b ui l d- u p w i l l b e ma s s i ve , b ut i t s
a b i l i t y t o ma k e a d e n t i n t h e t o t a l p o w e r p i c t u r e i s p r e t t y s ma l l .
             VICE CHAIRMAN BLUMENTHAL: So why do it? Do you think
t h e s e pl a ns a r e g oi ng t o be c a r r i e d o u t ?
             MR. HOUSER: Yes, absolutely, because they're going to be done
i n c oa s t a l p r o vi n c e s w h e r e d e l i v e r e d c o a l i s p a r t i c u l a r l y e x p e n s i v e ,
mo r e i n G u a n g d o n g , mo r e i n F u j i a n , a l o n g t h e c o a s t w h e r e t h e p r i c e o f
c o a l i s $ 6 0 , $ 7 0 a t o n . T h e y 'r e i mp o r t an t f o r t h o s e a r e a s . A s p a r t o f
the national picture, it's less significant.
             VICE CHAIRMAN BLUMENTHAL: Thank you.
                                                      - 74 -
           H E A R I N G C O C H A I R S H E A : T h a n k y o u . I 'l l a s k a q u e s t i o n . I n
y o u r p r e p a r e d d o c u me n t w i t h D a n R o s e n , a n d y o u me n t i o n e d i t i n y o u r
t e s t i mo n y , t h a t h e a v y i n d u st r y i s t h e ma i n s o u r c e f o r e n e r g y d e ma n d i n
C h i n a a s o p p o s e d t o r e s i d e n t i a l , c o m me r c i a l t r a n s p o r t a t i o n . T h a t ' s
b e c a u s e Ch i n a 's ha s a n e xp o r t - l e d e c o n o my , I i m a g i n e .
           MR. HOUSER: Not exactly. If you look at steel, so China
p r o d uc e s 3 5 p e r c e nt o f t h e w o r l d 's s t e e l , 4 6 0 mi l l i o n t o n s l a s t y e a r .
T h a t ' s u p f r o m 1 2 p e r c e n t o f g l o b a l s t e e l o nl y t e n y e a r s a g o . 9 0
p e r c e nt of i t i s c on s u me d d o me s t i c a ll y . E x p o r t s a r e o n l y t e n p e r c e n t
o f C h i n a 's t o t a l s t e e l c on s u mp t i o n ; r i g h t . I t ' s l a y i n g t h e i n f r a s t r u c t u r e
t h a t ’ s b u i l d i n g C h i n a 's c i t i e s , C h i n a 's f a c t o r i e s . N o w , i t 's f a c i l i t a t i n g
e x p o r t s o f o t h e r g o o d s , o f l i g h t e r i nd u s t r y g o o d s , b u t t h a t s t e e l i s n o t
a l l l o a d e d o n t o a s h i p a n d s e n t o ut a r o u n d t h e w o r l d . I t 's mo s t l y f o r
d o me s t i c c o n s u mp t i o n . T h e s a me w o u l d b e t r u e o f c e me n t a n d g l a s s .
           HEARING COCHAIR SHEA:                                    Wi l l t h e e ne r g y r e s o ur c e mi x
c h a n g e i f w h a t w e w a n t , w h i c h i s mo r e c o n s u m p t i o n i n C h i n a , a r r i v e s ?
Wh a t w i l l b e t he e ff e c t o f t h e r e s o u r c e mi x i f w e g e t mo r e c o n s u mp t i o n
in China?
           M R . H O U S E R : I d e a l l y . Wh a t w e t h i n k ma k e s o p t i ma l s e n s e f o r
C h i n a f r o m a n e c o n o mi c s t a n d p o i n t i s t h a t , i f y o u n e e d t o c r e a t e 2 5
mi l l i o n n e w j o b s a y e a r , a n d y o u ' r e a d e n s e l y p o p u l a t e d c o u n t r y a n d
d o n 't h a v e a l o t o f r e s o u r c e s c o mp a r a t i v e l y , i t d o e s n 't ma k e a l o t o f
s e n s e f o r y o u t o b e 5 0 p e r c e n t o f g l o b a l c e me n t p r o d u c t i o n a n d 3 5
percent of global steel production.
           S t e e l d o e s n ' t e mp l o y a l o t o f p eo p l e . D o i n g s t e e l i n d e n s e l y
p o p u l a t e d a r e a s h a s a h i g h e n v i r o n me n t a l c o s t . A n d s o i f t ha t c a p i t a l
w a s r e d i r e c t e d i n t o s e r v i c e s , i n t o m o r e l a b o r i n t en s i v e i n d u s t r y , t h e
s t u f f w h e r e C hi n a h a s mo r e o f a c o mp a r a t i v e a d v a n t a g e , w e t h i n k t h a t
t h a t w o u l d b e n e t p o s i t i v e f o r e c o n o mi c g r o wt h .
           B u t l i k e I s a i d i n t h e t e s t i mo n y , i f t h o s e e n v i r o n me n t a l c o s t s
c o me t o be a r i n a w a y t ha t ma k e s C h i n e s e f i r ms u n c o m p e t i t i v e , a n d i f
i t h a p p e n s a t a c r i s i s p o i n t , t h e n i t 's g o i n g t o b e a n e g a t i v e f o r g r o w t h
f o r a s a wh o l e .
           I n t e r ms o f e n e r g y c o n s u mp t i o n , a r e b a l a n c i n g o f g r o w t h t o w a r d s
c o n s u mp t i o n l e d / s e r v i c e s - l e d g r o wt h w o u l d b e p o s i t i v e f o r e n e r g y
d e ma n d . We ' d s e e a r e d u c t i o n i n e ne r g y d e ma n d c o mi n g f r o m t h a t t y p e
o f r e b a l a n c i n g i n t h e s h o r t t e r m.                 Now in the long term, the
c o n s u mp t i o n - l e d f u t u r e , w h e n w e h a v e C h i n e s e a t t e n t o 1 5 , 0 0 0 p e r
c a p i t a G D P , t h a t b r i n g s w i t h i t i t s o w n p r o b l e ms .
           B u t t h a t t y p e o f d e ma n d i s n 't a s v o l a t i l e a s t h e i n v e s t me n t - l e d
d e ma n d , a n d t h e r e 's w a y s n o w s o me o f t h e w o r k t h a t EM B A R Q d o e s t o
g e t a h e a d o f t h a t c u r v e t o t r y t o r e d u c e t h e i mp a c t o f t h a t c o ns u mp t i on
l e d f ut u r e .
           D R . S C H I P P E R : I t h i n k t h e w o r d " vo l a t i l i t y" i s p a r t l y c o r r e c t .
                                                        - 75 -
O n e o f t h e t h i ng s yo u d o s e e i s c o n s ume r s ' a b i l i t y t o c h a n g e h o w t h e y
mo v e a r o u n d i n t h i s c o u nt r y q u i c k l y . I n s p i t e o f w h a t p e o p l e s a y , o u r
o i l c o n s u mp t i o n f o r g a s o l i n e i s o f f f r o m w h e r e w e w e r e h e a de d b e f o r e
t h e p r i c e s s t a r t e d t o g o u p i n 2 0 0 2 , an d e v e n i n t h e l a s t f e w y e a r s , I
t h i n k p e o p l e wi t h t w o c a r s h a v e s wi t c h e d .
           N o w mo s t C h i n e s e h a v e n o c a r s a n d s o w h a t w e ' r e f a c i n g n o w i s
t h e b e g i n n i n g o f a c a r ma r k e t . P e o p l e a r e g o i n g t o d r i ve k i n d o f a l mo s t
a t a n y p r i c e . B u t w e s e e t h e e me r g e n c e o f a s ma l l c a r ma r k e t a n d w h a t
I w a s s a yi n g i s p e r ha p s e v e n a mi n i - c a r ma r k e t . O n t h e a p p l i a n c e s i d e ,
s o me o f t h e w o r k fr o m my f o r me r c ol l e a g u e s a t L a w r e nc e B e r ke l e y L a b
h e l p e d t he C h i ne s e d e v el o p a p p l i a n c e e f f i c i e n c y s t a n d a r d s s o me w h a t
l i k e o u r s , s o me w h a t mo d e l e d l i k e o u r s , w h i c h me a n s t ha t n o w y o u h a v e
very efficient air-conditioners.
           Wh e n I f i r s t w e nt t o C h i n a , a p r i va t e c i t i z e n c ou l d n ot ow n a n
air-conditioner, and I was in a guest house that had one, and I was
rather surprised.
           I n t h e c a s e o f t r a n s p o r t , w h a t I t hi n k I t r i e d t o e mp h a s i z e i s t ha t
t h e c l o c k i s t i c k i n g q u i c kl y. A s C hi n a 's j o i nt v e n t ur e s , C h i na - o n l y
c o mp a n i e s a r e q u i c k l y g i r d i n g u p t o b u i l d r e a l l y w o r l d - c l a s s c a r s , a n d
t h e mo r e t h a t a c i t y l i k e B e i j i n g ke e ps a d di n g r i n g- r oa d s , t he ha r de r i t
i s t h e n t o s a y , o ka y , l e t 's a l l mo v e b a c k i n t o a s l i g ht l y di ff e r e nt w a y o f
o r g a ni z i ng o u r h ome s . T h i s i s pa r t i c ul a r l y e v i d e n t i n t h e p a r t o f
S h a n g h a i t h a t I me n t i o n e d , Pud o n g , w h i c h a g a i n i s b r a n d n e w .
           I t c a n be s p r e a d o ut a n d s pr a w l i n g , b u t o n c e y o u d o t h a t , p e o p l e
are far from the metro stop. Those of us who know how to go from the
M a g l e v t he r e t o t h e me t r o a nd t h e n g e t t o t o w n a r e s o r t of p r i vi l e ge d ,
b u t mo s t o f P u d o n g w o n 't b e n e a r o n e o f t h o s e l i n e s . W e 'v e t a l k e d t o
the Shanghaians about bus rapid transit, and I think it's fair to say we
c o n vi n c e d t h e m t h e y c a n 't s ol v e t he i r p r o bl e m w i t h t h e me t r o a l on e - -
buses, but real bus priority.
           O n e o f t h e pi c t ur e s t h a t I h a ve s h o w s n i n e b u s e s l i n e d u p i n
downtown Shanghai, and what is really scary is not only are they stuck
i n t r a f f i c , b u t mo s t o f t h e p e o p l e b i c y c l i n g o r r i d i n g t w o - wh e e l e r s n e x t
t o t h e m h a v e h e a v y l o a d s i n c l u d i n g p r o p a n e c y l i n d e r s . Th a t 's n o t s a f e .
           A n d s a y i n g t o C h i n a t h e mo r e yo u k e e p t h i s p a t t e r n g o i n g , t h e
l e s s f l e x i b l e y o u r c o n s u me r s w i l l b e , s o i n a s e n s e , t h e y w i l l b e c o me
l e s s v o l a t i l e , a n d t h e n y o u h a v e t h e s a me p r o b l e ms i n C h i n a t h a t y o u
mi g h t h a v e h e r e w h e r e y o u h a v e t r u c k d r i v e r s a n g r y o v e r t h e c o s t o f
f u e l a n d s t u f f l i k e t h a t . S o i t 's h a r d f o r C h i n e s e t o e n v i s i o n t o d a y t h i s
p r o b l e m, b u t i t 's g o i n g t o c o me .
           H E A R I N G C O C H A I R S H E A : T h a n k y o u , D o c t o r . C o m mi s s i o n e r
Reinsch.
           C O M M I S S I O N E R R E I N S C H : L e t me s t a r t w i t h M r . H o u s e r a n d
t h e n i f I h a v e t i me g o t o a q u e s t i o n f o r D r . S c h i p p e r o r w e 'l l d o
                                                     - 76 -
another round hopefully.
             I w a n t t o p i c k u p o n y o u r l a s t s e q u e n c e , t he l a s t e x c h a n g e wi t h
C o m mi s s i o n e r S h e a . I t s e e ms t o me f r o m y o u r t e s t i mo n y - - a n d t h a t o f
others also--that you're suggesting that they are where they are in
t e r ms o f i n d u s t r i a l p r o d u ct i o n i n p a r t b e c a u s e o f d e f i c i e n c i e s i n t h e
ma r k e t s y s t e m, a n d t h r o u g h o t h er t e s t i mo n y w e 'v e h a d , g o v e r n me n t
s u b s i d i e s a n d e f f o r t s t o d i r e c t p r o d u ct i o n i n c e r t a i n d i r e c t i o n s . Y o u ' v e
t a l k e d a b o u t t h e n e e d t o r e b a l a n c e , a n d I d o n 't t h i n k t h e r e i s a l o t o f
d i s a g r e e me n t a b o u t t h a t , p r o b a bl y n o t e v e n o n t h e i r p a r t .
             My question in general is how do you get there and do you get
t h e r e i n a w a y t h a t 's c o n s i s t e n t wi t h ma r k e t p r i n c i p l e s o r d o y o u g e t
t h e r e e s s e n t i a l l y b y a s k i n g o r e x p e c t i n g t he go v e r n me nt t o e xp l i c i t l y
r e v e r s e c o u r s e a n d ma n d a t e p r o d u c t i on o r p r o v i d e i n c e n t i v e s i n o t h e r
directions?
             It's not clear from what you said that rebalancing can be
a c hi e ve d s i mp l y by t r y i ng t o i n t e g r a t e r e a l ma r k e t pr i nc i p l e s a n d
ma r k e t - ba s e d i nc e nt i ve s a n d c o s t s i n t o t he s y s t e m o r wh e t he r i t c a n
o n l y b e a c h i e v e d b y t h e g o v e r n me n t s a y i n g , a l l r i g h t , we 'r e g o i n g t o
s t o p i n v e s t i n g i n s t e e l a n d w e 'r e g oi n g t o s t a r t i nv e s t i n g i n s e r v i c e s .
             MR. HOUSER: I think that for us the question, the research
question, was first you have to know how did we get here, and that
helps you figure out how do you unwind it. Was it national aspiration
for China to be producing 35 percent of the world's steel and 28
p e r c e n t o f w o r l d 's a l u mi n u m o r w a s i t c o m p a n i e s r e s p o n d i n g t o
e c o n o mi c i n c e n t i v e s ?
             Wh a t w e f o u n d w a s mo s t l y t h a t i t 's t h e l a t t e r , t ha t w h e n g i v e n
t h e p r i c e o f e n v i r on me n t a l c o mp l i a n c e , g i v e n t h e p r i c e o f l a n d , g i v e n
t h e p r i c e o f l e n d i n g , i t 's p r o f i t a b l e t o d o s t e e l i n C h i n a a n d c o mp a n i e s
rush in, and actually for four years now, we've seen Beijing try to
consolidate the steel industry and rein in production and have been
s o me w h a t i n e f f e c t i v e i n d o i n g t h a t .
             T h e n u mb e r o f s t e e l e n t e r p r i s e s t o d a y i s 7 , 0 0 0 , u p f r o m f o u r
y e a r s a g o - - t h e r e we r e a b o u t 3 , 5 0 0 s t e e l c o mp a n i e s - - d e s p i t e B e i j i n g ' s
i n s i s t e n c e o n c o n s o l i d a t i o n , o n s l o w i n g g r o wt h , o n a d mi n i s t r a t i v e
guidance to banks to stop lending to heavy industry by trying to raise
t h e e n e r gy p r i c e fo r e ne r g y- i nt e n s iv e i n d u s t r i e s , b y i n s t i t u t i n g e x p o r t
l i c e ns e s .
             T h e r e 's a n u mb e r o f s t e p s B e i j i ng - -
             C O M M I SS I O N E R R E I N S C H :                 We l l , i f a l l t h o s e t h i ng s h a v e
failed, what should they do instead?
             M R . H O U S E R : F i n a n c e r e f o r m. B e c a u s e a t t h e e n d o f t h e d a y ,
t h i s i s t he c h a l l e ng e . Wh e n B e i j i ng g e t s s c a r e d — a b ou t t h e di r e c t i on
t h e e c o n o my i s h e a d i n g t h e y r e a c h fo r t h e t o o l k i t t h a t t h e y ' r e mo s t
c o mf o r t a b l e w i t h , w h i c h i s t h e a d mi n i s t r a t i v e t o o l k i t . Th a t t o o l k i t i s
                                                       - 77 -
l e s s a n d l e s s s u i t e d f o r t h e e c o n o my C h i n a f i n d s i t s e l f w i t h t o d a y .
            S o j us t t hr o w i n g o n s o me e x p o r t t a r i f f s , o r p u t t i n g a mo r a t o r i u m
o n l e n d i n g , i t 's a b l u n t i n s t r u me n t t o u s e . R e a l r e f o r m i n t h e f i n a n c e
s e c t o r , a l l o w i n g i n t e r e s t r a t e c o mp e t i t i on , a l l ow i n g / e n c o u r a g i n g b a n k s
t o l e n d t o t h e pr i va t e s e c t or a s w e l l a s t h e p u bl i c s e c t o r , t h e r e 's s ome
encouraging steps on this front.
            S u l f u r c o n t r o l i s p r o b a b l y t h e mo s t e nc o ur a g i n g e x a mp l e o f
w h e r e ma r k e t - o r i e n t e d e n v i r o n me n t a l c o mp l i a nc e t o ol s h a v e b e e n us e d
w i t h s o me s u c c e s s . I ' m s o r r y - - y o u h a v e a q u e s t i o n o n t h a t .
            C O M M I SS I O N E R R E I N S C H : L e t me i n t e r r u p t i f y o u d o n 't mi n d .
            MR. HOUSER: Sure.
            COMMISSIONER REINSCH: Because I see the yellow light.
L e t me j u s t a s k D r . S c h i p p e r , o n t h a t s a me p o i n t , i s t h a t a l s o t h e
a n s w e r t o t h e i r t r a ns p o r t a t i o n p r o b l e ms , ma r k e t pr i nc i p l e s ?
            D R . S C H I P P E R : Y o u s a w me w r i t e d o w n t o o l k i t . I t d o e s n ' t
necessarily exist for transport. I think strong fuel taxes, basing the
taxes on a vehicle and how much you use it and what it costs to park it,
c o n g e s t i o n p r i c i n g w h i c h S h a n g h a i i s e x t r e me l y i nt e r e s t e d i n . M a r k et
f o r c e s d o n 't s o l v e a l l t h e p r o b l e ms , b u t t h e y d e f i n e t h i n g s i n t e r ms o f
w h a t y o u n e e d o r d o n 't n e e d t o d o , w h a t c o s t s a n d w h a t d o e s n 't c o s t .
            I f y o u t h i n k a b o u t X i 'a n , t h e r e a r e 1 6 g a t e s t o X i 'a n , h o l e s
b u r r o w e d i n t h i s w a l l w h e r e w e c a n d r i v e t h r o u g h . I t 's k i n d o f t h e
easiest place in the entire world. There are no natural places in
L o n d o n o t h e r t h a n t h e r i v e r . B u t i n Xi 'a n , y o u 'v e g o t t h e p e r f e c t p l a c e
to try congestion pricing.
            On the other hand, and we had two chapters in the book that talk
a b o ut t h i s , w i t h n o e x p e r i e n c e i n d o i ng t h i s a t a l l , C h i n e s e e c o nomi s t s
a r e l e a r n i n g a b o u t t h e t h e o r y o f t h e e n v i r o n me n t i n e c o n o mi c s a n d
s t u f f l i k e t h a t . Bu t t h e n wh a t h a p p e n s w h e n y o u g o t o t h e Pe o p l e ' s
C o m mi t t e e a n d y o u s a y w e s h o u l d c h a r g e f o r c o n g e s t i o n p r i c i n g ,
a n o t h e r i mp o r t a n t me mb e r s a y s , a h , b u t t he a u t o mo b i l e i s a p i l l a r o f
e c o n o mi c g r o w t h , s o w e c a n 't o f f e n d i t .
            T h a t w a s w h a t s o me b o d y w h o c o u l d b e a v e n d o r f o r c o n g e s t i o n
p r i c i n g e q u i p me n t s a i d w a s h i s c o mp a n y 's f e a r w o r k i n g i n C h i n a . S o ,
i n o t h e r w o r d s , t h e ma r k e t s t i mu l i a r e s o i mp o r t a n t , a n d y e t s o me b o d y
h a s t o s a y I w a nt t h i s t o b e r e fl e c t e d i n t h i s p r i c e , a n d s o me o n e e l s e
w i l l s a y , a s w e d o a g a i n h e r e , b u t t h a t 's a g a i n s t me .
            I think one of the things we can do with our Chinese colleagues
i s l e a r n ho w t o d o t h i s o n b o t h s i d e s b e c a u s e w e 'r e n o t p e r f e c t a n d
t h e y 'r e f a r f r o m p e r f e c t , b ut I t hi n k w i t h o u t t h a t , y o u 'l l h a v e s i mp l y
mo r e c o w s .
            H E A R I N G C O C H A I R S H E A : T h a n k y o u , D r . S c h i p p e r . We ' v e
g o t t o mo v e o n t o t h e n e x t q u e s t i o n . C o m mi s s i o n e r H o u s t o n .
            COMMISSIONER HOUSTON: I would like to thank all three of
                                                       - 78 -
y o u . Y o u ' v e p r o v i d e d s u c h g r e a t s u c c i n c t a n d c o mp l e t e i n f o r ma t i o n i n
s u c h a s h o r t p e r i o d o f t i me . T o s a y t h a t t h e s u s t a i n a b l e d e v e l o p me n t
p r o b l e ms i n C h i n a a r e a d a u nt i n g c h a l l e n g e i s p r o b a b l y a n
u n d e r s t a t e me n t , a n d I t h i n k w e 'v e h a d a r e a l l y g o o d h a n d l e o n h o w
t h e s e i s s u e s a f f e c t o u r e n v i r o n me n t h e r e t o d a y w h i c h w e ' v e d i s c u s s e d
n a t i o n a l s e c u r i t y a n d e c o n o mi c s e c u r i t y i n t h e p a s t . I 'm s u r e y o u h e a r d
s o me o f t h e t e s t i mo n y a b o u t t h e p ar t i c u l a t e ma t t e r c o mi n g o v e r h e r e .
           I h a v e a q u i c k q u e s t i o n w i t h a f o l l o w - u p . T h e q u ic k q u e s t i o n i s
n o w t h a t C h i n a i s a n e t i mp o r t e r o f c o a l , h o w mu c h o f t h a t c o a l c o me s
from the U.S. percentage-wise?
           M R . H O U S E R : I g u e s s t h a t ' s p r o b a b l y t o me . I w o u l d g u e s s
a l mo s t n o n e o f i t c o me s f r o m t h e U . S .
           C O M M I S S I O N E R H O U S T O N : A l mo s t n o n e o f i t ?
           M R . H O U S E R : Y e s . T h e b i g g e r c h a l l e n g e f o r c o a l ma r k e t s w as
C h i n a e x i t i ng t he ma r k e t a s a n e xp o r t e r . C h i n a w a s t h e s e c o n d - l a r g e s t
c o a l p r o vi d e r i n A s i a u p u nt i l r e c e n t l y a n d h a s b a s ic a l l y e x i t e d t he
A s i a n c oa l m a r k e t o v e r t he p a s t f o u r ye a r s a n d b e c o me a n i mp o r t e r . S o
i t h a s a b i g i mp a c t i n I n d o n e s i a , A us t r a l i a . I w o u l d d o u b t a n y U . S .
c o a l ma k e s i t t o C h i n a . I t ' s p o s s i b l e a c o u p l e b o a t s d o , b u t v e r y l i t t l e .
           COMMISSIONER HOUSTON: Okay. So going to the next step,
i t s e e ms t o me f r o m w h a t w e ' v e h e a r d t o da y i n p a r t i c ul a r t h a t i t i s i n
o u r n a t i o n a l b e s t i nt e r e s t s f r o m a n e n vi r on me n t a l p e r s p e c t i v e t o
e n c o u r a ge C h i n a t o f o l l o w t he c o u r s e t o o t h e r s o r t s o f e n e r g y t h a t a r e
c l e a n e r , t h a t d o n 't c o me b l o w i n g o v e r t o o u r c o u n t r y .
           B u t a ga i n, C h i n a a p p e a r s t o b e s t u c k i n t h i s p a r a d i g m o f c o a l
d e p e n d e n c y , a t l e a s t i n t h e s h o r t t e r m. D o a n y o f t h e t h r e e o f y o u s e e
a n y p o s s i b i l i t y o f C h i n a s a y i n g t o i ts e l f , ma y b e w e n e e d t o p u t t h e
b r a ke s o n f o r a w h i l e ? M a y b e w e n e e d t o s l o w t h e g r o wt h . M a y b e w e
n e e d t o c u t b a c k a l i t t l e b i t o n t h e d e v e l o p me n t - - b a s e d p u r e l y o n - - n ot
p u r e l y , b u t f o r t h e s a k e o f t h i s p a n el - - o n e n v i r o n me n t a l c o n c e r n s o r o n
a n y e n e r g y d e ma n d , t h a t s o me o f t h e n u mb e r s y o u g a v e o u t t h i s
mo r n i n g w e r e s t a r t l i n g , a n d o n e w o n d e r s i f t he y a r e t h i n k i n g t o
themselves we can't sustain this, so now what do we do?
           M r . R a h i m, d o y o u w a n t t o s t a r t ?
           M R . R A H I M : Y e s . I t hi n k t h e r e 's a l r e a d y a s e n s e o f t h a t t o
s o me d e g r e e i n C h i n a , b u t I t h i n k y o u ' r e d e a l i n g w i t h c o mp e t i n g f o r c e s
here. On the one hand, you have to grow above a certain percentage to
a b s o r b t h e n e w e n t r a n t s i n t h e l a b or f o r c e . I t h i n k t h e n u mb e r w a s 2 5
mi l l i o n , b u t i t 's a ma s s i v e n u mb e r . I n o r d e r t o d o t h a t , y o u h a v e t o
k e e p a t l e a s t I ' d s a y a s e v e n p e r c e n t g r o wt h r a t e j u s t t o a b s o r b t h o s e
n e w e nt r a n t s .
           O n t h e o t h e r h a n d , a s y o u me n t i o n e d , t h e r e a r e t h e s e h u g e a n d
r i s i n g e n v i r o n me n t a l a n d e n e r g y c o s t s . A n d t h e v i e w t h e n r e a l l y i s , w e
d o n e e d t o mo d e r a t e a t l e a s t t h e h i g h e n d o f t h a t g r o wt h , a n d s o w e 'r e
                                                     - 79 -
s e e i n g s o me o f t h e me a s u r e s t h a t t h e y ' v e t r i e d t o t a k e , r a i s i n g t h e
l e n d i n g r a t e s a n d o t h e r s t e p s . T h e y h a v e n 't p r o v e d e f f e c t i v e , m a r k e t
forces are driving the expansion.
             I t h i n k a t s o me p o i n t y o u a r e g o i n g t o s t a r t t o s e e t h a t y o u c a n 't
grow exports at 30 percent a year indefinitely. There isn't enough
c a p a c i t y i n t h e w o r l d t o a b s o r b t h a t l e v e l o f e x p o r t s . S o I t h i nk t h e r e
w i l l b e s o me s l o w i n g d o w n e v e n t u a l l y .
             T h e q u e s t i o n r e a l l y o n e n e r g y , I t hi n k t h e y h a ve s t a r t e d t o t a k e
s t e p s i n t e r ms o f e f f i c i e n c y , a n d t h e y h a v e s e t v e r y c le a r g o a l s a s p a r t
of the Five-Year Plan.                            H o w s u c c e s s f ul t h e y 'r e g oi n g t o be i n
i mp l e me n t i n g t h a t I t h in k i s a n o p e n q u e s t i o n . B u t t h e r e i s t h a t
r e c o g n i t i o n t h e r e . I t 's j u s t h o w d o y o u g o a b o u t d o i n g i t .
             COMMISSIONER HOUSTON: Dr. Schipper.
             D R . S C H I P P E R : Y e s , o n t w o a cc o u n t s . O n e , t h e u r b a n a i r
pollution problem is increasingly one of transportation. Even if the
c a r s a r e r e l a t i v e l y c l e a n u n l e a d e d f u e l , t h e s h e e r r i s e i n t h e n u mb e r s
a n d t h e a mo u n t o f t r a f f i c me a n s a i r i s n o t r e a l l y g e t t i n g c l e a n e r .
             T h e s e c o n d i s w h a t I s a i d a b o u t t r a n s p o r t . I f c i t i e s c a n 't mo v e ,
w e ' r e t ol d t h a t t he ma y o r o f K u n mi n g w a s f i r e d b e c a u s e t h e h e a d o f t h e
P e o p l e 's C o m mi t t e e t h e r e wa s s t uc k i n t r a f f i c a n d mi s s e d a n i mp o r t a n t
me e t i n g .
             Y o u c a n 't c r e a t e s o me t h i n g s i f y o u k e e p r u n n i n g i n t o a w a l l
h a r d e r a n d h a r d e r . M y r e a d i n g o f o u r C h i ne s e c o n t a c t s i s t h e y s e e
t h e s e p r o b l e ms a n d t h e y h e a r s t r ee t p r o t e s t s a b o u t t h e b a d a i r a n d
about the bad fuel and above all about the bad traffic. But we hear
t h a t i n t h i s c o u n t r y , t o o , a n d i t t a k e s a l o n g t i me , e v e n i n a d e mo c r a c y ,
t o r e a l l y c h a n g e t h i n g s w h e n y o u 'r e g o i n g a t s u c h h i g h s p e e d .
             T h e g e n t l e me n o n b o t h s i d e s o f me p r o b a b l y c a n t e l l y o u b e t t e r
h o w l o n g i t t a k e s t o r e a c t . I t h i n k t h a t ' s t h e u n ce r t a i n l y , i s n o t d o t h e y
k n o w i t ; i t 's h o w q u i c k l y c a n t h e y c ha n g e c o u r s e w i t h o u t r i s k i n g t h e i r
p o l i t i c a l c a r e e r s a nd s o me k i n d o f e c o n o mi c d i s r u p t i o n ?
             MR. HOUSER: Yes, I'd agree. It's a growing issue. It's just a
ma t t e r o f t i mi n g . B e i j i n g c a n d e a l wi t h i t n o w a n d i t d o e s n 't h a v e t o
b e a c h o i c e b e t w e e n g r o w t h a n d e n v i r o n me n t . I t c a n b e p o s i t i v e f o r
both. If the ball is kicked down the road ten years before serious
a c t i o n i s t a k e n , t h e n t h e o p t i o n s a r e g o i n g t o b e mu c h l e s s
e c o n o mi c a l l y b e n i g n .
             HEARING COCHAIR SHEA: Thank you.
             C O M M I SS I O N E R H O U S T O N :                       T h a n k y o u v e r y mu c h .
Appreciate that.
             HEARING COCHAIR SHEA: Commissioner Fiedler.
             C O M M I SS I O N E R F I E D L E R : M y q u e s t i o n wa s p a r t i a l l y d e a l t
w i t h . M y q u e s t i o n r e a l l y w a s h o w mu c h t i m e d o t h e y h a v e t o ma k e
t h e i r c h o i c e s b e f o r e d r a ma t i c t h i n g s h a p p e n . Y o u ma d e r e f e r e n c e t o
                                                     - 80 -
mi d d l e c l a s s r e s i s t a n c e a l o n g t h e c o a s t a l a r e a s o r w h a t n o t .
            T h e r e s i s t a n c e t h a t w e r e a d a b o u t s e e ms n o t t o b e c o mi n g f r o m
t h e mi d d l e c l a s s b u t r a t h e r p r o t e s t s b y p e o p l e w h o l i v e i n pl a c e s t h a t
h a v e b e e n e n vi r on me n t a l l y d e gr a de d e xt r e m e l y , a c t ua l l y pe op l e
probably working in the industrial enterprises that are doing the
polluting.
            S o t h e p ol i t i c s a n d t h e e c o no mi c s a n d t h e e nvi r on me n t a l n e x us
s e e ms t o me t o s h o r t e n t h e t i me t h a t t he y h a v e t o ma k e r e a l s e r i o us
c h o i c e s . A n y b o d y d i s a g r e e; a g r e e ? Y o u 'r e s h a k i n g y o u r h e a d b o t h
ways, Dr. Schipper. You agree to disagree?
            MR. RAHIM: Yes. I think you are seeing real effects today in
t e r ms o f t h e e n v i r o n me n t , i n t er ms o f t h e a mo u n t o f a r a b l e l a n d
a f f e c t e d b y a c i d r a i n , t he s e t y pe s o f t h i n g s , t h e n u mb e r o f w o r k d a y s
l o s t t o pol l ut i o n , a l l t h a t . Ag a i n, t h e s e a r e n ' t c o s t s t h a t a r e g o i n g t o
b r i n g t h e e c o n o my t o a g r i n d i n g h a l t t o d a y , b u t i t i s a q u e s t i o n o f c o s t
down the line.
            R i g h t n o w y o u h a v e a n o p p o r t u n i t y t o p u t t h a t fr a me w o r k i n
p l a c e , a s D r . S c h i p p e r t a l k e d a b o u t. I f y o u w a i t a n d y o u d e l a y t h a t ,
t h e n t h e c o s t s r i s e e x p o n e n t i a l l y , t he f a r t h e r y o u d e l a y t h o s e d e c i s i o n s .
            C O M M I SS I O N E R F I E D L E R :                 Th e e c o n o mi c o r t he p o l i t i c a l
costs?
            M R . R A H I M : Ac t u a l l y b o t h , I w o u l d a r g u e , b e c a u s e I t h i n k
t h e y ' r e i nt e r l i n ke d .
            D R . S C H I P P E R : Th i n k o f i t t h i s w a y . I n 1 9 8 4 , L A k i n d o f s h u t
i t s t r a f f i c d o w n a l i t t l e w h e n w e h ad t h e O l y mp i c s . N o w t h e y s a y t h a t
i f B e i j i n g s h u t s i t s t r a f f i c do w n , t ha t w i l l c a us e a g l o b a l r e c e s s i o n . I
d o n ' t t h i n k t h e y 'r e g o i n g t o g e t t h r o u g h t he O l y mp i c s s m o o t h l y .
            S h a n g h a i , o n t h e o t h e r h a n d , w i t h E x p o 2 0 1 0 , w i t h mo r e t o t a l
p e o p l e s p r e a d o ut , i s t a k i ng I t hi n k a mu c h mo r e p ha s e d a t t i t u d e
towards how do we get through this and how do we get through this so
that the transport system we have ready in 2010 is also good for us in
2015 and 2020?
            S o I t h i n k w e h a v e t w o t e s t s c o mi n g u p , b u t y o u s t i l l s e e ma y o r s
a t me e t i n g s b r a g g i n g a b o u t h o w ma n y o v e r p a s s e s t he y b u i l t r a t h e r t h a n
b r a g g i n g h o w ma n y p e o pl e a n h o u r t h e y c a n mo v e a c r o s s a r i v e r o r
u n d e r a r i v e r , a n d s o t h e t i me i s s t i l l t i c k i n g a w a y .
            M R . H O U S E R : I a c t u a l l y h a v e b ec o m e o v e r t h e p a s t y e a r a l i t t l e
b i t l e s s p e s si m i s t i c a b o u t a b i l i t y t o d e a l w i t h t h e i m m e d i a t e
e n v i r o n me n t a l p r o b l e ms , t h a t b e i n g a i r a n d w a t e r p o l l u t i o n b e f o r e t h e y
r e a c h a c r i s i s p oi nt . T h e r e 's b e e n s ome e n c o ur a gi n g s t e p s on s ul f u r
c o n t r o l b y p o w e r p l a n t s u s i n g ma r k et me c h a n is ms t h at ma k e it
e c o n o mi c t o p u t i n f l u e g a s d e - s u l f ur i z a t i o n a n d mo s t n e w p o w e r p l a n t s
b u i l t t o da y a r e d o i n g t h a t .
            T h e ma r g i n a l c o s t s o f c o n t r o l l i n g t h i n g s l i k e p a r t i c ul a t e a nd
                                                       - 81 -
s u l f u r t h r o u g h e n d - o f - p i p e s o l u t i o n s i s n 't s o g re a t , a n d I t h i n k t h a t y o u
c a n t a k e t h o s e s t e p s w i t h o u t a s i g ni fi c a n t l y i mp a c t i n g g r o w t h . N o w
t h a t do e s n 't r e du c e o ve r a l l e n e r g y d e ma n d s i g n i f i c a n t l y . I n f a c t , i n
s o me c a s e s i t i n c r e a s e s a n d i t d o e s n o t h i n g f o r c a r b o n d i o x i d e . B u t i n
t e r ms o f t h e i m m e d i a t e c h a l l e n g e s t o C h i n a o f t h e a i r t h a t y o u c a n 't
s e e t h r o ug h a n d t he p o l l ut e d w a t e r , I t h i n k t ha t t h e y c a n a c t u a l l y t a ke
f a i r l y r e a s o n a bl e s t e p s t o de a l w i t h t h a t a n d a r e b e g i n n i n g t o d o s o .
            DR. SCHIPPER: If I can just add, China started to take its lead
o u t o f g a s o l i n e a t r o u g h l y a t h i r d o f t h e p e r c a p i t a i n c o me t h a t w e h a d
when we put lead into gasoline. So, again, you see this telescoping in
t i me w h e r e t h e y 'r e a c t u a l l y d o i n g t h i n g s s o o ne r . E v e n i f i t c o me s a f t e r
u s i n t i me , i t c o me s e a r l i e r i n d e ve l o p me n t . T h e k e y i s s u e f o r a l l o f
t h i s i s e n f o r c e me n t , i s mo n i t o r in g . Th e C h i n e s e d o n 't h a v e g o o d r o a d
statistics.
            T h e y d o n 't h a v e a l o t o f t h e n u mb e r s t h a t w e g e t c o n s t a n t l y . I 'm
n o t a d v o c a t i n g j u s t c o u n t i n g ; t h e y a ls o n e e d h e l p i n l e a r n i n g h o w t o
mo n i t o r , h o w t o e n f o r c e , h o w t o d o t h i n g s i n a n e q u i t a b l e w a y . S o t h a t
you don't get in principle very clean fuel, very clean new vehicles, and
p e o p l e ob e y i n g t he s p e e d l i mi t , b ut i n t h e r e a l w o r l d, a t ot a l l y
different world. That's what I unfortunately still tend to see.
            HEARING COCHAIR SHEA:                                         Thank you.              C o m mi s s i o n e r
Videnieks.
            H E A R I N G C O C H A I R V I D E N I E K S : A q u e s t i o n p r i ma r i l y f o r M r .
H o u s e r . We h e a r d p r i o r t e s t i mo n y t ha t p o l l u t i o n c o s t s a r e e i g h t t o 1 3
p e r c e n t o f G D P , h o w w o u l d t hi s f i g ur e i nt o t he n e t G DP g r o wt h o f t e n
p e r c e nt ov e r t he pa s t d e c a de , w h a t e ve r ? D o e s t h a t n e t o u t t o a mu c h
s ma l l e r n u mb e r t h e n ? A n d a l s o , i s i t a c u mu l a t i ve t i m e b o mb ? A s
G D P g r o w s , t h e 1 2 o r 1 3 , l e t 's s a y t e n p e r c e n t , w h a t e v e r w a s t h e
g r e a t e r n u mb e r , i t 's g o t a g e o me t r i c p r o g r e s s i o n , a n d h o w s e r i o u s a
p r o b l e m, f r o m a t i me b o mb p i n t o f v i e w , w o u l d t hi s b e ? Ca n w e
quantify how serious a problem this really is?
            M R . H O U S E R : I t ' s a c h a l l e n g e t o q u a n t i f y . T h e Wo r l d B a n k a n d
t h e U . N . h a v e b e e n t r y i n g t o d e v e l o p a g r e e n G D P me t r i c f o r a l o n g
t i me a n d h a v e h a d t r o u b l e d o i n g i t , a n d t he C hi n e s e ha ve b e e n t r y i n g t o
d o i t f o r t h e p a s t fi v e , s i x y e a r s , a n d h a v e h a d t r o u b l e d o i n g i t . I t
d e p e n d s o n t h e a p p r o a c h . f y o u j u s t d o a r e s o u r c e ac c o u n t i n g , l o o k i n g
a t h o w mu c h c o a l y o u 'v e t a k e n o u t o f t h e g r o u n d , h o w ma n y f o r e s t s
y o u 'v e c u t d o w n a n d s c o r e t h a t a g a i n s t G D P , t h a t 's f a i rl y e a s y , b u t t o
q u a n t i f y t h e c o s t s o f a i r p o l l u t i o n a n d w a t e r p o ll u t i o n o n t h e e c o n o m y
is tougher.
            S o me e s t i ma t e s w e 'v e t r i e d t o d o t h e s e n u mb e r s ; o t h e r p e o p l e
h a v e t o o - - p u t t h e n u mb e r a t a n y w h er e b e t w e e n f i v e a n d t e n p e r c e n t o f
GDP.
            N o w , i s t h a t a t i c k i n g t i me b o mb ? No t n e c e s s a r i l y . We d o n 't
                                                      - 82 -
a c c ou n t fo r gr e e n G D P i n t hi s c o u nt r y. I f t h e r e ' s a n o i l s p i l l , a l l o f t h e
people who go and clean up that oil are net positive for GDP. The
w a g e s g o i n g t o o i l s p i l l w o r k e r s a r e p o s i t i v e f o r G D P . S o i s t ha t
u n s u s t a i na b l e i n t he U . S . ? N o t n e c e s s a r i l y i n t e r ms o f a c a l c ul a t i on . I
d o n 't t h i n k t h a t i t a c c u mu l a t e s i n t h a t w a y .
            T h i n g s l i k e , o n t h e o t h e r h a n d , t h e p r o b l e ms t h a t g e t b u i l t i n t h a t
a r e t o u g h e r t o d e a l w i t h a r e t h e c o n s u mp t i o n - o r i e n t e d p r o b l e ms t h at
Dr. Schipper talks about of how if you don't account for the cost of the
p o l l u t i o n i n b ui l di ng t h a t o f f i c e b u i l d i n g o r c o n d u c t i n g u r b a n p l a n n i n g
now, then the ability to change course later on is much more difficult.
            HEARING COCHAIR VIDENIEKS:                                          I s e i gh t t o 1 3 a hi g h
n u mb e r , a s a c o s t o f p o l l u t i o n b o t h o f t h e i r G D P a n d i s t h i s g o i n g t o b e
a constant percentage as their GDP increases I guess is the question?
Is this postponed cost or--
            DR. SCHIPPER: This is the yin and the yang of this kind of
accounting, and I subscribe to this approach. On the one hand, the
a v e r a ge n e w s t e e l mi l l , t he a v e r a ge n e w h o me , t h e a v e r a g e n e w c a r , t he
a v e r a g e n e w w a t e r p u r i f i ca t i o n p l a n t me a n s t h i n g s a r e c l e a n e r . Bu t a t
t h e s a me t i me , y o u 'r e c r a m mi n g mo r e a n d mo r e a c t i v i t y p e r c a p i t a a n d
mo r e a n d mo r e c a pi t a i nt o s ma l l e r a nd s ma l l e r s p a c e , p r e f e r e n t i a l l y t h e
e a s t e r n c oa s t a l z o ne .
            S o i t 's k i n d o f a r a c e , a n d I d o n 't kn o w w h e t h e r a n y bo d y h a s
r e a l l y d on e a c a r e f u l c a l c ul a t i o n a bou t t he s c a l i n g o f t h i n g s . I d o
k n o w t h a t my Wo r l d B a n k f r i en d s , t h e B B C , y o u j u s t s e e t h e s e
n i g h t ma r e s c e n e s t o d a y i n ma n y c i t i e s , a n d y o u t h i n k t h o s e a r e 5 0
y e a r s a g o i f y o u l o o k a t t h e n u mb e r s , a n d i t 's n o t g e t t i n g b e t t e r ; i t 's
g e t t i n g wo r s e .
            A f e w p l a c e s l i k e Sh a n g h a i r e a l l y w a n t t o b e c l e a n a n d h a v e s a i d
t h a t a n d h a v e r e a l l y w o r k e d a t i t . A n d t h e q u e s t i o n i s h o w mu c h t h a t
c a n b e a mo d e l ?                Shanghai is not far from the water.                                    It has
g e o g r a p h i c a l a d v a n t a ge s , b u t I t h i n k t h a t ' s t h e c a s e o f h o w
t r a n s p a r e n c y o n t h e p o l i t i c a l s i d e c a n b e c o me a p r e s s ur e i n i t s e l f t o
ma k e t h e w o r l d c l e a n er i n C h i n e s e c i t i e s .
            M R . R A H I M : Y e s , I w o u l d s a y t ha t e i g h t t o 1 3 i s a h i g h n u mb e r ,
a n d I d o n ' t t h i n k i t i s c u mu l a t i v e f o r p r e c i s e l y t h i s r e a s on , t h a t t he r e
are new cleaner technologies and there are steps being taken to address
that. So I don't think the relative percentage is going to increase, but I
w o r r y t h a t i t i s g o i n g t o s t a y s t a bl e t o s o me de g r e e f or a w h i l e a s y o u
do get larger growth and you do get some of these other issues being
exacerbated. So I would take it as sort of net out.
            HEARING COCHAIR SHEA: Thank you.
            HEARING COCHAIR VIDENIEKS: Thank you.
            HEARING COCHAIR SHEA: Madam Chair.
            C H A I R M A N B A R T H O L O M E W: T h a n k y o u v e r y mu c h . T h a n k
                                                      - 83 -
you to all of our witnesses. One of the benefits of serving on this
C o m mi s s i o n i s w e g e t t h e o p p o r t u n i t y t o p i c k t h e b r a i n s o f s o me v e r y
t a l e n t e d , i n t e l l i g e n t a n d c r e a t i v e p e o p l e . S o i t 's a g r e a t o p p o r t u n i t y
for us.
            I ' m n o t s u r e t h a t my q u e s t i o n i s g o i n g t o b e v e r y c l e a r . I ' m
s t r u g gl i ng a l i t t l e bi t wi t h t he c o nt r a dic t i o n s t ha t a r e i n h e r e n t i n a l o t
o f w h a t y o u s a y . M r . H o u s e r , f o r e x a mp l e t h e p o i n t y o u ma d e a b o u t
h o w h e a v y i n d u s t r y d o e s n 't p r o v i d e j o b s , i t u s e s a l o t of e n e r g y, a n d
y e t i f y o u l o o k a t t h e 1 1t h F i v e - Y e a r P l a n , s o me o f t h e p i l l a r s o f
d e v e l o p me n t , t h i n g s l i k e t h e a v i a t i o n i n d u s t r y , a r e t h i n g s t h a t a r e v e r y
dependent on heavy industry.
            H o w d o e s t h e C h i n e s e g o v e r n me n t r e c o n c i l e s or t o f c o m p e t i n g ,
c o n f l i c t i n g d e ma n d s i n t h e r e ? I t 's s o r t o f a t i p p i n g p o i n t t h a t we ' r e
t a l k i n g a b o u t w i t h a l l o f y o u r t e s t i mo n y . Wh e r e i s i t t h a t t h e d e c i s i o n
i s b e i n g ma d e t h a t t h e e n v i r o n me n t a l q u a l i t y i s mo r e i mp o r t a n t t h a n
w h a t f o r u s mi g h t n o t s e e m a r a t i o n al d e c i s i o n t o f u n d a ll o f t h e s e s t e e l
mi l l s a nd d o e s n 't s e e m r a t i ona l i f i t' s n o t e mp l o y i n g a l o t o f p e o p l e a n d
i s u s i n g a l o t o f e n e r g y ? H o w i s i t t h e d e c i s i o n s a r e b e i n g ma d e ?
T h a t 's o n e q u e s t i o n .
            Dr. Schipper, I was really struck listening to you about
e s s e n t i a l l y t r y i ng t o s a y t o p e o p l e l e a r n f r o m o u r mi s t a k e s a n d y e t ,
w r i t l a r g e , i t s e e ms t o me o f t e n w h e n w e s a y l e a r n f r o m o u r m i s t a k e s ,
t h e r e s p o n s e b a c k i s y o u 'r e j u s t t r y i n g t o i mp e d e o u r d e v e l o p me n t .
H o w d o y o u d e a l wi t h t h a t i n a c o n ve r s a t i o n a n d w h y i s S h a n g h a i b e i n g
mo r e s u c c e s s f u l or mo r e i n t e r e s t e d i n t h i s t h a n B e i j i n g? S o s o r t o f t h e
q u e s t i o n f o r a l l o f y o u . I t 's a b a s k e t o f i s s u e s h e r e .
            MR. HOUSER: On the industry side, which is what we track
mo r e c l o s e l y , I j u s t w o u l d s t r e s s a g a i n t h a t t he d r i vi n g f o r c e i s n ot
B e i j i n g , a n d t h e p r o b l e m i s n o t Be i j i n g . I t ' s w h a t ' s g o i n g o n i n t h e
p r o v i n c e s a n d l o c a l i t i e s , a n d f i r ms a r e r e s p o n d i n g t o ma r k e t
i n c e n t i ve s .
            S o me o f t h o s e ma r k e t i n c e nt i ve s a r e i n c e n t i ve s t h a t s h ou l d b e
c o r r e c t e d . T h e y a r e i n c e nt i v e s b a s e d o n l a n d t h a t w a s t a k e n f r o m
f a r me r s wi t ho u t c omp e n s a t i on . Th e y a r e i n c e n t i v e s b a s e d o n a c a p i t a l
s y s t e m t h a t d o e s n 't l e n d t o d y n a mi c p r i v a t e s e c t o r fi r ms , b u t l e n d s
mo s t l y t o s t a t e - o wn e d e nt e r p r i s e s . T h e y a r e i n c e n t i v e s b a s e d o n a
f a i l u r e t o i n c o r p o r a t e e n v i r o n me n t a l e x t e r n a l i t i e s .
            But if you take that landscape and I'm an entrepreneur, steel
l o o k s q u i t e p r o f i t a b l e t o me i n C h i n a , a n d s o I 'm g o i n g t o d o i t w i t h o u t
a n y g o v e r n me n t e n c o u r a g e me n t , a n d t h e n a t a p r o v i n ci a l l e v e l , e a c h
o n e o f t h e s e 7 , 0 0 0 s t e e l c o mp a n i e s w a n t s t o b e c o me t h e n a t i o n a l
c h a mp i o n . T h e y wa n t t o b e t h e U . S . S t e e l o r t h e N u c o r o r t h e N i p p o n
o r t h e B a o s S t e e l . S o c o n s o l i d a t i n g t h a t i n d u st r y , w h i c h i s s o me t h i n g
t h a t B e i j i n g a c t u a l l y w o u l d l i k e t o i n o r d e r t o r a t i o n al i z e e n e r g y u s e ,
                                                       - 84 -
r u n s u p a g a i n s t p r o v i n c i a l l e v e l p r o te c t i o n a n d b a r r i e r s b e c a u s e e v e r y
p r o v i n c e w a n t s t h e i r s t e e l m i l l t o b e t h e c h a mp i o n .
             I t 's s o me t h i n g w e 'r e v e r y f a mi l i a r w i t h h e r e i n t h e U . S . :
i n t e r s t a t e c o mp e t i t i o n f o r de v e l o p me n t a n d i nt e r s t a t e c o mp e t i t i on f o r
e c o n o mi c r e s o u r c e s . S o w h i l e t h e r e i s t h i s r h e t o r i c p u t i n t o f i v e - y e a r
p l a n s a b o u t p i l l a r i n d u s t r i es , w h e n y o u a c t u a l l y g o s t r e s s t e s t i t o n t h e
g r o u n d , w h a t t h a t me a n s i n t h e d a y - t o- d a y e c o n o mi c s o f t h e s e f i r ms , i t
me a n s a l mo s t n o t h i n g t o t h e m- - a l mo s t n o t h i n g .
             C H A I R M A N B A R T H O L O M E W: B u t i t i s a p l a n n e d e c o n o my
t h a t w e 'r e t a l k i n g a b o u t .
             M R . H O U S E R : I f y o u g o t a l k t o a s t e e l mi l l , B e i j i n g h a v i n g a
n o t i o n t h a t s t e e l i s s t r at e gi c , h a s no b e a r i n g on w h a t t he s e c o mp a n i e s
d o . I t d o e s n 't h a v e a n y b e a r i n g o n w h e r e t h e y g e t t h e i r mo n e y . I t
d o e s n 't h a v e a n y b e a r i n g o n t he i r r e gu l a t or y f r a me w o r k t h e y f a c e . I t
d o e s n 't a f f e c t t h e m mu c h a t a l l . T h e y mo s t l y l a u g h a t t h o s e n a t i o n a l
plans.
             T h e f i v e - y e a r p l a ns a r e b e c o mi n g a j o k e t o f ol k s i n C hi n a t o da y ,
the farther you get outside of Beijing. Many of the folks in Beijing are
s t i l l u n d e r t h e i l l u s i o n t h a t t h e y h av e t o t a l c o n t r o l o f t h e e c o n o my
when people down in Guangdong are doing whatever they please.
             C H A I R M A N B A R T H O L O M E W: B u t i f t h e f i v e - y e a r p l a n s a r e a
j o k e , t h e n w h y s h o u l d w e p oi n t t o t he t h i n g s t ha t t h e y 'r e g o i n g t o d o o n
e n e r g y i n t h e fi v e - y e a r p l a n s ?
             MR. HOUSER: I don't.
             C H A I R M A N B A R T H O L O M E W: I t g e t s b a c k t o t ha t t h i n g w e 'r e
a l w a ys t ol d a b ou t e n f o r c e m e n t . C hi ne s e g ov e r n me n t s i gn s a gr e e me n t s
a n d t h e n s a y s , we l l , w e c a n 't e nf o r c e t h e m b e c a u s e e v e r y t h i n g i s
happening at the provincial level or people use that as an excuse.
             H o w d o y o u b a l a n c e w h a t i s h a p p e ni ng a t t he n a t i o na l l e v e l or
n a t i o n a l g o a l s i f t h e n at i o n a l g o v e r n me n t h a s n o c o n t r o l o v e r wh a t 's
happening?
             M R . R A H I M : Th i s i s t h e d i l e m ma C h i n a i s f a c i n g i s t h a t i t i s
t r a n s i t i o n i n g t o s o me d e g r e e a n d ma r k e t f o r c e s a r e b e c o mi n g mu c h
mo r e i mp o r t a n t a n d a mu c h l a r g e r p la y e r . S o t h e e n t r e p r e n e u r w h o i s
l o o k i n g t o t h e s t e e l mi l l s s a y s f i n e , t h i s i s n ' t g o i n g t o a d d 1 0 0 , 0 0 0
j o b s , b u t i t i s g o i n g t o ma k e me - -
             C H A I R M A N B A R T H O L O M E W: R i c h .
             M R . R A H I M : - - r i c h . E x a c t l y . A n d s o i t 's h a r d t o c o n t r o l t h a t
i n di v i du a l i mp u l s e f r o m c e n t r a l B e i j i ng . A g a i n, t he y 'r e d e a l i ng wi t h
b l u n t t o o l s t o t r y a n d d o t h i s . T h e y' r e t r y i n g t o c o n t r o l l e n d i n g r a t e s
a n d a l l t h a t a n d e x p o r t t ar i ff s , b u t t h a t h a s n 't w o r k e d , a n d s o i t i s a
process of gradual reform that has to take place at the national level
o v e r t i me .
             C H A I R M A N B A R T H O L O M E W: S o a r e t h e p e o p l e i n S h a n g h a i
                                                      - 85 -
mo r e i n t e r e s t e d i n t h e q u a l i t y o f t r a n s p o r t a t i o n l i f e b e c a u s e t h e y ' r e
rich already?
           D R . S C H I P P E R : Y e s , a n d b e c a u s e t h e y w a nt t o b e s e e n a s t h e
p r e mi e r c i t y i n t h e P a c i f i c R i m. T h a t's r e a l l y , r e a l l y c l e a r . I f I m a y
j u s t a d d , w e h a v e n 't a d mi t t e d o u r mi s t a k e s . We 'r e s t i l l a r g u i n g o v e r
w h a t h a p p e n e d i n 1 9 7 3 w i t h e n e r g y . M y v i e w s , I a d mi t , a r e i n t h e
mi n o r i t y a b o u t w h a t I t h i n k a b o u t t r a f f i c .
           S o , a g a i n , t h e s e b o d i e s t ha t s ur r o u n d u s h e r e a r e s u b s i d i z i n g .
A l l t h e t h i n g s I 'm s a y i n g t o C h i n a , d o n 't d o t h i s , a n d t he y s a y , we l l , i t
w o r k s , i t s o r t o f w o r k s f o r t h e A me r i c a n s . T he y g e t r e e l e c t e d . T h e
f i r s t p r i ma r i e s a r e i n I o w a a n d t h a t ' s a n e t h a n o l s t a t e , s o w e ’ v e g o t
t h o s e f a r me r s t h e r e t h a t mi g h t ma k e e t h a n o l .
           I t ha p pe ne d i n M e x i c o , a n o n - O P E C o i l p r o d u c e r . S o m e ma y o r
s a i d y o u g o t t o t r y o u t t h e s e e t h a n o l b u s e s b e c a u s e w e g o t f a r me r s t h a t
ma k e e t h a n o l f r o m s u g a r c a n e , a n d I t h i n k t h a t k i n d o f t h i n g d o e s t a k e
r o o t n a t ur a l l y i n b o t h s o- c a l l e d p l a n n e d e c o n o mi e s a n d i n p r i v a t e
e c o n o mi e s .
           F i n a l l y , S h a n g h a i w a s t h e fi r s t c it y t o h a v e a k i n d o f Tr a n s p o r t
2 5 Y e a r P l a n , a w h i t e p a p e r s e v e n ye a r s a g o. We c a me i n o n p a r t o f
t h a t p r o c e s s . T h e r e 's a n e w o n e . X i 'a n i s d o i n g i t . T h a t 's t he f i r s t
t i me . U p u n t i l t h e n i t w a s k i n d o f w h a t w o u l d t h e ma y o r l i k e n e x t
y e a r ? A h , t h a t s u b w a y s y s t e m, w e 'l l g e t y o u t ha t o n e , b e c a u s e t h e y 'r e
w e a l t h y , a n d t he r e a r e a l o t o f t hi n g s t h a t ha ve s l o w e d t hi s
d e v e l o p me n t d o w n , b u t t h e t h i n g a b o ut t h e mo t o r i z a t i o n i s c a r pl a n t s
a r e p r e s t i g i o u s t o h a v e a n d , a s my c o l l e a g u e s h a v e p o i n t e d o u t , p e o p l e
can now afford cars.
           Metro is a little more expensive. So it's a kind of lack of five-
y e a r p l a n me n t a l i t y i n t r a n s p o r t . I t a l l k i n d o f h a p p e n e d s p o n t a n e o u s l y
a n d t h a t ' s g o i n g t o h a v e t o b e s o me t h i n g t h a t i s l e a r n e d q u i c k l y . T h a t 's
where one of the urgencies is.
           MR. RAHIM: Just to go off of that point a little bit more. If we
look at cars in the U.S. over the last 15 years where acceleration has
i n c r e a s e d b y 2 2 p e r c e n t , w e i g h t h a s i n c r e a s e d b y s o me t h i n g l i k e 2 8
p e r c e n t , a n d mi l e a g e h a s o n l y i n c r e as e d b y a b o u t t w o p e r c e n t . S o t h e n
C h i n a l o o k s a t t h a t a n d s a y s , w h y s h o u l d w e l i s t e n b a s i c a l l y t o w h a t 's
b e i ng t ol d t o us ?
           N o w , a g a i n , I t h i n k t h a t t h e r e a r e d r i v e r s w i t hi n C h i n a a n d
w i t h i n t h e g o v e r n me n t t h e y'r e s a y i n g w e d o n e e d t o a d d r e s s t h i s . B u t
t h e y a r e s a y i n g , o k a y , w e 'l l d o i t o u r w a y , a n d t h e s a me t h i n g o n
c l i ma t e c h a n g e , a n d a l l t h a t a s w e l l . A n d a g a i n , w i t h t h e c a r i s s u e ,
a g a i n , I t h i n k a s p e o p l e a r e a b l e t o a f f o r d c a r s a n d t h e y d o n 't w a n t t o
b e t o l d , o k a y , d r i v e o n e t h a t 's mo r e e f f i c i e n t , t h e y w a n t t o d r i v e o n e
t h a t w i l l g e t t h e m p l a c e s q u i c k l y . S o t h a t 's w h y t h e y 'r e g o i n g t o m o v e -
-
                                                      - 86 -
             C H A I R M A N B A R T H O L O M E W: T h e y c a n 't g e t t h e r e b e c a u s e t h e
traffic is so bad.
             MR. RAHIM: Yes.
             C H A I R M A N B A R T H O L O M E W: T h a n k y o u .
             HEARING COCHAIR SHEA: Commissioner Reinsch.
             C O M M I SS I O N E R R E I N S C H :                  Th a n k y o u .         I c a n 't r e s i s t
c o m me n t i n g t h a t I 'm n o t s u r p r i s e d t h e C h i n e s e h a v e n ' t l e a r n e d f r o m
o u r mi s t a k e s s i n c e I t h i n k w e h a v e n 't l e a r n e d f r o m o u r mi s t a k e s . We
probably should begin with ourselves, but I was going to ask Dr.
Schipper a question. I think on reflection I'm going to ask all three of
y o u o r a n y o f y o u t h a t w a n t s t o c o m m e n t a c o mp a r i s o n q u e s t i o n . H a v e
y o u d o n e a s i mi l a r a n a l y s i s w i t h r e s pe c t t o I n d i a ? A n d w h a t a r e t h e
differences?
             DR. SCHIPPER: With respect to?
             COMMISSIONER REINSCH: India.
             D R . S C H I P P E R : A c t u a l l y w e 'r e j u s t a b o ut t o f i n i s h a s i mi l a r
India study. The key difference is two-wheelers, which the Chinese
h a v e k i n d o f t h r o w n o u t o f t h e i r c i t i e s , a n d s o me c i t i e s a r e e v e n
b a n n i n g e l e c t r i c t wo - w h e e l e r s , w h i ch w e r e s u d d e n l y t h e y 'r e 1 5 mi l l i o n
e l e c t r i c t w o - w h e e l e r s i n Ch i n a .        T h e r e w e r e n o n e fi v e y e a r s a g o
b e c a u s e s o me o n e r e a l i z e d , o k a y , i f y o u d o n 't l i k e t h e p o l l u t i o n fr o m,
s h a l l we s a y , c h e a p t w o - s t r o k e d i r t y mo t o r b i k e s , w e 'l l ma k e c l e a n
o n e s , a n d s o me C h i n e s e c i t i e s s a i d , o h , w e d o n ' t k n o w h o w t o t r e a t t h i s
s o w e 'r e n o t g o i n g t o l e t y o u h a v e i t .
             I n di a i n ou r v i e w mi g h t r e pr e s e n t a s u s t a i na b l e t r a ns p or t f u t u r e ,
a s I s a i d, s l o w , ye s , n o t c l e a n y e t , n o t n e c e s s a r i l y s a f e y e t , b u t
c e r t a i nl y s ma l l . I c a n 't t e l l C h i n a t o t a k e s o me t h i n g w i t h mu c h s m a l l e r
f o o t p r i n t , b u t my e x p e r i e n c e f r o m 1 1 t r i p s t o H a n o i w o r k i n g o n s i mi l a r
i s s u e s i s t h a t w h i l e H a n o i i s n o w v e r y c o n g e s t e d w i t h mo t o r b i k e s , t h a t
t h e r e i s a k i n d o f a t h i r d wa y . I f C h i n a l o o k s f o r e x a mp l e s , s h e w i l l
p r o b a b l y l o o k f i r s t t o I n di a , b e c a us e i t 's a c o mp a r a b l e p o p u l a t i o n a n d
i t h a s t h e s a me h u g e l y p r o s p e r o u s mi d d l e a n d u p p e r mi d dl e c l a s s t h a t ' s
g r o w i n g v e r y r a p i d l y a n d t h a t t h a t 's r e a l l y a mo d e l .
             On the other hand, the Chinese have moved faster on fuel
e c o n o my s t a n d a r d s , o n c l e a n i n g u p f u e l s , p a r t l y b e c a u s e t h e y 'r e l e s s o f
t h e k i nd o f d e mo c r a c y- - t h a t 's f a i r t o s a y - - t h a n I n d i a , w h e r e e v e r yt h i n g
gets argued to death for 20 years. So China is now way ahead of India
i n t h e u r b a n t r a n s p o r t s y s t e ms i t h as , a n d I t h i n k t h e g r e a t r e c k o n i n g
f o r b o t h c o u n t r i e s c o me s w h e n t h e y l o o k a t wh a t t h e s e h i d d e n t i me
b o mb s i n t r a n s p or t a t i on w i l l c o s t t h e m i n f i v e o r t e n y e a r s o u t .
             C O M M I S S I O N E R R E I N S C H : D o e i t he r o f t h e o t h e r t w o o f y o u
w a n t t o c o m me n t o n I n d i a , n o t s p e c i f i c a l l y w i t h r e s p e c t t o
transportation, but with respect to their energy consumption, energy
policy?
                                                     - 87 -
             M R . R A H I M : I g e n e r a l l y t h i n k t ha t t h e v ol u m e s , a ga i n , a r e a l ot
s ma l l e r r i g h t n o w i n C h i n a . T h e y 'r e u n d e r t a k i n g a l o t o f t h e s a me
s t e p s l o o k i n g a b r o a d f o r e n e r g y . The y 'r e l o o k i n g a t C h i n a a n d s a y i n g ,
w e l l , t h a t 's a p a t h ma y b e a g a i n w e d o n 't w a n t t o f o l l o w o n s o me t h i n g s .
             B u t I t hi nk t h e y h a v e s t a r t e d t o t a ke s o me s t e p s e a r l i e r l i k e t h e
C N G b u s e s t h a t t h e y 'v e i n t r o d u c e d .              I n I n d i a , y o u a l mo s t h a v e a
p r o b l e m o f t o o m u c h d e mo c r a c y . I t b r e a k s d o w n , w h e r e a g a i n e v e r y
state acts like its own independent country. So even with things like
e l e c t r i c i t y d e r e g u l a t i o n , t h i n g s l ik e t h a t , w h e r e y o u 'v e g o t t e n s t e p s
u n d e r t a k e n t o c h a n g e i t , b u t n o b o d y i s r e a l l y f o l l o wi n g i t , a g a i n , fo r a
very different reason than in China.
             I t h i n k t he y 'r e g o i n g t o r u n u p a ga i n s t s o me o f t he s a me i s s u e s ,
b u t I t h i n k t h e y 'r e i n a mu c h b e t t e r s t a r t i n g p o s i t i o n t h a n C h i n a i s .
             C O M M I SS I O N E R R E I N S C H : T h a n k y o u .
             M R . H O U S E R : I d o n 't h a v e mu c h v a l u e t o a d d o n I n d i a .
             C O M M I SS I O N E R R E I N S C H : T h a n k y o u .
             HEARING COCHAIR SHEA: Commissioner Videnieks.
             HEARING COCHAIR VIDENIEKS:                                         Earlier today we heard
t e s t i mo n y - - t h i s i s f o r a l l t h r e e o f t h e p an e l i s t s - - t h a t C a t e r p i l l a r j u s t
signed a contract with an entity in PRC, 56 million bucks, to deliver
mi n i n g e q u i p me n t , c o a l mi n e e q u i p me nt . We a l s o h e a r d t e s t i mo n y t h a t
c o a l ma y b e a c l o s e d s e c t o r fo r f o r e i g n i n v e s t m e n t i n P R C .
             T h e b a s i c q u e s t i o n I h a v e i s h o w d o e s o n e d e f i n e a We s t e r n o r
f o r e i g n - o w n e d c o mp a n y o v e r t h e r e ? We 'v e h e a r d f i g u r e s a s l o w a s t e n
percent equity. General question, question to all.
             M R . H O U S E R : O n t h e c o a l s i d e i t 's n o t a c l o s e d s e c t o r . I t ' s n o t
c l o s e d i n t h e w a y t h a t u p s t r e a m o i l a n d g a s i s . I 'v e w o r k e d o n s o me
i n v e s t me n t s i n t h e c o a l s e c t o r , a n d t h e r e i s a c e r t a i n pr o j e c t s c a l e o f
p r o j e c t s t h a t g e t s i nt o p o l i t i c a l l y s e n s i t i v e t e r r i t o r y , a n d w h e r e t h e
a b i l i t y o f a f o r e i g n c o mp a n y t o d o a n a c q u i s i t i o n a n d a ma j o r i t y o w n e d
s t a k e a r e l i mi t e d b y p o l i t i c a l c o n s i d e ra t i o n s , b u t i t 's n o t a s e c t or t h a t
i s bl a nk e t r e s t r i c t e d f o r f o r e i g n c o mp a n i e s .
             I n t e r ms o f w h a t 's d e f i n e d a s a fo r e i g n - o wn e d e n t e r p r i s e , I
a c t u a l l y d o n 't h a v e t h o s e n u mb e r s i n my h e a d . M y c o l l e a g u e i s b e t t e r
o n t h a t fr o n t a n d I c o u l d c e r t a i n l y g e t t h a t t o y o u .
             H E A R I N G C O C H A I R V I D E N I E K S : T h a t 's a n i s s u e t h a t a l w a y s
c r o ps u p b e c a u s e P R C a r g ue s t ha t a l o t o f o u r i mp o r t s fr o m t h e m a r e
f r o m o u r o w n c o mp a n i e s , f o r e i g n - o w n e d c o mp a n i e s .                    Now if ten
p e r c e n t i s a c r i te r i o n , i n my mi n d t h a t d o e s n o t e q u a t e t o a n o w n e d
p l a n t o r c o mp a n y .
             D o e s a n y o n e h a v e a n y o t h e r c o m me n t s o n t h a t ?
             M R . H O U S E R : I f i t 's a w h o l l y f o r e i g n - o w n e d e n t e r p r i s e , i f i t ' s a
WFOE--
             H E A R I N G C O C H A I R V I D E N I E K S : I t hi n k t h e y u s e t h e p h r a s e
                                                       - 88 -
" f o r e i g n o w n e d , " wh o l l y f o r e i g n o w n e d .
             MR. HOUSER:                       Yes.         In the stats, there are different
c a t e g o r i z a t i o n s f o r f i r ms t ha t a r e p r i v a t e , a r e f o r e i g n a n d a r e s t a t e -
owned enterprise.                      A n d w i t h i n t ho s e t h r e e , t h e r e 's a c t u a l l y a bo u t
s e v e r a l o t h e r c at e g o r i e s , a n d i f y o u 'r e a w h o l l y - o w n e d f o r e i g n
e n t e r p r i s e , t h e n i t s l i s t e d a s f or e i g n e n t e r p r i s e i n t h e C h i n e s e
statistics.
             HEARING COCHAIR VIDENIEKS: Okay.
             M R . H O U S E R : N o w a l o t o f t i me s i t ' s T a i w a n e s e o w n e d o r H o n g
K o n g o w n e d , a n d s o me t i me s i t ’ s C h i n e s e i n v e s to r s a r e w o r k i n g t h r o u g h
a Taiwanese or Hong Kong entity.
             I f i t 's a j o i nt ve n t ur e t ha t h a s s o me d e g r e e o f f o r e i g n
i n v o l v e me n t , t he n t h a t c a n b e c at e g o r i z e d a s a f o r e i g n c o mp a n y a s
w e l l , b u t t h a t t h r e s h o l d , I 'm n o t e x a c t l y s u r e w h a t t h e l a w i s .
             M R . R A H I M : I t h i n k h e 's c o v e r e d i t . Y e s .
             HEARING COCHAIR VIDENIEKS: Thank you.
             H E A R I N G C O C H A I R S H E A : I h a v e a q u e s t i o n a n d t h e n I 'm
g o i n g t o t u r n i t o v e r t o V i c e C h a i r ma n B l u me n t h a l .
             T h e t i t l e o f t h i s p a n e l i s " E n e r g y C o n s u mp t i o n P a t t e r n s a n d
Trends," and as I understand it, if you look at a pie chart, you want to
l o o k a t t h e e n e r g y mi x i n C h i n a t o d a y , i t 's c o a l , 6 7 t o 7 0 p e r c e n t ; o i l ,
a b o u t 2 0 - 2 1 p e r c e n t ; n a t u r a l ga s , t h r e e p e r c e n t ; n uc l e a r , t w o- t h r e e
p e r c e n t , ma y b e l o w e r ; r e n e w a b l e s , t w o o r t h r e e p e r c e n t .
             If I project out 20 years, the pie is going to be bigger, as I
u n d e r s t a n d i t , t h e p i e i s g o i n g t o b e a l ot b i g g e r , b u t i t ' s g o i n g t o b e
c o a l , 6 7 t o 7 0 p e r c e n t ; o i l , 2 1 p e r c e nt ; n a t u r a l g a s , t h r e e p e r c e n t ;
renewables, three; nuclear, three to four.
             I s t h a t f a i r ? I s t ha t a f a i r p r o j e c t i o n ?
             MR. HOUSER: Yes, oil will be slightly higher. Coal will be
s l i g h t l y l o w e r . Ga s a n d n u c l e a r w i l l b e a b o u t t h e s a me s i z e .
             M R . R A H I M : E x a c t l y . I t h i n k t he r e w i l l b e s o me c h a n g e s i n
c o a l a n d o i l , b u t I t h i n k b e c a u s e p a r t o f i t i s t ha t t he d e ma n d s o n e a c h
o f t h o s e fi e l d s i s go i n g t o be s o hi g h , t ha t j us t s i mp l y t o me e t t h a t , l e t
a l o n e t r a n s i t i o n , i s g o i n g t o b e s u c h a c h a l l e n g e t h a t I d o n 't t h i n k
y o u 'r e g o i n g t o s e e mu c h mo v e me n t .
             H E A R I N G C O C H A I R S H E A : O k a y . V i c e C h a i r ma n B l u me n t h a l .
             VICE CHAIRMAN BLUMENTHAL:                                            I just had a quick
c l a r i f i c a t i o n f o r M r . H o u s e r . We h e a r d t e s t i mo n y e a r l y t h i s mo r n i n g
t h a t i n t e r ms o f e q u i t y o i l , t h e C h i n e s e d o , i f I u n d e r s t o o d t h e a n s we r ,
i t w a s t ha t t he C hi n e s e d o s e n d mo s t o f i t b a c k t o t h e i r o w n h o me .
T h a t c o n f l i c t s w i t h y o u r p a p e r , w h i c h i s t h a t i t 's mo s t l y p u t o n t h e
ma r k e t .
             M R . H O U S E R : L a s t y e a r , t h e t h r e e o i l ma j o r s p r o d u c e d 6 9 0 , 0 0 0
b a r r e l s a d a y o f e q u i t y p r o d u c t i o n o v e r s e a s . I f y o u l o o k a t C u s t o ms
                                                    - 89 -
s t a t s , t h e mo s t t h a t c o u l d p o s s i b l y h a v e c o me b a c k h o me i s 2 5 0 , 0 0 0
b a r r e l s a d a y o f t h e 6 9 0 ,0 0 0 b a r r e l s a d a y . S o t h a t 's 2 5 0 , 0 0 0 b a r r e l s a
d a y o u t o f a n o v e r a l l i mp o r t b i l l o f 3 . 6 mi l l i o n b a r r e l s a d a y . S o i t
d o e s n 't g o v e r y f a r t o w a r d me e t i n g e n e r g y s e c u r i t y .
             Wh a t 's e v e n mo r e fa s c i n a t i n g i s i f y o u l o ok a t a s p e c i fi c p r oj e c t
l i k e S u d a n , l a s t y e a r J a p a n i mp o r t e d mo r e S u d a n e s e c r u d e t h a n Ch i n a
did. They bought it from CNPC. And this is creating a little bit of
heartburn in Beijing because while Beijing goes to the Security
C o u n c i l a n d g o e s t o b a t f o r C N P C a n d i t s i n t e r e s t s i n S u d a n , CN P C
i s n 't e v e n s e l l i n g t h e o i l ba c k h o me . T h e y 'r e s e l l i n g i t w h e r e v e r t h e
yields are better.
             I n t h e p a p e r , w e 'v e g o t a c h a r t t r a c k i n g J a p a n e s e i mp o r t s o f
S u d a n e s e c r u d e a n d C h i ne s e i mp o r t s o f S u d a n e s e c r u d e , a n d t h e y 'r e
mi r r o r i m a g e s . O nc e t h a t oi l i s l oa d e d o n a t a n k e r , t h e o i l t r a d i n g
branch of CNPC is going to sell it wherever the yields are higher.
             T h a t 's s t a r t i n g t o c h a n g e t h i n k i n g i n B e i j i n g , e s p e c i a l l y i n t h e
M i n i s t r y o f F o r e i g n A f f a i r s a b o u t wh e t h e r i t i s r e a l l y w o r t h w h i l e t o
l e n d d i p l o ma t i c s u p p o r t t o t h e s e p r o j e c t s , w h e n t h e y h a v e t o g o c l ea n
u p t h e me s s , i f a l l w e ' r e d o i n g i s i n p u t t i n g mo n e y i n t h e p o c k e t s o f t h e
o i l c o mp a n i e s a n d n o t a c t ua l l y ge t t i ng a n y d e g r e e o f o i l s e c u r i t y . I
t h i n k w e 'r e g o i n g t o s e e a c ha n g e i n t h a t t h i n k i ng i n B e i j i ng i n t he ne x t
two to three years on that questions.
             M R . R A H I M : Y e s . O n e o f t he t h i ng s w e 'v e b e e n t r a c k i n g i s
exactly this. I know Trevor and I have spoken of this quite a bit, but
i t ' s r e a l l y t h a t e n e r g y p o l i c y i s i nc r e a s i n g l y d r i v e n b y t h e N O C s , n o t
b y t h e c e n t r a l g o v e r n me n t a s mu c h , a n d t h e n s i n c e t h e g o v e r n me n t i s
l i s t e n i n g t o w h a t t h e N O C s a r e t e l l i n g t h e m, a n d t h e N O C s a r e
b a s i c a l l y v i e wi n g t h i s g o - o u t s t r a t eg y, s e c ur i ng e n e r g y a b r oa d a s a n
o p p o r t u n i t y t o ma k e mo n e y , t o g e t t e c h n o l o g i c a l e x p er i e n c e , t o b e
exposed to international partnerships rather than being energy security
a s t h e pr i ma r y d r i ve r .
             VICE CHAIRMAN BLUMENTHAL: Now if they're looking at a
p o l i c y c h a n g e , d o e s t h a t me a n t h a t t h e y w i l l s t o p b u y i n g e q u i t y s t a k e s
i n p l a c e s l i ke S u d a n ?
             MR. RAHIM: No.
             M R . H O U S E R : Wh a t i t me a n s w h e n C N P C s a y s - - f i r s t , w e h a v e
t o q u a l i fy t w o t h i n g s . T h e C h i ne s e o i l c o mp a n i e s d o n 't n e e d a n y
c a pi t a l t o ma k e t he i n v e s t me n t s t ha t t h e y ' r e ma k i n g . T h e y ' v e g o t
p l e n t y o f mo n e y t h e ms e l v e s . We 'r e t a l k i n g a b o u t 2 0 0 , $ 3 0 0 mi l l i o n
e q u i t y i n v e s t me n t . C N P C ma d e $ 2 4 b i l l i o n i n p r o f i t l a s t y e a r . T h e y
d o n 't n e e d a n y e x t r a c a s h . T h e y d o n 't n e e d a n y f i n a n c i a l s u p p o r t f r o m
t h e g o v e r n me n t . T h e y d o n ' t e v e n n e e d a n y l o a n s .
             CNOOC was an exception in that sense, that they needed a loan
b e c a u s e t h e y a r e a s ma l l c o mp a n y . S o w h a t i t me a n s t o c h a n g e p o l i c y
                                                      - 90 -
i s t h a t wh e n C N P C w i t h i t s o w n mo n e y a n d fo r c o m me r c i a l r e a s o n s ,
w a n t s t o g o b u y a s t a k e a nd t h i n k s i t w o u l d b e h e l p f u l i f H u J i n t a o
c a me o u t a n d d i d a s t a t e - t o - s t a t e m e e t i n g d u r i n g t h a t s i g n i n g , t h a t
ma y b e H u J i n t a o d e c i d e s t o g o s o me w h e r e e l s e or n ot t o t i e i n t h e
e n e r g y c o mp a n i e s i n t o me e t i n g s h e d o e s t a k e i n t h e c o u n t r y .
            VICE CHAIRMAN BLUMENTHAL: But they're not going to
s t o p t h e m f r o m p r o d u c t i o n a n d d e v e l o p me n t i n pl a c e s w h e r e w e
s a n c t i o n ? T h a t 's n o t g o i n g t o b e t h e pol i c y c h a ng e ?
            MR. HOUSER: My view would be that they're not going to stop
production in Sudan. Going forward, whether they take a different
a p p r o a c h t o w a r d s a n c t i o n s , I t h i n k t h a t 's a c t u a l l y i n f l u x . I t h i n k w h a t
t h e y 'l l a l s o s t a r t t o d o , a n d i n t h e c a s e t h a t w e ma k e t o t h e C h i n e s e i s
t h a t , l o ok, t he r e a s o n t h a t t h e U . S . d i s c i p l i n e d t h e b e h a v i o r o f i t s
c o mp a n i e s o v e r s e a s w a s n ' t o ut o f a l t r u i s m. I t w a s n ' t t h a t w e t h o u g h t i t
w a s b a d f o r d e mo c r a c y i n A f r i c a . I t w a s t ha t i f y o u p u t mo n e y i n t o
d i c t a t o r s ' p o c k e t s a n d s u p p o r t th o s e r e g i me s , y o u p l a n t s e e d s o f
i n s t a b i l i t y . A n d s o w h e n t h e r e g i me c h a n g e s a n d a l l o f a s u d d e n y o u r
a s s e t s a r e n a t i o n a l i z e d , i t i s n ’ t a t e r r i b l y g o od i n v e s t me n t s t r a t e g y .
            N o w , C h i n a i s n e w t o t h i s s p a c e a n d t h e y 'r e n e w t o f o r e i g n
i n v e s t me n t i n t h i s w a y a n d h a v e n 't h a d t o e n d u r e a r e g i me c h a n g e
where their assets were nationalized. I think once that happens, and it
w i l l h a ppe n s o on e r o r l a t e r , t h e t hi n k i n g i s g o i n g t o c h a n g e p r e t t y
f u n d a me n t a l l y a b o u t w h e th e r i t ma k e s s e n s e a s a p o l i c y o r w h e t h e r y o u
s h o u l d s t a r t a p p l y i n g s o me c o n d i ti o n s o n y o u r c o mp a n i e s a n d wh e re
t h e y i n ve s t .
            VICE CHAIRMAN BLUMENTHAL: Thank you.
            HEARING COCHAIR SHEA: Madam Chair.
            C H A I R M A N B A R T H O L O M E W: T h a n k y o u , a n d I 'm g l a d t h a t
t h e s u b j e c t o f S u d a n c a me u p b e c a u s e M r . R a h i m h a s q u i t e a n e x pe r t i s e
on this too from what I understand, and I was going to ask about it.
            C N P C i s n o t a pr i v a t e c o mp a n y a n d p r o f i t s f r o m C N P C a c c r u e
back to the Chinese government; don't they?
            M R . R A H I M : T h e y d o n 't .
            MR. HOUSER: There is no dividend policy so it all stays with
t h e c o mp a n y , a l l t h e p r o f i t s .
            H E A R I N G C O C H A I R S H E A : I t h o u g h t S A SA C c h a n g e d t h a t o r
i s c h a n gi n g t ha t ?
            MR. HOUSER:                       There are indications that there will be a
d i v i d e n d p o l i c y p u t i n t o p la c e t h i s y e a r . T h e d e g r e e t o w h i c h t h a t 's
e n f o r c e d r e ma i n s t o b e s e e n- - h o w mu c h o f t h e mo n e y i s a c t u a l l y c a l l e d
b a c k t o t h e g o ve r nme n t . B u t r i gh t no w , a l l t h a t c a pi t a l j u s t s l o s h e s
a r o u nd i n a c o mp a ny k i t t y a n d me a n s t h a t w he n C N P C g o e s t o b i d o n a
p r o j e c t - - i f I ' m B P , a n d I w a n t t o i n v e s t so me w h e r e , my ma r g i n h ur d le
i s ma y b e 1 5 p e r c e n t b e c a u s e i f I c a n 't g e t 1 5 p e r c e n t , my s h a r e h o l d e r s
                                                      - 91 -
w o u l d l o v e t o h a v e t h e i r mo n e y i n d i v i d e n d s a n d p u t i t s ome w h e r e e l s e
i n t h e S& P 5 0 0 . I f I 'm C N P C , t h e o n l y o p p o r t u n i t y c o s t s f o r t h a t
i n v e s t me n t i s d e p o s i t i n g i t i n a C h i n e s e b a n k w h e r e I 'm g o i n g t o g e t
t w o t o t hr e e pe r c e nt r e t u r n; r i g ht .
            M R . R A H I M : B e c a u s e t h e r a t e s a r e l i ke f i ve p e r c e nt i n s o me
projects.
            MR. HOUSER: Yes.
            C H A I R M A N B A R T H O L O M E W: S o t h e y c a n t a k e a w h o l e l o t
mo r e r i s k i s w h a t y o u 'r e s a y i n g ?
            M R . H O U S E R : C a n t a k e mo r e r i s k ; r i g h t .
            MR. RAHIM: Yes.
            C H A I R M A N B A R T H O L O M E W:                         But what I'm trying to
u n d e r s t a n d n o w i s t h i s , a g a i n , w h e r e i s t h e t i p p i n g p o i n t ? Wh e r e i s t h e
c o s t t o o h i g h f o r t h e C h i n e s e g o v e r nme n t o n C N P C 's i n v e s t me n t i n
S u d a n ? Y o u 'r e s a y i n g t h a t t h e r e i s n 't e v e r a p oi n t a t w hi c h t ha t c os t i s
too high?
            MR. RAHIM:                    We l l , n o t u n d e r c u r r e n t c o n d it i o n s , I d o n ' t
b e l i e v e . I d o n 't k n o w i f T r e v o r h a s a d i f f e r e n t v i e w .
            MR. HOUSER: I don't.
            M R . R A H I M : B u t I me a n a g a i n t h e i n v e s t me n t h a s a l r e a dy t a k e n
p l a c e . T h e y 'r e a l r e a d y t h e r e . I d o n 't t h i n k t h e y 'r e g o i n g t o b a c k o u t o f
t h a t a t a ny p o i nt i n t h e f o r e s e e a bl e f u t u r e .
            MR. HOUSER: Right.
            M R . R A H I M : A g a i n , i f t h e r e 's o b v i o u s l y a n a t i o n a l i z a t i o n o r a
mo v e t o w a r d s t h a t , t h e n I t hi n k t h e y wo u l d n 't v i e w t h a t f a v o r a b l y . B u t
i n ot h e r a r e a s , l i ke I r a n , fo r e xa mp l e , t h e y a r e c h a n g i n g t h a t v i e w
where they have all these deals that have been signed. Everyone talks
a b o u t C h i n e s e i n v e s t me n t i n I r a n . I f y o u l o o k a c t u a l l y a t d o l l a r s i n t h e
g r o u n d a n d i n p r o j e c t s , i t 's v e r y , v e r y l i mi t e d . I n f a c t , i t ' s a l mo s t
nonexistent to this point.
            S o a l o t of t h e s e d e a l s t ha t ha v e be e n s i g ne d ha v e n 't r e a l l y g o n e
forward, and precisely because of the political conditions that are
s u r r o u n d i n g t h a t i n v e s t me n t . B u t a g a i n t h a t 's a j oi n t d e c i s i o n a s w e l l
f r o m t h e c o mp a n y s a y i n g we d o n 't w a n t t o p u t mo n e y i n t o a p l a c e
w h e r e w e 'r e n o t s u r e i f w e 'r e g o i n g t o b e a b l e t o e x e c u t e o n t h a t
project.
            C H A I R M A N B A R T H O L O M E W: B u t t h e g o v e r n me n t i n B e i j i n g
c o u l d , c o u l d i n s i s t , i t h a s t h e p o w e r t o i n s i s t , d o e s n 't i t , t h a t C N P C h a s
to--
            M R . R A H I M : D e s i s t t h e i n v e s t me n t .
            M R . H O U S E R : H a s t o s h u t u p s h o p , y o u me a n ?
            C H A I R M A N B A R T H O L O M E W: S h u t u p s h o p , f o r e x a mp l e .
            M R . R A H I M : I t i s t h e ma j or i t y s h a r e ho l d e r .
            MR. HOUSER: In theory, sure, they could say, yes, you need to
                                                      - 92 -
c l o s e d o w n a l l t h a t i n v e s t me n t . We 'l l b u y i t , a l l t h a t i n v e s t me n t t h a t
y o u s u n k , w e ' l l b u y i t o f f f r o m y o u , a nd y o u h a v e t o c l o s e u p s h o p a n d
c o me h o m e . A n d t h e w o r l d w o u l d h a v e 6 0 0 , 0 0 0 b a r r e l s a d a y l e s s o i l
o n t h e ma r k e t , w h i c h i s a b o u t h a l f o f g l o b a l ma r g i n a l d e ma n d .
             MR. RAHIM: That would be pretty big shock.
             M R . H O U S E R : - - t h e re w o u l d b e a p r e t t y b i g i mp a c t o n o i l
ma r k e t s .
             C H A I R M A N B A R T H O L O M E W: I t h i n k i t 's , a g a i n , t h e b a l a n c e
o r i f t h e C h i n e s e g o v e r n me n t i s p l a yi ng t h e S u da n i s s ue i n a w a y t h a t i t
g e t s i t b o t h w a y s . S o l e t 's s a y H u J i n t a o d o e s n 't g o f o r a n o t h e r s i g n i n g
o f a n o t h e r b i g o i l d e a l . S o wh a t ? Th e o i l d e a l ha p p e n s . H o w i s i t t h a t
w e c o n n e c t t h e f a c t t ha t t h i s i s a g o v e r n me n t e n t e r p r i s e t h a t i s
i n v e s t i n g i n t h e p l a c e a n d t h e r e a re o t h e r a c t i v i t i e s g o i n g o n t h a t a r e
perpetuating a genocide? I'm asking you a question outside of the
realm of your interest.
             V I C E C H A I R M A N B L U M E N T H A L : I d o n 't w a n t t o t a k e u p y o u r
t i me - -
             C H A I R M A N B A R T H O L O M E W: N o , n o . G o a h e a d .
             VICE CHAIRMAN BLUMENTHAL:                                        A c l a r i fi c a t i o n qu e s t i o n
would be, are there thoughts within MOFA and in other places of
having a policy akin to a sanctions policy or a no-vote policy for
c o mp a n i e s t h a t a r e a c t u a l l y p u n i s h e d ? A p o l i c y a k i n t o w h a t o t h e r
g o v e r n me n t s h a v e , o u r s a n d o t h e r s , o r i s t h a t n o t o n t h e t a b l e ?
             C H A I R M A N B A R T H O L O M E W: M a y b e e v e n a n o t h e r w a y t o a s k ,
is, if Beijing is concerned about the public relations problem that it
h a s b u i l d i n g t h a t i t 's n o w c o n n e c t i ng e v e n t o t h e B e i j i n g O l y mp i c s ?
Wh a t k i n d o f l e v e r a g e d o e s i t h a v e o v e r t h i s c o mp a n y a n d w h a t d o y o u
t h i n k i t c o u l d o r wo u l d d o ?
             M R . R A H I M : A c t ua l l y f r o m w h a t we 'v e s e e n , t h e y w o ul d n 't t r y
a n d u s e t h e i r l e v e r a g e o v e r t h e c o mpa n y . T h e y w o u l d a c t u a l l y t r y a n d
u s e i t a g a i n s t , w i t h S u d a n . So t h e y'v e b e e n r e a c h i n g o u t mo r e t o S u d a n
t h a n t h e y h a v e t o C N P C t o s a y c u r t a i l y o u r a c t i v i t i e s ; i t 's b e e n mo r e t o
t h e S u d a n e s e g o v e r n me n t .
             T h e o t h e r t h i n g I t h i n k w e ' r e s ee i n g i n p l a c e s l i k e S u d a n a n d
e l s e w h e r e t h a t t h e C h i n e s e ha v e i nv e s t e d i n f a i r l y h e a v i l y o v e r s e a s , s o
t h e r e ' s a c t ua l l y a l o c a l ba c kl a s h a g a i n s t a l o t o f t h e C hi n e s e
i n v e s t me n t .
             C H A I R M A N B A R T H O L O M E W: R i g h t .
             M R . R A H I M : S o t h a t ma y b e w h a t c h a n g e s c o r p o r a t e b e h a v i o r
mo r e t h a n a g a i n t h e C h i n e s e g o v e r nme n t d i r e c t i n g t h e m t o d o t h a t .
We 'v e s e e n i t i n L a t i n A me r i c a . We 'r e se ei ng i t i n We s t a n d E a st
A f r i c a , t he s e a t t a c ks i n Et hi op i a a g a i n s t Si n o p e c e mp l o y e e s . S o t h e y
ma y r e a l i z e t h a t i t ' s n o t i n o u r b e s t i n t e r e s t s t o g o a f t e r t h e r i s ki e s t
c o u n t r i e s a n d t h e r i s k i e s t i n ve s t me n t s , t h a t w e m a y w a n t t o r e c o n s i d e r
                                                     - 93 -
w h a t o u r r e t u r n r e a l l y i s o n s o me o f t h e s e , b u t - -
            C H A I R M A N B A R T H O L O M E W:                      D o y o u t h i n k t h e y 'd d o
s o me t h i n g i f t he y t hi n k t h e Ol y mp i c s a r e a t s t a ke ?
            M R . H O U S E R : I t h i n k t h e y a r e f o r t h e m.
            MR. RAHIM: Yes.
            MR. HOUSER: From our perspective in the U.S., the changes
t h a t t h e C h i n e s e g o v e r n me n t h a s ma d e S u d a n d o n 't s e e m t e r r i b l y
significant. From a Chinese standpoint, with a long-standing view on
interventionist policy at the Security Council, I think the changes have
been pretty significant.
            MR. RAHIM: Absolutely.
            MR. HOUSER: In a Chinese context.
            M R . R A H I M : A g a i n , i t 's t h i s w h o l e p r i n c i p l e o f n o t i n t e r f e r i n g
i n o t h e r c o u n t r y 's a f f a i r s .
            C H A I R M A N B A R T H O L O M E W: T h e y'v e d o n e i t i n p l a c e s l i k e
Z a mb i a .
            MR. RAHIM: Absolutely. This is what they at least appreciate.
S o t h a t 's t h e i r l i ne .
            C H A I R M A N B A R T H O L O M E W: T h a n k y o u .
            H E A R I N G C O C H A I R S H E A : A n y mo r e q u e s t i o n s ?
            COMMISSIONER HOUSTON: I have a really quick one.
            HEARING COCHAIR SHEA: Sure.
            COMMISSIONER HOUSTON:                                     I'm just curious as to your
t h o u g h t s o n V e n e z u e l a - - 1 8 mo n t h s a g o , t w o y e a r s a g o , w h a t e v e r i t w a s ,
H u g o C h a v e z s a i d w e ' r e g o i n g t o d i v e r t s o me o i l r e s o u r c e s a w a y ,
s p e c i f i c a l l y a w a y fr o m t h e U . S . a n d s e n d t h e m t o C h i n a , e v e n t h o u g h
i t 's g o i n g t o c o s t u s mo r e m o n e y t o s h i p i t t h e r e b e c a u s e w e d o n 't l i k e
y o u o r w h a t e v e r h i s r e a s o n wa s .
            H a s t h a t h a p p e n e d ? H a s V e n e z ue l a d i v e r t e d a n y o f o u r o i l ,
V e n e z u e l a n o i l s u p p l y t o C h i n a , a n d i s i t e n o u g h t h a t w e c a r e ? Ha s i t
ma d e a n y k i n d o f a n i mp a c t ?
            MR. RAHIM:                     A t mo s t , i t w a s o n e o r t w o c a r g o e s , a n d
e s s e n t i a l l y i t w a s mo r e c o m me r c i a l e nt e r p r i s e t h a n a n y t h i n g e l s e . I t
w a s a b i d d i n g . O i l t a n k e r s c h a n g e h a n d s u p t o 3 0 0 t i me s b e t we e n t h e
s o u r c e a n d w h e n t h e y a c t u a l l y e n d u p a t t h e r e fi n e r y .
            T h e p r o bl e m w i t h V e n e z ue l a a n d C h i n a i n t e r ms o f c r u d e i s t h a t
C h i n e s e r e f i n e r i e s i n t h e i r c u r r e n t s t a t e r e a l l y c a n 't pr o c e s s l a r g e r
v o l u me s o f V e n e z u e l a n c r u d e .          A n d t h e r e 's t h i s i s s u e r i g h t n o w o f
Venezuela saying, Venezuelan production is actually declining fairly
r a p i d l y , a n d t h e y h a v e t o l o o k a t wh a t ' s c a l l e d u n c o n v e n t i o n a l , t h e
h e a v y o i l , t o r e a l l y ma k e u p t h a t p r o d u c t i o n . B u t t h e o n l y c o mp a n i e s
w h o c o u l d r e a l l y d o t h a t a r e t h e i nt e r n a t i o n a l o i l c o mp a n i e s , wh i c h
h a v e a l l e s s e n t i a l l y n o w e i t h e r be k i c ke d ou t or t o l d t ha t i n n o
u n c e r t a i n t e r ms t h a t l i f e w i l l b e c ome m u c h mo r e d i f f i c ul t fo r t h e m.
                                                    - 94 -
            S o t h e y h a v e s a i d , w e l l , w e 'l l b r i n g i n C N P C a n d t he s e ot h e r
g u y s t o c o me a n d a c t u a l l y ma k e t h o s e i n v e s t me n t s , a n d t h e s e
i n v e s t me n t s a r e n o w r u n n i n g a n y w h e r e b e t w e e n f i v e a n d $ 8 b i l l i o n f o r
2 0 0 t o 5 0 0 , 0 0 0 b a r r e l s a d a y , w h i c h i s n 't a r e t u r n o f a n y s o r t r e a l l y .
            S o w h a t t h e C h i n e s e a r e s a y i n g i s , l o o k , ma y b e w e ' l l u p g r a d e o u r
o w n r e f i n e r i e s t o b e a b l e t o b e t t e r h a nd l e V e ne z u e l a n c r ud e . T h e po i n t
i s t ha t t hi s i s a m u c h l o ng e r t e r m p r o c e s s s o t h i s s hi f t h a s n o t t a k e n
p l a c e n o w, a n d i t ' s u n l i k e l y t o r e a l l y h a p p e n i n a n y ma j o r w a y a n y t i me
soon. So I don't think that--
            C O M M I S S I O N E R H O U S T O N : Wi t h t h e c o mme n t s , p a r t i c u l a r l y
M r . H o u s e r ma d e a b o u t - - o r ma y b e i t w a s y o u , M r . Ra h i m, a b o u t t h e
f e a r t h a t t h o s e a s s et s w o u l d b e n a t i o n a l i z e d w i t h H u g o C h a v e z
n a t i o n a l i z i n g e v e r y t h i n g t h a t 's n o t n a i l e d d o w n i n V e n e z u e l a , I w o u l d
t h i n k t h a t w o u l d b e a c o n c e r n . S o I j u s t w o nd e r e d i f i t w a s a b i g
e n o u g h i s s u e t h a t we n e e d e d t o b e r e a l l y w o r r i e d a b o u t i t h e r e .
            M R . H O U S E R : A n d C N P C i s v e r y c o n c e r n e d . T h e y ' r e fu r i o u s a t
the Venezuelans for a bunch of reasons. Venezuela stopped producing
o i l e mu l s i o n w h i c h t h e y u s e d t o s e l l t o C h i na . J u s t w he n C h i n a h a d
built a variety of power plants to run on it, the Venezuelans cut it off.
            T h e s e n e w l a w s PD V S A h a s w h e r e y o u h a v e t o h av e a c e r t a i n
p e r c e n t a g e o f V e n e z u e l a n e mp l o y e e s i n t he pr o j e c t . C N P C l i k e s t o
b r i n g a v i l l a g e w i t h t h e m w h e n t he y i n v e s t s o me w h e r e . A n d P D V S A
h a s a h a r d t i me w o r ki n g l i k e t h a t . S o t h e r e i s n o l o ve l o s t b e t w e e n
P D V S A a n d t he C hi n e s e oi l c o mp a n i e s .
            M R . R A H I M : Wh i c h i s pr e c i s e l y w h y t h e y ' r e s a y i n g , l o o k , w e ' r e
not going to build the upgrade in Venezuela; we're going to upgrade
o u r o w n r e f i n e r i e s t o b e a b l e t o h a n dl e i t . S o t h a t w a y w e 'r e n o t s t u c k
there essentially.
            COMMISSIONER HOUSTON: Okay. Great. Thank you.
            M R . R A H I M : T h e w o r r y i s t h a t i f t h e r e i s n ' t t h a t i n v e s t me n t i n
V e n e z ue l a b y w h ome v e r , w h e t he r i t 's t h e C h i n e s e o r t h e i n t e r n a t i o n al
o i l c o mp a n i e s , i s t h a t Ve n e z u e l a 's o v e r a l l o i l p r o d u c t i o n r e a l l y d o e s
s t a r t t o de c l i ne v e r y r a pi dl y , a n d t h a t d o e s i mp a c t e x p or t s t o t h e U .S . ,
w h i c h c u r r e n t l y i t 's o n e o f t h e l a r g e r s u p p l i e r s t o t h e U . S .
            C O M M I S S I O N E R H O U S T O N : S o r t o f a d o mi n o t h e o r y .
            H E A R I N G C O C H A I R S H E A : B e f o r e I w r a p u p a nd e x c u s e o u r
guests, I just want to on behalf of the cochairs thank Marta McLellan,
w h o i s t h e s t a f f e r fo r t h e C o m mis s i o n w h o h a s d o n e a g r e a t j o b p u t t i n g
t h i s h e a r i n g t o g e t h e r a n d t o mo r r o w ' s h e a r i n g t og e t h e r , a n d M r . H o u s e r ,
D r . S c h i p p e r , M r . R a h i m, t h a n k y o u v e r y mu c h .
            We 'l l b r e a k n o w f o r l u n c h .
            [ Wh e r e u p o n , a t 1 2 : 5 4 p . m. , t h e h e a r i n g r e c e s s e d , t o r e c o n v e n e a t
2 : 0 0 p . m. , t h i s s a me d a y . ]


                                                     - 95 -
      PANEL IV: THE STRATEGIC CONSEQUENCES FOR THE
      UNITED STATES AND THE WORLD OF CHINA’S ENERGY
                       CONSUMPTION

            V I C E C H A I R M A N B L U M E N T H A L : We ' r e g o i n g t o c o me t o
o r d e r a g a i n . We 'r e v e r y p l e a s e d t o i n t r o d u c e t h i s f o u r t h p a n e l w h e r e
w e 'l l e x p l o r e t h e g l o b a l s e c u r i t y a n d p o l i t i c a l i mp a c t o f C h i n a ' s e n e r g y
c o n s u mp t i o n a n d a c q u i s i t i o n s t r a t e g i e s .
            We 'r e v e r y p l e a s e d t o w e l c o me t h r e e d i s t i n gu i s he d e xp e r t s t o
p r o vi d e t h e i r a na l ys i s o f t he i s s ue :
            We h a v e D r . J a me s H o l me s , w h o i s a n A s s i s t a n t P r o f e s s o r a t t h e
S t r a t e g y a n d P o l i c y D e p a r t me n t o f t h e N a v a l Wa r C o l l e g e i n N e w p o r t ,
Rhode Island. He is a graduate of Vanderbilt University and has a
P h . D . f r o m t h e F l e t c h e r S c h o o l o f L a w a n d D i p l o ma c y a t T u f t s
University.
            D r . T o s hi Y o s hi ha r a i s a l s o a n As s i s t a n t P r o f e s s or i n t h e
S t r a t e g y a n d P o l i c y D e p a r t me n t a t t h e N a v a l Wa r C o l l e g e . H e s e r v e d
p r e v i o u s l y a t t h e s a me d e p a r t me n t o r a s i mi l a r d e p a r t me n t i n t h e A i r
Wa r C o l l e g e i n M o n t g o m e r y , Al a b a ma , a n d c u r r e n t l y h i s r e s e a r c h
a g e n da f o c u s e s on g e o p ol i t i c s i n A s i a , C h i n a 's n a v a l s t r a t e g y a n d
J a p a n ' s ma r i t i me s t r a t e g y .
            And we have Mr. Michael Herberg, Research Director of the
E n e r g y Se c u r i t y P r o g r a m a t t h e N a t i o n a l B u r e a u o f A s i a n R e s e a r c h .
H e h a s 2 0 y e a r s e x p e r i e n c e i n t h e o i l i n d u s t r y i n s tr a t e g i c p l a n n i n g
r o l e s f o r A R C O , a n d h a s c o n t r i b ut e d t o w o r l d w i d e e n e r g y , e c o n o mi c
a n d p o l i t i c a l a n a l y s i s . S o t h a n k y o u f o r t e s t i f y i n g , a n d w e 'l l b e g i n
w i t h Dr . H o l me s , a n d w e w i l l t e l l y o u w h e n y o u h a v e t w o mi n u t e s a n d
o n e mi n u t e l e f t s o t h a n k y o u .



STATEMENT OF J.R. HOLMES, PH.D., ASSOCIATE PROFESSOR,
  STRATEGY AND POLICY DEPARTMENT, U.S. NAVAL WAR
         COLLEGE, NEWPORT, RHODE ISLAND

           DR. HOLMES:                T h a n k y o u f o r a l l ow i n g me t o a d d r e s s t hi s
g a t he r i n g . N e e d l e s s t o s a y , t h e vi e w s t h a t I w i l l v o i c e h e r e a r e n o t
necessarily those of the United States Navy, the Naval War College or
t h e D e p a r t me n t o f D e f e n s e .
           My purpose today is to venture a few thoughts about the kind of
s e a p o w e r C h i n a ma y b e c o me a s i t p u r s u e s i t s o v e r a l l g o a l o f e c o n o mi c
d e v e l o p me n t a n d i t s s u b o r d i n a t e g o a l s o f e n e r g y s e c u r i t y a n d s e a l a n e
s e c ur i t y .
                                                      - 96 -
             S t u d i e s o f C h i n e s e s e a p o we r o v e r t h e y e a r s h a v e t e n d e d t o
c o n c l u d e e i t h e r t h a t C h i n a w i l l c on t e nt i t s e l f w i t h f oc u s i n g o n e ve n t s
a s h or e a s i t h a s ov e r t he pa s t f e w d e c a d e s , k e e p i n g i t s a t t e n t i o n o n
events ashore and its attentions also on coastal waters or that it will
b u i l d a p o w e r f u l N a v y , p e r h a p s s y mme t r i c a l t o o u r o w n a n d v e n t u r e
o u t i n t o t h e P a c i f i c t o v i e f o r n a v a l s u p r e ma c y i n s o me c o mi n g d e c a d e .
             B y c o n t r a s t , I wi l l a r g u e t h a t C h i na i s t ur ni n g i t s na u t i c a l
e n e r g i e s t o t h e So u t h a n d t o t h e S o u t h w e s t a l o n g v i t a l ma r i t i me
c o m mu n i c a t i o n s t ha t pr o vi de t he s t u f f o f a m o d e r n e c o n o my . O n c e
B e i j i n g c a n ma n a g e t o s e t t l e e ve n t s i n Ea s t A s i a t o i t s o w n
s a t i s f a c t i o n , a s s e r t i n g c o n t r o l o v e r t h e C h i n a S e a s a n d T a i w a n wh e r e
t h e s e v i t a l ma r i t i me c o m mu n i c a t i o n s ru n , i t w i l l f e e l c o n fi d e n t e n o u g h
a n d i t w i l l h a v e e n o u g h r e s o u r c e s t o d e p l o y n a v a l me a n s i n S o u t h a n d
S o u t h e a s t A s i a a s t r i d e t h e s e v i t a l c o m mu n i c a t i o n s s h o u l d i t s e e f i t t o
do so.
             I f s o , w h a t f a c t or s w i l l s h a pe C h i n e s e t h i nk i n g a b o ut t he s e v i t a l
waters? First, and the subject of our hearing today, energy security,
w h i c h l e a d s t o a f oc u s o n s e a l a n e s e c u r i t y .
             Secondly, geopolitics. Geographical thinking is pronounced in
C h i n e s e p o l i c y a n d a c a d e mi c c i r c l e s . S o me a n a l y s t s e x t e n d t h e t wo
island chains that ring the Chinese coast all the way into the Indian
O c e a n e n c o mp a s s i n g G u a m a n d D i e g o G a r c i a , w h e r e A me r i c a n f o r c e s
are stationed.
             C h i n a i s a c ut e l y s e n s i t i v e o f I n d i a n p r e t e n s i o n s i n t h e I n d i a n
O c e a n r e g i o n i n pa r t i c u l a r , I n d i a 's f a v o r a b l e g e o g r a p h i c p o s i t i o n a n d
i t s a mb i t i o n s t o b e t h e p r e e m i n e n t p o we r i n S o u t h A s i a .
             A n d t h i r d l y , t h a t B e i j i n g i s c le a r l y c o n s c i o us t ha t t he U n i t e d
S t a t e s r e t a i ns i t s n a v a l d o mi n a n c e i n w a t e r s t ha t c o n ve y t h e s t u f f o f
C h i n e s e e c o n o mi c d e v e l o p me n t . N o l e s s a f i g u r e t h a n P r e s i d e n t H u
J i n t a o r ou t i n e l y s p e a k s o f t h e M a l a c c a d i l e m ma o r t h e M a l a c c a
p r e di c a me n t t h a t a r i s e s f r o m t h i s n a v a l d o mi n a n c e a n d i t s e c o n o mi c
repercussions.
             A t t h i s p o i n t , I s h o u l d i n t e r j e c t , t h i s a l l s o u n d s r a t h e r g r i m, b u t
a s a p a n e l o f s e n i o r e xp e r t s u p a t t h e N a v a l Wa r C o l l e g e s h a p i n g U . S .
ma r i t i me s t r a t e g y ha s c o nc l ud e d , n o na t i o n h a s a n y o b vi ou s i nc e nt i v e
at present to disrupt the flow of shipping or vital resources through
t h e s e w a t e r s . I w o u l d c a v e a t my a na l y s i s w i t h t h a t r a t h e r t h a n s o u n d
t o o g r i m a b o u t t he w h o l e s i t u a t i o n .
             N o n e t he l e s s , i t i s fa i r t o s a y t h a t C h i n a i s i n c r e a s i n gl y r e l uc t a n t
t o e n t r u s t t h e s e c ur i t y o f s h i p p i n g a n d t h u s i t s e c o n o mi c d e v e l o p me n t
to what it sees as the uncertain goodwill of the United States.
             S o w h a t c a n i t d o a s i t l o o k s t o t h e S o u t h a n d So u t h w e s t ? F i r s t ,
a s my c o l l e a g u e T o s h i Y o s h i h a r a w i l l s h o w i n a f e w mi n u t e s , C h i n e s e
o f f i c i a l s a r e a t t e mp t i n g t o b u i l d u p s o f t p o w e r i n r e g i o n s a d j o i n i n g
                                                       - 97 -
v i t a l s e a c o m mu n i c a t i o n s . U n t i l a n d u n l e s s Be i j i n g d e c i d e s t o a ma s s
h a r d n a v a l p o w e r , ma n i f e s t e d i n s hi p s a n d t h e u s u a l i mp l e me n t s o f
mi l i t a r y po w e r , i n S o u t h a n d S o u t h e a s t A s i a , t he s o f t p ow e r o r wh a t 's
b e e n c a l l e d " a s mi l i ng d i pl oma c y " a f f o r d s C h i na t h e a bi l i t y t o c ou r t
i n f l ue n c e n o w , t o e a s e c o nc e r n s t ha t a f u t u r e mi l i t a r y b u i l d - u p i n t h e
r e g i o n mi g h t p r o v o k e , a n d t o h e l p Be i j i n g b e g i n t o s t a k e i t s c l a i m t o
t h e s t a t u s o f t h e l e a d i n g g u a r a n t o r o f s e a l a n e s e c u r i t y i n t h e s e wa t e r s .
            How China's fellow Asian nations will receive China's charm
o f f e n s i v e r e ma i n s a n o p e n q u e s t i on a s T o s hi w i l l d i s c u s s i n a f e w
mi n u t e s .
            S e c o n d l y , C h i n a h a s b e g u n t o n e g o t i a t e b a s i n g a g r e e me n t s i n
S o u t h e a s t A s i a a n d i n p a r t i c u l a r S o u t h A s i a , t h e mu c h d i s c u s s e d
" S t r i n g o f P e a r l s . " I w o u l d a r g u e t h a t i t 's l a y i n g t h e g r o u n d w o r k o f
mi l i t a r y i n f r a s t r uc t u r e f or a f u t u r e bu i l d - u p of n a v a l po w e r i n t h e s e
regions, again, should Beijing see the need for such a build-up.
            T w o c a v e a t s a r e i n o r d e r . Fi r s t , w he t h e r t h e " S t r i n g o f P e a r l s "
r e pr e s e nt s a c o h e r e n t C hi n e s e s t r a t e g y t o me r e ma i n s a n o p e n q u e s t i o n .
Wh i l e C h i n e s e a n a l y s t s a n d p o l i c y ma k e r s h a v e a d o p t e d t h e l i n g o , i t 's
v e r y d i f f i c u l t t o f i n d i n t h e l i t e r at u r e r e f e r e n c e s t h a t w o u l d s u g g e s t
t h i s i s a c o n c e r t e d c a mp a i g n t o a d d t h i s c o mp o n e n t t o C h i n e s e s e a
power to its south.
            And for the second caveat, the value of these prospective bases
i s l e s s I w o u l d a r g u e t h a n i t mi g h t s e e m. G w a d a r i n w e s t e r n P a k i s t a n ,
which has garnered a lot of discussion, if you analyze the base
a c c or di n g t o t he M a h a ni a n i n d i c e s o f p o s i t i o n , s t r e n g t h a n d r e s o u r c e s ,
it becomes apparent that the position is quite perhaps not what, does
n o t a d d a s mu c h v a l u e a s y o u mi g h t t h i n k b e c a u s e t h e U n i t e d St a t e s
c a n o u t f l a n k G w a d a r s i mp l y b y b e i n g i n t h e P e r s i a n G u l f .
            Strength. It sits on a narrow peninsula. And resources seem
s c a n t . S o t h e p o r t w o u l d b e h i g hl y v u l n e r a b l e t o b o m b a r d me n t f r o m
t h e s e a . I t 's a l s o n o t a p p a r e n t t o me t h a t P a k i s t a n w o u l d p e r mi t t h e u s e
o f t h i s r e s o u r c e o n w h i c h i t s o w n e c o n o mi c d e v e l o p me n t h i n g e s i n w a r
t i me .
            T h i r d l y , a s a n e l e me n t o f C h i n e s e ma r i t i me s t r a t e gy , ma n y
C h i n e s e t h i n k e r s a n d p o l i cyma k e r s u r g e t he i r l e a de r s hi p t o b ui l d u p t he
final pillar, which Alfred Thayer Mahan discussed, of sea power,
n a me l y a p o w e r f u l o c e a n - g o i n g N a v y . T h i s n e e d n o t , I w o u l d a r g u e , b e
a N a v y t h a t c l o s e l y r e s e mb l e s o u r o wn . I t h i n k t h i s i s o n e p l a c e I
would take issue a little bit with most analyses.
            Wh a t w i l l b e s o me d e t e r mi n a n t s o f C h i n e s e s uc c e s s i n t he I n di a n
O c e a n ? O n t h e g r a n d s t r at e g i c l e v e l , f i r s t , a s s e r t i n g a t l e a s t a me a s u r e
o f c o n t r o l o v e r t h e C h i na S e a s a n d r e g a i ni ng c o n t r o l o f T a i w a n t o
B e i j i n g 's s a t i s f a c t i o n w i l l b e e s s e n t i a l t o a n y s o u t h e r n a n d
s o u t h we s t e r n s t r a t e g y .
                                                      - 98 -
             H o w B e i j i n g f a i r s i n t h i s e f f o r t w i l l c l e a r l y i nf l u e n c e C h i n a 's
a b i l i t y t o r e f o c u s e n e r g y i n S o u t h A s i a a n d So u t h e a s t A s i a .
             S e c o n d l y , C h i n a c o n f r o n t s a n o t h e r p ow e r a s i t mo v e s i n t o t h e s e
r e g i o n s t h a t h a s i t s o w n i d e a s a b o ut wh o s h o u l d b e n u mb e r o n e i n t h e
Indian Ocean. Namely, India. India holds considerable reserves, a soft
power of its own. Also, it has a powerful navy including aircraft
c a r r i e r s a n d i t h a s ma d e n a v a l d i p l o ma c y o n e o f t h e c o r e mi s s i o n s o f
i t s ma r i t i me f o r c e s s i g n i f y i n g i t s a p p r e c i a t i o n o f t h e v a l u e t h a t
ma r i t i me f o r c e s b r i n g t o d i pl o ma c y a n d s o l i d i f yi ng t h e n a t i on 's
reputation as a good neighbor.
             A n d t h i r d l y , t u r n i n g t o h a r d p o w e r , i f C h i n a c a n mo u n t w h a t t h e
M I T s c h o l a r B a r r y P o s e n wo u l d c a l l a c o nt e s t e d z o n e i n i t s ho me
w a t e r s , e v e n d e s p i t e i t s ov e r a l l i n f e r i o r i t y t o t h e U n i t e d S t a t e s , t h e n
y o u c o u l d c e r t a i n l y s e e I n d ia d o i n g t h i s , p u l l i n g t h e s a me f e a t o f f i n i t s
o w n h o me w a t e r s s h o u l d C hi n a a t t e mp t t o b u i l d u p h a r d n a v a l p o we r i n
I n d i a 's b a c k y a r d .
             N o w , mo v i n g d o wn t o t h e o p e r a t i o na l a n d f o r c e s t r u c t u r e l e v e l ,
j u s t t w o f i n a l o b s e r v a t i o n s a r e i n or d e r . Fi r s t , t o w h a t e x t e n t w i l l
p l a t f o r ms b u i l t o r a c q u i r e d fo r a T a i wa n c o n t i n g e n c y b e t r a n s f e r a b l e t o
a s t r a t e g y i n t h e I n d i a n O c e a n ? H ow f a r t h e s e p l a t f o r ms - - i t r e m a i n s a n
o p e n q u e s t i o n h o w e a si l y t h e s e t h i n g s c a n b e t r a n s f e r r e d t o a s o u t h e r n
strategy.
             A n d s e c o n d l y , a n a v a l b u i l d - u p n e e d no t l e a d t o a P L A N a v y t h a t
looks like our own aircraft carriers--perhaps not, and so forth. I would
b e w i l l i n g t o a d d r e s s t hi s f ur t h e r i n t h e r e ma r k s .
             A n d f i n a l l y , I w o u l d s i m p l y c l o se t h a t C h i n e s e c a p a b i l i t i e s w i l l
n o t ma t c h C h i n e s e i n t e n t i o n s i n t h e r e g i o n a n y t i me s o o n . I w o u l d
a r g ue t h a t C hi n a 's r e l a t i v e w e a k n e s s i n t hi s a r e a a f f o r d s Wa s h i n g t o n
a n d p e r ha p s N e w D e l h i a s w e l l t he a bi l i t y t o b e gi n f a s h i oni n g a
ma r i t i me p a r t n e r s hi p w i t h Be i j i ng t ha t h e l p s de f e n d mu t u a l i n t e r e s t s
a l o ng t he s e s e a l a ne s .
             Thank you.
[ T h e s t a t e me n t f o l l o w s : ] 6

     V I C E C H A I R M A N B L U M E N T H A L : T h a n k y o u v e r y mu c h . D r .
Yoshihara.

         STATEMENT OF PROFESSOR TOSHI YOSHIHARA
         ASSOCIATE PROFESSOR, STRATEGIC RESEARCH
       DEPARTMENT, U.S. NAVAL WAR COLLEGE, NEWPORT,
                        RHODE ISLAND


6
    Click here to read the prepared testimony of Dr. James R. Holmes
                                          - 99 -
            D R . Y O S H I H A R A : M e mb e r s o f t h e Co m mi s s i o n , t h a n k y o u v e r y
mu c h f o r i n vi t i n g me t o t h i s h e a r i ng . I t i s t r u l y a n h o n o r t o b e h e r e .
Wh a t I ' m a b o u t t o p r e s e n t i s my p er s o n a l v i e w a n d d o es n o t n e c e s s a r i l y
r e pr e s e nt t h e vi e w o f t h e N a v a l Wa r C o l l e ge , t h e U . S. N a v y or t he
D e p a r t me n t o f D e f e n s e .
            T h e p r e mi s e o f my a r g u me n t i s t h a t f o r c e f u l a d v o c a t e s i n C h i n a
are already looking beyond Taiwan as a nautical problem due to its
energy dependence and perceptions of increasing vulnerability to sea
lane disruption by hostile powers, particularly the United States.
            A t t h e mo me n t , C h i n a d o e s n o t h a v e t he w h e r e w i t h a l t o i n fl u e nc e
ma r i t i me e v e nt s wi t h i t s mi l i t a r y p o we r . C o n s e q u e nt l y , i t h a s r e l i e d
p r i ma r i l y o n e c o no mi c i n du c e me n t s a n d i t s g r o w i n g s o f t p o we r t o
s h a p e t he r e gi o n a l l i t t or a l e n v i r o n me n t , p a r t i c u l a rl y i n S ou t h e a s t As i a .
            My focus today is on how the Chinese have leveraged this soft
p o w e r t o c r e a t e f a v o r a bl e s t r a t e g i c c o n d i t i o n s t h a t mi t i g a t e
v u l n e r a b i l i t i e s t o s e a l a n e d i s r u p ti o n a n d c r e a t e o p p o rt u n i t i e s f o r i t s
l o n g e r - t e r m ma r i t i me a mb i t i o n s .
            C h i n a a l r e a d y b oa s t s a s i z a bl e le a d i n t h r e e k e y d i me n s i o n s o f
s o f t p o w e r i n S o u t h e a s t A s i a . T h e ap p e a l o f i t s c u l t u r e a n d h i s t o r y ,
i t s a p p a r e n t l y s u c c e s s f u l d e v e l o p me n t mo d e l , a n d i t s i n s i s t e nc e o n
n o n - i n t e r fe r e n c e h a v e a l l g ai n e d t r a c t i o n i n t h e r e g i o n .
            I t i s i n t h i s c o n t e xt o f w i d e s p r e a d g o o d w i l l t h a t C h i n a h a s s p u n a
h i s t o r i c a l n a r r a t i v e t o bo l s t e r i ts i m a g e a n d c r e d i b i l i t y o n t h e h i g h
s e a s . G i v e n t h e p a u c i t y o f C h i n a 's s e a b o r n e a c t i v i s m i n h i s t o r y , t h e
C h i n e s e ha v e l a t c he d o n t o a ma r i t i me f i g u r e t h a t h a s l on g f a s c i na t e d
o b s e r v e r s i n t h e We s t . A d mi r a l Zh e n g H e , w h o c o m ma n d e d s e v e n
v o y a g e s o f t r a d e a n d d i s c o v e r y i n S ou t h e a s t a n d S o u t h A s i a n a n d e v e n
E a s t A f r i c a n w a t e r s s i x c e n t u r i e s a g o , h a s b e c o me a k i n d o f a p o s t e r
c h i l d f o r C h i n e s e d i p l o ma c y .
            H i s e x p l o i t s ha ve e mp o w e r e d C hi n e s e di pl o ma t s t o s ha p e
r e g i o n a l e x p e c t a t i o n s o f C h i n a 's r e e n t r y i n t o t h e n a u t i c a l a r e n a .
I n d e e d , t o p l e a d e r s i nc l u d i n g P r e s i d e n t H u J i n t a o a n d P r e mi e r We n
Jiabao have repeatedly referenced Zheng He at public events to use the
p a s t a s a p r o l o g u e t o C h i n a 's r i s e .
            Wh a t 's t h e i r me s s a g e? F i r s t , C hi n a b o a s t s a p r o u d s e a f a r i n g
h i s t o r y a nd t h us C h i n a 's e nt r y i nt o t h e ma r i t i me d o ma i n i s n o t h i n g n e w
and not to be feared.
            S e c o n d , C h i n a 's t e c h n o l o g i c a l p r o we s s f a r s u r p a s s e d E u r o p e a n
c o u nt e r p a r t s i n i t s t i me , i mp l yi n g t ha t i t s n a v a l bu i l d- u p i s n ot a n
a n o ma l y .
            T h i r d , Z he n g H e 's v o y a g e s a r e i nv a r i a b l y p or t r a y e d a s pe a c e f ul
a n d b e n e v o l e n t , f i t t i n g i nt o C h i n e s e d e c l a r a t i o n s o f a p e a c e f u l r i s e
today.
            F o u r t h , o n a r e l a t e d p o i n t , C h i na ' s b e n i g n e n c o u n t e r s wi t h l o c a l
                                                     - 100 -
p o p u l a t i o n s a r e c o mp a r e d a g a i n s t t h e r a p a c i o u s n e s s o f We s t e r n
i mp e r i a l i s m.
            T h e b o t t o m l i n e , C h i n a i s a mo r e t r u s t w o r t h y s t e w a r d o f
ma r i t i me s e c ur i t y i n A s i a t ha n a n y p ow e r , e s pe c i a l l y t he U n i t e d St a t e s ,
could ever be.
            Wh a t a r e t h e o b j e c t i v e s o f t h i s me s s a g e ?                        They bestow
l e g i t i ma c y o n C h i n a 's n a v a l a s p i r a t io n s i n S o u t h e a s t a n d S o u t h A s i a ,
mo l l i f y i ng l i t t or a l n a t i o ns s k e pt i c a l o f C h i n e s e p r e t e ns i o ns a n d
u n d e r c u t s A me r i c a ' s c l a i m t o r u l e t h e w a v e s i n t h e r e g i o n .                          By
a s s u a g i n g r e g i o n a l a n x i e t i e s a b o u t Ch i n a 's r i s e , B e i j i n g i s s e e k i n g t o
f o s t e r p e r c e p t i o n s t h a t t h e n a t i o n 's r e t ur n t o t h e n a u t i c a l a r e n a i s n o t t o
b e f e a r e d b u t r a t h e r e mb r a c e d . T h i s i n e f f e c t c o u l d f o r e s t a l l U . S . o r
Asian opposition to its bid for sea power while averting the rise of a
b a l a n c i n g c o a l i t i o n t h a t mi g h t o p p o s e B e i j i n g 's i n t e r e s t i n s e c u r e
s h i p p i n g l a n e s a n d i t s d e s i r e p e r h a p s fo r r e g i o n a l p r i ma c y .
            B e i j i n g b e l i e v e s t h a t s u c h a p e r mi s s i v e ma r i t i me e n v i r o n me n t
w o u l d e na b l e C h i na t o e xt e nd i t s na v a l r e a c h wi t h gr e a t e r e a s e s ho u l d
i t s e e t he n e e d t o d o s o o v e r t h e l o n ge r t e r m f o r e n e r g y s e c u r i t y
purposes.
            Wh a t a r e t h e i mp l i c a t i o n s ? We l l , C h i n a i s c l e a r l y d e t e r mi n e d t o
e n t e r t h e w a t e r w a ys t o i t s i mme d i a t e s o u t h a n d e v e n t u a l l y t o t h e I n d i a n
O c e a n . C h i n a w i l l r e l y on s o f t p o w e r a n d o t h e r f o r ms of i n d uc e me n t s
u n t i l i t s mi l i t a r y c a p a bi l i t i e s ma t c h i t s l o ng e r - t e r m s e c ur i t y o b j e c t i v e s .
            This is having a clear effect on Southeast Asian nations who
a p p a r e nt l y w e l c ome t h i s me s s a g e a n d h a v e a l r e a d y a c q u i e s c e d t o
v a r i o u s C h i n e s e f or e i g n p o l i c y i ni t i a t i ve s .
            B u t , w e n e e d n o t i n f l a t e o r o ve rr e a c t t o t h i s s o f t p o w e r a c t .
China is hobbled by a critical deficit in its soft power. Its political
v a l u e s a r e a n a t h e ma t o m a n y i n t h e r e g i o n a n d u n d e r mi n e i t s
l e gi t i ma c y a n d c r e d i bi l i t y .
            F i n a l l y, t h e U n i t e d S t a t e s i s i n a p o s i t i o n t o c o n v e y a f a r
s t r o n g e r me s s a g e a s i t i s , i n p r a c t i c e , p r o d u c i n g r e a l t a n g i b l e ma r i t i m e
s e c ur i t y be n e f i t s t o t h e r e gi o n.
            I n c o n c l u s i o n , I 'd l i ke t o e n d w i t h a f e w f o l l o w - o n q u e s t i o n s .
F i r s t , i s s o f t p o w e r a z e r o s um g a me ? I n o t h e r w o r d s , a r e g a i ns i n t h i s
a r e a f o r C h i n a n e c e s s a r i l y a l o s s f o r t h e U ni t e d S t a t e s ? M y c ur r e n t
r e a d i n g i s t h a t t he C h i n e s e l e a d e r s hi p d o e s , i n f a c t , s e e s o f t p o w e r i n
g r e a t po w e r a n d c omp e t i t i v e t e r ms .
            S e c o n d , h o w u n c o n d i t i o n a l i s C h i ne s e s o f t p o w e r ? C h i n a h a s
d r a w n c l e a r l i n e s i n t h e S o u t h C h i na S e a , f o r e x a mp l e , p a r t i c u l a r l y
w i t h r e g a r d t o e n e r g y s e c u r i t y i s s ue s w h e r e s o ft p o w e r a p p a r e n t l y d o e s
n o t e xt e nd t o . R e c e nt s p a t s w i t h V i e t n a m s e e m t o c o n f i r m t h i s . T h i s
s u g g e s t s a t l e a s t s o me l e v e l o f b r i t t l e n e s s t o C h i n e s e s o f t p o w e r .
            T h i r d , t o w h a t e xt e nt i s t he s o f t p ow e r a n i n t e gr a l pa r t o f a
                                                       - 101 -
b r o a d e r ma r i t i me s t r a t e g y ? A r e t h e r e l i n ka g e s t o C h i ne s e a t t e mp t s t o
develop strategic ties and presence along the so-called "String of
Pearls"?
            A r e t h e Ch i n e s e c o n s c i o u s l y u s i n g t h e s e f o r a y s t o o p e n t h e w a y
f o r n a v a l p o w e r p r o j e c t i o n i n t o t h e I n d i a n O c e a n r e g i o n d o wn t h e
road?
            F o u r t h , I h a v e p r i ma r i l y f o c u s e d o n t h e s u p p l y s i d e o f s o ft p o w e r
from China. So it is worthwhile to study the recipients of soft power.
Given the diversity of the region, such analysis will necessarily have
t o d i s a g g r e g a t e t h e n a t i o n s i n t he r e g i o n . Ho w a r e So u t h e a s t A s i a n
s t a t e s e v a l u a t i n g Ch i n e s e s o f t p o w e r ?
            Are they really taking this message at face value? If so, do they
h a v e a P l a n B i f t h e y a r e wr o n g a b o u t C h i n e s e i n t e n t i o n s ? A n d i f n o t ,
w h a t k i n d o f a h e d g i n g s tr a t e g y a r e t h e y p u r s u i n g ?
            F i n a l l y , w h y i s t h e r e s u c h a s t a r k d i f f e r e n c e b e t we e n t h e
a b u n d a n c e o f s o f t p o w e r d y n a mi c s i n t h e S o u t h C h i n a Se a r e g i o n a n d a
c o mp l e t e a b s e n c e o f s o f t p o w e r i n t h e E a s t C h i n a S e a wh e r e C h i n a a n d
Japan have territorial disputes? Behind the disputes over international
l a w , e n e r g y r e s o ur c e s , t h e h i s t o r y q u e s t i o n , a n d a l s o o p e r a t i o n a l
c o n s i d e r a t i on s r e l a t e d t o Ta i w a n , a r e t h e r e b r o a d e r l i nk a g e s t ha t t i e
C h i n e s e d i p l o ma c y i n S o u t h e a s t A s i a t o N o r t h e a s t A s i a , p a r t i c u l a r l y
with regard to Japan?
            H o p e f u l l y, t hi s s e t o f p r e l i mi n a r y q u e s t i o n s wi l l e n g a g e s c h o l a r s
a n d pr a c t i t i on e r s a l i k e a n d f o r m a b a s e l i n e f o r f ur t h e r a na l ys i s .
            T h a n k y o u v e r y mu c h .
[ T h e s t a t e me n t f o l l o w s : ] 7
            VICE CHAIRMAN BLUMENTHAL: Thank you. Mr. Herberg.

       STATEMENT OF MR. MIKKAL E. HERBERG
RESEARCH DIRECTOR, ASIAN ENERGY SECURITY PROGRAM,
     THE NATIONAL BUREAU OF ASIAN RESEARCH,
              SEATTLE, WASHINGTON

          M R . H E R B E R G : L e t me s a y t h an k y o u a l s o t o t h e C o m mi s s i o n
f o r i n v i t i n g me t o s p e a k t o s u c h a n i mp o r t a n t g r o u p . I t 's a p l e a s u r e
a n d a n h o n o r . I ' v e b e e n a s k e d t o d i s cu s s a c o u p l e o f i s s u e s . O n e , w h a t
i s C h i na 's a p p r o a c h t o e ne r g y s e c u r i t y a n d i s t ha t i mp e d i ng o r
supporting energy cooperation globally?
          A n d s e c o n d , ma k e s o me c o m me n t s a b o u t C h i n a 's e n e r g y r e l a t i o n s
w i t h i t s c e n t r a l As i a n o v e r l a n d n e i g h b o r s i n p i p e l i n e i s s u e s a n d t h e
g e o p o l i t i c a l i mp l i c a t i on s o f t h o s e t w o .
          I 'l l s t a y i n my l a n e o n t h e s e t w o i s s ue s r a t he r t h a n ve nt u r e i n t o

7
    Click here to read the prepared statement of Prof. Toshi Yoshihara
                                          - 102 -
ma r i t i me i s s u e s , w h i c h c a n b e s t b e c o v e r e d b y t h e o t h e r t w o p a n e l s .
             E n e r g y s e c u r i t y , i t g o e s w i t h o u t s a y i n g i s a e x t r e me l y i mp o r t a n t
e c o n o mi c a n d p o l i t i c a l i s s u e f o r t he C h i n e s e l e a d e r s h i p .                 T h e y 'r e
d e s p e r a t e l y w o r r i e d t h a t e n e r g y s h o r t a g e s wi l l u n d e r mi n e e c o n o mi c
g r o w t h a n d t h e j o b c re a t i o n ma c h i n e , a nd t h a t 's w h a t ke e ps t h e
l e a d e r s h i p a w a k e a t n i g h t w o r r y i n g a bo u t t h a t j o b c r e a t i on ma c h i n e .
             T h e e n e r g y s u p p l y a n d t h e d e ma n d g a p i s s i g n i f i c a n t i n C h i n a
a c r o s s a l mo s t a l l fu e l s a n d t h e g a p i n o i l i s p a r t i c u l a r l y b u t i n t h e l o n g
r u n n a t u r a l g a s a n d e v e n c o a l s u p p l y s h o r t a g e s a r e g o i n g t o b e c o me
mu c h mo r e s i g n i fi c a n t .
             T h i s h a s l e d t o a p e r c e p t i o n , i f y o u t r y t o c a t c h t h e a t mo s p h e r e i n
B e i j i n g t ha t e n e r g y i n a s e n s e i s t o i mp o r t a n t t o b e l e f t e nt i r e l y t o t h e
ma r k e t s . E n e r g y i s t o o mu c h o f a s t r a t e g i c c o m mo d i t y d e t e r mi n i n g t he
d i r e c t i o n o f t h e C h i n e s e e c o n o my .
             China’s overseas strategy is based upon the perception that
t h e r e 's a g r e a t di s t r u s t o f m a r ke t s a nd t he a bi l i t y o f t he ma r k e t s t o
d e l i v e r r e l i a b l e s u pp l i e s a t r e a s o na bl e p r i c e s . T h e r e 's a p e r c e pt i on i n
B e i j i n g t h a t t h e U . S . c o n t r o l s g l o b a l o i l m a r ke t s o r h a s a g r e a t
i n f l u e n c e o v e r t h o s e ma r k e t s a n d mi g h t us e e n e r g y t o w e a k e n Ch i n a ,
contain China.
             Moreover, Beijing’s leadership feel like they're playing catch-up,
t h a t t h e i r n a t i o na l oi l c o mp a ni e s a r e n ot s t r o n g c o mp e t i t or s f o r t he b i g
i n t e r n a t i on a l o i l c omp a n i e s . A n d t he i r r e s p o n s e h a s b e e n t h i s g o - o u t
s t r a t e g y o r g o - o u t c a mp a i g n i s a b e t t e r t e r m f o r i t , w h i c h i s r e a l l y a
l o o s e l y c o o r d i n a t e d p r o g r a m o f i n v e s t me n t s b y t h e n a t i o n a l o i l
c o mp a n i e s ,           overland             pipeline           d e v e l o p me n t        proposals,           and
d i v e r s i f i c a t i o n o f s u p p l i e s g l o b a l l y . I w o n 't e la b o r a t e s i n c e i t h a s b e e n
d i s c u s s e d ma n y o t h e r p l a c e s .
             A l l t h e s e t h i n g s c o mb i n e d p r o v i d e a s t r o n g r a t i o n a l e f o r
i n t e r v e n t i o n b y t h e g o v e r n me n t i n t h e g l o b a l e n e r g y i n v e s t me n t
p r o c e s s , a n d g i v e t h e s t r a t e g y a v e r y me r c a nt i l i s t c a s t .
             T h e i mp l i c a t i o n i s , t h a t B e i j i n g ’ s e n e r g y s t r a t e g y h a s b e e n u p t o
n o w a r e l a t i v e l y g o - i t - al o n e a p p r o a c h , mu c h mo r e b i l a t e r a l t h a n
mu l t i l a t e r a l , a mu c h mo r e p o l i t i ci z e d a p pr oa c h t o e n e r g y s up p l y
s e c ur i t y i n t h e f ut u r e .             I t t e n de d t o p ol i t i c i z e t he gl o b a l ma r k e t
e n v i r o n me n t f o r s u p p l y s e c u r i t y , t o h e l p c o n t r i b u t e t o t h e z e r o s u m
a t mo s p h e r e , w e s e e p a r t i c u l a r l y i n A s i a o ve r c o mp e t i n g f o r s u p pl i e s .
I ' m a f r a i d t h e U .S . t o s ome e x t e nt h a s be e n p u l l e d i n t o t hi s mo r e
p o l i t i c i z e d a p p r o a c h , a s we l l .
             T h i s h a s me a n t a l i mi t e d c om mi t me n t b y B e i j i n g t o mu l t i l a t e r a l
i n t e r n a t i o n a l a p p r o a c h e s t o e n e r g y c o o p e r a t i o n . B e i j i n g ’ s d o me s t i c
a p p r o a c h t o e n e r g y p o l i c y a l s o h a s l i mi t e d p r o s p e c t s f o r e n e r g y
c o o p e r a t i o n w i t h o t h e r c ou n t r i e s o n e f f i c i e n c y a n d o t h e r r e f o r ms ,
b e c a u s e Be i j i n g h a s n 't f o c u s e d mu c h o n e f f i c i e n c y .
                                                      - 103 -
             I t hi n k t ha t 's w h e r e w e a r e t o d ay o r w h e r e B e i j i n g h a s b e e n o n
energy security strategy until recently. —However, I think there are
v e r y i mp o r t a n t s i g n s o f c h a n g e i n t h e i r a p p r o a c h t o w a r d a mo r e
c o o p e r a t i v e a p p r o a c h t o e n e rg y s e c u r i t y i n t e r n a t i o n a l l y .
             T h e r e a r e s e v e r a l r e a s o n s f o r t hi s .           First, there is growing
e v i de n c e t h a t B e i j i ng i s c o n c l u di n g t h a t t h i s e qu i t y s t r a t e g y,
ownership, the fixation on control of barrels is not going to give them
t h e ki n d o f e n e r g y s e c ur i t y t h a t t he y 'r e l o o k i n g f o r i n t e r ms o f s e c ur e
s u p p l i e s o f o i l . O i l d e ma n d i s s i mp l y r i s i n g t o o f a s t f o r t h e m t o k e e p
u p w i t h a s t r a t e g y f o c u s e d o n o w n e r s h i p a n d c o n t r o l . F o r e x a mp l e ,
d e ma n d f o r i mp o r t s o f o i l a r e r i s i n g a t f i v e t i me s t h e r a t e t h a t t h e y 'r e
a d d i n g e q u i t y b a r r e l s . S o t h a t 's f o c u s o n o w n e r s h i p r a t he r t h a n a c c e s s
i s s i mp l y n o t g o i n g t o w o r k , a n d t he y 'r e b e g i n n i n g t o r e a l i z e t h i s i n
Beijing.
             S e c o n d , t h e r e 's a r e a l i z a t i o n a mo n g e n e r g y p o l i c y a d v i s o r s i n
B e i j i n g t h a t t h e s e n a t i o n a l o i l c o mp a n y i n v e s t me n t s a b r o a d d o n 't
n e c e s s a r i l y n e e d e x t e n s i v e s t a t e s up p o r t a n d , mo r e o v e r , ma y n o t b e
s y n o n y mo u s w i t h s t a t e i n t e r e s t s a l l t h e t i me . T h e r e i s a g r o w i n g
p e r c e p t i o n t h a t t h e s e c o mp a n i e s a r e g e t t i n g i n p l a c e s t h a t c o mp l i c a t e
o t h e r i mp o r t a n t s t r a t e g ic r e l a t i o n s h i p s a n d i s s ue s , a n d mo r e o v e r , t h a t
t h e c o mp a n i e s d on 't n e e d t h e s u b si d i e s a n d e x t e n s i ve d i r e c t s t a t e
s u p p o r t t o b e c o m p e t i t i ve . Wh a t C h i n a r e a l l y n e e d s i s c o mp e t i t i v e o i l
n a t i o na l c o mp a n i e s a n d t hi s d o e s n 't r e q ui r e t h e e q ui t y s t r a t e g y t h e y
have been pursuing.
             T h i r d , t h e z e r o s u m a t mo s p h e r e o f c o mp e t i t i o n f o r e n e r g y
supplies is creating collateral problems in key foreign policy areas for
China, particularly in strategic relations with U.S and with Japan.
T h o s e a r e t h e t w o mo s t o b v i o u s c a s e s , a n d f r o m t h e p o i n t o f v i e w o f
t h e F o r e i g n M i n i s t r y a n d t he f o r e i gn po l i c y a nd s t r a t e gi c p o l i c y ma k e r s ,
t h e c o mp a n i e s a r e ge t t i ng C h i n a i nt o a l o t o f p l a c e s a n d a l o t o f i s s u e s
w h i c h a r e d a ma g i n g t h e s e c o l l a t e r a l r e l a t i o n s h i p s , w h i c h a r e v e r y
i mp o r t a n t f o r t h e m i n t h e l o n g r u n .
             A final factor is that there is a new focus in Beijing on energy
e f f i c i e n c y , c o n s e r v a t i o n , t e c h n o l o g y a n d t h e e n v i r o n me n t , a n d t h a t
o p e n s t h e d o o r f o r c o o p e r a t i o n i n ma n y w a y s w i t h t h e U . S . , J a p a n , t h e
I E A , a n d o t h e r s . I t ' s a d o o r t h a t s i mp l y w a s n 't v e r y o p e n i n t h e p a s t
b e c a u s e Ch i n a ’ s l e a d e r s h i p w a s n’ t f o c u s e d o n t h o s e i s s u e s .
             So I think there is a lot of evidence in China’s recent discussions
with the IEA, the bilateral energy and strategic economic dialogues
w i t h t h e U . S . , w i t h J a p a n a n d o t h e r c o u n t r i e s t h a t t h e y 'r e b e g i n n i n g t o
t a ke a m o r e c o o pe r a t i v e po s t ur e o ve r t i me t o mu l t i l a t e r a l i z e t h e i r
approach to energy security.
             I think it's a little premature to say Beijing has decisively
c h a n g e d i t s p r e v i o u s “ g o i t a l o n e ” me n t a l i t y o n e n e r g y s e c u r i t y , b u t I
                                                    - 104 -
t h i n k t h e y ' r e mo v i n g i n t ha t d i r e c t i o n v e r y c l e a r l y. T h e r e a l q u e s t i o n
i s t h e p a c e a t w hi c h t h e y a r e mo v i ng i n t hi s d i r e c t i o n, a n d t hi s i s
w h e r e I t h i n k i f t h e U . S . c a n e n g ag e mo r e e f f e c t i v e l y wi t h C hi na o n
o u r c o mmo n e n e r g y s e c u r it y c o n c e r n s , w e c a n e n c o ur a g e t ha t mo v e
t o w a r d s ma r k e t s o l ut i o ns a n d c o o pe r a t i o n a s a s o l ut i on t o t h e i r
concerns over energy security. So we need to redouble our efforts to
e n g a g e Ch i n a .
            A f e w w o r d s a r e i n o r d e r o n t h e i s s u e s r e l a t e d t o C hi n a a n d
C e n t r a l A s i a n o v e r l a n d p i p e l i n e d e v el o p me n t s a n d g e o p o l i t i c s . C h i n a
s e e s t he s e c o u n t r i e s , K a z a k hs t a n , C e n t r a l A s i a , R u s s i a , a s k e y s our c e s
of diversification for supply routes to reduce their dependence on
s e a b o r n e i mp o r t s f r o m t h e M i d e a s t , A f r i c a a n d o t h e r p l a c e s . Th i s i s
c l os e l y r e l a t e d t o t h e “ M a l a c c a d i l emma ” t h a t w a s me n t i o n e d i n e a r l i e r
t e s t i mo n y .
            For China, overland pipeline routes are a major potential
d i v e r s i f i c a t i o n o f s u p p li e s a n d B e i j i n g h a s b e e n w o r k i n g a s s i d u o u s l y
f o r t h e l a s t d e c a de t o t r y t o d e v e l o p e n e r g y t i e s w i t h C e n t r a l A s i a a n d
w i t h R us s i a . I t hi nk i t ’ s f a i r t o s a y t he y 'v e b e e n f a r mo r e s uc c e s s f u l
w i t h K a z a k h s t a n t h a n R u s s i a o n t h a t . T h e y c u r r e n t l y r e c e i v e r oug h l y
200,000 barrels a day of oil from Kazakhstan through a new pipeline to
C h i n a c o mp l e t e d i n 2 0 0 6 . T h a t wi l l g r o w t o 4 0 0 , 0 0 0 i n t h e n e x t f e w
years as the pipeline as expanded.
            T h e y h a v e a l s o s i g ne d a s t r a t e g i c e n e r g y a l l i a n c e w i t h
K a z a k hs t a n . C h i n a ’ s n a t i o na l o i l c o mp a n i e s n o w a c c ou n t fo r a q ua r t e r
o f K a z a k h s t a n ' s o i l p r o d u c t i o n c o n t r ol l e d t hr o ug h e q ui t y i n v e s t me n t s
b y t h e i r o i l c o mp a n i e s . S o t h e r e 's a s e r i e s o f s t r o n g e n e r g y t i e s a n d
this supports strong strategic ties between China and Kazakhstan.
            T h e r e a r e c l e a r l y t e n s i o n s i n t hi s e n e r g y r e l a t i o n s h i p , b u t s t i l l a
f a i r l y s t r o n g p a r t n e r s h i p h a s e me r g e d .
            A l t e r n a t i ve l y , S i n o- R u s s i a n r e l at i o n s h i p s o n e n e r g y h a v e b e e n
t o r t u r e d , u n d e r mi n e d b y s u s p i c i o n , a n d s t a l l e d b y c a p r i c i o u s R u s s i a n
e n e r g y p o l i c i e s . Ch i n a c u r r e n t l y d o e s r e c e i v e r o u g hl y 2 5 0 , 0 0 0 b a r r e l s
a d a y o f o i l b y r a i l f r o m E a s t S i b e r i a . B e i j i ng w o u l d l i k e a l o t mo r e ,
but the Russians have not been very cooperative. The oil pipeline that
w a s t o b e b u i l t ma y b e b ui l t t o t he C h i n e s e ; i t ma y n ot b e b u i l t .
            N a t u r a l g a s s u p p l i e s , w h i c h P r e s i d e n t P u t i n a n d t h e Ru s s i a n s
h a v e p r o mi s e d C h i n a o v e r a n d o v e r a g a i n , a r e s i mp l y n o t mo v i n g
f o r w a r d a s t h e R u s s i a n s f a i l t o mo v e o n b u i l d i n g t h e n e c e s s a r y
pipelines. There are other energy tensions between Russia and China
o v e r t h e i r c o mp e t i t i o n t o a c c e s s a n d c o n t r ol f u t u r e C e n t r a l A s i a n g a s
supplies.                C o n s e q u e n t l y , e n e r g y h a s b e c o me a s mu c h a s o u r c e o f
t e n s i o n b e t w e e n R u s s i a a n d C h i n a a s i t 's b e e n a s o u r c e o f n e w t i e s . S o
I t h i n k t h a t 's a v e r y t r o u b l e d r el a t i o n s h i p i n t e r ms o f e n e r g y .
            A s t o h o w mu c h o v e r l a n d p i p e l i n e r ou t e s c o ul d h e l p C hi n a me e t
                                                      - 105 -
i t s f u t u r e o i l i mp o r t n e e ds , i n t h e l o n g r u n , o n e t o t w o mi l l i o n b a r r e l s a
d a y c o u l d f l o w f r o m C e n t r a l A s i a a n d R u s s i a c o mb i n e d t o C h i n a . T w o
mi l l i o n ba r r e l s p e r d a y w ou l d b e t h e h i gh e n d o f t h e r e a s ona b l e
e s t i ma t e s . I t ’ s w o r t h c o n s i d e r i n g t h a t t h i s wo u l d b e 1 5 t o 2 0 y e a r s
f r o m n o w w h e n C h i n a w i l l b e i mp o r t i n g t e n t o 1 2 mi l l i o n b a r r e l s a d a y .
S o t he s c a l e o f C hi n a 's o i l d e ma n d g r o w t h a n d i mp o r t d e ma n d i s s u c h
t h a t a l t h o u g h C e n t r a l A s i a / Eu r a s i a c a n b e a h e d g e , i t c a n b e a p a r t o f
d i v e r s i f i c a t i o n e ffo r t , w i l l r e ma i n d e e pl y d e p e n d e n t o n s e a b o r n e
s u p p l i e s fr o m p a r t i c u l a r l y t h e M i d e a s t f o r t h e f o r e s e e a b l e f u t u r e .
            S o w i t h t h a t , I t hi nk I 'l l s t o p a n d l e a v e i t o p e n i t f o r q u e s t i o n s .
[The statement follows:]

                 P r e p a r e d S t a t e m e n t o f M r . M i k k al E . H e r b e r g
             R e s e a r c h D i r e c t or , A s i a n En e r g y Se c u r i t y P r og r a m ,
                       The National Bureau of Asian Research,
                                         Seattle, Washington

I first would like to thank the members of the Commission for the opportunity to testify to this important
group. It is an honor and a privilege.

I have been asked to speak about China’s approach to securing its energy supplies and implications. I will
focus mainly on the first two issues for our panel since there are two other panelists much more qualified to
discuss China’s maritime security policy:

    •    What is China’s approach to securing future energy supplies and does this encourage or impede
         cooperation among countries to promote secure and stable supplies globally?
    •    How have China’s relationships with it land-based neighbors been influenced by its increasing
         energy consumption and how will the development of oil and gas pipelines influence China’s
         access to petroleum? What new security challenges for China and the U.S. will arise from this
         development?

What is China’s Approach to Energy Security?
The global energy emergence of China reflects the enormous scale of its rising oil demand and Beijing’s
increasingly active strategic diplomacy designed to secure future energy supplies. China is now the second
largest oil consumer in the world and the third largest oil importer, accounting for roughly one-quarter of
the growth in world oil demand during the past decade. China’s three national oil companies (NOCs) have
become important new players on the global oil industry scene and China is now a major factor in world oil
demand and prices, production prospects in key energy-exporting countries, and the global oil industry
competitive rules of the game. Energy ties abroad are expanding Beijing’s diplomatic reach in key energy-
producing regions and China’s efforts to secure energy supplies and transport routes around the world and
are increasingly affecting the shape and tenor of China’s diplomatic ties and rivalries globally.

Energy security has become a critical political and economic concern for Beijing’s leadership for several
inter-related reasons. First, at a visceral level, China’s leaders fear that domestic energy shortages and
rising energy costs could undermine the country’s economic growth and thus seriously jeopardize job
creation. For a regime that increasingly stakes its political right to rule on economic performance and rising
standards of living, the threat of economic stagnation raises real risks of social instability, which could in
turn threaten the continued political monopoly of the Chinese Communist Party (CCP). Hence, energy
security is a strategic domestic political concern for the leadership. Beijing also has been alarmed, like

                                                   - 106 -
other oil importing governments around the world, by the huge rise in global energy prices over the past
four years and the increasing specter of long-term global oil “scarcity.”

China’s strong economic growth is spurring a concomitant rise in energy demand that is outstripping
domestic energy supply and infrastructure capabilities. This supply-demand gap will become more acute
over time and, in this regard, oil is a particularly sensitive problem. Over the next fifteen years, oil demand
is expected to roughly double. By 2020 China will likely import 70% of its total oil needs and will become
heavily dependent upon the Arabian/Persian Gulf to supply a large share of its future oil needs, and an
increasing share of China’s oil imports will have to transit vulnerable maritime choke points. Other
significant shares will be coming by tanker from Africa, by pipeline and rail from Russia, and by pipeline
from Central Asia. More than 50% of China’s oil will have to transit the Malacca Straits. Added to
insecurity over future tanker seaborne supplies, China has growing concerns about the reliability of Russia
as a future energy supplier as well as seeing itself in competition with Japan, South Korea, and India for
access to those potential Far East Russian energy supplies.

The same long-term trends are likely to hold for China’s natural gas needs, although import dependence
will probably accelerate only after 2010. The U.S. Department of Energy forecasts that natural gas imports
from Southeast Asia, the Persian Gulf, Africa, and Russia will account for 40% of China’s gas needs by
2025.

In short, China’s domestic energy supply-demand gap poses serious challenges to ongoing rapid economic
growth. As this problem becomes more acute over time, energy imports will play an increasing role in
China’s economy. Consequently, energy security has increasingly become an issue of the “high politics” of
national security, not just the “low politics” of domestic economic policy.

For Beijing today, energy security has become too important to be left entirely to the markets. In response,
Beijing has adopted an approach called the “Go-Out” strategy, a loosely coordinated range of efforts aimed
at reducing China’s vulnerability to future oil supply and price shocks. Briefly, the main elements of the
go-out strategy include a more active, energy-centric form of commercial diplomacy by Beijing’s leaders in
the key energy exporting regions, combined with a more commercially-driven expansion of China’s three
major NOCs—CNPC, Sinopec, and CNOOC—to secure equity investments in oil and gas fields abroad,
with an emphasis on physical control over oil supplies. Additionally, the NOCs are pursuing a diversified
slate of long-term crude oil supply market contracts and liquefied natural gas [LNG] supply contracts from
a broad range of exporters to meet future needs. A further aspect of this loosely coordinated effort is
Beijing diplomacy and NOC investments to promote development of new overland oil and natural gas
pipelines that will diversify future transport routes for energy imports.

China’s NOCs have acquired growing equity oil stakes and signed long-term crude oil supply contracts in
the Arabian/Persian Gulf, anchored by growing involvement in Iran’s oil and gas sector and more recently
by growing energy and diplomatic ties with energy giant Saudi Arabia. China’s focus on Central Asia has
centered on the acquisition of sizeable equity oil stakes in Kazakhstan that will be shipped via a long-
distance pipeline currently being built to western China. Russia has become an important crude oil supplier
through its rail shipments to northeastern China, and has plans to build both crude oil and natural gas
pipelines from East Siberia to China. China recently had its first success in establishing an equity oil
position in Russia through the recent acquisition of Urdmurtneftgas.

China’s NOCs have also built a large portfolio of oil stakes and supply contracts in Africa, centered on the
NOCs’ largest equity production position in Sudan’s oil industry, along with growing investments and
supply contracts with major West African oil exporters Nigeria and Angola. In the western hemisphere,
China owns growing equity oil stakes in Canada’s western heavy-oil belt and is building ties with
Venezuela. China has recently acquired equity investments through a major acquisition in Ecuador, and a
strategic energy alliance with Brazil’s Petrobras. In Southeast Asia, China’s energy acquisitions and supply
contracts are growing rapidly in Indonesian oil and LNG, Australian LNG and natural gas supplies, and
                                                 - 107 -
potential oil pipeline deals with Myanmar.

All told, China’s NOCs now have equity oil production overseas of roughly 500 thousand barrels per day
(MBD), equal to approximately 15% of China’s oil imports. Beijing has signed “strategic” energy alliances
of one sort or another with at least nine countries, including Iran, Sudan, Russia, Kazakhstan, Saudi Arabia,
Brazil, and Venezuela. However, while seeking to expand its equity oil and state-to-state (or NOC-to-NOC)
position, China still must rely on the open market for the vast majority of oil imports.

The decidedly mercantilist cast of the go-out strategy reflects China’s sense of weakness and vulnerability
regarding reliable access to energy supplies which has provided the rationale for significant state
intervention and support. This mentality has been strongly influenced by a general mistrust of global
energy markets. China’s leaders believe they are facing an unstable and unforgiving global energy market
that is dominated by sophisticated global oil companies, Western industrial countries, and unreliable and
unstable-oil exporting countries. The market alone cannot be counted on to provide reliable oil supplies at
reasonable prices. This helps explain Beijing’s fixation on physical control of oil supplies through direct
investment in the major producing countries, state-to-state cooperative agreements, and transport systems
in which China has a stake.

Second, distrust of energy markets has been aggravated by the perception that these markets are dominated
by the United States, a perception that overlaps with concerns that the United States is out to exploit
China’s energy weakness. U.S. strategic power in the Persian Gulf, the U.S. Navy’s control over critical
energy transport sea lanes, and what is perceived to be the power of the U.S. in the global oil industry and
institutions, drive a perception in Beijing that the United States exerts a powerful influence on global oil
prices and flows. Strident rhetoric in the United States during the 2005 CNOOC-Unocal episode has
reinforced the perception that the U.S. seeks to undermine China’s access to secure supplies and reinforced
suspicions in Beijing that the U.S. saw energy as an arena of strategic competition and that the U.S.
intended to use its strategic power and leverage over access to global energy supplies to weaken China.

Third, in terms of energy sector capabilities, Beijing feels it is working from a position of weakness and
must play “catch-up.” Excluded from the major institutions governing global oil cooperation (such as the
IEA) and forced to rely upon NOCs that are relatively new and weak competitors in the dynamic global oil
industry, China feels dominated by the large, powerful, and technologically sophisticated oil companies
that Beijing feels help to defend the interests of Western industrial countries.

All these factors combine to give a mercantilist character to China’s energy security drive and to Beijing’s
rhetoric about its energy security concerns.

Does Beijing’s Approach Encourage or Impede Cooperation?
As described above, Beijing’s focus has been on a relatively “go-it-alone” approach to meeting its oil
supply needs, with an emphasis on bilateral energy relations often including significant political, trade, and
aid components, and reliance on investments abroad by its own state-owned NOCs to meet future oil
security needs. This has certainly contributed to a more politicized and competitive environment, both
regionally in Asia as well as globally, regarding access to and control over long-term oil and gas supplies.
It has added to the zero-sum atmosphere that exists among today’s oil importing and consuming countries.
At the same time, Beijing has relegated regional or multilateral approaches to energy security to the back
burner and often simply “lip-service”. Moreover, in terms of domestic energy policy, Beijing until very
recently has focused very little attention on energy conservation, improving energy efficiency, or reducing
the rate of growth of oil and energy demand. This has limited prospects for energy cooperation with the
U.S. or other Asian countries on energy efficiency and demand management efforts.

However, China’s approach to energy security shows some signs of evolving gradually toward a more
cooperative posture for a number of reasons. Most importantly, there is a growing perception among key
policy advisors in Beijing that the current strategy is not fundamentally improving China’s energy security.

                                                - 108 -
Oil demand and need for oil imports is simply growing too quickly to be met effectively through equity
investments by China’s NOCs and bilateral deals with producing countries. Demand is growing roughly
500 thousand barrels per day (MBD) annually, almost all of which will have to be met with imported oil.
In five years China will be importing 6 million barrels per day (MMBD), compared to today’s 3.5 MMBD.
At best, China’s NOCs expect to add perhaps a total of 500 MBD to their equity production in that five
year period. The realization is growing that China’s future oil supplies and security are ultimately tied to
market access to crude oil rather than ownership of crude oil. This inevitably is leading policy advisors in
Beijing to suggest that policymakers begin focusing on the stability of the global oil market, stability of
supplies, and unimpeded access to long-term contract crude supplies as the key to China’s energy security,
rather than outright ownership and control. Global market stability is impossible without international
cooperation.

Related to this point, there is a growing sense in Beijing that the investment interests of China’s NOCs in
expanding abroad are not necessarily synonymous with China’s national energy security interests. For
example, the reality is that most of the oil produced by China’s NOCs abroad is not shipped back to China,
it is sold into the global market in the same way other global commercial oil companies do. The crude
shipped to China reflects its particular value in China’s refining system which needs mainly light, sweet
crude. There is growing discussion that, while China should have strong, globally-competitive national oil
companies commensurate with other global powers, China’s energy security interests do not require heavy
state support or unnecessarily controversial financial and diplomatic support for their NOCs.

In broader foreign policy terms, there also seems to be some recognition that the atmosphere of zero-sum
energy competition is creating serious and potentially unnecessary collateral foreign policy disputes with
key powers, most importantly the U.S. and Japan. While there remain suspicions about the long-term
energy in intentions of both the U.S. and Japan, there are concerns among those responsible for China’s
broader foreign policy interests that energy disputes are unnecessarily complicating these important
diplomatic relationships. Moreover, there appears to be some growing realization that as China seeks to
reassure other world powers that China’s rise will be peaceful and non-threatening to the world, that one
area where China can begin demonstrating a more a responsible posture, a “responsible stakeholder”, is in
the management of the global energy system.

A final key change that is occurring in Beijing is a growing recognition that domestic energy policy in
China, particularly regarding oil and coal use, needs to focus much more intently on energy conservation,
improving efficiency, and demand-side reforms. Energy policy has traditionally been heavily supply-side
driven, which partly explains the emphasis on accessing oil supplies abroad rather than addressing rapidly
rising demand domestically. This is changing rapidly toward an understanding that demand cannot
continue to grow on its current trajectory without disastrous environmental, infrastructural, and health
consequences. This opens the door widely to a new interest in international cooperation on energy.

The result of all these underlying trends is that there appears to be the beginnings of a sense in Beijing that
international energy cooperation is in China’s interest. For example, China has become gradually more
engaged and forthcoming with the IEA on its development of Strategic Petroleum Reserves. In recent
meetings it has suggested that it was favorably inclined on issues such as coordinating strategic stock
releases with the IEA during global market disruptions. This is new. Last December, China convened a
Ministerial-level meeting of the major Asian energy importing countries, including the U.S., Japan, South
Korea, and India to discuss common approaches to the importing countries’ energy security concerns. In
recent bilateral meetings with the U.S., both the SED and the Energy Bilateral, China has expressed
growing interest in energy cooperation with the U.S. on coal, natural gas, and oil issues. Beijing has also
recently begun make new efforts to resolve energy disputes with Japan, in particular a long-running dispute
over natural gas fields in the East China Sea. Recent China-Japan bilateral energy discussions also made
substantial new progress on cooperation on energy technology, efficiency, and energy/environmental
issues. In Southeast Asia, China has begun to show a more cooperative regional approach to maintaining
the security of regional sea lanes and the Straits of Malacca from the threats from piracy and terrorism.
                                                 - 109 -
It would be premature to say that China’s approach to energy security and energy cooperation has changed
decisively from its “go-it-along” pattern of the past decade. However, there are significant indications that
policy is evolving toward a policy that recognizes that the stability of the global market and reliable
transport flows are more important than trying to carve out its own secure energy supplies and supply-lines
unilaterally. As this develops, it is likely to lead to policies that increasingly support market stability
through global and regional energy cooperation. Consequently, it is vital that the U.S. re-double its efforts
to engage China across the board on energy cooperation internationally and bilaterally in order to
encourage the positive evolution of these policies.

Energy, Pipelines, and China’s Land-based Neighbors

China sees its land-based neighbors in Eurasia as key sources of oil and natural gas supplies that can help
diversify China’s growing dependence on these seaborne supplies of both oil and LNG. Russia,
Kazakhstan, and Turkmenistan are all potentially large suppliers of oil or natural gas to China and the rest
of Asia and the logistics of pipeline transport favor much of that oil and gas moving to China.

For this and many other strategic reasons, China has worked assiduously over the past decade to establish
closer energy and diplomatic ties with Russia and the key Central Asian energy rich states. Many analysts
have expected energy to become one of the main sinews to cement a strong set of strategic ties between
China and Russia and between China and Kazakhstan. For the U.S., the idea that China and Russian
strategic ties would strengthen as a result of a strong energy alliance raised questions of the implications of
Eurasia’s two major powers increasingly closely aligned in policies potentially seeking to reign in U.S.
power in influence in Asia and globally.

In reality, energy investment and trade have indeed helped cement improving strategic relations between
China and Kazakhstan. China’s NOCs have acquired several major oil production assets since the mid-
1990s and now control nearly 25% of Kazakhstan’s crude oil production. The first leg of a major oil
pipeline from western Kazakhstan to China’s western border was completed last year and is currently
delivering 200 MBD, with expansion plans to take the pipeline to 400 MBD over the next few years. China
also has signed a Strategic Energy Alliance with Kazakhstan. In the next 20 years, it is possible that up to
1MMBD of crude oil could flow to China by pipeline from Kazakhstan,. However, market drivers suggest
most of Kazakhstan’s crude is more likely to flow west through the CPC pipeline to the Black Sea with
new supplies from the Kashagan offshore field due to come in the next several years going into an enlarged
Baku-Ceyhan pipeline to the Mediterranean coast. Both sides have also recently discussed a potential
natural gas pipeline to China as Kazakhstan’s gas production ramps up over the next 5 years of field
development. All of this has led to a strong strategic relationship with Kazakhstan, encompassing energy
cooperation, military cooperation, and growing trade and investment.

However, the Sino-Russian energy relationship has been tortured and fraught with cross-currents of
competition, suspicion, and Russian energy policy paralysis and, hence, has done little to bring the two
Eurasian powers closer together, yet. China has been receiving 250 MBD of crude oil delivered by rail
over the past several years and these volumes are contracted to increase gradually, assuming Russia invests
in expanding its Far Eastern rail capacity. Russia has finally, apparently, begun to build a long-promised
oil pipeline from Angarsk to a point near the Chinese border, but details on that remain very sketchy. But
Russia’s repeated promises to build gas pipelines to China have been stalled by the re-centralization and re-
nationalization of much of the oil and gas industry during the Putin era which has paralyzed major new
projects in East Siberia and Sakhalin Island. This includes both Sakhalin Island projects and the Irkutsk
gas project in Eastern Siberia. Second, even where the Kremlin has had unchallenged control of gas
resources in Western Siberia, it has failed to follow-through on repeated promises, made as recently as
March 2006 by President Putin in Beijing, to build a major West Siberian gas pipeline to China. China has
also been rebuffed several times when it tried to make equity investments in producing oil assets in Russia,
only recently finally successful in gaining control of Urdmurtneftgas in a recent auction. Finally, Russia
                                                 - 110 -
has become a major obstacle to China’s hopes to access potential pipeline gas from Turkmenistan and
Kazakhstan. In a recent deal Russia has locked up large future supplies of gas from both countries to move
north to Russia, which is likely to leave insufficient gas supplies to justify a gas pipeline east to China.

So Sino-Russian energy relations have been rocky, at best, despite the natural strategic resource fit. Over
the long-run, however, the logic of more oil and gas moving from Russia to China are compelling and
volumes are likely to grow. The question is how much and at what pace of growth.

Therefore, in China’s straightforward energy security calculus, it is likely that Russia and Eurasia will be
important future suppliers of both oil and gas and should help diversify China’s sources of oil and gas
imports. However, these supplies are likely to only marginally reduce China’s dependence on seaborne oil
and gas imports. Most forecasts suggest a range of oil exports from Kazakhstan over the next 20 years of
possibly up to 1 MMBD, but more likely in the range of 500 MBD since most Kazakh oil exports are likely
to move west to markets in Europe. Russia could potentially export 1-2 MMBD to China in 20 years, but
most likely in the 1 MMBD range given the somewhat less robust oil reserve picture in East Siberia and the
Russian Far East. Most likely combined would be in the 1.5-2.0 MMBD range in 20 years. Alternatively,
on current trends, in 20 years China is likely to be importing roughly 10-12 MMBD worldwide. So an
important source of supply and an important source of transport diversification, certainly, particularly as it
will mainly be by overland pipeline rather than seaborne supplies. Another small increment of oil imports
could avoid the Malacca Straits through a proposed oil pipeline through Myanmar that may or may not get
built. Nevertheless, China’s dependence on seaborne supplies from the west, mainly the Middle East,
transiting the Malacca Straits will remain profound, accounting for a minimum of 70-75% of China’s oil
imports.


                  P A N E L I V : D i s c us s i o n, Q ue s t i o n s an d A n s we r s

             V I C E C H A I R M A N B L U M E N T H A L : T h a n k y o u a l l v e r y mu c h .
I 'l l t a k e t h e f i r s t q u e s t i o n . T h i s i s f o r D r . H o l me s a n d i f a n y o n e e l s e
h a s a n a n s w e r , I ' d e n c o u r a g e t h a t a s we l l .
             We h e a r d w h e n w e w e r e i n B e i j i n g a c o m mi t m e n t t o s o me f o r m
o f a n o c e a n - g o i n g b l u e w a t e r n a v y . We h e a r d i t f r o m t h e P L A . T h e y
w e r e q u i t e o p e n a b o u t i t i n t h e w ay s t h a t y o u d e s c r i b e d , s u c h a s
s u p p o r t i n g e c o n o mi c d e v e l o p me n t a n d s o f o r t h . T h e r e w e r e s t o r i e s
a f t e r w a r ds t ha t A dmi r a l K e a t i ng h ea r d a s i mi l a r me s s a g e . I w o n d e r
f r o m y o u r p e r s p e c t i v e , a n d o f c o u r s e i t 's a s p e c u l a t i v e q u e s t i o n , b u t i f
i t 's n o t t h e k i n d o f o c e a n - g o i n g n a v y t h a t w e h a v e o r t ha t we 'r e e v e n
u s e d t o , w h a t t y p e o f o c e a n - - w h a t a re t h e c h a r a c t e r i s t i c s o f t h a t oc e a n -
g o i n g n a v y ? Wh a t s o r t s o f t h i n g s wi l l w e s e e mo r e o f i n t e r ms o f
d e v e l o pi ng t ha t c a pa b i l i t y?
             DR. HOLMES:                     As Yogi Berra said, prediction is always a
d i f f i c u l t t h i n g a n d e s p e c i a l l y w h e n i n i n v ol v e s t h e f u t ur e . I f y ou s e e
C h i n a a c h i e v e w h a t I w o u l d d e s cr i b e a s i t s p r e mi e r o b j e c t i v e
g e o p o l i t i c a l l y , w h i c h w o u l d b e s e t t l i ng ma t t e r s w i t h i n t he f i r s t i s l a n d
c h a i n o f w h i c h T a i w a n o f c o u r s e i s t h e c e nt e r p o i n t t o i t s o w n
s a t i s f a c t i o n , u s i n g i t s c u r r e n t mi x o f c a p a b i l i t i e s , i f i n d e e d y o u d o s e e
C h i n a t u r n i t s a t t e n t i o n t o t h e s o u t h a n d t o t he s o ut h w e s t t o w a r ds t he
I n di a n Oc e a n, y ou w o u l d c e r t a i nl y s e e mo r e e mp h a s i s o n n uc l e a r

                                                      - 111 -
s u b ma r i n e s , c a p a b i l i t i e s t h a t a r e c a p a b l e o f l o n g e r e n d u r a n c e a t s e a
a l o ng t he s e s e a l i ne s o f c o mmu n i c a t i o n .
             L a n d - b a s e d t a c t i c a l a i r c r a f t a r e o f l i mi t e d u t i l i t y a r g u a b l y i n t h e
Indian Ocean. I would expect to see a big push on combat logistics
f l e e t , o i l e r s , a m mu n i t i o n s h i p s a n d t he o t h e r u n i t s t h a t a l l o w s h i p s t o
stay at sea longer, patrol these sea lanes.                                            My colleague Gabriel
C o l l i n s up a t t he C h i n a M a r i t i me S t ud i e s I n s t i t u t e h a s w r i t t e n a p a p e r
d e t a i l i n g C h i n a 's p l a ns t o a c t u a l l y c o n v o y s h i p p i n g b a c k a n d f o r t h
from the Persian Gulf to Chinese seaports, very intensive, very
i n t e n s i v e mi s s i o n , a s y o u mi g h t b e a b l e t o i ma g i n e i f y o u a s s i g n a
f r i g a t e or d e s t r o ye r o r s o me s o r t o f s ma l l c o m b a t t o e a c h s h i p me n t o f
oil.
             S o b a s i c a l l y t h a t w o u l d b e my p r e d i c t i on . W i t h r e ga r d t o t he
a i r c r a f t c a r r i e r q u e s t i o n w h i c h i s p r o b a b l y i m p l i c i t i n wh a t y o u w e r e
a s k i n g , I c a n t e l l y o u w h a t I w o u l d b u i l d i f I w e r e i n Be i j i n g . A s a
former Navy officer, I would certainly be looking at smaller carriers,
s u i t a bl e mo r e f o r p a t r ol l i n g t h e s e a l a n e s r a t he r t h a n s o me t h i n g mo r e
e q u i v a l e nt t o o ur l a r g e Ni mi t z c l a s s c a r r i e r s w h i c h ha v e be e n t h e
ma i n s t a y o f t h e U .S . N a v y f o r t he l a s t 2 0 , 3 0 y e a r s , w h i c h w a s t h e
b a s i s o f my p o i n t t h a t I d o n ' t n e c e s s a r i l y e x pe c t t o s e e a P L A N a v y
e me r g e t h a t 's g o i n g t o b e s y m me t r i c a l w i t h o u r o w n . I t                    could          look
quite different.
             Does that answer your question?
             VICE CHAIRMAN BLUMENTHAL: It does. The follow-on
w o u l d b e g i v e n s o me o f y o u r s k e p t i c i s m a b o u t t h e p o r t i n g a n d b a s i n g
r e l a t i o n s h i p s a l o n g t h e I n d i a n O c e a n , t h a t w o u l d s e e m t o me t o b e a
c r i t i c a l c o mp o n e n t o f s u c h a s t r a t e g y u n l e s s i t r e a l l y h a d t h e c a p a b i l i t y
to replenish at sea and that sort of thing.
             S o c a n y o u e x p a n d a l i t t l e b i t o u t a b o u t y o u r s k e p t i c i s m o f s o me
o f t h e r e l a t i o n s h i p s , d i p l o ma t i c a n d o t h e r w i s e , i n w h a t i s c a l l e d t h e
"String of Pearls" strategy?
             D R . H O L M E S : Y e s . P e r h a p s I d i d n 't e x p l a i n my s e l f v e r y w e l l .
I t h i n k I w a s a t t r i b u t i n g my s k e pt i c i s m m o r e t o a l a c k of e v i d e n c e t ha t
t h i s i s s ome t h i n g t h a t , c e r t a i n l y i f t he C h i n e s e a r e f ol l ow e r s o f A l f r e d
Thayer Mahan, which I would argue that a large and sizable school in
Beijing is, one of the components of sea power that Mahan always
u r g e d r i s i n g n a v a l p o w e r s t o a ma s s w a s b a s e s , f o r w a r d b a s e s , t o
s u p p o r t fo r w a r d o p e r a t i o n s o f t h e k i n d t h a t y o u 'r e r e f e r r i n g t o .
             I s i mp l y h a v e n ' t s e e n i n t h e l i t e r a t u r e a n y n o t i o n t h a t t h i s i s a
c o n c e r t e d e f f o r t . I t hi n k i t ' s mo r e o f a n o p p o r t u n i s t i c t h i n g . T h e
C h i n e s e a r e t a k i n g a d v a n t a g e o f t h e se o p p o r t u n i t i e s a s t h e y a r i s e , a n d
a s I t r i e d t o d o w i t h my a n a l y s i s o f G w a d a r , I w a s p o o - p o o i n g t h e
v a l ue o f t h e s e a s s e t s a s n a v a l b a s e s e v e n i f t h e y d o h a v e s u c h a
s t r a t e g y i n mi n d .
                                                        - 112 -
           P e r h a p s To s h i mi g h t w a n t t o c o m me n t o n t h a t a s w e l l .
           VICE CHAIRMAN BLUMENTHAL:                                         Q u i c k l y b e c a us e w e 'r e
r u n n i n g o u t o f t i me .
           DR. YOSHIHARA: Just very quickly, I think that throughout the
1 9 9 0 s t h e d e b a t e a b o u t t he C h i n e s e N a v y w a s k i n d o f a s t a l e o n e w h i c h
w a s a f a l s e d i c h o t o my t h a t i f t h e C hi n e s e w e r e n o t i n f a c t b u i l d i n g a
b l u e w a t e r n a v y t h e n i t mu s t f o r e v e r b e b o u n d t o a c o a s t a l n a v y , a n d I
t h i n k t h a t t h a t 's k i n d o f a f a l s e d i c h o t o my . I t h i n k i t ' s p o s s i b l e t h a t
C h i n a w o u l d b u i l d s o me k i n d o f a h y b r i d c a pa b i l i t y t ha t D r . H o l me s
h a s me n t i o n e d t h a t w o u l d e n a b l e i t t o d o t h e t h i n g s i t n e e d s t o d o ,
w h i c h i s p r i ma r i l y S L O C d e f e n s e . I t h i n k t o u n d e r s t a n d t h i s y o u h a v e
to start with what the Chinese have today.
           T h e C h i n e s e a r e we l l e q u i p p e d t o c r e a t e t h e s o - ca l l e d c o n t e s t e d
z o n e w i t hi n t he f i r s t i s l a n d c h a i n s t r e t c h i n g f r o m J a p a n d o w n t o t h e
Philippines.               In other words, to conduct sea denial, sea control
o p e r a t i o n s a l o n g Ch i n a 's c o a s t .
           I f y o u l oo k a t t he c a p a bi l i t i e s , mo s t o f t h o s e c a p a bi l i t i e s a r e
l a n d- b a s e d . I n o t he r w o r ds , t h a t a ct u a l l y mi g h t b e a w a y f o r u s t o u s e
a p r o p e r b e n c h ma r k t o me a s u r e C h i n e s e p r o g r e s s i n b u i l d i n g a f l e e t f o r
S L O C d e f e n s e , a n d I w o u l d a r g u e t h a t b e c a u s e mo s t o f t h e a s s e t s f o r a
contested zone are land-based. They still have quite a way to go
b e f o r e t h e y c a n h a v e t h o s e k i n d s o f l o n g - r a n g e ma r i t i me
reconnaissance or replenishment that would enable it to conduct those
k i n d s o f mi s s i o n s t h a t Dr . Ho l me s me n t i o n e d .
           Thank you.
           V I C E C H A I R M A N B L U M E N T H A L : T h a n k y o u . C o m mi s s i o n e r
F i e d l e r wa s n e x t .
           C O M M I SS I O N E R F I E D L E R : I h a v e t w o q u e s t i o n s . I w a n t t o
s e e i f I u n d e r s t o o d y o u c o r r e c t l y . I t h i n k i t wa s D r . H o l me s . I f t h e
C h i n e s e w e r e t o de v e l o p a mo r e r o bu s t So u t h e r n S e a s s t r a t e g y , n a v a l
growth strategy, did you say that they had to have Taiwan in order to
a c c o mp l i s h t ha t ?
           DR. HOLMES: Yes, sir. That is my analysis, and I think I'm
speaking for Dr. Yoshihara who has coauthored with me on this matter
a s w e l l . M y v i s i on o f i t i s t h a t r a t h e r t ha n s u r g e o ut i nt o t h e P a c i f i c
f o r s o me s o r t o f my t hi c a l b a t t l e w i t h t h e U . S . N a v y f o r s u p r e ma c y i n
t h e Pa c i f i c , w h a t C h i n a r e a l l y n e e ds t o d o , a n d I b e l i e v e i t i s i n t e n t o n
doing, is regaining control, if not physical control, then at least the
ability to operate freely around this first island chain of which Taiwan
f o r ms t h e mi d p o i n t . I f y o u g o b a c k i n t o h i s t o r y , G e n e r a l M a c A r t h u r
b a c k i n 1 9 5 0 r e f e r r e d t o Ta i w a n a s a n u n s i n k a b l e a i r c r a f t c a r r i e r .
D e a n A c h e s o n , Se c r e t a r y o f S t a t e A c h e s o n r e f e r r e d t o i t a s t h e
c e n t e r p o i n t o f t h e A me r i c a n d e f e n s e p e r i me t e r , a v e r y k e y s t r a t e g i c
point.
                                                   - 113 -
            M y a n a l ys i s i s t h a t C h i na i s a tt e mp t i ng t o b a s i c a l l y f or m a ho l d
s t r a t e g y i n E a s t A s i a s o t h a t i t c a n t u r n i t s a t t e n t i o n t o mo r e p r e s s i n g
ma t t e r s , n a me l y t h e f l o w o f v i t a l e n e r g y r e s o ur c e s , t o w h i c h
necessarily, as Mr. Herberg said, will come from the South.
            C O M M I SS I O N E R F I E D L E R : I h a v e a s e c o n d q u e s t i o n f o r y o u ,
s i r . A n y b o d y c a n j u mp i n . I w a n t t o ma k e a g e n e r a l s t a t e me n t , a n d s e e
w h e n w e r e a c h a c r i t i c a l p o i nt t h a t c o ul d r e s ul t i n mi l i t a r y a c t i o n
a l t e r n a t i ve s t o s ol ve t he pr o bl e m.
            S o C h i na 's g r o w i n g r a p i d l y . W e 'v e h e a r d a l ot a b o ut i t s e n e r g y
u s e . I don 't r e me m b e r a l l t he n u mb e r s. I t 's s t r i k i n g me a s e x p o n e n t i a l
g r o w t h . We a r e g r o w i n g . Eu r o p e h a s n e e d s . Br a z i l h a s n e e d s . P r e t t y
soon there's a scarcity, and then people want to get theirs. Done any
projections on that?
            M R . H E R B E R G : I d o n ' t d o t h o s e k i n d o f e s t i ma t e s my s e l f . T h e
b e s t c o n s i s t e n t f o r e c a s t s o n l o n g - t er m o i l s u p p l y a n d d e m a n d w o u l d b e
f r o m t h e I E A 's b i - a n n u a l W o r l d E n e r g y O u t l o o k s a n d t h e D O E 's a n n u a l
i n t e r n a t i on a l e n e r gy f o r e c a s t .
            I d o n ' t b e l i e v e t h a t t h e r e i s an y t i p p i n g p o i n t o u t t h e r e t h a t y o u
r e a c h w he r e t hi s s e n s e o f c o mp e t i t i on s p i l l s ov e r i nt o d i r e c t c on f l i c t .
T h e s u p p l y a n d d e ma n d p i c t u r e g l o b a l l y i n o i l i s g o i n g t o r e ma i n v e r y
t i g h t , v e r y p r e c a r i o u s a t l e a s t f o r t he n e x t t w o o r t h r e e y e a r s or mo r e .
I c o u l d i ma g i n e s o me e a s i n g i n t h a t t i g h t n e s s b e y o n d t h a t .
            B u t i f w e r e ma i n i n a $ 7 0 k i n d o f w o r l d w h e r e w e a r e f o r o i l ,
w h e r e e v e r y c o u n t r y a n d g o v e r n me n t c o n t i n u e s t o b e d e e p l y c o n c e r n e d
a b o u t w h e r e t h e i r f u t ur e s u pp l y i s g o in g t o c o me f r o m, i t w i l l c o n t i n u e
t h i s a t mo s p h e r e o f s c a r c i t y , w h i c h i s a l r e a d y i s a l r e a d y d e e p l y
e n t r e n c h e d i n p e o p l e 's t h i n k i n g .
            M y s e n s e i s i t 's g o i n g t o l e a d t o a g r e a t d e a l o f d i p l o ma t i c
jousting and tension, but an outright conflict over barrels strikes me as
f a r mo r e d a ma g i n g t h a n w o r k i n g ou t mu l t i l a t e r a l w a y t o ma n a g e t he
t i g h t n e s s . T h a t 's w h y I t h i n k i t 's s o i mp o r t a nt t o g e t Ch i n a , I n d i a a n d
t h e s e o t he r c o ns ume r s i n t o t h e I E A g l o ba l i ns t i t ut i on s o r a l i g ne d w i t h
t h e m i n s o me w a y s o t h a t e v e r y b o d y i s f o c u s i n g o n t h e s a me t h i n g
w h i c h i s t h e s t a b i l i t y o f t h e g l o ba l ma r k e t p l a c e , n ot t r y i n g t o c a r v e
t h e i r p a r t i c u l a r c h u n k o f b a r r e l s fr o m t h e ma r k e t f o r t h e i r o w n
s e c ur i t y .
            V I C E C H A I R M A N B L U M E N T H A L : Y o u s t i l l h a v e t i me .
            C O M M I SS I O N E R F I E D L E R : T h e r e a s o n I r a i s e d t h e q u e s t i o n i s
t h a t y o u a n d o t h e r s h a v e s a i d t h a t t h e Ch i n e s e g o v e r n me n t h a s t o w o r r y
a n d w o r r i e s d e e p l y a b o ut t h e j o b c r e a t i o n ma c h i n e a n d e n e r g y i s a k e y
c o mp o n e n t i n i t s a b i l i t y t o g e n e r at e , c o n t i n u a l l y g e n e r a t e ma s s i v e
n u mb e r s o f j o b s , a n d t h e g e n e r a t i o n o f j o b s i s s e e n a s a k e y f a c t o r i n
w h a t i s k n o w n a s s o c i a l s t a b i l i t y , w h i c h i s t o me a n t h e c o n t i n u e d
s u r vi v a l of t h e P a r t y a s t h e pr e d o mi n a n t f o r c e i n t he c o un t r y .
                                                    - 114 -
            S o t h a t 's a c t u a l l y t h e r o o t o f my q u e s t i o n . S o w h e n t h e y h a v e
i n t e r r u p t i o n s , i t 's a l i t t l e d i f f e r e n t t h a n g a s l i n e s i n W a s h i n g t o n a n d
New York that we had in the United States because the survival of the
g o v e r n me n t i s n o t a t s t a k e . R i g h t .
            I j u s t w o n d e r i f a n y b o d y h a s s t u d ie d t h a t , p r o j e c t s i t , t h i n k s
a b o u t i t , c a l c u l a t e s t h e t i p p i n g p o i n t ? I 'l l a d d r e s s i t m o r e t o t h e
mi l i t a r y gu y s i n t h a t s e n s e .
            M R . H E R B E R G : T h e l i n c h p i n i n t hi s i s pr i c e . A s t he ma r k e t
g e t s t i g h t e r , p r i c e s g o u p . T h i s i s t h e ma r k e t . B a r r e l s a r e a l w a y s
a v a i l a b l e o n t h e i n t e r n a t io n a l ma r k e t a t t h e ma r k e t p r i c e , a n d t h i s i s
w h a t t h e C h i n e s e d o n 't r e a l l y u n d e r s t a n d w e l l a n d t h e I n d i a n s d o
s o me w h a t b e t t e r . B u t f r a n k l y ma n y p e o p l e a n d g o v e r n me n t s d o n 't
seem to understand this.
            T h e b a r r e l s a r e a l wa y s a v a i l a b l e a t t h e ma r k e t p r i c e . I f i t 's $ 9 0 a
b a r r e l , t he n t h a t 's t h e pr i c e . B a r r e l s w i l l be a v a i l a b l e . Wh a t C h i n a
fears is, and what you're talking about is a pre-1970s vision of the
g l o b a l o i l ma r k e t w h e r e s u p p l y l i n e s w e r e v e r y r i g i d . I f s u p p l i e s g o t
t i g h t , s o me b o d y d i d n 't g e t b a r r e l s . I n t o d a y 's ma r k e t w i t h f u t u r e s
ma r k e t s , i n t e r n a t i o na l e xc h a ng e s a r o u n d t h e w o r l d , p r i c e s r e s p o n d i n a
nanosecond.
            B a r r e l s a r e a l w a y s a v a i l a b l e a t t he m a r k e t p r i c e . S o i t ' s n o t l i k e
s o me b o d y w o n 't g e t t h e i r b a r r e l s . T h e o n l y c a s e h e r e w h e r e t h i s i s a n
i s s u e i s i f s o me o n e w e r e t o t r y t o d e p r i v e C h i n a o f i t s b a r r e l s i n a
T a i w a n c o n f r o n t a t i o n , t ha t t h e n w o u l d b e a v e r y s e r i o u s i s s u e f o r
C h i n a . B u t i n a n o r ma l n o n - w a r c i r cu ms t a n c e , b a r r e l s a r e a v a i l a b l e o u t
t h e r e a t t h e p r i c e , a n d t h a t ' s w ha t t he C h i ne s e a r e e v o l v i n g t o w a r d s
understanding better.
            V I C E C H A I R M A N B L U M E N T H A L : C o m mi s s i o n e r H o u s t o n .
            C O M M I SS I O N E R H O U S T O N : T h a n k s t o a l l o f y o u fo r b e i n g
h e r e t h i s a f t e r n o o n . We r e a l l y a p p r e c i a t e y o ur t e s t i mo n y . I h a v e a
q u e s t i on a b o ut t he C h i n e se N a v y a n d e n e r g y s e c u r i t y n o t n e c e s s a r i l y i n
t h e i r b a c k y a r d . We ' v e h e a r d s o r t o f a n e c d o t a l e v i d e n c e o f m i l i t a r y
b u i l d - u p , I r a n b u i l d i n g u p a r o u n d t h e St r a i t o f H o r mu z t h r o u g h w h i c h a
w h o l e b u n c h o f o i l g o e s t o e v e r y bo d y e v e r y d a y , a n d t h a t C h i n a h a s
s u p p l i e d e i t h e r c a s h o r t h e e q u i v a l e n t b o a t s i n t h e St r a i t o f H o r mu z f o r
Iran, and that really does present a problem for us, in particular, in our
o w n e n e r g y s e c u r i t y i f I r a n d e c i d e d t o mi s b e h a v e a n d c l o s e d o w n t h e
S t r a i t o f H o r mu z u s i n g C h i n e s e ma t e r i a l s .
            Have you assessed this or studied this issue at all and if you
h a v e , w h a t d o y o u t h i n k C h i n a 's i n t e n t i s t h e r e ? I s i t s o r t o f a
d i p l o ma t i c mo v e w i t h I r a n o r i s i t t o p r o t e c t t he i r o w n oi l s u p p l y a n d
how worried should we be about it?
            D R . Y O S H I H A R A : I ' l l t a k e a s t a b a t t hi s j us t f r o m a b r o a d e r
g e o p o l i t i c a l p e r s p e ct i ve . I f yo u r e c a l l , i n t he 1 98 0 s , S a u di A r a bi a h a d
                                                     - 115 -
w a n t e d c e r t a i n a d v a n c e d we a p o n r y fr o m t h e U n i t e d S t a t e s w h i c h t h e
U n i t e d St a t e s q u i c k l y t u r n e d d o w n . T h e Sa u d i s t h e n t u r n e d t o t h e
C h i n e s e a n d t h e Ch i n e s e w e r e v e r y wi l l i n g t o p r o v i d e me d i u m- r a n g e
b a l l i s t i c m i s s i l e s t o S a u d i A r a b i a t ha t i n vo l ve s C hi n e s e c r e w s on t he
ground.
             So I think that the Chinese do see opportunities of that kind,
w h e t h e r i t 's t h r o u g h a r ms s a l e s o r f r o m e c o n o mi c i n d u c e m e n t s .
E s s e n t i a l l y , i n a k i n d o f g e o p o l i t i c a l ma n e u v e r , v i s - à - v i s t h e U n i t e d
S t a t e s , a n d I t h i n k t h a t t h e c o n n e c t i o n i n t e r ms o f t h e c o mp e t i t i o n w i t h
t h e U ni t e d S t a t e s i s t h a t t h e r e i s a p e r c e pt i o n t h a t t h a t r e gi on i s
e s s e n t i a l l y d o mi n a t e d b y t h e U n i t e d S t a t e s , a n d s o t h a t t h e C h i n e s e
n e e d t o d o w h a t e v e r t h e y c a n e s s en t i a l l y t o c o u n t e r b a l a n c e A me r i c a n
i n f l u e n c e , t o t h e e x t e n t t h a t i t c a n, a n d a s w e 'v e s e e n , t h e i r v e n t u r e s
i n t o A f r i c a a n d s o o n a n d s o f o r t h w i t h f a i r l y r e pu g na n t r e gi me s i s
r e a l l y e s s e n t i a l l y t r y i n g t o c i r c u mv e n t A me r i c a 's d o mi n a n c e i n t h e
Persian Gulf.
             S o f r o m a g e o p o l i t i c a l p e r s p e c t i ve , I t h i n k i t ma k e s s e n s e f o r t h e
Chinese to do what it can to basically its ability to open up a
secondary theater in a way in that region.
             Thank you.
             DR. HOLMES: I would only add that if you look down on the
o p e r a t i o n a l l e v e l , I t h i nk t h e I r a n i a n s c o u l d , i f y o u l o o k a t w h a t t h e y
h a v e , t h e y c o u l d p e r h a p s c l o s e t h e S t r a i t o f H o r mu z f o r a l i mi t e d
a mo u n t o f t i me . I h a v e v e r y fe w d o u b ts t h a t w e c o u l d f o r c e t h e S t r a i t s
in fairly short order.
             H a v i n g s a i d a l l t h a t , c l e a r l y t he r e wo u l d b e a s e r i o u s s h o c k t o
t h e w o r l d e c o n o mi c o r d e r e v e n f r o m a b r i e f s h u t d o w n . S o t h a t 's - -
             C O M M I SS I O N E R H O U S T O N : T h o s e a r e v e r y g o o d a n s w e r s , b u t
i s t h e s h or t a n s w e r t h a t t he C h i n e se a r e a c t i v e i n p r o v i d i n g ma t e r i a l s ,
s h i p s , w h a t e v e r , t o t h e I r a n i a n s f o r t h e S t r a i t o r y o u 'r e n o t a w a r e o f
a n y o f t h a t a c t i vi t y i n pa r t i c ul a r ?
             D R . H O L M E S : A s T o s h i p o i n t e d o ut , t h e C hi ne s e o ve r t h e y e a r s
have been very, very cognizant of the ability or of the capacity of
w e a p o n s a l e s i n t h e r e g i o n p r o v i d e t h e m t o a ma s s a d i p l o ma t i c , n o t
o n l y d i p l o ma t i c i n f l u e n c e , b u t o f c o u r s e n o w , u n d e r t he c i r c u ms t a n c e s
M r . H e r b e r g t a l k e d a b o u t , g u a r a n t e e d s u p p l i e s o f o i l , t h e a bi l i t y t o
develop the Iranian oil sector and so forth.
             S o , s u r e , I w a s i n t h e f i r s t G u l f W a r a n d we f o u n d w e w e r e
a l w a ys o n t h e b u s i ne s s e n d o f C h i n e s e - b u i l t mi s s i l e s . S o i t 's n o t a n e w
thing.
             C O M M I SS I O N E R H O U S T O N : T h a n k y o u v e r y mu c h .
             V I C E C H A I R M A N B L U M E N T H A L : C o m mi s s i o n e r Vi d e n i e k s .
             HEARING COCHAIR VIDENIEKS: This is a question for Dr.
Yoshihara. A lot has been written recently about a joint 1,000-ship
                                                     - 116 -
N a v y t o p a t r o l t h e s e a s , a n d t h e r e w a s a l o t o f d i s a g r e e me n t o n i t ,
w h e t h e r i t ' s o v e r l y f o r ma l o r n o t .
            Also, the Chinese obviously have this strategy of the "String of
P e a r l s ." I s t h e r e a n i n h e r e n t c o n f l i c t i n t h a t t h e " St r i n g o f P e a r l s "
s t r a t e g y t o me s o u n d s mo r e o r l e s s l i k e i t 's a u n i l a t e r a l t y pe o f t h i n g ,
a n d o b v i o u s l y t h e j o i n t n a v y , 1 , 0 0 0 s h i p n a v y , i f i t 's a f e a s i b l e c o n c e p t
even, is a cooperative effort.
            Wi l l y o u p l e a s e , a n y o f y o u , t a l k a b o u t t h a t a l i t t l e b i t b e c a u s e I
t h i n k t h e r e 's a c o n fl i c t , b u t i t ma y n o t b e .
            D R . Y O S H I H A R A : I t h i n k C h i n e s e r e a c t i o n s t o t he Pr ol i f e r a t i o n
S e c u r i t y I n i t i a t i ve , f o r e x a mp l e , i t s d e e p r e l u c t a n c e bo t h fr o m a n
i n t e r n a t i on a l l e ga l p e r s pe c t i v e , bu t a l s o f r o m a g e o p ol i t i c a l
p e r s p e c t i v e , p r o v i d e s u s a w i n d o w i n t o C h i n e s e t h i nk i n g a b o u t n a v a l
cooperation.
            I t h i nk y ou 'r e r i g ht . I t hi n k t h e w a y t he C h i ne s e h a ve d e ve l o pe d
t h e i r p h y s i c a l f o r wa r d p r e s e n c e t h r o ug h t h e " St r i n g o f P e a r l s ," I t h i n k
i s s e e n i n c o mp e t i t i v e t e r ms r a t he r t h a n i n c o o p e r a t i v e t e r ms .
            I w o u l d s u s p e c t t h a t t h e C h i ne s e w o u l d p r o b a b l y n o t l o o k u p o n
t h e 1 , 0 0 0 s h i p n a v y w i t h mu c h h a p p i n e s s , I w o u l d s a y , a n d i f y o u t h i n k
a b o u t C h i n e s e r e a c t i o n s - - a n d I 'v e men t i o n e d t h i s i n t h e p a p e r - - w h e n
A d mi r a l D e n n i s B l a i r p r o p o s e d t h e Se c u r i t y Co m mu n i t i e s c o n c e p t , f o r
e x a mp l e , t h e C hi n e s e v e r y qu i c kl y q ue l l e d t h a t b y p r e s s u r i n g S o u t h e a s t
A s i a n n a t i o n s b e h i n d t h e s ce n e s t o e s s e nt i a l l y r e j e c t t ha t pr o p os a l .
T h e r e a r e s u s p i c i on s t h a t i n t e r ms o f S o u t h e a s t A s i a n r e a c t i o n s t o t h e
R e g i o n a l S e c u r i t y M a r i t i me I n i t i a t i v e , w h i c h i s a f a i r l y i n n o c u o u s - - i t
w a s mi s q u o t e d i n t h e p r e s s - - b u t i t w a s a f a i r l y i n n o c u o u s i n i t i a t i v e t o
s h a r e i n f o r ma t i o n o n t r a ns n a t i o na l t h r e a t s , a n d K u a l a L u mp u r a n d
J a k a r t a r e a c t e d v e r y n e ga t i v e l y t o t h a t , a n d I w o u l d s u s p e c t t h a t p a r t o f
t h a t r e j e c t i on w a s i n p a r t i n c o r p or a t i ng s o me o f C h i n a 's o w n ma r i t i me
c o n c e r n s i n t h a t r e g i o n , w h i c h i s n o t t o g i v e a dd i t i o n a l e x c u s e s f o r t h e
U n i t e d St a t e s t o ma i nt a i n a mo r e p e r ma n e n t p r e s e n c e i n t h e M a l a c c a
Strait.
            HEARING COCHAIR VIDENIEKS:                                        All right.          So this is a
p r o p o s a l b y o u r a dmi r a l s - -
            DR. YOSHIHARA: That's correct.
            H E A R I N G C O C H A I R V I D E N I E K S : - - t h a t ma y n o t b e fa v o r a b l y
r e c e i v e d b y o u r p e o p l e a n d a l s o t he PR C ?
            DR. YOSHIHARA: That's correct.
            DR. HOLMES: Sir, I think the Chinese are very reluctant to do
a n y t h i n g t h a t w o u l d s e e m t o r a t i f y A me r i c a n , c o n t i n u e d A me r i c a n
n a v a l d o mi n a n c e i n t h e ir b a c k ya r d, o r e ve n a s s u mi ng s o me s o r t o f
ma r i t i me p a r t n e r s h i p d i d e me r g e , t h e y w o u l d b e r e l u c t a n t t o s e e m t o
a s s e n t or t o a c q ui e s c e i n t h e U n i t e d St a t e s h o l d i n g t he s e n i o r p o s i t i o n
in such a partnership.
                                                      - 117 -
            VICE CHAIRMAN BLUMENTHAL:                                          Thank you.               C h a i r ma n
B a r t h o l o me w .
            C H A I R M A N B A R T H O L O M E W:                      Thank you and thank you,
g e n t l e me n , f o r a v e r y i n t e r e s t i n g t e s t i mo n y . A s a l wa y s , t h e r e a r e s o
ma n y i s s u e s t h a t c o me u p , i t ' s d i f f i c ul t t o k n o w w h e r e t o s t a r t a s k i n g ,
b u t I g u e s s I 'm g o i ng t o a s k a mi l i t a r y q u e s t i on , f i r s t , w h i c h i s o n t h i s
w h o l e " S t r i n g o f P e a r l s " c o n c e p t , I 'v e h e a r d f r o m a f r i e n d i n Sr i La n k a
r e c e nt l y t h a t t h e Ch i n e s e a r e b u i l d i ng a b a s e i n t h e s o u t h e r n p a r t o f S r i
Lanka, and I wondered if you guys had heard anything about this?
            I h a d n o t h e a r d a b o u t i t a n y w h e r e e l s e . I t 's v e r y di f f i c ul t w he n
y o u l o o k a t t h e ma p n o t t o s e e s o me s o r t o f s t r a t e g y t a k i n g p l a c e wh e n
y o u s e e p l a c e s t h a t t h e y a r e p u t t i n g b a s e s . Ha v e y o u h e a r d a n y t h i n g
a b o u t a b a s e i n Sr i L a n k a ?
            D R . H O L M E S : N o t s p e ci f i c a l l y . I f I c o u l d c l a r i f y , I t h i n k n e ws
r e p o r t i n g o n t h e " S t r i n g o f P e a r l s " h a s b e e n a t a d mi s l e a d i n g . S o i f
y o u l o o k a t t h e b a s e i n G w a d a r , w h i c h h a s I t h i n k o c c a s i o n e d mo s t o f
t h e d e b a t e s , a l o t o f t h i n g s h a v e b e e n d o n e . I f y o u d o s o me t h i n g a s
s i mp l e a s g o t o t he We b s i t e t h e Pa ki s t a ni go ve r n me n t ma i n t a i n s , i t 's
q u i t e c l e a r t h a t t h e p r i ma r y p u r p o s e o f t h e dr e d gi n g i n t he c h a n ne l a n d
b u i l d i n g o f a l l t h e s e f a c i l i t i e s i s e co n o mi c . T h e P a k i s t a n i s a r e c l e a r l y
e x p e c t i n g t h a t t o b e c o me o n e o f t h e i r me g a p o r t s a n d a r e l o o k i n g t o i t
p r i ma r i l y f o r e c o n o mi c s , b a s i c a l l y a s a n o u t l e t f o r t r a de , a l s o
potentially to allow China to transship oil over land.
            S o , y e s , i t c o u l d s e r v e a mi l i t ar y p u r p o s e a t s o me t i me i n t h e
f u t u r e , b u t I w o u l d n ' t e x p e c t t h a t t o b e a n i m m e d i a t e p r o s p e c t . I d o n 't
k n o w a b o u t S r i La n k a i n p a r t i c u l a r .
            DR. YOSHIHARA: No.
            MR. HERBERG: No.
            C H A I R M A N B A R T H O L O M E W: O k a y . I ' m g o i n g t o s w i t c h f r o m
t h e m i l i t a r y a s p e c t t o p o l i t i c i z a t i o n . M r . He r b e r g , y o u me n t i o n e d
a b o ut a mo r e p o l i t i c i z e d a n d c o mp e t i t i v e e n v i r o n me n t , a n d I w a s
w o n d e r i n g i f y o u c o u l d e l a b o r a t e a l i t t l e b i t o n w h a t y o u me a n b y a
mo r e p o l i t i c i z e d e n v i r o n me n t ?
            M R . H E R B E R G : Wh a t y o u s e e a c r o s s A s i a , a mo n g s t t h e b i g
c o n s u me r s , J a p a n , I n d i a , C hi n a , t o s ome e x t e nt S o u t h Ko r e a , i s t h a t
t h i s s e ns e o f s c a r c i t y , t ha t e a c h c o u n t r y f e e l s l i k e i t h a s t o s p o n s o r i t s
o w n c o m p a n i e s t o g o o u t a n d g e t ph y s i c a l e q u i t y s u p p l i e s a n d b u y
f i e l ds f o r o i l s u p pl i e s t o , i n t h e or y , b r i n g b a c k h o me t o f e e d t h e h o m e
e c o n o my .
            T h e C h i ne s e ha v e b e e n t h e b i g ge s t pl a y e r i n t hi s pr o c e s s , b u t t h e
o t h e r A s i a n g o v e r n me n t s a r e c o n t r i b u t in g t o t h a t a t mo s p h e r e a s w e l l ,
w h e r e e ne r g y s up pl i e s b e c ome a p o l i t i c a l c o m mo d i t y , b e c o me a k e y
s t r a t e gi c g o a l , a n d a c c e s s t o t h os e s up p l i e s b e c o me s a s t r a t e gi c
c o mp e t i t i v e a r e n a . Y o u 'r e s e e i n g t h e i mp a c t o f t h a t i n ma n y w a y s ,
                                                     - 118 -
particularly in China-Japan, relations today, but also in China-India
relations as well, where the geopolitics of these suspicions and
r i v a l r i e s s p i l l s o v e r i n t o t h i s c o mp e t i t i o n f o r s u p p l i e s .
             C o mp e t i t i o n f o r s u p p l i e s i s n o t a r e a l i t y ; i t 's a n i l l u s i o n b e c a u s e
t h e g l o b a l o i l ma r k e t i s o n e b i g p o o l o f o i l . So i f y o u t a k e l e s s o u t o f
t h i s e n d o f t h e p o o l , y o u c a n t a k e mo r e o u t o f t h a t e n d . S o i t 's b a s e d
u p o n a d e e p mi s p e r c e p t i o n o f t h e wo r l d o i l ma r k e t , b u t a t t h e s a me
t i me i t 's mo t i v a t i ng r e a l a c t i o n s , a n d i n t h e p r o c e s s i s c r e a t i n g n e w a n d
u n n e c e s s a r y t e n s i o n s a mo n g t h e A s i a n s t a t e s . T h e b i l at e r a l i z a t i o n o f
e n e r g y t i e s , t h r o w i n g g o v e r n me n t a i d i n t o t h e p a c k a g e t o t r y t o g e t
a d v a nt a ge , i s a l s o a k e y c h a r a c t e r i st i c o f t h e p o l i t i c i z a t i on I 'm t a l ki n g
about.
             C H A I R M A N B A R T H O L O M E W: I s s o me o f t h i s mi s p e r c e p t i o n
based on the differing idea of ownership versus access?
             M R . H E R B E R G : E x a c t l y . A n d t he C h i n e s e I t h i n k a r e mo v i n g
f r o m o w n e r s h i p a n d c o n t r o l t o a n a c c e s s v i e w . Wh a t w e a l l w o r k
through the IEA and through international cooperation on energy, is
f o c u s e d o n t h e s t a b i l i t y o f o n e g l o b a l ma r k e t a n d a c c e s s t o t h o s e
supplies that's critical to all of us.
             O n e k e y i s s u e i s t he a v oi d a nc e o f a d i s r u p t i o n o f P e r s i a n G u l f o i l
s u p p l i e s t o t h e g l o b a l ma r k e t , f o r e x a mp l e . W e a l l h a v e a c o m mo n
i n t e r e s t i n t h a t , i n c l u d i n g t h e U . S . a n d C h i na S o I t h i n k a c c e s s i s t h e
i s s u e ; i t 's n o t o w n e r s h i p a n d c o n t r o l .
             B u t s t i l l C h i n a , i n p a r t i c u l a r , an d J a p a n s t i l l t o s o me e x t e n t , a n d
e v e n S o u t h K o r e a , s t i l l f a l l b a c k i n t o t h i s k i n d o f a p r e - 1 9 7 0 me n t a l i t y
a n d i t 's c r e a t i n g t hi s c o mp e t i t i ve a t mo s p h e r e .
             C H A I R M A N B A R T H O L O M E W: B u t i f y o u t h i n k t h a t y o u c a n
l o c k u p t h e s u p p l y , t h e n t h e r e i s n ' t a mo d e l o r a p a r a d i g m o f c o m mo n
i n t e r e s t . D o y o u t h i n k t h a t t h e r e 's e n o u g h o f a s i mi l ar u n d e r s t a n d i n g
o r c o n c e p t i o n o f t he w h o l e t h i n g , t h a t w e c a n b a s e a n i n t e r p r e t a t i o n o f
w h a t 's h a p p e n i n g o n t h a t ?
             MR. HERBERG:                            I think that is dawning on Chinese
p o l i c y ma k e r s , i n p a r t i c u la r . T h e p r o b l e m i s w h e n y o u v i e w i t i n t h e s e
k i n d o f m e r c a n t i l i s t t e r ms , b a l k a n i z e d , my s u p p l y , b e g g a r t h y n e i g h b o r
approach, it leads you to one vision of supply sucurity, which is
c o mp e t i t i v e .        Wh a t I t h i n k B e i j in g p o l i c y m a k e r s a re b e g i n n i n g t o
understand is if they turn Sudan into their own little filling station, it
me a n s t he y 'r e b u yi ng l e s s We s t A f r i c a n o i l , s o t ha t 's mo r e o i l a va i l a b l e
t o a l l t h e o t h e r c o n s u me r s .
             C H A I R M A N B A R T H O L O M E W: P r e s u mi n g t h a t t h e d e ma n d d o e s
n o t g o u p a t t h e s a me t i me .
             MR. HERBERG: Right.
             C H A I R M A N B A R T H O L O M E W: Y o u 'r e p r e s u mi n g a l e v e l e d o f f
o f d e ma n d .
                                                      - 119 -
             M R . H E R B E R G : Y o u 'v e g o t g r a d u a l l y i n c r e as i n g d e ma n d , a n d
t h e k e y q u e s t i o n h e r e i s g l o b a l s u p p l y . We 'r e b a l a n c i n g o f f t h a t g l o b a l
supply picture.
             C H A I R M A N B A R T H O L O M E W: R i g h t .
             MR. HERBERG: So that's really our key problem is that OPEC
and these other producers are not increasing supply fast enough to
me e t r i s i n g w o r l d d e ma n d . B u t o n a v e r a g e , w o r l d o i l d e ma n d h a s n o t
b e e n g r o w i n g t h a t f a s t r e l a t i v e t o h i s t o r i c a l c on d i t i o n s , a n d s o t h i s i s
not about getting my barrels here and you get your barrels there. It all
c o me s o u t o f t h e s a me b i g p o o l .
             B u t t h e pe r c e pt i o n i n As i a i s v e r y mu c h s t i l l i nf l u e n c e d b y t hi s
w e n e e d t o g e t o u r b a r r e l s , a n d t hi s i s p a r t of t h e c o mp e t i t i o n ov e r
s u p p l i e s t h a t c o me s f r o m $ 7 0 o i l p r i c e s .                Moreover, widespread
d i s c u s s i o n a b o u t “ p e a k o i l ” a n d ot h e r t hr e a t s t o s u p pl y i n s t i l l t hi s f e a r
a b o u t w h e r e wi l l e a c h co u n t r y g e t i t s s u p p li e s . Wh e n y o u ' r e i n t h e o i l
i n d u s t r y , y o u s e e t h i s i s j u s t o n e b i g p o o l , t a k e a l i t t l e mo r e h e r e , i t
me a n s a l i t t l e l e s s t h e r e .         T h e p o o l d o e s n 't g e t a f f e c t e d , b u t t h e
p o l i t i c a l p e r c e pt i on o f t h i s , a n d f r a n k l y s o me o f t h e U n o c a l - C NO O C
d e b a t e h e r e i n Wa s h i n g t o n , D . C . f e l l i nt o t h i s c a t e g o r y , t h a t t h e U . S . i s
g o i n g t o h a v e c e r t a i n o f o ur s u p pl i e s d e p r i v e d f r o m u s b e c a u s e o f t h i s
a c q u i s i t i o n a n d t h e i r o w n e r s h i p a n d c o n t r o l . I t j u s t me a n s t h e y ' r e
b u y i n g l e s s We s t A f r i c a n o i l a n d l e s s V e n e z u e l a n o i l a n d l e s s N o r th
Sea oil.
             T h a t 's t h e w a y i t ul t i ma t e l y s o r t s ou t . I t 's p r i c e ne u t r a l . Th e
g l o b a l s u p p l y a n d d e ma n d b a l a n c e d r i v e s p r i c e s , b u t n o t w h o t a k e s
which barrel out of which end of the pool.
             C H A I R M A N B A R T H O L O M E W: R i g h t . T h a n k y o u .
             V I C E C H A I R M A N B L U M E N T H A L : T h a n k y o u . C o m mi s s i o n e r
Shea.
             H E A R I N G C O C H A I R S H E A : T h a n k y o u v e r y mu c h f o r y o u r
t e s t i mo n y . I j us t ha v e a p u r e mi l i t a ry q u e s t i on . I w a s wo n d e r i n g i f t h e
t w o d oc t or s c o ul d e d u c a t e m e a l i t t l e b i t a n d g i v e me a p r i me r o n t h e
c a p a b i l i t y o f t h e I n d i a n N a v y a n d a s s e s s t h e I n d i a n N a v y 's c a p a b i l i t i e s
v i s - à - v i s t h e P L A N?
             C H A I R M A N B A R T H O L O M E W: I n t w o mi n u t e s .
             DR. HOLMES: I think the Indians, my analysis was predicated
i n p a r t o n B a r r y P o s e n 's n o t i o n o f t h e c o n t e s t e d z o n e , n a me l y , j u s t t o
b o i l i t d o w n t o a s o u n d b i t e , n a me l y , t h a t c o u n t r i e s h a v e a h o me c o u r t
a d v a n t a g e i n t h e i r o w n b a c k y a r d s . T h e y 'r e o b v i o u s l y c l o s e t o t h e
t h e a t e r o f a c t i o n . T h e y h a v e mor e m a n p o w e r . T h e y k n o w t h e a r e a
including things like the underwater geography better and so on and so
forth.
             I f y o u l o o k a t t h e I n d i a n N a v y n o w , i f y o u s e e a f o r c e t h a t 's , I
g u e s s , i t 's r o u g h l y c o mp a r a b l e t o w h a t C h i na ha s o ut t h e r e . I f y o u p u t
                                                     - 120 -
t h e m t o g e t h e r i n t he mi d d l e o f t h e I n d i a n O c e a n , t w o f o r ce s g o i n g a t i t
i n s o me s o r t o f M a h a n i a n T r a f a l g a r - t y p e c l a s h . T h e I n d i a n s h a v e
a i r c r a f t c a r r i e r s . T h e y 'v e o p e r a t e d t h e m f o r a l o n g t i me , o f w h i c h t h e y
take great pride in.
            You certainly would not liken them to our own nuclear powered
a i r c r a f t c a r r i e r s . T h e r e a r e a f e w p r o b l e ms . T h e y h a ve h a d a l o t o f
d i f f i c u l t y p u t t i n g t o s e a a n u n d e r s e a n u c l e a r d e t e r r e n t ma n i f e s t e d i n
n u c l e a r b a l l i s t i c m i s s i l e s u b s . T h i s h a s b e e n a s p o t o f s o me c o n t e n t i o n
i n N e w De l hi f o r s o me t i me .
            N o w w h a t e l s e ? T h e I n d i a n s h a v e h a d a h a b it o f b u y i n g a
h o d g e p o d g e o f f o r e i g n - s u p p l i e d mi l i t a r y e q u i p me n t . A n y t h i n g w h o ' s
s e r v e d i n u n i f o r m k n o w s i t 's v e r y d i f f i c u l t t o ma k e e q u i p me n t s u p p l i e d
n o t o n l y b y t w o d i f f e r e n t c o mp a n i e s b u t b y t w o n a t i o n s w o r k t o g e t h e r
w e l l . S o t h i s h a s b e e n a b i t o f a p r o b l e m f o r t h e m.
            So I guess the overall synopsis would be that the Indian Navy is
v e r y c a p a b l e . I t h i n k i t 's g e t t i ng mo r e c a p a b l e . T h e I n d i a n s h a v e
c l e a r l y s e t o ut t o pu t t o s e a a n a t i on a l ma r i t i me f o r c e . Th e y 'r e t r yi n g
to break down bureaucratic stovepipes between the Navy and the Coast
G u a r d i n t h e s e r v i c e o f t h e s e n a v a l d i p l o ma c y m i s s i o n s , a n d I a c t u a l l y
f i n d i t r a t h e r i mp r e s s i ve t he w a y t h e y 'v e p u t n a v a l p o w e r a t t h e s e r v i c e
of national foreign policy.
            Can I add anything to that?
            H E A R I N G C O C H A I R S H E A : V e r y g o o d . Dr . Y o s h i h a r a ?
            D R . Y O S H I H A R A : I w o u l d o n l y a d d s o r t o f f r o m a mo r e s e a
p o w e r t h e o r y p e r s p e c t i v e , t h e d e b a t e h a s a l w a y s b e e n wh a t k i n d o f a
n a v y d o y o u w a n t t o b u i l d ? D o y o u w an t t o b u i l d a w el l - b a l a n c e d n a v y
or would you like to build a niche navy? And I think at the present
mo me n t , a s I 'v e s a i d , be c a us e o f C h i n a 's c o n c e r n o ve r T a i w a n , C h i n a
has very consciously built essentially a niche navy to create the so-
c a l l e d c o n t e s t e d z o n e t h a t w e 'v e d i s c u s s e d w i t h i n t h e f i r s t i s l a n d c h a i n .
            F r o m t h a t p e r s pe c t i ve , I w o u l d a r g u e t h a t I n d i a 's N a v y i s
p r o b a b l y mo r e w e l l b a l a n c e d t h a n Ch i n a ' s mo r e l i mi t e d n i c h e n a v y
t h a t 's d e s i g n e d p a r t i c u l a r l y f o r j us t o n e mi s s i o n , a n d s o f r o m t h a t
perspective I think that the Indian Navy probably has a qualitative,
although not a quantitative, edge over the Chinese.
            B u t o n t h e o t h e r h a n d , I w o u l d s a y t h a t C h i n a 's f o c u s o n c e r t a i n
n i c he c a pa b i l i t i e s , l i ke i t s s ub ma r i n e fo r c e , mi g h t o n e d a y , a s s o m e o f
o u r c o l l e a g u e s a t t h e N a va l Wa r C o l l e g e h a v e a r g u e d , b e c o me s o r t o f
t h e s h a r p e n d o f t h e s p e a r f o r i t t o p e n e t r a t e i nt o t h e I n di a n Oc e a n ,
e s p e c i a l l y i f i t h a s n u c l e a r p o w e r e d a t t a c k s ub ma r i n e s , f o r e x a mp l e ,
t h a t w o u l d b e a b l e t o c o n d u c t l o n g er - r a n g e p a t r o l s i n t h e S o u t h Ch i n a
Sea and the Indian Ocean.
            D R . H O L M E S : C a n I a d d j us t f i v e mo r e s e c o n d s ?
            H E A R I N G C O C H A I R S H E A : S u r e . T e n mo r e s e c o n d s .
                                                      - 121 -
            D R . H O L M E S : T h e C h i n e s e h a v e b e e n r a t h e r c o y a b o u t w h e t h er
t h e y w a n t t o b u i l d a b l u e w a t e r n a v y , b u i l t mo r e s i mi l a r t o o u r o w n .
T h e I n d i a n s ma k e n o b o n e s a b o u t i t . B l u e w a t e r n a v y i s i t f o r Ne w
D e l hi .
            H E A R I N G C O C H A I R S H E A : T h a n k y o u v e r y mu c h .
            V I C E C H A I R M A N B L U M E N T H A L : H a v e a n y mo r e f i r s t - r o u n d
q u e s t i o n s ? Se c o n d r o u n d . I h a v e a q u e s t i o n . I ' m t r y i n g t o ma k e s e n s e
o f e v e n s o me o f t h e n o t i n c o n s i s t e n t b u t d i f f e r e n t t y p e s o f t e s t i m o n y
w e r e c e i v e d t h i s m o r n i n g a s w e l l a s o n t hi s pa n e l .
            On the one hand, you get a picture of the U.S. pushing forward
w i t h a nu mb e r o f c o o pe r a t i v e p r og r a ms t o t e a c h t h e C h i ne s e t he
i mp o r t a n c e o f t h e ma r k e t , a n d t h a t 's h o w i t c ome s o f f . I ' m b e i n g a
l i t t l e b i t g l i b , b ut t e a c h t h e C h i n e s e t h e i mp o r t a n c e o f t h e ma r k e t a n d
e n v i r o n me n t a l c o o p e r a t i o n a n d s o me o f t h e t h i n g s M r . H e r b e r g i s
t a l k i n g a b o u t a n d M r . H e r b e r g t e s t i f i e d t h a t t h e C h i n e s e ma y b e
mo v i n g t o a mo d e l o f a c ce s s v e r s u s c o n t r o l .
            O n t h e o t h e r h a n d , y o u g e n t l e me n f o l l o w t h e n a v a l d e b a t e s v e r y
c l o s e l y ; y o u s a y t h e r e 's a b i g M a h a n i a n s c h o o l b u i l d i n g i n C h i n a ,
w h i c h i s a mu c h d i f f e r e n t p r o p o s i t i o n t h a n a c c e p t i n g t h e i n t e r n a t i o n a l
e n e r g y ma r k e t , h a v i n g a l i b e r a l - - l o we r c a s e " l " -- v i e w o f i n t e r n a t i o n a l
e n e r g y ma r ke t s .
            S o I 'm w o n d e r i n g h o w t o r e c o n c i l e t he s e t w o . T h e r e a r e d e b a t e s
g o i n g o n i n C h i n a , I ' m s u r e . We 'r e h a v i n g a d e b a t e h e r e a b o u t wh a t
C h i n a i s d e b a t i n g . B u t I ' m w o n d e r i n g h o w t o ma k e s e n s e o f C h i n e s e
mi l i t a r y s t a t e me n t s a b o u t t h e n e e d t o - - s t a t e me n t s a n d c a p a b i l i t i e s ,
a c t i o n s , a b o u t t h e n e e d t o p r o t e c t y ou r o w n , h a v e a n o c e a n - g o i n g n a v y
b e c a u s e y o u c a n 't t r u s t t h e A me r i c a n s t o p r o v i d e y o u w i t h s e c u r i t y o f
s u p p l y v e r s u s t h e Ch i n e s e d e b a t e a b o u t r e l y i n g o n , be c o mi n g a m e mb e r
o f t h e mu l t i l a t e r a l c om mu n i t y i n t e r ms o f a c c e s s i n g i t s e n e r g y . H o w
d o w e ma k e s e n s e o f t h e s e t w o s t r a n d s ?
            A r e t he y h e d gi n g? T h a t 's t he a n s w e r t o e v e r yt hi n g t he s e d a y s or
w h a t 's g o i n g o n t h e r e ? I p r o b a b l y t o o k a n a n s w e r a w a y f r o m y o u .
            D R . H O L M E S : V e r y g o o d . L e t me c o me a t i t f r o m a l i t t l e b i t o f
a t h e o r e t i c a l p o i n t o f v ie w . T o s h i a n d I h a v e p r e d i c a t e d o u r a n a l y s i s
w i t h r e g a r d t o M a h a n a n d C h i n a on t h e a s s ump t i o n t ha t C hi n a r e a d s
M a h a n p e r h a p s n o t a s i n a s a s o p h i s t i c a t e d a f a s h i o n a s t h e y mi g h t .
            T h e q u o t a t i o n t h a t a l w a y s c o me s u p i n t h e C h i n e s e l i t e r a t u r e i s
t h e d e f i n i t i o n o f c o m ma n d o f t h e s e a . M a h a n d e f i n e d c o m ma n d o f t h e
s e a a s o v e r b e a r i n g p o w e r t h a t d r i v e s a n e n e my ' s f l a g f r o m t h e s e a s ,
from vital waters, or at best allows it to appear as a fugitive.
            T h i s q u ot a t i on a pp e a r s ove r a n d ov e r a g a i n i n t he C h i n e s e
literature. So, if that interpretation indeed wins out in Beijing, then
w e ma y h a v e p r o b l e ms o n o u r h a n d s .
            N o w , i f y o u r e a d - - M a h a n 's w o r k s a r e l i k e ma n y s e c r e t t e x t s - -
                                                     - 122 -
t h e r e a r e e l e me n t s i n a l l o f h i s v a r i o u s w o r k s t h a t y o u c a n u s e t o
s u p p o r t a l mo s t a n y t h i n g . M a h a n a l s o w r o t e t h a t f o r c e w a s a n a l i e n
e l e me n t i n p e a c e f ul i nt er n a t i o n a l c o m me r c e . S o t h e r e ' s a t e n s i o n e v e n
w i t hi n M a h a n 's w or k s t h a t pe r ha p s t h e U n i t e d S t a t e s c ou l d us e t o h e l p
f a s h i o n s o me s o r t o f mo r e b e n i g n e n v i r o n me n t i n E a s t A s i a i n t h e
c o mi n g y e a r s .
              D R . Y O S H I H A R A : L e t me j u s t v er y q ui c kl y s or t o f p a i nt t h e
cacophony of voices that you've identified.                                                    Even within the
geostrategic community of China, there are debates that are ongoing
right now.
              T h e r e a r e t h o s e w h o s a y w e ne e d t o b u i l d t h e s e a p o w e r f o r a l l o f
t h e r e a s o n s t h a t y o u 'v e r a i s e d , b ut t h e n , o n t h e o t h e r h a n d , t h e r e a r e
t h o s e w ho a r e ba s i c a l l y a b i d i n g b y M a c k i n d e r 's t he o r y , w h i c h i s t h a t
y o u n e e d t o h a v e a c o n t i n e n t a l h e a r t l a n d i n o r d e r t o ma i n t a i n a g r e a t
p o w e r s t a t u s , a n d t h e r e a r e p e o p l e w h o a r e e q u a l l y e n a mo r e d w i t h
M a c k i n d e r 's t e a c h i n g .         Th e y a r g u e e s s e n t i a l l y t h a t b e c a u s e o f t h e
U n i t e d S t a t e s ' d o m i n a nt na va l po w e r a l o n g t h e f i r s t i s l a n d c h a i n , t h e
We s t e r n P a c i fi c ha s e s s e n t i a l l y be e n c l os e d of f t o t he C h i n e s e . S o
t h e y t he r e f o r e o ug ht t o g o w e s t t o g o t o t h e l a nd r o ut e t ow a r d C e nt r a l
Asia.
              S o e v e n t h e r e , i t 's a f a i r l y c o n t e n t i o u s d i s p u t e a n d t h e y a r e q u i t e
clear that they disagree with this other school of thought, and even
within the Mahanian school of thought, there are splits as well.
              On the one hand, I think that there are sophisticated analysts who
a c t u a l l y d o r e a d M a h a n f r o m c o v e r t o c o v e r . I t h i n k t h a t e v e n ma n y
U.S. scholars do not read Mahan from cover to cover. But there are
t h o s e i n C h i n a w h o t h i n k v e r y s e r i o u s l y, a n d I t h i n k t h e r e i s a n
i n t e l l e c t u a l b u y - i n t h a t s e a p o w e r d oe s d e t e r mi ne t he f a t e o f n a t i o n s .
              On the other hand, there are those I think that have a fairly
s h a l l o w i n t e r p r e t a t i o n o f M a h a n t h a t w o u l d ma k e me s u s p e c t t h a t
t h e y 'r e r e a l l y l o o k i n g f o r r e s o u r c e s , t h a t t h i s i s s i mp l y a j u s t i f i c a t i o n
for the build-up of the PLA Navy.                                             S o a g a i n , i t 's a n o n g o i n g
c o n t e n t i o u s d e b a t e t h a t 's g o i n g o n e v e n w i t hi n t h e s t r a t e g i c
c o m mu n i t y .
              VICE CHAIRMAN BLUMENTHAL: Did you have--
              M R . H E R B E R G : Y e s . H e p o i n t e d t o t h e d i v i s i o n s wi t h i n t h e
s t r a t e g i c c o m mu n i t y , a n d I w o u l d a d d t o t h a t t h o s e di vi s i o n s a l s o e x i s t
b e t w e e n t h o s e w h o d e a l wi t h e n e r g y p o l i c y i n C h i n a a nd t h e s t r a t e gi c
c o m mu n i t y i n c h i n a ; h u g e g a p s a n d s i l o s , a n d c o mp a r t me n t a l i z a t i o n .
              S o w h e n I t a l k a b o ut e ne r gy po l i c y , I t hi n k i t 's g r a d u a l l y m o v i n g
t o w a r d s a mo r e c o o p e r a t i v e p o s t u r e . I t d o e s n 't n e c e s s a r y me a n i t 's
f i l t e r i n g t h r o u g h t o t h e s t r a t e g i c p o r t i o n o f t h e p o l i c y c o m mu n i t y .
              A n d s e c o n d , i t s i mp o r t a n t t o a l s o r e c o g n i z e t h a t t h e e n e r g y
p o l i c y ma k i n g s i d e i n C h i na i s d e e p l y f r a g me n t e d. T h e r e i s n o t h e r e
                                                      - 123 -
t h e r e w h e n y o u l o o k a t t h e s t r a t e g y . I t 's mo r e a c a mp a i g n w h e r e
e v e r y b o d y k i n d o f ma r c h e s o f f i n t h e s a me d i r e c t i o n b u t w i t h o u t a n y
r e a l c o o r d i n a t i o n . S o i t ' s mu c h mo r e o f a me n t a l i t y . I r o n i c a l l y , t h e r e 's
n o b o d y i n c h a r g e a l o t o f t i me s o n t h i s . S o h o w an d w h e n i t wi l l a f f e c t
s t r a t e gi c v i e w s f r om a n i n d u s t r y t h a t 's b e e n de e pl y c o nt r ol l e d a nd i s
o n e o f t h e l e a s t r e f o r me d i n d u s t r i e s w i t h i n C h i n a , t h a t i s s u b j e c t t o
mu c h mo r e s t a t e c on t r o l , I t hi n k a l l t h o s e t h i n g s m a k e t h a t d i s c o n n e c t
ma k e a l i t t l e mo r e s e n s e .
             VICE CHAIRMAN BLUMENTHAL: Let me just follow up real
q u i c k l y . I s i t s a f e t o s a y t h a t a s l o n g a s t h e r e i s a Ta i w a n d i s p u t e , t h e
Chinese will not trust the United States to provide safety of energy
supply, the Mahanian instincts, inclinations will be reinforced?
             MR. HERBERG: If you probe deeply when you talk to the
C h i n e s e e n e r g y p e o p l e a b o u t t h i s , u l t i ma t e l y t h a t 's w h e r e y o u e n d u p ,
i s , w e l l , i n t h e c a s e o f a c o n f r o n ta t i o n w i t h t h e U . S . , we k n o w y o u 'd
c u t o f f o u r o i l s u p p l i e s . We l l , t h e o n l y r e a l s c e n a r i o f o r c o n f r o n t a t i o n
i s Ta i w a n , s o I t hi n k i f y o u w e r e t o r e mo v e t h a t f r o m t h e e q u a t i o n , I
t h i n k a l ot o f t hi n gs c h a n g e .
             V I C E C H A I R M A N B L U M E N T H A L : Wh a t a b o u t t h e t wo o f y o u ?
Just quickly on that question?
             D R . H O L M E S : I w o u l d p r e t t y mu c h g o a l o n g w i t h w h a t M r .
Herberg said.                     Yes, actually I think if you want to cast it in
i n t e r n a t i on a l r e l a t i o n s t h e or e t i c a l t e r ms , w h i c h I 'm r e l u c t a nt t o d o- - y ou
w o u l d t e n d t o s e e t h a t a s C h i n a r i s e s t o g r e a t p o w e r , i t 's g o i n g t o
a l mo s t i n e v i t a b l y t e n d t o l oo k a s ka nc e a t a n ot h e r gr e a t p o w e r t h a t
c o n t r ol s t h i s i mp o r t a nt me d i u m i n i t s e n v i r o n me n t .
             VICE CHAIRMAN BLUMENTHAL: That's a different. That's a
d i f f e r e n t a n s w e r . M r . H e r be r g 's a n s w e r w a s t h a t i f t h e T a i w a n i s s u e
w a s r e s ol v e d , w e 'd p r ob a bl y s e e a l i t t l e b i t m o r e t r u s t o f U . S . c o n t r ol
o f s e a l a n e s , w h e r e a s y o u 'r e s a y i n g s o me t h i n g d i f f e r e n t .
             D R . H O L M E S : I t h i n k p e r h a p s my t i me h o r i z o n w a s a l i t t l e
s h o r t e r . I t h o u g h t I w a s a g r e e i n g w i t h h i m. P e r h a p s n o t .
             M R . H E R B E R G : I t d o e s n 't me a n c o o p e r a t i o n w o u l d b r e a k o u t
o v e r n i g h t , b u t i t i s a b ar r i e r t o e n e r g y c o o p e r a t i on a n d a r e a l c on c e r n
o f t h e e n e r g y f o l k s t h a t T a i wa n w o u l d b e t h e c a u s e o f a n e n e r g y c u t o f f .
             VICE CHAIRMAN BLUMENTHAL: You're just saying a great
p o w e r wi l l w a n t c o n t r o l a t s e a .
             D R . H O L M E S : O n e o f my s t a n d a r d r e c o m me n d a t i o n s , w h e n e v e r
I w r i t e s o me t h i n g a b o u t t hi s , i s t h a t t h e U n i t e d S t a t e s o u g h t t o i n v e s t
e f f o r t i n t o t r y i n g t o f a s h i o n s o me s o r t o f ma r i t i me p a r t n e r s h i p , w h e t h e r
t h r o u g h t h e P r o l i fe r a t i o n Se c u r i t y I n i t i a t i v e o r t h e s e o t h e r a n t i -
t r a f f i c k i ng e f f o r t s t o s e e i f w e c a n 't , i f n o t d r a w C h i na i n t o s uc h a
p a r t n e r s hi p , a t l e a s t s e t a m o r e c o nv i v i a l t o ne . P e r h a p s t h i s w o ul d
a d v a n c e t h e i n t e r e s t s t h a t M r. H e r b e r g w a s t a l k i n g a b o u t .
                                                      - 124 -
            MR. HERBERG:                         I 'm n o t a r g ui n g i t w o u l d c h a n g e t h e
f u n d a me n t a l g e o p o l i t i c a l e q u a t i o n . I t w o u l d s i mp l y t a k e e n e r g y o u t o f
that equation, as a source of firepower behind the difficulties.
            D R . Y O S H I H A R A : I t h i n k t h e d e b a t e , a n d we u s e t h i s d e b a t e
a l s o a t t h e N a v a l Wa r C o l l e g e f o r o u r s e n i o r mi l i t a r y o f f i c e r s , a n d t h e
q u e s t i o n i s , i s , I t h i n k w ha t y o u 'r e a s k i n g e s s e n t i a l l y i s , i s T a i w a n a n
a p p e t i z e r o r i s i t a d e s s e r t ? I n ot h e r w o r d s , i f , i f , i f T a i w a n i s , i n f a c t ,
t h e d e s s e r t , t h e n C hi n e s e g r e a t p o w e r a mb i t i o ns w o u l d b e s a t i a t e d a n d
therefore would go along the path of cooperation.
            B u t i f i t 's a n a p p e t i z e r , t h e n y o u c a n s e e Ta i w a n a s e s s e n t i a l l y a
p l a t f o r m f o r c o n t i n u i n g t o e xt e n d i t s ge o p ol i t i c a l i n f l u e n c e , a n d I t h i n k
t h a t I w o u l d t e n d t o w a r d s t h e a p p e t i z e r mo d e I t h i n k r a t he r t h a n t h e
d e s s e r t mo d e .
            V I C E C H A I R M A N B L U M E N T H A L : C o m mi s s i o n e r Fi e d l e r a n d
t h e n C h a i r ma n B a r t h o l o me w .
            COMMISSIONER FIEDLER: At what price per barrel of oil does
t h e C h i n e s e e c o n o my h i t a l i t t l e mo r e t h a n a b u mp ?
            M R . H E R B E R G : I n f a c t , t h e I EA i s w o r k i n g o n s o me o f t h o s e
issues right now.                     I t 's n o t a s t e p f u n c t i o n i s s u e ,           i t 's a g r a d u a l
escalation issue.                   Wh a t I me a n b y t h a t i s , t h e C hi n e s e e c on o my
a b s or b e d a t r i pl i n g o f o i l pr i c e s , a t r i p l i n g o f c o a l p r i c e s o v e r t h e l a s t
s i x y e a r s , a n d w e k n o w t h e e c o n o my h a s n ' t s k i p p e d a b e a t .                            If
a n y t h i n g , i t 's g r o w i n g t o o f a s t .
            S o I ' m n o t s u r e wh a t t h e p r i c e i s t ha t r e a l l y b e g i n s t o c r e a t e
p r o b l e ms f o r t h e Ch i n e s e e c o n o my . C l e a r l y , t h e y 'r e s e n s i t i v e t o t h e
p o t e n t i a l e c o n o mi c i mp a c t o f h i g h e r e ne r g y p r i c e s a n d t h a t 's p a r t o f t h e
r e a l f e a r a n d w h y t h e y c o n t r o l o i l , r e t a i l o i l p r i c e s , f o r e x a mp l e .
            B u t w h a t p r i c e b e g i n s t o r e a l l y a f f e c t t h e i r e c o no my , I t h i n k i t 's
a n a w f u l l y h i g h p r i c e b e c a us e t h e y h a v e a l o t o f s c o p e f o r s a v i n g s i f
prices get high enough.
            C O M M I SS I O N E R F I E D L E R : I t ' s a mo r e c o m p l i c a t e d t h i n g t h a n
j u s t t he m b e c a us e i t 's a g l ob a l e c o n omy a n d p r i c e s he r e a f f e c t r e t a i l
sales, price of gasoline affects retail sales fairly dramatically with
s o me ma j o r r e t a i l e r s i n t he U n i t e d Sta t e s . T h a t t h e n i n t u r n h a s t o
a f f e c t C h i n e s e e x p o r t p r o d u c t i o n t o t h e U n i t e d St a t e s .
            MR. HERBERG: Sure.
            C O M M I SS I O N E R F I E D L E R : We ' v e s e e n f l u c t u a t i o n s i n i t , b u t
w e h a v e n 't s e e n a n y r e a l h i t s a g a i n s t t h e w a l l . S o n o b o d y i s r e a l l y
l o o k i n g a t t h e s e n u mb e r s t h a t y o u k n o w o f ?
            M R . H E R B E R G : I t ' s a g r a d u a l e sc a l a t i on r a t he r t h a n s ome s t e p
f u n c t i o n w h e r e s u d d e n l y i t c r e a t e s h ug e p r o b l e ms . M u c h , mu c h h i g h e r
p r i c e s w o u l d d e f i n i t e l y b e a d r a g o n t h e C h i n e s e e c o n o my , o n t h e
w o r l d e c o n o my , w h i c h f e e d s b a c k i n t h e e x p o r t ma c h i n e a s w e l l , b u t I
d o n 't k n o w w h a t t h e p o i n t a t w h i c h i t c r e a t e s u n ma n a g e a b l e p r o b l e ms .
                                                      - 125 -
            C O M M I SS I O N E R F I E D L E R : T h a n k y o u .
            V I C E C H A I R M A N B L U M E N T H A L : C h a i r ma n B a r t h o l o me w .
            C H A I R M A N B A R T H O L O M E W: T h a n k y o u . D r . Y o s h i h a r a , I
think that you have just done the best job of putting out the challenge
o f i n t e n t , w h e t h e r T a i w a n i s a p p e t i z e r o r d e s s e r t , i n a c o n c i s e - - I d o n 't
k n o w - - mo r e p i c t u r e s q u e w a y t ha n I 'v e h e a r d b e fo r e .
            VICE CHAIRMAN BLUMENTHAL: I would say that you could
h a v e a d e s s e r t a n d t h e n a me a l t h e n e x t d a y .
            C H A I R M A N B A R T H O L O M E W: T h a n k y o u f o r t h a t . I t 's a u s e f u l
i ma g e , u s e f u l w a y t o t h i n k a b o u t i t . A c t u a l l y n o t w h a t I 'm g o i n g t o a s k
about.
            M r . H e r b e r g , y o u me n t i o n e d i n y o u r t e s t i mo n y t h e r e i s a g r o w i n g
s e n s e i n B e i j i n g t h a t t h e i n v e s t me n t i n t e r e s t s o f C h i n a 's N O C s i n
e x p a n di n g a b r oa d a r e n o t n e c e s s ar i l y s y n o n y mo u s w i t h C h i n a 's
national energy security interests, and one of the last discussions we
h a d w i t h t h e l a s t p a n e l w a s h o w t h i s w o u l d p l a y o u t i n t h e Su d a n
c o n t e x t , a n d I w o n d e r e d w h a t d o e s t h e C h i n e s e g o v e r n me n t d o a s t h e s e
i n t e r e s t s s e e m t o d i v e r g e w i t h w h a t e ve r i t s o t h e r i n t e r e s t s w o u l d b e i f
t h a t 's s e l l i n g o n t h e ma r k e t o r i t s o w n s t a n d i n g i n t h e w o r l d ?
            MR. HERBERG:                      I t h i n k y o u 'v e a l r e a d y b e g u n t o s e e s o me
ma r g i n a l s h i f t i n t h e i r a t t i t u d e / p o l ic i e s o n S u d a n . I t 's a s ma l l c h a n g e
a t t h e ma r g i n , b u t t h e C h i n e s e a r e g r a d u a l i s t s o n e v e r y t h i n g .
            T h i s i s w h e r e I g o b a c k t o t h e b r o a d v i e w o f ma r k e t v e r s u s o u r
l i t t l e c or n e r o f t he ma r k e t t h a t w e c a n c or n e r . L e t 's s t a r t wi t h t h e
b a s i c f a c t t h a t r e l a t i v e ly l i t t l e S u d a n o i l a c t u a l l y g oe s t o C h i na . T h e
n a t i o n a l o i l c o mp a n i e s t ha t p r o d u c e i t t h e r e s e l l i t o n t h e l o c a l ma r k et
f o r t he m o s t p a r t . .
            Roughly 150,000-200,000 barrels per day goes to China, but
t h a t ' s b e c a u s e i t f i t s C h i n e s e r e f i n e r i e s . S o i t ' s r e a l l y a ma r k e t i s s u e ;
i t 's n o t f e e d i n g n e e d s f o r o i l i n C h i n a d i r e c t l y a n y w a y .
            S e c o n d , t h e r e 's a r e a l d i s c o n n e c t w h i c h I 'm j u s t b e g i n n i n g t o
understand better, that the tail is wagging the dog a bit here. The
C h i n e s e oi l c o mp a ni e s a r e ou t d o i n g d e a l s , g o i n g t o p l a c e s , t h a t t h e
F o r e i g n M i n i s t r y d o e s n 't h e a r a b o ut i t u nt i l l a t e r . T h e y o f t e n c o nv i n c e
P r e s i d e n t H u t o t r a v e l t o c ou n t r i e s t o s i g n bi l a t e r a l e n e r g y a g r e e me n t s
w i t h o u t mu c h c o o r d i n a t i o n o f t h e b r o a d e r f o r e i g n p o l i c y c o m mu n i t y i n
B e i j i n g . I h a v e h e a r d i t a r gu e d t h a t i t 's t h e o i l c o mp a n i e s t h a t a r e t h e
mo s t p o w e r f u l i n B e i j i n g wh e n i t c o me s t o w h e r e t h e y g o , w h a t t h e y
do, and where they invest.
            I t 's t h e t a i l w a g g i n g t h e d o g h e r e , a n d s o me f e e l t h e g o v e r n me n t
is having trouble controlling the NOCs. This is a very sensitive issue
i n B e i j i n g . T h e y d o n 't l i k e t o t a l k a b o u t i t . B u t t h e p i c t u r e t h a t w e
h a v e o f t h i s s t r a t e g y i s i n s o me w a y o v e r d r a w n . I t h i n k t h e r e a r e
b e g i n n i n g t o b e p e r c e p t i o n s a mo n g t h o s e r e s p o n s i b l e f o r Ch i n a ' s
                                                      - 126 -
b r o a d e r r e l a t i o n s h i p s , w h e r e S u d a n i s s u e s c o me i n , I r a n i s s u e s c o me
i n , t h a t a r e r e a l l y c r e a t i n g t o x i c i ss u e s f o r t he U. S . - Ch i n a r e l a t i o n s h i p ,
w h e t h e r i t i s r e a l l y i n C h i na ’ s i n t e r e s t t o ha ve t h e s e c o mp a n i e s o u t
t h e r e i n v e s t i n g i n o i l f i e l d s t h a t d o n 't b r i n g o i l b a c k t o C h i n a a n y w a y ,
w h e n w e c a n b u y t h a t o i l i n t h e We s t A f r i c a n ma r k e t a t t h e s a me p r i c e
w e 'r e b r i n g i n g i t b a c k f r o m S u d a n ?
            Wh y s h o u l d w e b e t a k i n g a l l t h e f o r e i g n p o l i c y p r e s s u r e s t h a t
t h i s i s c a u s i n g u s i n v e r y i m p o r t a n t r e l a t i o n s h i p s ? So , i f y o u l o o k a t i t
t h a t w a y , w h i c h t o me s e e ms t o b e a mo r e a c c u r a t e v i e w , y o u 'r e
beginning to see that disconnect about why should Beijing be out
s u p p o r t i n g t h e s e c o mp a n i e s w h e n t h e y 'r e c r e a t i n g r e a l h e a d a c h e s i n
k e y p l a c e s i n s t r a t e g i c r e l a t i o n s h i p w i t h t h e U . S. a n d J a p a n ?
            B e i j i n g d o e s w a n t c a p a b l e c o mp e t i t i v e g l o b a l o i l c o mp a n i e s .
T h e g o v e r n me n t w a n t s t o h a v e i t s o w n E x x o n t y p e o f o i l c o mp a n i e s .
T h e U . S . h a s t he m; t h e E u r o p e a n s h a v e t h e m. T h a t d o e s n ' t me a n
B e i j i n g w i l l a l w a y s w a n t t o h a v e t h e s e s t a t e c o mp a n i e s o u t t h e r e
p u l l i n g Ch i n a i n t o a s e r i e s o f f o r e i g n p o l i c y p r o b l e ms t ha t t he y r e a l l y
don't need.
            C H A I R M A N B A R T H O L O M E W:                        But, so then what does the
g o v e r n me n t i n B e i j i n g d o? R e c o g n i t i o n i s t h e f i r s t s t e p , b u t w h a t
actions?
            M R . H E R B E R G : I t h i n k w h a t 's g o i n g t o h a p p e n i s t h e y 'r e g o i n g
t o b e c o me mo r e h e l p f u l o v e r t i me i n p l a c e s l i k e S u d a n . I d o n 't w a n t t o
overdraw this.                   I t 's p r e ma t u r e t o d e c l a r e t h e y 'r e g o i n g t o b e c o me
h i g hl y c oo p e r a t i v e h e r e . B ut I t hi n k a s t h e s e p r o bl e ms a c c u mu l a t e a t
t h e St a t e C o u n c i l l e v e l a n d t h e y b e g i n t o ma k e t h e c o n n e c t i o n s , t h a t
t h e s e c o mp a n i e s i n c r e a s i n g l y w i l l b e c u t l o o s e t o d o t h e i r o w n
b u s i n e s s , t o g o o u t a n d c o mp e t e a l l y o u w a n t , b u t ma y b e B e i j i n g h a s
b r o a de r i n t e r n a t i o na l i nt e r e s t s i n S ud a n a n d g l o ba l l y w h i c h t r ump
control over oil.
            C H A I R M A N B A R T H O L O M E W: S o t h e n B e i j i n g ge t s i t b ot h
w a y s . T h e s e a r e s t a t e c o mp a n i e s t h a t a r e d o i n g t h i s b e h a v i o r . T h e r e i s
o n l y s o fa r t h e g o v e r n me n t i s g oi n g t o b e a bl e t o d i s a s s o c i a t e i t s e l f
f r o m w h a t t h e s t a t e c o mp a n i e s a r e d oi ng .
            MR. HERBERG: This is a real problem in Beijing because you
w i l l t a l k t o p e o p l e w h o s a y w e n e e d t o c u t t h e m l o o s e . We w a n t
c a p a b l e c o mp a n i e s , b u t w e 'r e g e t t i n g t i e d d o wn b y t h e s e c o mp a n i e s .
B u t t he s e a r e v e r y po w e r f u l c o mp a n i es , v e r y p o we r f u l i n s t i t u t i o n s , t h a t
b y p a s s t h e N D R C a n d g o s t r a i g h t t o t h e St a t e C o u n c i l V i c e Pr e mi e r
l e v e l ma n y t i me s f o r c e r t a i n t h i n gs . S o i t 's a n i n t e r na l C h i n e s e po l i c y
issue, and you will see it in economic policy process, energy policy.
I t 's r e p l i c a t e d o t h e r p o l i c y a r e a s i n B e i j i n g wh e r e t he r e 's a l o t l e s s
c o o r d i n a t i o n g o i n g o n t h a n we t e n d t o t h i n k , a n d p a r t i c u l a r l y i n t h e i r
i n t e r n a t i on a l e n e r gy a c t i v i t i e s .       S o I t h i n k w h a t wi l l h a p p e n i s t he y
                                                      - 127 -
w i l l g r a d u a l l y c u t t h e c o mp a n i e s l oo s e f r o m s t a t e s p o n s o r s h i p a n d a l l
t h e t h i n g s t h a t g o w i t h t h a t a n d t ha t w i l l a l l o w t h e m t h e o p p o r t u n i t y t o
b e s o me w h a t mo r e s t a t e s ma n l i k e o r r e s po n s i bl e s t a k e h o l d e r i n a r e a s
l i k e S u d a n , b u t d o n 't g e t me w r o n g ; i t 's n o t n e x t w e e k o r n e x t mo n t h .
             C H A I R M A N B A R T H O L O M E W: T h e y mi g h t n o t h a v e t h e t i me i f
t h e Ol y m p i c s a r e a t s t a k e .
             M R . H E R B E R G : T h a t 's w hy t he l e a d e r s h i p i s f e e l i n g s o mu c h
p r e s s u r e o n t h i s b e c a u s e o f t h a t d i s c o n n e c t . Wh a t d o w e d o ?
             C H A I R M A N B A R T H O L O M E W: T h a n k y o u .
             V I C E C H A I R M A N B L U M E N T H A L : C o m mi s s i o n e r B r o o k e s .
             C O M M I SS I O N E R B R O O K E S : T h a n k y o u v e r y mu c h a n d t h a n k
y o u a l l fo r y o u r t e s t i mo n y . I 'd l i k e t o d i r e c t t h i s q u e s t i o n t o D r .
H o l me s a n d D r . Y o s h i h a r a . I s e e y o u 'r e b o t h i n t h e S t r a t e g y a n d
P o l i c y D e p a r t me n t a t N a v a l Wa r C o l l e g e . I 'm a g r a d u a t e o f t h e N a v a l
Wa r C o l l e g e a n u mb e r o f y e a r s a g o an d i t 's a t e r r i f i c c o u r s e . I 'm s u r e
y o u 'r e s t i l l p u t t i n g y o u r s t u d e n t s t h r o u g h t h e r i g o r s o f t e n s o f b o o k s o n
strategy and policy.
             I 'd l i k e bo t h o f y ou r c o m me n t s o n t h i s s e p a r a t e l y i f t he y'r e n o t
q u i t e t h e s a me - - h o w d o e s J a p a n a n d t h e U . S . - J a p a n a l l i a n c e f i g ur e i n t o
C h i n a 's m a r i t i me e n e r g y s e c u r i t y o r i n s e c u r i t y , a s i t w e r e ?
             D R . Y O S H I H A R A : I n i t i a l l y , I t h i n k t h e C h i n e s e d i d s e e s o me
b e n e f i t s o f t h e U . S . - J a p a n a l l i a n c e . I t 's t r a di t i on a l l y b e e n s e e n a s k i n d
of a way to keep the Japanese down. In other words, the U.S. security
a s s u r a n c e s a n d c a p a b i l i t i e s a n d c o mmi t me n t t o d e f e n d J a p a n w o u l d
basically provide disincentives for the Japanese to build up their
mi l i t a r y c a p a b i l i t i e s .
             B u t I t h i n k t h a t a f e w a r t i c l e s h a v e a l r e a d y e me r g e d w r i t t e n by
C h i n e s e s c h o l a r s w h o h a v e s a i d t ha t i t 's t he ki n d o f t he e n d o f t h e
s i l v e r l i n i n g , t h a t t h e a l l i a n c e i s , i n f a c t , b e c o mi n g a p l a t f o r m f o r
e mp o w e r i n g J a p a n , p a r t i c ul a r l y wi t h r e g a r d t o t he de v e l op me n t o f
b a l l i s t i c mi s s i l e d e f e n s e .
             S p e c i f i c a l l y , r e l a t e d t o t h e e n e r g y s e c u r i t y i s s u e , I t h i n k t h e Ea s t
C h i n a S e a d i s p u t e i s a v e r y i n t e r e s t i n g o n e . A s i d e f r o m s o me o f t h e
legal disputes, and of course, disputes over the natural gas fields, I
t h i n k t h a t t h e r e a r e a l s o s o m e o p e r a t i on a l c o n s i d e r a t i o n s w i t h r e g a r d t o
t h e E a s t C h i n a S e a d i s p u t e t h a t mi g h t i n f a c t i n v o l v e t h e U . S . - J a p a n
a l l i a n c e . A n d w h a t d o I me a n b y t h a t ?
             I t hi n k t ha t i n ma n y o f t h e s c e na r i o s i n w hi c h a T a i w a n c r i s i s
sort of flares up. If it gets closer to the point of conflict, the East
C h i n a Se a c o u l d p o t e n t i a l l y b e a pl a t f o r m f r o m w h i c h t he C hi n e s e
c o u l d e s s e nt i a l l y d e c l a r e a n e x c l u s i o n z o n e , b a s e d o n t h e i r
i n t e r p r e t a t i on s o f t h e i r s o ve r e i g nt y a n d s o v e r e i g n r i g h t s o v e r t h e E a s t
C h i n a Se a . I f t h a t 's t h e c a s e , w e c a n s e e i f we b u y C h i n a ' s a r g u me n t
t h a t t he C o n t i n e nt a l S h e l f i s r e a l l y w h a t e mp o w e r s t h e C h i n e s e t o h a v e
                                                        - 128 -
s o v e r e i g n r i g ht s ov e r t he E a s t C h i n a S e a , t h a t w o u l d e x t e n d C h i n a ' s
s o r t o f ma r i t i me a u t h o r i t y o u t t o t h e O k i n a wa T r o u g h w h i c h i s j u s t ,
ma y b e 3 0 , 4 0 mi l e s f r o m t h e c o a s t o f t h e i r R y u k y u I s l a n d c h a i n wh e r e
a t r e me n d o u s a mo u n t o f A me r i c a n a n d J a p a ne s e mi l i t a r y po w e r r e s i d e s .
             S o I t h i n k i n t h a t c o n t e x t , t h e C h i n e s e c l e a r l y ha v e e n e r g y
s e c ur i t y s t a k e s i n t he E a s t C hi n a S e a .                       We cannot forget the
o p e r a t i o n a l c o n s i d e r a t i o n s b e c a u s e i t wo u l d c l e a r l y b e n e f i t t h e C h i n e s e
t o h a v e t h a t k i n d o f a n e x c l u s i o n z on e w i t h r e g a r d t o a T a i w a n S t r a i t
c r i s i s , a n d I t h i n k t h a t w o u l d p o s e t r e me n d o u s c h a l l e n g e s t o t h e
J a p a n e s e p o l i c y ma k e r s i n t e r ms o f h o w d o y o u d e a l wi t h t h a t ? Wh a t
k i n d o f s e a d e n i a l , s e a c o n t r o l c a p a b i l i t i e s c a n t h e J a p an e s e d e p l o y i n
order to counter that type of a scenario in which the Chinese declare an
exclusion zone?
             Thank you.
             DR. HOLMES: Thank you. A good question. I should preface
my r e ma r k s b y s a y i n g t h e y o n l y ma d e y o u r e a d t e n s o f b o o k s b a c k
then? Y'all had it easy.
             C O M M I SS I O N E R B R O O K E S : 5 0 0 g r e a t b o o k s .
             D R . H O L M E S : O n e 5 , 0 0 0 p a g e b o o k . I ' m g o i n g t o c o m mi t a
l i t t l e b i t o f i n t e l l e c t ua l t hi e v e r y an d t h e n c a s t my a n s w e r i n t e r ms o f
T o s h i 's t o p i c w h i c h w a s C h i n e s e e f f o r t s t o b u i l d u p s o f t p o w e r t o t h e
S o u t h . I g u e s s I 'm s t a k i n g o u t t h e s o u t h e r n f r o n t i n t h e t e s t i mo n y
today.
             C h i n a a s i t l o o k s a t t h e S o u t h C h i na Se a ha s be e n i n t h e h a b i t o f
w h a t o u r c o l l e a g u e u p a t t h e Wa r C o l l e g e , P e t e r D u t t o n , h a s c a l l e d
ma i n t a i n i n g a ma n a g e d c o n f r o n t a t i on w i t h J a p a n , a n d p r o v i d e s t h e m
b a s i c a l l y a c o u n t r y t o t e e o f f w i t h , r e mi n d r e g i o n a l g o v e r n me n t s o f
J a p a n 's i mp e r i a l p a s t i n t h e r e g i o n a n d s o f o r t h , c a s t i n g i t s e l f a s a
b e n i g n p o w e r t h a t h a s t h e b e s t i nt e r e s t o f t h e r e g i o n a t h e a r t .
             S o a s i t r e a c h e s o u t , t r i e s t o b u i l d u p t o a ma s s t he s o f t p o w e r ,
l e a d i ng a l l t h e w a y d o w n t o t he St r a i t o f M a l a c c a , t h e k e y w a t e r w a y
there, I think Japan actually provides a useful foil for its efforts to
ma k e i n r o a d s t h e r e . O t h e r t h a n t h a t , I l i k e w h a t y o u s a i d .
             V I C E C H A I R M A N B L U M E N T H A L : C o m mi s s i o n e r Vi d e n i e k s .
             H E A R I N G C O C H A I R V I D E N I E K S : A f o l l o w - u p o n t h e Ea s t
C h i n a S e a a r g u me n t . D o I u n d e r s t an d y o u t o s a y t h a t t h e r e a s o n f o r
U.S. not ratifying the Law of the Sea Treaty would be operational
considerations?
             D R . H O L M E S : I 'm n o t s u r e I e nt i r e l y h e a r d t h e - -
             HEARING COCHAIR VIDENIEKS:                                            Okay.           I'm asking a
r h e t o r i c a l q u e s t i o n w h e t h e r , t o w h a t e x t e nt do mi l i t a r y o p e r a t i o n a l
c o n s i d e r a t i o n s f a c t o r i n t o t h e U . S . n o t a c c e p t i n g t h e 2 0 0 mi l e
C o n t i n e n t a l S h e l f l i mi t s ?
             DR. HOLMES:                      I 'm n o t s u r e I w o u l d n e c e s s a r i l y c a s t i t i n
                                                      - 129 -
o p e r a t i o n a l t e r ms . C e r t a i n l y i t u n d e r c u t s o ur a b i l i t y t o g o o u t a n d
ma i n t a i n o u r di p l oma t i c c a s e s i n c e we h a v e n 't b e c o me a p a r t y t o t h e
treaty ever since it was inked back in the early 1980s. In operational
t e r ms , I t h i n k i t gi v e s t h e Ch i n e s e a n a d v a n t a g e s h o u l d t h e y i n t h i s
w o r s t c a s e s c e n a r i o t h a t T o s h i f r a m e d t r y t o d e c l a r e s o me s o r t o f
exclusion zone in the region.
           D R . Y O S H I H A R A : I w o u l d o n l y a d d , j u s t t o f l e s h o u t s o me o f
the sort of legal disputes between China and Japan, is that the Chinese
t a ke t h e C o n t i ne nt a l S he l f a r g u me n t . T h e J a p a n e s e t a k e t h e e x c l us i ve
e c o n o mi c z o n e a r g u me n t w i t h t h e mi d l i n e .
           M y u n d e r s t a n d i n g o f t h e i n t e r na t i o n a l l e g a l i n t e r p r e t a t i o n o f
t h o s e t w o , b e c a u s e t h o s e t wo k i n d o f c o e x i s t u n e a s i l y , i s t h a t u s u a l l y
w h e n t h e r e ' s a d i s p u t e o v e r t h a t k i n d o f a s i t u a t i o n , t h e E E Z mi d l i n e
d i s p ut e a c t ua l l y t a k e s i n t e r n a t i on a l p r e c e d e n t o v e r t he C o n t i ne n t a l
S h e l f a r g u me n t .
           HEARING COCHAIR VIDENIEKS:                                               Or t h e r e c o u l d b e
cooperative action.
           D R . Y O S H I H A R A : R i g h t , a n d t h e C hi n e s e h a ve a c t u a l l y s t a ke d
o u t a f a i r l y n o ve l i nt e r p r e t a t i o n f r a n k l y o f i n t e r n a t i o na l l a w wi t h
r e ga r d t o t h i s , a nd w h a t 's i nt e r e s t i n g i s s o me o f t h e s e d e b a t e s t h a t a r e
c o mi n g o u t o f C h i n a t h a t o n e s c h o l ar b a s i c a l l y s a i d , w e l l , b e c a u s e o f
t h e s i l t t ha t h a s b e e n c o mi n g o u t o f t h e Y e l l o w Se a i nt o t he E a s t C hi n a
S e a o v e r h i s t o r y , t h i s r e i n f o r c e s C h i n a 's s o v e r e i gn c l a i ms t h a t t he
C o n t i ne nt a l S he l f i s , i n f a c t , C h i n a 's s o v e r e i g n t e r r i t o r y .
           S o t h e y w i l l p u s h t h e a r g u me n t a s f a r a s t h e y c a n t o e n fo r c e t h i s
novel legal interpretation.
           HEARING COCHAIR VIDENIEKS: My second question is to
M r . He r be r g . I f i n d e e d t he r e i s o n l y o n e p o o l o f o i l a n d t h e ma r k e t
r u l e s t h e s e a s or t h e p o ol , w h y i s t h e r e a c o n c e r n a b o u t ma y b e 7 0
p e r c e n t o f t h e o i l r e s e r ve s b e i n g o w n e d e i t h e r b y s t a t e s o r s t a t e - o w n e d
c o mp a n i e s ? I s t h e r e a t r e n d a w a y f r o m t h a t n o w a n d i t 's a mi s g u i d e d
concern?
           M R . H E R B E R G : C o u n t r i e s w h e r e w e c a n 't g e t a c c e s s t o t h e o i l ,
w h e r e we c a n ' t i n v e s t - -
           H E A R I N G C O C H A I R V I D E N I E K S : We l l , a c c e s s c o u l d b e b y
mi l i t a r y po w e r or ot h e r w i s e . A c c e s s i s a c c e s s . B u t I 'm s a y i ng i n t h i s
c a s e , 7 0 p e r c e n t o f - - my u n d e r s t a n d i n g i s t h a t 7 0 p e r c e n t o f o i l r e s e r v e s
a r e o w n e d e i t h e r b y f o r e i g n g o v e r n me n t s o r s t a t e - o w n e d c o mp a n i e s .
S o t h e ma j o r s a r e s h o o t i n g f o r t h e r e ma i n i n g 3 0 . I s t h e r e a fa l s e
c o n c e r n a b o u t t h i s f o r e i g n o w n e r s h i p , t h i s s t a t e / f o r e i g n c o mp a n y
ownership, the state owning 70 percent?
           M R . H E R B E R G : I t h i n k t h e p r o b l e m t h e r e i s t ha t s o mu c h o f
that oil is not getting developed up because it's under the control of
t h e n a t i o n a l o i l c o mp a n i e s w h o e i t he r d o n 't h a v e t h e c a p i t a l o r w o n 't
                                                     - 130 -
p u t t h e c a p i t a l i n t o d e v e l o p i n g u p t ha t o i l t o me e t g r o w i n g o i l s u p p l y
n e e d s / d e ma n d g l o b a l l y . An d t h a t 's t h e r e a l s e t o f pr o bl e ms t h a t w e a s
c o n s u me r s a l l f a c e .
            HEARING COCHAIR VIDENIEKS: Not enough R&D or?
            M R . H E R B E R G : We l l , j u s t s i mp l y t h e u n w i l l i n g n e s s t o i n v e s t
sufficient capital. These are very expensive projects and in Russia,
I r a n , N i g e r i a , V e ne z u e l a , I c o u l d g o d o w n t h e l i s t - -
            HEARING COCHAIR VIDENIEKS: Mexico.
            M R . H E R B E R G : - - o f mu r d e r e r 's r o w o f c o u n t r i e s t h a t a r e n o t
i n v e s t i n g i n r a i s i n g o i l p r o d u c t i o n w h e n t h e y 'r e s it t i n g o n l a r g e s i z a b l e
r e s e r v e s . A t t h e s a me t i me , d e ma n d j u s t k e e p s b u mp i n g u p a g a i n s t
s u p p l y . T h a t 's w h a t w e h a v e i n c o mmo n w i t h C h i n a a n d t h a t 's a g l o b a l
o n e - p o o l - o f - o i l p r o b l e m t h a t y o u 'r e n o t g r o w i n g t h e p o o l t o me e t t h a t
r i s i n g d e ma n d , b u t i t i s o n e o f t h e t h i n g s t h a t c o n t r i b u t es t o t h i s s e n s e
o f s c a r c i t y , f e a r o v e r y o ur s e c u r i t y o f s u pp l i e s a n d f e e d s t h i s
a t mo s p h e r e o f c o m p e t i t i o n , l e t 's t ry t o u n i l a t e r a l l y s e c u r e o u r o i l ,
w h i c h ul t i ma t e l y i s f u t i l e - - f u t i l e i n t h e s e n s e , n o t f u t i l e .
            V I C E C H A I R M A N B L U M E N T H A L : U n l e s s s o me o n e e l s e h a s a
q u e s t i o n , I t h i n k we ' l l w r a p u p a n d t a k e a f i v e mi n u t e b r e a k b e f o r e t h e
n e x t s e s s i o n . B u t t h a n k y o u a l l v e r y , v e r y mu c h f o r a f a s c i n a t i n g a n d
v e r y u s e fu l t e s t i mo n y a n d w e v e r y mu c h a p p r e c i a t e y o u r i n s i g h t s a n d
y o u r c o n t r i b u t i o n s t o o u r ma n d a t e .
            Thank you.
            [ Wh e r e u p o n , a s h o r t r e c e s s wa s t a k e n . ]


   PANEL V: THE ENVIRONMENTAL CONSEQUENCES FOR
  CHINA, THE UNITED STATES AND THE WORLD OF CHINA’S
                 ENERGY CONSUMPTION

           HEARING COCHAIR D'AMATO: The Commission will come to
o r d e r f o r t h e f i ft h a n d f i n a l p a n e l o f o u r d a y , w h i c h fo c u s e s o n t h e
i mp a c t o f C h i n a 's e n e r g y c o n s u mp t i o n o n i t s e n v i r o n me n t .
           D r . J e n n i f e r T u r n e r i s t h e c o o r d i n a t o r o f t h e Ch i n a E nv i r o n me n t
F o r u m a n d a Se n i o r P r o j e c t A s s oc i a t e a t t h e Wo o d r o w W i l s o n
International Center for Scholars. She coordinates several research
e x c h a n g e a c t i v i t i e s i n C h i n a , t h e U ni t e d S t a t e s a n d J a p a n o n i s s u e s o f
e n v i r o n me n t a l         n o n - g o v e r n me n t a l       organizations,              e n v i r o n me n t a l
j o u r n a l i s m, r i v e r b a s i n g o v e r n a n c e , w a t e r c o n f l i c t r e s o l u t i o n a n d
mu n i c i p a l f i n a n c i n g o f e n v i r o n me n t al i n f r a s t r u c t u r e . Dr . T u r n e r h a s
p u b l i s h e d f r e q u e n t l y o n C h i n a ' s e n v i r o n me n t a n d e n e r g y i s s u e s .
           A l s o j o i n i n g u s t o d a y i s D r . M u n S. H o , w h o i s a Vi s i t i n g
S c h o l a r a t R e s o u r c e s f o r t h e F u t u r e . D r . H o 's r e s e a r c h f o c u s e s o n
e c o n o mi c g r o w t h , p r o d u c t i v i t y , t a x a t i o n a n d e n v i r o n me n t a l e c o n o mi c s .
                                                      - 131 -
           D r . H o a l s o w o r k s w i t h t h e H a r v a r d U n i v e r s i t y C e nt e r f o r t h e
E n v i r o n m e n t f o c u s i n g o n C h i n e s e e n e rg y u s e a n d e n v i r o n me n t a l p o l i c y .
H e r e c e n t l y c o - e di t e d “ C l e a r i ng t h e A i r : A s s e s s i ng t h e H e a l t h a n d
E c o n o mi c D a ma g e s o f A i r P o l l u t i o n i n C h i n a . ”
           T h a n k y o u b o t h f o r c o mi n g a n d t e s t i f y i n g b e f o r e t h e C o mmi s s i o n
t o d a y . We l o o k f o r w a r d t o y o u r r e ma r k s a n d w e 'l l b e g i n w i t h D r .
T u r n e r . Y o u 'l l h a v e s e v e n t o t e n mi n u t e s a n d t h e n D r . H o , a n d t h e n
w e 'l l o p e n i t u p t o s o me Q & A . S o D r . T u r n e r , g o a h e a d .


              STATEMENT OF JENNIFER L. TURNER
          COORDINATOR, CHINA ENVIRONMENTAL FORUM
          WOODROW WILSON INTERNATIONAL CENTER FOR
                 SCHOLARS, WASHINGTON, D.C.

             D R . T U R N E R : Th a n k y o u v e r y mu c h . I 'm r e a l l y h o n o r e d t o
c o me h e r e a n d t a l k t o a l l o f y o u . S e e i n g t h i s a s mo r e a c o n v e r s a t i o n i n
t h e e n d , I l i k e t h e s ma l l g r o u p . S i n c e 1 9 9 9 , I 'v e b e e n d i r e c t i n g t h e
C h i n a E n v i r o n me n t F o r u m a t t h e Wo o d r o w Wi l s o n C e n t e r , a n d w e p u t
o n me e t i n g s , b r i n g i n g t o g e t h e r g o v e r n me n t , N G O , b u s i n e s s a n d
r e s e a r c h e r s i n U . S . a n d A s i a , t r y i n g t o p r o mo t e d i a l o g u e t o u n d e r s t a n d
C h i n a 's e n e r g y a n d e n v i r o n me n t a l p r o b l e ms a n d l o o k i n g f o r
opportunities for collaboration.
             F o r a l ot o f my c o m me n t s t o d a y , I 'm d r a w i ng f r o m- - I j o k i ng l y
c a l l t h e m my C h i n a E n v i r on me n t M a f i a . M a n y o f t h e m d o e n e r g y
work, and so I work with a lot of on-the-ground people so I am fairly
f a mi l i a r w i t h a l o t o f t h e p r o j e c t s t h a t a r e d o n e .
             A l s o , o v e r t h e p a s t e i g h t mo n t h s, I 'v e a l s o b e e n w o r k i n g w i t h
We s t e r n K e n t u c k y U n i v e r s i t y o n a p r o j e c t t h a t 's f u n d e d b y US A I D
c a l l e d t h e C h i n a E nv i r o n me n t H e a l t h P r o j e c t , w h i c h i s w h y I wi l l a l s o
i n t e r j e c t s o me c o m me n t s o n t h e h e a l t h l i n k a g e w i t h e n e r g y .
             A s I n o t e d i n my w r i t t e n t e s t i mo n y , my c o m me n t s a r e my
p e r s o n a l o p i n i o n , n o t n e c es s a r i l y t h o s e o f t h e Wo o d r o w Wi l s o n C e n t e r ,
a n d i n my s e v e n mi n u t e s I h a v e f o u r ma i n a r e a s t o t a l k a b o ut t h a t I
would like to explore further after Dr. Ho talks, and we can have a
bigger conversation.
             F i r s t o f a l l , t h e i s s u e o f t r a n s b o u n d a r y i mp a c t s o f C h i n a 's a i r
p o l l u t i o n a n d e n e r g y c o n s u m p t i o n . Th e y a r e s i g n i f i ca n t a n d t h e y a r e
g r o w i n g b o t h d o me s t i c al l y a n d t r a n s b o u n d a r y .
             A s I k n o w , I ' m s u r e y o u 'v e b e e n h e a r i n g a l l d a y , t h a t C h i n a
c o n s u me s mo r e e n e r g y a n d e mi t s m o r e g r e e n h o u s e g a s e s t h a n a n y
c o u n t r y t h a n U . S . T h e y w i l l b e s ur p a s s i n g u s , w e b e l i e v e , w i t h i n t h e
next year.
             B u t b e s i d e s C O 2 e mi s s i o n , S O 2 a n d me r c u r y e mi s s i o n s , b l a c k
                                                    - 132 -
s o o t fr o m c o a l b u r n i n g a r e a l s o o th e r ma j o r t r a n s b o u n d a r y p o l l u t a n t s
from China.                    P a r t i c u l a t e s , me r c u r y a n d d u s t f r o m C h i n a a r e a l s o
w o r s e n i n g a i r a s f a r a w a y a s t h e U . S . w e s t c o a s t . We h e a r a l o t a b o u t
C h i n a 's a c i d r a i n i n J a pa n a n d K o r ea t h a t i s h ur t i n g f o r e s t s a n d wa t e r
t h e r e , b ut t he r e i s r e s e a r c h do n e o n t h e w e s t c o a s t o f t h e U n i t e d St a t e s
t h a t I ' m s u r e i n y o u r b u l k o f ma t e r i a l h a v e s e e n t h a t t h e r e ' s a g o o d
c h a nc e t ha t C hi n a 's p a r t i c ul a t e s a r e p r o b a b l y n u l l i f y i n g t h e p r o g r e s s
t h a t C a l i f o r n i a a n d o t h e r w e s t e r n s t a t e s a r e ma k i n g i n t h e C l e a n A i r
Act.
            I t 's e v e n b e e n s t a t e d t h a t p o s s ib l y o n e - t hi r d o f C a l i f o r n i a 's f i n e
particulate pollution originates in Asia.
            A n o t h e r a r e a b e s i d e s t h e t r a ns b o u n d a r y i s s u e , w h i c h a g a i n w e
c a n t a l k mo r e a b o u t i n t h e Q & A , t h e r e 's a n o t h e r a r e a w h e r e C h i n a 's
e n e r g y c o n s u mp t i o n i s h a v i n g n eg a t i v e e n v i r o n me n t a l i mp a c t s
i n t e r n a t i o n a l l y , n a me l y , C h i n a ' s g o i n g - o u t s t r a t e g y f o r e n e r g y , l o o k i n g
f o r o i l a n d n a t u r a l r e s ou r c e s i n A f r i c an c o u nt r i e s , L a t i n A me r i c a .
            C h i n a 's Ex i m B a n k , u n t i l r e c e n t l y h a s h a d a v e r y k i n d o f c l o s e d
p o l i c y o n w h a t t h e i r e nv i r o n me n t a l a n d s o c i a l i mp a c t s c r i t e r i a we r e ,
a n d w h i l e w e 'v e j us t s t a r t e d a t t he Ch i n a E n v i r o n me n t F o r u m t o h o l d
s o me me e t i n g s o n t h i s i s s u e , w e f o c u s e d i n i t i a l l y o n A f r i c a a n d
a c t u a l l y d a m b u i l d i n g , b u t I a m a c t u a ll y i n t h e p r o c e s s o f t r y i n g t o
g a t h e r mo r e e x p o r t s w h o a r e l o o k i n g a t t h e e n v i r o n me n t a l i mp a c t s o f
C h i n a 's o i l a n d o t h e r p ro j e c t s , b u t t h e r e a r e s o m e p o s i t i v e s i g n s .
            C h i n a E x i m B a n k a mo n t h a g o r e l e a s e d t h e i r e n v i r o n me n t a l
p o l i c y . Th e y 'v e a l s o a gr e e d t h e ir w o r k i n g wi t h t h e Wo r l d B a n k o n h o w
t o i mp r o ve me e t i n g i n t e r na t i o n a l s ta n d a r d s f o r e n v i r o n me n t a n d s o c i a l
i mp a c t s i n t h e i r i n v e s t me n t s . S o t h e s e a r e g o o d s i g n s a n d I j u s t
me n t i o n i t k i n d o f f l a g g i n g i t a s a p o s s i b l e a r e a o f a l s o m a y b e
collaboration.
            S e c o n d a r e a , a i r p o l l ut i o n d r i v e r s . I t h i n k t h a t k n o w i n g s o me o f
t h e d r i v e r s k i n d o f h i g h l i g h t s o t h er a r e a s f o r c o l l a b o r a t i o n t h a t t h e
U.S. could do with China.
            We k n o w t h a t C h i n a , t h e y h a v e a l a r g e p o p u l a t i o n a n d r a p i d
e c o n o mi c g r o wt h , a n d i t 's d r i v i n g t h e i r e n e r g y c o n s u mp t i o n . A n d
t h e y 'r e s t r u g gl i ng t o k e e p u p t h e s u p p l y . On e f a c t o i d t h a t I c a me
across today that I think nicely illustrates this, besides just hearing
about the brownouts in China, is that this year the increase in new air
c o n d i t i o n e r s i n C h i n a , w i l l p r o b a b l y e x c e e d t h e c a p a c i t y o f t h e ma s s i v e
T h r e e G o r g e s D a m i n p r o d u c i n g e n e rg y , j u s t t o g i v e y o u a k i n d o f
feeling about how big their energy growth is.
            B u t a c t u a l l y i t 's n o t j u s t t h e p o p u l a ti o n a n d t h e s p e e d o f g r o w t h .
T h e b i g g e s t k i n d o f c u l p r i t , s h a l l I s a y , i n t h e a i r p o l l u t i o n c o mi n g
f r o m t h e e n e r gy s e c t o r i s a c t ua ll y C h i na 's w e a k e n v i r o nme n t a l
g o v e r n a n c e s y s t e m.
                                                       - 133 -
             N o w , t h e C h i n e s e c e n t r a l g o v e r n me n t r e a l l y h a s p r i o r i t i z e d
e n v i r o n me n t a l p r o t e c t i o n a n d e n e r g y e f f i c i e n c y , a n d y o u 'v e p r o b a b l y
t a l k e d t o s o me p e o p l e a b o u t t h a t a l r e a d y . B u t t h e i r c a pa c i t y f o r
a c t u a l l y i mp l e me n t i n g t h e s e l a w s i s t o ma n y s u r p r i s i n g l y w e a k . T h e
s u c c e s s of t h e e c on o mi c r e fo r ms i n C h i n a c a me f r o m d e c e n t r a l i z a t i o n
o f a u t h o r i t y t o l o c a l g o v e r n me n t s .
             So Beijing really has a lot of difficulty in controlling local
g o v e r n me n t s a n d e n f o r c i n g a l l k i n d s o f r e g u l at i o n s r e l a t e d t o a i r
p o l l u t i o n c o n t r o l a n d w a t e r p o l l u t i o n . T h e r e 's a l o t o f p r o t e c t i o n i s m a t
t h e l o c a l l e ve l t h a t me a n s t h a t B e i j i n g i s w e a k . A l s o C h i n a 's S t a t e
E n v i r o n m e n t a l Pr o t e c t i o n Ad mi n i s tr a t i o n , u n t i l r e c e n t l y , h a s b e e n
pretty weak.
             T h e y o n l y h a v e a b o u t 3 0 0 p e o p l e . T h e y 'r e p o o r l y f u n d e d . T h a t 's
s t a r t i n g t o c h a n g e . T h e r e ' s o n e e n c ou r a gi n g s i g n i s t h a t U . S . E PA i s
working with their counterparts in China to set up six regional offices
t o mi r r o r w h a t w e 'r e d o i n g . N o t a b l y , t h i s i n i t i a t i v e i s f u n d e d b y t h e
A s i a D e v e l o p me n t B a n k , a n d t h a t 's s ome t h i n g t h a t I 'm a l s o s e e i n g t h a t
a l o t o f t h e U . S . a g e n c i e s t h a t a r e w o r k i ng i n C h i n a o n e ne r g y
e n v i r o n me n t s , t h i s k i n d o f c o o p e r a t i o n h a s n 't s a d l y b e e n v e r y w e l l
s u s t a i n e d o v e r t h e p a s t 2 0 s o me y e a r s .
             B u t i n t h e l a s t c o u pl e of y e a r s , I 'm s e e i n g s o me o f t h e
E u r o p e a ns , t h e A s i a De v e l op me n t B a n k a c t ua l l y ki n d of h e l pi n g t o
f u n d t h e E P A a n d o u r o t h e r a g e n c i e s a n d d o i n g s o me w o r k i n C h i n a ,
a n d t h a t 's a n e n c o u r a g i n g s i g n .
             O v e r t h e p a s t fe w y e a r s , t h e Ch i n e s e g o v e r n me n t w i t h
i n t e r n a t i o n a l a s s i s t a n c e h a s b e e n i n i t i a t i n g ma n y p r o g r e s s i v e e n e r g y
p o l i c i e s a n d p i l ot p r o j e c t s a s w e l l a s o p e ni n g a l o t o f s p a c e f o r
e n v i r o n me n t a l n o n - g o v e r n me n t a l N GO s i n t h i s a r e a . N o t a b l y , a l o t o f
U.S. NGOs are doing work in China on energy issues.                                                           It's not
g e n e r a l l y s u p p o r t e d b y U . S . g o v e r n me n t f u n d s . U S A I D , I me n t i o n e d I
h a d a g r a n t , b u t t h e y 'r e v er y , v e r y f e w o f t h o s e .
             A l o t o f t h e i r mo n e y a c t u a l l y c o me s f r o m t h e E n e r g y F o u n d a t i o n
o u t i n C a l i f o r n i a t h a t h a s b e e n w o r k i n g o n p r o mo t i n g e f f i c i e n c y a n d
c l e a n e n e r g y d e v e l o p me n t i n C h i n a f o r t h e p a s t e i g h t y e a r s . L o o k i n g
a t t h e k i n d o f w o r k t h a t t h e N a t ur a l R e s o u r c e s D e f e n s e C o u n c i l h a s
d o n e i n b r i n g i n g t o g e t h e r , f o r e x a mp l e , C a l i f o r n i a E n e r g y a n d P u b l i c
U t i l i t i e s t o p a r t n e r w i t h J i a n g s u P r o v i n c e o n c r e a t i n g a d e ma n d s i d e
ma n a g e m e n t c e n t e r c a n h e l p a l o c al g o v e r n me n t b u i l d t h e i r c a p a c i t y
f o r e n e r g y e f f i c i e n c y . I h i g h l i g h t t ha t e x a mp l e b e c a u s e I s e e t h a t a s a
r e a l l y p r o mi s i n g d i r e c t i o n .
             A s I n o t e d , o n e o f t h e ma i n d r i v e r s i s l o c a l g o v e r n m e n t
i n t r a n s i g e n c e a n d o n i mp l e me n t i n g p o l i c y . A s y o u e x p l o r e wa y s o f
c o o p e r a t i o n , I t h i n k l o o k i n g a t l o c a l t o l o c a l o r w o r k i n g mo r e w i t h c i t y
p r o v i n c i a l g o v e r n me n t s i n C h i n a i s a g o o d a v e n u e b e c a u s e t h e c e n t r a l
                                                      - 134 -
g o v e r n me n t i s c o n v i n c e d t h a t t h e l a c k o f c a p a c i t y i s a t t h e l o c a l l e v e l .
             N o w , t h e e c o n o mi c a n d h e a l t h c os t s o f a i r p o l l u t i on i n Ch i n a a r e
g r e a t . An d t h e h e a l t h a n d e n v i r o n me n t a l t h r e a t s , a s y o u p r o b a b l y
k n o w , a r e c o mi n g f r o m c o a l f i r e d p o w e r p l a n t s , b ut a l s o a p o o r l y
r e g u l a t e d mi n i n g s e c t o r . I p a s s e d o u t a l i t t l e n e w s l e t t e r f r o m t h e
Wi l s o n C e n t e r , ma i n l y b e c a u s e i t h a d a p i c t u r e o f L i n f e n , w h i c h y o u 'v e
p r o b a b l y n e v e r h e a r d o f b e f o r e , b u t t h e Wo r l d B a n k h a s d e c l a r e d
L i n f e n t he mo s t p o l l ut e d c i t y i n t he wo r l d , a n d i t 's a c t ua l l y b e c a us e i t ' s
s u r r o u n d e d b y d o z e n s o f c o a l mi n es a n d c o a l mi n e s i n C h i n a a r e
e x t r e me l y p o o r l y r e g u l a t e d .
             Y o u 'v e p r o b a b l y h e a r d o f t h e s t a t t h a t C h i n a l e a d s i n t he w o r l d i n
t e r ms o f d e a t h s o f c o a l mi n e r s , b ut a l s o s o me t h i n g t h a t 's n o t o f t e n
b r o u g h t t o t h e f o r e f r o n t i n l o o k i n g a t C h i n a 's e n e r g y p o l l u t i o n t r e n d s i s
t h a t h o w p o l l u t i n g c o a l m i n e s a r e . N o t o n l y d o t h e y p o l l u t e l o c al
c o m mu n i t i e s i n t e r ms o f t h e d u s t , b ut a l s o t he t a i l mi n i ng s c o nt a mi n a t e
w a t e r . Th e y a r e a b i g c o n t r i b u t o r , p a r t i c u l a r l y i n n o r t h e r n C h i n a , o f
water pollution.
             I know your focus is energy, but again energy and water issues
a r e l i n k e d i n C h i n a . A b o u t h a l f o f C h i n e s e r i v e r s a r e r a t e d a s g r a de
f o u r o r f i v e , w h i c h me a n s y o u s ho u l d n o t u s e i t f o r i n d u s t r y ,
a g r i c u l t u r e a n d d o n 't d r i n k i t . S o t he w a t e r p r o b l e ms a r e v e r y g r e a t .
T h e l i n k a g e w i t h t h e c o a l mi n e s i s s o me t h i n g t h a t c o ul d b e no t e d a s
another area of collaboration.
             A n o t h e r k i n d o f h e a l t h t h r e a t f r o m e n e r g y c o n s u mp t i o n i n C h i n a
i s a c t u a l l y i n d o o r a i r p o l l u t i o n . I n d oo r a i r p o l l u t i o n , t h e Wo r l d H e a l t h
O r g a n i z a t i o n e s t i ma t e s t h a t a b o u t 4 0 0 , 0 0 0 p eo p l e d i e a n n u a l l y i n Ch i n a
f r o m i n d o o r a i r p o l l u t i o n . T h e y u se a l o t o f c o a l b r i q u e t t e s . I n
S o u t h w e s t C h i n a , t h e c o a l h a s n a t u r a l l y o c c ur r i ng a r s e ni c i n i t a s we l l .
             S o w h e n t h e y us e t h e c oa l i n t h e i r h o us e , i t 's n ot j u s t br e a t hi n g,
b u t d r yi ng t he i r c hi l i pe p p e r s a n d c o r n o v er i t s o t h a t t he y 'r e p oi s o n i ng
t h e ms e l v e s a l s o wi t h t h e i r i n d o o r a i r .
             T h e U S G S h a s d o n e s o me w o r k i n S o u t h w e s t Ch i n a o n i n d o o r a i r
p o l l u t i o n t r y i n g t o f i n d a q u i c k m e t h o d t o t e s t . T h e me t h o d w a s
d i s t r i b ut i n g s o me t e s t i n g ki t s t o c o mmu n i t i e s s o t h e y c o u l d t e s t t h e i r
c o a l a n d t r y t o f i n d s o me t h a t h a d l o we r l e v e l a r s e ni c t o t r y t o , a ga i n ,
lower exposure.
             A n o t h e r r e a l l y p r o mi s i n g a n g l e f o r c o l l a b o r a t i o n t h a t I d o n ' t s e e
e n o u g h a t t e n t i o n p a i d t o i s t h e e n e r g y a n d h e a lt h n e x u s o r j u s t t h e
e n v i r o n me n t a n d h e a l t h n e x u s .
             B e s i d e s t h e U S G S p r o j e c t , U . S . E P A h a s b e e n d o i n g s o me r e a l l y
p h e n o me n a l w o r k c a l l e d t h e I n t e gr a t e d E n v i r o n me n t a l S t r a t e g i es
I n i t i a t i v e . I d o n 't k n o w i f y o u h e a r d a b o u t i t t h i s mo r n i n g w i t h t h e
t e s t i mo n y t h e r e , t h a t - - i t 's a fu n n y t i t l e - - b u t t h e f o c u s i s e n e r g y o p t i o n s
a n d h e a l t h b e n e fi t s .
                                                      - 135 -
            I n t h e l a t e 1 9 9 0 s , t h e y s t a r t e d a t h r e e - y e a r s t u d y i n Sh a n g h a i
w i t h l oc a l r e s e a r c h e r s a n d l o c a l g o v e r n me n t s l o o k i n g a t , w e l l , w h a t
t y p e o f e n e r g y c h o i c e s d o e s S h a n g h a i ma k e i n t e r ms o f c a r s , e n e r g y ,
h e a t i n g , a n d h o w wo u l d t ha t a f f e c t t he p u bl i c 's h e a l t h ? A n d a f t e r t h e
t h r e e - y e a r s t u d y , t h e y g a v e a p r e s e n t a t i o n , wh i c h l e d t h e Sh a n g h a i
g o v e r n me n t t o s i g n i f i c a n t l y c h a n g e t he i r 1 0 t h F i v e - Y e ar P l a n t o p u t a
l o t mo r e p r i o r i t y a n d i n v e s t me n t i n t o c l e a n e r e n e r g y o p t i o n s f o r t h e
city.
            I n my e i gh t ye a r s a t t h e Wo o d r o w Wi l s o n C e nt e r , t hi s i s o n e o f
t h o s e p r o j e c t s t h a t h a s a n i m p a c t . Th i s h a s ma d e a d i f f e r e n c e . A n d I
t h i n k t h a t a l s o r e s o n a t e s r e a l l y w el l w i t h t he p o l i c yma k e r s . L o c a l
g o v e r n me n t o f f i c i a l s a r e mo t i v a t e d t o ma k e p r o f i t s . S h o w i n g t h e e x a c t
c o s t s , di s s e mi n a t e t h a t i n f o r ma t i o n m o r e wi d e l y i n y o u r p r o j e c t s , t o t h e
p u b l i c , t h e r e s e a r c h e r s , I t h i n k c a n r e a l l y h e l p k i n d o f mo v e f o r w a r d
s o me o f t h e c h a n g e s t h a t n e e d t o h a p p e n a t t h e l o c a l l e v e l .
            EPA has continued doing this work focusing on a study in
B e i j i n g . T h e y 'v e d o n e a s l i g h t l y b ro a d e r n a t i o n a l s t u d y , mo r e c o u l d g o
o n . N I H , L a w r e n c e B e r k e l e y N a t i o n a l L a b , a n d a l s o E PA h a v e a l s o
b e e n d o i n g s o me w o r k o n i n d o o r a i r p o l l u t i o n . A n d N I H a n d o b v i o u s l y
NSF also have done a lot of work in the health sector.
            A n o t h e r r e a s o n I t hi n k t h a t t h e h e a l t h s e c t o r i s i mp o r t a n t t o n o t e
i s t h a t i n C h i n a i n t h e r ur a l a r e a , i n p a r t i c u l a r , t h e r e i s o s t e n s i b l y n o
h e a l t h c a r e s y s t e m. C h i n a r a n k s 1 8 7 t h o u t o f 1 91 c o u nt r i e s i n t e r ms o f
access to health care.
            S o I h a v e mo r e s t a t s a b o u t h o w a wf u l , a w f ul a i r q u a l i t y a n d
water quality are in China, but when you think that the people in
C h i n a , t h e y 'r e l i v i n g i n a v e r y p o ll ut e d e n v i r o nme n t a n d l a c k i ng a c c e s s
t o g o o d h e a l t h c a r e , i t 's a c o mi n g c r i s i s . S o t ha t 's w h y a g a i n o n e o f m y
big points is just, you know, again, tossing out there to think about the
kind of energy and health nexus.
            L a s t c o u p l e c o m me n t s h e r e . I t o u c h e d o n a f e w a l r e a d y . C h i n a
h a s ma n y c h a l l e n g e s a n d m a n y o p p o r t u ni t i e s f o r c o l l a b o r a t i o n i n k i n d
o f h e l p i n g t o c l e a n u p C h i n a 's d e p e n d e n c e o n c o a l . T he y w i l l r e ma i n
d e p e n d e n t o n c o a l a t l e a s t a s mu c h a s t h e y a r e t o d a y , a b o u t 7 0 p e r c e n t ,
for the next 20 years, even though they have been, as you probably
h e a r d t h i s mo r n i n g , b r o a d e n i n g t h e i r e n e r g y p o r t f o l i o .
            T h e r e 's a l s o a l o t o f o p p o r t u n i t i e s f o r d e v e l o p i n g a l t e r n a t e
e n e r g y r e s o u r c e s . I t h i n k t h a t t h e U . S . g o v e r n me n t h a s b e e n o v e r t h e
l a s t 2 0 s o me y e a r s o f d o i n g c o o pe r a t i o n l e s s i n v ol v e d a n d l e s s
c o n s i s t e nt i n w o r ki n g w i t h C h i n a o n e n e r g y e n v i r o n me n t t h a n U . S .
NGOs and other international organizations in China. And it just
h a s n 't b e e n a ma j o r p r i o r i t y .
            B u t I 'm s e e i n g t h e r e 's s t i l l c o n t in u i n g p r o j e c t s , b u t a g a i n t h e y 'r e
n o t a s c o n s i s t e n t . I n t hi s c o o p e r a t i o n , t h e y d o n 't n e e d t o n s o f mo n e y ;
                                                      - 136 -
i t 's j us t s o me t i me s a n i s s u e of c a p a c i t y b u i l d i n g . O v e r my y e a r s I h e a r
s t o r i e s , EP A s t a f f e r s , t h e y c a n 't e v e n h a v e mo n e y t o f l y o v e r t o C h i n a .
B u t t h e C h i n e s e a r e - - a l s o t h e S E P A, y o u k n o w , t h e y ' r e p i c k i n g u p a l o t
o f t h e c o s t s f o r s o me o f t h e s h a r e d t r a i n i n g .
            S o I t hi nk t h a t t he C h i n e s e a r e v e r y , w h a t I ' v e s e e n o v e r t h e
y e a r s , v e r y i n t e r e s t e d i n w o r k i n g w i t h t h e U . S . g o v e r n me n t o n e n e r g y
e n v i r o n me n t a l i s s u e s a n d I 'm v e r y e x c it e d t h a t a l l o f y o u a r e i n t e r e s t e d
in looking at this kind of energy cooperation. And I'm going to stop
there.
[The statement follows:]

                 Prepared Statement of Dr. Jennifer L. Turner
                    C o o r d i n a t o r , C hi na E n v i r o n m e n t a l F o r u m
              W o o d r o w W i l s o n I n t e r n a t i o n a l C e nt e r f o r S c ho l a r s
                                          Washington, D.C.

China’s Energy Consumption and Opportunities for U.S.-China Cooperation to Address the Effects of
China’s Energy Use

Since 1999, I have directed the China Environment Forum at the Woodrow Wilson Center. In the China
Environment Forum we convene meetings and create publications that promote dialogue among U.S. and
Chinese scholars, policymakers, businesses, and nongovernmental organizations (NGOs) on environmental
and energy challenges in China. In the course of my work I have become acquainted with many
government, NGO, business, and research representatives from the United States and Asia who are active
in projects and policy development to address China’s energy challenges. I draw much of my comments
today from insights I have learned in working with many of these on-the-ground energy practitioners, as
well as from work the China Environment Forum has been doing with Western Kentucky University on the
China Environmental Health Project, an initiative supported by the U.S. Agency for International
Development. I would like to note that my comments today are my personal opinion and they do not reflect
the views of the Woodrow Wilson Center. In my seven minutes I have four points to make about the
environmental impacts of China’s energy use and I will highlight some opportunities for U.S.-China
cooperation. I welcome the discussion with the commission and Dr. Ho after my comments.

    1) Transboundary Impacts of China’s Air Pollution and Energy Consumption. China already
       consumes more energy and emits more greenhouse gases than any country except the United
       States. It is expected to surpass the United States in CO2 emissions sometime later this year.
       Carbon dioxide (CO2) emissions, sulfur dioxide (SO2) and mercury emissions from coal burning
       are some of the main transboundary pollutants from China. Besides pollution emissions from
       China, many of the China Exim Bank investments into oil and other resource extraction
       internationally have degraded the environment overseas, particularly in Africa. However, in recent
       months China Exim Bank has initiated dialogues with other international financial institutions on
       improving its transparency and strengthening oversight of the environmental and social impacts of
       its investments.

    2) Air Pollution Drivers. The main drivers of China’s air pollution problems are dependence on coal
       for energy, growing car use and, most crucially, the country’s weak environmental governance
       system. Over the past few years the Chinese government, often with international assistance, has
       been initiating many progressive energy policies and pilot projects, as well as opening more space
       for international and domestic environmental nongovernmental organizations (NGOs) to work in
       this area.
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    3) Economic and Health Costs of Air Pollution in China. China is the largest producer and
       consumer of coal in the world. Abundant natural coal reserves have fueled China’s booming
       economic development; however, the increasing domestic health threats from coal-fired power
       plants, a poorly regulated coal mining sector, and coal briquette use in rural homes pose
       significant challenges for the Chinese government to address due to local government
       protectionism and a weak health care system. The serious environmental and public health
       problems created by coal use may nullify much of China’s GDP growth.

    4) Challenges and Opportunities of China’s Continued Coal Dependence and Development of
       Alternative Energy Sources. Over the past few years the Chinese government has diversified its
       energy portfolio to expand nuclear and renewable energy development, particularly hydropower,
       which is slated to quadruple by 2020. However, due to exploding energy demand, the dependence
       on coal will remain around 70% for the next two decades. This continued dependence highlights
       the need for even more collaboration with China on energy efficiency initiatives, clean coal
       technologies and policies to help improve the capacity of China’s environmental watchdogs to
       better monitor power plants and enforce emissions control and trading policies. International
       assistance could also improve the design and planning of renewable energy projects, particularly
       hydropower, in which the lack of local government accountability often has led to ill-conceived
       and poorly executed dams that do not take ecological and human livelihood costs into account.
       The U.S. government has been much less involved and less consistent in working with China on
       clean energy and energy efficiency than many other bilateral, multilateral, and nongovernmental
       clean energy initiatives. The fairly significant number of U.S. NGOs and bi/multilateral
       organizations engaged in improving China’s energy development offers the U.S. government
       many opportunities for forming partnerships in clean energy and energy efficiency work in China.

1) China’s Domestic and Transboundary Air Pollution
China has the dubious distinction of having 16 out of the world’s 20 most polluted cities. Beijing’s efforts
to clean up the city’s air before hosting the 2008 summer Olympics have highlighted China’s broader
challenge in addressing the serious urban air pollution from cars, coal, and dust (from desertification and
construction). Rural areas also face serious indoor air pollution challenges from coal burning for household
use.

Coal, most of it dirty, fuels 70 percent of China’s energy and is the main source of the country’s domestic
and transboundary air pollution. Notably, in the 1990s as many Chinese cities shifted away from coal to
natural gas heating, personal car ownership grew phenomenally (although still quite low when compared to
per capita rates in industrialized countries). Today, CO2 emissions from cars have replaced coal as the
major source of air pollution in major Chinese cities. Despite considerable efforts to promote energy
efficiency and renewables, China will remain dependent upon coal for the foreseeable future.

The lack of widespread coal washing infrastructure and scrubbers at Chinese industrial facilities and power
plants highlight the potential negative domestic and global air impacts of China’s plans to build 562 new
coal-fired power stations by 2012. China already emits more greenhouse gases (GHG) than any country
except the United States, and is expected to surpass the United States in GHG emissions sometime this year
(although cumulatively, U.S. CO2 emissions will be greater since it remains in the atmosphere for nearly
100 years). The expansion of China’s power plants alone could nullify the cuts required under the Kyoto
Protocol from industrialized countries.

Regionally, sulfur dioxide (SO2) and mercury emissions from coal burning are some of the main pollutants
spreading from China. Acid rain resulting from coal and fossil fuel combustion has damaged nearly one-
third of China’s limited cropland and also severely degraded forests and watersheds on the Korean
Peninsula and in Japan.


                                               - 138 -
Particulates, mercury, and dust from China are also worsening air quality as far away as the U.S. west
coast. While mercury is insoluble as it leaves smokestacks in China, by the time it reaches the U.S. west
coast it transforms into a reactive gaseous material that dissolves easily in the wet Pacific Northwest. While
it is difficult to track the exact sources of overseas pollutants, some U.S. researchers have estimated that
approximately one-third of California’s fine particulate pollution originates from Asia. There are concerns
in California and other west coast states that these pollutants could potentially nullify their progress in
meeting stricter Clean Air Act requirements. In May 2006, researchers at the University of California-
Davis claimed that nearly all the particulate matter over Lake Tahoe originated from China. The
researchers of one study featured in The Oregonian posited that at least one-fifth of the mercury entering
the Willamette River in Oregon comes from abroad, most likely from China. This mercury is even
beginning to build up to toxic levels in the local wildlife.

Notably in China, data on carbon dioxide (CO2) and mercury emissions from coal burning have not been
released since 2001. Unconfirmed data estimate that China releases 400 to 600 tons of mercury each year
(U.S. emissions are approximately 48 tons each year). Coal burning in China is possibly emitting up to 25
percent of global mercury. A 2006 the Chinese State Environmental Protection Administration (SEPA)
survey found that 41 percent of fish species in water bodies in eastern Jiangsu Province, where there is a
high concentration of manufacturers, contained various heavy metals transmitted through polluted air fall-
out. The lack of data in China on air emissions complicates efforts at promoting emissions trading and
environmental information disclosure programs and highlights an area where more international
collaboration could be very useful.

Another often overlooked pollutant creating hazy skies in China and beyond is black carbon (BC) soot.
BC—the active ingredient in haze produced by vehicles, burning crop residues, and household stoves—is
potentially the second most important global warming gas after CO2. China is the largest BC-emitting
country in the world (responsible for 17 percent) and small BC particles are causing hundreds of thousands
of premature deaths from respiratory illnesses each year in China. In combination with SO2, BC particles
are blocking sunlight and may be lowering crop yields by 30 percent for grain crops in China. Regionally,
BC emissions may be heating the atmosphere and destabilizing weather in China and in the Pacific region.

Another environmental impact linked to China’s energy consumption is China’s overseas investments into
oil and other resource extraction. China’s export credit and guarantee agencies—in particular China Exim
Bank and Sinosure—have played an important role in fostering the rapid expansion of Chinese trade and
overseas investment. In 2005, China Exim Bank approved loans with a volume of $20 billion. Established
only in 1994, the institution has grown to become the world’s third largest export credit agency, financing
many oil, mining, dam, and other infrastructure projects in the Africa and Latin America. China Exim
lending practices tend to follow China’s foreign policy, with package deals frequently focusing on projects
that provide access to raw materials, and on concessional loans for economically and politically important
countries. In Africa, China Exim Bank is investing in many much-needed infrastructure projects, but often
without strict social and environmental standards, which potentially undermine efforts to bring about good
governance, environmental protection and social justice. Over the past few months there have been signs
that China Exim Bank is becoming more receptive to improving its oversight of investments—it recently
released its environmental policy documents and has begun discussions with the World Bank on
strengthening the environmental and social impacts of its investments. The U.S. government could also
become involved in working with China Exim Bank to help bring it up to international standards on
environmental protection.

2) Main Drivers of Air Pollution Problems
While China’s large population and rapid economic growth are driving its phenomenal energy
consumption, it is the country’s dependence on coal combined with a weak environmental governance
system that explain the considerable air pollution and other ecological damage from the energy sector.

In 1979, Deng Xiaoping granted local governments considerable authority to promote economic growth,
                                                - 139 -
which they have, but at a major cost to the environment. Strong local governments routinely ignore the
poorly funded and understaffed State Environmental Protection Administration (SEPA) and its local
bureaus. As the above section indicated, China’s failing environmental governance system not only poses
domestic health and ecological threats, but also is creating negative environmental impacts regionally and
globally.

To push better energy conservation and pollution control from power plants at the local level, the central
government has passed progressive energy laws that create incentives for local officials to develop clean
coal and renewable energy sources. There is also a continued, yet still unsuccessful effort to create a green
GDP system to judge local officials on their environmental performance. A number of U.S. research
institutions and NGOs—many with funding from the Energy Foundation—have been pursuing energy
conservation and clean energy programs with both central and local governments over the past decade.
Some of the most promising kinds of international projects are those working to build the capacity of local
governments in the energy sector. For example, Natural Resources Defense Council and the China-U.S.
Energy Efficiency Alliance have brought together the Jiangsu Provincial Economic & Trade Commission,
the California Public Utilities Commission, and California Energy Commission to develop end-use energy
efficiency incentive (demand-side management) programs in Jiangsu Province. Another vital local capacity
building effort that could significantly improve SEPA’s ability to monitor and enforce air pollution control
laws is the creation of six regional environmental protection offices. The U.S. Environmental Protection
Agency is working with their Chinese counterparts on this promising initiative, which is notably funded by
the Asian Development Bank.

3) Growing Economic and Health Costs from Coal Burning
In 2006, the Chinese State Environmental Protection Administration estimated that environmental
degradation and pollution cost the economy at least 10 percent of its GDP annually. Acid rain alone is
causing ecological degradation and human health problems that cost the country $13 billion annually.
Statistics in China are often difficult to find or verify, but overall studies on China’s air pollution indicate
serious threats to economic growth, the environment, and human health:

• Climate experts within China link greenhouse gas emissions and deforestation to the rising incidences of
natural disasters witnessed in the first half of 2006, which forced the evacuation and relocation of 13.2
million people and killed more than 2,300, causing direct economic losses of $24 billion.

• China’s Meteorological Administration has estimated that air pollution is driving some extreme weather
events, which hamper China’s economic growth by between 3 to 6 percent of GDP, or $70-130 billion,
annually.

• Estimates on respiratory illnesses from China’s air pollution leading to early deaths range from 300,000 to
500,000.

• Indoor air pollution—much from burning coal briquettes—contributes significantly to the leading cause
of death among children in rural China—pneumonia. With 80 percent of the population using solid fuels
(particularly coal briquettes), the World Health Organization estimates that 394,200 people die annually
from indoor air pollution in China. Respiratory problems are particularly acute in China’s countryside
because many rural residents lack any form of health coverage and medical care has become prohibitively
expensive as the industry increasingly is privatized. A recent WHO survey has ranked China 187th out of
191 countries in terms of equality to medical treatment.

• Air pollution also poses a threat to international investment in China. In February 2007 the China
Environment Forum hosted a talk on air pollution and health in southern China in which Christine Loh,
founder of the Hong Kong think tank Civic Exchange, suggested that Hong Kong could lose its status as
the economic hub of Asia if the city does not clean up its skies. One sign the financial sector may already
be fleeing smoggy Hong Kong was a statement from Merrill Lynch recommending that investors switch
                                                 - 140 -
their real estate investments from Hong Kong to Singapore, a city with significantly cleaner air. In the long
run other Chinese cities may experience a similar flight in international investment. Beijing and Shanghai
are already considered hardship posts for employees of international companies due to the poor
environmental quality.

Environmental and Health Impacts of Coal Mining Sector
Linfen—a major coalmining city in Shanxi Province—has been dubbed the most polluted city in the world
by the World Bank. The coal industry has greatly boosted the city’s economic development; however, it has
led to the dramatic deterioration of the environment and a rise in major health problems. Crops are covered
in grey dust and considered toxic, and the coal pollution dust is so great cars must use headlights during the
day. City residents suffer from respiratory illnesses from the severe pollution generated by dozens of coal
mines surrounding the city. Many other cities, particularly in northern China face similar problems from
coal mining.

Coal production in China has increased about 66 percent over the past 5 years from 1.38 billion tons in
2001 to 2.3 billion tons in 2006. China’s huge coal mining sector is strikingly antiquated and highly
polluting when compared to the industry in developed countries.
China has approximately 30,000 coal mines, 80 percent of which are small mines, which are the major
source of the environment, safety, and public health problems. Besides air pollution, degradation of water
and land are growing environmental problems. Enforcement of laws to limit these problems is weak and
mines are thus not pushed to internalize the costs of their production. Some of the key environmental
impacts from coal mining include:

• Methane Emissions. Globally, coal mines release about 8 percent—nearly half—of all human-induced
methane emissions. China is the world’s leading emitter of coal mine methane. With a global warming
potential 23 times greater than CO2, methane is a potent greenhouse gas, which highlights the significant
impact a decrease in methane emissions could have on limiting potential global climate change. Methane in
mines is also responsible for many explosions, the main cause of miner deaths in China. Besides methane,
731,300 tons of SO2 and soot are emitted each year from Chinese coal mines. Soot pollution contributes to
local and global climate change. In 2004, the U.S. government launched in 2004 the Methane to Markets
Partnership, which includes 18 national governments and nearly 200 private sector companies that aim to
help overcome the financial, regulatory, and technical barriers to coal mine methane (CMM) recovery
projects. Such projects capture methane, improve safety of mines, and provide a clean energy source for
communities surrounding mines. There are currently thirty CMM projects in China.

• Water Quality and Quantity Threats. A large amount of toxic wastewater from mines is discharged
without any treatment in China. The discharged wastewater combined with runoff from mine tailings has
greatly polluted surface water and groundwater in mine areas, often contaminating soils and crops. The
need for water to wash coal has stressed already water-scarce regions in northern China, particularly
Shanxi, one of the major coal producing provinces. In some mining areas, the underground water level has
dropped considerably because of coal exploitation.

• Expanding Waste Land and Desertification. China has about 13.3 million hectare waste land, and about
46,667 hectares of land is destroyed by coal mining every year, 66.7 percent of which is arable land.
Mining is also one of the factors exacerbating desertification in northern China.

• Land Subsidence and Seawater Intrusion. In Shanxi, the largest coal producing province in China, about
one million people have been affected by land subsidence from mines over the past few years. Seawater
intrusion has occurred in some of China’s coastal mine areas due to pumping of water from mines, which
contaminates freshwater resources (which are quite limited in China) and cropland surrounding the mines.

• Human Health Risks. Mine workers face many health risks, such as dust-related lung diseases, hearing
loss, neuromuscular disorders, and rheumatism. According to China’s Ministry of Health figures, of the
                                                - 141 -
approximately one million people in China suffering from pneumoconiosis (black lung disease), 600,000
are miners. The number of miners falling ill from pneumoconiosis increases by approximately 70,000 every
year. Every year, nearly 80 percent of the world’s total deaths in coal mine accidents occur in China,
underscoring the poor state of safety measures and regulation of Chinese mines.


4) Challenges and Opportunities of China’s Continued Coal Dependence and Development of
Alternative Energy Sources

While the air quality problems linked to energy production are grim, another major area of environmental
challenge linked to energy production is actually the destruction of water resources—some of which stems
from coal mining tailings, fall out of air pollutants, and hydropower plant construction. These forms of
water resource degradation exacerbate other pollutants in water, which have left half of China’s rivers so
polluted that their water cannot (or should not) be used by industry, agriculture or drinking. Twenty-five
percent of the Chinese population, mainly in rural areas, is drinking unclean water. Anecdotal evidence
indicates that cancer, tumor, and miscarriage rates in many of China’s heavily polluted river basins are on
the rise.

China is facing serious shortages of energy as its rapid economic expansion further strains its limited
natural resources. Over the past few years a new round of dam building in southwest China aims to triple
China’s hydropower capacity by 2020. China, already the biggest hydropower user in the world, is home to
86,000 dams—22,000 of which are large dams, accounting for 45 percent of large dams in the world.
Tripling China’s hydropower capacity would mean:

• Fragmentation of ecosystems across China and in downstream neighboring states;
• Impoverishment of biodiversity and pristine rivers in China; and,
• Displacement of more than one million people from their ancestral homeland in the deep valleys of
China’s hilly southwest.

The construction on China’s largest dam—the Three Gorges Dam on the Yangtze River had been debated
for decades in China before the government approved the plan in 1992. The goals of the dam were to
improve flood control and navigation on the river and provide nearly 11 percent of China’s energy needs.
In order to prevent siltation of the Three Gorges Dam, Chinese planners now aim to build 6 large dams on
the trunk of the Yangtze River. In addition to these major dams on the Yangtze, along its tributaries and
other rivers in southwest China there are 200+ dams planned. Chinese environmental NGOs and
environmentalists worry that the current massive hydropower development will severely overexploit
China’s rivers and result in serious environmental and social harm.

Most of the local NGOs doing this work on this issue are not ideologically against dams, rather proponents
of transparent decision-making—most of the current dams are local government initiatives that fail to carry
out environmental impact assessments or involve local communities in the decision-making process.

The Nature Conservancy is one U.S. NGO that is working with the Chinese government to promote more
ecological considerations in dam building. In terms of promoting transparency in construction projects like
dams and factories in China, the American Bar Association, National Democratic Institute, and EcoLinx
Foundation are carrying out training projects focused on strengthening China’s environmental impact
assessment processes and public participation in environmental decision-making.
Opportunities for Energy Collaboration with China
China’s regional and global pollution is fueled both by weak environmental governance domestically and
by the burgeoning demand internationally for cheap Chinese goods. This demand drives China’s economic
machine and its pollution. For example, there are estimates that 7 percent of China’s CO2 emissions are due
to production of U.S. imports.


                                               - 142 -
A growing number of bilateral and multilateral aid agencies and NGOs have established clean coal, energy
efficiency, urban transport, and renewable energy projects in China, as well as undertaken environmental
governance initiatives that strengthen local regulators and society. Chinese environmental NGOs have
begun to take on more sensitive issues such as a national campaign to demand more transparency in dam-
building decision-making and assisting pollution victims in class action court cases.

The Chinese central leadership has vowed to significantly reduce air pollution from the energy sector by
passing ambitious laws and pronouncements prioritizing renewable energy and energy efficiency, including
more fuel-efficient automobiles. China’s notoriously weak environmental watchdog agency has been
flexing its muscles more over the past two years, pushing for prosecuting firms for toxic chemical spills,
cracking down on major polluters or environmentally damaging dam projects by using a newly
strengthened environmental impact assessment law, and passing regulations to give the public a greater
voice in environmental policymaking.

All of these progressive policy developments and growing international assistance in China’s energy sector
highlight numerous areas in which the U.S. government could become more involved. Notably, despite the
alarming environmental degradation and human health trends linked to China’s energy use, energy issues
have not occupied a prominent position in U.S.-China relations. To the extent that energy and
environmental issues have been considered at all, U.S. policy regarding cooperation with China in these
areas has not been sustained or consistent, reflecting tensions in the U.S.-China relationship, disagreements
between past administrations and Congress, and the higher priorities given to other issues in the
relationship. There are some new opportunities for strengthening Sino-U.S. energy cooperation such as the
Sino-U.S. Strategic Economic Dialogue held in December 2006. This meeting catalyzed a Joint Economic
Study that is focusing on identifying cost-effective solutions to improve air quality and energy efficiency in
both countries, as well as recommend policies, regulations, and institutions for China to meet its energy
efficiency and clean energy targets in its Eleventh Five-Year Plan. SED also prompted the renewal of the
Sino-U.S. Protocol on Energy Efficiency and Renewable Energy, which the Department of Energy had
allowed to expire in February 2005. If the U.S. government prioritizes energy cooperation with China there
are not only environmental and human health benefits globally, but such collaboration could play an
important role in building up good will and offsetting tensions in other parts of the Sino-U.S. relationship.

Resources
Portions of this testimony document were drawn from China Environment Forum publications and online
research briefs and meeting summaries. I list some of my project’s resources and other publications on
China’s energy challenges below.

Bosshard, Peter. (December 2006). “Export Credit Agencies and Environmental Standards: An Invitation to
Join    the   Dialogue.”    International   Rivers   Network     International  Finance    Campaign.
http://www.irn.org/programs/finance/index.php?id=061220exim.html

Buckley, Lila. (December 19, 2006). “Feeling the Warming: Villagers in Southwestern China
Grapple         with     Climate        Change.”       China          Watch/Worldwatch                     Institute.

China.org.cn.            (November             5,     2004)    “Rehabilitating   China’s   Killer   Coal   Mines.”
http://www.china.org.cn/english/2004/Nov/111285.htm



Casey Delhotal and Barbora Jemelkova. (2006). “Recovery and Use of Methane from Coal Mines in
China.”           China            Environment             Series.          Issue          8.

Ellis, Linden. (2007). “China Exim Bank in Africa: Opportunities for Strengthening Environmental
Standards for Hydropower in Sudan.” China Environment Forum Meeting Summary.
http://www.wilsoncenter.org/index.cfm?topic_id=1421&fuseaction=
topics.event_summary&event_id=224956
                                                              - 143 -
Kim, Juli. (2007). “Transboundary Air Challenges in China.” China Environmental Health Project
Research Brief. www.wilsoncenter.org/cef

Lü Zhi, Michael Totten, & Philip Chou. (2006). “Spurring Innovations for Clean Energy and Water
Protection in China: An Opportunity to Advance Security and Harmonious Development.” China
Environment                       Series                         (Issue                     8).

Ma Jun. (2005). “Will China’s Rivers Survive the Next 20 Years? Record-Breaking Dam Building Boom
Could Make Free-Flowing Rivers an Endangered Species in the World’s Most Dammed Country.” World
Rivers Review. Volume 20, Number 4. http://www.irn.org/programs/china/

Nankivell, Nathan. (January 11, 2006). “China’s Pollution and the Threat to Domestic and Regional
Stability.”                                                                                 ZNet.

Ng, Wei-Shiuen & Schipper, Lee. “China’s Motorization Trends: Policy Options in a World of Transport
Challenges” Growing in the Greenhouse: Policies and Measures for Sustainable Development while
Protecting the Climate. Eds. Kevin Baumert, et al. http://climate.wri.org/growingingreenhouse-pub-
4087.html.

Pottinger, M., Stecklow, S., & Fialka, John. (December 20, 2004). “Invisible Export—A Hidden Cost of
China’s Growth: Mercury Migration.” Wall Street Journal. http://www.webcitation.org/5ML0etsAk.

Read, Richard. (November 24, 2006). “China’s Dirty Exports: Mercury and Soot” The Oregonian.

Stern, Rachel & Hopkinson, Lisa. (2003). “One Country, Two Systems, One Smog—Cross Boundary Air
Pollution Policy Challenges for Hong Kong and Guangdong.” China Environment Series 6.

The Edge Daily. (November 22, 2006) “Merrill Downgrades HK Office Sector, Cites Pollution.”

Turner, Jennifer L. & Juli S. Kim. (February 7, 2007). “China’s Filthiest Export.” Foreign Policy in Focus.
http://www.fpif.org/fpiftxt/3978

Wan, Ming. (April 1998). “China’s Economic Growth and the Environment in the Asia-Pacific Region.”
Asian   Survey,    Vol.    38,    No.   4.,   pp.   365-378.    http://links.jstor.org/sici?sici=0004-
4687%28199804%2938%3A4%3C365%3ACEGATE%3E2.0.CO%3B2-A

Yang Yang. (2007). “Coal Mining and Environmental Health in China.” A China Environmental Health
Project                                        Research                                    Brief.
http://www.wilsoncenter.org/index.cfm?topic_id=1421&fuseaction=topics.item&news_id=231749

Yeh, Andrew. (April 11, 2006). “Toxic Chinese Mercury Pollution Travelling to U.S.” Financial Times.

Zhao Xiaohui & Jiang Xueli. (November 13, 2004). “Coal mining: most deadly job in China”
http://www.chinadaily.com.cn/english/doc/2004-11/13/content_391242.htm

        HEARING COCHAIR D'AMATO:                               Thank you very much.                   Dr.
Ho.

      STATEMEMT OF DR. MUN S. HO, INSTITUTE OF
  QUANTITATIVE SOCIAL SCIENCE, HARVARD UNIVERSITY,
    VISITING SCHOLAR, RESOURCES FOR THE FUTURE,
                       - 144 -
                                           W A S H I NG T O N , D. C .

            D R . H O : F i r s t , I 'd l i k e t o t ha n k t h e Co m mi s s i o n f o r i n v i t i n g me
t o t a l k a bo u t t he e f f e c t s o f C h i n a 's e n e r g y u s e on t h e e n vi r o n me n t a n d
t a l k a b o u t h o w t h e U . S . mi g h t h e l p i m p l e me n t p o l i c i e s t o r e d u c e t h i s
e n v i r o n me n t a l d a ma g e .
            I s h o u l d p o i n t o u t I 'm a n e c o n o mi s t a n d I d r a w o n t h e k n o w l e d g e
o f my c o l l e a g u e s i n t h e E n g i n e e r i n g a n d S c h o o l o f P u b l i c H e a l t h i n my
c o m me n t s .
            L e t me hi g hl i g ht t h e ma i n p o i nt s o f my w r i t t e n c o mm e n t s . I
k n o w i t 's b e e n a l o n g d a y . M a n y o f t h e s e f a c t s a r e w e l l k n o w n b u t l e t
me p u t t h e m i n c o n t e x t . O n e , C h i na i s s t i l l a v e r y p o o r c o u n t r y d e s p i t e
ma n y y e a r s o f r a p i d e c o n o mi c g r o w t h . I t s p e r c a p i t a i n c o me i s a b o u t
$ 7 , 0 0 0 c o mp a r e d t o , s a y , 1 1 , 0 0 0 f o r M e x i c o a n d 2 2 , 0 0 0 fo r K o r e a .
            P o o r p e o p l e u s e l e s s e n e r g y . C h i ne s e e n e r gy c o ns u m p t i o n i s
o n l y a b o u t a f i f t h o f t h e J a p a n e s e l e v e l , w h i c h i s a l r e a d y v e r y fr u g a l i n
c o mp a r i s o n t o t h e U . S . , a n d i n p a r t i c u l a r p o o r s o c i e t i e s u s e a l o t mo r e
c o a l c o mp a r e d t o o i l . C o a l i s 7 0 p e r c e n t o f e n e r g y u s e i n Ch i n a
c o mp a r e d t o 2 3 p e r c e nt i n t he U . S . , i . e . , a v e r y d i r t y f u e l .
            P o o r s o c i e t i e s a l s o d o n o t c o n t r o l t h e e mi s s i o n s o f p o l l u t a n t s
v e r y w e l l . S o e v e n t ho u g h l e s s f o s s i l f u e l i s u s e d p e r p e r s o n , t h e
e mi s s i o n s p e r p e r s o n i s h i g h e r - - e mi s s i o n s o f s u l f u r d i o x i d e , p a r t i c u l a t e
ma t t e r a n d o t h e r t o x i n s . S o t h e s e hi gh e r e mi s s i o n s c o mb i n e d w i t h t he
h i g h p o p u l a t i o n d e n s i t i e s me a n t h a t a b i g fr a c t i o n o f t h i s 1 . 3 b i l l i o n
p e o p l e a r e e x p o s e d t o v e r y h i g h c o n c e n t r a t i o n s o f p a r t i c u l a t e ma t t e r ,
s u l f u r d i o x i d e a n d o z o n e . Th e s e h a v e b e e n f o u n d t o c a u s e r e s p i r a t o r y
p r o b l e ms . T h e s u l fu r d i o x i d e t u r n i n g t o s ul f a t e s t h a t g o d e e p i n t o t h e
l u n g s a n d c a u s e v a r i o u s p r o b l e ms .
            S o o u r o wn c o n s e r v a t i v e e s t i ma t e i s t h a t t h e n u mb e r o f p r e ma t u r e
d e a t h s d u e t o o u t d o o r a i r p o l l u t io n i s 1 0 0 , 0 0 0 p e r y e a r a n d mo r e t h a n a
mi l l i o n c a s e s o f c h r o ni c br o n c hi t i s . T h i s i s t h e l o w e nd c o mp a r e d t o
t h e fi g u r e t h a t J e n n i f e r j u s t me n t i o n e d o f 4 0 0 , 0 0 0 d u e t o i n d o o r a i r
pollution.
            V a r i o u s s u r v e y s o f p e o p l e 's w i l l i n g n e s s t o p a y t o r e d u c e
p o l l u t i o n d a ma g e h a v e n o w b e e n c o n d u c t e d i n Ch i n a s i m i l a r t o
me t h o d o l o g i e s u s e d b y t h e U . S . E P A t o e v a l u a t e t h e b e n e f i t s o f a i r
pollution regulation. These surveys have found high valuations, i.e., a
h i g h w i l l i n g n e s s t o p a y , t o f o r e g o o t h e r ma t e r i a l g o o d s , i n o r d e r t o
h a v e a mo r e h e a l t h fu l e n v i r o n me n t .
            T h i s v a l u a t i o n , i n c o mp a r i s o n t o t h e i r i n c o me s i s c o mp a r a b l e t o
those found in the rich countries. And when we apply these valuations
t o o u r e s t i ma t e s , w e w o u l d p u t t h e d o l l a r v a l u e o f t hi s o u t d o o r a i r
pollution at two percent of GDP, i.e., before including the indoor air
a n d w a t e r p o l l u t i o n d a ma g e . S o t h i s i s a v e r y h i g h n u mb e r .
                                                       - 145 -
             O v e r t he y e a r s , C h i n a h a s s u c c e e d e d i n r e d u c i n g p a r t i c u l a t e
ma t t e r e mi s s i o n s , b u t s u l f u r d i o x i d e r e mo v a l r e q u i r e s e x p e n s i v e
d e s ul f u r i z a t i o n e q u i p me n t t h a t i s n o w j u s t b e g i n n i n g t o b e p u t i n p l a c e ,
a n d e mi s s i o n s o f S O 2 h a s a c t u a l l y b e e n r i s i n g s i n c e 2 0 0 0 .
             T h e w o r s t t r e n d i s i n n i t r o g en o x i d e s f r o m mo t o r v e h i c l e s ,
n i t r o g e n o x i d e s w h i c h c a u s e o z o n e , a n d t hi s i s r i s i ng r a p i d l y d e s p i t e
tightening regulations on vehicles.
             T h e s e h i g h a n d r i s i n g d a ma g e s h a v e p u t p o l l u t i o n r e d u c t i o n h i g h
o n t h e g o v e r n me n t ' s a g e n d a . E n e r g y e f f i c i e nc y a n d S O 2 r e d u c t i o n s a r e
o n e o f t h e f e w e x p l i c i t t a r g e t s me n t i o n e d i n t h e 1 1 t h F i v e - Y e a r Pl a n ,
t h e p l a n c o v e r i n g '06 t o 2 0 1 0 .
             T h e o t he r t a r ge t i s t h e G D P p e r c a p i t a t a r g e t . S o t h i s h i g h
c o n c e r n c o mb i n e d w i t h t h e i n t e r n a t i o n a l c o m m u n i t y ' s i n t e r e s t i n
r e d u c i n g t r a n s b o u n d a r y p o l l u t i o n ma k e s t h i s a n i mp o r t a n t t i me t o
refine U.S. policies to sustain these energy efficiency and pollution
c o n t r ol e ff o r t s .
             T h e s e e ff o r t s a l s o h a v e a d i r e c t i mp a c t o n g r e e n h o u s e g a s
e mi s s i o n s , a n i s s u e t h a t t h e c u r r e n t C o n g r e s s i s c o n c e r n e d w i t h . T h i s
a l s o f i t s i n w i t h t h e s t r a t e g i c e c o n o mi c d i a l o g u e i n i t i a t e d b y Tr e a s u r y
S e c r e t a r y H e n r y Pa u l s o n .
             G i v e n t h e s e c o n c e r n s we h a v e a n a l y z e d v a r i o u s p o l i c i e s .
H i s t o r i c a l l y , i n t h e r i c h c o un t r i e s , p o l l u t i o n c o n t r o l h a s b e e n i n t h e
f o r m o f e mi s s i o n s t a n d a r d s a n d o t h e r e n d - o f - p i p e r e g u l a t i o n s . M o r e
r e c e n t l y , t h e U . S . h a s a ma r k e t - b a s e d me c h a n i s m f o r S O 2 , t h i s c a p a n d
t r a d e p r o g r a m, w h i c h h a s s h o w n q u i t e g o o d r e s u l t s .
             S o , i n t h a t s p i r i t , we h a ve e xa mi n e d t he e f f e c t s o f u s i n g ma r k e t -
b a s e d i n s t r u me n t s i n C h i n a a n d w e f i n d t h a t s u c h a g r e e n t a x p o l i c y i s
a v e r y c os t e f f e c t i v e w a y t o r e d u ce p o l l u t i o n d a ma g e . A t t h e s a me
t i me , t h e s e ma r k e t - b a s e d p o l i c i e s c o n t r i b u t e t o l o w e r e n e r g y u s e a n d
c a r b o n d i o x i d e e mi s s i o n s .
             Wh a t e v e r p o l i c i e s t h a t a r e c h o s e n , t h e y n e e d a s t r o n g r e g u l a t o r y
i n s t i t ut i on t h a t J e nn i f e r T ur n e r ha s po i nt e d o ut . T h e i nc e n t i v e t o c h e a t
i s v e r y h i g h . R u n n i n g t h e d e s u l f u r i z a t i o n eq u i p me n t , f o r e x a mp l e ,
t a k e s t w o p e r c e n t mo r e e l e c t r i c i t y . I ma g i n e h o w mu c h t h i s c o mp a r e s
t o t h e p r o f i t ma r g i n . S o t h i s i s a n e n o r mo u s i n c e n t i v e t o t u r n o f f t h e
e q u i p me n t .
             H o w c a n t he U . S . c on t r i b ut e t o t h e d e v e l o pme n t a nd
i mp l e me n t a t i on o f e f f e c t i v e p o l i c i e s a n d s t r o n g i n s t i t u t i o n s ? I w o u l d
s e c o nd wh a t J e nn i f e r j u s t s a i d .              At t h e s i m p l e s t l e ve l , a n a l yt i c a l
c a p a c i t y b u i l d i n g , i . e . , p r o mo t i n g g o o d c o s t b e n e f i t a n a l y s i s . S o me o f
t h i s i s a l r e a d y d o n e b y EP A a n d o t h e r i n s t i t u t i o n s , b u t c o u l d be
expanded. Another cheap way to do things is to share knowledge from
t h e U . S . e n e r g y e f f i c i e n c y p r o g r a ms l i k e e n e r g y r a t i n g s fo r a p p l i a n c e s .
             T h e n e xt l e ve l i s t o a d d r e s s i n v e s t me n t i n c o n t r o l a n d mo n i t o r i n g
                                                     - 146 -
e q u i p me n t . T hi s i s s u e i s c omp l i c a te d b y t w o p o i n t s . On e i s t h e h i g h
cost and the other is the intellectual property rights of countries
w i s h i n g t o e x p o r t s u c h e q u i p me n t t o C h i n a . A d d r e s s i n g t h e s e i s s u e s
s h o u l d b e a p a r t o f S e c r e t a r y P a u l s o n 's S t r a t e g i c E c o n o mi c D i a l o g u e .
             If we are willing to think on an even bigger scale, the key to
e n v i r o n me n t a l i m p r o v e me n t i s i n v e s t me n t i n i n f r a s t r u c t u r e , p u b l i c
t r a n s p o r t a t i o n , h i g h e f f i c i e n c y e l e ct r i c i t y g r i d s , a n d h i g h e f f i c i e n c y
boilers. These are very expensive, but they last for decades, and they
are currently being decided. It is important to get these big decisions
c o r r e c t . T h e s e i s s u e s a r e we l l d i s c u s s e d i n a Wo r l d B a n k r e p o r t j u s t
p u b l i s h e d t i t l e d " S u s t a i n a b l e E n e r g y : A C l o s i n g Wi n d o w o f
Opportunity."
             S o t h e r e i s a s ma l l w i n d o w o f o p p o r t u n i t y n o w a s t h e s e b i g
d e c i s i o n s a r e b e i n g ma d e f o r t h e U . S . a n d t h e w o r l d t o i mp l e m e n t
d e c i s i o n s t h a t w o u l d me a n b e t t e r e n e r g y u s e a n d l o w e r p o l l u t i o n i n t h e
d e c a d e s t o c o me .
             L e t me f i n a l l y n o t e a n i mp o r t a n t l i n k b e t w e e n i n v e s t me n t a n d t h e
t r a d e s u r p l u s i s s u e t h a t i s a s o u r c e o f s u c h U . S . - C h i n a t e n s i o n . Hi g h e r
d o me s t i c i n v e s t me n t i n t h e f o r m o f c o n t r o l e q u i p me n t o r e f f i c i e n t
p o w e r p l a n t s o r h u g e i n f r a s t r u c t u re pr o j e c t s me a n s hi g he r a bs or pt i on
a n d h i g h e r i mp o r t s a n d t h e mo r e n o r ma l f l o w o f i n t e r n a t i on a l s a vi n g s
a n d i n v e s t me n t .
             T h a t i s a mo v e t o w a r d s c o r r e c t i n g t h e i r c u r r e n t a b n o r ma l
s i t u a t i o n w h e r e t h e r i c h U . S. i s b o r r o w i n g f r o m t h e p o o r c o u n t r i e s .
The Chinese would probably view such suggestions from U.S. with
s u s p i c i o n , b u t t h i s i s i n t h e w o r l d ' s i n t e r e s t a n d t h e U . S . ma y f i n d
o t h e r i n t e r l o c u t o r s t o h e l p p r o mo t e t h i s a r g u me n t .
             Thank you.
[ T h e s t a t e me n t f o l l o w s : ] 8

                   P A N E L V : D i s c u s s i o n , Q u e s t i o ns a n d A n s we r s

           H E A R I N G C O C H A I R D ' A M A T O : T h a n k y o u v e r y mu c h , D r . Ho .
L e t me s t a r t o f f t he q ue s t i on i n g . D r . T u r n e r , t h e r e a r e a n u mb e r o f
p l a c e s i n y o u r t e s t i mo n y t h a t i n d i c a t e t o me t h a t w e h a v e s o me p r e t t y
i mp o r t a n t d a t a c h a l l e n g e s i n t h i s r e l a t i o n s h i p .   F o r e x a mp l e , y o u
me n t i o n e d i n y o u r p r e p a r e d t e s ti mo n y t h a t d a t a o n c a r b o n d i o x i d e
e mi s s i o n s a n d me r c u r y e mi s s i o n s f r o m c o a l b u r n i n g h a v e n o t b e e n
released since 2001; is that still the case?
           D R . T U R N E R : T h a t ' s r i g h t . We c a n c h e c k w i t h Dr . H o , i f h e
k n o w s a n y t h i n g b e t t e r t h a n I d o . T h e l a s t t i me I ' v e h e a r d f r o m p e o p l e
t h a t t h e r e h a s n 't b e e n a n y k i n d o f n a t i o n a l a n n o u n c e me n t o n C O 2 a n d

8
    Click here to read the prepared statement of Dr. Mun S. Ho
                                          - 147 -
me r c u r y e mi s s i o n s . H a v e y o u h e a r d o f a n y t h i n g ?
           D R . H O : I ' m n o t f a mi l i a r wi t h t h e me r c u r y d a t a , b u t t h e c o a l us e
data has recently been massively revised and so there are new
e s t i ma t e s .
           DR. TURNER: Okay.
           HEARING COCHAIR D'AMATO: Is what?
           D R . H O : H a s b e e n ma s s i v e l y r e v i s e d f r o m t h e e a r l i e r f i g u r e s
t h a t h a d b e e n me t w i t h mu c h s k e p t i c i s m. S o t h e n e w f i g u r e s a r e mo r e
trustworthy, and so there is built into that--
           HEARING COCHAIR D'AMATO:                                               T h e r e a r e n e w mo r e
a u t h o r i t a t i v e fi g u r e s ?
           DR. HO: Yes.
           H E A R I N G C O C H A I R D ' A M A T O : S o t he C hi n e s e a r e w o r k i ng on
that?
           DR. HO: That's right.
           HEARING COCHAIR D'AMATO: There's another area of data
t h a t I t h i n k i s i mp o r t a n t . D r . T u r n e r , y o u me n t i o n e d wa t e r p o l l u t i o n
a n d I ' m w o n d e r i n g w h e t h e r o r n o t y o u 'r e a wa r e o f t h e i n f o r ma t i o n
about the changes that we can expect in the flow of water in the big
r i v e r s y s t e ms c o mi n g o u t o f T i b e t a n mo u n t a i n s f r o m g l a c i e r s t h a t ma y
be receding?
           D o w e h a v e a n y g o o d i n f o r ma t i o n a b o u t t h e l o n g - t e r m i m p a c t s o f
r e d u c e d wa t e r f l o w i n t o C h i na a n d w ha t t he i mp a c t s w o ul d b e ? A r e t h e
C h i n e s e a w a r e a n d p a y i n g a tt e nt i o n t o t h a t ? Or i s t h e r e a n y k i n d o f
a n a l y s i s g o i n g o n i n C h i n a a b o u t h o w t h a t w i l l , w i l l t ra n s p i r e a n d w i l l
a f f e c t t e ns o f mi l l i o n s o f p e o p l e i n t e r ms o f t h e i r d a i l y l i v e s ?
           DR. TURNER: I think actually in the papers in China, when you
h e a r r e p o r t i n g o n c l i ma t e c h a n g e , t he r e a r e r e p o r t s w i t h i n t h e n e w s
me d i a i n C h i n a a b o u t t h e g l a c i e r i s s u e , a n d I k n o w t h a t t h e r e a r e
s t u di e s t h a t a r e s t a r t i n g.         A c t u a l l y G r e e n p e a c e C h i na i s a c t ua l l y
i n v o l v e d i n s o me o f t h i s k i n d o f e n c o u r a g i n g s c i e n t i s t s t o l o o k a t t h i s
issue.
           I t h i n k t h a t y o u 'r e r i g h t . Th a t 's o n e p i e c e o f a l a r g e r k i n d o f
w a t e r c r i s i s i n C h i n a b es i d e s t h e p o l l u t i o n . Ch i na i s a c t u a l l y a v e r y
w a t e r s hor t c o u nt r y . P e r c a p i t a C h i n a h a s a q u ar t e r o f t h e w o r l d ' s
resources per capita freshwater.                                I t 's o n e - t e n t h i n n or t h e r n C h i n a .
D e s e r t i f i c a t i o n i s a n o t he r a i r p o l l u t i o n i s s u e . T h e s a n d s t o r m s t h a t
b l o w t h r o u g h c o me b e c a u s e t h e r e wa s o v e r e x t r a c t i o n f o r c e n t u r i e s o f
w a t e r i n no r t h e r n Ch i n a e x a c e r ba t e d u n d e r d e v e l o p me n t u n d e r M a o a n d
not always enough efforts on water conservation.
           Y o u ma y h a v e a l s o h e a r d a b o u t t h e S o u t h Wa t e r N o r t h R i d g e
Project.
           HEARING COCHAIR D'AMATO: Yes.
           D R . T U R N E R : B i g c a n a l s mo v i n g w a t e r f r o m t h e Y a n g z i u p
                                                    - 148 -
n o r t h . Th e y 'r e d o i n g i t . I t 's a d e s p e r a t e s i t u a t i on i n t he n o r t h . M o r e
c o u l d b e d o n e - - s i mi l a r t o t h e e ne r g y i s s u e , a s w e l l , p u s h i n g
c o n s e r v a t i o n . M a k e s me t h i n k o f a n o t h e r i s s u e . I h a d s o me B e i j i n g
g o v e r n me n t f o l k s h e r e l a s t y e a r w i t h D O E a n d I b r o u g h t s o me U . S .
NGOs and EPA into talk to them about their energy efficiency. They
w a n t e d t o r e t r o f i t t h e ir b u i l d i n g s , a n d I s u g g e s t e d t o t h e m t o a l s o l o o k
i n t o t h e r e a r e s o me p r o g r a ms i n t h e U . S . l i k e A l l i a n c e t o S a v e E n e r g y
h a s t h i s Wa t e r G P r o g r a m, h o w c o n s e r v i n g w a t e r s av e s y o u e n e r g y .
            I t 's a b i g i n i t i a t i ve . C a l i f o r ni a h a s b e e n d o i n g a l o t o n t h i s , a n d
i t w a s t he o n e t i me i n t h e me e t i n g t ha t t he y w e r e j u mp i n g o u t o f t h e i r
s e a t s w i t h e x c i t e me n t . T h a t 's a n o t h e r a r e a t o n o t e . Wa t e r c o n s e r v a t i o n
p r o mo t e s e n e r g y c o n s e r v a t i o n , a c o nc e p t t h a t i s n ot w e l l k n o w n i n
C h i n a . So j u s t n o t e t h a t .
            H E A R I N G C O C H A I R D ' A M A T O : Y e s . We l l , o n e o f t h e t hi n g s
t h a t w e 'r e g o i n g t o t r y t o d o i s a d v i s e t h e C o n g r e s s o n
r e c o m me n d a t i o n s a s t o h o w C o n g r e s s mi g h t b e a b l e t o p r o v i d e u s e f u l
r e c o m me n d a t i o n s t o t h e e x e c u t i v e b r a n c h a n d i n l e g i s l a t i o n t o f i l l s ome
of these data gaps and what agencies might be helpful in doing that.
            I n a d d i t i o n , o n e o f t h e ma j o r q u e s t i on s t h a t a r i s e s f r o m a l l o f
t h i s d i s c u s s i o n o f t h e w e a k e n v i r o n me n t a l g o v e r n a n c e s y s t e m, a s y o u
p o i n t o u t , i s t h e l a c k o f a t t e n ti o n a n d i n t e r e s t a n d d e d i c a t i o n a n d
c o m mi t me n t a t t h e pr o vi n c i a l l e ve l s .
            Y o u me n t i o n e d a c o u p l e o f t h i n g s t h a t ma y b e h e l p i n g t o c o r r e c t
t h a t s uc h a s E P A 's p o s s i b l e s i x r e g i o n a l o f f i c e s i n t h e d e c e nt r a l i z e d
C h i n e s e s t r uc t u r e . A n d a l s o t h e p o s s i b i l i t y o f a d d i t i o n a l U . S . N G O s '
w o r k . C a n y o u c o m me n t a l i t t l e b i t mo r e ? Wh a t a r e t h e k i n d s o f
t h i n g s t h a t w e c o u l d r e c om me n d t h a t w o ul d b e h e l p f u l t o ge t t h e
p r o vi n c i a l l e ve l s m o r e c o m mi t t e d a s t h e y h a v e n ot be e n c o m mi t t e d
o v e r n o t j u s t t h i s p a r t i c u l a r r e g i me ' s l i f e b u t o v e r t h e h i s t o r y o f C h i n a
a c t u a l l y , i n my o p i n i o n , f r o m w h a t I u n d e r s t a n d ?
            I t ' s v e r y w e a k c o m mi t me n t t o t h e e n v i r o n me n t i n p r o v i n c i a l
C h i n a . Wh a t k i n d s o f t h i n g s c a n we r e c o m me n d? I s i t s t r e n gt h e n i n g
t h e N G O o p e r a t i o n s ? I s i t mo r e f u n d i n g f o r E P A r e g i o n a l o f f i c e s o r
w h a t k i n d s o f t h i n g s c o u l d we s u g ge s t t h a t w o u l d h e l p t h a t p r o b l e m ?
            D R . T U R N E R : I t h i n k b o t h . I 'm n o t a n E P A o f f i c i a l s o I c a n
t e l l y o u , I t h i n k EP A n e e d s a l i t t l e mo r e f u n d i n g . T h e y d o n 't h a v e a n y
real dedicated resources from their congressional budgets for their
China work.
            T h e y 'v e b e e n v e r y i n n o v a t i v e , i t s e e ms t o m e , t r y i n g t o f i n d
r e s ou r c e s . T h e I t a l i a n s a r e a c t u a l l y g o i n g t o b e h e l pi n g t he m w i t h
s o me w o r k t h a t t h e y ' r e d o i n g o n e n e r g y i s s u e s .                  So I think it's
i mp o r t a n t t o f i n d p a r t n e r s h i p s . Y o u l o o k a t l i k e a n o t h e r e n e r g y a r e a ,
and I'll get back to your data question, like the Methane to Markets
p r o g r a m? D i d t h e y t a l k t o yo u a bo u t t h a t t hi s mo r n i n g? I t hi n k t h a t ' s
                                                     - 149 -
a r e a l l y e x c i t i n g e x a mp l e o f a d d r e s s ing t h e i s s ue o f me t h a n e e mi s s i o n s
f r o m c o a l mi n e s w o r k i n g w i t h b u si n e s s e s a n d o t h e r i n t e r n a t i o n a l
organizations.
            T h a t 's e xc e pt i on a l , b u t i t 's a l s o s o me t h i n g t h a t p r o b a b l y h a s
s o me p o t e n t i a l f o r t h e C D M a n d t he c a r b o n b a n k i n g a n d w h a t n o t . I
t h i n k t h a t t h a t 's a g o o d mo d e l t o f o l l o w , b u t I t h i n k i t w i l l b e u s e fu l i f
E P A c o u l d j u s t h a v e s o me m o r e c o n s i st e n t r e s o u r c e s . O v e r t h e y e a r s a t
t h e Wi l s o n C e n t e r , my p r o j e c t i n v e n t o r i e s w h a t U . S . g o v e r n me n t a n d
U . S . a n d C h i n e s e N G O s d o o n e n v i r o n me n t , a n d I h a v e a l o t o f U . S .
g o v e r n me n t p r o j e c t s , b u t s o me t i me s t h e y t a k e a l o n g t i me .
            DOE, they let their energy efficiency and renewable energy
p r o t o c o l e x p i r e f o r t w o y e a r s . T h e SE D h e l p e d . I t g o t r e n e w e d a n d I
t h i n k t h a t ' s r e a l l y e n c o u r a g i n g , b u t i n my mi n d w e l o s t t w o y e a r s o f
e n e r g y e f f i c i e n c y a n d r e n e w a b l e e n e r gy p r o j e c t s , a n d t ha t ' s u n f o r t u n a t e
because the Chinese do want to work with us.
            I n t e r ms o f t y p e s o f c o o p e ra t i o n w i t h l oc a l g o ve r nme n t s , I
me n t i o n e d t h e e x a mp l e o f N R D C a n d t h e i r p a r t n e r , t h e C h i n a - U . S .
E n e r g y E f f i c i e n c y A l l i a n c e . T h a t ' s a mo d e l t h a t s h ou l d be e n c o u r a g e d .
T h e r e a r e s o me p r og r e s s i v e p r o vi n c e s i n C h i n a . J i a n g s u b e i n g o n e o f
t h e m w h e r e t h e y 'r e w o r k i n g n o w .                 Liaoning.            Shanghai is very
p r o g r e s s i v e . U s i n g t h e s e a s mo d e l s t o e x p a n d , n o t a l w a y s f o c u s i n g o n
B e i j i n g , i s my p e r s o n a l o p i n i o n , i n t e r ms o f c a p a c i t y b u i l d i n g .
            H E A R I N G C O C H A I R D ' A M A T O : A l l r i g h t . We l l , a s y o u t h i n k
o f t h e s e k i n d s o f r e c o m me n d a t i o n s , w e 'd l i k e t o k n o w a b o u t t h e m s o
t h a t w e c o u l d a d d t h e m t o o u r p o s s i b l e r e c o m me n d a t i o n s .
            DR. TURNER:                    Yes.          I t h e l ps m e , w h e n w e ' r e t a l k i n g , t o
u n d e r s t a n d . I c a n c o me u p w i t h a s t r o n g e r l i s t t o s u b mi t t o y o u l a t e r i f
y o u 'd l i k e .
            HEARING COCHAIR D'AMATO: Thank you. Dr. Ho, did you
have something?
            D R . H O : Y e s , I wo u l d l i k e t o s e c o n d t h a t my o w n r e s e a r c h h a s
b e e n f u n d e d b y t h e E n e r g y F o u n d a t i on a n d o t h e r p r i v a t e f o u n d a t i o n s ,
and also by the U.S. EPA. There is a lot of knowledge that is inside
t h e E P A t h a t o n l y g o v e r n me n t f u n d i n g c a n p r o v i d e . S o t h e E P A h a s a
c o u p l e o f p e o p l e g o i n g t o Ch i n a r eg u l a r l y a n d t h a t c a n n o t r e a l l y d o a
l o t i n a de c e nt r a l i z e d s y s t e m.
            A s t h e S h a n g h a i e x a mp l e s h o w ed , a s ma l l a mo u n t o f h u n d r e d s o f
t h o u s a n d s g e n e r a t e s a s t u d y t h a t c h a n g e d t h e Sh a n g h a i Fi v e Y e a r P l a n
i n t h e S h a n g h a i e c o n o my t h a t i s man y b i l l i o n s o f d o l l a r s . S o w e a r e
t a l k i n g a b o u t l o w- c o s t a n a l y t i c a l c a p a c i t y b u i l d i n g b u t s p r e a d
throughout the provinces.
            H E A R I N G C O C H A I R D 'A M A T O :                       Thank you.                  C h a i r ma n
B a r t h o l o me w .
            C H A I R M A N B A R T H O L O M E W: T h a n k y o u v e r y mu c h a n d t h a n k
                                                      - 150 -
y o u t o b o t h o f o u r w i t n e s s e s . D r . T u r n e r , a s y o u c o me u p w i t h s o m e
s u g g e s t i o n s , i f y o u c o u l d c o me u p w i t h s o me s u g g e s t i o n s o n
e n v i r o n me n t a l - h e a l t h c o o p e r a t i o n , t ha t w o u l d - - t h e n e x u s b e t w e e n t h e
e n v i r o n me n t a n d h e a l t h - - t h a t w o u l d b e t e r r i f i c .
             B u t n o w I t h i n k I w a n t t o p l a y t h e s k e p t i c . A s w e t a l k a b o ut
U . S . a s s i s t a n c e f o r t h e s e k i n d s o f p r o g r a ms , w e h a v e a n A me r i c a n
p u b l i c t h a t i s f a c i n g t h e r e a l i t y o f a t r a d e d e fi c i t w i t h C h i n a o r $ 2 3 0
b i l l i o n a n d t h e C h i n e s e g o v e r n me n t t h a t h a s $ 1 . 2 t r i l l i o n i n f o r e i g n
c u r r e nc y r e s e r ve s .
             I f t he s e i s s ue s a r e i mp o r t a n t t o C hi n a , s h o ul d n 't t he C h i n e s e
g o v e r n me n t b e p i c k i n g u p t he c o s t f o r a l o t o f t h i s ?
             DR. TURNER: What you just said is actually what the Japanese
public said. 2008, Japan stops their yen loans to China for precisely
that reason.
             C H A I R M A N B A R T H O L O M E W: Y e s .
             D R . T U R N E R : T he a s s i s t a nc e t h a t I t h i n k c o u l d b e u s e fu l i s n o t
p u t t i n g l o t s o f mo n e y - - n o t g i v i n g a l o t o f mo n e y t o C hi na , b ut j u s t a s
D r . H o me n t i o n e d , j u s t s o me t i me s t h e a b i l i t y t o ge t s o me o f o u r
e x p e r t s t o C h i n a t o h o l d me e t i n g s , t o d o s t u d i e s .                  S o i t 's n o t a
s i g n i f i c a n t i n v e s t me n t .
             B u t I s h o u l d n o t e t h a t w h e n y o u c o mp a r e , o v e r t h e l a s t 1 5 , 2 0
y e a r s , t h e J a p a n e s e a n d t h e E u r o p e a n s a n d t h e i r e n v i r o n me n t a l
a s s i s t a n c e p r o g r a ms i n C h i n a h a v e b e e n s i g n i f i c a n t . I f y o u l o o k a t h o w
mu c h e n e r g y e f f i c i e n c y a n d c l e a n j us t e n v i r o n m e n t a l t e c h n o l o g i e s t h a t
t h e y 'r e e xp o r t i n g t o C h i n a , t h e y 'v e g ot t he ma r k e t . We ' r e s o me w h e r e
l i k e 1 1 p e r c e n t a n d t h e y 'v e go t t h e r e s t i n t e r ms o f t h e e x p o r t s t o C h i n a
for these kind of technologies.
             The Chinese would like to buy our technologies, but they
s o me t i me s f i n d t h a t b e c a u s e w e d o n 't t e n d t o h a v e t h a t k i n d o f s t e a d y
k i n d o f c o o p e r a t i o n t h a t c o u l d p r o mo t e t h a t , a n d I k n o w w e d o n 't h a v e
t i e d - - w e d o n ' t g e n e r a l l y d o t i e d a i d , b u t i t 's b e e n h e l p f u l . Th e U . S .
T r a d e , U S T A , t h e i r w o r k h a s h e l pe d .               They focus on energy and
t r a n s p or t a t i on i n Ch i n a , a n d - - p e o pl e h a v e t ol d me t h i s a l s o he l p s
generate business.
             O n e a r g u me n t t o b e ma d e t h a t t h e r e c o u l d b e b u s i n e s s
o p p o r t u n i t i e s . C l e a n c o a l , mi n i n g i ss u e s , w e h a v e t e c h n o l o g i e s t h a t
t h e y w o u l d p r o b a b l y b u y , a n d a g a i n y o u me n t i o n e d t h e y h a v e t h e
mo n e y .
             C H A I R M A N B A R T H O L O M E W: D r . H o , a n y c o m me n t ?
             D R . H O : Y e s , I 'd l i ke t o e mp h a s i z e t h i s . T hi s i s n ot a n i s s ue o f
U . S . s p e n d i n g mo n e y .           T h i s i s a n i s s u e o f ma k i n g t h e m s e e t h e
a r g u me n t s f o r a h i gh e r r a t e of i n v e s t m e n t f o r s p e n d i n g m o n e y t o b u y
p o l l u t i o n c o n t r o l e q u i p me n t , a n d t o i n v e s t i n t h e S EP A 's p r o v i n c i a l
mo n i t o r i n g a b i l i t i e s t o ma k e s u r e t ha t t h e r e i s n o c h e a t i n g . S o t h i s i s
                                                    - 151 -
n o t s o mu c h a c a s e o f s p e n d i n g m o n e y a s p r o v i d i n g i n s t i t u t i o n a l
support.
            C H A I R M A N B A R T H O L O M E W: I ' l l c o nt i n ue a l on g t h a t l i n e .
A r e t h e r e i n c e nt i v e s i n C h i na f o r l oc a l a n d r e g i o n a l g o v e r n me n t s t o b e
honest in the data reporting about air and water quality, and if not,
h o w d o we f a c t o r t h a t i n? H o w d o w e ma k e s u r e t h a t t h e d a t a t h a t ' s
being collected and the data that is being reported is an accurate
me a s u r e o f w h a t 's g o i n g o n ?
            D R . T U R N E R : J u s t a ct u a l l y t w o w e e k s a g o , SE P A j u s t p a s s e d a
n e w r e g u l a t i o n o r a d e c r e e w o r k i ng t o w a r d s a l a w o n e n v i r o n me n t a l
i n f o r ma t i o n d i s c l o s u r e . Th e y n o w l a s t y e a r p a s s e d r e g u l a t i o n s o n
p u b l i c p a r t i c i p a t i o n a n d e n v i r o n me n t a l i mp a c t a s s e s s me n t s .
            T h e r e 's a mo v e , a n d t h e s e a r e a r e a s , a n d o n e o f t h e r e a s o n s h o w
these have been pushed forward is through international assistance.
T h e Wo r l d B a n k w a s r e a l l y b e h i n d t hi s i n f o r ma t i o n d i s c l o s u r e
r e g u l a t i o n . T h e A me r i c a n B a r As s o c i a t i o n , w h i c h d i d r e c e i v e mo n e y
f r o m S t a t e D e p a r t me n t t o d o t h e i r e n v i r o n me n t a l g o v e r n a n c e w o r k ,
a n o t h e r e x a mp l e , b i g i mp a c t i n C h i n a . S ma l l o f f i c e , b i g i mp a c t .
            T h e y 'v e b e e n d o i n g t r a i n i n g s o f S E P A a n d E n v i r o n me n t a l
P r o t e c t i o n B u r e a u o f f i c i a l s n o w a b o ut w h a t i s a p u b l i c h e a r i n g ? H o w
d o e s t h i s w o r k ? An d t he r e a r e N G O s , N D I - - my b r a i n i s f o r g e t t i n g t h e
o t h e r s - - Ec o L i n k s i s a n o t h e r o n e . T h a t ' s a n o t h e r p i e c e i n t e r ms o f s o me
o f t h e i n c e n t i v e s t h a t a r e a l s o b ui l di ng t h e c a pa c i t y a n d a w a r e ne s s o f
t h e N G O c o m mu n i t y a n d e v e n t h e l o c a l o f f i c i a l s t h e ms e l v e s .
            T h e E n vi r o n me n t a l P r o t e c t i on B u r ea u o f f i c i a l s , t h e y w a n t t o d o
t h e i r j o b a l o t o f t i me s , a n d s o s o me t i me s h e l p i n g t o b u i l d t h e i r
c a p a c i t y a n d i n f o r ma t i o n i s k e y , a n d t h i s i s a n e w a r e a o f mo v e me n t .
S o me c i t i e s h a v e p a s s e d o v e r t h e l a s t f i v e y e a r s o r s o k i n d o f f r e e d o m
o f i n f o r ma t i o n a c t s , a n d t hi s i s , a g a i n , t h a t g e t s a l i t t l e b i t t o y o u r d a t a
i s s u e , a c c e s s t o i n f o r ma t i o n f o r t h e p u b l i c t o k n o w w h a t 's b e i n g
polluted.
            T h e Wo r l d B a n k 's G r e e n Wa t c h Pr o g r a m i n J i a n g s u P r o v i n c e h a s
a l s o b e e n i n s t r u me n t a l i n r a i s i n g a w a r e n e s s .
            C H A I R M A N B A R T H O L O M E W: I s mi l e e v e r y t i me y o u me n t i o n
t h e Wo r l d B a n k b e c a u s e 2 0 y e a r s a g o, w e p a s s e d i nt o l a w s o me t hi n g
c a l l e d t h e P e l o s i A me n d me n t w h i c h f o r c e d t h e Wo r l d B a n k t o s t a r t
d o i n g e n v i r o n me n t a l i mp a c t s t a t e me n t s a n d ma k i n g t h e m p u b l i c l y
a v a i l a b l e . S o i t 's ve r y i n t e r e s t i n g f or me 2 0 y e a r s l a t e r t o h e a r t ha t t h e
Wo r l d B a n k i s t he s t a n da r d, t h e Wo r l d B a nk i s t h e pu s h e r o f t h e
standard when I know how we had to fight to get the World Bank to
pay attention to these things in the first place.
            O n e mo r e q u e s t i o n a n d t he n I 'l l e n d, a n d t ha t 's g e t t i n g t o t he
n a t u r e o f t h e N G O s . Y o u ' v e me n t i o n e d N G O s a n u mb e r o f t i me s , a n d
t h e r e 's a l o t o f s k e p t i c is m o r q u e s t i o n a b o u t t h e n a t u r e o f w h e t h e r t h e r e
                                                     - 152 -
a r e a n y i n d e p e n d e n t N G O s i n C h i na o r w h e t h e r t h e y ' r e a l l t h e
G O N G O s , t h e g o v e r n me n t o r g a n i z e d N G O s w h i c h o f c o u r s e i s j u s t a n
o x y mo r o n r i g h t t h e r e .
           B u t c a n y o u t a l k t o m e a l i t t l e b i t a b ou t t h e ki nd s o f N GO s t ha t
y o u w o r k w i t h ? A r e t h e y i n d e e d i n d e p e n d e n t o f t h e g o v e r n me n t a n d d o
they have the freedom to operate?
           D R . T U R N E R : Y e s , f u l l d i s c l os u r e , I h a n g o u t a l o t w i t h t h e
C h i n e s e e n v i r o n me n t a l N G O s . I ' v e h a d t h e m o v e r g i v i n g t a l k s . I ' v e
d o n e e x c h a n g e s , b r i n g i n g o v e r C h i n e s e N G O s t o w o r k o n s o me o f t h e
w a t e r p r o j e c t s . I p u t o n a w o r ks h o p i n H o n g K o n g i n 2 0 0 1 b r i n g i n g
Taiwanese, Hong Kong, and PRC green activists and green journalists
together to talk.
           S o t h a t w a s k i n d o f my e n t r e e ba c k t h e n ge t t i n g t o kn o w t h i s
c o m mu n i t y .         Yes, there are independent groups.                                  Registration is
challenging.                Th e r e i s s o me w h e r e n e a r 3 , 0 0 0 t h a t h a v e o ff i c i a l
registration as civil society groups, shehui tuanti, and probably as
ma n y i f n o t mo r e t h a t a r e r e g i s t e r e d a s b u s i n e s s e s a n d t h e n t h o u s a n d s
t h a t a r e j u s t n o t r e g i s t e r e d , s o me t i me s a l s o k i n d o f n e s t l e d u n d e r
universities.
           A l o t o f t h e g r o u p s t h a t a r e o f f i c ia l l y r e g i s t e r e d , e i t h e r a s c i v i l
society groups or businesses, they do tend to depend on a lot of their
funding from international organizations, not just foundations, but U.S.
N G O s a n d a l s o i n t e r n a t i o n al b u s i n e s s e s h a v e a l s o b e e n g i v i n g g r a n t s t o
Chinese NGOs.
           I 'v e w r i t t e n a b o ut t h i s i n a l o t o f my s t u f f , t h a t t he y a r e r e a l l y
t h e v a n g u a r d o f c i v i l s o c i e t y d ev e l o p me n t .            I k n ow t h a t y o u 'v e
p r o b a b l y h e a r d t h i s b e f o r e , b u t i t 's a c t u a l l y o n e o f t h e b r i g h t l i g h t s ,
a n d t h a t 's p r o b a b l y w h y , c o n t r a r y t o t h e e v i d e n c e y o u p r o b a b l y h e a r
a b o u t h o w b a d Ch i n a 's e n v i r o n me n t i s , t h a t I r e ma i n a n o p t i mi s t
because I see these eco-entrepreneurs in the NGO sector, but I also
k n o w s o me e n t r e p r e n e u r s i n t h e g ov e r n me n t a n d b u s i n e s s s e c t o r s i n
C h i n a t h a t c a u s e m e , ma k e m e e n c o u r a g e d .
           T h e C h i n e s e N G O s h a v e p l a y e d i t s a fe a l o t o f t i me s , b u t t h e r e
w a s a b i g c a mp a i g n a y e a r a n d a h a l f a g o a g a i n s t d a m s i n s o u t h w e s t
C h i n a . I t w a s a c t u a l l y a p r o - t r a ns p a r e n c y p u s h a d v o c a t i n g f o r s t r o n g e r
e n v i r o n me n t a l i mp a c t a s s e s s me n t s . A n d t h e y wo n a n a t i o n a l c a mp a i g n
t o s t o p f o r n o w t h e p l a n n in g o f d a ms o n o n e o f C hi n a ' s l a s t w i l d r i v e r s ,
and no one got arrested.
           C H A I R M A N B A R T H O L O M E W: T h a t ' s a ma z i n g .
           D R . T U R N E R : S a d l y , i n t he l a s t y e a r a nd a ha l f , t he r e ha v e be e n
t w o a r r e s t s o f C h i n e s e e n v i r o n me n t a l a c t i v i s t s . T h i s i s , f o r t h e f i r s t
t i me i n 12 y e a r s , w h i c h w h e n y ou c o mp a r e i t t o o t h e r s e c t or s , l a b or
and HIV/AIDS, is pretty low. But notably these two people, trying to
d o w a t c h d o g w o r k o n i n d u s tr y p o l l ut i n g, a n d i t 's t h e l o c a l of f i c i a l s t ha t
                                                     - 153 -
a r r e s t e d t h e m.
            I t h i n k I 'v e h a d t h e S E P A , t h e f o r me r S E P A M i n i s t e r X i e - - h e ' s
t a l k e d a t my c e n t e r a c ou p l e o f t i me s- - a n d he s a i d i n h i s f i r s t t a l k ,
w h e n s o me o n e a s k e d h i m t h e s a me q u e s t i o n , w h a t d o y o u t h i n k , a r e
t h e r e C h i n e s e N G O s , d o y o u l i k e t h e m ? H e s a i d ma k e n o i s e ; y o u g i v e
me p o w e r . S o S E P A h a s b e e n e n c o u r a g i n g o f t h e N G O s e c t o r .
            C H A I R M A N B A R T H O L O M E W: G r e a t . T h a n k y o u .
            H E A R I N G C O C H A I R D ' A M A T O : T h a n k y o u . C o mmi s s i o n e r
Brookes.
            COMMISSIONER BROOKES: Thank you both for being here
t o d a y . D o w e h a v e a n u mb e r o n h o w mu c h C h i n a s p e n d s o n p r e v e n t i n g
e n v i r o n me n t a l d e g r a d a t i o n ? D o w e h a v e a n y s o r t o f d o l l a r f i g u r e ?
            D R . T U R N E R : Y o u 'r e my e c o n o mi s t .
            D R . H O : N o , I d o n ' t h a v e , I ' v e n e v e r s e e n s u c h a n u mb e r b e f o r e .
T h e g o v e r n me n t i s v e r y d e c e n t r a l i z e d . T h e S E P A b u d g e t i t s e l f i s
s ma l l , b ut t he t o t a l e s t i ma t e s o f s or t o f how mu c h d e s ul f u r i z a t i o n
e q u i p me n t t h e y h a v e b u i l t , t h e r e 's n o s u c h f i g u r e .
            D R . T U R N E R : I h a v e h e a r d t h o u g h t h a t i t 's b e e n s o me w h e r e l i k e
1 . 7 p e r c e n t o f t h e G D P . T h a t 's a r o u nd t h e r e , b u t a l ot o f e x p e r t s s a y
t h e y n e e d t o d o a b o u t f o u r p e r c e n t o f GD P .
            C H A I R M A N B A R T H O L O M E W:                         Is that prevention or
mi t i g a t i on?
            DR. TURNER: I have a friend in the audience from SEPA who I
w a n t t o l o o k a t a n d s a y - - I t h i n k t h a t ' s t h e n u mb e r t h a t ' s b e e n u s e d fo r - -
I t h i n k t h e y k i n d o f l ump i t t o g e t h e r . S t a t s a r e h a r d . I f y o u w a n t ,
w e 'l l t r y t o s c u r r y a r o u n d t r y t o f i n d i t , b u t s t a t i st i c s , n u mb e r s i n
China is difficult, but the general consensus, though, is when you look
a t t h e f i v e - y e a r p l a n s , t h e a mo u n t o f i n v e s t me n t b y t h e c e n t r a l
g o v e r n me n t , a n d I t h i n k t h a t 's t h e n u mb e r t h a t 's g e n e r a l l y t r a c k e d a s
this 1.7 percent, is looking at the five-year plans.
            COMMISSIONER BROOKES: And where has that been? How
has that progressed?                          W h a t 's t h e t r e n d on t ha t ?             B e c a us e w e
o c c a s i o n a l l y h e a r o u t o f C h i n a a r o u n d t h e Na t i o n a l Pe o p l e 's C o n g r e s s
c e r t a i n i nc r e a s e s l i k e t h i s y e a r w a s 1 8 p e r c e nt fo r i n c r e a s e i n mi l i t a r y
s p e n d i n g . Wh a t a b o u t o n e n v i r o n me n t a l i s s u e s ? A r e t h e r e a n y s o r t o f
n u mb e r s i n t e r ms o f - -
            D R . T U R N E R : T h e p e r c e n t a ge i s w h a t I 'v e t e n d e d t o h e a r .
Again, 1.7, two percent.
            C O M M I SS I O N E R B R O O K E S :                  Ha s t h a t i n c r e a s e d , t h e 1 . 7
p e r c e nt , ha s t h a t i n c r e a s e d o r - -
            D R . T U R N E R : I t 's i n c r e a s e d . I t w a s l i k e , w h e n I s t a r t e d e i gh t
y e a r s a g o , i t w a s b e l o w o n e p e r c e n t . An d y o u h a v e t o t hi nk t he G DP i s
growing every year. So it is getting bigger. I can dig around and try
t o f i n d o u t , s e e i f I c a n f i n d s o me o n e t h a t h a s a n u mb e r .
                                                   - 154 -
             DR. HO: My sense is that they have increased. As I said, the
p a r t i c u l a t e ma t t e r , e mi s s i o n s h a v e a ct u a l l y f a l l e n , e v e n i n t h e f a c e o f
t h i s r a p i d e c o n o mi c g r o w t h . S o t h i s h a s t o c o me o u t f r o m s p e n d i n g o n
t h e e q ui pme n t .
             COMMISSIONER BROOKES: Are you saying that the pollution
levels are decreasing?
             D R . H O : T h e e m i s s i o n s o f p a r t i c u l a t e ma t t e r h a v e d e c r e a s e d .
T h e e m i s s i o n s o f s ul f u r d i o x i d e h a v e f a l l e n a n d r i s e n . S o t h i s f a l l i n g
t r e n d h a s a l s o c o me o u t f r o m i n c r e a s e d s p e n d i n g .
             C O M M I SS I O N E R B R O O K E S : O k a y . I w a s w o n d e r i n g , w e ' v e
h a d a n u mb e r o f d i f f e r e n t t e s t i mo n i e s , t h e r e ' s a n u mb e r o f n u mb e r s
f l o a t i n g a r o u n d o u t t h e r e . Ho w w o u l d y o u d e s c r i b e t h e e x t e n t t o w h i c h
C h i n e s e p o l l u t i o n i s a f f e c t i n g t h e w e s t e r n U n i t e d St a t e s ? O r e v e n
beyond that if you think it actually travels beyond that?
             D R . T U R N E R : I t h i n k , a s I n o t e d i n my t e s t i mo n y t h a t , a g a i n ,
s t a t s a r e t o u g h , a n d t hi s i s a c t u a l l y s o me t h i n g t h a t , y o u k n o w, t h e
N O A A f o l k s w h e n I ' v e c h a t t e d w i t h t h e m, t h e y s a y i t ' s a c t u a l l y r e a l l y
h a r d t o me a s u r e , b u t t h e g e n e r a l c o n s e n s u s i s t h a t i t i s p o s s i b l y
n u l l i f y i n g t h e p r o g r e s s t h a t C a l i f o r n i a a n d Wa s h i n g t o n a n d O r e g o n a r e
ma k i n g o n t h e C l e a n A i r A c t , w h i c h fr u s t r a t e s t h e m b e c a u s e t h e y d o n ' t
w a n t t o l os e t h e i r h i g h w a y f u n d i n g ; r i g h t .
             M e r c u r y i n O r e g o n , a g a i n , s o me s t u d i e s d o n e t h i n k i n g t r a c i n g i t
t o p r ob a bl y , t he y s a y A s i a n e mi s s i on s . C h i ne s e c oa l h a s a l ot o f
n a t u r a l l y o c c u r r i n g me r c u r y . S o , y e s , t h e s t a t i s t i c s a r e h a r d , b u t I
t h i n k t h e t r e n d s a r e t ha t t he r e i s mo r e . T h e r e 's a l s o t h e d u s t , a n d w i t h
t h e d u s t , t h e p a r t i c ul a t e s o f t h e d u s t a l s o c ar r i e s o v e r p o l l u t a n t s .
             C O M M I SS I O N E R B R O O K E S :                      Thank you.                C o m mi s s i o n e r
Houston.
             C O M M I SS I O N E R H O U S T O N :                         Thank you.                     C h a i r ma n
B a r t h o l o me w , y o u k i n d o f s t o l e my q u e s t i o n p r o v i n g t h a t g r e a t mi n d s
t h i n k a l i k e , b u t my q u e s t i o n i s r e a l l y a b o u t t he N G O s a n d s o r t o f t h e
c o m mu n i c a t i o n w h e e l . Y o u h a d me n t i o n e d a l i t t l e w h i l e a g o t o s o me
p a s s i n g p u b l i c h e a r i n g s , a n d I t h o u g h t t o my s e l f, i f t h e y c o u l d h a v e
n o n c o n f r o n t a t i o n a l p u b l i c h ea r i n g s l i k e t h i s , y o u g e t t h e i n t e l l e c t u a l
a n d t h e i d e a t r a n s f e r i n a c h e e r f u l e n v i r o n me n t , h o w h e l p f u l t h a t w o u l d
b e i f t h a t c o u l d o c c u r o ve r t h e r e . S o t h a t 's s ome t h i n g w e 'l l c e r t a i nl y
pray for in the future.
             B u t w e h a d t e s t i mo n y l a s t y e a r a b o u t t h e e n v i r o n me n t a l N G O s
over there, and that they were quite passionate about what they do, and
t h a t t h e y d o w o r k w i t h s o me o f t h e U . S . N G O s , e n v i r o n me n t a l N G O s ,
b u t t h e y d o n ' t t a l k t o e a c h o t h e r . T he y d o n 't h a v e a s t r uc t u r e w h e r e t h e
N o r t h t a l k s t o t h e S o u t h t a l k s t o t h e E a s t t a l k s t o t h e We s t , a n d I 'm n o t
s u r e w h e t h e r t h a t i s b e c a u s e t h e y d o n 't h a v e t h e c a p a c i t y , t h e y d o n 't
h a v e t h e t e c h n o l o g y t o t a l k t o e a c h o t h e r , o r t h e y a r e d i s a l l o we d b y t h e
                                                      - 155 -
g o v e r n me n t o r p r e v e n t e d t o t a l k t o e a c h o t h e r .
           I w o n d e r i f y o u c o u l d a d d r e s s t h a t a l i t t l e bi t , h o w mu c h t he y a r e
a b l e t o w o r k t o ge t he r i n d i f f e r e nt a r e a s of C h i n a a n d w h a t t h e
p r o s p e c t s f o r t h a t i s c on t i n u i n g , a n d a l s o w h a t t h e b a r r i e r s f o r t h o s e
f o l k s mi g h t b e ?
           D R . T U R N E R : I t h i n k a l o t o f C h i n e s e e n v i r o n me n t a l N G O s a r e
q u i t e s ma l l .         S o s o me a r e ve r y f o c u s e d o n v e r y l o c a l i s s u e s .
S o me t h i ng I 'v e n o t i c e d i n t he l a s t , p a r t i c ul a r l y t h e l a s t t w o y e a r s , i s
t h a t t he u s e o f t h e i nt e r ne t h a s r e a l l y k i n d o f i n c r e a s e d t h e i r
c o m mu n i c a t i o n , l o o k i n g a t t h e N u j i a n g D a m c a mp a i g n .                    It was a
n a t i o n a l c a mp a i g n . C h i n e s e N G O s e nc o u r a g i n g C h i n e s e j o u r n a l i s t s t o
g o d o w n , i n v e s t i g a t e . T h e r e w a s t h e I n t e r n e t . T h e c h a t r o o ms w e r e
l i v e w i t h i t , a n d I h a v e n 't r e a l l y s e e n a n y o n e c l a mp i n g d o w n o r c l o s i n g
e n v i r o n me n t a l N GO s We b s i t e s .
           I t h i n k t h a t t h e y a r e c o mi n g t o g e t h e r .                  T h e r e a r e mo r e
c o n f e r e n c e s , w o r k s h o p s c o mi n g t o g e t h e r , a l o t o f i n t e r n a t i o n a l p a r t n e r s
s o me t i me s h e l p br i ng t h e m t o g e t he r , b ut a g a i n ma n y o f t h e m a r e
f o c u s e d - - t h i n k o f o u r g r a s s r o o t g r o u p s . Y o u k n o w c o m mu n i t y g r o u p s
f o c u s o n c o m mu n i t y i s s u e s . S o I t h i n k i t 's a p o s i t i v e t r e nd .
           COMMISSIONER HOUSTON:                                   But they're not fearful of it?
T h e y 'r e n o t f e a r f u l o f t h e c o m m u n i c a t i o n ?
           DR. TURNER: No, not that I've seen. Again, a lot of the NGOs-
- mo s t o f t h e m a r e d o i n g wo r k t h a t t h e g o v e r n me n t s u p p o r t s wh i c h ,
a g a i n , a c o m me n t a b o u t me n t i o n i n g w he t h e r o r n o t t h e y 'r e p u p p e t s o f
t h e g o v e r n me n t , I d o n 't s e e t h a t a l w a y s a s t h e c a s e . I t 's n o t a b a d t h i n g
b e c a u s e t h e C hi n e s e g o ve r n me n t , a l o t o f t he e n vi r o nme n t a l pol i c i e s
a r e g o o d p o l i c i e s , a n d h e l pi n g t o b u i l d t h e c a p a c it y o f c o m mu n i t i e s t o
h e l p e n f o r c e t h e m i s s o me t h i n g t ha t t h e c e n t r a l g o v e r n me n t n e e d s a n d
s o me p e o p l e i n t h e c e n t r a l g o v e r n m e n t t h i n k t h e y n e e d t o b u i l d t h e
capacity.
           C O M M I SS I O N E R H O U S T O N : T h a n k y o u . T h a t ' s c h e e r fu l .
           H E A R I N G C O C H A I R D ' A M A T O : C o m mi s s i o n e r Fi e d l e r .
           C O M M I SS I O N E R F I E D L E R : I l i ve d i n Tu r k e y i n t h e 1 9 7 0 s
d u r i n g p e r h a ps t he w o r s t o f t h e s ul f u r i c a c i d r a i ns w h e r e a l o ng t h e
B l a c k Se a i n c op p e r s me l t e r a r e a s , t h e r e w e r e e n t i r e v i l l a g e s a n d t o w n s
whose populations were suffering from renal disease, where in the
w i n t e r , i n t h e n or t he r n c l i ma t e s , i n t he c ol d e r c l i ma t e s , a w a y f r o m t h e
M e d i t e r r a n e a n , t h e s t i l l b i r t h a n d t h e mi s c a r r i a g e r a t e s w e n t u p
d r a ma t i c a l l y i n t he w i n t e r t i me .
           Wh a t i s g o i n g o n i n t e r ms o f t h e i mp a c t o f a c i d r a i n s i mi l a r l y i n
C h i n a ? I s a w a l i t t l e b i t i n L iz E c o n o m y 's t e s t i m o n y a b o u t c r o p s b e i n g
c o v e r e d w i t h g r a y d u s t a n d c o n s i d e r e d t o xi c .               Wh a t a bo u t r e na l
d i s e a s e ? Wh a t a b o u t mi s c a r r i a g e s ? Wh a t a b o u t s t i l l b i r t h s i n s o me o f
the northern colder provinces, Heilongjiang, Liaoning, and the like?
                                                      - 156 -
            D R . H O : I ' m a f r a i d I h a v e n o t h e a r d my s c h o o l o f p u b l i c h e a l t h
c o l l e a g u e s t a l k a bo u t s u c h i s s ue s . B y a n d l a r g e , w e t h i n k t h a t t h e
h e a l t h d a ma g e f a r d o mi n a t e s t he a g r i c u l t u r e d a m a g e , b u t t h e
a g r i c u l t u r e d a ma g e i s s u b s t a n t i a l . Ag r ic u l t u r e d a ma g e f r o m t h e a c i d
r a i n a n d f r o m o z o n e , b u t t h e p r e do mi n a n t e f f e c t i s h u m a n h e a l t h , t h e
r e s p i r a t o r y p r o b l e m, s o I 'v e n o t h e a r d a b o u t t h e s t i l l b i r t h e f f e c t s , b u t
t h e r e wi l l b e a n o t h e r - -
            C O M M I SS I O N E R F I E D L E R :                  Acid rain causes more than
r e s p i r a t o r y p r o b l e m s i s my p o i n t a c t u a l l y , a nd I w a s w o n d e r i n g w h e r e
t h e r e w e r e a n y s ta t i s t i c s o n i t ?
            G e t t i n g a w a y f r o m B e i j i n g , o u r w i t n e s s e s t h i s mo r n i n g f r o m t h e
D e p a r t me n t o f E n e r g y a n d EP A w e r e k n o w l e d g e a b l e a b o u t p o l i c y , b u t
w e r e l e s s k n o w l e d g e a b l e a b o u t w h a t wa s g o i n g o n i n t h e p r o v i n c e s . S o
I d i d n 't g e t a n a n s w e r t o my q u e s ti o n o f - - o u t s i d e o f c i t i e s - - w h a t
p r o v i n c e i s ma k i n g t h e mo s t p r o g re s s i n r e s t o r i n g i t s e n v i r o n me n t a l
c o n d i t i o n ? A n d i s a me a n i n g f u l d i ff e r e n c e a mo n g t h e p r o v i n c e s i n
their progress?
            DR. TURNER: You go first.
            D R . H O : We l l , I d o n 't k n o w .
            D R . T U R N E R : O k a y . Sh a n g h a i i s o f t e n c i t e d a s b e i n g - - t h e y
h a v e b e e n v e r y p r o g r e s s i v e i n a l o t o f a r e a s a n d s o me t i me s t h e r e
h a v e n ' t b e e n a s ma n y C h i n e s e N G O s d e v e l o p i n g i n S h a n g h a i , a n d s o me
p e o p l e s a i d b e c a u s e t h e y d o n 't n e e d i t b e c a u s e t h e g o v e r n me n t s e e ms t o
b e a l i t t l e b i t , v e r y p r o a c ti v e o n t he e nv i r o n me n t a l i s s u e .
            S o me p r o v i n c e s l i k e J i a n g s u i s a n o t h e r o n e t h a t I b e l i e v e i s v e r y
p r o g r e s s i v e . A g a i n , a l o t o f w o r k w i t h t h e i nt e r n a t i o n a l c o m mu n i t y.
T h e y ' v e b e e n , t he y w e r e l e a d o n t he i n f o r ma t i o n di s c l o s u r e . A ga i n ,
t h e y a r e w o r k i n g w i t h N R DC . D e ma n d s i d e ma n a g e me n t , t h e y w a n t t o
be a lead.
            L i a o n i n g P r o v i n c e w a s t he f i r s t p r o v i nc e t ha t r e a l l y t r i e d t o
e x p e r i me n t w i t h- - I l o ve t h e t e r m- - c i r c u l a r e c o n o my . H a v e y o u h e a r d
t h a t t e r m ? I t 's t a l k i n g a b ou t t r y i n g t o p r o mo t e r e c yc l i ng , r e s ou r c e
c o n s e r v a t i o n i s s u e s mo r e b r o a d l y . T h e f o r me r ma y o r o f D a l i a n , h e
r e a l l y p u s h e d D a l i a n t o b e c o me a v e r y g r e e n c i t y , w a n t e d t o b e c l e a n .
I t 's g r e e n a s w e l l , l o t o f g r e e n s p a c e .
            C O M M I SS I O N E R F I E D L E R : We w e r e j u s t t h e r e .
            C O M M I SS I O N E R H O U S T O N : I t w a s w o n d e r f u l .
            D R . T U R N E R : B u t t h e ma y o r o f t ha t c i t y b e c a me t h e h e a d o f t h e
province.
            COMMISSIONER FIEDLER: Right.
            D R . T U R N E R : S o y o u h e a r d t h e s e s to r i e s . S o i t i s k i n d o f t r u e
t h a t Li a o n i n g i s v e r y p r o g r e s s i v e . T h e y d o a l o t w i t h t h e E u r o p e a n
U n i o n o n r i v e r b a s i n ma n a g e me n t i s s u e s . T h e y s t r i k e me a s , a g a i n , a s
a v e r y h o l i s t i c , t h e y 'r e t a k i n g a v e r y h o l i s t i c a p p r o a c h .
                                                     - 157 -
            A n d J i a n g s u b e i n g o n e r e a l l y d o i n g a l o t o f e x p e r i me n t a t i o n w i t h
n e w p o l i c i e s . S h a n g h a i a s we l l e x p e r i me n t a t i o n o n n e w p o l i c i e s .
            C O M M I SS I O N E R F I E D L E R : T h a n k y o u .
            H E A R I N G C O C H A I R D ' A M A T O : C o m mi s s i o n e r Vi d e n i e k s .
            HEARING COCHAIR VIDENIEKS:                                      D r . Ho , d i d I h e a r y o u
c o r r e c t l y s a y p e r c a p i t a i n c o me i n P R C i s $ 7 , 0 0 0 ?
            D R . H O : T h a t i s wh a t t he W o r l d B a n k- -
            H E A R I N G C O C H A I R V I D E N I E K S : Y u a n . Oh , y u a n .
            D R . H O : N o , t h i s i s w h a t t he Wo r l d B a n k a c c o un t a n t s c a l l
p u r c h a s i n g p o w e r p a r i t y a d j u s t e d d o l l a r s . S o o n t h e c o m mo n s c a l e ,
adjusting for prices, the U.S. would be--
            HEARING COCHAIR VIDENIEKS: Oh, purchasing power parity
ma y b e .
            DR. HO: Yes.
            HEARING COCHAIR VIDENIEKS:                                      Okay.            Fine.       T h a t wa s
b a s i c a l l y a q u e s t i o n b e c a u s e I t h o u g h t i t w as v e r y h i g h , t e n t i me s
higher. It would be.
            T h e o t h e r q u e s t i o n I h a v e i s S E P A a c e n t r a l or ga n i z a t i on t h a t ha s
d e p a r t me n t s g o i n g d o w n t o t he l o c a l l e v e l ? T h a t 's a n o r ga ni z a t i o n a l
q u e s t i o n . H o w i s t h a t g o v e r n me n t o r g a n i z e d o v e r t h e r e , t h e C h i n e s e
E n v i r o n m e n t a l Pr o t e c t i o n A g e n c y ?
            D R . H O : T h e C h i n e s e h a v e a s y s t e m w h e r e t he p r o v i n c i a l a n d
l o c a l l e v e l s r e p l i c a t e a l l t h e a g e n c ie s a t t h e n a t i o n a l l e v e l . S o e a c h
p r o v i n c e h a s i t s o w n e n v i r o n me n t a l p r o t e c t i o n b u r e a u w h i c h d o n o t
report to the SEPA.
            HEARING COCHAIR VIDENIEKS: Okay.
            D R . H O : S o t h e y d o n o t h a v e g o o d c o n t r o l . Th a t 's t h e p r o b l e m.
            H E A R I N G C O C H A I R V I DE N I E K S : T h e r e w a s s o me t hi n g i n t h e
p r e s s , ma y b e t w o o r t h r ee d a y s a g o , t h a t s o me o f t h e s e C h i n e s e c o a l ,
p o w e r p l a n t s u t i l i z i n g c o a l h a v e s cr u b b e r s i n s t a l l e d , b u t t h e ma n a g e r s
c h o o s e n o t t o u s e t h e m i n o r d e r t o b e mo r e p r o d u c t i v e . S o t a l k a b o u t
i n c e n t i ve s - - d o t he p r o d u c t i o n i n c e n t i v e s s o mu c h o u t w e i g h t h e
p o l l u t i o n c o n t r o l i n c e nt i ve s t h a t t h e y ma y b e m e a ni n gl e s s ? T ha t 's k i n d
of a conclusory question, I guess.
            D R . T U R N E R : I t h i n k t h a t i n t e r m s o f , t o a n s w e r t ha t a l s o
l o o k i n g a t t h e S E PA e n v i r o n me n t a l p r o t e c t i o n b u r e a u s t r u c t u r e , l o c a l
e n v i r o n me n t a l p r o t e c t i o n b u r e a u s a r e p a i d b y t h e l o c a l g o v e r n me n t s ,
a n d t he r e i s s o me t i me s a c a t a n d mo u s e g a me i n t e r ms o f mo n i t o r i n g .
B u t s o me t i me s , t h o u g h , w h e n S E P A w i l l f i n e a n i n d u st r y f o r p o l l u t i n g
a n d t h e l o c a l g o v e r n me n t w i l l t h e n p a y t h e m b a c k . S o t h a t 's w h e r e t h e
l a c k o f i n c e n t i v e c o me s i n .
            HEARING COCHAIR VIDENIEKS: But that I guess would be a
r o o t p r o b l e m.
            D R . T U R N E R : A r o o t p r o b l e m, b u t t h e i s s ue , t h e r e gi o na l o f f i c e
                                                    - 158 -
p r o gr a m t h a t E P A i s he l pi ng t h e m w i t h c o ul d h a v e a n e x t r e me l y b i g
i mp a c t i n i nc r e a s i n g mo n i t o r i n g a t t h e l o c a l l e v e l a nd e n f or c e me n t
i s s u e s . I s e e t h a t a s a g o o d h o p e f o r b u i l d i n g t h e c a p a c i t y o f t h e EP B s
at the local level.
            HEARING COCHAIR VIDENIEKS: The other question I had, I
think you said that the pollution fighting budget is like 1.7 percent of
GDP at the central level, I guess, or nationwide.
            D R . T U R N E R : A g a i n , t h e s t a t i s t i c s, I h a v e t o w r e s t l e wi t h . I 'm
p r e t t y s u r e t h a t t h a t p e r c e n t a g e i s f o c u s e d o n t h e c e n t r a l g o v e r n me n t
a l l o t me n t a n d - -
            HEARING COCHAIR VIDENIEKS: Right.
            D R . T U R N E R : - - I ' m n o t q u i t e s u r e . A g a i n , i t 's g o i n g t o v a r y
considerably at the local level.
            H E A R I N G C O C H A I R V I D E N I E K S : B e c a u s e i t 's t h e n q u i t e h i g h
b e c a u s e t h e mi l i t a r y b u d g e t i s l i k e t h r e e p e r c e n t , t h a t 4 5 b i l l i o n t h a t
w e s e e k i c k e d a r o u n d , t h e i r o f f i c i a l e s t i ma t e . S o w e w o u l d , o f c o u r s e ,
k i c k i t h i g h e r . B u t t h a t w o u l d b e l i k e h a l f t h e mi l i t a r y b u d g e t . A n d
t h e n a l s o t o d a y w e h e a r d n u mb e r s t h a t p ol l u t i o n c o s t s PR C e i g h t t o 1 3
p e r c e n t o f G D P , w h i c h o t h e r p e o p l e s a i d w a s h i g h , b u t my q u e s t i o n i s ,
i s t h i s a - - y o u me n t i o n t h e w o r d " c r i s i s . "
            I s t h i s a t i me b o mb t h a t 's wa i t i ng t o h a p p e n ? Wh e n i n b o t h o f
y o u r e s t i ma t i o n w o u l d i t h a p p e n i f i t h a p p e n s ?
            D R . T U R N E R : A l o t o f t h e c o s t s , t o o, i n s o me o f t h o s e n u mb e r s -
- I d o n 't r e a l l y k n o w - - a n d I 'l l l e t h i m a n s w e r t o o - - t h e e c o n o mi s t h e r e - -
b u t t h e h e a l t h c o s t s , t h os e a r e o f t e n h a r d t o c a l c u l a t e , a n d t h e r e i s a l s o
t h e c o s t o f i n s t a b i l i t y . Y o u 'v e p r o b a b l y h e a r d t h e s t a t a b o u t 8 5 , 0 0 0
p r o t e s t s o f a h u n d r e d a n d mo r e i n 2 0 0 5 .                    Many of those were
e n v i r o n me n t a l p r o t e s t s i n r u r a l a re a s , w a t e r p o l l u t i o n , a i r p o l l u t i o n ,
t h a t t h e l o c a l g o ve r n me n t w a s n 't r e s po n s i ve .
            A n d t h a t a l s o h a s a n i mp a c t . I n s t a b i l i t y c o s t s , b u t h o w d o y o u
calculate it?
            HEARING COCHAIR VIDENIEKS: Right, right.
            D R . H O : I 'm n o t f a mi l i a r wi t h t hi s 1 .7 f i g u r e , G D P f i g u r e , b u t
t h e b u d g e t s o f t h e a g e n c i e s a r e s mal l s o w e w o u l d , w h a t w e w o u l d l i k e
t o c ou n t i s t he c os t o f t h i s c o n t r o l e q u i p me n t a n d t h i s i s w h a t d r i v e s i t
t o t h i s c l os e t o a p e r c e n t o f GD P . I t ' s n o t t h e s a l a r i e s f o r t h e S E P A .
            C O M M I SS I O N E R F I E D L E R : I t 's t h e i n d u s t r i a l c o s t s .
            D R . T U R N E R : I f I c o u ld a l s o i n t e r j e c t , t he r e i s a l s o t he c o s t o f
l o s s o f f o r e i g n i n v e s t me n t s , a n d w e 'r e s e e i n g t h a t . Ho n g K o n g i s a
p a r t o f C h i n a . Y o u mi g h t h a v e h e a r d M e r r i l l L y n c h r e c o m me n d e d i n
l a t e 2 0 06 t ha t i n v e s t o r s s w i t c h t h e i r r e a l e s t a t e i n v e s t m e n t s t o
S i n g a p o r e w h i c h i s mu c h c l e a n e r , a n d t h e y 'r e s t a r t i n g t o s e e s o m e
i n v e s t o r s c o n s i d e r i n g , w e l l , ma y b e , s o me C h i n e s e c i t i e s a r e c o n s i d e r e d
hardship posts because of the poor air quality.
                                                     - 159 -
             S i n c e t h a t a n n o u n c e me n t , H o n g K o n g h a s r e a l l y p u s h e d t h e i r a i r
q u a l i t y s t a n d a r d s e t t i n g . Th e y 'r e g o i n g t o w o r k w i t h G u a n g d o n g o n
S O 2 e mi s s i o n s t r a d i n g . W e 'v e r e a l l y s e e n i t a s a c a t a l y s t i n H o n g
K o n g a n d ma y b e e v e n w i t h G u a n g d o n g b e c a u s e o f t h e fe a r o f l o s i n g
i n v e s t me n t . S o a n o t h e r c o s t t h a t ' s h a r d t o c a l c u l a t e .
             HEARING COCHAIR VIDENIEKS: Thank you.
             H E A R I N G C O C H A I R D ' A M A T O : T h a n k y o u . C o mmi s s i o n e r
Houston.
             COMMISSIONER HOUSTON: I just had another quick question
t h a t c a me o n t h e l a s t d i s c u s s i o n , o ne o f t h e q u e s t i o n s C o m mi s s i o n e r
V i d e ni e ks a s k e d. H e r e i f a ma n a ge r t u r n e d o f f a s c r u b b e r , h e w o u l d g o
t o j a i l , w h i c h i s f a i r l y s i g n i f i c a nt d i s i n c e n t i ve t o t ur n i n g t h e s c r u bb e r
off.
             S o i t ma d e me w o n d e r i f t h e r e i s a n y a c t i o n w i t h i n C h i n a 's
j u d i c i a l s y s t e m v i s - à - v i s e n v i r on m e n t a l i s s u e s ? I s t he r e a n y mo v e m e n t
to punish?                 A r e t h e r e a n y p e n al t i e s i mp o s e d ?             Are they paying
a t t e n t i o n t o i t a l l ? F o t h e y h a v e i mp a c t a t a l l a t w h a t 's h a p p e n i n g a t
t h e e n v i r on me n t a l l e v e l e i t he r i n B ei j i n g o r mo r e i mp o r t a n t l y , p r o b a b l y
out in the provinces?
             D R . H O : I d o n 't k n o w i f t h e j u d ic i a l s y s t e m c a n e n t e r . T h e
f i n d i n g o f v i o l a t i o n h a s t o c o me f r o m t h e e n v i r o n me n t a l b u r e a u , a n d i f
t h e e n v i r o n me n t a l b u r e a u i s c o r r u p t o r i n f l u e n c e d b y o t h e r e c o n o mi c
d e c i s i o n s , t h e n t h i s w o u l d n 't e v e n r i s e t o t h e l e v e l o f a j u d i c i a l a c t i o n .
             COMMISSIONER HOUSTON: All right.
             D R . T U R N E R : B u t i f I c o u l d a d d , t wo y e a r s a g o , t h e r e w a s t h e
b i g s p i l l o n t h e S o n g h u a R iv e r , t h e b e n z e n e s p i ll , w h i c h a c t u a l l y h a s
b e e n a r e a l l y i mp o r t a n t i n c r e a s e i n C h i n a 's E P A 's p o w e r . R i g h t a f t e r
t h a t , t h e y w e r e a b l e t o p a s s r e g u l a t i o ns t h a t c r i mi n a l i ze d i f y o u d o n 't
r e p o r t y o u r s p i l l . S o t h e i d e a t ha t p o l l u t i o n a c c i d e n t s n o w , t h e r e 's a
higher bar now.
             B u t a l s o t h e r e a r e c a se s , a n d I a c t u a l l y h e l pe d w i t h a n N G O , t o
give you another good example, the Center for Legal Assistance for
P o l l u t i o n V i c t i ms i s a n N GO b a s e d a t a u n i v e r s i t y i n B e i j i n g . T h e y
have a network of lawyers that give pro bono support to class action
c a s e s , p o l l u t i o n v i c t i ms , an d t h e y ' r e s t a r t i n g t o w i n .
             I me a n o u t o f a h u n d r e d s o me c a s e s, t h e y w i n o v e r ha l f . I n t e r ms
o f , t h e y t a k e c a s e s a w a y f r o m t h e l o c a l c o ur t s t o mo v e i t t o a r e gi o n a l
c o u r t . A me r i c a n B a r A s s o c i a t i o n a n d o t h e r U . S . N G O s h a v e b e e n
d o i n g t r a i n i n g s o f j u d g e s a n d l a w y e r s o n e n v i r o n me n t a l l a w s o t h a t t h i s
has been, again, a very, very encouraging trend.
             S o me e n v i r o n me n t a l p r o t e c t i o n b u r e a u s h a v e b e e n , t h e r e h a v e
b e e n a t t e mp t s t o s u e t h e m. T h e y d o n 't o f t e n s u c c e e d . Th e r e 's a wo m a n
out in California did her dissertation on this, and I really want to see it
b e c a u s e I d o n ' t - - s h e l o o k e d w a y o u t i n t h e p r o v i n c e s a bo u t t h i s t r e n d ,
                                                      - 160 -
a g a i n , p u t t i n g p r e s s u r e s o n EP B s .
            S o I 'l l g e t b a c k t o y o u o n t h a t o n e o n c e I c a n r e a d t h i s w o ma n ' s
dissertation.
            C O M M I SS I O N E R H O U S T O N : T h a n k y o u .
            HEARING COCHAIR D'AMATO:                                   Thank you.               Any further
q u e s t i o n s o n t h e p a r t o f c om mi s s i o n e r s ? I f no t , t h i s c o n c l u d e s t o d a y 's
h e a r i n g . T h a n k t h e p a n e l v e r y mu c h f o r y o u r a t t e n t i o n a n d i n t e r e s t a n d
f o r f o l l o w - u p . An d w e w i l l r e s u me t h e s e c o n d d a y o f t h i s h e a r i n g
t o mo r r o w mo r n i n g i n t h i s r o o m a t 8 : 3 0 p r o mp t l y .                  We h a v e t w o
g o v e r n o r s s o I a s k c o m mi s s i o n e r s t o b e p r o mp t . T h a t w i l l c o n c l u d e
t o d a y 's h e a r i n g .
            DR. TURNER: Thank you.
            [ Wh e r e u p o n , a t 4 : 3 5 p . m. , t h e h e a ri n g r e c e s s e d , t o r e c o n v e n e a t
8 : 3 5 a . m. , F r i d a y , J u n e 1 5 , 2 0 0 7 . ]




                                                   - 161 -
                      CHINA'S ENERGY CONSUMPTION AND

            OPPORTUNITIES FOR U.S.-CHINA COOPERATION

        TO ADDRESS THE EFFECTS OF CHINA'S ENERGY USE

                                                  _________


                                        Friday, June 15, 2007


U.S.-CHINA ECONOMIC AND SECURITY REVIEW COMMISSION
                                   Washington, D.C.



          T h e C o m mi s s i o n me t R o o m 3 8 5 , R u s s e l l S e n a t e O f f i c e B u i l d i n g ,
Wa s h i n g t o n , D . C . a t 8 : 3 5 a . m. , C h a i r ma n C a r o l y n B a r t h o l o me w , V i c e
C h a i r ma n D a n i e l A . B l u me n t h a l a n d C o m mi s s i o n e r s C . R i c h a r d
D ’ A ma t o , D e n n i s C . S h e a , a n d P e t e r V i d e ni e ks ( H e a r i n g C o c h a i r s ) ,
presiding.

           C H A I R M A N B A R T H O L O M E W:                    W e 'r e g o i n g t o s t a r t w i t h
o p e n i n g s t a t e me n t s f r o m o u r c o c h a i r s o f t h e h e a r i n g , a n d t h e n I 'l l h a v e
a f e w r e ma r k s t o m a k e , a n d t h e n w e 'l l mo v e i n t o t h e t e s t i mo n y .
           C o m mi s s i o n e r D 'A ma t o .

      OPENING STATEMENT OF COMMISSIONER C. RICHARD
                D’AMATO, HEARING COCHAIR

           H E A R I N G C O C H A I R D ' A M A T O : T h a n k y o u , M a d a m C h a i r ma n ,
a n d w e l c o me t o t h e s e c o n d d a y o f o u r h e a r i n g o n C h i n a 's e n e r g y
c o n s u mp t i o n a n d o p p o r t u n i t i e s f o r U . S . - C h i n a c o o p e r a t i o n t o a d d r e s s
the effects of China's energy use.
           Y e s t e r d a y , w e h e a r d t e s t i mo n y a b o u t t h e t r e n d s o f C h i n e s e
e n e r g y u s e a s w e l l a s a n a l y s i s o f t h e s t r a t e g i c a n d e n v i r o n me n t a l
effects of that use.
           T o d a y , w e 'r e a s k i n g o u r wi t n e ss e s t o t a k e a f o r w a r d - l o o k i n g
a p p r o a c h b a s e d o n t h o s e a n a l y s e s a n d p i n p o i n t s t r a t e g i e s t ha t c a n b e
u s e d t o a d d r e s s t h e s e e f f e c t s . M or e o v e r , w e wi l l h e a r t e s t i mo n y f r o m

                                                    - 162 -
w i t n e s s e s e n g a g e d i n U . S . - C h i n a c o o p e r a t i v e p ro g r a ms o n e n e r g y a n d
t h e e n v i r o n me n t a b o u t w h a t a s p e c t s o f t h e s e p r o g r a ms h a v e s u c c e e d e d
a n d w h a t a s p e c t s h a v e n o t , a n d h o w w e c a n i mp r o v e f u t u r e
cooperation.
             I w o u l d l i k e t o e mp h a s i z e my c o n v i c t i o n a s a n i n d i v i d u a l
c o m mi s s i o n e r t h a t t h e r e i s n o g r e a t e r c ha l l e n g e t o t h e h e a l t h a n d
s e c u r i t y o f t h e U n i t e d S t a t e s t h a n g l o ba l c l i ma t e c h a n ge . T h e U . S . a n d
C h i n a a r e t h e w o r l d ' s t w o l a r g e s t e mi t t er s o f g r e e n h o u s e g a s e s , a n d n o
i n t e r n a t i on a l e f f o r t t o c u r b t h e e f f e c t s o f c a r b on d i o xi d e e mi s s i o ns i s
g o i n g t o h a v e g r e a t e f f e c t w i t h o u t t h e d e d i c a t e d i n v o l v e me n t o f b o t h
countries.
             I a p p l a u d t he r e l e a s e o f c l i ma t e c h a n g e r e p o r t s b y t h e U . S . a n d
C h i n a b o t h l a s t w e e k p r i o r t o t h e G r o u p o f E i g h t s u m mi t i n G e r m a n y .
Wh i l e i t i s l a u d a b l e t o a c k n o w l e d g e t h e p r o b l e m o u r p l a n e t c o n f r o n t s ,
these proposed responses so far are insufficient to ensure the
w o r l d wi d e c u r b i n g o f g r e e n h o u s e g a s e s a n d ma n a g e t h e i r ma n y - f a c e t e d
aspects.
             T h e U . S . a n d C h i n a c a n i n t h e i m me d i a t e f u t u r e e s t a b l i s h mo r e
s t r i n ge nt c a p s i n a n i n t e r n a t i o n a l e f f o r t t o s e t t h e s t a g e f o r a p o s t -
K y o t o a c c o r d , w h i c h h a s b e e n i de n t i f i e d b y Pr e s i de n t B u s h a l r e a dy a s a
p r i o r i t y i n w h i c h a l l ma j or po l l u t e rs p a r t i c i pa t e f r o m b o t h a d e v e l o p e d
a n d a d e v e l o p i n g wo r l d .
             I f w e a r e t o s u c c e e d i n s u c h e f f o r t s , i t wo u l d b e w h o l l y
i n s u f f i c i e n t t o r e l y s o l e l y o n t h e a c t i on s o f g o ve r n me n t s , a s i mp o r t a nt
a s t h os e a r e . I t w i l l b e c r u c i a l f o r c o m mi t t e d , c o n c e r t e d a c t i on s t o
e me r g e fr o m a mo n g t h e r a n k s o f s o c i e t y a r o u n d t h e g l o b e .
C o m m u n i t i e s a nd bu s i ne s s e s mu s t t a ke a n a c t i v e r o l e i n a d d r e s s i n g t h e
p r o b l e m, a n d I b e l i e v e t h a t p u b l i c / p r i v a t e p a r t n e r s h i p s i n b o t h Ch i n a
a n d t h e U n i t e d St a t e s c a n c o n t r i b ut e dr a ma t i c a l l y t o r e d uc t i on o f
p o l l u t i o n r e s u l t i n g f r o m e n e r g y c o n s u mp t i o n .
             I n d e e d , U . S . - C h i n e s e c o o pe r a t i o n a n d l e a d e r s h i p i n t h i s a r e a i s
the critical keystone to worldwide success. Lacking such cooperation
a n d l e a d e r s h i p , t h e p r o b l e m w i l l l i ke l y g o a l ong u n c o n t r o l l e d p a t h w a y s
increasingly dire in their consequences.
             T h e g o o d n e w s i s i t a p p e a r s w e h a v e t h e te c h n o l o g i e s , o r g a n i z i n g
s k i l l s , a n d l e v e l o f u n d e r st a n d i n g o f w h a t n e e d s t o b e d o n e t o ma n a g e
t h e p r o b l e m g i v e n t h e p o l i t i c a l w i l l t o d o s o . T h e b a d n e w s i s we d o
n o t h a v e t h e l u x u r y o f u n l i mi t e d t i me t o d o t h i s .
             I w o u l d l i k e t o t h a n k a l l t h e w i t ne s s e s f o r s h a r i n g t he i r t i me ,
t h e i r k n o w l e d g e a n d t h e i r i d e a s w i t h t h e C o m mi s s i o n . W e ' r e e s p e c i a l l y
p l e a s e d t o w e l c o me G o v e r n o r B r i a n S c h w e i t z e r o f M o n t a n a a n d
G o v e r n or J o e M a nc h i n o f We s t V i r g i ni a w h o w i l l di s c u s s t he i r s t a t e s '
e n e r g y - r e l a t e d i n t e r a c t i o n s w i t h C h i na a n d s t r a t e gi e s f o r mi t i ga t i ng t h e
negative effects of energy use.                                   An d M r . D a v i d H e l v e y fr o m t h e
                                                      - 163 -
D e p a r t me n t o f D e f e n s e , w h o w i l l j oi n u s l a t e r t hi s mo r n i ng .
          T h a n k y o u f o r c o m i n g , a n d I ' l l t u r n t h e mi c r o p h o n e o v e r n o w t o
my c o c h a i r f o r t o da y 's s e s s i on , C o m mi s s i o n e r De n n i s S h e a .
[The statement follows:]

        P r e p a r e d S t a t e m e n t o f C o m m i s s i o ne r C . R i c h a r d D ’ Am a t o
                                          H e ar i n g C o c h a i r

        Good morning, and welcome to the second day of our hearing on “China’s energy consumption
and opportunities for U.S.-China cooperation to mitigate the effects of China’s energy use.” Yesterday, we
heard testimony about the trends of Chinese energy use, as well as analyses of the strategic and
environmental effects of that use. Today, we are asking our witnesses to take a forward-looking approach
based on those these analyses and pinpoint strategies that can be used to address these effects. Moreover,
we will hear testimony from witnesses engaged in U.S.-China cooperative programs on energy and the
environment about what aspects of these programs have succeeded and what aspects have not, and how we
can improve future cooperation.

          I would like to emphasize my conviction that there is no greater challenge to the health and
security of the United States than global climate change. The U.S. and China are the world's two largest
emitters of greenhouse gases, and no international effort to curb the effects of carbon dioxide emissions can
have great effect without the dedicated involvement of both countries. I applaud the release of climate
change reports by the U.S. and China last week prior to the Group of Eight summit in Germany. Yet while
it is laudable to acknowledge the problem our planet confronts, these proposed responses so far are
insufficient to ensure the worldwide curbing of greenhouse gases to manage their many-faceted impacts.
The U.S. and China can in the immediate future establish more stringent caps in an international effort to
set the stage for a post-Kyoto accord - which has been identified already by President Bush -- in which
all major polluters participate, from both the developed and developing world.

          If we are to succeed in such efforts, it will be wholly insufficient to rely solely on actions by
governments, as important as those are. It will be crucial for committed, concerted actions to emerge from
within the ranks of society around the globe. Communities and businesses must take an active role in
addressing this problem, and I believe that public-private partnerships in both China and the United States
can contribute dramatically to reduction of pollution resulting from energy consumption. Indeed, U.S.-
Chinese cooperation and leadership in this area is the critical keystone to worldwide success. Lacking such
cooperation and leadership, the problem will likely grow along uncontrolled pathways, increasingly dire in
their consequences. The good news is it appears we have the technologies, organizing skills, and level of
understanding of what needs to be done to manage the problem, given the political will to do so. The bad
news is we do not have the luxury of unlimited time to do so.
          I would like to thank all of the witnesses for sharing their time, their knowledge, and their ideas
with the Commission. We are especially pleased to welcome Governors Joe Manchin of West Virginia and
Brian Schweitzer of Montana who will discuss their states’ energy-related interactions with China and
strategies for mitigating the negative effects of energy use, and Mr. David Helvey from the Department of
Defense, who will join us later this morning. Thank you for coming, and now I’ll turn the microphone over
to my co-chair for today’s session, Commissioner Dennis Shea.

  OPENING STATEMENT OF COMMISSIONER DENNIS C. SHEA
                 HEARING COCHAIR

      HEARING COCHAIR SHEA:                             T h a n k y o u , C o m mi s s i o n e r
D 'A ma t o . I t o o w o u l d l i k e t o w e l c o me t h e w i t n e s s e s w h o w i l l b e
                                                - 164 -
j o i n i n g u s t o d a y , a n d I w o u l d e s p e c i a l l y l i k e t o we l c o me G o v e r n o r
S c h w e i t z e r f o r a t t e n d i n g a n d t h a n k h i m f o r a t t e n d i n g , a n d I 'd l i k e t o
w e l c o me G o v e r n o r M a n c h i n i n a b s e n t i a .                I ' m s u r e h e 'l l b e h e r e
mo me n t a r i l y .
            I w a nt t o t ha n k bo t h g e nt l e me n f o r t he i r wi l l i n g ne s s t o s h a r e
w i t h t h e C o m mi s s i o n t h e i r e x p e r i e n c e s i n p r o mo t i n g a r e l i a b l e c l e a n
e n e r g y s u p p l y a n d i n w o r k i n g w i t h C hi n a o n t hi s i s s u e .
            T h e s t r a t e g i c a n d e n v i r o n me n t a l e f f e c t s o f C h i n a 's e n e r g y u s e
p r e s e nt a g r o w i ng c h a l l e ng e t o U . S . - Ch i n a r e l a t i o n s . T h i s w a s v i v i d l y
illustrated by the focus on energy and environmental issues during last
mo n t h 's S t r a t e g i c Ec o n o mi c D i a l o g u e h e r e i n W a s h i n g t o n .
            I t a p p e a r s t h a t b o t h t h e a d mi n i s t r a t i o n a n d t h e C h i n e s e
g o v e r n me n t r e c o g n i z e t h e h i g h s t a k e s i n v o l v e d , a n d r e a l i z e t h a t b o t h
n a t i o n s f a c e s o me o f t h e v e r y s a me c h a l l e n g e s .
            T h e b o t t o m l i n e i s t h a t t h e r e i s mu c h c o m mo n g r o u n d a s b o t h o f
our countries try to respond to these challenges in ways that enhance
o u r e c o n o mi c g r o w t h a n d p r o t e c t o u r n a t i o n a l s e c u r i t y .
            A f t e r y e s t e r d a y 's i n s i g h t f u l t e s t i mo n y , w e w i l l h a v e a n
opportunity today to hear suggestions from witnesses about how they
b e l i e v e o u r g o v e r n me n t c a n b e s t a p p r o a c h t h e s e i s s u e s . O u r e x p e r t
witnesses have been asked to identify strategies both from the realm of
p u b l i c p o l i c y a n d t h e a re n a o f p r i v a t e s e c t o r a c t i v i t y f o r a d d r e s s i n g
b o t h t h e s t r a t e g i c a n d e n v i r o n me n t a l c o n s e q u e n c e s o f C h i n e s e e n e r g y
c o n s u mp t i o n t r e n d s .
            We w i l l b e d e p e n d i n g o n o u r w i t n es s e s ' e x p e r i e n c e w i t h C h i n a t o
a s s i s t u s i n d i s t i n gu i s hi n g be t w e e n w h a t f e a s i bl y c a n be a c c o mp l i s h e d
i n C hi n a , g i ve n t he c ur r e nt s t a t e o f t h e g o ve r nme n t a n d e c on o my a nd
w h a t ma y s o u n d l i k e a g o o d i d e a , b u t may n o t b e a c h i e v a b le i n t h e n e ar
t e r m.
            I a l s o l o o k f o r w a r d t o h e a r i n g t h e t e s t i mo n y o f o u r w i t n e s s e s
w h o c u r r e n t l y l e a d U . S . - C h i n a c o o p e r a t i v e p r o g r a ms o n e n e r g y a n d t h e
e n v i r o n me n t . T h e i r r e ma r k s w i l l g i v e t h e C o m mi s s i o n a n o p p o r t u n i t y
t o i de nt i fy b e s t p r a c t i c e s i n U . S . - C h i n a c o o p e r a t i v e p r o je c t s a n d b e t t e r
i n f o r m t h e C o n g r e s s o n h o w U . S . - Ch i n a c o o p e r a t i o n c a n b e i mp r o v e d
and expanded.
            I w a n t t o t h a n k i n a d v a n c e a l l t he w i t n e s s e s f or p a r t i c i p a t i ng i n
t o d a y 's h e a r i n g a n d , G o v e r n o r S c h w e i t z e r , a g a i n , t h a n k y o u v e r y mu c h
for attending.
            I'm going to hand it over to the chairman.
[The statement follows:]




                                                     - 165 -
             P r e p a r e d S t a t e m e n t o f C o m mi s s i o ne r D e n ni s C . S h e a
                                           H e ar i n g C o c h a i r

          Thank you, Commissioner D’Amato. I’d like to welcome the panelists who have joined us today.
I especially would like to welcome Governor Manchin and Governor Schweitzer for their appearance this
morning, and thank them for their willingness to share with the Commission their experiences in promoting
a reliable, clean energy supply and in working with China on this issue.
          The strategic and environmental effects of China’s energy use present a growing challenge to
U.S.-China relations. This was vividly illustrated by the focus on energy and environmental issues during
the Strategic Economic Dialogue in May. It appears that both the Administration and the Chinese
government recognize the high stakes involved, and realize that both nations face some of the very same
challenges. The bottom line is that there is much common ground as both of our countries try to respond to
these challenges in ways that enhance our economic growth and protect our national security.
          After yesterday’s insightful testimony, we will have an opportunity today to hear suggestions from
witnesses about how they believe our governments can best approach these issues. Our expert witnesses
have been asked to identify strategies—both in the realm of public policy and in the arena of private sector
activity—for addressing both the strategic and environmental consequences of Chinese energy
consumption trends. We will be depending on our witnesses’ experience with China to assist us in
distinguishing between what feasibly can be accomplished in China, given the current state of the
government and economy, and what may sound like a good idea but may not be achievable in the near
term.
          I also look forward to hearing the testimony of our witnesses who currently lead U.S.-China
cooperative programs on energy and the environment. Their remarks will give the Commission an
opportunity to identify best practices in U.S.-China cooperative projects and better inform the Congress on
how U.S.-China cooperation can be improved and expanded.
          We thank all of you for participating, and we’ll begin with today’s first panel.



               PANEL VI: GUBERNATORIAL PERSPECTIVES

             C H A I R M A N B A R T H O L O M E W: T h a n k y o u v e r y mu c h . I t 's a
real honor and a privilege for us today to have testifying several of the
governors of our great nation. They are on the front lines of dealing
w i t h t h e e n e r g y a n d e n v i r o n me n t c o n s e q u e n c e s .               Before I do an
i n t r o d u c t i o n , I 'd a l s o l i k e t o t h a n k a n d c o m me n d t h e c o c h a i r s o f t h i s
h e a r i n g , p a r t i c u l a r l y C o m mi s s i o n e r Vi d e n i e k s , w h o i s t h e o n e w h o h a d
t h e i d e a t h a t we s h o u l d h a v e g o v e r n o r s t e s t i f y . T h a n k y o u v e r y mu c h .
I t w a s a gr e a t i d e a a n d w e 'r e t h r i l l e d t o h a v e y o u h e r e .
             Y e s t e r d a y , w e h e a r d t h a t p o l l u t a n t s f r o m C h i n a mi g h t b e
n e g a t i n g i n C a l i f o r n i a a l l o f t h e p r o g r e s s ma d e b y t h a t s t a t e i n
c o mp l y i ng w i t h t h e C l e a n Ai r A c t . We a l s o h e a r d a b o u t t h e i n d o o r a n d
o u t d o o r h e a l t h a n d e n v i r o n me n t a l c o n s e q u e n c e s o f a i r p o l l u t i o n , s o I
t h i n k t h a t i t 's a r e a l l y i mp o r t a n t t h i ng t ha t y ou 'r e h e r e t o t a l k t o u s
today particularly about coal and about clean coal technology.
             I n o u r fi r s t p a n e l , w e a r e r e a l l y p le a s e d t o w e l c o me G o v e r n o r J o e
Manchin, who I understand is stuck in traffic, another hazard of the
l i f e s t y l e s t h a t w e l e a d , a n d Go v e r no r Br i a n S c h we i t z e r o f M o n t a n a .
             I t h i n k I 'm g o i n g t o d e f e r my i n t r o d u c t i o n o f G o v e r n o r M a n c h i n
                                                   - 166 -
until he gets here, but just briefly about Governor Schweitzer, Brian
S c h w e i t z e r b e c a me t h e 2 3 r d G o v e r n o r o f t h e g r e a t s t a t e o f M o n t a n a o n
January 3, 2005.
            H e e a r n e d a B a c h e l or o f S c i e n c e d e g r e e i n I n t e r n a t i o n a l
A g r o n o my f r o m C o l o r a d o St a t e U n i v e r s i t y a n d a M a s t e r o f S c i e n c e
d e g r e e i n S o i l Sc i e n c e f r o m M o n t a n a S t a t e U n i v e r s i t y . H e h a s b e e n
a c t i v e i n i mp l e me n t i n g n a t i o n a l f a r m p o l i c y a n d i n v e s t i g a t i n g c l e a n
coal and other alternative energy sources. He is a leader in addressing
t h e e n e r g y a n d e n v i r o n me n t a l c h a l l e n g e s o f t h e n a t i o n a n d
i n t e r n a t i o n a l l y , a n d I 'd l i k e t o j u s t a l s o n o t e , a l t h o u g h i t 's n o t i n my
c o m me n t s f r o m y o u r b i o g r a p h y , t h a t y o u 'v e s p e n t t i me w o r k i n g
overseas in the developing world on irrigation and energy issues. I'm
really pleased to see that you take the lessons learned there and
brought them back here and took the lessons learned here and take
them to people who really need it.
            S o t h a n k y o u v e r y mu c h , G o v e r n o r Sc h w e i t z e r . We 'r e g o i n g t o
s u s p e n d o u r t i me l i mi t s . Y o u c a n s p e a k f o r a s l o n g a s y o u 'd l i k e , a n d
had I thought ahead, we would have suspended our clothing situation
and all have been here in blue jeans, but welcome.

                        STATEMENT OF BRIAN SCHWEITZER
                            GOVERNOR OF MONTANA

             M R . S C H W E I T Z E R : T h a n k y o u v e r y mu c h f o r i n v i t i n g me a n d ,
i n f a c t , ye s , I l i ve d a n d w or k e d i n S a u d i Ar a b i a f o r s e v e n y e a r s . I 'v e
b e e n i n 3 4 c o u n t r i e s a r o u n d t h e w o r l d , mo s t l y d e v e l op i n g i r r i g a t i o n i n
t h e d e v e l o p i n g w o r l d a n d t r a ns f e r r i n g A me r i c a n a g r i c u l t u r a l
t e c h n o l o g y . I 'v e s h i p p e d f r o z e n e mb ry o s . Be f o r e w e g e t i n t o d e b a t e
a b o u t i t , t h i s i s c a t t l e . C a t t l e e mb r y o s a n d s e me n a n d l i v e c a t t l e ,
i r r i g a t i o n e q u i p me n t , s e e d , a n d A m e r i c a n t e c h n o l o g y a l l o v e r t h e
world.
             O u r s i t u a t i o n w o r l d w i d e i n c o a l i s t h i s : t h e U n i t e d St a t e s l e a d s
t h e w or l d i n c oa l r e s e r ve s ; R u s s i a i s n u mb e r t w o ; C hi n a i s n umb e r
t h r e e . L e t 's j u s t c omp a r e C h i n a t o o u r s i t ua t i o n h e r e . C hi n a h a s a bo u t
1 1 4 b i l l i o n t o n o f c o a l r e s e r v e s . M o n t a n a a l o ne h a s a b o u t 1 2 0 b i l l i o n
ton. Montana has about 32 percent of the supply in this country and
a b o u t e i g h t p e r c e n t o f t h e w o r l d 's s u p p l y .
             I n C h i na , t h e s i t u a t i o n i s t h a t mo s t o f t h e c o a l i n C h i n a i s i n t h e
n o r t h a n d i n t h e no r t h w e s t , a n d M o nt a na i s m o s t l y i n t h e n o r t h a n d
n o r t h w e s t . T h e y h a v e b i t u mi n o u s c o a l ; t h e y h a v e s u b - b i t u mi n o u s , a n d
t h e y h a v e l i g n i t e , s a me a s M o n t a n a .
             7 8 p e r c e n t o f t h e e l e c tr i c i t y p r o d uc e d i n C hi n a c o me s f r om c o a l ,
a n d i n t h e U n i t e d S t a t e s , a b o u t 5 0 pe r c e nt o f o u r e l e c t r i c i t y c ome s
from coal.
                                                    - 167 -
           H e r e 's t he s i t ua t i on , f o l k s . O n l y a bo u t .8 o f a pe r c e nt o f t h e
p e o p l e i n C h i n a o wn c a r s . An d y e t t h e y a r e o n e o f t h e wo r l d 's l a r g e s t
i mp o r t e r s o f o i l .         T h e y w i l l b e t he l e a d e r s i n t h e w o r l d f o r t h e
f o r e s e e a b l e f u t u r e i n i n c r e a s e s o f e n e r g y p r o d u c t i o n a n d c o n s u mp t i o n .
I n f a c t , we b e l i e v e t h a t t h e y w i l l c o mp l e t e t h e e q u i v a l e n t o f o n e 5 0 0
me g a w a t t e l e c t r i c i t y p l a nt p ul v e r i z e d c o a l p e r we e k f o r t h e f o r e s e e a b l e
future.
           D u r i n g t h e n e x t 3 0 y e a r s , Ch i na w i l l p r o d u c e mo r e C O 2 t h a n t h e
r e s t o f t h e w o r l d h a s f o r t h e l a s t 1 0 0 y e a r s . W e t a l k e d a b o u t me r c u r y .
A l r e a d y i n t h e w e s t e r n U n i t e d S t a t e s , mo r e t h a n 5 0 p e r c e n t o f t h e n o n -
n a t ur a l l y o c c ur r i n g me r c u r y a r r i v e d f r o m C h i n a .
           Wi t h p e a k o i l h a v i n g a r r i v e d o r s o o n a r r i v i n g , C h i n a w i l l
i n c r e a s i ng l y r e l y on c o a l . Th a t i s t h e e n e r g y s o u r c e t ha t t h e y h a v e .
           T h e U n i t e d S t a t e s mu s t l e a d b y e x a m p l e . W e a r e t h e l a r g e s t
p r o d u c e r s o f C O 2 t o d a y , a n d w h i l e w e 'v e ma n a g e d t o mi t i g a t e t h o s e
i n c r e a s e s a n d w e a r e ma k i n g a t t e mp t s t o a t l e a s t d i s c us s t h e q u e s t i on
o f g l o ba l c l i ma t e c h a n ge , w e a c t u a ll y h a v e n o s t a n d i n g i n t he w o r l d
t o d a y o n g l o b a l c l i ma t e c h a n g e - - n o s t a n d i n g .
           Wh e n w e d i s c u s s t h e s i t u a t i o n i n C h i n a , w e 'r e s i mp l y d i s c u s s i n g
t h e s i t ua t i o n i n C hi n a b e c a us e f r a n kl y h o w c a n w e s a y t o a g r ow i n g
e c o n o my l i k e C h i n a t h a t y o u mu s t d e c r e a s e y o u r C O 2 o r y o u mu s t f i n d
mo r e e x p e n s i v e wa y s o f p r o d u ci n g e n e r g y o r c o n s u mi n g e n e r g y
b e c a u s e t h e g l o b e h a s b e c o me mu c h s ma l l e r , a n d w h a t y o u d o a ff e c t s
u s i n t he U n i t e d S t a t e s ?
           China in response would say, well, but during the last hundred
y e a r s , y o u b e c a m e t h e w e a l t h i e s t c o un t r y i n t he h i s t or y o f t h e w or l d
b e c a u s e o f y o u r g r e a t c o n s u mp t i o n o f f o s s i l f u e l s , a n d w e j u s t k i n d o f
w a n t t o g e t o n t h e w a g o n w i t h y o u . So , u n t i l t h e U n i t e d S t a t e s l e a d s ,
u n t i l w e d e v e l o p t h e t e c h n o l o g i e s a n d i mp l e me n t t h e m, w e w i l l n o t b e
a b l e t o s a y a n y t h i n g t o C hi n a a b o ut t he i r f u t ur e .
           M o n t a n a i s a l r e a d y w o r k i n g wi t h Y a n z h o u C o a l C o mp a n y .
T h e y 'r e t h e s e c o n d - l a r g e s t c o a l c omp a n y i n C h i n a . A n d t h e b o t t o m
l i n e h e r e i s t h a t t he U n i t e d S t a t e s h a s g o t t o d e v e l o p a c a r b o n p o l i c y ,
a n d I a m b a c k h e r e i n Wa s h i n g t o n , D . C . , w h e r e t h e y 'r e d a n g - g o o d a t
d i s c u s s i n g t h i n g s . Wh y t h e y d i s c us s t he m a n d t h e y d i s c u s s t h e m a n d
they pontificate, but what action have we taken?
           N o w , t h e r e a r e s o me f u n d a m e n t a l p r o b l e ms . W e 'r e t a l k i n g a b o u t
c a r b o n s e q u e s t r a t i o n t o d a y . We 'r e s a y i n g t h a t i n o r d e r f o r t h e U n i t e d
States to have standing, in order for coal to be a significant part of the
e n e r g y f u t u r e , mo s t o f u s a g r e e t h a t c oa l i s g oi ng t o h a ve t o f i nd a w a y
of burying the carbon dioxide.
           So where are we at today? The only carbon dioxide that we
s e q u e s t e r i n t h e U ni t e d S t a t e s t o da y i s u s e d f o r e n h a n c e d o i l r e c o ve r y .
We 'v e b e e n d o i n g t h a t f o r a b o u t t h e l a s t 3 0 y e a r s . We 'r e a b l e t o p u mp
                                                     - 168 -
carbon dioxide into these geologic zones, force the oil out of the rocks
a n d t h e C O 2 i n , a n d u n de r t h e s e h i g h p r e s s u r e s , a c t u a l l y t h e C O 2
b e c o me s a s o l i d a n d p a r t o f t h e r oc k . Wh y w o u l d n 't i t b e c a u s e , o f
c o u r s e , t h e c a r b o n c a me f r o m t h e r o c k s t o b e g i n w i t h . I t c a me f r o m
d e e p i n t he e a r t h . We b r i n g i t t o t h e s u r f a c e .
            Wh e n y o u d i s a s s o c i a t e t h e c a rb o n f r o m t h e h y d r o g e n , t h e r e 's a
burst of energy, and unfortunately then you have carbon dioxide. But
if you can capture that carbon dioxide and put it right back into the
earth, then coal and other hydrocarbons could indeed be part of our
energy future.
            H e r e a r e o u r c h a l l e n g e s . Le t 's s t a r t w i t h s o me t hi n g a s s i mp l e a s
t h i s : n o w p r o b a b l y y o u k n o w t h a t i n t h e U n i t e d St a t e s , mo s t s t a t e s
h a v e w h a t w e c a l l s p l i t e s t a t e s , me a n i n g t h e p e r s o n o r t h e e n t i t i e s wh o
o w n t h e mi n e r a l s u n d e r t h e s u r f a c e ma y n o t b e t h e s a me o n e s w h o o w n
t h e s u r f a c e l a n d . S o , i n p r a c t i c a l t e r ms , i f yo u c o me t o M o n t a n a , a n d
y o u w a n t t o f i n d o u t w h o o w n s a p i ec e o f l a n d , w h o o wn s t h a t r a n c h ,
well, you go on down to the courthouse, walk into the courthouse, and
a l l t he w a y i n t he ba c k , t h e r e 's a b i g t h i c k b o o k , d u s t y . D u s t i t o ff a
l i t t l e b i t , y o u o p e n i t u p , y o u g o t o t h e t o w n s h i p a n d r a n g e t h a t y o u 'r e
i n t e r e s t e d i n , y o u f o l l o w i t d o w n t o t he s e c t i o n , a n d v o i l a . T h a t 's w h a t
t i t l e c o m p a n i e s d o e v e r y d a y a n d t h e l a s t t i me y o u b o u g h t o r s o l d a
h o u s e , t h a t 's e x a c t l y w h a t t h e y d i d .
            There it is. Joe Manchin is the owner of that ranch in Montana.
B u t d o e s J o e M a n c h i n o w n t h e mi n e r a l s u n d e r t h a t r a n c h ? M a y b e .
Maybe not. In order to find that out, you go to the other side of the
courthouse and there is another dusty book, and you open it to that
t o w n s h i p a n d r a n g e a n d t h a t s e c t i o n , a n d n o w w h i l e i t 's t r u e t h a t J o e
a n d G a y l e M a n c h i n o w n t h e r a n c h , y o u ' l l f i n d o u t t h a t t h e y d o n 't o w n
a l l t h e mi n e r a l s u n d e r i t .
            I n f a c t , t h e f e d e r a l g o v e r n m e n t o w n s s o me o f t h e m a n d t h e s t a t e
o f M o n t a n a o w n s s o me , t h e r a i l r o a d o w n s s o me , s o me d e a d l a d y fr o m
O ma h a o w n s s o m e , a n d J o e a n d Ga y l e o w n 1 2 - 1 / 2 p e r c e n t o f t h e
mi n e r a l s .
            O k a y . T h a t 's w e l l u n d e r s t o o d . T h a t ' s t h e l e g a l s y s t e m t h a t w e
h a v e i n t h i s c o u n t r y , b u t l e t me a s k y o u t h i s q u e s t i o n . We 'r e t a l k i n g
a b o u t C O 2 s e q u e s t r a t i o n , t r i l l i o n s o f t o n s o f c a r b o n we ' r e g o i n g t o
s e q u e s t e r d u r i n g t h e n e x t 3 0 y e a r s . Wh o o w n s t h e r i g h t t o p u mp
c a r b o n d i o x i d e u n d e r J o e a n d G a y l e 's r a n c h ? J o e a n d G a y l e ? T h e y
o w n t h e s u r f a c e . O r t he mi n e r a l o w n e r s ? T h e y h a v e t h e r i g h t t o
e x t r a c t t he mi n e r a l s .
            But who owns the vacant space 10,000 feet below the ranch?
N o w , t h i s i s k i n d o f a f u n d a me n t a l l e g a l q u e st i o n ; r i g h t . We d o n 't
k n o w . T h a t h a s n o t b e e n e s t a b l i s h e d . We s t e r n g o v e r n o r s h a v e b e e n
d i s c u s s i n g t h i s . S o me s t a t e s a r e w o r k i n g t o w a r d a l e g a l s o l u t i o n b u t ,
                                                   - 169 -
u l t i ma t e l y , a n d u n f o r t u n a t e l y , I g u e s s w e ne e d C o ng r e s s t o d o
s o me t h i n g h e r e b e c a u s e i f M o n t a n a h a s o n e s t a n d a r d a n d Wy o mi n g h a s
a n o t h e r a n d w e h a v e c a r bo n d i o x i d e t h a t 's p a s s i n g t h r o u g h s t a t e l i n e s ,
a n d w e h a v e g i a n t s a l t d o me s t h a t a r e o n b o t h s i d e s o f t h e b o r d e r i n
N o r t h Da k o t a a n d M o n t a n a , w e h a v e t o e s t a b l i s h a n at i o n a l s t a n d a r d .
           S o t h e r e 's a f u n d a me n t a l q u e s t i o n , a n d y e t w e 'r e d e b a t i n g a
c a r b o n c a p a n d t r a d e s y s t e m i n t h i s c o u n t r y . We 'r e t a l k i n g a b o u t
b u r y i n g t r i l l i o n s o f t o n s a n d w e d o n 't e v e n k n o w w h o h a s t h e r i g h t . S o
t h a t 's a f u n d a me n t a l q u e s t i o n .
           L i a b i l i t y . Wh o 's r e s p o n s i b l e i f t h e r e 's a f a i l u r e i n s e q u e s t e r e d
carbon dioxide during the first ten years, the next 50 years, the next
5 0 0 a n d t h e 1 0 , 0 0 0 t h a t f o l l o w i t ? We h a v e n 't e s t a b l i s h e d t h e l e g a l
s y s t e m.
           I n c e n t i v e s . S o me s a y t h e c a r b o n c a p a n d t r a d e s y s t e m i s a
w o r k a b l e s y s t e m. I n f a c t , ma n y o f t h e u t i l i t i e s i n t h e U n i t e d S t a t e s a r e
p r o p o n e n t s o f a c a r b o n c a p a n d t r a d e s y s t e m. I t h i n k y o u 'v e s e e n s o me
o f t h e l a r g e s t u t i l i t i e s a n d s o me o f t h e l a r g e s t t e c h n o l o g y c o mp a n i e s ,
G E a n d s o me o f t h e l a r g e s t u t i l i t i e s , i n f a c t , h a v e f o r me d a c o n s o r t i u m,
h a v e c o me b e f o r e C o n g r e s s a n d s a i d w e n e e d a c a r b o n c a p a n d t r a d e
s y s t e m. S o y o u s a y , w e l l , h o w d o e s t h a t r e a l l y w o r k ?
           We l l , t he y s a y i t 's p r e t t y s i mp l e . We w i l l s e t a c a p o n t he
a mo u n t o f c a r b o n d i o x i d e t h a t ' s p r o d u c e d i n t h i s c o u n t r y a n d t h e n w e
w i l l s e t g o a l s t o d e c r e a s e t h e a mo u n t o f c a r b o n t h a t y o u p r o d u c e i n t h e
future. So, who gets the right to produce the carbon dioxide right
n o w ? We l l , t h e y s t r a i g h t e n t h e i r t i e a n d t h e y s a y , w e l l , w e d o . We 'r e
t h e o n e s w h o a r e p r o d u c i n g t h e c a r b o n r i g h t n o w . S o w e 'r e f r a n c h i s e d
to continue to produce carbon, and as we decrease our production, then
w e 'l l b e r e w a r de d i n s o me w a y w i t h i nc e nt i ve s .
           Wh y w o u l d n ' t t h e y b e f o r a s y s t e m l i ke t ha t ? We 'v e j u s t o f f e r e d
f r a n c h i s e s t o t h o s e w h o p r o d u c e c a r b o n . Th a t s y s t e m ma y w o r k . I t
ma y n o t .
           S o me s a y t h a t w e o u g h t t o j u s t h a v e a c a r b o n t a x a n d l e t t h a t t a x
b e n e u t r a l . O t h e r s , f o r e x a mp l e , s o me o f t h e l a r g e r c o a l c o mp a n i e s ,
s a y , o h , a n y k i n d o f a c a r bo n t a x i s g o i n g t o d e s t r o y t h e c o mp e t i t i v e
n a t u r e o f t h e U n i t e d S t a t e s . I t wi l l i n c r e a s e t h e p r i c e o f o u r e l e c t r i c i t y
b y a mu l t i p l e o f o n e o r t wo o r t h r e e t i me s , a n d w e s i mp l y c a n ' t a f f o r d a
c a r b o n t a x . Ot h e r s h a v e p r o p o s e d t h a t w e n ee d j u s t a n e n e r g y t a x , t h a t
i f y o u a r e a c o n s u me r o f e n e r g y , y o u p a y a p o r t i o n o f w h a t y o u 'r e
c o n s u mi n g t o t h e fe d e r a l g o v e r n me n t a n d t h e f e d e r a l g o v e r n me n t w i l l
u s e t h a t mo n e y t o d e v e l o p t h e r e s e a r c h a n d c o m me r c i a l i z a t i on o f
carbon sequestration.
           I d o n 't h a v e t h e a n s we r s , b u t I c a n t e l l y o u t h i s . We a r e a l o n g
w a y s f r o m h a v i n g t h e a n s w e r s t o d a y , a n d y e t w e 'r e i n a p o s i t i o n w h e r e
w e h a ve g o t t o mo v e n o w be c a us e i f w e w a i t a n o t h e r t e n y e a r s , C h i n a
                                                      - 170 -
and the developing world are going to continue to produce carbon
d i o x i d e a n d me r c u r y a t u n p r e c e d e n t e d r a t e s .
            So step one. The United States has got to have standing. The
U n i t e d S t a t e s h a s g o t t o d e v e l op t hos e t e c hn ol o gi e s t ha t w i l l e i t h e r
p r o d u c e c l e a n c o a l t e c h n o l o g y o r s o me h o w w a l k a w a y f r o m c o a l . N o w
t h e r e a r e t h o s e w h o s a y y o u c a n n o t p u t l i p s t i c k o n a p i g . T h e y d o n 't
l i k e c o a l . T h e y c a l l c o a l a f o u r - l e t t e r w o r d . We l l , I g u e s s t h a t ' s o n e ,
that's one way of looking at it, but unless you are willing to live naked
in trees and eat nuts, coal is going to be part of your future.
            R e me mb e r , 5 0 p e r c e n t o f t h e e l e c t ri c i t y p r o du c e d i n t hi s c o u nt r y
c o me s f r o m c o a l . I h a v e s o me f r i e n d s w h o s a y , w e l l , I a m g o i n g t o
d r i v e a n e l e c t r i c c a r . I 'm g e t t i n g o f f o f t h o s e h y d r o c a r b o n s . I d o n 't
w a n t a n y t h i n g t o d o w i t h h y d r o c a r b o n s a n y m o r e . We l l , s o t h a t e l e c t r i c
c a r h a s a l o n g c o r d t h a t i s h o o k e d t o a t a l l s mo k e s t a c k b e c a u s e 5 0
p e r c e n t o f o u r e l e c t r i c i t y c o me s f r o m c o a l .
            T o d a y o u r c h a l l e n g e i s d e v e l op t h e t e c h n o l o g y ; t r a n s f e r t h e
t e c h n ol o gy .        N o w , i t w a s T o m B r o k a w - - y o u r e me m b e r w h o T o m
Brokaw is--he and his wife Meredith actually started in South Dakota,
b u t n o w t h e y 'v e h a d t h e g o o d s e n s e t o b u y a r a n c h i n M o n t a n a , a n d
t h e y 'r e r a i s i n g s o m e b u f f a l o , a n d M e r e d i t h i s a t t e m p t i n g t o s p e n d mo s t
o f t h e mo n e y t h a t T o m h a s ma d e i n t h e l a s t 4 0 y e a r s b u y i n g h o r s e s .
S h e 's w e l l o n h e r w a y . T o m w r o t e a b o o k , a n d y o u p r o b a b l y k n o w o f
t h i s b o o k , c a l l e d T h e G r e at e s t G e n e r a t i o n , a n d t he p r e mi s e o f t h e b o o k
w a s s i mp l y t hi s : t h a t t h a t g e n e r a t i on t h a t w e r e r e a r e d i n t h e G r e a t
D e p r e s s i o n , t h o s e s o p h o mo r e s i n h i g h s c h o o l , j u n i o r s i n h i g h s c h o o l ,
g r a d u a t i n g f r o m h i g h s c h o o l i n 1 9 3 4 o r ' 3 5 o r ' 3 8 , w h e n mo s t o f t h e
people that they knew didn't have a job unless they were working for
t h e g o v e r n me n t , w h e n p e o p l e l o o k ed a t o n e a n o t h e r i n s h o c k , a n d
o p e n l y a s k e d t h e q u e s t i o n d o e s d e mo c r a t i c c a p i t a l i s m e v e n w o r k ?
D o e s t h i s e x p e r i me n t h a v e me r i t i n t h e f u t u r e ?
            T h e G r e a t D e p r e s s i o n w a s c o n q u e r ed , a n d t h e n l a t e r t h e y w e r e
c h a l l e n g e d a n d t h e y w e r e a s k e d t o d e fe a t t y r a n n y i n E u r o p e . I n a f o u r -
y e a r p e r i o d , w e we n t f r o m a n a l s o- r a n mi l i t a r y p o w e r t o t h e n u mb e r
o n e mi l i t a r y p o w e r i n t h e w o r l d . We b u i l t t h e mi l it a r y i n d u s t r i a l
c o mp l e x . We t r a i n e d o u r mi l i t a r y , a n d i n a f o u r - y e ar p e r i o d , l e s s t i me
t h a n w e 'v e b e e n i n I r a q , w e de fe a t e d t yr a n n y i n E u r o p e a n d A s i a .
            L a t e r , my g e n e r a t i o n , I w a s o n l y s i x , s e v e n y e a r s o l d , a n d p e o p l e
a l l o v e r A me r i c a w e r e g a z in g i n t o t h e n i g h t s k i e s . M o s t o f y o u a r e o l d
e n o u g h t o r e me mb e r t h i s . We w e r e l o o k i n g i n t o t h e n i g h t s k i e s a n d
a mo n g t h e s t a r s , w e s a w a s a t e l l i t e t h a t w a s mo v i n g , S p u t n i k , a n d t h a t
s i mp l e s a t e l l i t e , o n e s a t e l l i t e , i t s a i d t o t h e A m e r i c a n p e o p l e t h a t w e
h a d f a l l e n b e h i n d t h e R u s s i a n s i n p r o b a b l y a g e n e r a t i on i n a e r os p a c e
technology.
            I t w a s Pr e s i d e n t K e n n e d y , e v e n t ho u g h h e h a d a d v i s o r s w h o s a i d
                                                    - 171 -
t o h i m, M r . P r e s i d e n t , d o n 't g o b e f o r e t h e A me r i c a n p e o p l e a n d s a y
w e 'r e g o i n g t o p u t a ma n o n t h e mo o n i n t e n y e a r s ; w e d o n 't e v e n k n o w
i f i t 's t e c h n i c a l l y f e a s i b l e . I n f a c t , t h e r e w e r e s c i e n t i s t s w h o t h o u g h t
p e r h a p s t h e r e mi g h t h a v e b e e n j u s t 5 0 0 f e e t o f d u s t , a n d w h e n y o u
l a n de d s ome k i n d o f a s p a c e c r a f t , i t w o u l d s i n k h u n d r e d s o f me t e r s i n t o
the dust.
            T h e r e w e r e t h os e wh o s a i d i t w o u l d b e i mp o s s i b l e t o l a n d o n t h e
mo o n i n t e n y e a r s , b u t i t w a s P r e s i d e n t K e n n e d y w h o d i d g o b e f o r e t h e
A me r i c a n p e o p l e a n d s a i d t h i s i s t h e g r e a t e s t c h a l l e n g e o f t h i s
g e n e r a t i o n , a n d w e w i l l p u t a ma n o n t h e mo o n i n t e n y e a r s . A n d w h e n
t h a t A p o l l o mi s s i o n l a n d e d , r e a c h i n t o y o u r p o c k e t , fe e l t ha t c e l l
p h o n e , wh e n t h a t A p o l l o mi s s i o n l a n d e d , i t h a d l e s s c o mp u t i n g
t e c h n ol o gy t ha n y o u r c e l l p h o n e .
            Now, we are faced with the greatest challenge in the history of
our country, and that challenge is to produce energy for this country
d o me s t i c a l l y w i t h ou t i n c r e a s i n g c a r b o n d i o x i d e a n d me r c u r y e mi s s i o n s ,
and not only developing the technology for this country, but
t r a n s f e r r i n g i t t o t h e r e s t o f t h e w o r l d . I f w e g e t i t r i g ht i n t hi s
generation, we will be known for seven generations as the greatest
g e n e r a t i o n . I f w e g e t i t w r o n g , h e a v e n h el p u s . T h a n k y o u .
            C H A I R M A N B A R T H O L O M E W: T h a n k y o u v e r y mu c h . T h a n k
y o u f o r a v e r y i n t e r e s t i n g t e s t i mo n y . Y o u ' v e g i v e n u s a l o t t o t h i n k
about.
            I ' m p l e a s e d n o w t o w e l c o me G o v e r n o r M a n c h i n . J o e M a nc h i n I I I
i s W e s t V i r g i n i a ' s 3 4 t h G o v e r n o r . C l e a r l y , We s t V i r g i ni a ha s b e e n
a r o u nd a l i t t l e bi t l o n ge r t ha n M o nt a n a . U n d e r h i s l e a d e r s h i p , We s t
V i r gi n i a h a s be c ome " O p e n f o r B u s i n e s s . "
            Wo r k i n g w i t h t h e l e gi s l a t u r e , h e h a s f i x e d t h e s t a t e 's w o r k e r s '
c o mp e n s a t i on s y s t e m, i n s t i t u t e d i n s u r a nc e r e f o r ms , e s t a bl i s h e d t h e
first comprehensive teacher pay package in over 15 years, decreased
t h e s t a t e 's d e b t , s t r e n g t h e n e d i t s e t h i c s l a w s a n d r e d u c e d t h e f o o d t a x .
            H e i s a l s o t h e C h a i r ma n o f t h e S o u t h e r n S t a t e s En e r g y B o a r d a n d
s u p p o r t s t h e A me r i c a n E n e r g y S e c ur i t y I n i t i a t i v e w h i c h p l a n s t o
e l i mi n a t e i mp o r t e d o i l b y 2 0 3 0 b y a d o p t i n g r e f o r ms .
            We 'r e v e r y i n t e r e s t e d t o h e a r w h a t y o u h a v e t o s a y t o d a y a n d t o
h e a r a l i t t l e b i t m o r e a b o u t We s t V ir g i n i a a n d C h i n a . T h a n k y o u v e r y
mu c h , G o v e r n o r .

                             S T A T E M E N T O F J O E M AN C H I N
                             GOVERNOR OF WEST VIRGINIA

     M R . M AN C H I N : T h a n k y o u v e r y m u c h f o r i n v i t i n g m e . I t ' s
good to be with my good friend Brian Schweitzer from Montana. As
you have just heard, we have an awful lot in common. As the second
                                                      - 172 -
l a r g e s t c o a l - p r o d u c i n g s t a t e , We s t V i r g i n i a h a s a p a r a mo u n t i n t e r e s t i n
t h e d e v e l o p me n t o f w o r l d e n e r g y s u p p l i e s , j o i n t r e s e a r c h a n d
d e v e l o p me n t p r o g r a ms w i t h o t h e r n at i on s , a n d t h e i mp l e me n t a t i on o f
new and innovative energy technologies that ensure reliable supply,
s e c u r e s o u r c e s a n d e n v i r o n me n t a l r e s p o n s i b i l i t i e s .                And I'm
p a r t i c u l a r l y p l e a s e d t o s h a r e t h o s e wi t h y o u t o d a y .
            Global energy demand and the use of coal will continue with
u n p r e c e d e n t e d g r o wt h . B y 2 0 3 0 , t h e p l a n e t w i l l d o u b l e i t s u s e o f c o a l
and we are expected to be using about 10.5 billion tons annually.
            C h i n a , i n p a r t i c u l a r , i s a t t h e f o r e f r o n t o f t h i s d e ma n d ,
a n t i c i p a t e d t o b e a t 1 . 5 b i l l i o n t on s b y 2 0 2 0 . B y 2 0 2 0 , t h e Pe o p l e 's
R e p u b l i c i s e x p e c t e d t o i nc r e a s e i t s c o a l pr o duc t i o n f r om 1 . 7 mi l l i on
t o n s p e r da y t o mo r e t ha n 3 . 2 mi l l i o n t o n s p e r da y . I t s p r e s s i n g ne e d s
f o r t h e g r o w t h i n c o a l us e wi l l b e i n e l e c t r i c i t y , c o a l l i q u e f a c t i o n a n d
syngas.
            T h e c o u n t r y 's e l e c t r i c g e n e r a t i n g c a p a c i t y w i l l d o u b l e t o 1 , 0 0 0
g i g a w a t t s b y 2 0 2 0 . T h e E n e r g y I n f o r ma t i o n A d mi n i s t r a t i o n o f t h e U . S .
D e p a r t me n t o f E n e r g y h a s e s t i ma t e d t h a t o v e r 1 0 0 , 0 0 0 me g a w a t t s o f
c o a l - b a s e d p o w e r p l a n t s wi l l b e b u i l t i n C h i n a b e t w e e n 2 0 0 3 a n d 2 0 1 0 .
            C h a n g e s i n t h e ma g n i t u d e o f C h i n a 's o i l u s e a l s o b e a r a t t e n t i o n .
J u s t s e v e n y e a r s a g o , c o n s u mp t i o n wa s 4 . 9 mi l l i o n b a r r e l s p e r d a y .
T h a t f i g u r e i s e x p e c t e d t o j u mp t o 1 4 mi l l i o n b a r r e l s p e r d a y b y 2 0 2 5 ,
a n i n c r e a s e o f 1 8 9 p e r c e n t , a p p r o x i ma t e l y t he p r o d uc ti o n c a p a c i t y o f
S a u d i Ar a b i a .
            O i l p r o d u c t i o n i n C h i n a a l r e a d y h as p e a k e d . S o , mo r e t h a n n i n e
mi l l i o n ba r r e l s p e r d a y w i l l b e i mp o r t e d . T h i s i s s u e a l o n e w i l l i m p a c t
t h e g r o wt h a n d d e v e l o p me n t o f m a t ur e a nd e me r g i n g e c on omi e s
t h r o u g h o u t t h e w o r l d , i mp a c ti n g c o a l u s e a l s o . F o r e x a mp l e , B e i j i n g
already has announced an outlay of $20 billion for coal-to-liquid
facilities.
            T h i s u n p r e c e d e n t e d e n e r g y g r o w t h h a s o b v i o u s i mp l i c a t i o n s f o r
w o r l d e n e r g y ma r k e t s , s e c u r i t y a n d t h e e n v i r o n me n t . F o r e x a mp l e , t h e
I n t e r n a t i o n a l En e r g y A g e n c y 's Wo r l d E n e r g y O u t lo o k 2 0 0 6 p r e d i c t e d
t h a t C h i n a w o u l d s u r p a s s t h e U n i t e d St a t e s i n CO 2 e mi s s i o n s b y 2 0 0 9 .
            I n f a c e o f t h e s e c h a l l e n g e s , t h e q u e s t i o n b e c o me s w h a t c a n w e d o
c o l l e c t i v e l y t o e ns u r e mu t u a l l y a c c e p t a b l e o u t c o me s ? I t i s my b e l i e f
t h a t i t i s b e t t e r t o h e l p ma n a g e a pr o c e s s t ha n t o w a t c h i t f r o m t h e
s i d e l i n e s . A s s u c h , i n We s t Vi r gi n i a , o u r p o l i c y ma k e r s , r e s e a r c h e r s
and businesses have begun to work with their counterparts in China.
Wi t h s e v e r a l We s t V i r g i n i a i n i t i a t i v e s , a c t i v i t i e s a r e u n d e r w a y t o
e x p a n d t h e r o l e t h a t t e c h n o l o g y c a n p l a y i n me e t i n g b o t h o u r s a n d
C h i n a 's e n e r g y g o a l s .
            O n e a r e a i s e n e r gy e f f i c i e nt t r a n s f o r me r s . F C X S y s t e m s , I n c . ,
l o c a t e d i n M o r g a n t o w n , We s t V i r g i ni a , h a s b e e n s e l l i n g s o l i d s t a t e
                                                     - 173 -
frequency converters and preconditioned air units to the aviation
industry in China. FCX power and cooling units allow aircraft to turn
o f f t h e i r a i r p r o c e s s i n g u n i t s w h i c h c o n s u me e x p e n s i v e j e t f u e l .
             T h e F C X e q ui p me n t o pe r a t e s o n u t i l i t y p o w e r a t a v e r y h i g h
e f f i c i e n c y r a t e w h i c h s a v e s e n e r g y a n d a l s o i s e x t r e me l y
e n v i r o n me n t a l l y f r i e n d l y .       The FCX units save energy, adding no
a d d i t i o n a l p o l l u t i o n i n t o t h e e n v i r o n me n t . F C X h a s o v e r 2 0 0 u n i t s i n
China at 15 airports.
             A n o t h e r a r e a i s k n o w l ed g e s h a r i n g i n t h e e me r g i n g a r e a o f c o a l -
t o - l i q u i d s , w h i c h w e a ll a r e v e r y m u c h f a mi l i a r w i t h n o w .                     West
Virginia has taken action in the planning of coal-to-liquid facilities in
the state. These build upon existing knowledge and technologies to
p r o d u c e s u b s t i t u t e t r a n s p o r t a t i o n f ue l s f r o m c o a l a n d f r o m c o a l
b i o ma s s b l e n d .
             M u c h c a n b e l e a r n e d a s t h e t w o c o u n t r i e s e x p l o r e c o m mo n
challenges for using their vast coal resources to fuel their
transportation.
             U n d e r t h e a u s p i c e s o f t h e C h i n a - U .S . C l e a n E n e r g y P r o t o c o l ,
We s t V i r g i n i a U n i v e r s i t y h a s i n i t i a t e d a p r o g r a m o f r e s e a r c h w i t h t h e
S h e n h u a G r o u p C o r p o r a t i o n t o s t u d y t h e e c o n o mi c a n d e n v i r o n me n t a l
i mp a c t s o f d e p l o y i n g 1 2 0 , 0 0 0 b a r r e l - p e r - d a y c o a l - t o - l i qu i d s p l a n t i n
Shanxi Province in Inner Mongolia.
             B a s e d o n C h i n a 's n e e d f o r p e t r o l e um f o r i t s t r a ns p o r t a t i o n s e c t o r ,
coal-to-liquid industries may be widely deployed in China in the
f u t u r e . T h i s r e s e a r c h w i l l be e x p a n d e d t o i n c l u d e a s t u d y o f c a r b o n
s e q u e s t r a t i o n a s s o c i a t e d w i t h p o t e n t i a l e mi s s i o ns f r o m t h e p l a n t .
             A s j u s t n o t e d , t h e a r e a o f c a r b o n ma n a g e me n t i s a n o t h e r
o p p o r t u n i t y , a n d I k n o w t h a t B r i a n h a s g o n e i n t o t hi s . I 'l l t o u c h o n i t
briefly.              Reducing or offsetting carbon dioxide emissions is the
p r i ma r y ob j e c t i v e o f a n e w s u i t e o f t e c h n o l o g i e s t h a t a r e f o c u s e d o n
c a r b o n c a p t u r e a n d s t o r a g e . C a r b o n d i o x i d e c a n b e c a pt u r e d d i r e c t l y
f r o m i n d u s t r i a l s o u r c e s a n d t h e n c o n ce n t r a t e d i n t o a n e a r l y p u r e f o r m
o f e n e r g y w h i c h c a n b e s t o r e d i n g e o l o gi c a l f o r ma t i o ns b e l o w t h e
earth's surface.
             T h e U . S . D e p a r t me n t o f E n e r g y h a s f o r me d a n a t i o n w i d e n e t w o r k
o f r e g i o n a l p a r t n e r s h i p s t o h e l p d e t e r mi n e t he b e s t a p p r o a c h e s f o r
c a p t u r i n g a n d p e r ma n e n t l y s t o r i n g g r e e n h o u s e g a s e s .
             The         Regional             Carbon             S e q u es t r a t i o n     Partnerships           are
g o v e r n me n t / i n d u s t r y e f f o r t s t a s k e d w i t h d e t e r m i n i n g t he mo s t s u i t a b l e
technologies, regulations and infrastructure needed for carbon capture,
s t o r a g e a n d s e q u e s t r a t i o n i n d i f f e r ent a r e a s o f t h e U n i t e d S t a t e s .
             I t i s my p l e a s u r e t o s e r v e t h i s y e a r a s C h a i r ma n o f t h e So u t h e r n
States Energy Board, a regional organization of 16 states and two
territories.              T he So u t he r n S t a t e s E n e r g y B o a r d s e r v e s a s t h e l e a d
                                                      - 174 -
organization for one of the partnerships, the Southeast Regional
C a r b o n Se q u e s t r a t i o n P a r t n e r s h i p .
             A d d i t i o n a l l y , t h e e n t i r e p a r t n e r s h i p p r o g r a m i s ma n a g e d b y t h e
D O E 's N a t i o n a l E n e r g y Te c h n o l o g y L a b o r a t o r y i n We s t V i r g i n i a .
             A n o t h e r a r e a o f o p p o r t u n i t y fo r c o l l a bor a t i on a n d l e s s o n s l e a r n e d
i s t h a t o f e l e c t r i c i t y g r i d mo d e r ni z a t i o n . A s I n o t e d e a r l i e r , C h i n a i s i n
t h e p r o c e s s o f d r a ma t i c a l l y i n c r e a s i n g i t s e l e c t r i c i t y- ge n e r a t i ng
c a p a c i t y . S ma r t c ho i c e s i n gr i d d e s i g n a n d t e c h n o l o g y d e p l o y me n t c a n
g o a l o n g w a y t o w a r d e n s u r i n g e f f i c ie n t , r e l i a b l e a n d s e c u r e e n e r g y .
             This is the focus of the West Virginia-based National Energy
T e c h n o l o g y L a b o r a t o r y 's M o d e r n G r i d I n i t i a t i v e . T h e I n i t i a t i v e i s
w o r k i ng t o w a r d a fr a me w o r k t h a t e n a bl e s u t i l i t i e s , v e n d o r s , c o n s u me r s ,
r e s e a r c h e r s a n d o t h e r s t a k e h o l d e r s t o f o r m p a r t n e r s h i p s a n d o v e r c o me
b a r r i e r s t o g r i d mo d e r n i z a t i o n .
             T h e i n i t i a t i v e h a s ac c u mu l a t e d v a l u a b l e k n o wl e d g e t h a t c o u l d b e
s h a r e d wi t h C h i n a , s u c h a s t h e n e e d t o d e s i g n a n d i n s t a l l i n t e g r a t e d
c o m mu n i c a t i o n s a nd i nt e l l i ge n c e i nt o t h e n e t w o r k f r o m t h e b e g i n n i n g
b e c a u s e t h e s e t e c h n o l o gi e s a r e t h e f o u n d a t i o n f o r a d v a n c e d a u t o ma t i o n
a n d d e ma n d r e s p o n s e me a s u r e s a n d k n o w l e d g e a b o u t g r i d o p e r a t i o n s .
             T h e f i r s t d e v e l o p me n t a l f i e l d t e s t i s u n d e r wa y i n We s t V i r g i n i a
w h e r e A l l e g h e n y En e r g y i s w o r k i n g w i t h t he D e p a r t me n t o f E n e r g y a n d
t e c h n o l o g y d e v e l o p e r A u g u s t a S y s t e ms t o d e p l o y s e n s o r n e t w o r k
i n f r a s t r u c t u r e t e c hn o l o gi e s w i t hi n Al l e g h e n y 's d i s t r i b u t i o n s y s t e m.
T h i s t e s t b e d c i r c ui t i s b e i n g r e f e r r e d t o a s t h e c i r c u i t o f t h e f u t ur e .
             These technologies will assist the grid by injecting distributed
i n t e l l i g e nc e i nt o t he n e t w or k, ma k i n g t h e ne t w or k s ma r t e r i n t e r ms o f
r e a l - t i me r e mo t e mo n i t o r i n g a n d c o n t r o l .
             Let me just say in closing that Brian and I, Dave Freudenthal
f r o m W y o mi n g , a n d a l l o f u s i n c oa l p r o d u c i n g s t a t e s h a v e t h e s a me
goal, which is to make this country energy independent.
             B r i a n h a s s a i d , a n d I w o ul d r e i t e r a t e , t h a t c o a l w i l l b e a ma j o r
f a c t o r i n t h i s . W h e t h e r p e o p l e l i k e i t o r n o t , we h a v e t o f i n d a w a y t o
u s e i t a n d u s e i t r e s p o n s i b l y. T h e r e ' s a b a l a n c e t o b e h a d . I c a n t e l l
y o u s o me o f t h e p r o b l e ms t h a t w e 'r e r u n n i n g i n t o g e t t i n g o u r c o a l - t o -
l i q u i d s o ff t h e g r o u n d . E v e r y b o d y w a n t s t o b u il d a c o a l - t o - l i q u i d s
f a c i l i t y . I h a v e p e o p l e e v e r y d a y c o mi n g t o o u r e c o n o mi c d e v e l o p me n t
office wanting to build a coal-to-liquids facility.
             B r i a n i n M o n t a n a h a s p e o p l e c omi n g e v e r y d a y . E v e r y s t a t e t h a t
h a s c a r b o n h a s p e o p l e t h a t w a n t t o d o t h e s e d e v e l o p me n t s . T h e b o t t o m
l i n e i s w i t h o u t a s o u n d e n e r g y p o l i c y c o mi n g o u t a n d a s o u n d ,
a t t r a c t i v e , i f y o u wi l l , i n c e n t i v e t y p e o f f i n a n c i a l p a c k a ge c o mi n g o u t
o f Wa s h i n g t o n , t h i s w i l l n o t b e a r e a l i t y .
             We h a v e t a l k e d a b o u t g e t t i n g t h e f i n a n c i a l w o r l d i n v o l v e d . T h e
r i s k s a r e h i g h , b u t t h e r e w a r d s a r e g r e a t a n d w e mu s t d o i t . U n t i l t h i s
                                                      - 175 -
g o v e r n me n t g e t s a h a n d l e , u n t i l t h e f e d e r a l g o v e r n me n t s a y s t h a t w e
a r e g o i n g t o p u t a b a s e p r i c e o n a b a r r e l o f o i l , a n d w e 'r e g o i n g t o u s e
d e b i t s a n d c r e d i t s b a s e d o n l o w s a n d h i g h s , t h a t t h e r e i s s o me f i n a n c i a l
s e c u r i t y a n d p r e d i ct a b l e r i s k i n v o l v e d t o w h e r e t h e f i n a n c i a l w o r l d w i l l
g e t i n v o l v e d - - t h e s e a r e v e r y e x p e n si v e p l a n t s - - y o u a r e n o t g o i n g t o s e e
i t mo v e f o r w a r d .
             We 'r e a l l g o i n g t o t a l k a bo u t i t . T h e r e i s n o t a s t a t e t h a t ' s g o i n g
t o s t e p t o t h e p l a t e t h a t c a n a f f o r d t o t a ke t h e r i s k i n t hi s h i g h- s t a k e s
g a me . Wi t h t h a t b e i n g s a i d , w e a re u r g i n g t h e D e p a r t me n t o f E n e r g y t o
e n c o u r a g e i n t o t h e e n e r g y b i l l g u i d e l i n e s , w h e t h e r i t 's $ 4 5 o r $ 5 0 a
b a r r e l a s a b a s e l i n e . Wi t h t h a t , I c a n g u a r a n t e e y o u t h a t t h e r e w i l l b e
mo r e d e v e l o p me n t i n t h e n e x t y e a r o r t w o t h a n y o u c a n e v e r i ma g i n e .
I t h i n k t h a t w e 'l l a c h i e v e e n e r g y i n d e p e n d e n c e b y t h e y e a r 2 0 3 0 .
             T h r o u g h my i n i t i a t i v e a s b e i n g C h a i r ma n o f t h e S o u t h e r n S t a t e s
E n e r g y Bo a r d , w e h a v e a s k e d e v e r y s t a t e t o s i g n a d e c l a r a t i o n o f
i n d e p e n d e n c e , i f y o u w i l l , t ha t w e 'l l a l l s t r i v e t o b e e n e r g y i n d e p e n d e n t
by no later than 2030.
             Wi t h t h a t , w e s t a r t v e r y b a s i c a l l y , a t t h e v e r y b a s i c s w i t h a
b a s e l i n e o f d o i n g a n i n v e n t o r y . M y l i t t l e s t a t e o f We s t V i r g i ni a
d e p e n ds on 1 . 2 bi l l i o n ga l l on s o f o i l a y e a r . By M a y , b y M a y o f e a c h
y e a r , w e r u n o u t o f o u r d o me s t i c p r o d u c e d o i l . We d e p e n d o n - - t h e s a me
a s t h i s na t i on d oe s - - w e d e p e n d o n o i l f r o m o t h e r n a t i o n s , w h i c h h a v e
n o t b e e n f r i e n d l y t o w a r d s o u r w a y o f l i f e o r o u r p o l i c i e s , a n d i t 's
g e t t i n g mo r e a n d mo r e d i f f i c u l t .
             Wi t h t h e s e q u e s t e r i n g , I k n o w t ha t t h e c a r b o n s e q u e s t r a t i o n i s a
b i g c o n c e r n t h a t we a l l h a v e , b u t i f we w a i t u nt i l w e p e r f e c t i t , we 'l l
n e v e r d o i t . T h e b o t t o m l i n e i s w e mu s t g e t s t a r t e d . S o , w e wo u l d
h o p e t h a t o u r c o n c e r n a n d f o r w a r d i n g o n o u r i n f o r ma t i o n t h a t y o u 'r e
r e c e i v i n g t h r o u g h t h e s e t e s t i mo n i e s , w i l l b e o f g r e a t h e l p t o t h i s
nation.
             I w a n t t o t h a n k y o u a l l f o r t h e o p p o r tu n i t y t o j o i n t h e U . S . - C h i n a
E c o n o mi c a n d S e c u r i t y R e v i e w C o m mi s s i o n t o d i s c u s s t h e s e v e r y
i mp o r t a n t i s s u e s , a n d I b e l i e v e t h a t i s s u e s o f e n e r g y s e c u r i t y a n d
r e l i a b i l i t y, a s w e l l a s e n vi r o n me n t a l i mp a c t , a r e a mo n g t h e mo s t
c r i t i c a l g l o b a l i s s u e s t ha t we h a v e f a c i n g u s .
             T h e me t h o d s w i t h w h i c h C h i n a f e e d s i t s e n e r g y a p pe t i t e s w i l l
s u r e l y i m p a c t t h e U n i t e d S t a t e s . T h e r e i s n o do u b t a b o u t t h a t . Th e r e
a r e s u r e l y l e s s o n s t o b e l e a r n e d fr o m t h e s e i n n o v a t i v e t e c h n o l o g y
d e p l o y me n t s n o t e d a b o v e a n d n u me r o u s o p p o r t u n i t i e s f o r k n o w l e d g e
sharing, technology transfer and collaboration.
             I'm confident that our two countries can join together in a
c o o p e r a t i v e s p i r i t t h a t w i l l p r o mo t e t h e d e v e l o p me n t o f e f f i c i e n t ,
e n v i r o n me n t a l l y r e s p o n s i b l e e n e r g y g r o w t h . I a m p r o u d t h a t s u c h
e f f o r t s a r e u n d e r w a y i n We s t V i r g i n i a a n d M o n t a n a a n d a l l t h e c o a l
                                                      - 176 -
p r o d u c i n g s t a t e s a n d a m h o p e f u l t h a t t he r e a r e e x p a n s i o ns i n t h e
f u t u r e . I w a n t t o t h a n k y o u a g a i n f o r h a v i n g me h e r e t o d a y .
[The statement follows:]

   P r e p a r e d S t a t e m e n t o f J o e M a n c h i n, G o v e r n o r o f W e s t V i r g i n i a

Good morning and thank you for this opportunity to address the U.S.-China Economic and Security Review
Commission. It is my pleasure to represent the state of West Virginia in these hearings and to assist the
Commission in fulfilling its statutory mandate from Congress in Public Law 109-108.

As this Nation’s second largest coal producing State, West Virginia has a paramount interest in the
development of world energy supplies, joint research and development programs with other nations, and
the implementation of new and innovative energy technologies that provide reliability, security and
environmental responsibility.

Because of its wide availability, versatility and reasonable cost, coal will prove to be of strategic
importance to many developing countries in the future, including China. For this reason, I am particularly
pleased to offer my perspectives today.

Globally, energy demand and the use of coal will continue with unprecedented growth for the next twenty-
five years. A number of developing nations are leading this charge because the resource is available and
inexpensive. Yet we will also see growth in developed nations as well. Dramatic increases in coal use are
projected in India, Russia, Japan, Indonesia and the United States. Just four years ago, our global
consumption of coal was 5.4 billion tons, or about 96 million tons per week. By 2030, the planet will
double its use of coal and we are expected to be using about 10.5 billion tons annually.

China, in particular, is at the forefront of this demand. China’s population growth is anticipated to be at 1.5
billion by 2020. As the world’s largest country (by population) grows, so will her appetite for resources.

By 2020, the People’s Republic is expected to increase its coal production from 1.7 billion tons per day
today to more than 3.2 billion tons per day. The pressing needs for this growth in coal use will be in
electricity, coal liquefaction and syngas.

From an electricity perspective, the country’s electric generating capacity will double to 1000 gigawatts by
2020. Specifically, the Energy Information Administration of the U.S. Department of Energy has estimated
that over 100,000 megawatts of coal-based power plants will be built in China between 2003 and 2010.
Between 2010 and 2015, another 90,000 megawatts is forecasted to be built.

Changes in the magnitude of China’s oil use also bear attention. Just seven years ago, consumption was 4.9
million barrels per day. That figure is expected to jump to 14 million barrels per day in 2025, an increase
of 189 per cent, which approximates the production capacity of Saudi Arabia. Oil production in China
already has peaked, so more than 9 million barrels per day will be imported. This issue alone will impact
the growth and development of mature and emerging economies throughout the world.

These oil figures also impact coal use. Beijing already has announced an outlay of $20 billion for coal-to-
liquid facilities, where coal is converted for use as a liquid fuel.

This unprecedented energy growth has obvious implications for world energy markets, security and the
environment. For example, the International Energy Agency’s World Energy Outlook 2006 predicted that
China would surpass the United States in CO2 emissions by 2009.

In the face of these challenges, the question becomes: what can we do, collectively, to ensure mutually
                                                 - 177 -
acceptable outcomes?

Surely, collaboration has a role. It is my belief that it is better to help manage a process than to watch from
the sidelines. As such, in West Virginia, our policymakers, researchers and businesses have begun to work
with their counterparts in China.

Highlights of Several West Virginia Related Initiatives

In West Virginia, individual collaborations are underway that seek to expand the role that technology can
play in meeting both our, and China’s, energy goals.

One area is energy efficient transformers.

FCX Systems, Inc., located in Morgantown, West Virginia, has been selling Solid State Frequency
Converters and Preconditioned Air Units to the aviation industry in China for over 14 years. FCX power
and cooling units allow aircraft to turn off their air processing units (APU), which consume expensive jet
fuel. The FCX equipment operates on utility power at a very high efficiency rate, which saves energy and
also is extremely environmentally friendly. The FCX units save energy and offer no pollution into the
environment thus making them more efficient and environmentally friendly than using the aircraft APU or
the former means of supplying power and air with diesel-powered equipment. FCX has over 200 units in
China at 15 airports.

Another area is knowledge sharing in the emerging area of coal-to-liquids.

West Virginia has activities in various stages of planning and design for coal-to-liquid facilities in the State.
These build upon existing knowledge and technologies to produce substitute transportation fuels from coal
and from a coal/biomass blend. Much can be learned as the two countries explore common challenges of
using their vast coal resources to fuel their transportation sector.

For example, under the auspices of the U.S.-China Clean Energy Protocol, West Virginia University
(WVU) has initiated a program of research with the Shenhua Group Corporation to study the economic and
environmental impacts of deploying a 120,000 barrel per day coal-to-liquids plant in Shanxi Province in
Inner Mongolia. Based on China’s need for petroleum for its transportation sector, coal-to-liquids
industries may be widely deployed in China in the future. This research will be expanded to include a
study of carbon sequestration associated with the potential emissions from the plant. Carbon capture and
storage will help to meet an overall goal of zero emissions for the plant. Success will also help China to
develop better carbon management technologies for these emerging coal-to-liquids facilities.

In addition, WVU is developing a U.S.-China Energy Center within the university’s National Research
Center for Coal and Energy to coordinate energy related activities between the U.S. and China. Initial
efforts will focus on coal utilization, opportunities for U.S.-China cooperation in energy related issues,
business opportunities for West Virginia firms, and training, education, and research programs for WVU
and other universities and colleges in the state.

The WVU-Shenhua activities and the U.S.-China Energy Center compose the current activities under
Annex II of the U.S.-China Clean Energy Protocol. These activities support higher level interactions
between the governments.

Carbon Management Opportunities

The activities also provide a bridge into another area for collaboration, that of carbon management.

It is important that all major coal consuming countries, China included, begin now to pursue carbon
                                                 - 178 -
management options that address climate change, reduce greenhouse gases and provide energy reliability
and security.

Reducing or offsetting carbon dioxide emissions is the primary objective of a new suite of technologies that
are focused on carbon capture and storage. Carbon dioxide can be captured directly from an industrial
source and then concentrated into a nearly pure form which can be stored in geologic formations below the
earth’s surface. Potential storage solutions include depleted oil and gas reservoirs, saline–filled formations
or unmineable coal seams. In addition, carbon dioxide can assist in enhanced oil recovery, enhanced coal
bed methane recovery, or be fed to algae with the expanding biomass converted to biofuels.

I believe China, and other nations, can learn from a series of innovative carbon sequestration
demonstrations underway in the U.S. The U.S. Department of Energy (DOE) has formed a nationwide
network of regional partnerships to help determine the best approaches for capturing and permanently
storing greenhouse gases. The Regional Carbon Sequestration Partnerships (RCSPs) are
government/industry efforts tasked with determining the most suitable technologies, regulations, and
infrastructure needs for carbon capture, storage, and sequestration in different areas of the United States. It
is my pleasure to serve this year as Chairman of the Southern States Energy Board, a regional organization
of 16 states and two territories. The Southern States Energy Board serves as the lead organization for one
of the partnerships, the Southeast Regional Carbon Sequestration Partnership. Additionally, the entire
partnership program is managed by DOE’s National Energy Technology Laboratory in West Virginia.

Grid Modernization

Another area of opportunity for collaboration and lessons learned is that of electricity grid modernization.
As I noted earlier, China is in the process of dramatically increasing its electric generating capacity. Smart
choices in grid design and technology deployment can go a long way toward ensuring efficient, reliable and
secure energy.

This is the focus of the West Virginia-based National Energy Technology Laboratory’s Modern Grid
Initiative. The initiative is working toward a framework that enables utilities, vendors, consumers,
researchers and other stakeholders to form partnerships and overcome barriers to grid modernization. The
initiative has accumulated valuable knowledge that could be shared with China, such as the need to design
and install integrated communications and intelligence into the network from the beginning, because these
technologies are the foundation for advanced automation, demand response measures and knowledge about
grid operations.

The initiative also supports demonstrations of key technologies that can serve as the foundation for an
integrated, modern power grid. The first developmental field test is underway in West Virginia. In my state,
Allegheny Energy is working with the U.S. Department of Energy and technology developer Augusta
Systems to deploy Augusta’s sensor network infrastructure technologies within Allegheny’s distribution
system. This test bed circuit is being referred to as “the circuit of the future.” These technologies will
assist the grid by injecting distributed intelligence into the network; basically making the network smarter
in terms of real-time remote monitoring and control.


Closing

There are surely lessons to be learned from these innovative technology deployments.

Thank you very much for this opportunity to join the U.S.-China Economic & Security Review
Commission to discuss these very important issues. I believe that issues of energy security and reliability,
as well as of environmental impact, are among the most critical global issues. The methods with which
China feeds its energy appetites will surely impact the United States.
                                                 - 179 -
I believe that we must be proactive in ensuring that China’s energy growth is undertaken in a manner that is
acceptable to both nations. There are numerous opportunities for knowledge sharing, technology transfer
and collaboration.

I am confident that our two countries can join together in a cooperative spirit that will resolve any
differences and promote the development of efficient and environmentally responsible energy growth. I am
proud that such efforts are underway in West Virginia and I am hopeful for their expansion in the future.

Thank you.

                  P A N E L V I : Di s c us s i o n , Q u e s t i o n s a nd A n s we r s

            C H A I R M A N B A R T H O L O M E W: T h a n k y o u v e r y mu c h t o b o t h o f
o u r g o v e r n o r s . A s I s a i d , i n t h e o p e n i n g , i t 's r e a ll y a p r i v i l e g e a n d a n
h o n o r f o r u s t o h a v e y o u h e r e . We h e a r f r o m a l l s o r t s o f w o n d e r f u l
e x p e r t s o v e r t h e c o u r s e o f o u r h e a r i n g s , b u t i t 's p a r t i c u l a r l y u s e f u l t o
hear from people who are having to grapple with these issues on the
g r o u n d a n d d e a l w i t h t h e c o n se q u e n c e s f o r t h e i r s t a t e s .
            I a l s o w a n t t o a c kn o w l e d g e t h a t G o v e r n o r M a n c h i n p o s t p o n e d a
t r i p t o C h i n a i n or d e r t o a p p e a r h e r e t o d a y . S o w e t h a n k y o u v e r y
mu c h . We 'l l d o s o me q u e s t i o n s . Wh e n I g e t t o my t u r n t o a s k
q u e s t i o n s , o n e o f t h e t h i n g s t h a t I 'd b e v e r y i n t e r e s t e d i n h e a r i n g f r o m
both of you is a little bit of discussion about how you identify the
opportunities in China to work together and what kinds of things you
a r e g o i n g t o d o o n t h i s t r i p , w h i c h I p r e s u me y o u w i l l b e t a k i n g s o o n .
            T h a n k s v e r y mu c h . I ' m g o i n g t o t u r n i t o v e r t o C o m mi s s i o n e r
D 'A ma t o .
            H E A R I N G C O C H A I R D ' A M A T O : T h a n k y o u v e r y mu c h , M a d a m
C h a i r ma n , a n d t h a n k b o t h G o v e r n o r S c h w e i t z e r a n d G o v e r n o r M a n c h i n
f o r y o u r c o m me n t s . T h e p u r p o s e o f t h i s h e a r i n g i s r i g ht o n p o i n t w i t h
t h e c o mm e n t s t h a t y o u ' v e m a d e . T h e p u r p o s e o f t h e h e a r i n g i s t o t r y
a n d i d e n t i f y i n i t i a t i v es t h a t w e c a n r e c o m me n d t o t h e C o n g r e s s f o r
c o o p e r a t i v e p r o g r a ms w i t h t h e C h i n e se t o g e t u s o f f t h e d i me o f t he
urgent situation that you portray us as being in as a nation. The level
o f u r g e n c y c o u l d n 't b e h i g h e r i n o u r j u d g me n t .
            T h e s e c o n d t h i n g i s t h a t y o u b o t h c ome f r o m a p l a c e t h a t s a y s
t h a t w e h a v e t e c h n o l o g i e s a n d t h e p ot e n t i a l t o g e t o ur s e l v e s o u t o f t h i s
i f w e pu t ou r mi n d t o i t .                           I have a couple questions on
r e c o m me n d a t i o n s t h a t y o u me n t i o n e d , Go v e r n o r S c h w e i t z e r , t h e i d e a o f
i d e n t i f y i n g t h e n e e d t o c l e a r u p t h e l e g a l r e g i me a n d s o me o f t h e s e
a r e a s t h a t w e n e e d t o i d e n t i fy s o w e d o n 't h a v e i mp e d i me n t s o f o u r o w n
t o g e t t h e s e q u e s t r a t i on , n e w t e c h n o l o g i e s , o f f t h e g r o u n d , a n d I w o u l d
h o p e t h a t w e c o u l d w o r k w i t h y o u r s t a f f t o i d e n t i f y s o me s p e c i f i c s
a b o ut w ha t t ha t k i n d o f p r o p o s a l mi g h t b e i n t h e w a y o f l e g a l r e g i me s
s o w e c o u l d p r o v i d e t h a t r e c o mme n d a t i o n t o t h e a p p r o p r i a t e
                                                     - 180 -
c o m mi t t e e s o f t h e C o n g r e s s .
              I t h i n k we w o u l d b e v e r y , v e r y o p e n t o t h a t k i n d o f a q u e s t i on
a n d p r o b a b l y mo s t me mb e r s o f C o n g r e s s h a v e n o i d e a t ha t t h e r e ' s a n
o p e n l e g a l i s s u e o f t h i s k i n d t h a t mi g h t g e t i n t he w a y .
              T h e s e c o n d t h i n g i s y e s t e r d a y w e h e a r d fr o m a n u mb e r o f
t e s t i f i e r s f r o m t h e e x e cu t i v e b r a n c h a b o u t , a n d f r o m o u r l a b o r a t o r i e s
a b o u t t h e p o t e n t i a l f o r s eq u e s t r a t i o n . A n d o u r q u e s t i o n i s t o w h a t
e x t e n t we c a n r e c o m me n d t h e mo s t a g g r e s s i v e k i n d o f r a n g e o f
sequestration and including coal-to-liquefaction technologies for
p u r p o s e s o f g e t t i n g i n t o t h e e n e r g y bi l l , e ne r g y b i l l s t h a t w e 'r e g o i n g
to be seeing.
              C o n g r e s s i s o b v i o u s l y a n x i o u s t o d o s o me t h i n g s . T h e y n e e d
s o me g u i d a n c e a n d s o me r e c o m me n d a t i o n s , a n d i t s e e ms t o me t h a t w e
n e e d t o b e mo r e a g g r e s s i v e o n s e q u e s t r a t i o n , a n d I w o n d e r e d i f y o u
a g r e e w i t h t ha t ?
              Y e s t e r d a y , w e h e a r d t h a t t h e f i r s t t i me w e c o u l d g e t a
c o m me r c i a l i z e d f a c i l i t y o f a n y k i nd i n t h e s e qu e s t r a t i o n a r e a w o ul d b e
f i v e y e a r s o r mo r e o u t f o r u s .
              M y q u e s t i o n i s , d u r i n g Wo r l d Wa r I I w h e n we n e e de d a U - 2 ,
b e t w e e n t h e t i me t h a t w e p u t d o w n o n p a p e r t h e n e e d f o r a U - 2 a n d t h e
t i me t h a t a i r c r a f t t o o k o f f f r o m t h e r u n w a y , I b e l i e v e i t w a s n i n e
mo n t h s . S o w e 'v e b e e n a b l e i n t h e p a s t w h e n f a c e d w i t h t h e u r g e nt
s i t u a t i o n t o p u t s o me t e c h n o l o g i e s o n t h e g r o u n d i n a l o t f a s t e r f a s h i o n
t h a n w e 'r e h e a r i n g .
              S o my q u e s t i o n t o y o u i s w h a t i s y o u r a s s e s s me n t ? H a v e y o u p u t
t o g e t h e r y o u r b e s t k i n d o f p l a n f o r h o w w e w o u l d mo s t a g g r e s s i v e l y
a p p r o a c h s e q u e s t r a t i o n t ec h n o l o g i e s o f v a r i o u s k i n d s i n d e mo n s t r a t i o n
p r oj e c t s ?
              M R . S C H W E I T Z E R : L e t me j u s t s ay t h a t J o e me n t i o n e d t h a t i f
w e w a i t u n t i l w e h a v e c a r b o n s e q u es t r a t i o n / c a r b o n c a p t u r e p e r f e c t ,
w e ' l l n e ve r b ui l d i t .
              HEARING COCHAIR D'AMATO: Yes.
              M R . S C H W E I T Z E R : T h o s e w h o wo u l d s u g g e s t t h a t we ' r e a t
l e a s t 2 0 1 2 b e f o r e w e c a n c o m me r c i a l i z e c a r b o n c a p t u r e n e e d t o s p e n d a
l i t t l e b i t mo r e t i me o u t s i d e o f Wa s h i n g t o n , D . C. , a n d a l i t t l e b i t mo r e
a b o u t w h e r e w e 'r e a c t u a l l y d o i n g t he s e t h i n g s . T h e c o a l g a s i fi c a t i o n
plant in Beulah, North Dakota that was completed in 1984 has been
p i p i n g p u r e s t r e a m C O 2 t o We y b u r n , S a s k a t c h e w a n a n d p u mp i n g i t
b a c k i n t o t h e i r o i l fi e l d s f or s o me t i me .
              So we are capturing carbon today in enhanced oil recovery. The
d i f f e r e n c e i s s i mp l y t h i s : f i n a n c i a l . T h o s e w h o n e e d CO 2 i n t h e o i l
business will pay 25 or $30 a ton for it. Those who are producing CO2
w i t h n o h o me f o r t he C O 2 i n t e r ms o f e n h a n c e d o il r e c o v e r y a r e
p r o b a b l y g o i n g t o p a y s o me w h e r e b e t w e e n 3 0 a n d $ 5 0 a t o n t o
                                                     - 181 -
p r e s s u r i z e t h e C O 2 a n d p u mp i t i nt o s o me s a l i ne w a t e r de e p or ba s a l t
o r s o me l i me s t o n e o r s o me s a l t d o me s .
            J o e m e n t i o n e d t h a t t h e r e a r e r e g i o n a l s e q u e s t r a t i o n s t ud i e s , a nd
w e k n o w i n M o n t a n a , a n d w e 'v e a l r e a d y i d e n t i fi e d , t h a t w e c o u l d
s e q u e s t e r a l l o f t he c a r b o n d i o x i d e t h a t i s b e i n g p r o d u c e d i n a f o u r -
s t a t e a r e a i n M o n t a n a . We c a l l M o n t a n a t h e " T r e a s u r e S t a t e . " We
thought it was the Treasure State because we have, of course, gold and
p l a t i n u m a n d p a l l a d i u m a n d c o p p e r a nd o i l a n d g a s a n d c o a l a n d wi n d ,
b u t a s i t t u r n s o u t , w e a l s o h a v e s o m e o f t h e be s t g e o l o g y f o r s t o r i n g
carbon dioxide because God spent about six days with the rest of the
w o r l d a n d t h e n w h e n h e g o t i t r i g h t c a me t o M o n t a na . S o w e c a n s t o r e
the carbon.                  We c a n t e c h n i c a l l y s t o r e t h e c a r b o n t o d a y , b u t D r .
S o c o l o w w a s s i t t i n g a t o n e o f t h e s e t a b l e s b e fo r e t h e Se n a t e F i n a n c e
C o m mi t t e e a l o n g w i t h my s e l f , a n d h e w a s a s k e d t h i s q u e s t i o n b y
S e n a t o r Bu n n i n g - - D r . S o c o l ow , w h o i s o n e o f t h e l e a d i n g a u t ho r i t i e s i n
c a r b o n c a p t u r e f r o m P r i n c e t o n - - h o w mu c h o f t h e c a r b o n d i o x i d e t h a t
w e ' r e c u r r e n t l y p r o d u c i n g w i t h o u r p u l v e r i z e d c o a l p l a n t s i n A me r i c a
c o u l d w e s t o r e ? Ho w mu c h o f i t ?
            A n d h e s a i d , w e l l t h e s ho r t a n s w e r i s a l l o f i t , a n d a l l o f i t t h a t
w e w i l l pr o d u c e d ur i ng t h e n e x t 5 0 ye a r s . T h e l o n g e r a n s w e r i s w e
d o n 't k n o w e x a c t l y w h e r e a n d h o w d e e p , a n d w e d o n 't k n o w w h e r e i t
w i l l f a i l a n d w h e r e i t wi l l s u c c e e d.
            And then the question was asked, well, what percent of it would
s u c c e e d? H e s a i d o n c e a g a i n t h e s h ort a ns w e r i s I be l i e ve t ha t we c a n
k e e p 9 0 p e r c e nt of i t u n d e r t h e s u r fa c e f o r 10 , 0 0 0 y e a r s . We l l , 9 0
p e r c e n t , a s w e 'd s a y i n M o n t a n a , " a i n ' t b a d . "
            M R . M A N C H I N : I t c o me s d o w n t o mo n e y a n d t h e s i t u a t i o n o f
w e k n o w w e c a n d o i t . We k n o w t h a t w e c a n b u i l d t h e c o a l - t o - l i q u i d s
p l a n t s . I 'l l g i v e y o u a n e x a mp l e o f w h a t w e 'r e w o r k i n g o n . A me r i c a n
Electric Power, AEP, is the largest power producer in the nation, is in
We s t V i r g i n i a r i g h t n o w p r o j e c t i n g t o b u i l d a 6 0 0 me g a w a t t g a s i fi e r ,
coal gasification plant, which is the newest technology and the
cleanest technology of producing electricity.
            T h e c o s t s h a v e r i s e n e x t r e me l y o v e r a p e r i o d o f t i me t h a t t h e y 'v e
b e e n p l a n n i n g t o b u i l d t h i s , a n d w i t h t h a t , t h e y 'v e a l s o i n s o me o f t h e i r
e x i s t i n g p l a n t s , b e e n e x p e r i m e n t i n g wi t h s e q u e s t r a t i o n .
            S o w e k n o w i t c a n b e d o n e . B u t w h e n i t c o me s d o w n t o mo n e y ,
w h o p a y s f o r i t ? D o t he r a t e p a y e r s p a y f o r i t o r i s i t a n a t i o n a l
p r o b l e m? I f i t 's a n a t i o n a l p r o b l e m, h o w d o y o u s p r e a d t h e c o s t o u t o n
a national basis?
            I f i t 's a r a t e - b a s e d , t h e n d o e s A me r i c a n E l e c t r i c t a k e a l l i t s r a t e
p a y e r s a n d ma k e t h e m p a y f o r t ha t ? D o e s Al l e g h e n y E n e r g y m a k e
t h e m p a y f o r i t o r d o t h e d i f f e r e nt e n e r g y c o mp a n i e s a r ou n d t h e
country just be divvied out to their rate payers?
                                                     - 182 -
            U n t i l t h e y s e t t l e t h a t o n a l a r ge r i s s u e t h a n w h a t we 'r e d e a l i n g
w i t h r i g h t n o w , y o u 'r e n o t g o i n g t o h a v e a n y o f t h e m f o r w a r d . D u r i n g
the Clean Air Act, they were selling credits, as you recall, and they
u s e d t he u mb r e l l a e f f e c t . So i f a u t i l i t y c o m p a n y h a d t e n c o a l - f i r e d
p l a n t s a n d i t w a s u n d e r t h i s u mb r e l l a , t h e y 'd t a k e s o me t h a t w e r e
c l e a n e r t h a n t he ot h e r s a n d t h e y w ou l d t r a d e b a c k a n d f o r t h t o s t a y
w i t h i n t h e u mb r e l l a , i f y o u wo u l d .
            Wh a t h a d h a p p e n e d t h e n i s w e s t a r t e d mo v i n g i n t o p h a s e t w o o f
the Clean Air Act; they had to start scrubbing, paying a lot of money
t o s c r u b . We w o r k e d w i t h t h e m t h r o u g h a p u b l i c s e r v i c e c o m mi s s i o n
as far as the rate recovery, that we had to pass the rates on. Then they
w e n t i n t o t h e s e c on d p h a s e , a n d n o w a l l t he pl a nt s i n We s t V i r g i ni a
h a v e w h a t w e c a l l s c r u b be r s , w h i c h i s b y u s i n g a n i n j e c t i o n o f l i me t o
k n o c k o u t t h e s u l f u r . N o w , w e c o me a l o n g t h e r e 's g r e e n h o u s e g a s e s
a n d c a r b o n . I t ' s t h e n e x t p h a s e t h a t we ' r e i n t o .
            I t 's r e a l l y b r o u g h t e v e r y t h i n g t o a h a l t .            If it would be
r e t r o a c t i v e , w h e r e d o y o u t h i n k we 'd b e a s a n a t i o n i f r e t r o a c t i v e l y
e v e r y p l a n t h a s t o b e s e q ue s t e r e d? We l l , y o u c o u l d n 't . Y o u 'd s h u t
d o w n t h e w h o l e n a t i o n . We ' r e a t t h a t p o i n t i f w e d o n 't d o s o me t h i n g ,
t h e n w e 'r e g o i n g t o s h u t d o w n t h e n a t i o n b y 2 0 3 0 a n y w a y b e c a u s e
w e 'r e n o t g o i n g t o h a v e t h e o i l t o p r o d u c e .
            Y o u 'r e n o t g o i n g t o b e a bl e t o a f f o r d t r i pl e di g i t i n f l a t i o n. E v e r y
e c o n o mi s t w i l l t e l l y o u b y 2 0 2 0 , 2 0 2 5 , i f w e c o n t i n u e t h i s a p p e t i t e t h a t
w e h a v e fo r f o r e i g n o i l , t h a t w e ' l l b e i n t r i p l e d i g i t i n f l a t i o n , a n d we 'l l
n o t b e a b l e t o c o mp e t e a s a g l o b a l p o w e r .
            Wi t h t h a t b e i n g s a i d , w e k n o w t ha t w e c a n d o i t . We k n o w t h a t
w e c a n p e r f o r m a n d p r o du c e i t , b ut un t i l t h e y g r a p pl e on h o w t he y 'r e
g o i n g t o h a n d l e t h e f i n a n c in g o f i t , a n d t h a t 's wh y w e ' r e s a y i n g t h a t t h e
f i n a n c i a l r i s k c a n b e s pr e a d i f t he r e 's g o i n g t o b e a b a s e l i n e t h a t w e
can work off of. If you think that oil is going to go below $40 a barrel
a n d s u s t a i n t h a t a n y t i me s o o n wi t h t h e r i s i n g d e ma n d a r o u n d t h e
w o r l d , a n d e s p e c i a l l y w i t h C h i n a c o mi n g o n t h e w a y t h e y ' r e g o i n g t o
s u r p a s s u s b y 2 0 2 9 , t h e n w e h a v e o c e a n f r o n t p r o p e r t y i n We s t V i r g i n i a .
            A n d s o w h a t w e 'r e a s k i n g i s a r e a l i s t i c a pp r o a c h t o h o w w e
h a n dl e t h i s . T hi s i s a p r o b l e m t h a t a l l h a v e t o d e a l w i t h .
            H E A R I N G C O C H A I R D 'A M A T O :                      T h a n k y o u v e r y mu c h ,
G o v e r n o r . We 'd a l s o b e i n t e r e s t e d i n w o r k i n g w i t h y o u r s t a f f t o
identify the kinds of incentives that you think that we ought to be
r e c o m me n d i n g t o t h e C o n g re s s t o a d d r e s s t h e p r o b l e m i n t h e w a y t h a t
b e s t f i t s i t a s a ma j o r n a t i o n a l p r o b l e m. I f i t ' s a n a t i o n a l p r o b l e m, i t
d e ma n d s a n a t i o n a l r e s p o n s e .
            M R . M A N C H I N : B a s i c a l l y I 'v e l o o k e d a t i t , a n d B r i a n s i n c e
w e 'v e b e e n g o v e r n o r s t o g e t h e r , w e 'v e t a l k e d a b o u t t h i s ma n y t i me s . I f
y o u l o o k a t t h e o n e p u b l i c p o l i c y t h a t 's b e e n mo s t s u c c e s s f u l i n t h e
                                                     - 183 -
n a t i o n 's h i s t o r y , i t 's b e e n f e e d i n g t he ma s s e s . H o w h a v e w e b e e n a b l e
t o f e e d t h e ma s s e s ? We ' v e d o u b l e d o u r p o p u l a t i o n i n t he s h o r t p e r i o d
o f t i me . We 'r e g o i n g t o a d d a n o t he r 1 0 0 mi l l i o n p e o pl e i n t h e ne x t 2 0
y e a r s , a n d y e t n o t o n e o f u s h a v e g o ne t o t h e g r o c e r y s t o r e a n d s a i d I ' m
s o r r y , t h e b o a t d i d n 't c o me i n , t h e r e 's n o f o o d .
            We ' v e b e e n a b l e t o d o i t , s o h o w d o w e w o r k w i t h t h e f o o d
i n d u s t r y , w i t h t h e a g r i c u l t u r e i n d u s t r y , w i t h t h e f a r me r s ? H o w d o w e
k e e p t h e m a l i v e d u r i n g t h e G r e a t D e p r e s s i o n a n d u p t h r o u g h t h e '5 0 s
a n d '6 0 s ? I f t h e r e 's b e e n a p o l i c y t h a t h a s w o r ke d , l o o k a t t h a t o n e a n d
find out, and basically it was bases. They put baselines so that people
w o u l d c o n t i n u e t o p r o d u c e . We 'r e n o t c r e a t i ng t h o s e i nc e nt i ve s r i g ht
n o w , a n d I d o n 't k n o w w h y p e o p l e a r e a fr a i d o f t h e w o r d s u b s i d y . I ' m
n o t l o o k i n g f o r a su b s i d y . I ' m l o o k i n g f o r a n a mo u n t o f a r i s k . Gi v e
me a l o w a n d a h i g h o n t h e r i s k a n d I ' l l g e t t h e p e o p l e t o p a r t i c i p a t e
a n d p u t t h e mo n e y i n . R i g h t n o w i t ' s a n u n k n o wn .
            A n d t h e n l o n g - t e r m c o n t r a c t s . U n t i l t h e f e d e r a l g o v e r n me n t
steps forward--if they give our little state a 25-year contract to
p r o d uc e J e t A f u e l , w e 'l l gi ve t he m a l l t h e y w a n t . I c a n 't d o i t o n f i v e
y e a r s . T h e e c o n o mi c s i s n o t t h e r e , b u t a 2 5 - y e a r c o n t r a c t a n d g i v e me
a p a r a me t e r , a n d I g u a r a n t e e y o u w e ' l l b e a t t h e s p r e a d o n w h a t y o u 'r e
d e a l i ng w i t h r i g ht no w .
            A n d w e 'v e b e e n s a y i n g t h i s . We 'v e b e e n t a l ki ng t o t h e D e f e n s e
D e p a r t me n t , b ut s ome o n e h a s g o t t o s t e p t o t h e p l a t e . I 'm c o m mi t t e d i n
my l i t t l e s t a t e o f We s t V i r g i n i a t h a t t h e f i r s t c o a l - t o - l i q u i d s p l a n t t h a t
w e 'r e g o i n g t o b u i l d , t h a t I 'm g o i n g t o b e t h e t o t a l t a ke . I 'l l u s e i t f or
a l l my s c h o o l b u s e s . I t wi l l b e w h a t w e c a l l c l e a n d i e se l . I t w i l l b e a
mu c h b e t t e r di e s e l t ha n w h a t w e 'r e p r o d u c i n g r i g h t n o w f r o m
p e t r o l e u m, a n d w e 'l l u s e i t i n a l l o f o u r s c h o o l b u s e s .
            We ' l l u s e i t i n a l l o f o u r h i g h w a y d e p a r t me n t v e h i c l e s a n d w e 'l l
h a v e 2 5 t o 3 5 p e r c e n t a v a i l a b l e f o r t h e p u b l i c u s e , b u t I 'v e g o t t o
g u a r a n t e e t h e t a k e f r o m t h a t i n o rd e r t o f i n a n c i a l l y ma k e t h e p r o j e c t
w o r k . T h e f e d e r a l g o v e r n me n t n e e d s t o s t e p t o t h e p l a t e , t o o .
            H E A R I N G C O C H A I R D 'A M A T O :                          T h a n k y o u v e r y mu c h ,
Governor. Governor.
            M R . S C H W E I T Z E R : I n t e r ms o f p u b l i c p o l i c y , C o n g r e s s i s
c o n s i d e r i n g t h e e n e r g y b i l l r i g h t n o w , a n d o n e o f t h e t h i n g s t h a t t h e y 'r e
c o n s i d e r i n g i s t h e p r o d u c t i o n t a x c r e d i t t h a t t h e y 'v e be e n o f f e r i n g t o
b i o f u e l s a n d o t h e r a l t e r n a t i ve s o u r c e s . T h i s i s w h a t 's v e r y i n t e r e s t i n g .
            If we started today, if one of these deals that Joe is working on
o r w e 'r e w o r k i n g o n i n M o n t a n a o f c o a l l i q u e f a c t i o n , w e 'r e p u t t i n g
c o n s o r t i ums t o g e t he r wi t h of f - t a k e a g r e e m e n t s , w i t h f i n a n c i n g , w i t h
t e c h n ol o gy c o mp a n i e s , w i t h c o a l c o mp a n i e s , t o b u i l d p l a nt s t h a t
p r o d u c e 2 0 t o 8 0 , 0 0 0 b ar r e l s o f l i q u i d f u e l s , u l t r a - c l e a n d i e s e l a n d J P -
8 a v i a t i o n f u e l , i f w e s t a r t e d t o d a y , i f w e s t a rt e d p o u r i n g c o n c r e t e a n d
                                                      - 184 -
p u t t i n g s t e e l i n t h e g r o u n d, n o n e o f t h e m w o u l d b e d o n e b e f o r e 2 0 1 3 .
             T h e s e a r e mi n i mu m o f t w o t o $5 b i l l i o n p r o j e c t s . T h e y a r e
e n g i n e e r i n g ma r v e l s . A n d y e t C o n g r e s s i s c o n s i d e r i n g e x t e n d i n g t h e
p r o d uc t i on t a x c r e d i t o f 5 0 c e n t s t o a l t e r na t i v e f u e l s a l l t h e wa y t o
2 0 1 0 . C o n g r e s s n e e d s t o b e r e a l i s t i c a n d s a y t h e t i me f r a me o n t h e s e
a l t e r n a t i ve f u e l s , c o a l - t o - l i qu i d s , t h e r e w i l l b e n o p r o d u c t i o n b e f o r e
2013.
             S o t h e p r o d u c t i o n t a x c r e di t s h o u l d s t a r t i n 2 0 1 3 , 2 0 1 4 , a n d
e x t e n d t o 2 0 2 0 i f we a r e g o i n g t o e n c o u r a g e c o a l l i q u e f a c t i o n . J o e h a s
t a l k e d a b o u t a mi n i mu m p r i c e . L o o k , w e i mp o r t f o u r b i l l i o n b a r r e l s o f
o i l e v e r y y e a r . We c o n s u me 6 . 5 b i l l i o n b a r r e l s , a n d I b e l i e v e t h a t
w e ' r e g o i n g t o b e a b l e t o p r o d u c e a bo u t 2 . 5 b i l l i o n b a r r e l s . M o n t a na
and North Dakota are the only states that increased our oil production
d u r i n g t h e l a s t y e a r , a n d w e 'r e f i n di ng s o me g r e a t oi l r e s e r v e s , bu t i t
me a n s t h a t 's 2 . 5 b i l l i o n b a r r e l s .
             S o l e t 's do a l i t t l e ma t h t o g e t h e r . T he r e 's a f ou r bi l l i o n b a r r e l
p r o b l e m w e h a v e . I f w e c on v e r t e d e v e r y s i n gl e a c r e o f c o r n a nd w h e a t
a n d s o y b e a n s t h a t w e e x p o r t i n t hi s c o u n t r y , we c o u l d p r o d u c e a g r a n d
t o t a l o f o n e b i l l i o n b a r r e l s o f b i o f u e l s. T h a t ' s i t . I ' m a n a g r o n o mi s t .
T h a t 's t h e k i n d o f ma t h I c a n d o .
             S o t h a t s t i l l l e a v e s a t h r e e b i l l i o n b a r r e l p r o b l e m. N o w , i f w e
d e c r e a s e o u r c o n s u mp t i o n b y a b i l l i o n b a r r e l s a n d w e c a n d o t h a t - -
ma y b e s o me o f y o u a r e e c o n o mi s t s . Y o u ' v e g o t a n e c o n o mi s t h e r e ? I
w o u l d n 't a d mi t i t e i t he r . S o a n e co n o mi s t w o u l d s a y , w e l l , Br i a n , i f
y o u a s k e d u s t o d e c r e a s e o u r c o n s u mp t i o n o f o i l i n t h i s c o u n t r y b y o n e
b i l l i o n b a r r e l s , w h y i t wi l l s e n d u s i n t o a r e c e s s i o n b e c a u s e e v e r y o n e
k n o w s t h a t y o u me a s u r e t h e s t r e n g t h a n d w e a l t h o f a n e c o n o my b y h o w
mu c h y o u c o n s u me , h o w mu c h o i l y o u c o n s u me .
             N o t s o f a s t . F r o m 1 9 7 5 t o 1 9 8 3 , t h e l a s t t i me w e h a d a c r i s i s , w e
d e c r e a s e d o u r c o n s u mp t i o n o f o i l b y p r e t t y c l o s e t o a b i l l i o n b a r r e l s .
S o I t h i n k w e c a n d o i t a n d I 'm d o i n g my p a r t . M y w i f e a n d t r a d e d o f f
o u r M o n t a n a C a d i l l a c - - w h e e l d r i v e Su b u r b a n - - a n d w e b o u g h t a l i t t l e
diesel car and we run it 100 percent on biodiesel.
             I 'v e g o t f a r me r s a n d h i g h s c h o ol k i d s a n d c o l l e g e s a l l o v e r
M o n t a n a ma k i n g b i o d i e s e l . E v e r y w h e r e I g o , s o me b o d y c o me s u p a n d
g i v e s me t w o o r t h r e e g al l o n j u g o f t h e i r l o c a l ho o t c h . I t a k e i t h o me ,
d u mp i t i n t o t ha t bi o di e s e l c a r , a n d s o me o f i t 's y e l l o w , s o me o f i t 's
w h i t e , s o me h a s g o t f l o a t i e s i n i t , b u t i t a l l w or k s .
             I d r i v e a p i c k u p t h a t r u n s o n d i e s e l a n d i t 's a c o a l - t o - l i q u i d s o
I ' m p e r s o n a l l y o f f o i l . H o w h a v e y o u d o n e d u r i n g t h e l a s t we e k ? S o
w e c a n d e c r e a s e o u r c o n s u mp t i o n b y a b i l l i o n b a r r e l s . N o w w e s t i l l
h a v e a t wo b i l l i o n b a r r e l p r o b l e m .
             N o w , l o o k , I 'v e a l r e a d y a s k e d y o u t o s u s p e n d a l l e x p o r t o f f o o d .
T h a t 's t h e b i o f u e l s p o r t i o n .             I 'v e a l r e a d y a s k e d y o u t o d e c r e a s e
                                                     - 185 -
c o n s u mp t i o n a t a r a t e t h a t w e 'v e o n l y d o n e o n e o t h e r t i me i n t h e
h i s t o r y o f t h i s c o u n t r y , a n d w e ' r e s t i l l t w o bi l l i on b a r r e l s s h o r t . S o
u n l e s s , u n l e s s y o u 'v e g o t a b e t t e r p la n , w e 'r e g o i n g t o h a v e t o g o t o o u r
ace in the hole, and it's coal.
            N o w , w e c a n n o t d e v e l o p t h e s e c o a l r e s o u r c e s w i t h o u t s o me k i n d
of guarantees on a base price because I'm going to tell you, and almost
e v e r y b o d y i n t h i s r o o m i s g o i n g t o d i s ag r e e w i t h me , b u t I h a v e b e e n i n
t h e c o mm o d i t i e s b u s i n e s s my w h o l e l i f e , s o h a s my f a t h e r a n d m y
g r a n d p a r e n t s b e f o r e t h e m, a n d t h e p r i c e o f o i l w i l l d r o p b e l o w $ 4 0 a
b a r r e l . I t mi g h t ma k e i t b e l o w $ 3 0 a b a r r e l .
            Y o u c a n 't f i g u r e o u t h o w t h a t c o u l d h a p p e n . We c o u l d n ' t f i g u r e
o u t h o w i t ma d e i t t o $ 9 a b a r r e l i n t h e '9 0 s o r h o w i t m a d e i t a l l t h e
w a y d o w n t o $ 2 a b a r r e l a f t e r Wo r l d Wa r I I . B u t i t w i l l , a n d I d o n 't
k n o w a l l o f t h e e v e n t s , b u t t h a t 's t h e c o m mo d i t y b u s i n e s s .
            T h e f o l k s w h o f i n a n c e t h e s e p r o j e c t s o n Wa l l S t r e e t , a n d I 'v e
b e e n b a c k t h e r e o n my h a n d s a n d k ne e s - - I k n o w h o w t h i s w o r k s - - t h e y
h a v e t he mo n e y b e c a u s e t h e y d o n 't l i k e t o t a k e r i s k . T he y l i ke t o s h o ot
f i s h i n a b a r r e l . Th e y 'r e n o t g o i n g t o b e i n t h e c o m mo d i t y b u s i n e s s ,
b u t i f t h i s g o v e r n me n t s a y s i f i t 's a d o me s t i c a l l y p r o d u c e d f u e l , i f y o u
g r o w i t o r b l o w i t o r d i g i t o r d r i l l i t , t h e mi n i m u m p r i c e w i l l b e $ 4 0 a
b a r r e l , y o u w i l l u n l e a s h t h a t c a pi t a l t o i nv e s t i n a l l o f t h e s e
technologies.
            We h a v e t h e c a p a b i l i ti e s , b u t w e n e e d C o n g r e s s t o j u s t g e t u s
s t a r t e d , d e v e l o p t h e c ar b o n s e q u e s t r a ti o n l a w, d e v e l o p a mi n i m u m
p r i c e s t a n d a r d f o r a l l d o me s t i c a l l y p r o d u c e d f u e l s . I f we d o t h a t , y o u
w i l l u n l e a s h t h e g r e a t e s t i n v e s t me n t a n d t e c h n o l o g i c g a i n s i n t h e
history of this country.
            H E A R I N G C O C H A I R D 'A M A T O :                       T h a n k y o u v e r y mu c h ,
G o v e r n o r . V i c e C h a i r ma n B l u me n t h a l .
            V I C E C H A I R M A N B L U M E N T H A L : T h a n k y o u b o t h v e r y mu c h
f o r c o mi n g h e r e a n d f o r y o u r v e r y i n t e r e s t i n g t es t i mo n y a n d v e r y
i n t e r e s t i ng w o r k on t h e s e t o pi c s .
            I h a v e a q u e s t i o n r e l at e d t o C h i n a a nd h o w t h e y w o u l d f i t i nt o
s o me o f t h e s e p l a n s . G o v e r n o r S c h w e i t z e r me n t i o n e d t h e d i f f i c u l t i e s
o f t h e l e ga l r e gi me h e r e i n t he U n i t e d S t a t e s . W h e n w e ' r e d e a l i n g w i t h
C h i n a , w e 'r e d e a l i n g w i t h a mu c h mor e c o mp l i c a t e d s i t u a t i on i n t e r ms
o f t h e l e g a l r e g i me o r l a c k t h e r e o f .
            We h a v e a p r e t t y g o o d i d e a o f w h o o w n s t h e l a n d , p o s s i b l y w h o
o w n s t h e mi n e r a l s , b u t t h e n w e h a v e o t h e r q u e s t i o n s , w e ' r e s t a r t i n g
f r o m a c r a w l mo d e w h e n i t c o me s t o C h i n a i n t h a t s e n s e . We ' r e s o f a r
a h e a d , w i t h a l l o u r p r o b l e ms , w e 'r e s o f a r a h e a d , a n d I ' m w o n d e r i n g
h o w w e de a l w i t h t h a t a s p e c t o f t hi n g s i n t e r m s o f c o o p e r a t i n g wi t h
C h i n a ? Th e r e 's I PR i s s u e s ob v i o us l y. T h e r e i s g e t t i n g t he m t o s or t o u t
t h e s e s o r t s o f t h i n g s t h a t w e 'v e b e e n a t f o r a c o u p l e o f h u n d r e d s o f
                                                   - 186 -
years.
             A n d t he n t h e r e i s t h i s i s s u e o f t h e C h i n e s e p r i o r i t i e s . W e 'r e i n a
s i t u a t i on r i gh t n o w w h e r e w e a r e a v e r y w e a l t h y c o u n t r y a n d c a n a f fo r d
t o s t a r t t o t a k e on s o me o f t h e s e i s s u e s . T h e C h i n e s e a r e i n a s i t u a t i o n
w h e r e t h e y 'r e t h i n k i n g v e r y mu c h a b o u t k e e p i n g p e o p l e e mp l o y e d ,
u n e mp l o y me n t , k e e p i n g t h e mi d d l e c l a s s ha p p y w i t h a ut omo b i l e s .
             We ' r e v e r y d i f f e r e n t l y s i t u a t e d , a n d s o I w o u l d t h i n k i t wo u l d b e
v e r y d i f f i c u l t o n s o me o f t h e s e c o o p e r a t i v e p r o g r a ms .
             A r e l a t e d q u e s t i o n o r c o m me n t i s t h i s q ue s t i o n o f e n e r gy
i n d e p e n d e n c e . L e t 's s a y t h a t w e a c t u a l l y a c h ie v e e n e r g y i n d e p e n d e n c e ,
a n d I u n d e r s t a n d a l l t h e n a t i o n a l s e c u r it y a r g u me n t s f o r t h a t . B u t , I ' m
n o t a n e c o n o mi s t , b u t t h e e c o n o mi c s o f i t w o u l d me a n p r o b a b l y t h e
price goes down for oil and petroleum if the U.S. gets that out of the
ma r k e t . I t b e c o me s mu c h mo r e a t t r a c t i v e f o r - - t h e r e s t o f t h e w o r l d h a s
t o b e c o me e n e r g y i n d e p e n d e n t , t o o . T h e o i l p r o d u c i n g s t a t e s t h a t , a s
y o u me n t i o n e d , G o v e r n o r M a n c h i n , a r e p r o b l e ma t i c f o r u s w o u l d s t i l l
be producing the oil if other countries such as China decided to buy
t h e m.
             S o w e mi g h t s o l v e o u r p r o b l e m ma y b e , b u t i t d o e s n ' t g e t t o t h e
i s s u e o f t h e k e y i s s u e w hi c h I t h i n k y o u t o u c h e d o n , w h i c h i s t h a t t h e s e
oil producing states would still be able to sell to other countries at
p o s s i b l y a mo r e a t t r a c t i ve p r i c e . S o a ny w a y , t h os e a r e s or t o f t h e f o u r
o b s e r v a t i o n s I 'v e h a d o n w h a t y o u 'v e s a i d e v e n i f w e d o a c h i e v e o u r
own plans here.
             M R . M A N C H I N : C h i n a i s b u i l d i n g . T h e y 'r e n o t w a i t i n g f o r u s .
T h e y c a n 't a f f o r d t o w a i t f o r u s . N o w , w e c a n e i t he r w or k w i t h t h e m o r
s i t b a c k a n d w a t c h w h a t t h e y d o , a n d I t h i n k w h a t w e 'r e d o i n g n o w i s
w e 'r e i n t e r a c t i n g . I 'm g o i n g o v e r t o S h a n x i P r o v i n c e w h e r e t h e y ' r e
l a r g e c o a l p r o d u c e r s l i k e t h e s t a t e o f We s t V i r g i n i a , a nd t he t y pe o f
mi n e s t h a t w e h a v e i n We s t V i r g i n i a a r e t h e s a me a s w h a t t h e y ' r e
mi n i n g t h e r e .
             S o a l o t of o u r p e op l e f r o m We s t V i r g i ni a a r e a l r e a d y s e l l i ng a n
awful lot of the product and using a lot of the technology. They are so
interested in working, but they know they have to produce the energy
a n d t h e y 'r e g o i n g t o p r o d u c e - - t h e i r c o a l p r o d u c t i o n i s g o i n g t o
i n c r e a s e . We k n o w t h a t . The y 'r e p r o j e c t e d t o g o u p o v e r t o f r o m 1 . 7
t o 3 . 2 mi l l i o n t o n s p e r d a y i n p r o d u c t i o n b y 2 0 2 0 . T h e i r d e ma n d f o r
oil is growing at just leaps and bounds. So with all that being said of
h o w w e 'r e g o i n g t o w o r k w i t h t h e m, a r e t h e y p u t t i n g a s h i g h a v a l u e o n
s e q u e s t e r i n g a s we a r e ? I d o n 't t h i n k s o a t t hi s po i nt .
             Could we learn an awful lot by them being so advanced as far as
t h e i r t i me s c h e d u l e o f b u i l d i n g t h e s e p l a n t s ? I t h i n k t h a t w e c a n l e a r n
a t r e me n d o u s a mo u n t . C o u l d w e w or k i n a j o i n t v e n t u r e s e q u e s t e r i n g
t o s e e how i t d o e s w o r k i f t h e r e 's s o me a n s w e r s i n i t t h a t w e a r e
                                                    - 187 -
l o o k i n g fo r b e f o r e w e mo v e f o r w a r d ? I b e l i e ve s o . A n d t h o s e a r e t h e
t h i n g s w e 'r e g o i n g t o e x p l o r e t o s e e w h a t t y p e o f r e l at i o n s h i p s w e c a n
build. But--
            VICE CHAIRMAN BLUMENTHAL:                                         Wo u l d n ' t w e b e p u t t i n g
i n c e n t i v e s i n p l a c e i f w e b e c a me e n e r g y i n d e p e n d e n t f o r t h e C h i n e s e o r
t h e I n d i a ns t o b e b u y i n g o i l an d p e t r o l e u m a t l o we r p r i c e s ?
            M R . M A N C H I N : I t h i n k y o u 'r e g o i n g t o b e d e p l e t i n g t h e o i l
s u p p l i e s . E v e r y o n e h a s t ol d me t h a t o v e r t h e n e x t 2 0 t o 3 0 y e a r s , o u r
o i l s u p p l i e s a r e g o i n g t o b e d e p l e t e d t r e me n d o u s l y. Wi t h t h a t , t h e n
s u p p l y a n d d e ma n d w i l l w o r k o n t h a t . I n S o u t h A f r i c a a n d S a s o l
b e c a me e n e r g y i n de p e n de n t , i t n e v er c h a n ge d a w h o l e l ot o f t h e wo r l d
ma r k e t s , a n d I t h i n k i n t h i s c o u nt r y w e 'r e a l w a y s g o i n g t o h a v e o il
p r o d u c i n g s t a t e s I w o u l d l i k e t o s a y f o r t h e fa r f u t u r e . A n d w e ' r e
talking about that being part of the energy independence.
            Every state should look at its reserve base right now and how can
t h e s t a t e o f We s t V i r g i n i a o r M o n t a n a b e e n e r g y i n d e p e n d e n t b y 2 0 3 0?
L e t ' s s a y t h a t w e r e a c h a n i n d e p e n de n c y o f 1 50 p e r c e n t , a n d t he n w e
can help another state that only gets to 60 or 70 percent. I think
J i m my C a r t e r i n 1 9 7 6 s a i d w e 'd b e e n e r g y i n d e p e n d e n t b y 2 0 0 0 .
Wh e r e d o y o u t h i n k w e 'd b e t o d a y i f t h a t w o u l d h a v e h a p p e n e d ?
            I d o n 't t h i n k t h a t w e w o u l d b e a t $ 3 . 2 0 o r 5 0 c e n t s a g a l l o n , b u t
i t w o u l d s t i l l b e i n c r e a s e d o v e r w h a t i t w a s i n 1 9 7 6 , I 'm s u r e o f t h a t .
Wh a t h a p p e n e d , t h e ma r k e t f e l l o ff i n t h e '8 0 s , a d mi n i s t r a t i o n s
changed, priorities changed, directions changed, and we have what we
have today.
            I d o n ' t t h i n k w e c a n w a i t a n d b e s i t t i n g h er e a t 2 0 2 5 s a y i n g , o h ,
w e s u r e i n t e n d e d t o b e e n e r g y i nd e p e n d e n t b y 2 0 3 0 , b u t w e j u s t d i d n 't
g e t i t a c c o mp l i s h e d . I d o n 't t h i n k y o u c a n a f f o r d t h a t .
            M R . S C H W E I T Z E R : Le t me j u s t s u g g e s t t o y o u t h a t a c t u a l l y f o r
b e t t e r , f o r w o r s e , C h i n a i s c e n t r a ll y p l a n n e d . A n d t h e y c a n mo v e
f a s t e r t h a n w e d o . We h a v e t h e g re a t e s t s y s t e m i n t h e w o r l d , b u t w e
u s u a l l y mo v e p r e t t y s l o w he r e i n Wa s h i n gt o n , D . C . C h i n a c a n d e c i d e
t h i s i s t h e d i r e c t i o n w e ' r e g o i n g a n d a c o u p l e d o z e n p e o pl e c a n s a y t h a t
i s t h e d i r e c t i o n w e ' r e g o i n g , a n d t h e y c a n d o t h i n g s l i k e t h e y 'r e d o i n g
r i g h t n o w, w h i c h i s b u i l d i n g c o a l - t o -l i q u i d p l a n t s w i t h S a s o l a n d S h e l l
Oil technology in China today.
            A s t o t h e l e g a l r e g i me , I t h i n k C h i n a i s p r o b a b l y i n a b e t t e r
c i r c u ms t a n c e t h a n w e a r e b e c a u s e i t 's c e n t r a l l y o w n e d . S o t he y c a n
s i mp l y s a y w e s h a l l p u t C O 2 h e r e a nd w e s h a l l d e l i v e r t h e c o a l f r o m
t h e r e . S o t h e y c a n a c t ua l l y mo v e a l i t t l e f a s t e r t h a n u s , b u t w h e n w e
l o o k a t t h e o i l ma r k e t a s w e g o f o r wa r d , I a b s o l u t e l y a gr e e w i t h y o u .
I f t h e U n i t e d S t a t e s p r o d uc e s a l l o f o u r l i q u i d f u e l s d o me s t i c a l l y a n d
C h i n a d o e s a n d I n d i a d o e s , a n d o t h e r c o u n t r i e s d o , w e l l , t h e n w e 'l l b e
awash in oil. That would be the theory and the price of oil could drop
                                                    - 188 -
to $25 a barrel.
            I b e l i e v e t h a t t o b e t r ue f o r a s h o r t p e r i o d o f t i me . T h e p r o b l e m
t h a t w e h a v e r i g h t n o w i s , a s w e l o o k a t t h e c o n s u mp t i o n c u r v e , i n
C h i n a , . 8 p e r c e n t o f t h e p e o p l e t h e re o w n a c a r . T h e y ' r e g o i n g t o g e t
t o t w o pe r c e n t a n d t h e n fi v e p e r c e nt a n d t h e n t e n p e r c e nt , a n d I n d i a i s
going to get there as well, and Bangladesh, and the rest of the world is
mo v i n g v e r y r a p i d l y i n t h e i r a b i l i t y t o c o n s u me o i l .
            S o e v e n i f t h e i n d u s t r i a l i z e d co u n t r i e s o f t h e w o r l d t h a t h a ve
r e s o u r c e s l i k e c o a l a n d b i o fu e l s , a s w e d e c r e a s e o u r c o n s u mp t i o n o f
o i l , y o u c a n b e t y o u r b o t t o m d o l l a r t h a t t h e t h i r d w o r l d i s g oi ng t o
c o n t i n u e t o i n c r e a s e t h e i r c o n s u mp t i on o f o i l a t a f a s t e r r a t e t h a n t h e
o i l - p r o d u c i n g c o u n t ri e s c a n p r o d u c e i t .
            S o I 'm o p t i mi s t i c t h a t t h e p r i c e o f o i l w i l l s t a y w e l l a b o v e $ 4 0 a
b a r r e l f o r mo s t o f t h e n e x t 2 0 y e a r s .
            H E A R I N G C O C H A I R D 'A M A T O : C a n w e g o t o a s e c o n d r o u n d ?
            VICE CHAIRMAN BLUMENTHAL: Sure.
            H E A R I N G C O C H A I R D ' A M A T O : C o m mi s s i o n e r Vi d e n i e k s .
            HEARING COCHAIR VIDENIEKS:                                       Y o u b o t h me n t i o n e d t h e
u r g e n c y o f t h e ma t t e r . We h a d t e s t i mo n y y e s t e r d a y f r o m a l a d y f r o m
L a w r e n c e L i v e r mo r e N a t i o n a l L a b o r at o r y , a n d s h e me n t i o n e d , a c t u a l l y
s t uc k p r e t t y h a r d t o t h e s e qu e s t r a t i o n t i me f r a me a s b e i n g t e n y e a r s .
Then underground gasification of coal, she was a little bit more
o p t i mi s t i c t h e r e s a y i n g ma y b e f i v e t o t e n y e a r s .
            R e c o g n i z i n g w e 'r e n o t a s e f f i c i e n t a s a n a u t o c ra t i c g o v e r n me n t ,
a n d w e d o h a v e t h e s e l e g a l p r o b l e ms , w h a t c o u l d w e r e c o m me n d t o
C o n g r e s s , t h e C o m mi s s i o n , h o w t o a c c e l e r a t e t h i s p r o c e s s ?                   I
u n d e r s t a n d t h e r i s k f a c t o r . S u b s i d i e s ma y n o t b e a g o o d w o r d , b u t
s o me o n e h a s t o ma y b e c o me u p w i t h g o v e r n me n t g u a r a n t e e s .
            M a y b e b o t h y o u g o v e r n o r s c o u l d c o me u p wi t h s o me
r e c o m me n d a t i o n s t o u s w e s h o u l d r e c o m me n d t o C o n g r e s s .
            M R . M A N C H I N : I c a n s e e t w o , j us t t w o v e r y s i mp l y . T h e f i r s t
i s t h e fi na n c i a l e nd o f i t . F i n a nc i a l l y , t h e r e h a s t o b e a b a s e t o w o r k
o f f o f o r t h e fi n a n c i a l w o r l d w i l l n o t e n g a g e . An d t h e r e 's n o t a s t a t e
n o r t h e f e d e r a l g o v e r n me n t g o i n g t o t ak e t h e f r o n t - e n d r i s k o n t h i s . S o
you have to engage the capital of this country and around the world in
order to get in this venture.
            S e c o n d i s t h a t t hi s f e d e r a l g o v e r n me n t h a s t o c h a n g e i t s p o l i c y
towards long-term contracts with viable alternative energy and
d o me s t i c a l l y p r o d u c e d . I t c o u l d o n l y b e a p e r c e n t a g e . I t d o e s n ' t h a v e
to be the whole ball of wax in one arena, but basically what they could
d o i s s a y t h a t w e ' r e g o i n g t o p u t 2 0 p e r c e n t o f o u r c o n s u mp t i o n o u t f o r
l o n g - t e r m c o n t r a c t s b a s e d o n a v i a bl e e n e r g y p r o d u c e d i n t h i s c o u n t r y ,
a n d t h e y c a n i d e n t i f y t h e v i a b l e e n e r g i e s t h a t c a n b e u s e d , w h e t h e r i t 's
ethanol biofuels or coal-to-liquids.
                                                    - 189 -
              They've already tested coal-to-liquids in the B-52 bomber and
i t ' s w o r ke d v e r y w e l l . T he y k n o w t h a t w i l l w or k . S o t h e y 'r e d o i n g a l l
t h i s , b u t u n t i l t h e y c h a n g e t h e i r p o li c i e s , y o u 'r e n o t g o i n g t o h a v e
a n y o n e a g a i n i n t h e f i n a n c i a l a r e na t a k i n g t h e r i s k . A n d y o u w o n ' t
h a v e a p r i v a t e d e v e l o p e r o r a s t a t e s t a n d o n t h e f r o n t e nd o f t h i s t h a t
w o u l d b e a b l e t o a ff o r d t o d o i t .
              So until those two things happen, and whether they call it a
s u b s i d y o r n o t , i t 's b a s i c a l l y s e t t i n g a b a s e l i n e , a n d a s u b s i d y b a s i s i s
w h e n y o u s u b s i d i z e s o me b o d y n o t t o d o a n y t h i n g . W e ' r e s a y i n g t o s e t a
d e b i t a n d c r e d i t . I f i t f a l l s b e l o w p r i c e s , we d o n 't b e l i e v e i t w i l l
sustain a low price, but they could artificially drive it lower.
              I f t h e w or l d ma r k e t d r i v e s t h e o i l pr i c e s l o we r a r t i f i c i a l l y t o
d i s r u p t t h e f i n a n c i a l ma r ke t s , i f y o u w i l l , t h e n I u n d e r s t o o d i n t h e '8 0 s
t h a t 's p r e t t y mu c h w h a t w a s t he d o om o n t h e c o a l - t o- l i q ui d s i n t h a t
p e r i o d . Wi t h t h a t b e i n g s a i d , w e c o u l d r e a l l y s o l i d i f y .
              M R . S C H WE I T Z E R :             Here's the greatest challenge.                          If you
c o n s i d e r a l l o f t h e C O 2 w e ' r e p u t t i n g i n t o t h e a t mo s p h e r e t o d a y , a n d
y o u w a n t e d t o c r e a t e s o me k i n d o f a n i n c e n t i v e p l a n t o g e t t h a t C O 2
placed beneath the surface, at $30 a ton, and that's kind of a wag that
p e o p l e a r e u s i n g fo r t he c o s t o f s e q u e s t e r i n g t h a t c a r b o n , my ma t h
s h o w s t h a t 's p l u s o r mi n u s $ 1 2 t r i l l i o n a y e a r .
              Now, I believe that with time, with research, we will find ways
o f p u t t i n g c a r b o n b e n e a t h t h e s u r fa c e , s e q u e s t e r i n g i t i n s o me w a y
c h e a p e r t h a n $ 3 0 a t o n , b e c a u s e s i m p l y s t a t e d , w e c a n 't r e mo v e $ 1 2
t r i l l i o n f r o m o u r e c o n o my e v e r y y e a r f o r t h e n e x t 2 0 y e a r s a n d b e
c o mp e t i t i v e w i t h t he r e s t o f t h e w o r l d .
              T h e r e a r e a f e w t hi n g s t h a t w e 'v e g o t t o d o r i g h t n o w . N o w , I
u n d e r s t a n d p e o p l e a r e s a y i n g w e ' v e g o t t o mo v e f a s t ; I 'm o n e o f t h e m.
B u t h o w a b o u t i f w e s t a r t t h e n e w fa c i l i t i e s t h a t w e p r o d u c e i n t h i s
c o u n t r y s e q u e s t e r i n g t h e c a r b o n d i o x i d e ? Pe o p l e a r e t a l k i n g a b o u t c o l d
a m mo n i a t r e a t me n t o f e x i s t i n g p u l v e r i z e d c o a l p l a n t s s o t h a t y o u c a n
r e mo v e t h e c a r b o n d i o x i d e a s a l i q u i d a n d s e q u e s t e r i t . T h a t ' s n o t 3 0
b u c k s a t o n . N e a r a s w e c a n t e l l , t h a t c o u l d b e 1 0 0 , mo r e . H o w a b o u t
if we incentivize all new production, all new production, to carbon
c a p t u r e , a n d l e t 's s t a r t i n pl a c e s w h e r e y o u c a n c a rb o n c a p t u r e wi t h
enhanced oil recovery because now you have a double win. You
i n c r e a s e d o me s t i c o i l p r o d u c t i o n a n d y o u 'r e s t o r i n g , c a p t u r i n g c a r b o n
in those geologic zones.
              Now, there are those who would give up the good for the perfect.
T h e y s a y b u t e n h a n c e d o i l r e c o v e r y o nl y c a p t u r e s 6 5 p e r c e n t . We w a n t
t o s t o r e 9 0 p e r c e n t . We l l , s i mp l y s t a t e d t o d a y , w e d o n 't h a v e t h e
technology to assure that we can get to 90 percent.
              So set a standard at 65 percent, and I can assure you there would
b e a d o z e n o f t h e s e p l a nt s bu i l t a n d a l l o f t h a t C O 2 w o u l d ma k e i t t o
                                                     - 190 -
e n h a nc e d o i l r e c o ve r y . L e t 's g e t s t a r t e d . B e c a u s e i f w e w a i t f o r t h e
p e r f e c t , we ' l l l o s e .
            HEARING COCHAIR VIDENIEKS: Okay. So basically I guess
a t e n - ye a r t i me f r a me , t h e w i t ne s s a c t u a l l y me n t i o n e d t h e l i a b i l i t y
p r o bl e m, t h e p os s i bi l i t y o f t he C O 2 mi g r a t i n g t o w a t er s u p p l i e s , ma y b e
e s c a p i n g b a c k u p , a n d t h e r e i s , I t h i n k y o u me n t i o n e d a l i a b i l i t y i s s u e
t h a t 's n o t r e s o l v e d . T he l e g a l p a r t , I g u e s s , C o n gr e s s c a n mo v e q u i c k l y
on.
            B u t a l s o s h e t e s t i f i e d t h a t t h e s c a l e o f t h e p l a nt s b e i ng d e ve l o pe d
a t t h e c o m me r c i a l s c a l e i s h u g e b e c a u s e t h e p r e s s u r e s c a n n o t b e
c r e a t e d i n s ma l l s c a l e s i t u a t i o n s . S o I w o u l d g u e s s a t e n - y e a r n u m b e r
i s a , ma y b e n o t a g o o d n u mb e r b u t a r e a l i s t i c n u mb e r .
            M R . S C H W E I T Z E R : I t ' s a ma r k o n t h e w a l l . I t ' s a p l a c e t o
b e g i n . I ' m a s c i e n t i s t . I ' m i n v o l v e d i n t h e s e t hi n g s . I 'm w a t c hi n g t h e
d e v e l o p me n t o f p u b l i c p ol i c y , a n d I 'd b e s u r p r i s e d i f w e t e n y e a r s f r o m
n o w h a d e v e n c o mp l e t e d t h e pu b l i c p o l i c y , l e t a l o n e t h e
c o m me r c i a l i z a t i o n o f t h e s e p r o j e c t s .
            HEARING COCHAIR D'AMATO:                                          Thank you.               Thank you.
C h a i r ma n B a r t h o l o me w .
            C H A I R M A N B A R T H O L O M E W: T h a n k y o u v e r y mu c h a n d t h a n k
y o u a g a i n t o o u r w i t n e s s e s f o r t a k i n g t i me o u t o f t h e i r b u s y a n d
i mp o r t a n t w o r k i n o r d e r t o a p p e a r b e fo r e u s .
            T w o q u e s t i o n s o n my e n d . O n e i s c a n y o u t a l k t o me a b o u t h o w
y o u i d e n t i f i e d t h e b u s i n e s s o p p o r t u n i t i e s t h a t c o mp a n i e s i n y o u r s t a t e s
are doing with China? Are you getting the kind of assistance from the
f e d e r a l g o v e r n me n t t h a t y o u n e e d t o b e g e t t i ng i n or d e r t o fu l l y
identify and take to fruition the opportunities? Are the opportunities
b e i ng i de n t i fi e d b y i n d i v i d u a l b u s i n e s s e s ? H o w d o e s t ha t p r o c e s s
work?
            A n d t h e n t h e s e c o n d q u e s t i o n i s a s y o u l o o k t o t h e e c o n o mi c
f u t u r e o f y o u r i n d i v i d u a l s t a t e s i n t e r ms o f o p p o r t u n i t i e s w i t h C h i n a ,
a r e mo r e o f t h e o p p o r t u n i t i e s g o i n g t o c o me f r o m s a l e s o f c o a l o r s a l e s
of coal-related technology?
            M R . M A N C H I N : I n We s t V i r gi ni a , w e d o t h e s a me t y pe o f
mi n i n g , w h i c h i s d e e p mi n i n g , u n d e r g r o u n d mi n i n g , t h a t t h e y 'r e d o i n g
i n mo s t o f C h i n a w h e r e mo s t o f t he i r p r o d u c t i o n i s c o mi n g f r o m. S o
w i t h t h a t , o u r p e o p l e i n We s t V i r g i n i a , t h e ma n u f a c t u r e r s , w h e t h e r i t
b e t h e c o n v e y e r s , w h e t h e r i t b e t h e p r e p p l a n t s , w h e t he r i t b e t h e
ma c h i n e r y , w h a t e ve r i t t a ke s . We 'v e b e e n d o i n g t h i s fo r q u i t e s o me
t i me s o i t w a s a g r e a t o p p o r t u n i t y w i t h t h e t r a d e p o l i c i e s .                     But
b a s i c a l l y l e t t h e p r i va t e s e c t o r g o o v e r a n d d e t e r mi n e h o w t h e i r
relationships are going to be. So we have people that are over there
t h a t a r e s e l l i n g e q u i p me n t , t h a t a r e b a s i c a l l y t r a i n i n g C h i n e s e a s f a r a s
i n t h e u s e o f e q u i p me n t .
                                                      - 191 -
            T h e y a r e a l s o d o i n g ma n u f a c t u r i n g , w h e t h e r i t b e ma n u f a c t u r i n g
h e r e a n d a s s e mb l y t h e r e , o r v i c e v e r s a . T h e y c an d o t ha t . T h e y 'r e a l s o
i n j o i n t v e n t u r e s o f mi n i n g . S o w e h a v e We s t V i r g i n i a c o mp a n i e s t h a t
h a v e b e e n h i s t o r i c a l l y mi n i n g c o mp a n i e s , t h e y a r e n o w mi n i n g i n C h i n a
o r i n a c o l l a b o r a t i o n w i t h t h e C h i ne s e g o v e r n me n t o r t h a t p r o v i n c e i f
you will.
            S o t h e r e 's a g r e a t c o l l a b o r a t i o n .        I just entertained a group
y e s t e r d a y t h a t c a m e t o We s t V i r g i ni a a n d I 'l l b e g o i n g t o t h e c o a l s h o w
i n N o v e mb e r . C h i na i s v e r y s e r i o u s a b o u t c o a l a n d t h e c o a l p r o d u c t i o n
a n d t h e r e s o u r c e s t h e y h a v e a n d h o w t h e y 'r e go i n g t o us e i t f o r t h e
d e v e l o p me n t o f t h e i r c o u n t r y .
            We c a n l e a r n a n a wf u l l o t , b u t i t 's a l s o a n e c o n o mi c o p p o r t u n i t y
f o r a s t a t e l i k e o u r s w h o d o e s a l o t o f t h e ma c h i n e w o r k a n d t h e
technical end.
            C H A I R M A N B A R T H O L O M E W: G o v e r n o r S c h w e i t z e r .
            M R . S C H W E I T Z E R : We l l , t h e s h o rt a n s w e r i s t h a t i t w i l l b e
c o a l t e c h n o l o g y , n o t c o a l s a l e s , b e c a u s e C h i n a i s a l r e a dy a n e t e x po r t e r
of coal.             T h e y i mp o r t s o me c o a l a n d t h e y e x p o r t s o me c o a l , b u t
f r a n k l y , t h e y 'r e l a r g e c o a l p r o d u c e r s , t h e y ' l l c o n t i n u e t o b e s o , a n d
t h e y w i l l b e e x p o r t e r s o f c o a l f o r t h e f o r e s e e a b l e f u t ur e .
            A s t o c o m me r c i a l i z i n g b u s i n e s s o p p o r t u n i t i e s a n d a s s i s t a n c e
f r o m t h e f e d e r a l g o v e r n me n t , I t h i nk t h a t o n c e a g a i n i t ' s s t a t e s a n d
p r i v a t e b u s i n e s s w h o j u s t t a k e t he l e a d h e r e , a n d f r a n k l y C h i n a h a s
t a ke n t h e l e a d t h e ms e l v e s . Th e y a r e t h e o n e s w h o a r e r e c o g n i z i n g t h a t
they have an energy crisis. They recognize that coal is going to be
p a r t o f t h e i r f u t ur e , a n d s o t h e y 'v e be e n r e a c h i n g o u t t o t h e w o r l d 's
t e c h n ol o gy c o mp a n i e s , w h e t h e r t ha t b e S h e l l o r G e ne r a l El e c t r i c o r
Sasol or RENTEC, and they have been putting partnerships together to
b u i l d c o a l g a s i f i c a t i o n a n d l i qu e f a c t i o n i n C h i n a .
            Wh e r e d o e s i t a l l e n d ? I d o n 't k n o w . Wi t h c e n t r a l p l a n n i n g ,
s o me t i me s t he r e s ul t i s s pe c t a c ul a r a nd s o me t i me s n o t s o mu c h , bu t w e
c a n s e e t h a t t h e y h a v e a d e s i r e t o p r o d uc e d o me s t i c e n e r g y , n e w
t e c h n o l o g i e s u s i n g c o a l , a n d w e ha v e c o mp a n i e s t h a t a r e o n t he
forefront in developing that technology.
            S o t he r e i s a d e s i r e f o r c o m me r c i a l i z a t i o n o f n e w t e c h n ol o gi e s i n
C h i n a , a nd a p p a r e n t l y t h e y 'r e w i l l i n g t o d o s o me o f t h o s e s o r t o f
e x p e r i me n t a l c o mme r c i a l i z a t i o n s t h a t w e 'r e n o t . S o a s i t t u r n s o u t , w e
ma y a c t u a l l y b e g o i n g t o Ch i n a t o s e e h o w i t w o r k e d o u t a n d n o t t h e
other way around.
            M R . M A N C H I N : T h e Wo r l d E n e r g y O u t l o o k f o r 2 0 0 6 p r e d i c t e d
t h a t C h i n a w o u l d s u r p a s s C O 2 e mi s s io n s o f t h e U n i t e d St a t e s b y 2 0 0 9 .
T h a t t o o k u s a l o n g t i me t o g e t w he r e w e a r e t o d a y , a n d t h e y 'r e g o i n g
t o s u r p a s s u s i n a v e r y s h o r t p e r i o d o f t i me . B u t t he y 'r e n o t g oi n g t o
s l o w d o wn o n t h e b u i l d i n g o f e n e r g y .
                                                    - 192 -
             C H A I R M A N B A R T H O L O M E W: D o y o u r c o mp a n i e s h a v e t h e
s a me k i n d s o f f e a r s t h a t c o mp a n i es i n o t h e r s e c t o r s o f o u r e c o n o my
h a v e , t ha t t h e y 'r e de v e l o pi n g t h e t e c h no l o g y a n d t h e C h i ne s e a r e e i t h er
s t e a l i n g t h e t e c h n o l o g y o r t h e y 'r e s o r t o f a f o r ce d t e c h n o l o g y t r a n s f e r ?
a r e t h e o p p o r t u n i t i e s g o i n g t o c o n t i n u e t o b e t h e r e f o r t h e c o mp a n i e s i n
We s t V i r g i ni a a n d i n M on t a n a t h a t a r e d e v e l o p i n g t he t e c h n o l o g y t o
continue to developing technology here, and what about the
ma n u f a c t u r i n g o f t h e e q u i p me n t ?
             MR. MANCHIN:                          The thing that I was encouraged about
y e s t e r d a y b e c a u s e w i t h t h e t r a g e d i e s w e 'v e h a d i n t he mi n i n g i n d us t r y
i n We s t V i r gi n i a i n t he l a s t y e a r , w e 'v e r e a l l y a c c e l e r a t e d o ur mi n e
s a f e t y l a w s a n d r u l e s . We 'r e a bo ut t w o y e a r s a h e a d o f t h e f e d e r a l
g o v e r n me n t , a n d w e 'r e i m p l e me n t i n g t h i s m o n t h s o me o f t h e f a r -
r e a c h i n g a d v a n c e s o f k e e p i n g o u r mi n e r s s a f e .
             I s p o k e t o o u r Ch i n e s e d e l e g a t i o n y e s t e r d a y a n d t h e y w e r e
i n t e r e s t e d , v e r y mu c h s o , w h i c h w a s v e r y e n c o u r a g i n g , s o w h e n w e g o
there we're taking our legislation with us and showing them all the new
t e c h n o l o g y t h a t 's wo r ki n g f o r u n d e r g r o u n d c h a mb e r s a n d a l s o t r a c k i n g
d e v i c e s s o w e c a n ma k e s u r e w e c a n k e e p o ur mi n e r s s a f e .
             So with those type of technologies there, and the need to be able
t o mi n e c o a l i n a mu c h s a f e r e n v i r on me n t , b u t a l s o t h e t e c h n o l o g i e s , I
h a v e n o t h e a r d t h e c o n c e r n s f r o m o u r c o mp a n i e s t ha t t he y h a ve s t o l e
o u r l a t e s t a n d g r e a t e s t t e c h n o l o g y . I t 's b a s i c a l l y a c o l l a b o r a t i v e s h a r i n g
o f i t , a n d t h e y 'r e d e v e l o p i n g a t s u c h r a p i d r a t e s t h e y 'r e g o i n g t o
i n c r e a s e t h e i r p r o d u c t i o n f r o m 1 . 7 mi l l i o n a d a y t o 3 . 2 b y 2 0 2 0 . T h a t 's
a t r e me n d o u s t e c h n o l o g y a d v a n c e me n t t h a t 's g o i n g t o b e g a r n e r e d i n
o r d e r f o r t h a t t o h a p p e n . Y o u c a n 't d o i t w i t h wh a t w e 'r e d o i n g t o d a y .
             I t w i l l be t h e s a me a s h a p pe n e d i n t h i s c o u nt r y i n t h e '40 s a n d
' 5 0 s . We h a d h u n d r e d s o f t h o u s a n d s o f p e o p l e w o r ki n g i n t h e c o a l
i n d u s t r y i n t h e s t a t e o f We s t V i r g i n i a . N o w , we h a v e a f e w t h o u s a n d
b u t w e 'r e p r o d u c i n g mo r e c o a l t h a n e v e r w i t h t e c h n ol o g y . I t w i l l b e
t h e s a me . A n d i t w i l l d e p e n d o n t h e t o t a l c o l l a b o r a t i o n .
             C H A I R M A N B A R T H O L O M E W: G o v e r n o r S c h w e i t z e r .
             M R . S C H WE I T Z E R :                  I n c o a l t ec h n o l o g i e s , l i k e a l o t o f
t e c h n o l o g i e s , t h e r e a r e c h a l l e n g e s b e c au s e C h i n a ' s r e c o r d i n r e s p e c t i n g
intellectual property rights has not been stellar. And so I view these
p a r t n e r s h i p s a r e c o m me r c i a l i z a t i o n p a r t n e r s h i p s , a n d s o t h e c o mp a n i e s
will be partners in the production of the fuel and the production of the
e l e c t r i c i t y , a n d t h e y w i l l r e a p t he r e w a r d s t h r o u g h a c t u a l l y p r o d u c i n g
t h e p r o d u c t s wi t h t h e f u l l e x p e c t at i o n t h a t a s t i me g o e s f o r w a r d , t h o s e
i n t e l l e c t u a l p r o p e r t y r i g h ts wi l l j u s t ki n d o f s hi f t i n t o t he g e n e r a l s p a c e
in China.
             I t ' s k i n d o f t h e w a y i t w o r ks , b u t f o r a l o t o f t he c o u n t r i e s a r o u n d
the world when they do business in China, they recognize that, and so
                                                        - 193 -
t h e y b e c o me e q u i t y p a r t n e r s i n p r o d u c t i o n , a n d I t hi n k t h a t 's w h a t
w e 'r e s e e i n g i n t h e e n e r g y wo r l d a s w e l l .
            C H A I R M A N B A R T H O L O M E W: O k a y . T h a n k y o u .
            H E A R I N G C O C H A I R D ' A M A T O : T h a n k y o u . C o mmi s s i o n e r
Reinsch.
            C O M M I SS I O N E R R E I N S C H : T h a n k y o u , b o t h o f y o u , fo r s o me
v e r y i n t e r e s t i n g a n d h e l p f u l t e s t i mo n y . F o r a n o n - e x p er t l i k e me , i t 's
b e e n a r e a l e d u c a t i o n a n d I a p p r e c i a t e t h a t . I 'd l i k e t o g e t y o u t o f o c u s
a l i t t l e bi t o n c o s t s o r s t i c k s r a t he r t ha n c a r r ot s w h i c h i s w h e r e y ou 'v e
been.
            M o s t o f t h e d i s c u s s i o n h a s b e e n a b ou t h o w t o, a s I i n t e r pr e t i t ,
e n h a n c e c o a l p r o d u c t i o n a n d u s e i t i n a w a y t h a t ' s s a f e fo r t h e mi n e r s
a n d e n v i r o n me n t a l l y s o u n d , w h i c h i s a l l i mp o r t a n t . I t h i n k w e a l l t h i n k
t h o s e a r e i mp o r t a n t t h i n g s , b u t I 'd l i k e t o g o b a c k t o t h e f o u r b i l l i o n
b a r r e l p r o b l e m t h a t y o u me n t i o n e d , Go v e r n o r Sc h w e i t z e r , a n d a s k y o u
b o t h t o t a l k a b o u t t h e c o s t s t h a t a r e g o i n g t o e n s u e fr o m d o i n g a l l t h e
v a r i o u s t h i n g s we 'r e g o i n g t o h a v e t o do t o de a l w i t h t h a t p r o bl e m.
            Y o u ma d e a g o o d p o i n t , t h a t w e c a n 't a d d r e s s t h e p r o b l e m
adequately without coal. I think likewise you would probably agree we
c a n 't a d d r e s s t he pr o b l e m s o l e l y t hr ou g h c o a l . S o w e 'r e g o i n g t o h a v e
t o d o s o me o t h e r t h i n g s a s we l l , s o me o f w h i c h y o u a l l u d e d t o .
            I ' m i n t e r e s t e d i n a n y c o m m e n ts y o u mi g h t h a v e o n t h e c o s t s t o
t h e e c o n o my , n o t t h e c o s t s i n a p p r o p r i a t e d f u n d s o f v a r i o u s R & D
p r o g r a ms o r p r i c e f l o o r s o r t h i n g s t h a t t h e f e d e r a l g o v e r n me n t c a n p a y
f o r , b u t t h e e c o no mi c c o s t s i n t e r ms o f g r o w t h , u n e mp l o y me n t o r
e mp l o y me n t , t h i ng s l i ke t ha t , o f t a k i ng t h e s t e p s t ha t we 'r e g o i ng t o
have to take to get where I think we all want to be.
            M R . S C H W E I T Z E R : I t ' s b e e n e s t i ma t e d b y t h o s e i n i n d u s t r y t h a t
t o s h i f t f r o m p u l ve r i z e d c oa l e l e c t ri c i t y p r o d u c t i o n , f o r e x a m p l e , i n
t h i s c o u n t r y t o i n t e g r a t e d g a s c o mb i n e d c y c l e s o t h a t w e c o u l d p r o d u c e
t h e e l e c t r i c i t y w i t h o u t p u t t i n g c a r b o n d i o x i d e i n t o t h e a t mo s p h e r e , i n
f a c t , we g e t a p u r e s t r e a m o f c a r b o n d i o x i d e a nd p u mp i t b a c k i n t o t h e
e a r t h , t ha t w o u l d i n c r e a s e t he c o s t o f e l e c t r i c i t y t o c o n s u me r s b y 2 5 t o
40 percent.
            S o u n d s l i k e a b i g n u mb e r . B u t w h e n y o u c o n s i d e r t h a t f o r t h e
l a s t 5 0 y e a r s , o u r e n e r g y c o n s e r v a t i o n h a s i mp r o v e d b y a b o u t 1 . 5
p e r c e n t p e r y e a r , i t me a n s t h a t w e w o u l d g o b b l e u p t h a t a d d i t i o n a l c o s t
d u r i n g t h e n e x t 1 5 y e a r s j u s t b a s e d o n o u r i n h e r en t a b i l i t y t o c o ns e r ve
e n e r g y , t o f i n d n e w s y s t e ms t h a t g e t mo r e p r o d u c t i o n w i t h f e w e r
e l e c t r o n s . A n d s o s o me w o u l d s a y t h a t 2 5 p e r c e n t c o s t w o u l d h a v e t o
b e p a i d f o r i n s o me o t h e r s e c t o r o f t h e e c o n o my .
            I v i e w i t c o mp l e t e l y d i f f e r e n t . I s e e t h i s a s a n o p p o r t u n i t y i n
developing new technologies, and when we invested all of this
p u b l i c / p r i v a t e p a r t n e r s h i p i n t h e N A S A p r o g r a m, t h e r e w e r e v e r y f e w
                                                     - 194 -
a t t h a t t i me w h o s a i d , o h , my g o s h , h o w c a n w e a f f o r d t o p u t a ma n o n
t h e mo o n ?
            A n d a s we l o o k i n t h e r e a r v i e w mi r r o r t o d a y , e v e r y t h i n g f r o m
t h e j e t s t h a t w e f l y i n t o n e w w a y s o f mo v i n g e n e r g y a n d d e v e l o p i n g
t h e f u e l c e l l t e c h n o l o g y , e ve r y t h i n g t o t h e Fr i s b e e , i t w a s b a s e d o n t h a t
r e s e a r c h a n d d e v e l o p me n t a t N A S A .
            T h e r e 's v e r y f e w p e o p l e i n t h i s c o u n t r y t o d a y wo u l d s a y t h a t t h a t
h u g e i n v e s t me n t t h a t w e ma d e , t h a t p u b l i c / p r i v a t e p a r t n e r s h i p , w a s a
mi s t a k e . T h i s i s a g r e a t e r op p o r t u ni t y t h a n e v e n t h e s p a c e r a c e . T h i s
o p p o r t u n i t y t h a t 's p r e s e n t e d t o u s t o d a y c o u l d b e t h e g r e a t e s t e n g i n e
f o r A me r i c a 's t e c h n o l o g y a n d i n n o v a t i o n i n t h e h i s t o r y o f t h i s c o u n t r y
if we get it right.
            I f w e g e t i t w r o n g , a c o u n t r y l i k e C h i n a ma y l e a d a n d t h e y w i l l
b e t h e e x p o r t e r s o f t hi s ne w t e c h n ol o gy .
            M R . M A N C H I N : I h a v e t o a g r ee w h o l e h e a r t e d l y . I j u s t t h i n k
the upside is so great that--we know the profits are there with the oil
c o mp a n i e s ma k i n g r e c o r d p r o f i t s , u n h e a r d o f , a n d i f y o u l o o k a t
b a s i c a l l y t h o s e t y p e s o f i n v e s t me n t s t h a t w e ' v e ma k e i n t h i s c o u n t r y t o
s e c u r e e n e r g y i n d e p e n d e n c e a n d t he r e t ur n a s fa r a s i n hu ma n c a p i t a l
a n d t h e j o b s a n d t h e i n v e s t me n t s t h a t w o u l d b e r e q u i r e d i n o r d e r t o
a t t a i n t h a t , i t w o u l d b e a t r e me n d o u s w i n d f a l l f o r t h i s c o u n t r y a n d f o r
t h e s t a t e s t ha t w o ul d pa r t a k e i n i t . So I s e e no t hi n g b ut a n u ps i d e t o
this.
            C O M M I S S I O N E R R E I N S C H : I g u e s s w h a t I 'm t r y i n g t o g e t y o u
t o c o m me n t o n , a n d I ' m n o t s u c c e e d i n g , b u t t h a t 's a l l r i g h t , i s t h a t i f i t
w e r e t h a t g o o d a t h i n g a nd i f i t w e r e t h a t o b v i o u s , y o u t h i n k w e wo u l d
h a v e f i g u r e d t h i s o u t a n d s t a r t e d d o i n g i t a l o n g t i me a g o .
            M R . M A N C H I N : I 'd j u s t m e n t i o n t h e p r o f i t s . I t h i n k t h e p r o f i t s
t h a t a r e i n c e r t a i n h a n d s r i g h t n o w p r e v e nt t h i s f r o m h a p p e n i n g .
            Y o u d o n 't s e e a n y o f t h e l a r g e o i l c o mp a n i e s j u mp i n g t o t h e f r o n t
t r y i n g t o b u i l d c oa l l i q u i f i c a t i o n ; d o y o u ?
            M R . S C H W E I T Z E R : L o o k , i t i s n ot g o i n g t o h a p p e n wi t h o u t t h e
v i s i b l e h a n d o f g o v e r n me n t s t e p p i n g o u t a n d s a y i n g t h i s i s t h e
d i r e c t i o n w e ' r e g o i n g t o g o . F o r e xa mp l e , i f M o n t a n a a l l b y h e r s e l f
d e c i d e d w e 'r e n o t b u i l d i n g a n y n e w e l e c t r i c i t y g e n e r a t i o n u n l e s s i t i s
c a r b o n n e u t r a l , w e l l , w e w o u l d n o t b e c o mp e t i t i v e wi t h N o r t h D a k o t a
a n d Wy o mi n g .
            I t ' s l i k e t h e l i o n t a m e r . T h e l io n t a me r g o e s t o t h e c e n t e r o f t h a t
c a g e a n d t h e r e a r e f o u r l i o n s i n a l l f o u r c o r n e r s . A n d t h a t l i o n t a me r
c a n t u r n h i s ba c k t o t h e ot h e r t hr e e l i on s a nd p u t ou t t h e w hi p a n d
f o r c e a l i o n t o d o s o me t h i n g i n f r o n t o f h i m. N o w , p e o p l e w o n d e r , h o w
i s i t t h a t t h o s e o t h e r t h r e e l i o n s d o n 't j u mp o n h i s b a c k , a t t a c k h i m,
b i t e h i m?
            I t ' s s i mp l y t h a t t h a t l i o n t a m e r h a s f o u r d i f f e r e n t s p e c i e s o f c a t s
                                                      - 195 -
a n d a l l o f t h e m a r e n a t u r a l e n e mi e s . So i f a n y o n e o f t h e m j u mp s o n t h e
l i o n t a me r , o n e o f t h e o t h e r l io n s wi l l j u mp o n t h e l i o n .
            N o w , i n a c o mp e t i t i v e ma r k e t , i f M o n t a n a de c i de s t h a t w e 'r e
g o i n g t o p r o d u c e o u r e l e ct r o n s mu c h c h e a p e r b y s p e n d i n g mo r e mo n e y ,
a l l o f o u r n e i g h b o r s w h o a r e t h e c a t s i n t h e c o mmu n i t y , t h e y w i l l j u mp
o n t h e ma r k e t a n d t a k e o v e r .
            But I can tell you this. It is the states in the western United
S t a t e s a n d s o me o t h e r s t a t e s w h o h a v e t a k e n t h e l e a d . I n C a l i f o r n i a ,
Wa s h i n g t o n , a n d Or e g o n , A r i z o n a , N ew M e x i c o , t h e y 'v e s a i d , i f w e 'r e
going to import new electrons, it will be carbon neutral. So it sends a
s i g na l t o a pl a c e l i k e M o n t a n a w h e r e w e h a v e c o a l a n d we h a v e wi n d .
I f w e 'r e g o i n g t o p r o d u c e n e w e l e c t r o n s f o r t h e m, w e 'r e g o i n g t o
p r o d u c e t h e m c a r b o n n e u t r al . I t me a n s w e 'r e g o i n g t o u s e wi n d p o w e r
a n d w e ' r e g o i n g t o u s e z e r o e mi s s i o n c o a l t e c h n o l o g y .
            S o o n c e t h e ma r k e t d e ma n d s t h e s e c h e a p - - t h e s e e l e c t r o n s t h a t d o
n o t e mi t a d d i t i o n a l c a r b o n , t h e n t h o s e o f u s w h o a r e p r o d u c e r s w i l l
p r o d u c e i t . S o i f t h e ma r k e t i s c r e at e d b y c e n t r a l p l a n n i n g , b y s t a t e s o r
b y t h e f e d e r a l g o v e r n me n t , w e 'l l g et w i t h i t . We 'l l p r o d u c e t h o s e
cleaner electrons.
            M R . M AN C H I N : L e t me j u s t s a y fr o m t h e f i n a n c i a l e n d o f i t ,
t h e s e wi nd f a l l p r o f i t s t h a t c o mp a n i e s h a v e e n j o y e d , i f t h o s e wi n d f a l l
p r o f i t s a ft e r t he y me e t t h e i r f i n a nci a l ma r k s , a n d t he y h a v e a wi n d f a l l
o n t o p o f t h a t , w h e r e t h e re w a s p u bl i c p o l i c y i n t hi s c o un t r y t ha t s a i d
t h a t t h e y h a d t o b e r e i n v e s t e d i n a l t e r n a t i v e e n e r g y , n o t - - I 'v e h e a r d
p e o p l e t a l k a b o u t w i n d fa l l t a x e s . Wh y s h o u l d t h e f e d e r a l g o v e r n me n t
w a n t t o t a x o r p e n a l i z e? M a k e t h e m p u t t h a t i n p r o d u c t i o n . M a k e
t h e m u s e t h o s e e x c e s s m o n i e s t he y 'r e ma k i n g , p u t i t b a c k i n
p r o d u c t i o n , s o t h e p e o p l e of t h i s c o un t r y w o n 't b e h u r t i n g a s b a d a s
t h e y a r e n o w , t o r e l i e v e u s a nd ma k e u s mo r e c o mp e t i t i v e .
            T o me , t ha t ma k e s a l l t h e s e n s e i n t he w o r l d . Wh e n i s t h e l a s t
t i me t ha t w e 'v e h a d a r e f i n e r y? I 'v e he a r d j u s t r e c e nt l y t h a t s o me o f
t h e r e f i n e r i e s a r e d o w n r i g h t n o w d u r i n g t h e p e a k s e a s o n t h a t 's d r i v i n g
t h e p r i c e s u p . T h a t d o e s n 't ma k e s e n se t o a n y r a t i o n a l W e s t Vi r g i n i a n .
I c a n t e l l y o u t h a t . B u t y e t w e d o n o t h i n g o n p u b l i c p o l i c y t o fo r c e
t h e s e mo n i e s t o b e i n v e s t e d .
            C O M M I S S I O N E R R E I N S C H : T h a t r a i s e s a wh o l e o t h e r s e t o f
issues. I think I better defer to others.
            M R . M AN C H I N : D i d y o u g e t w h e r e y o u w e r e g o i n g ?
            COMMISSIONER REINSCH: Part way.
            H E A R I N G C O C H A I R D 'A M A T O : C o m mi s s i o n e r H o u s t o n .
            C O M M I SS I O N E R H O U S T O N : T h a n k s t o b o t h o f y o u f o r b e i n g
h e r e t o d a y . I f e e l l i k e I 'v e g o n e t o c o a l s c h oo l a n d I s h o u l d h a v e a
d i p l o ma w h e n w e ' r e d o n e , b u t e v e r y t h i n g t h a t y o u h a v e s a i d i s v e r y
f a s c i n a t i n g a n d v e r y i nt e r e s t i n g . I w o u l d a g r ee a n d d i s a g r e e w i t h ma n y
                                                    - 196 -
t h i n g s t h a t y o u ' v e t al k e d a b o u t w i t h s o me o f y o u r p u b l i c p o l i c y
s o l u t i o n s , b u t w e c a n 't r e c o m me n d t o C o n g r e s s d o me s t i c a g e n d a u n l e s s
i t h a s a Ch i n a h a t on i t .
            T h e i mp o r t a n t t h i n g t h a t I w a n t t o b r i n g o u t o f t h i s h e a r i n g t h i s
mo r n i n g i s h o w a l l t h i s r e l a t e s t o o u r r e l a t i o n s h i p wi t h C h i n a , o u r
e c o n o mi c s e c u r i t y , o u r n a t i o n a l s e c u r i t y w i t h Ch i n a .
            F o l l o wi n g u p o n w h a t C o m mi s s i o n e r B l u me n t h a l a s k e d a l i t t l e
w h i l e a g o. T h e r e a r e di f f e r e n c e s b et w e e n u s a n d C h i n a . O u r p r o p e r t y
r i g h t s a r e a b s o l u t e l y c r i t i c a l t o wh o w e a r e a s a n a t i o n a n d o u r s u c c e s s ,
and China doesn't have any, which in a weird case like this, would
ma k e t h a t a l mo s t a p o s i t i v e f o r t h e m. I h a t e t o s a y t h a t o u t l o u d , b u t
the other thing we have here is political pressure.
            I lived in Texas and I tried to work with TXU and help them out
when they were trying to change nine yucky plants into 11 plants that
a r e u s i n g c l e a n c o a l t e c h n o l o g y , a n d e v e r y e n v i r o n me n t a l g r o u p i n t h e
c o u n t r y c o n v e r g e d o n T X U , h o o k e d u p w i t h t h e ma y o r s o f D a l l a s a n d
H o u s t o n , a n d i t 's a b o u t k i l l e d w h a t t h e y 'r e t r y i n g t o d o .
            T h a t 's a n o t h e r t h i n g t h a t C h i n a d o e s n ' t h a v e , I b e l i e v e , a r e t h e s e
i n t e r e s t g r o u p s t h a t c o me o u t a n d t ry t o f i g h t a n y t h i n g t h a t h a s t o d o ,
i f i t h a s t o d o w i t h c o a l , i t ' s b a d . E v e n i f i t ' s fi x i n g c oa l , i t 's s t i l l b a d .
S o t h a t 's s o me t h i n g t h a t w e s u f f e r u n d e r h e r e t h a t t h e y d o n 't h a v e .
            We h a v e a p a r a d i g m w i t h o u r r el a t i o n s h i p w i t h C h i n a o r s o i t
s e e ms a t t h i s p o i n t , w h i c h i s t h a t w e g o t h e r e a n d w e g i v e t h e m
technology and we give them advice on, in this particular case, energy
policy and tech transfer, which is great.
            G o v e r n o r S c h w e i t z e r , y o u a c t u a ll y i n a w a y b r o u g h t u p my o w n
q u e s t i o n w h e n y o u s a i d ma y b e w e c a n b e n e f i t f r o m w h a t t he y a r e
d o i n g . S o my q u e s t i o n i s , i s i t a p a r a d i g m t h a t w e s h o u l d c h a n g e i n
this particular case? Should we really closely follow what China's
doing with sequestration, with the coal-to-liquid, all the new
t e c h n ol o gi e s t ha t a r e e me r g i ng?
            Are there any state-to-state relationships that you know of that
really track how China is doing on advancing those technologies? Is
t h e r e p r i va t e s e c t o r s t ud y o f w h a t t h e y 'r e d o i n g w i t h t he t e c h n ol o gi e s ?
And we had a couple of people here yesterday who did these kinds of
s t u d i e s h e r e i n t h e U . S . o n p o l l u t i o n , o n e n e r g y , o n i mp o r t a n t i s s u e s
like that. Are there any studies here in the United States or any states
t h a t a r e l o o k i n g a t r e a l l y a n o f f i c i a l p r o g r a m t o t r a c k w h a t t h e y 'r e
doing with coal, especially with the sequestration, in China, that could
h e l p u s h e r e , t h a t we c o u l d s o r t o f p i g g y b a c k o n ?
            M R . S C H W E I T Z E R : I t ma y b e a l i t t l e b i t mo r e d i f f i c u l t t o t r a c k
e x a c t l y w h a t i s h a p p e n i n g i n C h i n a , b e c a u s e t h e r e 's n o t p u b l i c
disclosure on what contracts have been signed, so we hear from the
t e c h n ol o gy c o mp a n i e s a r ou nd t h e w or l d t ha t t he y 'v e s i g ne d a c on t r a c t .
                                                      - 197 -
We h e a r f r o m S a s o l . We h e a r f r o m S h e l l . We h e a r fr o m G E t h a t t h e y
have contracted to build.
            O u r i n f o r ma t i o n w i l l a c t u a l l y c ome f r o m s o me o f t h o s e p u b l i c l y
t r a d e d c omp a n i e s i n t he i r qu e s t t o b u i l d t h e s e n e w p r o j e c t s i n Ch i n a ,
a n d s o w h i l e w e 'l l p r o b a b l y n o t g e t s uc h g r e a t e x c h a n g e o f i n f o r ma t i o n
from the Chinese government per se, we do see a lot of Chinese
g o v e r n me n t o f f i c i a l s c o me t o o u r s t a t e s a n d v i c e v e r s a .
            B u t I t hi nk t he c ond u i t t o t h i s i nf o r ma t i o n w i l l b e t h o s e c o n t r a c t s
t h a t a c e n t r a l p l a n n e d g ov e r n me n t i s m a k i n g w i t h c o r p o r a t i o n s a r o u n d
the world, and, yes, we will learn from their technology because
i n s t e a d o f t a l k i n g a b o u t c o mme r c i a l i z a t i o n o f s o me o f t h e s e p r o j e c t s ,
t h e y 'v e a c t ua l l y l a i d t h e mo n e y d o w n a n d t he y' r e b e g i n n i n g t o b u i l d
these projects.
            T h e y 'l l ma k e s o me mi s t a k e s . E ve r y b o d y w a n t s t o b e t h e f i r s t o n e
t o b u i l d t h e s e c o n d p l a n t . We l l , Ch i n a i s i n a p o si t i o n o f s a y i n g
t h e y 'r e g o i n g t o b e t h e fi r s t o n e t o bu i l d t he fi r s t on e . A n d s o w e 'l l
l e a r n f r o m s o m e o f t h e i r m i s t a k e s , a nd t h e y w i l l l e a r n f r o m u s s o me o f
the technologies that we have that will contribute to the possibilities
of commercializing some of these big IGCC plants.
            T h e r e a r e s o me a d va n t a g e s wi t h c l e a n c o a l t e c hn o l o g y , a n d t h a t 's
s i mp l y t h i s : a s t h e p r i c e o f e n e r g y g o e s u p a n d t h e p r i c e o f c o a l g o e s
u p , J o e M a n c h i n i s i n a r e ma r k a b l e p l a c e w h e r e t h e i r c o a l i s w o r t h - -
h o w mu c h a t o n i n We s t V i r g i n i a ?
            MR. MANCHIN: It can go up to 80 to $100 a ton, anywhere
from 30 to 80.
            MR. SCHWEITZER: In Montana, once you've got it on a rail
c a r , y o u 'r e t a l k i n g s i x o r $ 8 a t o n . S o i f y o u 'v e g o t s i x o r $ 8 a t o n
c o a l , y o u 'r e n o t s o c o n c e r n e d ab o u t h o w mu c h e n e r g y y o u g e t f r o m
e v e r y t o n , b u t i f y o u 'v e g o t c o a l t h a t i s w o r t h $ 8 0 a t o n o r $ 1 0 0 a t o n ,
o r $ 1 2 0 a t o n , t h e n c o a l g a s i f i c a t i o n w h i c h s q u e e ze s a l l o f t h e e n e r g y
out of the coal as opposed to only about 25 percent with our current
technology, it's like with a pig. They get everything out of the pig
including the squeal when you use IGCC.
            B u t w i t h o l d c o a l t e c h n o l o g y , y o u 'r e s e n d in g 7 5 p e r c e n t o f t h e
e n e r g y u p t h r o u g h t h e s t a c k . S o , a s w e c o n t i n u e t o mo v e u p i n t h e
v a l u e o f o u r e n e r g y , w e 'r e f i n d i n g t h a t i t 's d r i vi n g u s t o t h e s e n e w
t e c h n o l o g i e s s i mp l y b e c a u s e o f t h e c om me r c e o f t h e pr i c e o f e n e r gy .
            COMMISSIONER HOUSTON: Governor Manchin, I'd love to
hear your thoughts as well.                                      I'm wondering if perhaps a
r e c o m me n d a t i o n t h a t w e s h o u l d t h i n k a b o ut i s o n e t o e i t h e r E PA o r
DOE about really trying to track the progress in China because the
p a r a d i g m a l w a y s c o me s t h e o t h e r w a y a r o u n d .
            M R . M A N C H I N : We mi g h t h a v e a g o l d e n o p p o r t u n i t y . We ' v e
b e e n t a l ki n g t o t h e S h a n xi P r o vi n c e , w h i c h i s t h e l a r g e s t c o a l
                                                   - 198 -
p r o d u c i n g p r o v i n c e o f C h i n a , a n d i t 's v e r y mu c h l i k e We s t V i r g i n i a .
A n d t h e y 'r e w o r k i n g o n a n a g r e e me n t r i g h t n o w .                        O u r e c o n o mi c
d e v e l o p me n t o f f i c e i s w o r k i n g w i t h t h e i r e c o n o m i c d e v e l o p me n t o f f i c e .
T h e y w e r e o v e r y e s t e r d ay , t h e i r v i c e g o v e r n o r , a n d t h e y 'v e i n v i t e d u s
o v e r . We 'r e g o i n g o v e r a n d i f w e g e t t h i s wo r k i n g r e l a t i o n s h i p a n d
w o r k i ng a g r e e me n t b a s e d o n ma n y f a c e t s , w h i c h w i l l be f r o m c o a l mi n e
s a f e t y t o t h e h e a l t h a n d w e l f a r e o f t h e h u ma n f a c t or , t he mi n e r s , a l l t h e
w a y t o t h e t e c h n o l o g y , s h a r i n g i n t e c h n o l o g y , i t c ou l d b e t h i n g s t h a t
w e c o u l d t r y t h e r e t h a t w e c a n 't h e r e b e c a u s e o f r e g u l a t i o n s .
             T h e r e a r e s o ma n y d i f f e r e n t t h i n g s , a n d t h i s mi g h t b e a
w o n d e r f u l c o m mi t t e e t o r e c o m me n d w h e r e we j o i n i n t o a t y p e o f
r e l a t i o n s h i p t h a t we s h a r e a l l f a c et s o f p r o d u c t i o n t e c h n o l o g y a n d I
t h i n k t h a t w e c a n b o t h b e n e fi t b y t h a t . B u t w e ' r e v e r y c l o s e . We ' v e
b e e n t a l ki n g a n d w o r k i ng w i t h t he m.                         T h e y 'r e p u r s u i n g i t v e r y
a g g r e s s i v e l y . T h e y w a n t t h a t r e l a t i o n s h i p a n d t h e y k n o w t h a t We s t
V i r g i n i a i s t h e s t a t e t h a t w o u l d b e t h e mo s t a l i g n e d w i t h t h e m t o d o
that relationship.
             I 'v e b a s i c a l l y b e e n w o r k i n g w i t h o u r d e l e g a t i o n h e r e i n
Wa s h i n g t o n a n d ma k i n g s u r e t h a t t h e p o l i c i e s o f t h i s g o v e r n me n t
w o u l d b e i n s y n c w i t h w h a t w e 'd b e t r y i n g t o d o , s o i t mi g h t b e
something we could further the cause of all.
             C O M M I SS I O N E R H O U S T O N : G r e a t . T h a n k y o u v e r y mu c h .
Appreciate it.
             H E A R I N G C O C H A I R D 'A M A T O :                          T h a n k y o u v e r y mu c h .
C o m mi s s i o n e r Fi e dl e r .
             C O M M I SS I O N E R F I E D L E R : I w a n t t o pu r s u e t he C hi ne s e v i e w
o f s e q u e s t r a t i o n . Y o u s a i d e a r li e r t h a t y o u d i d n ' t t h i n k t h e y w e r e
p u s h i n g t h e i n i t i a t i v e . Ha v e y o u h a d d i s c u s s i o n s a b o u t t h e e c o n o mi c s
o f i t wi t h t h e m?
             M R . M A N C H I N : We h a v e n 't g o t i nt o t h a t . I w i l l w h e n I t r a ve l
o v e r a n d s p e n d t i m e w i t h t h e m. I h av e n o t g o t t e n a n i mp r e s s i o n t h a t
t h e y w e r e h o l d i n g b a c k t h e c o n s t r u c t i o n o r t h e f o r w a r d mo v e me n t o f
the needs that they have for liquids out of coal, trying to get more
v a l u e o u t o f t h e i r c o a l , b e i n g a b l e t o g e t mo r e p r o d u c t i o n i n t h e i r c o a l
mi n e s .
             T h a t i s t he f o r e mo s t t hi n g o n t h e i r mi n d s r i gh t no w f r o m w h a t I
h a v e b e e n a b l e t o a s c e r t a i n f r o m t h i s. I ' m s u r e t h a t w e c a n ma k e t h a t
p a r t o f o u r a g r e e me n t , w o r k i n g w i t h t h e m t o s e e i f t h e r e 's s o me o t h e r
t e c h n ol o gi e s . T h a t 's t h e q u e s t i o n t h a t w a s j u s t a s k e d n o w ; h o w w o u l d
t h a t w o r k i n p a r a l l e l t o b e n e f i t u s ? B u t w i t h t ha t , I h a ve n o t s e e n t h e
c o n c e r n a b o u t , w e l l , w e h a v e t o s e q u e s t e r b e f o r e we c a n b u i l d a c o a l
l i q u e f a c t i o n p l a n t o r a n o t h e r c oa l - f i r e d p l a n t o r I G C C p l a n t .
             C O M M I SS I O N E R F I E D L E R : Y e s , t h e y ' r e o n a f a s t t r a c k .
             M R . M A N C H I N : T h e y 'r e o n a f a s t t r a c k . B y '2 9 , t h e y 'r e g o i ng
                                                     - 199 -
t o s u r p a s s u s . T h e y 'r e b u i l d i n g . We ' r e s t i l l t a l k i n g a b o u t b u i l d i n g t h e
f i r s t I G CC p l a n t . H o w ma n y d o t h e y h a v e i n p r o d u c t i o n n o w ?
            M R . S C H W E I T Z E R : A f e w . T h e a dv a n t a g e i s t h i s : w h i l e t h e y ' r e
n o t t a l k i ng a b o ut c a r b o n s e qu e s t r a t i o n, a t l e a s t t h e y 'r e b ui l di n g p l a n t s
t h a t a r e c a r b o n c a pt u r e r e a dy.
            M R . M AN C H I N : R i g h t .
            MR. SCHWEITZER: Take the South Africans who have been
ma k i n g l i q u i d f u e l s f r o m c o a l f o r s o me 5 0 y e a r s . T h e r e ' s b e e n n o
c o mp u n c t i o n t o c a p t u r e t h e c a r b o n , b u t t h e y h a v e a p u r e s t r e a m o f
c a r b o n . I t j u s t r u n s r i g h t u p a p i p e a n d i nt o t h e a t mo s p h e r e .
            I n U z b e k i s t a n , t h e y 'v e b e e n e mp l o y i n g i n - s i t u c o a l g a s i f i c a t i o n
n o w f o r d e c a d e s , b u t o f c o u r s e t h e y 'v e d o n e i t b e c a u s e i t w a s
i n e xp e n s i v e t o p r o du c e t he c oa l g a s i n t h a t w a y , n o t b e c a u s e t h e y c o u l d
g e t a p u r e s tr e a m o f C O 2 .
            I n f a c t , I 'l l b e t y o u f i v e y e a rs a g o , t h e r e w o u l d n ' t h a v e b e e n a
w h o l e g r o u p o f p e o p l e t h a t r e p r e s e nt e d t h e n u mb e r o f p e o p l e t h a t w e
h a v e i n t h i s c i t y w h o w e r e s i t t i ng a r o u n d t a l k i n g a b o ut C O2 a n d c a r b o n
sequestration.                  So before we get so high and falutin about our
l e a d e r s h i p i n c a r b o n s e q ue s t r a t i o n , l e t ' s r e me m b e r w e d i d n 't e v e n t a l k
about it ten years ago.
            M R . M AN C H I N : R i g h t .
            M R . S C H W E I T Z E R : S o t h e y a t l e a s t a r e mo v i n g t o w a r d s c a r b o n
c a p t u r e r e a d y t e c h n o l o g y a n d t h a t 's a h e a d o f u s . N o w , w e w i l l d o t h e
r e s e a r c h a n d d e v e l o p me n t i n c a r b o n s e q u e s t r a t i o n b e c a us e t h a t 's w h a t
t h e e c o n o my o f t h e U n i t e d St a t e s c a n a f f o r d t o d o .
            We w i l l be t h e o ne s w h o t a k e t h e l e a d i n t h e d e v e l o p me n t o f t h i s
s e q u e s t e r i n g t e c h n o l o g y , n o t t h e C h i n e s e . T h e y ma y a c t u a l l y l e a d u s
in developing clean coal technology with carbon capture ready gases,
b u t n o t i n s e q ue s t e r i n g b e c a u s e t h a t c o s t s s o me e x t r a mo n e y .
            R i g h t n o w , w e d o n 't h a v e a n y s t a n d i n g b e c a u s e w e 'r e n o t
capturing the carbon, but once we develop this technology and we start
producing carbon as a pure stream CO2, and sequestering, then we can
g o b a c k t o o u r f r i e n d s a n d c o mp e t i t or s i n C h i na a n d s a y i f w e 'r e g o i n g
t o b e s h a r i n g a l l o f t h e se t e c h n o l o g i e s a n d i f w e 'r e g o i n g t o c o n t i n u e t o
b u y y o u r g o o d s a n d s e r v i c e s , a n d y o u 'r e g o i n g t o c o n t i n u e t o b u y o u r
g o o d s a n d s e r v i c e s , w e n e e d t o b e o n a l e v e l p l a y i n g f i e l d . We 'r e
s p e n d i n g mo n e y t o c a p t u r e , y o u 'r e n o t , s o l e t 's ge t i n t h e s a me g a me .
            C O M M I SS I O N E R F I E D L E R : S o w h a t 's t h e p r i n c i p a l o p p o s i t i o n
t h a t y o u 'r e f a c i n g h e r e i n Wa s h i n g t o n w h e n y o u r a i s e t h e s e i s s u e s a t
t h e e x e c u t i v e b r a n c h l e v e l o r e ve n o t h e r me mb e r s o f C o n g r e s s ?
            M R . S C H W E I T Z E R : A s y o u k n o w , i n t h i s t o w n , t h e r e a r e r o o ms
f u l l o f s ui t s w h o wo r k f or s p e c i a l i n t e r e s t s , a n d s p e c i a l i n t e r e s t s , f o r
t h e mo s t p a r t , l i k e s t a t u s q u o . I f y o u r e p r e s e n t b i g o i l , a n d y o u r c l i e n t
has $60 billion in cash, simply because they have been the conduit of
                                                     - 200 -
d e l i v e r i n g f o r e i g n o i l t o o u r e c o n o my a n d d e l i v e r i n g t h e c a s h b a c k t o
s o me d i c t a t o r , y o u l i k e t h e s t a t u s q u o . Y o u d o n 't w a n t t o c h a n g e
anything.
            I f y o u a r e w o r k i n g f o r a u t i l i t y t h a t h a s e l e c t r i ci t y g e n e r a t i o n
p o r t f o l i o t h a t i n c l u d e s o l d c o a l t e c h n o l o g y , y o u d o n 't w a n t t o c h a n g e
a n y t h i n g . I f y o u h a p p e n t o b e i n t h e wi n d b u s i n e s s , y o u j u s t , y o u d o n 't
like the coal business. If you happen to be in the nuke business, you
d o n 't l i k e t h e c o a l b u s i n e s s , a n d s o t he g r e a t e s t c h a l l e n ge t h a t w e h a v e
is that this town is built on the status quo.
            Y o u w a n t t o mo v e t h i s t o w n , y o u b e t t e r t a k e s o me c o n s i d e r a b l e
a mo u n t o f mo n e y a n d s o me t i me an d p r o b a b l y a w o r l d w i d e c r i s i s .
U n t i l w e g e t o n e o r mo r e o f t h o s e a s a n e x u s , w e p r o b a b l y a r e n ' t g o i n g
t o mo v e t h i s t o w n . Y o u a s k me w h a t t he gr e a t e s t c ha l l e n ge i s , i t 's
r o o ms f u l l o f s u i t s t h a t w o r k f o r p e o p l e w h o h a v e a l o t o f mo n e y w h o
want to keep the status quo.
            M R . M AN C H I N : I w o u l d a g r e e .
            C O M M I SS I O N E R F I E D L E R : T h a t ' s a d i r e c t a n s w e r . Y o u              were
t a l k i n g a b o u t e a r l i e r h o w y o u p a y f or i t a n d w h e t h e r t h e r a t e p a y e r
pays for it, and--
            M R . M A N C H I N : We ' r e a c o n t r o l l e d s t a t e .
            C O M M I SS I O N E R F I E D L E R : Y e s , I u n d e r s t a n d .
            M R . M A N C H I N : We 'r e s t i l l a c o nt r ol l e d s t a t e . P u b l i c s e r vi c e
c o m mi s s i o n c o n t r o l s t h e r a t e s a n d i t 's a p a s s - t h r o u g h o p e r a t i o n .
            C O M M I SS I O N E R F I E D L E R :                 T h e b i o f u e l s d e v e l o p me n t h a s
r a i s e d a n u mb e r o f c o n c e r n s , a n d t he f i n a n c i a l , t h e e c o n o mi c i m p a c t s
h a v e b e e n i m me d i a t e . S o t h e p r i ce o f c o r n g o e s u p , a n d f o l k s ' f o o d
p r i c e s f o l l o w v e r y q u i c k l y , a n d b y t h e w a y , w e 'r e n o t p r o d u c i n g a l o t
o f f u e l y e t w i t h i t . Y e t , t h e e co n o mi c i mp a c t o n f o l k s a t t h e l o w e r
i n c o me l e v e l h a s b e e n p e r c e n t a g e- wi s e f a i r l y d r a ma t i c , a n d s h o u l d
continue.
            I don't know what the offset is on their gasoline prices or their
a u t o mo b i l e o p e r a t i o n p r i c e s .
            MR. MANCHIN:                       I t s e e ms l i k e t h e p o l i c i e s o f t h e f e d e r a l
g o v e r n me n t i s t h a t 's b e c o m e t h e d a r l i n g b e c a u s e t h e r e i s n o CO 2
e mi s s i o n s f r o m t h e p r o d u c t i o n , a n d w i t h t h a t b e i n g s ai d , i t l o o k e d l i k e
they threw caution to the wind as far as what the food chain would do
a n d w h a t t h e p e o p l e o n t h e l o w e r en d o f t h e s o c i o e c o n o mi c l a d d e r a r e
g o i n g t o e n d u r e j u s t f o r t h e s a k e t h a t i t s e e me d mo r e a c c e p t a b l e
w i t h o u t t r u l y t r y i n g t o c o me t o t h e t a b l e t o s e c u r e a s o l u t i o n . A n d I
t h i n k w e 'r e g o i n g t o p a y d i s a s t r o u s f o r t h i s .
            C O M M I SS I O N E R F I E D L E R : O r o n t h e w o r l d 's f o o d s u p p l y .
            M R . M A N C H I N : I t hi n k t he mo s t s u c c e s s f u l t h a t I 'm t o l d a n d
what I've read and studied has been with sugar cane. Sugar cane has
t h e b e t t e r y i e l d , I b e l i e ve ; a m I r i g h t o n t h a t ?
                                                    - 201 -
             MR. SCHWEITZER: Yes.
             C O M M I SS I O N E R F I E D L E R : Y e s , e n e r g y o u t p u t . T h a t 's r i g h t .
             MR. SCHWEITZER: That's right.
             M R . M A N C H I N : Y e s , s u g a r c a n e fo r t h e e t h a n o l , i f y o u w i l l ,
than what we are doing with corn, and corn has a rippling effect of
w h a t i t 's d o i n g t o t h e f o o d c h a i n .
             M R . S C H W E I T Z E R : Y e s . I t ' s f a i r l y c l e a r . I r a n t h e n u mb e r s f o r
you, that unless we get to that quantum leap of cellulosic ethanol, that
a l l o f t h os e a c r e s t h a t a r e de d i c a t e d t o e x p o r t e q u a t e t o 1 5 p e r c e n t o f
o u r l i q u i d f u e l d e m a n d a n d n o n e o f o u r e l e c t r i c i t y . S o i t 's a ve r y s ma l l
p l a ye r . I t g e t s a l o t o f a t t e n t i o n f r a n k l y b e c a u s e I t h i n k t h e r e ' s fo c u s
t e s t i n g a l l o v e r t h e c o u n t r y , a n d p e o p l e h a v e g o t te n t o a p o s i t i o n w h e r e
t h e y l i k e t o he a r t he w o r d e t h a n ol .
             S o i f y o u a r e i n Wa s h i n g t o n , D . C . , y o u s a y t h o s e wo r d s t h a t
people like to hear, and they seem to like that word.
             C O M M I SS I O N E R F I E D L E R : T h a n k y o u v e r y mu c h .
             MR. MANCHIN: Just one thing, I just think that basically what
w e h a v e t o f i n d e v e r y d a y a s b e i n g CE O s o f o u r s t a t e s - - a n d i t r e a l l y i s
w h a t w e d o e v e r y d a y - - w e m a k e d e c is i o n s e v e r y mi n u t e o f e v e r y d a y - -
t h a t w e 'r e l o o k i n g f o r b a l a n c e . F o r s o me r e a s o n , I w o u l d t h i n k t h a t
t h i s f e d e r a l g o v e r n me n t s h o u l d b e l o o k i n g a l i t t l e h a r d e r f o r b a l a n c e
t h a n w h a t w e 'r e f i n d i n g .
             Y o u 'r e n o t g o i n g t o g o v e r n f r o m t h e r i g h t o r t h e l e f t ; y o u 'r e
going to find a balance. If we can find a balance with our energy
needs and our energy ability to provide that, and we can look at other
c o u n t r i e s , y o u r r e l a t i o n s h i p a n d o u r r e l a t i o n s h i p w i t h C h i n a , i f t h a t 's
t h e c o u n t r y t h a t c a n h e l p u s f i n d t h a t b a l a n c e i n A me r i c a b e c a u s e t h e y
d o n 't h a v e t h e i mp e d i me n t s w e h a v e , w e c a n j o i n i nt o a c o o p e r a t i v e
r e l a t i on s hi p , I t h i nk i t 's s o me t h i n g t h a t w e p r o b a b l y s h o u l d e x p l o r e .
             C O M M I SS I O N E R F I E D L E R : T h a n k y o u v e r y mu c h .
             H E A R I N G C O C H A I R D 'A M A T O :                         T h a n k y o u v e r y mu c h .
C o m mi s s i o n e r Sh e a .
             HEARING COCHAIR SHEA: Thank you, Governors, for taking
t h e t i me t o b e h e r e t o d a y . I ' m n o t a s c i e nt i s t , I ' m n o t a n e c on o m i s t ,
but I am the grandson of a guy who worked in coal in Pennsylvania in
Pittston.             Q u e s t i o n , t wo q u e s t i o n s , o n e v e r y s p e c i f i c .           Governor
S c h w e i t z e r , y o u s a i d - - c or r e c t me i f I ' m w r o n g - - t h a t o n e - h a l f o f t h e
me r c u r y e mi s s i o n s i n M o n t a n a c o me f r o m C h i n a ?
             M R . S C H W E I T Z E R : N o . I t i s e st i ma t e d t h a t h a l f o f t h e n o n -
n a t ur a l l y o c c ur r i n g me r c u r y i n t he s ur f a c e , i n t h e w a t e r , i n t he a i r , i n
t h e w e s t e r n U n i t e d S t a t e s a r r i v e s f r o m C h i n a . S o i t 's a g l o b a l p r o b l e m
i s w h a t I 'm s a y i n g a b o u t me r c u r y .
             HEARING COCHAIR SHEA: Okay. Secondly, as a non-expert
i n t h i s a r e a , my u n d e r s t a n d i n g o f c ar b o n s e q u e s t r a t i o n i s t h a t y o u h a v e
                                                      - 202 -
t o t a k e t h e g a s , t h e C O 2 , a n d p u mp i t u n d e r g r o u n d i nt o g e o l o g i c a l
f o r ma t i o n s s o t h a t w e c a n k e e p i t t h e r e f o r 1 0 , 0 0 0 y e a r s , a n d G o v e r n o r
Schweitzer, you said that we probably could do 90 percent, have a 90
success rate in that.
            D o p e o p l e i n y o u r s t a t e h a v e e x p e r t i s e i n ma p p i n g t h e g e o l o g i c a l
f o r ma t i o n s t o - - y o u g o t t o k n o w w h e r e t o p u mp t h i s s t u f f .
            MR. MANCHIN: Sure.
            HEARING COCHAIR SHEA: And is this an area of potential
cooperation with China, the expertise of people in your respective
states on--
            M R . S C H W E I T Z E R : A b s o l u t e l y , a n d J o e me n t i o n e d t h e DO E h a s
f u n d e d r e g i o n a l c a r b o n s e q ue s t r a t i o n s t u d i e s . I n M o n t a n a , i t 's c a l l e d
t h e B i g Sk y S e q u e s t r a t i o n Pr o j e c t . A n d w e h a v e ma p p e d t h e g e o l o g y
o f M o n t a n a . We k n o w a p p r o x i ma te d e p t h s , wh i c h s a l t d o me s , w h i c h
s a l i n e a q u i f e r s , w h i c h b a s a l t f o r ma t i o n s , w h e r e i n t h e M a di s o n
L i me s t o n e t h a t we 'r e l i k e l y t o b e a b l e t o s t o r e i t , w h i c h o f t h o s e
enhanced oil recovery opportunities are going to be successful, and so
w e 'v e s p e n t a l i t t l e mo n e y o n t h i s , j u s t t o g i v e y o u a n i d e a .
            I t h i n k D e p a r t me n t o f E n e r g y h a s f u n d e d t h e B i g S k y
Sequestration Project to study the geologic structures of Montana and
Wy o mi n g , a p l a c e w h e r e w e h a v e $ 1 2 t r i l l i o n w o r t h o f c o a l , a n d
t h e y 'v e s pe n t a p p r ox i ma t e l y $ 1 8 mi l l i o n i n t h e l a s t f i v e y e a r s t o s t u d y
t h e c a r b on s e q ue s t r a t i o n o p p o r t u n i t i e s .
            T h e r e ' s s o me e a r t h i n t h e b a l a n c e . W e l l , t h a t ' s e c o n o mi c s o u t o f
b a l a n c e . I f w e 'r e s e r i o u s a b o u t t h i s, l e t ' s p u t s o me s e r i o u s d o l l a r s i n t o
it, and I have suggested to Congress you need $15 billion to study the
carbon sequestration geologic opportunities.
            HEARING COCHAIR SHEA: 15 billion?
            M R . S C H W E I T Z E R : B i l l i o n w i t h a " B , " w h i c h i s v e r y s ma l l
c o mp a r e d t o t h e va l u e o f t h e c o a l B TU s t h a t we h a ve i n t h i s c oun t r y .
I f w e 'r e s e r i o u s a b o u t u s i n g t h e c o a l i n t h i s c o u n t r y a s a l e g i t i ma t e
source of energy in the future, we've got to get carbon sequestration
c o r r e c t n o w . A n d s i n c e A m e r i c a h a s mo r e c o a l t h a n a n y o t h e r c o u n t r y
i n t h e w o r l d , a n d w e h a v e a c o mp e t i t i ve a dv a n t a ge i n o u r c o a l , i f w e
c a n g e t i t c o r r e c t , i t s e e ms t o me t h a t $1 5 b i l l i on w o r t h o f r e s e a r c h a n d
d e v e l o p me n t i s a v e r y s ma l l p r i c e t o p a y .
            We c a n 't w a i t t e n y e a r s . We c a n 't w a i t 2 0 ye a r s . We n e e d t o
mo v e n o w . $ 1 5 b i l l i o n f o r o u r r e s o u r c e - - l i k e I s ai d , i n t w o s t a t e s w e
h a v e $ 1 2 t r i l l i o n w o r t h o f c o a l a t c u r r e nt pr ic e s . So , y e s , we a r e
studying; no, we are not investing enough.
            HEARING COCHAIR SHEA: On mapping.
            M R . S C H W E I T Z E R : B u t w e a r e ma k i n g o p p o r t u n i t i e s a v a i l a b l e .
            M R . M AN C H I N : T h e r e 's s t i ll a l o t o f u n k n o w n , a n d I t h i n k
t h a t ' s t h e c a u t i o n t h a t e v e r y o n e s e e ms t o b e t a k i n g b e c a u s e o f t h e
                                                     - 203 -
u n k n o w n . I g u e s s w h e n y o u 'r e p r e s s e d a s w e ' v e b e e n p r e s s e d i n
d i f f e r e n t t i me s i n o u r h i s t o r y , w e d o wh a t w e h a v e t o d o .
             HEARING COCHAIR SHEA: Thank you.
             H E A R I N G C O C H A I R D ' A M A T O : T h a n k y o u , M r . C h a i r ma n , a n d
l e t me j us t r e i t e r a t e t ha t t h e c e nt r a l p ur p os e o f t hi s h e a r i n g i s t o
e x p l o r e t h e p o s s i b i l i t y o f n e w c o o p er a t i v e v e n t u r e s a nd i d e a s t h a t we
c a n pu t fo r w a r d t o t h e C o n gr e s s . We ' r e pa r t i c ul a r l y i nt e r e s t e d i n yo u r
r e l a t i o n s h i p s a s y o u g o f o r w a r d w i t h y o u r c o u n t e r p a rt s i n C h i n a .
             Y o u ' r e g o i n g o n a t r i p . We w o u l d b e i n t e r e s t e d i n w h a t y o u f i n d
w h e n y o u 'r e t h e r e , t h e k i n d o f p o s s i b i l i t i e s w i t h p u b li c a n d p r i v a t e - -
             M R . M A N C H I N : We 'v e b e e n p a r t o f t h e i r i n t e r n a t i o n a l c o a l
s h o w s i n c e 1 9 8 0 s . We s t V i r g i n i a h a s t a k e n a v e r y a c t i v e p a r t i n t h a t ,
a n d a l o t o f o u r v e n d o r s h a v e b e e n t he r e . A n d a s t h i n g s o p e n e d u p a n d
t r a d e c h a n g e d , i f yo u w i l l , w e g o t m o r e i n v o l v e d , a n d t h e n w e o p e n e d
u p a l i t t l e b i t mo r e f o r c a pi t a l i n ve s t m e n t s a n d p a r t n e r s h i p s . T h e n w e
h a d s o me o f o u r i n d u s t r i a l i s t s , i f y o u w i l l , h a d g o n e o v e r t h e r e a n d p u t
i n s o me j o i n t v e n t u r e s wi t h t h e m.
             S o w e 'v e h a d a p r o b a b l y a s l o n g , i f n o t l o n g e r , r el a t i o n s h i p i n
t h i s a r e n a t h a n mo s t . T h e y s e e m t o b e r e a c h i n g o u t t o a n o t h e r v e n t u r e
r i g h t n o w w i t h t h i s s i g ne d a g r e e me n t , t h i s s i s te r s t a t e h o o d , i f y o u w i l l ,
o f h o w w e j o i n t l y s h a r e . We n e e d t o e x p l o r e t h a t w i t h t h e f e d e r a l
g o v e r n me n t o f h o w We s t V i r g i n i a c a n b e c a t a l y s t o f s e e i n g h o w w e c a n
s h a r e i n f o r ma t i o n , h o w w e c a n t r y n e w t e c h n o l o g i e s , ma y b e o n a mo r e
r a p i d s c a l e t h a n w h a t w e d o o n o u r o wn , s o t h a t t h e u n k n o w n s t h a t w e
h a v e t h a t a r e o f mu c h c on c e r n t o a l l o f u s mi g h t b e s o me t h i n g t h a t c a n
be put to rest a little quicker there.
             H E A R I N G C O C H A I R D ' A M A T O : A n d u s e fu l t o o t h e r s t a t e s a s
t h e y e x pl o r e - -
             M R . M A N C H I N : V e r y mu c h s o .
             H E A R I N G C O C H A I R D ' A M A T O : - - t h e i r s i s t e r s t a t e r e l a t i on s hi p
a n d h o w t h e U n i t e d S t a t e s f e d e r a l g o v e r n me n t c a n e n c o u r a g e t h e s e
r e l a t i o n s h i p s s o y o u 'r e n o t a l w a y s o n y o u r o w n .
             M R . M A N C H I N : R i g h t n o w y o u d o n 't k n o w - - a n d I w a n t t o ma k e
s u r e t h a t my d e l e g a t i o n , Se n a t o r B yr d , S e n a t o r R o c k e fe l l e r , a n d o u r
congressional delegation, everyone is in sync.                                                We e n t e r i n t o
r e l a t i o n s h i p a n d a g r e e me n t t h r o u g h a mu t u a l M O U , i f y o u w i l l , t h a t
w e 'r e a l l mo v i n g o n t h e s a me t r a c k , a n d i t ' s t o t h e b e n e f i t o f n o t o n l y
t h e s t a t e o f We s t Vi r g i ni a b u t t h e e n t i r e n a t i o n .
             H E A R I N G C O C H A I R D ' A M A T O : T h a n k y o u . We 'r e v e r y mu c h
interested in staying in touch with you on how that goes.
             M R . M AN C H I N : S u r e , p l e a s e .
             H E A R I N G C O C H A I R D 'A M A T O :                       Thank you.                C h a i r ma n
B a r t h o l o me w .
             C H A I R M A N B A R T H O L O M E W: T h a n k y o u v e r y mu c h . T h a n k
                                                     - 204 -
y o u , g e n t l e me n , f o r y o u r v e r y i nt e r e s t i n g t e s t i mo n y .                Governor
S c h w e i t z e r , I t h i n k o f t he s u i t s t h a t y o u r e f e r t o, o f c o u r s e , e v e r y b o d y
h e r e s a y s a l l t h e y w a n t i s a l e ve l p l a y i n g f i e l d , b u t t h e y a l w a y s w a n t
t h e l e v e l p l a y i n g fi e l d t o t i l t i n t h e i r d i r e c t i o n .
             B e f o r e w e t a k e a s h o r t b r e a k , l e t me n o t e t h a t w e 've b e e n
p r e s e n t e d t h i s mo r n i n g wi t h a s t a t e me n t fr o m S e n a t o r By r d a d d r e s s i n g
t h e e f f e c t s o f C h i n a 's e n e r g y u s a g e .                     Senator Byrd had other
c o m mi t me n t s t h i s m o r n i n g , wa s u n a b l e t o b e h e r e i n p e r s o n t o d e l i v e r
h i s t e s t i m o n y , b u t w e 'r e v e r y p l e a s e d t o h a v e h i s s t a t e me n t , a n d w e
will place it in our hearing record.
             He is as everyone here well knows currently the President Pro
T e mp o r e o f t h e S e n a t e a n d C h a i r ma n o f t h e A p p r o p r i a t i o n s C o m mi t t e e .
H e h a s h a d a s t r o n g an d l o n g - s t a n d i n g i n t e r e s t i n t h e U . S . - Ch i n a
r e l a t i o n s h i p a n d w a s o n e o f t h e p r i ma r y a c t o r s i n t h e c r e a t i o n o f t h i s
C o m mi s s i o n . We a r e v e r y p l e a s e d t o h a v e h i s t e s t i mo n y . We 'r e v e r y
t h a n k f u l , g r a t e f u l t o y o u b o t h f o r a p p e a r i n g b e f o r e u s t o d a y . We l o o k
f o r w a r d t o c o n t i n u i n g t o w o r k w i t h y o u , a n d n o w w e 'l l t a k e a s h o r t
break.
             M R . M AN C H I N : T h a n k y o u v e r y mu c h .
             [ Wh e r e u p o n , a s h o r t r e c e s s wa s t a k e n . ]


    PANEL VII: POLICY STRATEGIES FOR ADDRESSING THE
        EFFECTS OF CHINA’S ENERGY CONSUMPTION

           H E A R I N G C O C H A I R V I D E N I E K S : We 'l l s t a r t w i t h Pa n e l V I I ,
w h i c h d e a l s w i t h p o l i c y s t r a t e g i e s f or a d d r e s s i n g t h e e f f e c t s o f C h i n a 's
e n e r g y c o n s u mp t i o n . A n d I 'l l i n t r o d u c e t h e p a n e l i s t s a s p r e s e n t e d .
O u r f i r s t t w o s p e a k e r s w i l l e x a mi n e t h e s t r a t e g i e s f o r a d d r e s s i n g t h e
e n v i r o n me n t a l c o n s e q u e n c e s o f C h i n a 's e n e r g y u s e . O u r f i r s t s p e a k e r
i s N a t i o na l R e s our c e s D e f e n s e C o u n c i l S e n i o r A t t o r n e y , B a r b a r a
F i n a mo r e . S h e i s t h e f o u n d e r a n d d i r e c t o r o f N R D C ' s C h i n a Cl e a n
E n e r g y P r o g r a m. M s . F i n a mo r e h a s o v e r t w o d e c a d e s o f e x p e r i e n c e i n
e n v i r o n me n t a l l a w a n d p o l i c y i n t h e U n i t e d St a t e s , C hi n a , R u s s i a a n d
Taiwan.
           N e x t i s D r . L o g a n , J e f f r e y L o g a n . H e 's a S e n i o r A s s o c i a t e i n
c l i ma t e a n d e ne r g y a t t he Wo r l d R e s o u r c e s I n s t i t ut e . J e f f r e y L o g a n
h a s o v e r 1 2 y e a r s o f e x p e r i e n c e ma n a g i n g e ne r g y a n d e n v i r o n me n t a l
p r o j e c t s i n a n i n t e r n a t i o n a l c o n t e xt . H i s a r e a s o f e x p e r t i s e a r e c l e a n
e n e r g y m a r k e t d e v e l o p me n t , e n e r g y s e c u r i t y , g r e e n h o u s e g a s a b a t e me n t
a n d e n e r g y p o l i c y a n a l y s i s , p r i ma ri l y i n t h e d e v e l o p i n g c o u n t r y
context.
           T h e n , f i n a l l y , M r . T h o ma s D o n n e l l y . H e 's a R e s i d e n t F e l l o w a t
t h e A me r i c a n E nt e r p r i s e I ns t i t ut e .         H e 'l l a d dr e s s t h e p o l i c i e s f o r
                                                     - 205 -
mi t i g a t i ng t h e s t r a t e g i c c on s e q ue n c e s f o r t h e U . S . a nd t h e w or l d o f
C h i n a 's e n e r g y c o n s u mp t i o n . T o m D o n n e l l y i s a d e f e n s e a n d s e c u r i t y
p o l i c y a n a l y s t f o r A E I , w i t h p a s t e x p e r i e n c e o n t he H o u s e A r me d
S e r vi c e s C o m mi t t e e , a n d t h e U . S . - C h i n a C o m mi s s i o n .
           We l c o me t o a l l p a n e l i s t s . We 'l l b e g i n w i t h M s . F i n a mo r e .

STATEMENT OF MS. BARBARA FINAMORE, DIRECTOR, CHINA
   PROGRAM, NATURAL RESOURCES DEFENSE COUNCIL
  PRESIDENT, CHINA-U.S. ENERGY EFFICIENCY ALLIANCE
                  W A S H I NG T O N , D. C .

             M S . F I NA M O R E : T h a n k y o u . T h a n k y o u f o r t h e o p p o r t u n i t y t o
t e s t i f y a t t o d a y 's h e a r i n g o n C h i n a 's e n e r g y c o n s u mp t i o n a n d
opportunities for U.S.-China cooperation to address the effects of
China energy use. Thank you for the kind introduction. I would like
t o a dd t ha t i n a dd i t i on t o he a di n g NR D C 's C h i n a Pr o gr a m, I a m a l s o
the cofounder and president of the China-U.S. Energy Efficiency
A l l i a n c e , w h i c h i s a p u b l i c / p r i v a t e p a r t n e r s h i p w h o s e mi s s i o n i s t o
p r o mo t e g l o b a l s u s t a i n a b i l i t y b y w o r k i n g w i t h C h i n a t o h a r n e s s
e f f i c i e n c y a s a vi a bl e e n e r g y r e s o u r c e . A c t i v e U . S . A l l i a n c e m e m b e r s
i n c l u de a l l t h r e e o f C a l i f or n i a 's i n v e s t or - o w ne d ut i l i t i e s , t he C a l i f or ni a
E n e r g y C o m mi s s i o n , t h e C a l i f o r n i a Pu b l i c U t i l i t y C o mmi s s i o n s , t h e
Lawrence Berkeley National Lab, whom you heard from yesterday,
e n e r g y s e r v i c e c o mp a n i e s s uc h a s N e x a n t , v e n t u r e c a p i t a l c o mp a n i e s
s u c h a s Nt h P o w e r , E n e r g y F o u n d a t i o n a n d o t h e r N G O s .
             I would like to briefly begin by addressing one of the other
i s s u e s t h a t y o u a r e s e e ki n g t e s t i mo n y o n , a n d t h a t i s t h e r o l e o f NG O s
i n s u p p o r t i n g e n e r g y a n d e n v i r o n me n t a l p ol i c y i n C h i na , a n d a s t h e
h e a d o f t w o o f t h e m I t h o u g h t I w o u l d b r i e f ly s u m ma r i z e my v i e w s o n
what role NGOs can and are playing in these areas.
             I b e l i e v e , a s my e x p e r i e n c e h a s s h o w n , t h a t g i v e n e x p e r t i s e a n d
i n d e p e n d e n c e a n d l o n g - t i me o n - t h e -g r o u n d e x p e r i e n c e , t h e s e N G O s c a n
a n d a r e b e c o mi n g i n f l u e n t i a l a d v i s o r s t o C h i n a , i n p a r t , b e c a u s e t h e y
don't have a hidden agenda or not so hidden agenda of the baggage of
g o v e r n me n t a l p o l i c y o r t r y i n g t o ma k e a p r o fi t . S o w e c a n b e c o me
s o me w h a t i n d e p e n d e n t a d v i s o r s .
             We a r e a l s o o f t e n a b l e t o r e s p o n d mo r e q u i c k l y t o r e q u e s t s b y t h e
C h i n e s e g o v e r n me n t f o r a s s i s t a n c e o n p a r t i c u l a r i s s u e s , a n d b e l i e v e
me , t h e y c o me f a s t a n d f u r i o u s . M o r e i mp o r t a n t , w e a r e a b l e t o m a k e
l o n g - t e r m c o m mi t m e n t s t o wo r k i n g o n p a r t i c u l a r i s s u e s i n C h i n a a n d
we have over the last ten years. And that is the kind of sustained
e f f o r t t h a t 's n e c e s s a r y , b o t h t o h el p Ch i n a d e v e l o p s u s t a i n a b l e e n e r g y
e n v i r o n me n t a l p o l i c i e s a n d , e v e n mor e i mp o r t a n t , t o i mp l e me n t t he m.
             And I would add that when NGOs work in partnership with
                                                      - 206 -
e x p e r t s f r o m g o v e r n me n t a l a g e n c i e s , mu l t i n a t i o n a l s , a nd a l s o e xp e r t s
f r o m t h e p r i v a t e s e c t o r , t h e i mp a c t c a n b e c o me e v e n g r e a t e r .
             S o f o r mo r e t h a n t e n y e a r s , N R D C h a s b e e n w o r k i n g i n C h i n a t o
s u p p o r t d o me s t i c e f f o r t s t o d e v e l o p mo r e s u s t a i n a b l e e n e r g y a n d
e n v i r o n me n t a l p o l i c i e s . W e b u i l d o n o u r e x p e r t i s e i n t he U . S . o n
e n e r g y i s s u e s , a n d w e p a r t n e r w i t h g o ve r n me n t a g e n c i e s i n C h i n a a t t h e
n a t i o n a l l e v e l a n d i n k e y p r o v i n c e s a n d mu n i c i p a l i t i e s , a c a d e mi c ,
n o n g o v e r n me n t a l o r g a n i z a t i o n s a n d t h e l e g a l c o m m u n i t y .
             We w o r k a t t he n a t i o na l l e v e l t o p r o mo t e d e v e l o p me n t o f
p o l i c i e s , l o o k f o r w a y s t o t r a n s f o r m m a r k e t i n c e n t i v e s . We a l s o w o r k
a t t h e l oc a l l e ve l on g r a s s r oo t s a n d pr o vi n c i a l l e ve l p i l ot pr o j e c t s t h a t
c a n , i n t u r n , i n f o r m t h e d e v e l o p me n t o f n a t i o n a l p o l i c i e s .
             We w e r e t h e f i r s t i n t e r n a t i o n a l e n v i r o n me n t a l o r g a n i z a t i o n t o
e s t a bl i s h a c l e a n e n e r g y pr og r a m i n C h i n a a nd I 'd j u s t l i k e t o b r i e f l y
h i g h l i g h t a c o u p l e o f t h e s uc c e s s e s t h a t w e ' v e a c h i e v e d o v e r t h e l a s t
d e c a d e . We h e l p e d t h e c i t y o f C h o n g q i n g , w h i c h h a s 3 0 0 mi l l i o n
p e o p l e , t o d e v e l o p C h i n a ' s f i r s t r es i d e n t i a l e n e r g y c o d e f o r b u i l d i n g s ,
w h i c h t h e n b e c a me a mo d e l f o r t h e e n t i r e Y a n g t z e R i v e r b a s i n a n d t h e n
a l s o l e d t o t he d e v e l o p m e n t o f r e s i d e n t i a l b u i l d i n g c od e s f o r a l l t h r e e
o f C h i n a 's c l i ma t e z o n e s .
             We a l s o a s s i s t e d t h e C h i n e s e g o v e r n me n t i n d e v e l o p i n g t o u g h
l i g h t i n g s t a n d a r d s f o r b u i l d i n g s t h a t i f f u l l y i mp l e me n t e d c o u l d s t o p 6 0
mi l l i o n me t r i c t o ns o f c a r b on f r o m b e i n g s e n t i n t o t he a t mo s p h e r e e a c h
year.
             We h a v e b e e n i n v o l v e d i n a g l o b a l e f f o r t t o d e v e l o p a s i n g l e
w o r l d wi de s pe c i f i c a t i o n f or e n e r g y l os s f r o m p o w e r s u p p l i e s t h a t y o u
u s e t o p l u g i n y o ur c o mp u t e r . M a n y o f t h e s e a r e m a d e i n C h i n a , a l o n g
w i t h mu c h o t h e r e l e c t r o n i c e q u i p me n t .                     We d e v e l o p e d a s i n g l e
w o r l d wi d e s p e c i f i c a t i o n . I t i s ma n d a t o r y i n t h e U . S . I t i s a s y e t
v o l u nt a r y i n C h i na . B u t , a ga i n , f u l l y a d o p t e d , t h i s s p e c i fi c a t i o n c o u l d
h e l p a v o i d c a r b o n e mi s s i o ns i n C h i n a e q u i v a l e nt t o t ha t of t a k i n g up t o
6 5 0 , 0 0 0 v e h i c l e s o ff t h e r o a d .
             T h i r d , N R D C a n d t h e A l l i a n c e h av e b e e n w o r k i n g w i t h C h i n e s e
e x p e r t s t o d e v e l o p l a r ge - s c a l e e n e r g y e f f i c i e n c y f i n a n c i a l i nc e n t i v e
p r o g r a ms , t h a t u s e a p o r t i o n o f e l e c t r i c i t y r a t e s t o p r o mo t e w i d e s p r e a d
adoption of energy efficiency technologies, and these incentive
p r o g r a ms , w h i c h I ' l l t o u c h o n a b i t l a t e r , c o u l d a v o i d u p t o o n e b i l l i o n
tons of carbon per year.
             Fourth, as part of a public/private partnership, which began as a
c o l l a bo r a t i o n b e t w e e n t he U . S . D e p a r t m e n t o f E n e r g y a n d C h i n a 's
M i n i s t r y o f S c i e n c e a n d T e c h n o l o g y , w e s e r v e d a s t h e p r o j e c t ma n a g e r
f o r t h e d e v e l o p me n t a n d c o n s t r u c t i o n a n d o p e r a t i on o f C h i n a 's f i r s t
i n t e r n a t i on a l l y c e r t i f i e d g r e e n b u i l d i n g , w h i c h u s e s o n l y o n e q u a r t e r o f
t h e e n e r g y a n d p r o d u c e s o n l y 4 0 p e r ce n t o f t he w a s t e w a t e r o f a t yp i c a l
                                                      - 207 -
o f f i c e b u i l d i n g i n Be i j i n g .
             F o r t hi s w o r k , w e r e c e i v e d C hi na 's f i r s t G r e e n B u i l di n g
Innovation Award.                           I t i s s e r v i n g a s a mo d e l f o r mu c h o t h er
c o n s t r u c t i o n , b o t h i n B e i j i n g a n d t hr o u g h o u t t h e c o u n t ry .              We h a v e
a l s o mo s t r e c e n t l y b e e n t h e o n l y n o n g o v e r n me n t a l o rg a n i z a t i o n t o
s e r v e o n t h e e x p e r t t e a m f o r t h e d e v e l o p me n t o f C h i n a 's f i r s t n a t i o n a l
green building design standard.
             A n d f i n a l l y , f o r t h e l a s t f i v e ye a r s , N R D C h a s p r o mo t e d t h e u s e
o f t e c h n o l o g i e s t h a t c a n h e l p r e d u ce p o l l u t i o n a n d t h e c a r b o n i mp a c t s
o f c o a l , s u c h a s c o a l g a s i f i c a t i o n w i t h c a r b o n c a pt u r e t ha t w e 'v e b e e n
h e a r i n g s o mu c h a b o u t t h i s mo r n i n g .
             O u r a d v o c a c y e f f o r t s h e l p t o ma k e c o a l g a s i fi c a t i o n b a s e d
p o l y g e n e r a t i o n o r c o p r o d u c t i o n o n e o f t h e t o p p r i o r i t i e s i n C h i n a 's mi d
t o l o n g - t e r m N a t i o n a l R e s e a r c h a n d D e v e l o p me n t P l a n .                     We a l s o
s u p p o r t e d t h e c re a t i o n o f a n a t i o n a l r o a d ma p o n c o a l g a s i f i c a t i o n
d e v e l o p me n t t ha t c a l l s f o r t h e c o n s t r u c t i o n o f s e v e r a l l a r g e I G C C
d e mo n s t r a t i o n f a c i l i t i e s t o b e c o m p l e t e d b y 2 0 1 0 .
             T u r n i n g t o t h e p o l i c i e s , I a m g o i n g t o f o c u s my r e ma r k s o n o n e
p a r t i c u l a r a r e a o f c o o p e r a t i o n , a n d t h a t i s e n e r g y e f f i c i e n c y . We
believe and I think all the studies have shown, that energy efficiency is
t h e l a r g e s t , c he a pe s t , f a s t e s t a n d gr e e n e s t r e s o u r c e a va i l a b l e t o s o l v e
t h e g l o b a l w a r mi n g p r o b l e m. A n d a r e c e n t s t u d y b y M c K i n s e y G l o b a l
I n s t i t u t e f o u n d t h a t t h r o u g h o u t t he g l o b e i n c r e a s i n g t h e e n e r g y
p r o d u c t i v i t y , t h e a mo u n t o f e n e r g y w e n e e d t o p r o d u c e o u t p u t ,
i mp r o v i n g o u r e n e r g y p r o d uc t i v i t y c o u l d c u t g l o b a l e n e r g y d e ma n d b y
half or more over the next 15 years.
             T h i s w o ul d i n t ur n c o nt r i b ut e u p t o h a l f o f t h e g r e e n h o u s e g a s
e mi s s i o n a b a t e me n t r e q u i r e d t o c a p t h e l o n g - t e r m c o n c e n t r a t i o n o f
g r e e n h o u s e g a s e s i n t h e a t mo s p h e r e a t 4 5 0 t o 5 5 0 p a r t s p e r mi l l i o n .
B u t w i t ho u t i n c r e a s e s i n e n e r g y p r o d u c t i v i t y , o v e r o n e - t h i r d o f t h e
g r o w t h , p r o j e c t e d g r o w t h i n g l o b a l e n e r g y d e ma n d w i l l b e i n C h i n a .
             B u t t h i s M c K i n s e y s t u d y f o u n d t ha t C h i n a c a n c o n t r i b u t e mo r e t o
i n c r e a s e d e n e r g y p r o d u c t i v i t y t h a n a n y o t h e r co u n t r y b e c a u s e o f t h e
r a p i d g r o w t h t h a t y o u 'v e h e a r d s o mu c h a b o u t , b e c a u s e i t s t a r t s f r o m a
l o w e r b a s e a n d b e c a u s e i t c a n a d o p t t h e l a t e s t t e c h n ol o gy a t a l ow e r
cost.
             I n f a c t , w h e n M c Ki n s e y c a m e u p w i t h i t s fi v e t o p p r i o r i t i e s f o r
g l o b a l c o o p e r a t i o n o n i mp r o v i n g e n e r g y p r o d u c t i v i t y w o r l d w i d e , t w o
o f i t s t op t hr e e r e c o m me n d a t i o n s we r e , n u mb e r o n e , t o he l p C h i n a
b u i l d i t s fa c t o r i e s t o i nt e r n a t i o n a l s t a n d a r d s f or e f f i c i e n c y a n d , n u mb e r
three, to help China build its new buildings to international standards
f o r e n e r g y e f f i c i e n c y . S o I w o u l d h i g h l i g h t t h o s e t w o a r e a s a s t wo o f
the three for global cooperation.
             China recognizes that energy efficiency is key to its increased
                                                      - 208 -
e c o n o mi c g r o w t h a n d e n v i r o n me n t a l s u s t a i n a b i l i t y . Y o u ' l l h e a r a l o t
a b o u t i t s n a t i o n a l g o a l f o r i mp r o v in g i t s e n e r g y i n t e n s i t y b y 2 0 p e r c e n t
b y 2 0 1 0 . B u t I w o u l d s a y t h a t a l t ho u g h i t h a s t h e p ol i t i c a l w i l l t o
achieve these goals, it lacks the way.
            I t f a c e s s e v e r a l s t r o n g o b s t a c l e s t o a c hi e vi n g t h o s e a mb i t i o u s
g o a l s : o n e , l a c k o f c a p a c i t y t o i mp l e m e n t t h e e n e r g y e f f i c i e n t b u i l d i n g
c o d e s a l r e a d y o n t h e b o o k s ; l a c k o f i n f o r ma t i o n o n b e s t p r a c t i c e s a n d
c o s t e f f i c i e n t t e c h n o l o g y; a n d p e r h a p s mo s t i mp o r t a n t , l a c k o f a n
a d e q u a t e l o n g - t e r m f u n d i n g me c h a n i sm t o h e l p t h e c u s t o me r s a ff o r d
mo r e e f f i c i e n t i n d u s t r i a l e q u i p me nt , c o m me r c i a l l i g h t i n g a n d c o o l i n g
technologies and residential appliances.
            A n d i n d e e d , o n c e mo r e , t h e M c K i n s e y I n s t i t u t e f o u n d t h a t t h e
l e a d i n g b a r r i e r t o e n e r g y p r o d u ct i v i t y i mp r o v e me n t s t h r o u g h o u t t h e
w o r l d i s l a c k o f c a pi t a l .               S o f i n a n c i a l me c h a n i s ms a r e k e y t o
o v e r c o mi n g t h i s
            HEARING COCHAIR VIDENIEKS: Could you please try to
s u m ma r i z e t he r e s t ?
            MS. FINAMORE:                            We a r e wo r k i n g w i t h p r i v a t e a n d
g o v e r n me n t a l p a r t n e r s t o b r e a k t h r o u gh t h e p r o b l e ms t h e y 'r e f a c i n g i n
i mp l e me n t i ng t he i r a mb i t i o us b u i l di ng c o d e s , w h i c h onl y t e n t o 1 5
p e r c e nt of o u r b ui l di n gs c u r r e n t l y c o mp l y w i t h , a n d w h a t we a r e
exploring the options of are creating a private sector code
i mp l e me n t a t i o n n e t w o r k i n C h i n a t o s u p p l e me nt g o v e r n me n t a l e ff o r t s
t o i mp l e m e n t t h e s e c o d e s .
            T h e r e 's a s y s t e m c a l l e d R E S N E T . I t 's b e e n r e c e i v i n g r e c o g n i t i o n
i n 1 7 s t a t e s i n t h e U n i t e d S t a t e s a s a s u b st i t u t e f o r g o v e r n me n t a l
c o mp l i a nc e . I n a dd i t i on , i n t h e U . S . , t h e 2 0 0 5 E n e r g y Po l i c y A c t t a x
i n c e n t i v e s f o r e n e r g y e f f i c i e n c y a re p r o d u c i n g v e r y g o o d r e s u l t s t h a t
w e a l s o t h i n k c o u l d b e a p pl i c a b l e t o C h i n a .
            F i n a l l y , d e ma n d - s i d e ma n a g e me n t e ne r g y e f f i c i e n c y i nc e nt i ve s
have been proven in the U.S. and other nations to significantly reduce
energy loads and reduce load growths at costs significantly less than
electricity generation.                      C h i n a , a ft e r ma n y y e a r s o f d i s c u s s i o n a n d
d e b a t e h a s d e c i d e d t o a d o p t D S M a s a k e y p o l i c y me c h a n i s m f o r
a c h i e v i n g t h e s e g oa l s . We h a v e b e e n w o r k i n g s i d e b y s i d e w i t h t h e m,
a n d p a r t i c u l a r l y i n o n e o f t h e i r mo s t a d v a n c e d p r o v i n c e s , J i a n g s u
Province, who has already shown the benefits of adopting financial
incentives in China, and this has reached the attention of the national
g o v e r n me n t , w h i c h h a s a d o p t e d t h i s a s a n a t i o n a l mo d e l .
            A n d s o N R D C a n d t h e A l l i a n c e h av e b e e n a s k e d t o c o s p o n s o r a
n a t i o n a l c o n f e r e n c e n e x t mo n t h w i t h Ch i n a 's N a t i o n a l D e ve l o p me n t a n d
R e f o r m C o m mi s s i o n - -
            HEARING COCHAIR VIDENIEKS:                                           I 'm s u r e we 'l l ha v e
q u e s t i on s , mo r e d e t a i l e d q ue s t i o n s , a nd y o u 'l l be a b l e t o f i l l i n yo u r
                                                     - 209 -
presentation.
         I 'd l i k e t o g o t o M r . D o n n e l l y n o w .
         M S . F I N AM O R E : O k a y . T h a n k y o u .
[ T h e s t a t e me n t f o l l o w s : ] 9

       STATEMENT OF MR. THOMAS DONNELLY, RESIDENT
      FELLOW IN DEFENSE AND FOREIGN POLICY STUDIES,
     AMERICAN ENTERPRISE INSTITUTE, WASHINGTON, D.C.

             MR. DONNELLY:                            T h a n k y o u v e r y mu c h , C h a i r ma n
B a r t h o l ome w , V i c e C h a i r ma n B l u me n t h a l . I t 's a gr e a t pl e a s ur e t o
a p p e a r b e f o r e y o u . A l s o , my f o r me r c o l l e a g u e s o n t h e C o m mi s s i o n a n d
me mb e r s n e w l y n a me d t h i s y e a r . T he C o m mi s s i o n 's p a s t y e a r a n d I ' m
s u r e y o u r w o r k t h i s y e a r p e r f o r ms a u n i q u e f u n c t i o n f o r C o n g r e s s .
There is no other body that considers the totality of U.S.-China
r e l a t i on s a s t he C om mi s s i o n d o e s , a nd i f t h e Co m mi s s i o n d i d n 't e x i s t ,
I'm sure we would want to invent it.
             I 'v e b e e n a s k e d t o t e s t i f y a b o u t wa y s t h a t U . S . g o v e r n me n t
p o l i c y mi g h t b e a d o p t e d o r c ha n g e d b a s e d o n t h e s t r a t e g i c
c o n s e q u e n c e s o f C h i n a 's r i s i n g e n e r g y c o n s u mp t i o n . I t s e e ms t h a t t h e
C o m mi s s i o n , i f t h i s i s P a n e l V I I , y o u 'v e p r o b a b l y h e a r d a w h o l e l o t o f
a b o u t w h a t t h e e f f e c t s o f r i s i n g C h i n e s e e n e r g y co n s u mp t i o n a r e , b u t i f
y o u c a n p e r mi t me a b r i e f d i g r e s s i o n , I t h i n k I ma y h a v e j u s t k i n d o f a
different perspective on the whole topic.
             A n d i t w i l l p r o b a b l y h e l p p l a c e my p o l i c y r e c o m me n d a t i o n s i n a
mo r e u s e f u l p e r s p e c t i v e . I w i l l a ls o t r y t o a d h e r e t o t h e s e v e n mi n u t e
r u l e , a n d s o I 'm g o i n g t o o f f e r k i n d o f a b r o a d a p p r o a c h , a w a y o f
t h i n k i n g a b o u t a n A me r i c a n r e s p o ns e r a t h e r t h a n c o mp e n d i u m o f
particular policies.
             B r i e fl y s t a t e d , I t h i n k t h a t C h i n a 's r i s i n g e n e r g y c o n s u mp t i o n
a l r e a d y h a s a n u m b e r o f i mp o r t a n t s t r a t e g i c e f f e c t s . M o s t o b v i o u s i s
j u s t t h e p r i c e o f e n e r g y i t s e l f f o r mo d e r n i n d u s t r i al e c o n o mi e s , n o t
only in the United States, but throughout the world. The price of
e n e r g y i s i t s e l f k i n d o f a s t r a t e g i c ma t t e r , a t l e a s t a q u a s i - s t r a t e g i c
ma t t e r , a n d d e ma n d f o r e n e r g y , p a r t i c u l a r l y t h a t g e n e r a t e d f r o m f o s s i l
f u e l s i n t h e M i d dl e E a s t , i s a c c e l e r a t i n g f a s t e r t h a n t h e a bi l i t y t o
d i s c o v e r o r d e v e l o p i t . S o t h e t i me l i n e s a r e p r e t t y c l e a r a n d p r e t t y
set.
             B u t i f t h e t h e o r y o f ma r k e t e c o n o mi c s w e r e p u r e l y t r u e , t he
P e o p l e 's R e p u b l i c w o u l d s h a r e w i t h t h e U n i t e d St a t e s a s i mi l a r ,
p o s s i b l y e v e n a mo r e e n t h u s i a s t i c c o m mi t me n t , t o e n s u r i n g c h e a p a n d
plentiful energy supplies.

9
    Click here to read the prepared statement of Dr. Barbara Finamore
                                          - 210 -
             Wh e t h e r t h e e c o no mi c t h e o r y i s i mp e r f e c t I wi l l l e a v e t o
e c o n o mi s t s a n d I w i l l l e a v e t o my c o l l e a g u e s o n t h e p a n e l t h e
p o t e n t i a l l y s t r a t e g i c d i me n s i o n s o f e n v i r o n me n t a l c o n c e r n s , b u t I
would like to talk about geopolitical effects of Chinese energy
p o l i c i e s , a n d I t h i nk t he s e a r e p r e t t y c l e a r , p r e t t y w e l l e s t a b l i s h e d a n d
t h e y r e a l l y , i n my j u d g me n t , o u g h t t o b e t h e t h i n g s t h a t c o me a t t h e t o p
o f t h e l i s t w h e n s h a p i n g a n A me r i c a n r e s p o n s e t o t h e f a c t s b e c a u s e t h e
facts, as I see them as they now stand, are that China's increasingly
e n t hu s i a s t i c q ue s t f o r e n e r gy , i s s i m p l y a r e f l e c t i o n of t h e l a r g e r
p h e n o me n o n o f C h i n a 's r i s e t o g r e a t p o w e r s t a t u s .
             A n d I t h i n k t h a t 's t h e w a y , a n d c e r t a i n l y t h a t w a s my i mp r e s s i o n
f r o m my w o r k o n t h e C o m mi s s i o n , t ha t t ha t 's t he w a y t he C h i n e s e s e e
things.             I t s e e ms p r e t t y c l e a r t ha t i n r e c e n t y e a r s , B e i j i n g v i e w s
q u e s t i o n s a b o u t e n e r g y r e s ou r c e s f r o m a g e o p o l i t i c a l p e r s p e c t i v e . T h a t
i s s o me t hi n g mo r e t h a n t h e ma r k e t c om m o d i t y t h a t w e t e n d t o t hi nk o f
e n e r g y r e s o u r c e s a s . T h e C h i n e s e s ee o t h e r h a n d s t h a n t h e h i d d e n h a n d
o f t h e ma r k e t p l a c e a t w o r k i n t h e g l o b a l a l l o c a t i o n o f e n e r g y s u p p l i e s .
             T h i s d i ve r g e nc e i s a ma j o r a s y m me t r y i n t h e w a y t h e C h i n e s e
l o o k a t t h i n g s a n d t h e w a y we t e n d t o l o o k a t t h i n g s . B u t i n my v i e w ,
t h i s i s s o me t h i n g t h a t w e mi g h t b e a b l e t o u s e t o o u r a d v a n t a g e t o t r y
to shape Chinese behavior.
             T h e c e nt r a l p r o b l e m o r c e n t r a l p o l i t i c a l pr o bl e m i s t h a t C h i n a ' s
a p p r o a c h t o n a t u r a l r e s o u r c e s h a s t h e e f f e c t , i f n o t a c t u a l l y t h e i nt e n t ,
of giving support and succor to a collection of rogue states that stand
w e l l o ut s i d e t he no r ms o f i n t e r n a t i on a l s oc i e t y a n d wh i c h s e e k t o
frustrate the goals of the United States. I can partially list some of
t h e m- - S ud a n , I r a n , Z i mb a b w e , V e n e z u e l a . Y o u c a n p r o b a b l y g o o n a s
long as I could on that.
             B u t i t i s a l s o l i k e l y t o e n c ou r a g e b a d b e h a v i o r o n t h e p a r t o f
s t a t e s , f o r e x a mp l e , N i g e r i a w h o a r e n o t h o s t i l e t o t h e U n i t e d S t a t e s
a n d t he y 'r e s t r u g gl i n g t o p a r t i c i p a t e i n i nt e r na t i on a l s o c i e t y , b ut a r e
i n t e r n a l l y c o r r u pt a n d i n s t i t u t i o n a l l y w e a k . T h e y 'r e s u b j e c t t o t he
s i r e n c a l l o f a n d p r o n e t o d o b a d t h i n g s , a s y o u mi g h t s a y .
             S o t h e m o s t i mp o r t a nt q u e s t i o n f o r us i s h o w t o mi t i g a t e t h e s e
b a d e f f e c t s , w h e t h e r t h e y 'r e i n t e n d e d o r n o t .
             I t h i n k t hi s i s a n i mp o r t a n t c h a l l e n g e t h a t c h a l l e n ge s not o nl y
A me r i c a n i n t e r e s t s b u t t h e c o h e s i o n o f i n t e r n a t i o n a l s o c i e t y .
             O u r p o l i c y t h u s f a r s e e ms t o me i s b u i l t a r o u n d t h e h o p e o f
engaging China as a responsible stakeholder to encourage the Chinese
t o b e h a v e b e t t e r . T h e r e 's a c o r ol l a r y t o t hi s , t h e v a r i a t i o n i n t h e
t h e me , s l i g h t l y p a t e r n a l i s t i c e f f o r t t o t r y t o d e f i n e f o r t h e C h i n e s e w h a t
their interests are as though we could understand their interests better
t h a n t he y c a n .
             B u t e i t he r w a y , t he a p pr o a c h t h u s f a r h a s n 't p r o d u c e d w h a t I
                                                      - 211 -
w o u l d r e ga r d a s a s a t i s f a c t or y r e s ul t . I r a n i s n o t o n l y d e v e l o p i n g i t s
nuclear capabilities but is playing an aggressive and destabilizing role
throughout the region. So I would say again the trend lines are kind of
g e t t i n g wo r s e a n d t h a t C h i n a d o e s n 't s e e m t o h a v e a n y i n t e r e s t i n
r e i n i n g i n a n y o f i t s c li e n t s . T h e y d o n ' t a p p e a r t o s e e t h e r i s k a n d
r e w a r d c a l c ul a t i o n i n t h e s a me w a y t h a t w e do, i n w a ys t h a t w e t h i n k
w o u l d r e fl e c t t h a t i n t e r n a t i o n a l r e s p o n s i b l e s t a k e h o l d e r .
            S o I t h i n k t h e s h o r t c o mi n g o f o u r p ol i c y i s t h a t w e o n l y o f f e r t h e
p o t e n t i a l r e w a r d s . We i mp o s e n o c o s t s o n t h e C h i n e s e . O n e c o s t -
i mp o s i n g a p p r o a c h w o u l d b e t o d i r e c t l y l i nk U . S . - C h i n a r e l a t i on s ,
p o s s i b l y e v e n a b r o a d e r e c o n o mi c r e l a t i o n s hi p , t o C h i n e s e
international behavior. The role of the United States as the guarantor
of the international order is a global public good, which is hugely
beneficial to Beijing, so they do have an interest in stability and
security as we do.
            B u t C h i n a 's c l i e n t s a r e a mo n g t he mo s t d a n g e r o u s p o t e n t i a l a n d
i m me d i a t e t hr e a t s t o t h a t i nt e r n a t i o n al o r de r . T h e r e 's a c o s t t o us o f
r e s p o n d i n g t o t h e b a d b e h a v i o r t h a t Ch i n a 's c l i e n t s e x h i b i t , a n d i f t h e
C h i n e s e d o n 't s e e a r e wa r d f o r a ct i n g r e s p o n s i bl y , ma y b e t h e y w o u l d
b e t t e r s e e t h e s i t u a t i o n t h e wa y w e d o i f t h e r e w e r e c o s t s .
            I w o u l d s a y t h e r e 's p o s s i b l y a mo r e e f f e c t i v e a n d l e s s
c o n f r o n t a t i o n a l a pp r o a c h i f w e t a k e a c o s t - i m p o s i n g s t r a t e g y t o wa r d s
C h i n a 's c l i e nt s . B e i j i n g mi g h t c o nt i nu e t o t ol e r a t e t he I r a ni a n n uc l e a r
p r o j e c t , b u t i t c a n 't r ea l l y g u a r a n t e e T e h r a n ' s d e s i r e t o be c o me a
r e g i o n a l h e g e mo n , a n d s i mi l a r l y w i t h s l i g h t l y mo r e c l e v e r s t a t e c r a f t
a n d f o r c e f u l l e a d e r s h i p o n o u r p a r t t ha n w e 'v e e x h i b i t e d t h us f a r , s a y
a n i n t e r na t i o n a l c oa l i t i o n o f t h e w i l l i n g f o r D a r f u r , m i g h t b e c o b b l e d
together.
            T h e b a s i c i d e a w o u l d b e t o d e n y t o t h e r o g u e r e g i me s t h e ms e l v e s
t h e b e n e fi t s o f b e i n g a C hi ne s e c l i e nt , a n d I t hi n k t h a t w o u l d h a v e a
d r a ma t i c e f f e c t i n d e v a l u i n g t h i s q u a s i - c l i e n t r e l a t i o n s h i p , b e c a u s e i t ' s
my v i e w t h a t t h e r o g u e r e g i me s o r t h e i n t e r n a t i o n a l b a d a c t o r s v a l u e
t h i s mu c h mo r e t h a n t h e C h i n e s e a c t u a l l y d o .
            S o t o r e a l l y s u m u p t h e a p pr o a c h I 'm r e c o mme n d i n g i s t o d e a l
d i r e c t l y w i t h t h e b a d g e o p o l i t i c a l e ff e c t s o f C h i n e s e " c l i e n t i t i s , " i f I
can invent that term. I think it will be less confrontationalist, directly
c o n f r o nt a t i on a l t o B e i j i n g .         I t w o u l d h a v e s o me e f f e c t ot h e r t ha n
s i mp l y t o e n c ou r a ge C h i na t o b e ha v e i n t h e w a y s t h a t w e w o u l d l i k e
t h e m t o b e h a v e , a n d o f c o u r s e , i t w o u l d a c t u a l l y d e a l w i t h a n u mb e r o f
j u s t a w f u l s i t ua t i on s t h a t no t o nl y f r u s t r a t e A me r i c a n i n t e r e s t s b u t
c o n t r i b u t e t o i n s t a b i l i t y a n d t o v i o l e n c e t h r o u g h o u t t h e wo r l d .
            T o r e a l l y j u s t q u i c k l y s u m u p , I t hi n k t h i s i s a n i mp o r t a n t t e s t f o r
t h e U n i t e d S t a t e s a n d f o r t he i nt e r n a t i o n a l s ys t e m. A s y s t e m t h a t c a n 't
deal with Robert Mugabe or Hugo Chavez or even the Iranian clerics or
                                                        - 212 -
f a c e d o wn e t h n i c c l e a n s i n g i n A f r i c a d o e s n ' t l o o k l i k e a n i n t e r n a t i o n a l
s y s t e m t h a t c a n r o b u s t l y a c c o m m o d a t e t h e r i s e of C h i n a t o g r e a t p ow e r
status.
           S o a l o t o f t h e q u e s t i o n s a b o u t w h a t C h i n a 's r o l e i n t h e w o r l d
w i l l b e g o i n g f o r w a r d d e p e n d s o n h o w t h e i n t e r na t i o n a l s ys t e m a n d t he
U n i t e d S t a t e s r e s p o n d t o t h i s e f f e c t c a u s e d a l mo s t e x c l u s i v e l y b y
C h i n a 's p u r s u i t n o t o n l y o f e n e rg y r e s o u r c e s b ut o t h e r n a t i o n a l
resources that has the effect of promoting the worst kind of behavior
f r o m t h e w o r l d 's wo r s t r e gi me s i n w a y s t h a t a r e i n c re a s i n g l y d a n g e r o u s
and violent.
           H E A R I N G C O C H A I R V I D E N I E K S : Wr a p i t u p , p l e a s e .
           M R . D O N N E L L Y : Y e s . I 'l l j u s t s t o p t h e r e t h e n .
[The statement follows:]

 P r e p a r e d S t a t e m e n t o f M r . T h o m a s D o n n e l l y , R e s i de n t F e l l o w i n
D e f e n s e a n d F o r e i g n P o l ic y S t u d i e s , A m e r i c a n E n t e r pr i s e I ns t i t ut e ,
                                         Washington, D.C.

         Chairman Bartholomew, it is a great pleasure to appear before you, my former commission
colleagues and the members newly named this year. The commission’s past work and, I am sure, your
work this year perform a unique function for Congress; there is no other body which considers the totality
of U.S.-China relations as does the commission. If the commission did not exist, we should want to invent
it.

          You have asked me to testify today to suggest policies our government might adopt based upon
the strategic consequences of China’s rising energy consumption. While I am aware that the Commission
heard a panel’s worth of testimony yesterday on what those strategic consequences are, please permit me a
brief digression to summarize my views on the matter. It may help place the subsequent policy
recommendations in a more complete perspective. And, because I intend to try to adhere to the seven-
minute rule I will offer a broad approach, a way of thinking about an American response, rather than a
compendium of particular policies.

         In a nutshell, China’s rising energy consumption already has had a number of strategic effects.
The most obvious is the effect on the price of energy resources themselves; to modern, industrial
economies the price of energy is itself a semi-strategic matter. Demand for energy, especially that
generated from the fossil fuels of the Middle East, is accelerating faster than the ability to discover and
develop it. If the theory of market economics were purely true, the People’s Republic would share with the
United States a similar, possibly even a more enthusiastic, commitment to ensuring cheap and plentiful
energy supplies. The economic dimensions of this question I will leave to professional economists – as I
will leave the quasi-strategic dimensions of environmental concerns to my fellow panelists – but it does
lead me to a consideration of the geopolitical effects of Chinese energy policies. These, I think, are the
most immediate and compelling issues that ought to shape any American policy response. As things now
stand, the effects of rising Chinese energy consumption is simply a reflection of the larger effects of
China’s rise as a global great power.

         This is only to try to begin to see things the way China does. It has become increasingly clear in
recent years that Beijing views questions about energy resources from a geopolitical perspective – that is,
involving other factors than just the price – whereas the United States believes that such resources are
simply commodities and therefore governed by the hidden hands of markets. This divergence represents a
major asymmetry in American and Chinese strategy-making; in my view, this asymmetry is something that
                                                     - 213 -
can work to our advantage.

          The problem is that China’s approach to natural resources has the effect – if not also the intent – of
giving succor to a collection of rogue states that stand outside the norms of international society and seek to
frustrate the United States: Sudan, Iran, Zimbabwe and Venezuela, for example. It is also likely to
encourage bad behavior on the part of states like Nigeria that are not hostile to America or the larger
international community but that are corrupt and institutionally weak. The most important question for the
United States is how to mitigate these deleterious effects. The strategic stakes could not be higher: this
represents a challenge to the cohesion of international society and to the America’s role in the world.

          Thus far, U.S. policy, built around the hope of engaging Beijing as a “responsible stakeholder,”
has been to encourage China to behave better – say, by joining in U.N. efforts to end the genocide in Darfur
or to restrict Iran’s nuclear program. A variation on this theme is the slightly paternalistic effort to try to
explain to Beijing what its true interests are – as though we in Washington better understand Chinese
desires than the Chinese themselves do. To date, this approach has not produced much in the way of
results; indeed, the number and nature of the problems seems to be getting worse. Iran is not only
developing its nuclear capabilities, it is playing an aggressive and destabilizing role across the region, in
Iraq and in Lebanon. China shows no interest in reining in any of its clients. Beijing does not appear to
value the rewards of acting in the ways we think reflect their international responsibilities.

         The undeniable shortcoming of current U.S. policy is that it only offers rewards; it imposes no
costs. One cost-imposing approach would be to more directly link U.S.-China relations, perhaps even
including economic relations, to Beijing’s international behavior. The role of the United States as
guarantor of today’s international order is a global public good – something uniquely beneficial to Beijing.
China’s clients include a number of the most serious threats to international security. If the People’s
Republic does not see a real reward for acting responsibly, it may better see the costs of failing to do so.

         But perhaps a more effective and less confrontational approach is to impose costs on China’s
clients. Beijing might continue to tolerate the Iranian nuclear project, but it cannot really guarantee
Tehran’s bid for regional hegemony. Similarly, with a modicum of clever but forceful leadership on the
part of the United States, an international “coalition of the willing” might be cobbled together to act in
Darfur. Strong support for Columbia and a renewed commitment to diplomacy and democracy-promotion
in Latin America would do much to frustrate Hugo Chavez’s ambitions. These rogue regimes are
fundamentally weak and already internationally isolated. They need China much more than China needs
them. By dealing more effectively with such regimes, we would be lessening the value of posing as a
Chinese client state.

          China’s approach to securing the energy supplies it needs is one of the clearest demonstrations that
Beijing wishes to change the international system to meet its political and strategic needs rather than
accommodate itself to the order – the remarkably free and liberal order – that now exists. Rather than
pleading with China to comply with international norms, or to meet its international obligations, or
lecturing it about its real interests, the United States and its allies – the real responsible stakeholders –
should strengthen the system that we have built together over the past half century. But a system that
cannot withstand the challenges of Robert Mugabe or Hugo Chavez, or the Iranian clerics, or act effectively
in the face of ethnic cleansing in Africa, will be hard pressed to withstand the pressures that a rising China
will place upon it.

          The question you are asking today – what to do about China’s mercantilist attitudes toward energy
supplies – are the precursors to larger questions about other kinds of natural resources and, at root, one of
the largest questions of our time, that of China’s rise. The answer to that question lies less in the
malleability of Chinese attitudes than in the strength of the principles that preserve liberty and give order to
international society.


                                                 - 214 -
          Thank you for inviting me to appear before you. I look forward to your questions.

          HEARING COCHAIR VIDENIEKS: Thanks. Dr. Logan.

               STATEMENT OF DR. JEFFREY LOGAN
        SENIOR ASSOCIATE, WORLD RESOURCES INSTITUTE,
                      W A S H I NG T O N , D. C .

             D R . L O G A N : T h a n k y o u v e r y mu c h , C h a i r ma n B a r t h o l o me w ,
V i c e C h a i r ma n , C o m mi s s i o n e r s . G o o d mo r n i n g a n d t h a n k y o u f o r
i n v i t i n g me t o t e s t i f y t hi s mo r n i n g o n C h i n e s e e n e r g y c o l l a b o r a t i o n .
M y n a me i s J e f f r e y L o g a n , a n d I 'm a S e n i o r A s s o c i a t e a t t h e W o r l d
Resources Institute here in Washington, D.C.
             Yesterday, we heard Lee Schipper, also from WRI, give
t e s t i mo n y , s o I w i l l n o t b e l a b o r a g r e a t e r i n t r o d u c t i o n t o o u r
organization.
             O n e o f t h e g r e a t e s t c h a l l e nge s o v e r t h e c o mi n g d e c a de s w i l l b e
for countries to act in concert to address the linked challenges of
g l o b a l c l i ma t e c h a n g e a n d e n e r g y s e c u r i t y . T h e s e a r e l i n k e d p r o b l e ms
a n d t h e y c a n n ot be s o l ve d i n i s o l a t i o n f r o m o n e a n o t h e r .
             The U.S. and China are key to any solution as they together
c o n s u me a b o u t o n e - t h i r d o f t h e g l o b a l o i l s u p p l y a n d e mi t f o ur - t e nt h s
o f a l l g r e e n h o u s e g a s e mi s s i o n s .
             I'm here today to talk about U.S.-China energy cooperation. The
mo s t i mp o r t a nt t hi n g t h e U .S . c a n d o t o mi t i g a t e t h e i mp a c t s o f C h i n a ' s
r e c e n t e n o r mo u s g r o w t h i n e n e r g y d e ma n d i s t o l e a d by e x a mp l e . T he
U . S . mu s t d e mo n s t r a t e t h a t i t c a n a d d r e s s e n e r g y s e c u r i t y a n d c l i ma t e
c h a n g e s i mu l t a n e o u s l y w i t h i n a t h r i v i n g e c o n o mi c c o n t e x t . T h i s i s o u r
mo s t p o w e r f u l t oo l . Wi t h o ut t h i s l e a d e r s h i p, n o i nc r e me n t a l s hi f t i n
t e c h n i c a l a s s i s t a n c e o r p ol i c y d i a l o g u e w i l l g e t t h e t r a c t i o n i t n e e d s t o
h e l p mo v e C h i n a o n t o a f u n d a me n t a l l y d i f f e r e n t c o u r s e .
             G i v e n g r e a t e r U . S . w e a l t h , c u mu l a t i ve e mi s s i o ns a n d r e l i a n c e o n
g l o ba l e ne r g y ma r k e t s , t hi s l e a de r s hi p i s a pr e r e q ui s i t e . I 'd l i k e t o
ma k e o n e p o i n t a b o u t c u mu l a t i v e e mi s s i o n s b e f o r e m o v i n g o n t o m o r e
practical areas of collaboration.
             I t 's w i d e l y a c k n o wl e d g e d t h a t C h i n a w i l l s u r p a s s t h e U . S . a s t h e
w o r l d 's l a r g e s t e mi t t e r o f g r e e n h o u s e g a s e mi s s i o n s v e r y s o o n . B u t i t ' s
a l s o i mp o r t a n t t o r e me mb e r t h a t c a r b o n d i o x i d e , a ft e r b e i n g e mi t t e d ,
l i v e s i n t h e a t mo s p h e r e fo r 1 0 0 y e a r s o r mo r e .                            So from this
perspective, over the period 1920 to 2020, the United States will have
e mi t t e d mo r e t h a n t w i c e a s m u c h c a r bon d i o xi d e i n t o t he a t mo s p h e r e a s
C h i n a . I t w i l l t h u s b e ma n y d e c a d e s be f o r e C hi n a s ur p a s s e s t h e Un i t e d
S t a t e s a s t h e l a r g e s t e mi t t e r , a n d t h e c h a r t i n my w r i t t e n t e s t i mo n y I
think illustrates this point vividly.

                                                      - 215 -
             S o I ' d l i k e t o t o u c h o n f o u r s e l ec t e d a r e a s o f p o t e n t i a l U . S . a n d
C h i n a c o o p e r a t i o n t h i s mo r n i n g : e n e r g y e f f i c i e n c y ; e n e r g y s e c u r i t y ;
clean coal; and renewables.
             A s M s . Fi n a mo r e n o t e d , e f f o r t s t o i mp r o v e t h e e f f i c i e n t u s e o f
e n e r g y a r e t he mo s t p o w e r fu l me a s ur e s C hi n a c a n t a k e t o me e t i t s
d e v e l o p me n t g o a l s , i mp r o v e g l o b al e n e r g y s e c u r i t y a n d r e d u c e
g r e e n h o u s e g a s e mi s s i o n s . B e n e f i t s o f i mp r o v e d e f f i c i e n c y a c c u mu l a t e
o v e r t i me . C h i n a 's u n i q u e l y l o w e n e r g y - t o - G D P r a t i o d u r i n g t h e 1 9 8 0 s
a n d 1 9 90 s h e l p o f f s e t t h e n e e d t o bu r n mi l l i o ns of t o n s o f c o a l .
             S o me o f t h a t b e n e fi t h a s b e e n o f f s e t i n r e c e n t y e a r s , b u t C h i n a
has placed deficiency, now in a political way, back at the top of its
d o me s t i c e n e r g y p o l i c y a g e n d a .
             C h i n a ' s e ff i c i e n c y e f f o r t s a r e t i e d t o l a r g e r g l o b a l i nt e r e s t s . T he
e l e c t r i c i t y s h o r t a g e o f 2 0 0 3 t o 2 0 0 5 , a s w e n ow k n o w , r e s u l t e d i n t h e
need for substantial oil-fired backup power generation at Chinese
f a c t o r i e s a n d c o n t r i b u t e d t o t h e s u r g e i n i mp o r t ed o i l p r o d u c t s i n 2 0 0 4 .
T h i s p h e n o me n o n d e mo n s t r a t e s t h a t C h i n a 's l a r g e l y h o me g r o w n a n d
i n t e r n a t i on a l l y i n s u l a t e d p ow e r s e c t or c a n a f f e c t t he p r i c e o f c or n i n
Iowa.
             I t i s i n t he U . S. n a t i o n a l i n t e r e s t t o h e l p C h i na me e t i t s
a mb i t i o us e n e r g y e f f i c i e nc y t a r g e t a nd , a s M s . F i na mo r e me n t i on e d ,
that is to lower energy intensity by 20 percent by 2010.
             The U.S. should support capacity building efforts to provide the
b u s i n e s s , f i n a n c i a l a n d r e gu l a t or y s k i l l s ne e d e d t o p r o mo t e ma r k e t -
b a s e d e ne r g y e f f i c i e n c y pr oj e c t s a nd pe r f o r ma n c e s t a n da r d s i n C h i n a .
             S p e c i a l e mp h a s i s i s ne e de d t o i mp r o v e t r a ns p a r e n c y i n t h e
r e l a t i o n s h i p b e t w e e n e n e r g y , e c o n o mi c a c t i v i t y a n d g r e e n h o u s e g a s
e mi s s i o n s .
             W R I r e c e n t l y i n i t i a t e d a p r o j e c t t o i n t r o d u c e t he g r e e n h o u s e g a s
p r o t o c o l i n t o C h i n a . T h e Pr o t o co l , wh i c h wa s d e v e l o p e d b y WR I a n d
t h e Wo r l d B u s i n e s s C o u n c i l o n S u s t a i n a b l e D e v e l o p me n t , i s a wi d e l y
u s e d me t h o d o l o g y t o me a s u r e e n e r g y u s e a n d g r e e n h o u s e g a s
e mi s s i o n s , a n d i t s e r v e s a s a f o u n d a t i o n f o r c a r b o n ma r k e t s a n d t r a d e .
We a r e g e t t i n g s u r p r i s i n g i nt e r e s t i n t hi s pr o d u c t f r o m t h e C h i n e s e .
             On energy security, there is a need to better integrate China into
t h e g l o b a l e n e r g y s y s t e m. G r e a t e r p a r t i c i p a t i o n i n t h e I E A , G 8 a n d
o t h e r g l o b a l b o d i e s t h a t c o o r d i n a t e e n e r g y a nd c l i ma t e d i a l o g u e wo u l d
g i v e C h i n a a g r e a t e r s t a k e i n t h e o u t c o me s .
             T h e U . S . n e e d s t o a c c e l e r a t e h i g h - l e ve l d i a l o gu e w i t h C h i n a t o
e n s ur e t ha t e a c h ot h e r 's i n t e n t i o n s a n d c o n c e r n s a r e u n d e r s t o o d mo r e
c l e a r l y . Wi t h o u t a c t i o n , C h i n a w i l l l i k e l y c o n t i n u e i n v e s t i n g i n a n d
c o u r t i n g r e l a t i o n s w i t h c o u n t r i e s t h a t h a v e d r a ma t i c a l l y d i f f e r e n t w o r l d
views than our own.
             China will also continue trying to build energy security through
                                                       - 216 -
p a r t i a l s o l u t i o n s l i k e c o a l- t o - l i q u i d s . A n d i t w i l l u s e i t s n e wl y b u i l t
S t r a t e g i c P e t r o l e u m R e s e r v e n o t i n c on c e r t w i t h o t h e r s t o c k - p i l e r s t o
ma x i mi z e t h e s h a r e d p u bl i c g o o d b u t t o i n f l u e n c e n a r r o w e r p o l i t i c a l
i n t e r e s t s a t h o me .
             T h e U . S . h a s s e v e r a l e f f o r t s u n d e r wa y t o d i s c u s s e n e r g y s e c u r i t y
c o n c e r n s w i t h C h i na . T o b e f r a n k , w e l a c k c r e d i b i l i t y w i t h t h e C h i n e s e
b e c a u s e w e d o n ' t a l w a y s w a l k t h e t al k . U n o c a l , C A F E a n d K y o t o a r e
e x a mp l e s o f t h i s t h a t t h e C h i n e s e o f t e n c i t e .
             T h e U . S . n e e d s t o d e mo n s t r a t e s i n c e r i t y t h r o u gh d o me s t i c a c t i o n
b e f o r e C h i n a wi l l b e c o mp e l l e d t o a c t . C o n f i d e n c e b u i l d i n g me a s u r e s
a r e n e e d e d t o r e ga i n t r a c t i o n .
             T h e U . S . c o u l d l i n k a s i g n i f i ca n t i n c r e a s e i n i t s C o r p o r a t e
A v e r a ge F u e l E f f i c i e n c y s t a n d a r d s , f o r e x a mp l e , wi t h a r e c i pr o c a l
a c t i o n i n C h i n a s u c h a s g r e a t e r e n e r g y d a t a t r a n s p a r e n c y . F o l l o w- o n
me a s u r e s c o u l d b u i l d f r o m t h e s e s t a r t i n g p o i n t s .
             Now, the third point: clean coal. China's use of coal is key to
our ability to hold greenhouse gas concentrations at a level that avoids
t h e mo s t d e v a s t a t i ng i mp a c t s o f c l i ma t e c ha n g e .
             In the last three years alone, China has installed about 200
g i g a w a t t s o f n e w c o a l - f i r e d p o w e r p l a n t s t h a t e mi t a b i l l i o n t o n s o f
c a r b o n d i o x i d e e a c h y e a r . T h i s i s l o n g - l i v e d i n f r a s t ru c t u r e a n d o u r
global carbon budget cannot absorb this level of expansion for long.
             A n u mb e r o f b i l a t e r a l a n d m u l t i l a t e r a l e f f o r t s a r e u n d e r w a y t o
s p e e d t h e d e p l o y me n t o f c a r b o n c a p t u r e a n d s e q u e s t r a t i o n i n C h i n a .
B e f o r e w e c a n e x p e c t Ch i n a t o d e p l o y CC S w i d e l y , h o w e v e r ,
i n d u s t r i a l i z e d c o u n t ri e s l i k e t h e U . S . mu s t f i r s t p r o v e t h a t i t c a n b e
d o n e s a f e l y a n d u n d e r a v i a bl e b u s i n e s s mo d e l h e r e .
             T h e U . S . s h o u l d t h u s s u p p o r t o n a mu c h l a r g e r s c a l e t h e d o me s t i c
d e mo n s t r a t i o n p r o j e c t s a nd p o l i c i e s t h a t a r e n e e d e d t o a n s w e r
r e ma i n i n g q u e s t i o n s a b o u t C C S .
             China is actively developing industries around renewable energy
t e c h n o l o g y a n d h a s s e t a g g r e s s i v e t a r g e t s f o r i t s d e p l o y me n t . T h e
n a t i o n a l r e n e w a b l e e n e r g y l a w o f f e r s s o me i n c e nt i ve s f or i t s us e .
             D e s p i t e t h i s p r o g r e s s , r e n e w a b l e s w i l l c o n t i n u e t o ma k e u p a
r e l a t i ve l y s ma l l f r a c t i o n o f t h e e n e r g y mi x i n C h i n a o ve r t h e n e xt f e w
decades.                   I n t e r n a t i o na l c ol l a b or a t i on wi t h C h i na t o fu r t h e r
c o m me r c i a l i z e wi n d , s o l a r , b i o ma s s a n d o t h e r r e n e w a b l e e n e r g y
technologies could pay significant dividends.
             C h i n e s e ma n u f a c t u r e r s c a n d r i ve c o s t r e d u c t i o n s t h a t ma k e
p o s s i b l e mo r e w i d e s c a le p e n e t r a t i o n o f t h e s e c l e a n o p t i o n s a r o u n d t h e
w o r l d . M a n y e x i s t i n g i n t e r n a t i o n a l f o r a s u c h a s t h e U . N . F r a me w o r k
C o n v e n t i o n o n Cl i ma t e C h a n g e a n d t h e W T O a r e b e i n g u n d e r u t i l i z e d a s
opportunities to discuss key issues surrounding renewable energy
t e c h n o l o g y t r a n s f e r i n c l u d i n g t he r o l e g o v e r n me n t s c a n p l a y i n
                                                     - 217 -
f a c i l i t a t i ng t he s ha r i n g a n d pr o t e c t i o n o f i n t e l l e c t u a l p r o p e r t y r i g h t s .
             I n c o n c l u s i o n , C h i n a mu s t b e p a r t o f a n y g l o b a l r e s p o n s e t o
c l i ma t e c h a n g e a nd e n e r g y i n s e c ur i t y. T h e U . S . w i l l a l mo s t c e r t a i nl y
need to act first, however, given its greater wealth, resource
e n d o w me n t s a n d h i s t o r i c a l e mi s s i o n s . Wh i l e t h e r e i s g r o w i n g f e d e r a l
s u p p o r t t o p u t a b i n di n g c a p o n g r e e n h o u s e g a s e mi s s i o n s i n t h i s
c o u nt r y , C h i n a p r e s e nt s bo t h r ea l a n d p e r c e i v e d t h r e a t s t o o u r
u n i l a t e r a l a c t i on .
             T h e p o t e n t i a l i mp a c t s o n t r a d e t h a t w o u l d r e s u l t f r o m a n
a s y m me t r i c a l c a r b o n r e g i m e , f o r e xa mp l e , m u s t b e m o r e t h o r o u g h l y
considered. Early studies suggest, however, that only a few U.S.
s e c t o r s w o u l d b e a f f e c t e d b y c ar b o n i n t e n s i v e C h i n e s e i mp o r t s .
Policies could be developed to address these impacts.
             T h e U . S . c o u l d i n t e n s i f y c o o p e ra t i o n w i t h C h i n a o n a v a r i e t y o f
clean energy options. Four have been discussed here. But successful
c o l l a b o r a t i o n wi l l r e q u i r e c o n f i d e n c e b u i l d i n g me a s u r e s t h a t o v e r c o me
mi s t r u s t a n d a s e n s e o f i n s i n c e r i t y .
             B y d e mo n s t r a t i n g d o me s t i c a c t i o n t o i mp r o v e g l o b a l e n e r g y
s e c ur i t y a n d mi t i ga t e g r e e n ho u s e g a s e mi s s i o ns , t h e U . S . c o u l d i ni t i a t e
t h a t n e w - f o u n d t r u s t . Th a n k y o u .
[ T h e s t a t e me n t f o l l o w s : ] 10

                 P A N E L V I I : D i s c us s i o n, Q ue s t i o n s an d A n s we r s

             VICE CHAIRMAN BLUMENTHAL:                                        Thank you all for your
t e s t i mo n y . We ' v e h e a r d , a s T o m D o n n e ll y h a s s a i d , s i x p a n e l s s o f a r ,
s o w e a r e d e v e l o p i n g s o me s o r t o f p i c t u r e , s o me s o r t o f
i n c o n s i s t e n c i e s , b u t i t s e e ms l i k e t he r e 's a c o n t e x t t o a l l o f t hi s t h a t
w h e n D r . L o g a n a n d M s . Fi n a mo r e s a y t h a t t he r e i s po l i t i c a l w i l l i n
China.
             T h e r e 's a h o s t o f p r i o r i t i e s t ha t w e 'v e h e a r d a b ou t . Th e fi r s t a n d
f o r e mo s t i s k e e p i n g t h e e c o n o my g o i n g a n d ma k i n g s u r e t h a t j o b s a r e
c r e a t e d a n d ma k i n g s u r e t h e r e gi me s t a ys i n p ow e r . T h e n w e 'v e he a r d
t e s t i mo n y f r o m M r . D o n n e l l y a n d o t h e r s b e f o r e h a n d a b o u t o t h e r t y p e s
o f s e c ur i t y p r i o r i t i e s . I w o nd e r w he t he r y ou g e t t h e s e ns e t h a t t h e r e i s
p o l i t i c a l w i l l a s c omp a r e d t o a l l t he ot h e r c r i s e s a nd da y- t o- d a y pu l l s
o n t h e l e a d e r s hi p a n d a l s o i n t h e c o n t e xt o f s u s pi c i o n o f t h e Un i t e d
S t a t e s , s o me o f w h i c h w e c a n 't d o a n y t h i n g a b o u t , a n d t h e i s s ue s o f
Taiwan.
             I d o n ’ t t h i n k t h a t c o o pe r a t i v e p r og r a ms i n t he w o r l d w i l l e ve r
c o n v i n c e t h e C h i n e s e t h a t w e 'r e g o i n g t o b e t r u s t w o r t h y o n t h e T a i w a n
i s s ue .

10
     Click here to read the prepared statement of Dr. Jeffrey Logan
                                          - 218 -
             I'm very curious about this issue of political will or this issue
t h a t t h e Ch i n e s e a r e g o i ng t o l a y o u t t h e c o s t s n e c e s s a r y t o d o s o me o f
t h e t h i n g s t h a t y o u 'v e me n t i o n e d w h e n t h e r e a r e s o ma n y o t h e r
p r i o r i t i e s i n C h i na a n d t he l a r g e r c o n t e x t i s o n e o f g e n e r a l i z e d
s u s p i c i o n a b o u t g e o p o l i t i c a l i s s u e s v i s - à - v i s t h e U n i t e d S t a t e s ? Th a t 's
f o r e i t h e r o f y o u o r t h a t 's f o r a l l t h r e e o f y o u r e a l l y .
             M S . F I N A M O R E : I 'd b e h a p p y t o t a k e a c r a c k a t t h a t . I t
certainly depends upon the issue.                                     T h e r e a r e ma n y , ma n y i s s u e s .
Y o u ' v e d e s c r i b e d a n u mb e r o f t h e m o n w h i c h t he r e i s n 't p o l i t i c a l w i l l .
I ' m o n l y r e f e r r i n g t o e n e r g y e f f i c i e nc y . I h a v e s e e n a c h a n g e i n t h e
c e n t r a l g o v e r n me n t l e v e l o v e r t h e 1 7 y e a r s I 'v e b e e n w o r k i n g i n C h i n a .
I h a v e n e v e r s e e n s u c h a t t en t i o n t o e n e r g y e f f i c i e n c y .
             We ' v e b e e n p r o mo t i n g t h e s e i s s u e s i n C h i n a f o r o v e r t e n y e a r s ,
a n d h a v e h a d t o g o t o me e t i n g a f t er me e t i n g , h o s t c o n fe r e n c e s , p a y f o r
them ourselves, pay to bring study groups to the U.S., try to talk to
them about these issues and get very nice response.
             B u t d u r i n g a p e r i o d w h e r e t he r e w a s e n e r g y a b u n d a n c e , i t w a s
n o t o f g r e a t i n t e r e s t . T h a t h a s a l l c ha n g e d i n t h e p a s t c o u p l e o f y e a r s .
I t h i n k wh a t t r i g g e r e d i t w a s n a t i o n w i d e e ne r g y s h o r t a g e s t h a t C h i n a
e x p e r i e n c e d o v e r t h e l a s t t h r e e o r f o u r s u m me r s . I t h i n k t h e r e a r e a l s o
other issues at play here in that China is beginning to feel the heat of
i n t e r n a t i o n a l p r e s s u r e t o d o s o me t hi n g a b o u t i t s c a r b o n e mi s s i o n s , a n d
s o i t i s f o c u s e d o n e n e r g y e ff i c i e n c y a s o n e wa y.
             C h i n a c a me o u t w i t h a N a t i o n a l C l i m a t e A c t i o n P l a n l a s t w e e k
t h a t f e a t u r e d e ne r g y e f f i c i e n c y . I t h i n k i t ' s a l s o b e g i n n i n g t o b e
c o n c e r ne d a b o ut t he e n vi r o nme n t a l i mp a c t s o f i t s e n e r g y u s e , b u t I
w a n t t o s a y h e r e ' s s o me o t h e r e vi de n c e o f t h i s : C h i na s e t t h i s 2 0
percent energy intensity reduction goal 2005 to 2010 after the first
y e a r i t d i d n ' t me e t i t .
             T h i s s h o r t f a l l g o t r e p o r t e d a r o u n d t h e wo r l d .                        It was
e mb a r r a s s i n g t o C h i n a 's i n t e r n a t i o n a l i ma g e , a n d a s a r e s u l t , t h e
P r e mi e r We n J i a b a o w e n t o n n a t i o n a l t e l e v i s i o n f o r o v e r a n h o u r t o
b e r a t e t h e c o u n t r y f o r i t s f a i l u r e t o me e t t h o s e g o a l s a n d s a i d i f t h e y
d o n 't me e t i t b y t h e e n d o f t h i s y e a r , h e a d s a r e g o i n g t o r o l l .
             S o I s e e t h a t a s a b i g c h a n g e . Wh e n I s a y po l i t i c a l wi l l , i t 's
i mp o r t a nt t o d i s t i ng u i s h be t w e e n t he c e nt r a l go v e r n me nt l e v e l , w h i c h
i n t e r e s t i ng l y e n o ug h i s t a k i n g t he l e a d on t hi s , a n d t h e l oc a l
g o v e r n me n t s r e s p o n s i b l e f o r i mp l e me n t a t i o n , w h e r e t h i n g s o f t e n f a l l
s h o r t . S o t h e ke y i s t o ge t t h e l oc a l go v e r n me nt s a c t i n g t o i mp l e me n t
national policies.
             O n e o f t h e t h i ng s t he y 'r e s t a r t i n g t o d o i s t o d e ve l op a ne w
s y s t e m o f r a t i n g t h e j o b p e r f o r ma n c e o f p r o v i n c i a l l e a d e r s , n o t j u s t o n
h o w w e l l t h e y g r o w t h e e c o n o my o f t h e i r p r o v i n c e o r c i t y , b u t o n h o w
w e l l t h e y me e t t h e s e n a t i o n a l t a r g e t s .
                                                      - 219 -
            VICE CHAIRMAN BLUMENTHAL:                                           Just to follow up that
s t r a n d . We w e r e i n n o r t h e a s t C h i n a . T h e y w e r e r a t i n g t h e i r p a r t y
secretary on how quickly he built his infrastructure.
            M S . F I N AM O R E : R i g h t .
            V I C E C H A I R M A N B L U M E N T H A L : A n d I wo u l d i ma g i n e t h a t
h e ' s g o t a g o o d f u t u r e . I wo u l d a l s o i ma g i n e t h a t i mp l e me n t a t i o n o f
new building energy codes is very expensive versus just building a
b u i l d i n g ; r i g h t . S o t h e r e a r e s o me t r a d e o f f s . Wh e n y o u ' r e i n n o r t h e a s t
C h i n a a n d y o u s e e t h a t t h e p a r t y s e c r e t a r y i s g o i n g t o g e t p r o mo t e d b y
h o w q u i c k l y h e b u i l d s u p n o r t h e a s t C hi n a v e r s u s b u i l d i n g c l e a n
buildings or energy codes, it still seems to me that I haven't seen that
t r a d e o f f b e i n g ma d e i n t h e f o r m o f l a y i n g o u t t h e c o s t t o h a v e c l e a n
energy.
            M S . F I NA M O R E : J u s t o ne o t h e r e x a mp l e . Y o u ' r e r i g h t . H o w
w e l l t he i r G D P g r o w s i s a ke y me a s ur e o f j o b p e r f o r ma n c e , b u t t h e r e
a r e e f f o r t s u n d e r wa y t o r e fo r m t h e w a y i n wh i c h G D P i s d e t e r mi n e d
t h r o u g h d e v e l o p me n t o f a g r e e n G D P a p p r o a c h w h e r e t h e c o s t s o f
developing that GDP are subtracted, and I think that is another
w e l c o me e f f o r t .
            VICE CHAIRMAN BLUMENTHAL: Thank you.
            M R . D O N N E L L Y : C a n I j u s t a ct u a l l y a d d o n e c o m me n t ?
            VICE CHAIRMAN BLUMENTHAL: Yes, please.
            MR. DONNELLY: I don't think that energy efficiency or even
c l e a n c o a l i n i t i a t i ve s a r e i n c o n s i s t e n t w i t h t he s t r a t e gi c a p p r oa c h t h a t
China is taking. It's a little bit of a caricature to say that they have
t h i s q u e s t f o r e n e r g y a u t a r k y , b u t t h e re i s s o me a s p e c t o f t h a t , s o t o t h e
d e g r e e t o w h i c h t h e C h i ne s e f e e l t he ms e l v e s l e s s v u l n e r a b l e t o a n
i n t e r n a t i on a l e ne r gy ma r k e t , a n d w he n t he y r e l y p a r t i c ul a r l y o n e n e r g y
s u p p l i e s f r o m u n s t a b l e p l a c e s , t h e a bi l i t y t o g e t t h e b i g g e s t b a n g f o r
B T U o r t o d e v e l o p t h e i r o wn c o a l s u p p l i e s o r s o me t h i n g l i k e t h a t I
think would have strategic appeal to Chinese leadership.
            VICE CHAIRMAN BLUMENTHAL: Thanks.
            C O M M I SS I O N E R F I E D L E R : I h a v e t w o q u e s t i o n s . On e , w h a t
role does corruption play in the Chinese pollution problem and the
f i x e s n e c e s s a r y t o s o l v e t h e p r o b l e ms ?
            We h e a r d y e s t e r d a y a b o u t u n l i c e n s e d p l a n t s g o i n g u p . We 'v e
l o n g r e a d a b o u t i l l e g a l mi n e s . We h a v e l o n g r e a d a b o u t n o l o c a l
e n f o r c e m e n t o f du mp i n g s t u f f i n t o r i ve r s .                   S o w h a t r ol e do e s
c o r r u p t i o n p l a y i n t h i s p r o c e s s , a n d wh a t i s t h e p r o s p e c t fo r f i x i n g i t ?
            D R . L O G A N : I 'l l s t a r t o f f w i t h t h i s t o ma k e a f e w r e ma r k s . I 'm
s u r e my c o l l e a g u e s w i l l c h i me i n . I t h i n k t h e d i f f e r e n c e b e t w e e n
c o r r u pt i on a n d t h e l a c k o f e n f o r c i n g l a w s i s a f a i r l y b i g d i s t i n c t i o n
t h e r e . Th e a mo u n t o f c o r r u p t i o n t ha t p r o b a b l y i s u n d e r w a y o r t h a t
o c c ur s , wh i c h a l l ow s i l l e ga l mi n e s t o c o n t i n u e o p e r a t i n g o r t h a t a l l o w s
                                                     - 220 -
f a c t o r i e s t o p u mp p o l l u t a n t s i n t o w a t e r o r t h e n u mb e r o f c o a l p l a n t s
t h a t a r e bu i l t w i t h ou t t h e r i gh t p e r mi ts , mo s t o f t h a t i s p r o b a b l y j u st
d u e t o i n s t i t u t i o n a l f a i l u r e mo r e t ha n o u t r i g h t c o r r u p t i o n i n my v i e w .
             B u t c l e a r l y , i t ' s h a p p e n i n g . I t ' s n o t t o s a y t h a t c o r r u p t i o n i s n 't
c o m mo n i n t h e e n e r g y a n d e n v i r o n me n t a l s e c t o r s i n C h i n a .
             M S . F I NA M O R E : I 'd a l s o s a y t h a t t h e r e 's a l o t o f i nc e n t i v e s ,
s h a l l w e s a y , f o r l o c a l g o v e r n me n t s t o l o o k t h e o t h e r wa y w h e n t h e i r
p o l l u t i n g f a c t o r i e s a r e s h u t d o w n y e t c o n t i n u e t o o p e r a t e . I d o n 't k n o w
a s mu c h c o r r u p t i o n a s t h e f a c t t h a t t h e y h a ve a f i n a nc i a l i n t e r e s t i n t he
f a c t or i e s o r t h e y ow n s h a r e s i n i t .
             C O M M I SS I O N E R F I E D L E R : I d o n 't k n o w h o w y o u ' r e d e f i n i n g
c o r r u p t i o n , b u t g e n e r a l l y i t 's d e f i n e d a s f i n a n c i a l i n t e r e s t s .
             M S . F I NA M O R E : Y e s . We l l , f i n a n c i a l i n t e r e s t i n me a n i n g t h e y
o w n s h a r e s i n t h e f a c t o r y t h e ms e l v e s , n o t r e a l l y c o r r u p t i o n .
             C O M M I SS I O N E R F I E D L E R : Y e s , I u n d e r s t a n d .
             M S . F I N AM O R E : I t i s a c o n fl i c t o f i n t e r e s t s .
             DR. LOGAN: Looking the other way.
             C O M M I SS I O N E R F I E D L E R : C o n f l i c t o f i n t e r e s t a n d c o r r u p t i o n
d i s t i n c t i o n s o n s c a l e i n C h i n a a r e s tr i k i n g l y n o t t h a t d i f f e r e n t , i n t h e
s e n s e t h a t i f I h a v e a f i n a n c i a l i nt e r e s t i n a f a c t o r y , I 'm a l o c al
g o v e r n me n t a n d I 'm t h e Pa r t y l e a d e r , a n d I w a n t t o ma k e mo n e y o n i t , I
t h e r e f o r e d o n o t e n fo r c e t he l a w .
             M S . F I N AM O R E : C o r r e c t .
             C O M M I SS I O N E R F I E D L E R :                   I d o n 't k n o w h o w y o u d e f i n e
c o r r u p t i o n , b u t I t h i n k t h a t 's c o r r u p t i o n . A n d t h a t 's s y s t e mi c i s w h a t
I ' m u n d e r s t a n d i n g , a n d s o I 'm t r y i n g t o g e t a t w h e t h e r o r n o t t h e r e 's
a n y p r o s p e c t o f s u c c e s s o n a n e n v i r o nme n t a l l e v e l w i t h ou t s ol vi n g t h e
c o r r u p t i o n p r o b l e m?
             M S . F I NA M O R E : I t i s a s e r i o u s p r o b l e m. Y o u c a n c a l l i t
w h a t e v e r y o u w a n t , b u t t h e f a c t t h a t t h e g o v e r n me n t o w n s s h a r e s i n
e n t e r p r i s e s i s a s e r i o u s i mp e d i me n t , a n d o n e w a y t o s o l v e t ha t i s
i n s t i t u t i o n a l l y b e c a u s e t h e g o v e r n me n t b o d i e s a n d t h e o f f i c i a l s
r e s po n s i bl e          f or    enforcing             t he      e n vi r on me n t a l         laws     are      the
E n v i r o n m e n t a l Pr o t e c t i o n B u r e a u o f f i c i a l s , w h i c h a r e o s t e n s i b l y u n d e r
t h e St a t e E n v i r o nme n t a l Pr o t e c t i o n A g e n c y r a t h e r t h a n t h e l o c a l
g o v e r n me n t s t h a t o w n t h e s h a r e s .
             B u t t h e l o c a l g o v e r n me n t s a r e t h e o n e s t h a t , i n fa c t , h i r e a n d p a y
t h o s e l o c a l o f f i c i a l s , a n d r e mo v i n g t h a t b o n d w o u l d g i v e t h e
e n v i r o n me n t a l p r o t e c t i o n o ff i c i a l s m o r e i n d e p e n d e n c e a n d a bi l i t y t o
e n f o r c e t h e l a w s r e g a r d l e s s o f t he vi e w s o f t he f i na n c i a l i n t e r e s t s o f
t h e l o c a l g o v e r n me n t .
             C O M M I SS I O N E R F I E D L E R : L e t me a s k a s e c o n d q u e s t i o n . I
s t i l l h a v e a mi n u t e o r t w o . We h e a r d y e s t e r d a y , M r . Do n n e l l y , fr o m
o n e o f t h e e n e r g y e x p e r ts t h a t t h e Ch i n e s e p ur s u i t o f o w n e r s h i p o f
                                                      - 221 -
s o u r c e s o f e n e r g y i s f u t i l e . A n d t h a t i t w i l l b e a l o n g t i me o r ma y b e
t h e y h a v e n 't s u c c e e d e d i n p r o t e c t i n g t h e i r o w n s e a l a n e s w i t h t h e i r o w n
n a v y , a n d t he y mi gh t no t b e a bl e t o e v e r d o t ha t i n t he I n di a n O c e a n
u n l e s s t h e y w e r e t o c o n t r o l Ta i w a n .
             S o i t s e e ms t h a t t h e i r i nt e r e s t s a r e go i n g t o be d i f f i c ul t , i f n o t
i mp o s s i b l e , t o s a t i s f y o n e n e r g y , t h a t t h e y wi l l h a v e t o d e p e n d o n t h e ,
l i k e t h e r e s t o f u s , o n t he i n t e r n a t i o n a l e n e r g y ma r ke t t o p r o d u c e f u e l .
             M R . D O N N E L L Y : I w o u l d s a y t h a t ' s a w i d e l y h e l d v i e w a mo n g s t
e c o n o mi s t s a n d i t m a y a c t u a l l y b e t r u e i n t h e l o n g r u n .
             H o w e v e r , i n t h e i nt e r i m, t h a t d o e s n 't me a n t h a t t h e r e w ou l d n 't b e
g e o p o l i t i c a l c o n s e q u e n c e s o f C h i n e s e a t t e mp t s , f u t i l e or s u c c e s s f ul , t o
s e e k e ne r g y a ut o n omy . I t ' s v e r y d i f f i c u l t , f o r e x a mp l e , t o e x pl a i n w h y
t h e y w o u l d b u i l d t h e K az a k h s t a n p i p e l i n e . I t c e r t a i nl y , a b s e nt t h e
r e c o r d p r i c e s f o r o i l t h a t c u r r e n t l y e x i s t , d i d n 't ma k e e c o n o mi c s e n s e ,
b u t i t ma ke a w h ol e l ot o f s t r a t e g i c s e ns e .
             S o I d o n 't k n o w f o r s u r e w h e t h e r t h e C h i n e s e w i l l u l t i ma t e l y f a i l
i n t h i s , bu t t h e r e c o u l d be a l o t o f - -
             C O M M I SS I O N E R F I E D L E R : F a l l o u t f r o m i t .
             M R . D O N N E L L Y : A n d a g a i n , I w ou l d s a y t h e r e a l r e a d y h a v e
b e e n b a d c o n s e q u e n c e s i n t h e a t t e mp t t o do s o . T h e y j u s t s e e t hi n g s
d i f f e r e n t l y t h a n we d o . W h e r e w e s e e ma r k e t f o r c e s o c c u r r i n g , t h e y
s e e o r s m e l l a h i n t o f A me r i c a n h e g e mo n y . S o I ' m s i m p l y t r y i n g t o
e x p l a i n t h e i r b e h a v i o r , a n d w h e t h e r t h e i r s t r a t e gy i s u l t i ma t e l y a f u t i l e
o n e , i t wi l l b e a l o n g t i me b e f o r e w e k n o w t h a t .
             C O M M I SS I O N E R F I E D L E R : T h a n k y o u v e r y mu c h .
             HEARING COCHAIR VIDENIEKS: Madam Chair.
             C H A I R M A N B A R T H O L O M E W: T h a n k y o u v e r y mu c h a n d t h a n k
you to all of our witnesses today. Mr. Donnelly, it's nice to see you
b a c k w i t h u s , a n d M s . F i n a mo r e a n d D r . L o g a n , i t 's r e a l l y i nt e r e s t i ng
t o h e a r a b o u t y o u r o n - t h e - g r o u n d e x p e r i e n c e o v e r , I t hi n k y o u s a i d 1 7
years of doing this, and how things are changing.
             I always find it interesting when people talk about the
r e l a t i o n s h i p b e t we e n t h e c e n t r a l g o v e r n me n t a n d t h e l o c a l
g o v e r n me n t s . O n s o me i s s u e s , t h e l o c a l g o v e r n me n t s s e e m t o b e t r y i n g
t o d o t h e r i g h t t h i n g a n d t h e y 'r e h a mp e r e d b y t h e c e n t r a l g o v e r n me n t .
O n o t h e r i s s u e s , t h e c e n t r a l g o v e r n me n t s e e ms t o b e d o i n g t h e r i g h t
t h i n g a n d i s h a mp e r e d b y i t .
             I f i n d my s e l f c o n s t a n t l y p e r p l ex e d a b o u t j u s t h o w mu c h p o w e r
t h e c e n t r a l g o v e r n m e n t h as a n d w h a t 's g o i n g o n . I h o l d i n my h e a d t h e
f a c t s o n i n t e l l e c t u a l pr o p er t y r i g h t s , a n d t h a t t he r e i s n o v i o l a t i o n o f ,
n o c o u n t e r f e i t i n g o f t h e Be i j i n g O l y mp i c s l o g o s . Y o u g e t t h e s e n s e
t h a t t h e r e a r e s o m e t h i n g s t h a t t h e C h i n e s e g o v e r n me n t c o u l d e x e r t
s o me mo r e p o w e r o n . H o w y o u g e t t he m t o d o i t i s I t h i n k a n o n g o i n g
challenge.
                                                      - 222 -
            I w a s g o i n g t o a s k , h o w d o y o u i de n t i fy t h e o p p o r t u n i t i e s f o r t h e
cooperation to take place.                              B u t M s . F i n a mo r e , y o u d e s c r i b e d i t .
T h r o u g h c o n f e r e n c e s a n d me e t i n g s a n d n e t w o r k s a n d a l l o f t h a t .
            A r e y o u f i n d i n g t h a t t h e i d e a s a r e n o w c o mi n g mo r e f r o m y o u r
C h i n e s e c o l l e a gu e s o r i s t h i s s t i l l s o me t h i n g t h a t y o u r o r g a n i z a t i o n s
e n d u p h a v i n g t o p i t c h mo s t o f t h e t i me ?
            MS. FINAMORE:                        T h e r e i s a c h a n g e i n t h a t t h e i d e a s a nd
a c t u a l l y s o me o f t h e p u s h n o w i s c o mi n g f r o m t h e C h i n e s e s i d e . F o r
e x a mp l e , j u s t l a s t M a r c h , w e w e r e i n v i t e d t o a t t e n d t h e n a t i o n a l a n n u al
e n e r g y p l a n n i n g m e e t i n g o f t h e J i a n g s u p r o v i n c i a l g o v e r n me n t , wh i c h
w a s q u i t e a n h o n o r . We w e r e a l i t t l e b i t s t u n n e d b ec a us e t he y s pe n t
t h e me e t i n g b e r a t i n g u s a n d s a y i n g h e r e 's o u r w o r k p l a n , a n d h e r e 's
w h a t w e w a n t y o u t o d o t o g e t u s t o me e t t h i s t a r g e t b y t h e e n d o f t h e
y e a r , a n d c a n y o u g e t u s a r e p o r t b y n e x t mo n t h ?
            And we were taken aback.                            T ha t w a s t h e f i r s t t i me t ha t 's
h a p p e n e d . S o t h a t 's t h e k i n d o f c h a n g e t h a t I ' m s e e i n g .
            C H A I R M A N B A R T H O L O M E W: D r . L o g a n , a n y s i mi l a r - -
            DR. LOGAN:                   I w o u l d a d d t o t h a t t h a t t h e r e 's t r e m e n d o u s
c o mp e t i t i o n t o w o r k w i t h t he C h i ne se . T h e A us t r a l i a n s , t h e J a pa ne s e ,
a l l t h e E ur o p e a n s , t h e C a n a di a n s , a l mo s t a l l l a r g e d e v e l o p i n g c o u n t r i e s
a r e t r yi n g t o w o r k w i t h t he C h i n e s e on t h i n gs , a n d i t 's o f t e n v e r y h a r d
t o g e t t h e m t o a g r e e t o c o l l a b o r a t e w i t h y o u i n a me a n i n g f u l a n d n e w
w a y b e c a u s e t h e y 'l l o f t e n r e c y c l e e xi s t i n g w or k or t h e y 'l l s a y t h a t
t h e y 'r e g e t t i n g mo r e mo n e y f r o m s o me o n e e l s e . T o a c t u a l l y h a v e a
p a r t n e r wh o i s c a p a b l e t o d o w o r k w i t h y o u i s s o me t i me s a c h a l l e n g e .
            C H A I R M A N B A R T H O L O M E W:                     T h a t 's a n i n t e r e s t i n g p o i n t
b e c a u s e t h e r e 's a di l e m ma i n d e v e l o pme n t g e ne r a l l y , o f c o ur s e , w h i c h
h a s t o d o w i t h o n - t he - g r o u n d c o o r d i n a t i o n b e t w e e n mu l t i l a t e r a l
a g e n c i e s , i n d i v i d u a l d o n o r s a n d n o w c l e a rl y a l o t o f N G Os . Ar e t h e r e
a n y me c h a n i s ms d e v e l o p i n g e v e n a m o n g s t p e r h a p s t h e n o n - C h i n e s e
N G O c o m mu n i t y t r y i n g t o c o o r d i n a t e t h a t o n e o r g a n i z a t io n i s n o t b e i n g
p l a y e d o f f a g a i n s t a n o t h e r , b u t a l s o t h a t t h e r e 's a n e c o n o my a n d a n
efficiency that's going on?
            M S . F I N A M O R E : T h a t w a s o n e o f t h e r e a s o n s f o r f o r mi n g t h i s
C h i n a - U .S . E n e r g y E f f i c i e nc y A l l i a nc e , a n d w e 'r e a c t u a l l y h o p i n g t o
e x p a n d i t t o i n c l u d e o t h er c o u n t r i e s a s w e l l b e c a u s e w e f o u n d , j u s t a s
Mr. Logan said, that there are a lot of organizations now throughout
t h e w or l d t r y i n g t o d o t he s a me t h i n g. We 'r e w a s t i n g ou r r e s ou r c e s .
T h e r e i s s o mu c h t h a t n e e d s t o b e d o n e . Th e o n l y w a y t o r e a l l y
l e v e r a g e o u r r e s o u r c e s i s t o c o o pe r a t e , s o t h a t ' s o n e e x a mp l e o f w h a t
w e 'r e t r y i n g t o d o .
            C H A I R M A N B A R T H O L O M E W: O n e o f t h e d i l e m ma s t h a t w e
have found on a lot of trade issues, of course, is that it's not unknown
f o r t h e Ch i n e s e g o v e r n me n t t o p i t o n e c o u n t r y a g a i n s t a n o t h e r i n o r d e r
                                                     - 223 -
to get different kinds of benefits or perks or get a stand down on
l e g i s l a t i o n t h a t mi g h t b e p e n d i n g .
            D o y o u t h i n k y o u 'r e g o i n g t o b e s e e i n g t h a t ? I f t h e C h i n e s e c a n
s a y t o y o u , w e l l , we c a n g e t a w h o l e l o t mo r e mo n e y f r o m t h e D u t c h o r
f r o m t h e N o r w e g i a n s o r fr o m a n o t h e r o r g a n i z a t i o n ? H o w d o y o u g e t
t h e m a l s o t o b e a r s o me o f t h e c o s t s o f t h e p r o g r a ms f r o m w h i c h t h e y 'r e
benefiting?
            D R . L O G A N : I w o u l d s a y t h e C hi n e s e a l r e a d y d o c o n t r i b u t e
costs for projects that they really consider key to their strategic
i n t e r e s t s . F o r e x a m p l e , t h e E u r o p ea n U n i o n r e c e n t l y i n i t i a t e d a m u l t i -
h u n d r e d mi l l i o n d o l l a r p r o je c t t o i m p r o v e i n du s t r ia l e ne r g y e f f i c i e nc y
i n C h i n a , a n d o n e o f t h e r e q u i r e me n t s w a s t h a t t h e C h i n e s e g o v e r n me n t
c o n t r i b u t e " x " p e r c e n t o f c o s t t o t h a t. I t hi n k t h e y 'r e v e r y w i l l i n g t o
d o t h a t wh e n t h e y s e e i t i n t h e i r s tr a t e g i c i nt e r e s t s , a nd C h i n a i s n o
longer a poor developing country. It has tremendous resources that it
c a n br i n g t o f o c us i f i t 's i n t he c o u nt r y’ s i n t e r e s t s .
            C H A I R M A N B A R T H O L O M E W: Y e s . $ 1 . 2 t r i l l i o n o f f o r e i g n
c u r r e nc y r e s e r ve s . M s . Fi n a mo r e , a n y c o m me n t o n t ha t ?
            M S . F I NA M O R E : Y e s . I w a s a l s o e n c o ur a ge d t o s e e , I be l i e ve ,
t h a t C hi na j o i ne d t h e F o ur t e e n a l l ia n c e a n d t h a t r e q u ir e d a s u b s t a n t i a l
financial contribution. So once again, this is a big change. It was for
ma n y y e a r s t h e c a s e o f o h , w e 'r e a p o o r d e v e l o p i n g c o u n t r y , a n d y o u
h a v e t o h e l p u s , a n d t h a t 's s t i l l o ft e n t h e c a s e , I t h i n k , f o r d e v e l o p me n t
o f c o a l g a s i fi c a t i o n a n d c a r b o n c a pt u r e a n d s t o r a g e . T h e y 'r e h o p i n g
f o r i nt e r na t i o n a l a s s i s t a nc e or d e v e l o pme n t o f i n t e r n a t i o na l fi n a nc i n g
me c h a n i s ms , s i mi l a r t o t h e M o n t r e a l Pr o t o c o l s - - f o r e x a mp l e , o r t h e
C l e a n D e v e l o p me n t M e c h a n i s m, t o h e l p t h e m a f f o r d t h a t a d d i t i o n a l
cost.
            S o t ha t 's s t i l l g oi ng t o b e t he i r f i r s t l i n e , b u t wh e n t h e y h a v e t o ,
w h e n i t ' s ma d e a c o n d i t i o n o f h a v i n g t o p a r t i c i p a t e i n a n i n i t i a t i v e ,
t h a t t h e y p e r c e i v e a s i mp o r t a n t , t h e y w i l l c o n t r i b u t e .
            C H A I R M A N B A R T H O L O M E W:                       Right.           And, of course, a
c o u n t r y 's b u d g e t i s a r e f l e c t i o n o f i t s v a l u e s . S o w e n e e d t o s e e t h at
t h i s ma t t e r s t o t h e C h i n e s e , t o o . I r e c o g n i z e i t h a s c o n s e q u e n c e s f o r
a l l o f u s , b u t I t h i n k t ha t w i l l b e i m p o r t a n t . H e r e I a m t h e f i s c a l
conservative. Thank you.
            HEARING COCHAIR VIDENIEKS:                                             Any more questions?
C o m mi s s i o n e r H o u s t o n .
            C O M M I SS I O N E R H O U S T O N : D r . L o g a n , s o me t h i n g y o u s a i d
r e a l l y , w e l l , f r a n k l y i t u p s e t me , i t w o r r i e d me , a n d i t 's t h e s e c o n d t i m e
I 'v e h e a r d i t t o d a y . Y o u s a i d t ha t i t i s v e r y d i f f i c u l t f o r us a s t h e U. S .
t o g o t o C h i n a a nd b a s i c a l l y t e l l t he m w h a t t o d o b e c a u s e w e ' r e b a d
actors.
            There is the concept of the greater good, and although we trip
                                                     - 224 -
over ourselves a lot in this country, I would certainly argue that both
t h e pu b l i c s e c t or a nd t h e p r i va t e s ec t o r d o e s t r y t o d o t h e r i g h t t h i n g .
We a r e c u t t i n g e m i s s i o n s . We 'v e g o t c l e a n a i r a c t s . We a r e d oi n g a l l
t h e r i g h t t h i n g s a n d mo v i n g a t l e a s t t h e r i g ht w a y e v e n i f w e 'r e n o t
doing it as quickly as we would like to.
            Wh e n y o u 'r e i n C h i n a , d o t h e y s a y t h a t t o y o u , o r i s t h a t y o u r
o w n f e e l i n g t h a t we c a n ' t r e a l l y h a v e s t a n d i n g w i t h t h e m? I w o u l d
a r g u e t h a t a n y n a t i o n 's b a d a c t i s t h e f a u l t an d t h e r e s p o n s i b i l i t y o f
that nation.
            So when you are there, do they say these things to you or is that
just sort of your feeling about the subject? And then I have another
question for Mr. Donnelly too.
            DR. LOGAN:                    S o me o f my o b s e r v a t i o n s t h a t s u p p o r t t h e
s t a t e me n t s t h a t I ma d e w e r e f r o m w o r k t h a t I di d w i t h U .S . D e p a r t me n t
o f E n e r g y a n d o t h e r g o v e r n me n t a g e n c i e s f o r a n u mb e r o f y e a r s
c o l l a b o r a t i n g w i t h C h i n a o n e n e r gy e f f i c i e n c y a n d n a t ur a l g a s
p r o mo t i o n a n d t h i n g s l i k e t h a t .
            We ' v e s e e n t h a t t h e U . S . b u d g e t t o s u p p o r t w o r k i n C h i n a i s
r o u g h l y , a n d t h i s i s f r o m t h e l a s t n u mb e r s I ' v e s e e n , a b o u t a mi l l i o n
d o l l a r s a y e a r t o f o c u s o n c l e a n e n e r g y a n d e n v i r o n me n t a l i s s u e s , a n d
g i v e n w h a t 's a t s t a k e f o r u s , t h a t i s a l mo s t a n i n s i g n i f i c a n t a mo u n t o f
mo n e y . Wh e n a U . S . d e l e ga t i on g oe s t o C hi n a , a n d s i t s do w n a n d s a y s
“ w e w a n t t o g e t s e r i o u s a b o u t d ev e l o p i n g n a t u r a l g a s o r c o a l b e d
me t h a n e o r e n h a n c e d o i l r e c o v e r y o r e n e r g y e f f i c i e n c y i n C h i n a , l e t ' s
talk,” and we sit and talk for two days, and then nothing really ever
happens afterwards because neither one of us is ready to devote
r e s ou r c e s t o i t , t he n t he C h i n e s e s t a r t t o g e t d i s i l l u s i o n e d , I t h i n k ,
a b o u t h ow s i n c e r e w e a r e a n d h o w s e r i o u s we a r e .
            I 'v e h e a r d f r o m a n u mb e r o f p e o p l e - - I g u e s s ma i n l y mo r e
w e s t e r n e r s t h a n C h i n e s e - - t h a t e x a mp l e s l i k e wh a t h a p p e n e d w i t h t h e
Unocal deal and CNOOC, that we're not always practicing what we
p r e a c h , a n d I ' m n o t s a y i n g t h a t w e 'r e n o t a p e r f e c t c o u n t r y . I t h i n k t h e
U . S . d o e s e x t r e me l y w e l l i n a l o t o f a r e a s . B u t w e d o s e n d m i x e d
me s s a g e s t o t h e C h i n e s e , t hi n g s l i k e Un o c a l , t hi n g s l i k e n o t
p a r t i c i p a t i n g i n a l o t o f t h e mu l t i n a t i o n a l c o l l a b o r a t i v e e f f o r t s l i k e t h e
K y o t o P r o t o c o l , t h i n g s l i k e t h e f a i l u r e t o i mp r o v e a u t o e f f i c i e n c y
standards in this country for the last 20 years. The Chinese look at us
a n d t h e y s a y , “ Wo w , y o u g u y s a r e a l l d r i v i n g a r o u n d i n S U V s a n d
y o u ' r e t e l l i n g u s t o c u t b a c k o n o u r o i l d e ma n d ? T h a t 's - - o k a y , w e l l , i f
t h a t 's h o w y o u f e e l a b o u t i t , b u t t h a t d o e s n ' t ma k e s e n s e t o u s . ”
            I t h i n k i t 's i mp o r t a n t f o r u s t o ma k e s u r e w e c a n p u t o u r s e l v e s i n
C h i n a ’ s s h o e s a n d p e r c e i v e w h a t w e l o o k l i ke s o me t i me s b e c a us e t h a t
w i l l r e a l l y h e l p u s t o b e a bl e t o s i t dow n a n d t a l k w i t h e a c h o t h e r mo r e
s e r i o u s l y a n d t r y t o r e a l l y u n d e r s t a n d w h a t t h e o t h e r s i d e 's p e r s p e c t i v e
                                                       - 225 -
i s , a n d t h a t 's t h e f o u n d at i o n f o r c o o p e r a t i o n a n d c o l l a b o r a t i o n , I t h i n k .
              C O M M I S S I O N E R H O U S T O N : We l l , t h e y h a v e - - w h a t i s i t - - a $ 3
t r i l l i o n c u r r e n t a c c o u nt s u r p l u s . I f w e h a d t h a t , ma y b e w e c o u l d d o
s o me r a p i d i mp r o v e me n t s a r o u n d h e r e t o o .
              M r . D o n n e l l y , i t ' s s o n i c e t o s e e y ou . I h a ve a qu e s t i o n. A l l t h e
e f f i c i e n t l i gh t b ul bs i n t h e w o r l d a r e n o t g o i n g t o s a v e u s i f s ome o f
t h e ba d a c t or s o ut t h e r e i n t h e w o r l d d e c i d e t o p u r s u e t h e i r v e n d e t t a
a g a i n s t t h e U . S . , i n p a r ti c u l a r , I r a n w h o h a s s a i d t h i s q u i t e o p e n l y .
              I t s e e ms t o me t ha t on e o f t h e ma i n d a n ge r s t o o ur n a t i o na l
s e c u r i t y , a s y o u h a v e s a i d , i s C h i n a 's e n e r g y s e e k i n g , n o t b e c a u s e
C h i n a i s g o i n g t o c o me a t t a c k u s t o mo r r o w , b ut C h i n a 's e n e r g y s e e k i n g
a n d t h e mo n e y t h a t g o e s a l o n g w i t h t ha t e n e r g y s e e ki n g i s p r o p p i n g u p
a l o t o f t h e s e r e g i me s t h a t d o n 't l i k e u s v e r y mu c h .
              I n p a r t i c u l a r , a l - Q a e d a o n i t s We b z i ne - - i t a c t u a l l y h a s o ne - - s a i d
directly that Africa was its next recruiting target and that its goal was
t o b u i l d p a r t i c u l a r l y t r a ns p o r t a t i o n i n f r a s t r u c t ur e i n A f r i c a t o
a c c o mmo d a t e i t s r e c r u i t i n g g o a l s t o c ome b a s i c a l l y a n d k i l l u s .
              S o w h e n y o u l o o k a t t h e Su d a n a n d C h i n a 's o i l i n v e s t me n t i n
S u d a n a n d t h e i n fr a s t r u c t u r e t h a t g o e s a l o n g w i t h i t, t h a t c a u s e s me
g r e a t f e a r f o r o u r s e c u r i t y t h a t t ha t t r a i l o f m o n e y i s ma k i n g u s f a r
mo r e v u l n e r a b l e i n t h e w o r l d . S o I ' m w o r r i e d a b o u t t hi s . I k n o w a l o t
o f p e o p l e i n t h e U. S . a r e wo r r i e d a b o u t t h i s . I k n o w y o u 'r e w o r r i e d
about this.
              My question to you, is anybody else in the world worried about
this? Are other either democratic nations concerned or is there any
t a l k o n t he w o r l d s t a ge a t a l l a b o ut t h e i mp l i c a t i o n s o f t h e mo n e y t h a t
does go along with this energy seeking?
              MR. DONNELLY: I would say just in a summary way, there's
n o t e n o u g h c o n c e r n o n t h e p a r t o f s ay E u r o p e a n c o u n t r i e s w h o h a v e a
l o n g e x p e r i e n c e , n o t a l l t h a t h a p p y , i n b o t h E a s t a n d We s t A f r i c a .
M a n y o f t h e E u r o p e a n - b a s e d e n e r g y c o mp a n i e s w h o h a v e a b i g
p r e s e n c e , p a r t i c u l a r l y i n We s t A f r i c a , h a v e b e e n , I t hi n k , r e t i c e n t o r
l o a t h e t o r a i s e t h e q u e s t i o n , n o t n e c es s a r i l y e v e n i n a c a s e l i k e S u d a n
w h e r e I t h i n k t he r e c or d i s pr e t t y c l e a r . B u t j us t t a k i n g N i g e r i a a s a n
e x a mp l e - - a g a i n n o t a h o s t i l e g o v e r n m e n t , b u t a c o u n t r y t h a t h a s we a k
g o v e r n me n t a l i n s t i t u t i o n s , c o r r u p t g o v e r n me n t a l i n s t i t u t i o n s wi t h a
g r o w i n g I s l a mi s t f a c t i o n i n t h e c o u n t r y , a nd a g r o w i n g C h i n e s e
presence as well.
              S o i t i s , I t h i n k t h e r es p o n s e t o t h i s i s i t 's a c h a n c e f o r g r e a t e r
international cooperation, and this is not just again what I would
r e ga r d a s a n A me r i c a n i s s u e o r a n e x e r c i s e i n Ame r i c a n p o w e r , b u t a n
o p p o r t u n i t y f o r s o r t o f g l o b a l g o o d g o ve r n a n c e t o h e l p p o s i t i v e l y s h a p e
t h e o u t c ome s i n s t a t e s t h a t a r e a t r i s k w h e r e C h i n e s e a c t i o n s ma y n o t
b e ma l e v o l e n t b u t j u s t s o r t o f s h o r t - s i g h t e d .
                                                      - 226 -
          S o i t 's v e r y di f f i c ul t a c t ua l l y t o g e t Ame r i c a n s t o l o o k t o c o n ne c t
t h e s e d o t s , a s i t w e r e , a n d e v e n mo r e d i f f i c u l t t o g e t o t h e r s a r o u n d t h e
world.            E v e n t h e mo s t k n o w l e d g e a b l e f o l k s w h o ma y n o t b e
g o v e r n me n t p e o p l e , b u t a l s o t h e o i l c o mp a n i e s w h o d o b u s i n e s s i n
We s t A f r i c a a n d a r e c e r t a i nl y p r e t t y s o p h i s t i c a t e d a b o u t t h e s e i s s u e s .

             HEARING COCHAIR VIDENIEKS:                                             Okay.         Commissioner
D ’ A ma t o
             H E A R I N G C O C H A I R D ' A M A T O : T h a n k y o u , M r . C h a i r ma n .
M y q u e s t i o n i s , M s . F i n a mo r e , a b o u t t h e c h a n g e i n w h a t y o u p e r c e i v e
of either the strength of the organization or resources available by
C h i n e s e e n v i r o n me n t a l o r g a n i z a t i o n s o r t h e a t t i t u d e o f C h i n e s e
o f f i c i a l s a b o u t c l i ma t e c h a n g e a n d t h e n e e d t o d o e n e r g y e f f i c i e n c y
initiatives at the local level.
             I t h i n k t he pr o bl e m i n a l l t h e i n f o r ma t i o n a n d w r i t i n g t h a t w e
h a v e h a s b e e n b a s i c a l l y t h e l a c k o f c o m mi t me n t t o t h e e n v i r o n me n t a t
t h e p r o v i n c i a l l e v e l a nd a t t h e l o c a l l e v e l o ve r t i me , n ot j u s t d ur i ng t he
c u r r e n t p e r i o d , b u t i n C h i n a 's h i s t o r y . S o I 'd l i ke t o p u r s u e a l i t t l e b i t
mo r e a b o u t w h a t y o u s e e i s a c h a n g e , a n d h o w w e c a n t a k e a d v a n t a g e
o f a s t r e n g t h e n i n g a t t e n t i o n o r c h a n g e i n C h i na ?               Do you see this
i n t e r ms o f a g r o w i n g o r g a n i z i n g a b i l i t y o f N G O s a n d / o r t h e
c o m mi t me n t b y p r i v a t e e n t re p r e n e u r s o r a c t o r s a t t h e g o v e r n me n t l e v e l
i n t h e pr ov i n c i a l l e v e l ? Wh e r e i s t h e c h a n g e a n d h o w c a n w e p r o mo t e
it?
             M S . F I N AM O R E : O n t h e e n v i r o n me n t a l s i de , i t 's r e a l l y a v a r i e t y
o f f a c t or s . T h e r e i s a n i n c r e a s e i n t h e n u mb e r a n d t h e a b i l i t i e s o f
C h i n e s e n o n g o v e r n me n t a l o r g a n i z a t i o n s . T h e y 'r e s t i l l p r e t t y s ma l l .
T h e y 'r e u n d e r f u n d e d , b u t t h e y 'r e g r o w i n g i n s i z e a n d c a p a c i t y , a n d w e
a r e i n f a c t w o r ki n g w i t h a nu mb e r o f t h e m t o h e l p t r a i n t h e m i n t h e i r
a b i l i t y t o p a r t i c i p a t e i n e n v i r o n me n t d e c i s i o n - ma k i n g .
             T h e g o v e r n me n t i s o p e n i n g t h e d o or a b i t t o a l l o w t h i s t y p e o f
public participation.                          I t ' s d e v el o p e d n e w r e g u l a t i o n s f o r o p e n
i n f o r ma t i o n a n d f o r h e a r i n g s o n e nv i r o n me n t a l i mp a c t a s s e s s me n t s .
T h a t ' s a l l v e r y n e w , b u t i t ' s j u s t a c r a c k a n d y o u c a n i ma g i n e t h a t t h e
g o v e r n me n t i s g o i n g t o b e w a t c h i n g v e r y c a r e f u l l y t o s e e h o w t h i s
w o r k s , b ut I t hi n k t h e y a r e do i n g s o be c a us e t he a l t e r n a t i v e t o a l l o w i n g
t h e p u b l i c t o p a r t i c i p a t e i n e n v i ro n me n t a l d e c i s i o n - ma k i n g i s v i o l e n t
p r o t e s t s . T h o s e p r o t e s t s a r e g r o w i n g i n n u mb e r a n d s i z e .
             A n d I t h i n k t h e g o v e r n me n t r e a l i z e s i t h a s t o p r o v i d e s o me
a v e n ue o r t h a t i s j u s t g oi n g t o g e t w o r s e . So w e 'r e t r y i n g t o t a ke
advantage of those opportunities to work on regulations on how those
n e w p a r t i c i p a t o r y o p p o r t u n i t i e s w i l l b e a c t u a l l y i mp l e m e n t e d a n d a l s o
to train the NGOs.
             O n t h e p r i v a t e s e c t o r s i d e , c o mpa n i e s i n C h i n a a n d e l s e w h e r e i n
                                                     - 227 -
t h e w o r l d a r e s e e i n g o p p o r t u n i t i e s t o ma k e mo n e y t h r o u g h i n v e s t me n t
i n c l e a n t e c h n o l o g y . F o r e x a mp l e , t h r o u g h t he i n c e n t i v e s n o w ma d e
a v a i l a b l e t h r o u g h Ch i n a 's r e c e n t p a s s a g e o f t h e r e n e w a b l e e n e r g y l a w .
China I think doubled its capacity in wind energy last year, and it is
n o w o n e o f t h e t o p s i x , I t h i n k , w i n d e n e r g y p o we r s i n t h e w o r l d .
            T h e r e 's a n e x p l o s i o n i n t h e g r o wt h o f s o l a r p o w e r s i mp l y b e c a u s e
p e o p l e s e e a n o p p o r t u n it y f o r ma k i n g mo n e y , i n f a c t , n o t j u s t t o
p r o v i d e t e c h n o l o g y f o r t h e C h i n e s e ma r k e t , bu t t o p r od u c e i t mo r e
c h e a p l y i n C h i n a a n d t he n s e l l i t w o r l dw i d e .
            I n g o ve r nme n t , c h a n g e I s e e i s mo s t l y a t t h e c e nt r a l go v e r n me n t
l e v e l . I t 's s t i l l a p r o b l e m, a s y o u 'v e s a i d , a t t h e c e n t r a l g o v e r n me n t
l e ve l , bu t w e a t t e m p t t o w or k w i t h ke y p r o vi n c e s t ha t s e e t h e ne e d t o
ma k e c h a n g e a n d t o w o r k wi t h t h e m. T h e r e ' s s t i l l a l o t o f w o r k t o b e
d o n e i n o t h e r l o c a l g o v e r n me n t l e v e l s . T h e r e 's n o t mu c h c h a n g e t h e r e .
            DR. LOGAN:                     I f I c o u l d ma k e o n e q u i c k p o i n t a b o u t t h e
p o t e n t i a l f o r g r e a t e r l e v e r a g e t h r o ug h b u s i ne s s a c t i vi t i e s , e s p e c i a l l y o f
mu l t i n a t i o n a l c o mp a n i e s i n C h i n a , t h a t c o ul d h e l p t o o v e r c o me t h e
f a i l u r e o f t h e c e n t r a l g o ve r n me n t t o b e a b l e t o e x e r t c o n t r ol a t t h e
provincial level.
            O n e e x a mp l e , I t h i n k , i s s e e n i n t h e U . S. C l i ma t e A c t i o n
P a r t n e r s h i p , w h i c h w a s a r e c e n t a n n o u n c e me n t b y a b o u t 2 5 ma j o r
c o r p o r a t i o n s , i n c l u d i n g B P , G E , A l c oa , C a t e r p i l l a r a n d o t h e r s , c a l l i n g
f o r a c a p a n d t r a de s y s t e m h e r e i n t h e U . S . T h o s e c o mp a n i e s , o f
c o u r s e , a r e a l s o he a vi l y i nv e s t e d i n t h e s u pp l y c h a i n o f C h i na i n
p r o d u c i ng ma t e r i a l s t h a t a g a i n a r e e x p o r t e d i n Ch i n a .
            T h o s e c omp a n i e s , e v e n t h o ug h t he y a r e a t t h e w i l l s o me t i me s o f
t h e C h i n e s e g o v e r n me n t i n t e r ms o f t h e i r i n v e s t me n t s , t h e y c a n s e n d
s t r o n g s i g n a l s t o t h e i r o wn s u p p l i e r s i n C h i n a t o g r e e n t h e i r o p e r a t i o n s
a n d t o r e d u c e g r e e n h o u s e g a s e mi s s i o n s , f o r e x a mp l e . T h o s e p r i v a t e
s e c t o r i n v e s t me n t s c o u l d b e u s e d , I t h i n k , t o g e t b e t t e r t r a c t i o n a t t h e
p r o v i n c i a l a n d l o c a l l e v e l s i n h o w b u s i n e s s a n d ma n u f a c t u r i n g i s d o n e
in China.
            I f w e de ma n d t ha t C hi n e s e p r o d u c t s h a v e a l o w e r c a r b o n
i n t e n s i t y , w e c a n s e n d t h os e s i g n a l s i nt o t h e s u p pl y c h a i n i n C h i n a
t h r o u g h t h o s e i n v e s t me n t s .
            HEARING COCHAIR D'AMATO: Thank you.
            H E A R I N G C O C H A I R V I D E N I E K S : C o m mi s s i o n e r Fi e d l e r .
            C O M M I SS I O N E R F I E D L E R : S e c o n d r o u n d , y o u 'r e f i r s t .
            C H A I R M A N B A R T H O L O M E W: T h a n k y o u . We 'l l f i g h t o v e r
o u r s p a c e a n d o u r t i me . I w a s w o n de r i n g i f y o u c o u l d e l a b o r a t e o n
w a y s t h a t t h e WT O c o u l d b e u s e d t o p r o mo t e r e n e w a b l e e n e r g y a n d
a d d r e s s s o me o f t h e s e i s s ue s , a n d a r e t h e s e t h i n g s o n w h i c h t h e
C h i n e s e g o v e r n me n t w o u l d b e c o o p e r a t i v e ?
            A s y o u k n o w , t h e W T O i s t u r n i n g o u t t o b e a b i t mo r e o f a t u s s l e
                                                       - 228 -
p l a c e t h a n I t h i nk i t w a s or i g i n a l l y e n v i s i o n e d t o b e, a n d t he r e a r e a
f a i r n u mb e r o f c a s es t ha t t h e U . S . h a s e i t he r f i l e d o r s h o u l d b e f i l i n g
relatively soon. Is this a place that the U.S. and China actually could
w o r k c oop e r a t i v e l y t o a c hi e ve s o me e nd s ?
             D R . L O G A N : L e t ' s s e e . I ' m n o t a n e x p e r t o n t h e WT O , b u t I ' l l
t r y t o a d d a f e w r e ma r k s , a n d I h o p e my c o l l e a g ue s w i l l c hi me i n.
C h i n a , a s y o u k n o w , c a n p r o d u c e t h i n g s l i k e w i n d t u r b i n e s f o r mu c h
c h e a p e r t h a n t h e Eu r o p e a ns o r t h e Ame r i c a n s . T h e q u a l i t y , o f c o u r s e ,
i s n 't y e t u p t o p a r , b u t t h e g e n e r a l i d e a o f ma k i n g s o me e n e r g y
technologies, they can do it at a low cost.
             T h e r e f o r e , a s I n o t e d i n my t e s t i mo n y , t h e r e i s r e a l l y a n
o p p o r t u n i t y f o r t h e C h i n e s e t o h e l p s p r e a d t h e d e p l o y me n t o f
renewables around the world which are often, at least in the way that
c u r r e n t a c c o u n t i n g i s d o n e , mo r e e x p e n s i ve t h a n o t h e r o p t i o n s .
Wh e t h e r o r n o t w e w a n t t o v e s t o u r e c o n o mi c i n t er e s t i n t h e C h i n e s e t o
b e t h e s u p p l i e r o f t h e s e t e c hn o l o g i e s i s a n o t h e r q u e s t i o n .
             B u t t h e r e a r e me t h o d s , I t h i n k , a s w e r e me n t i o n e d e a r l i e r , t o b e
e q u i t y p a r t n e r s w i t h C h i n e s e ma n u fa c t u r e r s t o s h a r e i n t h e w e a l t h
t h a t ' s g e n e r a t e d f r o m b e i n g t h e p r o du c e r o f t h e s e t hi n g s . T h e r e a r e
o b v i o u s l y i n t e l l e c t u a l p r o p e r t y i s s u e s t h a t a l o t o f c o mp a n i e s a r e
c o n c e r n e d a b o u t . T h e WT O mi g h t b e o n e o r g a n i z a t i o n w h e r e t h e U . S .
a n d C h i n a c o u l d b e g i n t o s h a r e i d e as mo r e h o n e s t l y , b u t t h e i d e a o f
b e i ng e q ui t y pa r t ne r s i n t he d e a l c a n a l s o ov e r c o me s ome o f t h o s e
things, I think.
             C H A I R M A N B A R T H O L O M E W: M s . F i n a mo r e , M r . D o n n e l l y ?
             MR. DONNELLY: I'm willing to speculate with the stipulation
t h a t I d o n 't r e a l l y k n o w w h a t I ' m t a l ki ng a b o ut .
             C H A I R M A N B A R T H O L O M E W:                   A h , Wa s h i n g t o n s p e c i a l t y , a
fact-free congregation.
             M R . D O N N E L L Y : Y e s . Wo r l d ' s f o r e mo s t e x p e r t . B u t , y o u c a n
l o o k a t t h e e x p e r i e n c e t h a t w e h a v e h a d w i t h t h e WT O , a n d i f t h e r e i s
e i t h e r a n A me r i c a n o r o t h e r i nt e r n a t i o n a l a t t e mp t t o i n t r o d u c e
e n v i r o n me n t a l r e qu i r e me n t s o r e ne rg y e f f i c i e n c y r e q u i r e me n t s i n t o
t r a d e a g r e e me n t s , a s w a s s u g g e s t e d , i f w e d e ma n d p r o d u c t s t h a t a r e
greener, I would tend to think that it would end up being a forum
where those who weren't keen on the idea would tend to use the WTO
a s a me c h a n i s m t o r e s i s t .
             C H A I R M A N B A R T H O L O M E W: T o b l o c k .
             M R . D O N N E L L Y : I t h i n k t h e WT O i s l i k e l y t o b e a t r a i l i n g
e d g e i n d i c a t o r o f a g r e e me n t s o n e n e r g y e f f i c i e n c y o r e n v i r o n me n t a l
i n i t i a t i v e s r a t h e r t h a n a l e a d i n g e d g e or a r e a l l y u s e f u l t ool t o t r y t o d o
t h a t . B u t t h a t j u s t i s b a s e d o n o b s e r v i n g t h e n a t u r e o f WT O a c t i v i t i e s .
             C H A I R M A N B A R T H O L O M E W: O k a y . T h a n k s . D r . L o g a n , y o u
a l s o me n t i o n e d c o n f i d e n c e b u i l d i n g me a s u r e s , a n d w e h a v e s o me s e n s e
                                                    - 229 -
o f w h a t s o me o f t h o s e c o n f i d e n c e b u i l d i n g me a s u r e s c o u l d b e i n t h e
mi l i t a r y r e a l m. I w o n d e r e d i f y o u c o u l d e l a bo r a t e o n w h a t y o u t h i n k
t h e c o n fi d e n c e b u i l d i n g me a s u r e s c o u l d o r s h o ul d b e i n t he
e n v i r o n me n t a l a n d e n e r g y r e a l m?
           D R . L O G A N : I me n t i o n e d o n e c o n f i d e n c e b u i l d i n g me a s u r e , a n d
I b e l i e v e t h a t t he U . S . s h o ul d t a k e t he f i r s t s t e p , a t l e a s t ma r g i n a l l y , i n
a n y c o n f i d e n c e b u i l d i n g me a s u r e , a n d I u s e d t h e e x a mp l e o f i n c r e a s i n g
o u r C o r p o r a t e A v e r a g e F u e l E f f i c i e n c y r e q u i r e me n t s h e r e i n t h e U . S .
T h e s e h a v e b e e n l a r g e l y u n c h a n g e d fo r t h e l a s t 2 0 y e a r s , a l t h o u g h w e
s a w e n o r mo u s b e n e f i t o f t h e s e r e g u l a t i o n s b a c k i n t h e l a t e '7 0 s a n d
e a r l y '8 0 s w h e n w e c u t o u r o i l de ma n d b y a b o u t t h r e e mi l l i o n b a r r e l s
per day very quickly.
           I t h i n k t h a t c o u l d b e r e p l i c a t e d a g a in n o w b e c a u s e t h e r e 's a l o t o f
low-hanging fruit in that sector. That would send a very strong signal
t o t h e Ch i n e s e t h a t w e 'r e s e r i o u s a b o u t g l o b a l e n e r g y s e c u r i t y a n d
c l i ma t e c h a n g e .
           Other types of confidence building measures are also available.
T h e U . S . c o u l d r e e n g a g e i n t h e i nt e r na t i o n a l ne g o t i a t i o ns o v e r c l i ma t e
c h a n ge , fo r e xa mp l e , a n d t ha t i n i t s e l f c o u l d s e n d a v e r y s t r o n g s i g n a l .
           I t 's i mp o r t a n t t h a t w h a t e v e r i s d o n e , a n d t h e r e i s a w h o l e l i s t o f
potential bills in the Congress right now to address energy security and
c l i ma t e c h a n g e , wh a t e v e r w e d o , I t h i n k i t 's i mp o r t a n t t o t a k e
a d v a n t a ge o f i t w i t h t h e C hi n e s e . H o l d o u r h a n d o u t a n d s a y , h e y ,
w e 'r e d o i n g t h i s , w e 'r e r e a l l y d o i n g i t f o r o u r s e l v e s , b u t w e 'r e g o i n g t o
a t l e a s t h o l d h a n d s w i t h y o u a n d s a y l e t 's d o t hi s t o ge t he r a n d l e t 's g e t
a c o m mi t me n t f r o m t h e C h i n e s e t o d o s o me t h i ng i n r e s p on s e .
           I t h i n k t h e f i r s t t h i n g t h a t t h e y s h ou l d d o t ha t 's mo s t i mp o r t a nt i s
t o i mp r o ve t r a ns p a r e n c y o f e n e r g y d a t a . I t 's c r i t i c a l f o r i n v e s t me n t i n
e n e r g y ma r ke t s . I t 's c r i t i c a l f o r C h i n a ’ s o w n u n d e r s t a n d i n g o f w h a t ' s
h a p p e n i n g i n t h e c ou n t r y b e c a u s e t h e y o f t e n h a v e a c l o u d y p i c t u r e o f i t
a s w e l l . A n d I t h i n k t h a t wo u l d b e a g o o d f i r s t s e t o f e x a mp l e s .
           C H A I R M A N B A R T H O L O M E W: G r e a t . T h a n k y o u .
           H E A R I N G C O C H A I R V I D E N I E K S : C o m mi s s i o n e r Fi e d l e r .
           C O M M I SS I O N E R F I E D L E R : A c o u p l e o f t h i n g s . D r . L o g a n , d i d
I h e a r y o u r i g h t t ha t y o u s a i d t h a t o u r f a i lu r e t o a l l o w C N O O C t o b u y
U n o c a l w a s a p r ob l e m?
           DR. LOGAN:                    I believe the Chinese often see us spouting
ma r k e t - ba s e d pl a t i t u d e s , l e t ma r ke t s p e r f o r m a n d s o l v e p r o b l e ms .
From their perspective, I think they see us speaking out of both sides
o f o u r mo u t h w h e n t h e y s a w t h a t C o n gr e s s w a s r e a d y t o a c t t o pr e ve n t
that buyout. So to them it wasn't clear. They couldn't really see how
w e w e r e n 't a c t i n g i n t w o - f a c e d w a y .
           C O M M I SS I O N E R F I E D L E R : A r e y o u f a mi l i a r a t a l l w i t h t h e
C h i n e s e g o v e r n me n t p o l i c y , I t h i n k , i t w a s N o v e mb e r o f 2 0 0 6 wh e r e
                                                    - 230 -
t h e y d e t e r mi n e d a n u mb e r o f i n d u s tr i e s a s b e i n g a b s o l u t e c o n t r o l
i n d u s t r i e s s u c h a s o i l ? I t 's my u n d e r s t a n d i n g t h a t me a n s w e c a n 't b u y
t h e i r o i l c o mp a n i e s . S o a r e y o u s a y in g t h a t t h e y s h o u l d b e a l l o w e d t o
buy ours but we should not be allowed to buy theirs?
            D R . L O G A N : I ' m n o t s u r e . I d o n 't r e a l l y h a v e a n o p i n i o n o n
that one way or the other.
            C O M M I SS I O N E R F I E D L E R : L e t me a s k a r e t h e C h i n e s e t a l k i n g
o u t o f b o t h s i d e s o f t h e i r mo u t h ?
            D R . L O G A N : I 'm s u r e t h e y d o , y e s .
            C O M M I SS I O N E R F I E D L E R : I n t h i s c a s e ?
            D R . L O G A N : I d o n ' t k n o w . T h e i r r e s p o n s e ma y h a v e b e e n i n
response to what they saw happening with the potential CNOOC and
Unocal deal.
            C O M M I SS I O N E R F I E D L E R :                 I t hi n k t h e i r r e s p o n s e w a s t o
d e c i d e t h a t t h e o i l e n e r g y w a s a s t r a t e g i c a l l y i mp o r t a n t i n d u s t r y t h a t
they did not want foreigners to buy.                                     I t h i n k t h a t is mu c h mo r e
c o m mo n s e n s e e x p l a n a t i o n .
            D r . F i n a mo r e , s o me c a u t i o n o r l et 's h a ve a c a ut i on a r y di s c u s s i o n
a b o ut t he a l l o w a nc e o f a c t i v i s m i n e n v i r o n me n t a l r e a l m v e r s u s t h e
allowance of activism in any other realm in China. So, for instance, we
h a v e a s k e d a c o u p l e o f q u e s t i o n s o n NG O s a n d t h e s pa c e t h a t t he y ha v e
t o mo v e a n d i t 's q u i t e c l e ar t ha t t h e r e 's g r e a t e r s pa c e .
            I t ' s a l s o c l e a r t h a t b e y o n d a c e r t a i n l e v e l , c e r t a i n p e o p l e mi g h t
g e t a r r e s t e d f o r t h e i r a ct i v i t y . Y o u i n d i c a t e d t ha t i t w a s s o me w h a t i n
r e s p o n s e t o p r o t e s t s . I n m y v i e w , t h a t 's t o b e l e a v e n e d s o me w h a t
a g a i n s t t he r e a r e l ot s o f l a b o r p r o t e s t s b u t i n d e p e n d e n t u n i o n s h a v e n o t
been allowed.
            S o i n t h e c o mp a r i s o n o f s pa c e t ha t e x i s t s i n t hi s c o un t r y f o r
NGOs and the space that exists in China for NGOs, what's the
c o mp a r i s on? I s t he r e p ot e nt i a l f o r r e a l i mp a c t or i s t h e r e gr e a t e r
p o t e n t i a l o r r i s k f o r a r r e s t fo r p r e ss u r i n g l o c a l a u t h o r i t i e s , e s p e c i a l l y
w h e r e w e h a v e t h a t n e x u s o f c o r r u p t i o n?                      E i t h e r t h a t or p a r t y
i n t e r e s t s o r s o me o t h e r i n t e r e s t s ? W h a t i s t h e p r o s p e c t i n y o u r v i e w
f o r f r e e d om o f a c t i vi s m f o r e nv i r o n me n t a l a c t i vi s t s i n C hi na ?
            M S . F I N AM O R E : I t h i n k I a g r e e w it h y o u c o mp l e t e l y t h a t i t 's a n
area where great caution needs to be exercised because the line beyond
w h i c h NG O s c a n a n d c a n n o t o p e r a t e s e e ms t o b e c on st a n t l y s h i f t i n g ,
a n d a n y o n e w h o w i s h e s t o e n g a g e a s a C h i n e se N G O n e e d s t o b e v e r y
a w a r e o f w h a t t h o s e l i n e s a r e b e c a u s e t h e r e a re c o n s i d e r a b l e r i s k s .
            I t hi n k w h a t 's a n ot h e r t h i ng t h a t 's d r i v i n g t h e s p a c e - - i n c r e a s i n g
b u t s t i l l v e r y s ma l l s p a c e - - a v a i l a b l e t o C h i n e s e N G O s , i s , i n f a c t , t h e
S t a t e E n v i r o n me n t a l P r o t e c t i o n A d min i s t r a t i o n , w h i c h h a s , o f c o u r s e ,
b e c o me t h e n a t i o n a l mo u t h p i e c e a s t o t he g r a v e e xt e nt o f C h i n a 's
e n v i r o n me n t a l i mp a c t s a n d t h e n e e d t o t a ke a c t i on , b ut s t i l l h a s v e r y
                                                       - 231 -
l i mi t e d p o w e r .
            So what I see is the SEPA increasingly relying upon or seeking
to use the Chinese NGOs to help them to publicize and perhaps to even
h e l p e n f or c e e nv i r o n me n t a l l a w s i n Ch i n a . So h e r e 's a n e nt i t y wi t h i n
t h e C hi n e s e g o ve r nme n t t h a t i s ki n d o f p u s h i n g t h i s t h i n g f o r w a r d .
            T h i s i s s i mi l a r t o w h a t h a pp e n e d i n t h e U ni t e d S t a t e s , I mi g h t
a d d , i n t h e b e g i n n i n g s t a g e s o f t h e U . S . E n v i r o n me n t a l Pr o t e c t i o n
A g e n c y , w h i c h a l s o h a s l i mi t e d r e s o u r c e s t o e n f o r c e U . S .
e n v i r o n me n t a l l a ws a n d o v e r t h e y ea r s r e l i e d u p o n U . S . N G O s t o t a k e
t h a t o n e s t e p f u r t h e r . F o r e x a mp l e , b e c a u s e ou r e n vi r on me n t a l l a w s
i n c l u d e c i t i z e n s u i t p r o v i s i o n s , g r o u p s l i k e N R D C , f o r ma n y y e a r s ,
w e r e go i ng t o f a c t or i e s , l o o k i n g a t t h e i r w a t e r , mo n i t o r i n g t h i n g s , a n d
t h e n b r i n g i n g l a w s u i t s b a s e d o n t h e c o mp a n y ' s o w n r e c o r d s . A n d w e
r e c e i v e d a n a w a r d f r o m t h e U . S . E n v i r o n me n t a l P r o t e c t i o n A g e n c y f o r
our help to them in enforcement.
            I h o pe t ha t w e 'l l be s e e i ng mo r e o f t h a t i n C hi n a . Th e r e i s o n e
g r o u p we w o r k w i t h y o u ma y h a v e h e a r d o f c a l l e d t h e C e n t e r f o r Le g a l
A s s i s t a n c e t o P ol l u t i o n V i c t i ms w h i c h , i n f a c t , d o e s b r i n g s u i t s i n
C h i n a o n b e h a l f o f p o l l u t i o n v i c ti ms . I t ' s v e r y l i mi t e d , a g a i n , t h e
s c o p e , b u t i t i s e n d o r s e d b y t h e c e nt r a l g o v e r n me n t , a n d s o a g a i n t h e r e
i s d e v e l o p me n t . I t 's s l o w , b u t i t 's g o i n g a l o n g t h e l i n e s t o s o me e x t e n t
o f w h a t we s e e i n t h e U . S . , b u t t h e c h a l l e n g e s a r e mu c h g r e a t e r .
            H E A R I N G C O C H A I R V I D E N I E K S : C o m mi s s i o n e r D 'A ma t o .
            H E A R I N G C O C H A I R D ' A M A T O : T h a n k y o u , M r . C h a i r ma n . I
h a v e t w o q u i c k q u e s t i o n s . W e h e a r d y e s t e r d a y a b o u t t h e d e v e l op m e n t
o f s i x r e g i o n a l E PA o f f i c e s i n t h e p r o v i n c e s . I w o n d e r i f y o u c o u l d
t e l l me a l i t t l e bi t mo r e a bo u t t h a t , w h e t h e r o r n o t y o u 'v e h a d s o me
c o n t a c t w i t h t h e m, w h e t h e r t h e y 'r e b eg i n n i n g t o b e e f f e c t i v e , w ha t t h e
status of that operation is at the provinces?
            A n d s e c o n d l y , M r . L o g a n , I u n d e r s t a n d y o u w e r e a t t i me w i t h t h e
IEA.
            DR. LOGAN: That's correct.
            H E A R I N G C O C H A I R D 'A M A T O : I w o n d e r i f y o u c o u l d s a y
s o me t h i n g a b o ut t he o pa q u e n e s s o f Ch i n e s e p a r t i c i p a t i on i n I E A a s t o
t h e St r a t e g i c P e t r o l e u m R e s e r v e a n d t h e i r p ol i c i e s t ow a r d St r a t e gi c
P e t r o l e u m R e s e r v e ? D o y o u t h i n k t ha t i t 's p o s s i bl e t o mo v e i n t o a
mo r e t r a n s p a r e n t r e l a t i o n s h i p i n I EA w i t h r e g a r d t o t h e St r a t e g i c
P e t r o l e u m R e s e r ve s o t ha t t he r e i s n 't u s e o f t h a t r e s e r v e f o r
ma n i p u l a t i o n o f p r i c e s o r w h a t e v e r ?
            M S . F I NA M O R E : I 'm f a mi l i a r wi t h t h e d e v e l o p me n t o f s e v e r a l
r e g i o n a l C h i n e s e EP A o f f i c e s i n C h i na , b u t I u n d e r s t a n d y o u r q u e s t i o n
t o be U . S .
            HEARING COCHAIR D'AMATO: U.S.
            M S . F I N A M O R E : I ' m n o t f a mi l i a r w i t h t h a t a t a l l . T h a t 's a n e w
                                                   - 232 -
d e v e l o p me n t t o me .
             HEARING COCHAIR D'AMATO:                                         I believe we were told
y e s t e r d a y t h a t t h e U . S . E P A h a d s i x r e g i o n a l o f f i c e s . I s t h a t , i s n 't t h a t ,
o r ma y b e I mi s u n d e r s t o o d .
             C H A I R M A N B A R T H O L O M E W: N o , i t ' s t h e C h i n e s e .
             H E A R I N G C O C H A I R D ' A M A T O : Wa s i t t he C h i n e s e E P A ?
             M S . F I N AM O R E : Y e s . I b el i e v e i t 's t h e C h i n e s e .
             HEARING COCHAIR D'AMATO: All right.
             M S . F I NA M O R E : E P A i s w o r k i n g v e r y c l o s e l y f r o m w h a t I
understand in helping to establish these Chinese regional EPA offices,
but they are not U.S. offices.
             B u t o f c o u r s e o u r U . S . E mb a s s y a n d t h e c o n s u l a t e s h a v e
e n v i r o n me n t a l s c i e n c e a n d t e c h n o l o g y o f f i c e r s wi t h a ct i v e p r o g r a ms .
             H E A R I N G C O C H A I R D ' A M A T O : Y e s . S o t h e n t e l l us a b o ut t he
e f f e c t i v e ne s s o f t h e n e w d e c e n t r a l i z e d C h i n e s e EP A o f f i c e s .
             M S . F I NA M O R E : I t h i n k i t 's a g o o d i d e a . I t h i n k i t c o u l d h e l p
t o a d d r e s s t h e p r o b l e m, t h e s e r i o u s p r o b l e m t h a t y o u r a i s e d o f t h e
i n e f f e c t i ve n e s s o f t h e p r o v i nc i a l a n d c i t y - b a s e d E n v i r o nme n t a l
Protection Bureaus.
             B u t I h a v e t o s a y t h a t t h e y 'r e r u n n i n g u p a g a i n s t r e s i s t a n c e f r o m
t h o s e b u r e a u s t o h a n d t he p o w e r o v e r t o t h e m. S o i t ' s a p o w e r s t r u g g l e
w h i c h I w o u l d h o p e w o u l d e n d u p w it h mo r e p o w e r f o r t h e s e r e g i o n a l
o f f i c e s , b u t r i g h t n o w , i t 's n o t h a p p e n e d a s f a s t a s w e w o u l d h a v e
hoped.
             HEARING COCHAIR D'AMATO:                                          So there is essentially
r e s i s t a n c e t h a t 's s t i l l n o t o v e r c o me - -
             M S . F I N AM O R E : Th a t 's r i g h t .
             H E A R I N G C O C H A I R D ' A M A T O : - - i n t e r ms o f s t r e n g t h e n i n g t h e
C h i n e s e EP A i n t o t h e p r o v i n c e s ?
             M S . F I N AM O R E : Th a t 's r i g h t .
             D R . L O G A N : V e r y g o o d q u e s t i o n a b o u t t h e St r a t e g i c Pe t r o l e u m
Reserves in China and transparency surrounding it. China has been
building Strategic Petroleum Reserves storage facilities for a number
of years now. There are four sites where oil will be stored. At least
o n e o f t h e m i s b e i n g f i l l e d . T h e I EA me mb e r c o u n t r i e s h a v e b e e n
c o l l a b o r a t i n g w i t h C h i n a f o r a b o u t f i v e y e a r s i n h o w me mb e r c o u n t r i es
a t t h e I EA o p e r a t e t h e i r s t r a t e g i c r e s e r v e s .
             S o me o f t h e q u e s t i o n s t ha t C hi n a i s gr a p pl i ng w i t h i n c l u de :
Should you hold crude oil or should you hold products? Are these
n a t i o na l l y h e l d r e s e r v e s ? Wh a t r o l e d o p r i v a t e c o mp a n i e s p l a y i n t h e m?
Wh e n d o y o u r e l e a s e ? H o w d o y o u c o o r d i n a t e w i t h o t h e r c o u n t r i e s ? A
w h o l e r a n g e o f d i f f e r e n t q u e s t i o n s , v e r y i n t er e s t i n g d i s c u s s i o n s , a n d
t h e I E A ha s s e r ve d a s t h e c e nt e r f o r t h a t c o l l a b o r a t i o n w i t h C h i n a .
             T o t h i s d a y , I d o n 't t hi n k t h e r e i s c l a r i t y a b o u t h o w t h e C h i n e s e
                                                      - 233 -
p l a n t o u s e t h e i r St r a t e g i c Pe t r o l e u m R e s e r v e s . I t w o u l d b e w o n d e r f u l
i f C h i n a c o u l d a c t i n c o n c e r t w i t h I EA c o u n t r i e s t o r e l e a s e s t o c k p i l e s
i n t h e e ve n t o f d i s r u pt i o n s a r o u n d t h e w o r l d . T h a t w o u l d c o n t r i b u t e
e n o r mo u s l y t o t h e g l o b a l p u b l i c g o o d .
            We d o n ' t h a v e a c l e a r a n s we r f r o m t h e C h i n e s e y e t h o w t h e y 'r e
g o i n g t o d o i t . W e d o n 't h a v e a c l e a r a n s w e r t o t h e e x t e n t t h a t t h e
r e s e r ve s w i l l b e c o n t r o l l e d b y n a t i o na l oi l c omp a n i e s i n C h i n a ve r s us
t h e c e nt r a l g o ve r nme n t . I t 's a l l u n c l e a r , b u t t h e C h i n e s e ma i n t a i n a
v e r y s t r o n g i n t e r e s t i n c ol l a b o r a t i n g w i t h I EA m e m b e r c o u n t r i e s i n
talking more. I think the IEA now is creating a bigger platform for
Chinese participation.
            T h e y h a v e t o a c k n o w l e d g e t h e f a c t t h a t C h i n a 's b e i n g t h e s e c o n d -
l a r g e s t e n e r g y c o n s u me r i n t h e w o r l d h a s t o p l a y a b i g g e r r o l e i n t h a t
o r g a n i z a t i o n f o r i t t o b e me a n i n g fu l i n t h e fu t u r e . A n d t h e n e w
e x e c u t i v e d i r e c t o r o f t h e I E A i s g oi n g t o t r y t o f u r t h e r a c c e l e r a t e
c o l l a bo r a t i o n w i t h C h i n a a n d t r y t o g e t t h e m t o s h a r e mo r e
i n f o r ma t i o n .
            HEARING COCHAIR VIDENIEKS: I'd like to follow quickly on
C o m mi s s i o n e r D 'A ma t o 's q u e s t i o n . D o n 't c o u n t r i e s wh o h a v e f u l l
me mb e r s h i p t o I EA o t h e r t h a n ob s e r v e r s h a v e t o m e e t c e r t a i n
d e mo c r a c y s t a n d a r d s ?
            DR. LOGAN:                 T h e r e a r e t w o r e q u i r e me n t s t o j o i n t h e I E A .
N u mb e r o n e , y o u m u s t b e a n O E C D me mb e r , a n d f o r t h a t , y o u n e e d t o
h a v e a c e r t a i n l e v e l o f w e a l t h p e r c a p i t a a n d y o u mu s t me e t g e n e r a l l y
r e c o g n i z e d h u ma n r i g h t s s t a n d a r d s .
            T h e s e c o n d r e q u i r e me n t t o j o i n t h e I EA i s t h a t y o u h o l d 9 0 d a y s
worth of oil stockpiles.
            HEARING               COCHAIR              VIDENIEKS:                     Only         t ho s e     two
r e q ui r e me n t s .
            D R . L O G A N : T h o s e t wo r e q u i r e me n t s , e x a c t l y .
            HEARING COCHAIR VIDENIEKS:                                       S o t h e y me e t o n e b u t
definitely not the other one.
            D R . L O G A N : Y e s , t h e r e ' s s o me n e w me mb e r s t o t h e I EA , R u s s i a
i s i n l i n e t o b e c o me a n I E A m e mb e r . T h e y 'r e i n t h e p i pe l i n e t o d o t h a t .
T h e r e a r e c l e a r l y g o i n g t o b e s o me c o n c e r n s a b o u t h u ma n r i g h t s i n
Russia.
            HEARING COCHAIR VIDENIEKS: Thank you.
            C O M M I SS I O N E R F I E D L E R : O n e q u i c k f a c t u a l q u e s t i o n .
            HEARING COCHAIR VIDENIEKS: Go ahead.
            C O M M I SS I O N E R F I E D L E R : D o e s a n y b o d y h a v e a n y i d e a h o w
mu c h C O 2 e mi s s i on s a n d e ne r g y c o ns u mp t i o n ha v e be e n r e d uc e d i n t he
U n i t e d S t a t e s b y t h e mo v e o f ma n u f a c t u r i n g j o b s f r o m t h e U n i t e d
States to China?
            DR. LOGAN: That's an excellent question. I don't think there
                                                    - 234 -
h a s b e e n e n o u g h r e s e a r c h . Th e r e a r e a f e w s t u d i e s o u t t h e r e .
           C O M M I SS I O N E R F I E D L E R : I d o n ' t t h i n k t h e r e h a s b e e n a n y .
           DR. LOGAN: Yes.
           C O M M I SS I O N E R F I E D L E R : Y e s .
           D R . L O G A N : N o t c o mp r e h e n s i v e s t u d i e s .
           MR. DONNELLY: Conceivably there could be a net increase.
           H E A R I N G C O C H A I R D ' A M A T O : Y o u 'r e n o t s u g g e s t i n g t h a t a s
a p a r t o f o u r c l i ma t e c h a n g e p o l i c y ?
           C O M M I SS I O N E R R E I N S C H : I s t h i s y o u r p o l i c y , J e f f ?
           C O M M I SS I O N E R F I E D L E R : N o . I ' m s u g g e s t i n g t h a t t h e s h i f t
o f p o l l u t i o n - - o k a y - - t h a t t he e mi s s i o n s t h a t w e r e g e n e r a t e d i n t h e
U n i t e d S t a t e s w e r e a l o t l e s s t h a n t h e e mi s s i o n s t h a t a r e c u r r e n t l y
b e i n g g e n e r a t e d i n C h i na t o p r o d u c e t h i s s a me p r o d u c t . T h a t 's w h a t
I ' m s u g g e s t i n g . B u t t h e n a g a i n I d o n 't h a v e a n y e v i d e n c e , b u t n o b o d y
has any evidence to the contrary either.
           M S . F I NA M O R E : I f I c o u l d me n t i o n j u s t o ne mo r e a r e a o f t h e
potential U.S.-China cooperation that I think is worth mentioning, it
c o u l d b e v e r y fr u i t f u l . A n d i t a p p l i e s t o b o t h e n e r g y r e d u c t i o n a n d
r e d uc t i o n i n e mi s s i o n s . T hi s i s a ne w p r oj e c t l a un c he d b y t h e U . S .
D e p a r t me n t o f Co m me r c e c a l l e d P 2 E 2 , P o l l u t i o n Pr e v e n t i o n a n d
E n v i r o n m e n t a l E n e r g y E f f i c i e n c y . I do n 't k n o w i f y o u 'r e a w a r e o f t h i s .
B u t i t 's b a s e d o u t o f t h e U . S . C o n s u l a t e o f H o n g K o n g .
           C O M M I SS I O N E R F I E D L E R : T r a d i n g o f c r e d i t s ?
           M S . F I NA M O R E : A c t u a l l y n o . N o , t h e y 'v e s e t u p a s y s t e m
w h e r e f a c t o r i e s i n C h i n a c a n r e d u c e t h e i r e n e r g y u s e a n d e mi s s i o n s a n d
water use at no up-front cost by contracting in Hong Kong with
E E S C O s , E n e r g y a n d E n v i r o n me n t S e r v i c e c o m p a n i e s w h o b o r r o w t h e
mo n e y f o r t h e u p g r a d e s f r o m H o n g K o n g b a n k s , a n d t h e n t h e y a n a l y z e
t h e b a s e l i n e e mi s s i o n s a n d e n e r g y u s e , a n d t h e n o n c e t h e y 'v e d e v e l o p e d
the upgrades and help the factory upgrade its energy technologies and
e mi s s i o n t e c h n ol o gi e s , t he n t h e c o mp a n y p a y s b a c k t h a t e n e r g y s e r v i c e
c o mp a n y l o a n o v e r t i me t hr o u g h t h e m o n e y t h e y s a v e d f o r l o w e r e n e r g y
e mi s s i o n a n d w a t e r u s e a n d l o w e r w a s t e d i s p o s a l c o s t s .
           I t h i n k t h i s i s a v e r y p r o mi s i n g a r e a o f c o o p e r a t i o n t h a t I h o p e
y o u w i l l s u p p o r t . Th a n k y o u .
           C H A I R M A N B A R T H O L O M E W: T h a n k y o u .
           H E A R I N G C O C H A I R V I D E N I E K S : O k a y . We ' l l w r a p u p . I t ' s
n o o n . T h a n k y o u , p a n e l i s t s , f o r y o u r v e r y g o o d t e s t i m o n y a n d w e 'l l
p r o b a b l y f o l l o w u p a n d a s k fo r mo r e d e t a i l .
           [ Wh e r e u p o n , a t 1 2 : 0 0 n o o n , t h e h e a r i n g r e c e s s e d , t o r e c o n v e n e a t
1 : 0 5 p . m. , t h i s s a me d a y . ]




                                                    - 235 -
                              A F T E R N O O N S E S S I O N
                                         [ 1 : 0 5 p . m. ]

     PANEL VII: POLICY STRATEGIES FOR ADDRESSING THE
         EFFECTS OF CHINA’S ENERGY CONSUMPTION

             HEARING COCHAIR D'AMATO: The Commission will come to
o r d e r . We 'r e n o w i n t h e s e c o n d a ft e r n o o n o f o u r h e a r i n g o n C h i n a 's
e n e r g y c o n s u mp t i o n a n d o p p o r t u n i t i e s f o r U . S. - C h i n a c o o p e r a t i o n t o
address the effects of China's energy use.
             I n o u r n e x t p a n e l t h i s a f t e r n o o n , w e 'r e v e r y p l e a s e d t o we l c o me a
r e pr e s e nt a t i v e fr om t h e D e p a r t me n t o f D e f e n s e , M r . D a v i d H e l v e y , t h e
C o u n t r y D i r e c t o r o f C h i n a , T a i w a n , a n d M o n g o l i a i n t he O f f i c e o f t h e
A s s i s t a n t S e c r e t a r y o f D e f e n s e f o r A si a a n d P a c i fi c Se c ur i t y A f f a i r s .
             P r i or t o t hi s po s i t i on , h e w a s a s s i g n e d t o t h e D e f e n s e
I n t e l l i g e n c e A g e n c y a s a C h i n a mi l i t a r y p o l i t i c a l a f f a i r s a n a l y s t i n t h e
C h i n a St r a t e g i c I s s u e s D i v i s i o n , Of f i c e o f C h i n a a n d E a s t A s i a .
             M r . H e l v e y w i l l p r e s e n t t h e a dmi n i s t r a t i o n p e r s p e c t i v e o n t h e
i mp a c t o f C h i n a ' s e n e r g y c o n s u mp t i o n o n U . S . n a t i o n a l s e c u r i t y , t h e
ma r i t i me i mp l i c a t i on s f o r t h e U . S . N a v y o f C h i n a 's g o i n g - o u t s t r a t e g y ,
so-called "going-out" strategy, to require resources, and the
g e o p o l i t i c a l a n d s t r a t e g i c i mp a c t s o f C h i n a 's e n e r g y d i p l o ma c y w i t h
Central Asia and Iran.
             T h a n k y o u v e r y mu c h f o r j o i n i n g u s t o d a y , M r . H e l v e y . We l o o k
f o r w a r d t o y o u r r e ma r k s . I w a n t t o a p o l o g i z e f o r V i c e C h a i r ma n
B l u me n t h a l , w h o i n t e n d e d t o b e h e r e , b u t w a s j u s t c a l l e d o u t o n a n
e me r g e n c y b a s i s t h i s a f t e r n o o n - - we h o p e h e 'l l r e t u r n - - f o r h i m n o t
b e i n g a b l e t o a t t e n d t hi s p a r t i c u l a r p a n e l .
             M r . H e l v e y , y o u ma y p r o c e e d . T a k e a s mu c h t i me a s y o u l i k e .

            STATEMENT OF MR. DAVID F. HELVEY
     DIRECTOR, CHINA, TAIWAN AND MONGOLIA AFFAIRS,
   OFFICE OF THE DEPUTY UNDER SECRETARY OF DEFENSE,
    ASIAN & PACIFIC SECURITY AFFAIRS, DEPARTMENT OF
               DEFENSE, WASHINGTON, D.C.

           MR. HELVEY:                 T h a n k y o u v er y mu c h .               M a d a m C h a i r ma n ,
me mb e r s o f t h e C o m mi s s i o n , I 'd l i k e t o t h a n k y o u f o r i n v i t i n g me t o
a p p e a r t o d a y t o s p e a k o n t h i s t o p i c . M y t e s t i mo n y t h i s a f t e r n o o n w i l l
o f f e r s ome p e r s pe c t i ve s fr o m t h e D e p a r t me n t o f D e f e n s e o n t h e
mi l i t a r y s t r a t e gi c a n d g e o p o l i t i c a l i mp l i c a t i o n s o f C h i n a 's e n e r g y
acquisition strategy.
           These questions have an important influence on security trends
i n E a s t As i a a n d mo r e d i s t a n t r e g i o n s o f t h e w o r l d . I c o m me n d t h e
                                                      - 236 -
C o m mi s s i o n f o r i t s c o n t i n ue d i nt e r e s t i n t hi s t o pi c .
             I n t he t h r e e d e c a d e s s i nc e r e f o r m a n d o p e n i n g , C h i n a h a s
e x p e r i e n c e d r a p i d , c o n t i n u a l e c o n o mi c g r o w t h a n d d e v e l o p me n t . I n
2 0 0 6 , C h i n a b e c a me t h e f o u rt h l a r g e s t e c o n o my i n t h e wo r l d . I t ' s t h e
w o r l d 's t h i r d - l a r g e s t t r a d i n g n a t io n , a ma j o r d e s t i n a ti o n f o r f o r e i g n
d i r e c t i n v e s t me n t , a n d o n e o f t h e w o r l d 's l e a d i n g ma n u f a c t u r e r s .
             T o s u s t a i n t h e g r o w t h o f C h i n a 's e c o n o my a n d t o s a t i s f y t h e
r i s i n g e x p e c t a t i o n s o f a g r o w i n g d o m e s t i c mi d d l e c l a s s t h a t n a t u r a l l y
s e e k s t h e b e n e f i t s o f a c c u mu l a t e d w e a l t h , C h i n a 's l e a d e r s a r e
i n c r e a s i n g c o n c e r n e d o v e r s e c u r e a n d r e l i a b l e a c c e s s t o e x p o r t ma r k e t s
a n d s o u r c e s f o r r a w ma t e r i a l s , a n d e n e r g y i s a b i g p a r t o f t h a t .
             C h i n a h a s b e c o me t h e w o r l d 's s e c o n d - l a r g e s t e n e r g y c o n s u me r
a f t e r t he U n i t e d S t a t e s . I t s d e ma n d f o r e n e r g y w i l l s u r p a s s t h a t o f t h e
U n i t e d S t a t e s , a c c ou n t i n g f o r s o me 2 0 p e r c e n t o f t o t a l w o r l d d e ma n d
by 2025.
             C h i n a i s e x p e c t e d t o r e l y o n c o a l a s i t s p r i ma r y f u e l s o u r c e , b u t
c o n s u mp t i o n o f p e t r o l e u m a n d o t h e r l i q u i d f u e l s i s e x p e c t e d t o g r o w .
Nuclear power and natural gas account for growing but smaller
p o r t i o n s o f e n e r g y c o n s u mp t i o n . S i n c e 2 0 0 3 , C h i n a ' s b e e n t h e w o r l d ' s
t h i r d - l a r g e s t i m p o r t e r o f o i l a n d t h e s e c o n d - l a r g e s t c o n s u me r , a g a i n ,
after the United States.
             C h i n a c u r r e n t l y i mp o r t s a b o u t 4 0 p e r c e n t o f i t s o i l a n d i s
e x p e c t e d t o r e l y o n i mp o r t s t o s a t i s f y 6 9 p e r c e n t o f i t s o i l d e ma n d b y
2030.
             As we have noted in our reports to Congress on Military Power
o f t h e Pe o p l e 's R e p u b l i c o f C h i n a , c o n c e r n s o v e r a c ce s s t o r e s o u r c e s
i n c l u d i n g e n e r g y h a v e b e c o me a n i mp o r t a n t i n f l u e n c e o n C h i n a 's
strategic behavior.
             C o mp o u n d i n g t h e s e c o n c e r n s a r e t h e i n h e r e n t f r i c t i o n s a t t h e
c e n t e r o f C h i na 's t r a n s f o r ma t i o n t o a s oc i a l i s t ma r k e t e c on o my i n
w h i c h t h e d y n a mi c e l e me n t s o f C h i n a 's i n c r e a s i n g l y ma r k e t - b a s e d
e c o n o my c l a s h wi t h t h e C h i n e s e C o m mu n i s t P a r t y 's d e s i r e t o r e t a i n i t s
mo n o p o l y o n p o l i t i c a l p o w e r a n d c o n tr o l i t s s t r a t e g i c i n d u s t r i e s a n d
s e c t o r s o f t h e e c o n o my , i n c l u d i n g e n e r g y .
             C h i n a 's l e a d e r s h i p a p p e a r s c o n ce r n e d t h a t t h e r a p i d g r o w t h o f
C h i n a 's o i l a n d g a s c o n s u mp t i o n a n d t he r e l a t e d n e e d t o i n s u l a t e C h i n a
f r o m f l u c t u a t i o n s i n g l o ba l ma r ke t pr i c e s c ou l d a f f e c t e c o no mi c g r ow t h
a n d d o me s t i c s t a bi l i t y. P r e mi e r We n J i a ba o , fo r e xa mp l e , ha s s t a t e d
t h a t t h e " s h o r t a g e o f o i l a n d g a s r e s o u r c e s h a s b e c o me a r e s t r i c t i n g
f a c t o r i n o u r c o u n t r y " - - t h a t 's C h i n a - - " i n o ur c o u n t r y 's e c o n o mi c a n d
s o c i a l d e v e l o p me n t . "
             A n o l e s s u r g e n t c o n c e r n f o r B e i ji n g i s t he s e c u r e t r a ns p o r t o f
t h e s e m a t e r i a l s b a c k t o C h i na . S o me 8 0 p e r c e n t o f C hi na 's c r ud e o i l
i mp o r t s t r a n s i t t h e M a l a c c a S t r a i t .
                                                     - 237 -
            I n N o v e m b e r 2 0 0 3 , C h i n a 's Pr e si d e n t a n d t h e C h i n e s e C o m m u n i s t
P a r t y G e n e r a l S e c r e t a r y H u J i n t a o d is c u s s e d t h i s v u l n e r a b i l i t y , t h e s o -
c a l l e d " M a l a c c a d i l e m ma , " p r e s u ma b l y b e c a u s e i t p o se s fu n d a me n t a l
q u e s t i o n s o v e r w h e t h e r o r n o t C h i n a s h o u l d ma i n t a i n i t s p r e s e nt
r e l i a n c e o n o t h e r s fo r s e a l a n e s e c u r i t y , d e v e l o p i t s o wn c a p a b i l i t i e s t o
p r o t e c t i t s s e a l a n e s o r w o r k c o o p e ra t i v e l y w i t h o t h er s t o w a r d s t he s e
ends or finally develop alternative seaborne or overland supply routes.
            C o n f r o n t e d w i t h t h e c h a l l e n g e s o f r i s i n g e n e r g y d e ma n d , C h i n a 's
l e a d e r s h a v e e mb a r k e d o n a s o p h i s t ic a t e d s t r a t e g y t o a d d r e s s C h i n a 's
energy security needs. This strategy is being pursued along three
principal axes.
            T h e f i r s t i s t o i n c r e a s e e n e r g y e f f i c i e nc y a n d t h e u s e o f
r e n e w a b l e r e s o u r c e s . T h e s e c o n d i s t o i n c r e a s e d o me s t i c p r o d u c t i o n
a n d i n f r a s t r u c t u r e d e v e l o pme n t , a nd t he t h i r d i s t o s e c ur e f o r e i gn
r e s o u r c e s t h r o u g h t h e s o - c a l l e d " go - o u t " s t r a t e g y .
            I n my w r i t t e n s t a t e me n t , I d i s c u s s t h e f i r s t t w o o f t h e s e i n s o m e
detail. In the interest of time, I will focus on the third because when
C h i n a a c t s a s i f i t c a n l o c k u p e n e rg y s u p p l i e s i n t h i r d c o u n t r i e s i t
r a i s e s c o n c e r n s f o r U . S . d e f e n s e a n d s e c ur i t y p o l i c y .
            A s r e c e n t l y a s 1 9 9 6 , C h i n a h a d r e l i e d p r i ma r i l y o n t w o c o u n t r i e s ,
O ma n a n d I n d o n e s i a , f o r r o u g h l y h a l f o f i t s i mp o r t s . Si n c e t h a t t i me ,
C h i n a h a s p u r s u e d l o n g - t er m s u p p l y c o n t r a c t s w i t h t h e d i v e r s e r a n g e o f
supplier nations including Angola, Chad, Egypt, Indonesia,
K a z a k hs t a n , N i g e r i a , O ma n , R u s s i a , S a u d i A r a b i a , S u d a n , a n d
Venezuela.
            C u r r e n t l y, s l i g ht l y o v e r ha l f o f C h i na 's i mp o r t s c o me f r o m t h e
M i d d l e Ea s t a n d a l mo s t a q u a r t e r f r o m A f r i c a . I n a d d i t i o n t o s e c u r i n g
long-term supply contracts, China has pursued equity positions in a
v a r i e t y o f e n e r g y a s s e t s a n d i n v e s t me n t s .
            A l t h o ug h s ma l l c omp a r e d t o i n v e s t me n t s b y t he i n t e r n a t i o n a l oi l
ma j o r s , C h i n a 's i n v e s t me n t s h a v e i n c r e a s e d s i g ni f i c a nt l y i n r e c e nt
y e a r s . Ch i n e s e n a t i o n a l o i l c o mp a n i e s h a v e i n v e s t e d i n o i l v e n t u r e s
i n c l u d i n g o i l f i e l d d e v e l o p me n t , p i p e l i n e r e fi n e r y p r o j e c t s i n
K a z a k h s t a n , N i g e r i a , a n d S u d a n a n d a ls o i n o ve r 2 0 o t he r c o u n t r i e s i n
N o r t h A f r i c a , C e n t r a l A s i a , S o u t h e a s t A s i a , L a t i n A me r i c a a n d No r t h
A me r i c a .
            C h i n a 's r e s p o ns e t o i t s e n e r g y n e e d s h a s l e d Be i j i n g t o f i n a n c e
e n e r g y p r o j e c t s t h a t h a v e u n c e r t a i n p r o s p e c t s fo r a p o s i t i v e r e t u r n o n
i n v e s t me n t , t o i g n o r e p o l i t i c a l r i s k t h a t i s p r o h i b i t i v e t o p r i v a t e
c o m me r c e , a n d t o e s t a b l i s h c l o s e r r e l a t i on s wi t h p r o bl e m s t a t e s s u c h a s
S u d a n t h a t a r e r i c h i n e n e r g y b u t t h a t de f y i nt e r na t i o n a l n or ms .
            I n t e r ms o f s e c ur i t y i mp l i c a t i on s , C h i n a ' s p o l i c i e s a n d e ff o r t s t o
e s t a b l i s h s p e c i a l r e l a t i o n s h i p s w i t h t h e s e f o r e i g n s u p p l i er s h a v e
p o t e n t i a l n e g a t i v e r e p e r c u s s i o n s o n r e g i o n a l s t a b i l i t y a n d s e c ur i t y .
                                                      - 238 -
           I n s o me c a s e s , C hi n a ha s us e d e c o n o mi c a i d , d i p l o ma t i c f a v o r s
a n d t h e s a l e o f mi l i t a r y t e c h n o l o gy a s i n c e n t i v e s t o s e c u r e e n e r g y
deals.             I n t h e c a s e o f S u d a n , B e i j i ng 's c o m me r c i a l t i e s h a v e
c o mp l i c a t e d e f f o r t s t o s e c u r e mo r e r o b u s t s u p p o r t fr o m C h i n a i n
c o u n t e r i n g t h a t c o u n t r y 's d e f i a n c e o f i n t e r n a t i o n a l n o r ms . S u c h t i e s
ma y a l s o h a v e i n f l u e n c e C h i n a 's r o l e i n c o n t a i n i n g I r a n 's n u c l e a r
a mb i t i o ns .
           A s e c o n d i mp l i c a t i o n l i e s i n t h e u n c e r t a i n t y c r e a t e d b y C h i n a ' s
e n e r g y a c q u i s i t i o n s t r a t e g i e s . A s d o c u me n t e d i n t h e r e p o r t s p u b l i s h e d
b y t h i s Co m mi s s i o n , t h e i r r e ma i n s c o n c e r n s a n d q u e s t i o n s , b o t h w i t h i n
t h e U n i t e d S t a t e s a n d a mo n g C h i na ' s n e i g h b o r s o v e r t h e e c o n o mi c
i mp a c t o f C h i n a 's e n e r g y p o l i c i e s .
           Wh e r e a s , t h e U n i t e d St a t e s t e n d s t o p u r s u e e n e r g y s e c u r i t y
t h r o u g h f o s t e r i n g b r o a d - b a s e d ma r k e t s a n d d i v e r s i f i c a t i o n o f r e s o u r c e s ,
C h i n a ha s t e n d e d t o s e e i t s e n e r g y s e c u r i t y i nt e r e s t s a d v a n c e d by
p r o t e c t i n g i t s e l f f r o m t h e i n t e r n a t i o n a l ma r k e t t h r o u g h c o n t r o l o f t h e
supply chain beginning at the source of production.
           S o me h a v e q u e s t i o n e d w h e t h e r C hi ne s e i n ve s t me n t s i n e n e r g y
a s s e t s s u c h a s o i l a n d g a s f i e l d s , p i p e l i ne s a n d r e f i n e r i e s a b r o a d w i l l
r e mo v e e n e r g y r e s o u r c e s fr o m t h e c o mp e t i t i v e ma r k e t .                         On the
c o n t r a r y , o w n e r s h i p o f t h e s e r e s o u r c e s g e ne r a l l y di s pl a c e s w h a t t h e
C h i n e s e w o u l d h a v e o t h e r w i s e b o u g h t o n t h e o p e n ma r k e t .
           I n a d d i t i o n , p r o d u c t i on f r o m C h i n e s e o w n e d f i r ms o f t e n e n t e r s
t h e ma r k e t f o r g l o b a l c o n s u mp t i o n . A n d l a s t l y , t o t h e e x t e n t t h a t
C h i n e s e fi r ms a r e i n v e s t i ng w h e r e o t he r i n t e r n a t i o n a l f i r ms a r e n o t , t h e
b e h a v i o r c o u l d e v e n e x p a n d t h e w o r l d 's s u p p l y o f t r a d e o i l a n d g a s .
           N e v e r t h e l e s s , t h e q u e s t i o n r e ma i n s o v e r t h e d e g r e e t o w h i c h
C h i n a 's b e h a v i o r c o u l d a f f e c t o t h e r c o u n t r i e s i n c lu d i n g e me r g i n g
ma r k e t e c o n o mi e s , p o t e n t i a l l y c r e a t i n g a t r e n d t h a t r u n s c o u n t e r t o t h e
p r o c e s s o f ma r k e t - o r i e n t e d g l o b a l i z a t i o n u p o n w h i c h C h i n a i s
increasingly dependent for success.
           A t h i r d i mp l i c a t i o n r e l a t e s t o t h e l i ng e r i n g di s p u t e s t ha t C hi n a
h a s w i t h s e v e r a l o f i t s n e i g h b o r s o ve r s o v e r e i g n t y c l a i m s i n t h e E a s t
a n d S o u t h C h i n a S e a s . D i s p u t e o v e r o w n e r s h i p o f r i c h e ne r g y d e pos i t s
i n t h e s e a r e a s h a s p e r i o di c a l l y co n t r i b u t e d t o f r i ct i o n b e t w e e n C h i n a
a n d o t h e r c l a i ma n t s i n t h e p a s t .
           A n d w e a r e e nc o ur a g e d t h a t B e i ji n g a n d t h e o t h e r p a r t i e s r e ma i n
f o c u s e d on d i pl o ma c y t o r e s o l v e t he se i s s u e s , b u t n e v e r t h e l e s s , a s w e
saw in the fall of 2005 when PRC naval vessels trained their weapons
o n J a p a n e s e S e l f D e f e n s e Fo r c e s a i r c r a f t , mo n i t o r i n g C h i n e s e d r i l l i n g
and surveying activity in the disputed area of the East China Sea, the
p o t e n t i a l e x i s t s f o r mi s c a l c ul a t i on o r a c c i d e n t s t h a t c o u l d l e a d t o a
crisis.
           I n t e r ms o f d e f e n s e i mp l i c a t i o n s, a s w e 'v e d i s c u s s e d i n o u r 2 0 0 7
                                                       - 239 -
r e p o r t t o C o n g r e s s o n M i l i t a r y P ow e r o f t h e P e o p l e 's R e p u b l i c o f
C h i n a , t he r e 's a q ue s t i o n o ve r t h e e xt e n t t o w hi c h Be i j i n g 's c o n c e r n s
for the security of its access to energy supplies has begun to shape
C h i n a 's d e f e n s e p o l i c y a n d f o r c e p l a n n i n g f o r t h e f u t u r e .
             C h i n a 's l a t e s t d e fe n s e w h i t e p a p e r , e n t i t l e d " C h i n a 's N a t i o n a l
Defense in 2006," states explicitly in its description of the security
e n v i r o n me n t , t h a t , q u o t e , " s e c u r i t y i s s u e s r e l a t ed t o e n e r g y , r e s o u r c e s ,
f i n a n c e , i n f o r ma t i o n a n d i n t e r n a t i o n a l s h i p p i n g r o u t e s a r e mo u n t i n g . "
             I t a l s o d e f i n e s t h e P e o p l e 's L i b e r a t i o n A r my ' s p ri ma r y t a s k a s
upholding national security and unity and ensuring the interest of
n a t i o n a l d e v e l o p me n t .
             C h i n a h a s n o t b e e n f o r t h c o mi n g o n h o w t h e s e c o n c e r n s w i l l b e
addressed through doctrinal evolution, resource allocation, force
structure changes or contingency planning.
             T h e l a c k o f t r a n s p a r e n c y a n d e x c e s s i v e s e c r e c y t h a t s ur r o un d s
C h i n e s e mi l i t a r y a n d s e c u r i t y a f f a i r s g i v e s l i mi t e d i n s i g h t , i f a n y , i n t o
t h e d e b a t e s o c c u r r i n g w i t h i n C h i n a on t h e s e f u nd a me n t a l q u e s t i on s .
             We s e e t o d a y a P L A t h a t 's i n t h e mi d s t o f a b r o a d - b a s e d
c o mp r e h e n s i ve mi l i t a r y t r a ns f o r ma t i o n. I n t he ne a r t e r m, C h i n a 's f o c u s
a p p e a r s t o b e o n p r e p a r i n g f o r mi l i t a r y c o n t i n g e n c i e s i n t h e T a i w a n
S t r a i t , w h i c h w o u l d i n c l u d e t h e p o ss i b i l i t y o f U .S . i n t e r v e n t i o n .
             O v e r t h e l o n g e r t e r m, o u r r e p o r t n o t e s t h a t o f f i c i a l d o c u me n t s
a n d w r i t i n g s o f C h i n e s e mi l i t a r y s t r a t e g i s t s s u g g e s t t h a t B e i j i n g i s
surveying the landscape beyond Taiwan in the consideration of the
a p p l i c a t i on o f C h i n a 's mi l i t a r y f o r ce s t o o t h e r r e g i o n a l c o n t i n g e n c i e s
s u c h a s c o n f l i c t o v e r t er r i t o r y o r r e s o u r c e s .
             C h i n a 's a b i l i t y t o pr o j e c t a n d s u s t a i n mi l i t a r y po w e r a t a d i s t a nc e
t o d a y r e ma i n s l i mi t e d . T h i s i n d i c a t e s t h a t a t l e a s t f o r t h e n e a r a n d m i d -
t e r m, C h i n a a n d i n p a r t i c u l a r t h e P L A N a v y f a c e s a n a m b i t i o n
c a p a b i l i t y g a p i n t e r ms o f u s i n g i t s mi l i t a r y p o w e r t o s e c u r e f o r e i g n
e n e r g y i n v e s t me n t s o r t o d e f e n d c r i t i c a l s e a l a n e s a g a i n s t d i s r u p t i o n .
I n a n a l y z i n g t h e p o t e n t i a l c a p a b i l i t i e s t h a t C h i n a ma y c o n s i d e r
d e v e l o pi ng f o r t h e s e t y pe s o f mi s s i on s , a n umb e r o f c u r r e nt P L A
a c q u i s i t i o n p r o g r a ms a r e o f n o t e , h o w e v e r .
             F i r s t , n e w mi s s i l e u n i t s o u t f i t t e d wi t h c o n v e n t i o n a l t h e a t e r - r a n g e
mi s s i l e s c o u l d b e u s e d f o r a n t i - a c c e s s o r a r e a d e n i a l i n a v a r i e t y o f
regio