TESTIMONY OF

JACK COGEN, PRESIDENT, NATSOURCE LLC

BEFORE THE SENATE ENVIRONMENT & PUBLIC WORKS COMMITTEE

MARCH 14, 2002

Good morning, Mr. Chairman and Members of the Committee. Thank you for inviting me to testify. My name is Jack Cogen and I am the president of

Natsource LLC, an energy environmental commodity broker headquartered in New York City with offices in Washington, DC, Europe, Japan, Canada, and Australia. My testimony will address the financial risk associated with climate change policy.

At the outset, I want to acknowledge that there are legitimate differences of opinion as to what should be the nature, degree and timing of policy responses to the risk associated with climate change itself. However, the role of Natsource is to work with clients who decide it is in their best interest to evaluate the extent of their financial exposure under possible greenhouse gas policies. Our clients make the threshold decision that they are at risk financially. After that, the next step for them is to analyze the extent of their financial risk and develop strategies that make sense for mitigating that risk. Natsource contributes its policy and market expertise to helping clients assess and manage risk.

The client base of Natsource includes multinational corporations as well as foreign and domestic firms. Natsource assists them in quantifying their financial exposure under different policies that might be adopted to limit greenhouse gas emissions. Our experience indicates that companies consider a variety of factors when they weigh the degree of risk they face and what to do about it. The primary factors are (1) the probability they will be subject to emission limitation policies, and (2) the potential direct and indirect cost of those policies to the company.

Natsource provides analysis, strategic advice, and market intelligence once a company decides to undertake a comprehensive risk assessment. Generally, we help clients assess their financial exposure by identifying policies that might be adopted; assigning probabilities to those policies; quantifying the net emissions “shortfall” or “surplus” the company faces under each policy; and estimating potential compliance costs based on the company’s emissions profile, internal reduction opportunities, and our knowledge of various commodities available in the greenhouse gas emission markets. Multinational companies face an especially complicated risk because they operate across multiple jurisdictions with different policies. In addition, many of these companies must evaluate the effect of climate change policies on the market demand for their products in different countries.

If potential compliance costs are substantial and the probability of emission limitations is significant enough, the next step for many companies is to develop a cost-effective risk management strategy. This involves assembling an optimal mix of measures for reducing or offsetting emissions. These include internal and external emission reduction projects, internal emission trading programs, and external trading markets.

Companies choose to undertake emission reduction measures in spite of or because of policy uncertainty for a variety of reasons, including to reduce future compliance costs, gain experience in the greenhouse gas markets, maintain or enhance their environmental image, and place a value on internal reduction opportunities.

Greenhouse gas markets are evolving and will continue to evolve over the next several years. In the future, these markets will function more smoothly and with lower transaction costs as greenhouse gas policies become clearer and markets become more liquid. Even now, more sophisticated financial instruments such as call options are being used as a hedge against risk.

Natsource recently completed the first comprehensive analysis of the greenhouse gas trading market for the World Bank. The analysis identified approximately 60 greenhouse gas transactions involving some 55 million tons of emissions. These numbers actually underestimate the total number of transactions because they do not include internal-only transactions and small volume transactions. Current market prices for greenhouse gas commodities range from less than a dollar to over $9 per ton of carbon dioxide equivalent, depending on the type of commodity and vintage.

In conclusion, Mr. Chairman, a small but growing number of companies are beginning to more carefully analyze their financial risk under possible greenhouse gas policies. For a variety of reasons, some companies have decided to take steps now to reduce emissions even though final policy decisions, in most cases, are still pending. As a consequence, these companies are able to take advantage of the most cost-effective opportunities to reduce their financial exposure. As the markets for sulfur dioxide and nitrogen oxides emissions in the U.S. have shown, emission markets can provide an efficient way to lower the cost of reducing emissions.

That concludes my remarks, Mr. Chairman. I would be glad to answer any questions you or other Members of the Committee might have.