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AHML
GLOBAL CLIMATE COALITION
Global Climate July Coalition
1275 K St. N.W.
Suite 890
GROWTH IN A ENVIRONMENT
Washington, D.C. 20005
Tel: 202.682.9161
Fax: 202.638.1043
GLOBAL
July 23, 1997
The Honorable Janet L. Yellen, Chair
Council of Economic Advisers
Old Executive Office Building
17th Street and Pennsylvania Avenue, N.W.
Washington, D.C. 20500
Dear Janet:
I was very pleased to meet you and Jeffrey Frankel last week during the break in the
Senate Environment Committee's hearing on climate change and enjoyed discussing
informally some of the dynamics surrounding this complex issue. Thank you particularly
for your interest in a more active and open dialogue with the Global Climate Coalition
which has sought to persuade the Administration to integrate economic considerations
and assessments into our international negotiating position. As I mentioned, the
industries participating in the GCC do not oppose actions to address potential human-
induced climate change. But that action should be calibrated to the state of scientific
knowledge concerning climate change, the contribution of existing and near term
technology and the capacity of our economy to achieve realistic emissions reductions
while maintaining reasonable levels of growth.
I have enclosed for your information the GCC's letter to the President, sent immediately
after his address on climate change to the United Nations last month. In addition, I have
enclosed a recent letter to Dr. John H. Gibbons, Assistant to the President for Science and
Technology, and a March 1996 letter to your predecessor, Laura Tyson. From these, you
will see a consistency in our position regarding the need for policymaking that balances
the real economic costs to our nation of any international commitment with the
environmental and economic benefits we expect to realize.
I look forward to meeting with you in the near future and thank you again for inviting a
dialogue.
Sincerely,
Sill O'Keefe, Chairman
PRINTED WITH
SOY INK
Page Two
Letter to Janet L. Yellen
July 23, 1997
Enclosures
cc: Mr. Jeffrey A. Frankel, Council of Economic Advisers
GLOBAL CLIMATE COALITION
GROWTH A GLOBAL )
July 2, 1997
IN
The Honorable William J. Clinton
President
The White House
1600 Pennsylvania Avenue, N.W.
Washington, DC 20502
Dear Mr. President:
On behalf of the more than 60 national business organizations that make up
the Global Climate Coalition, I am writing to express our disappointment and
concern about the direction of your global climate policy as you enunciated it at
the United Nations last week. Your remarks indicate a belief that the science is
conclusive on the existence of human-induced climate change. That impression
is reinforced by your more recent remarks suggesting that some damaging
climate events over the past four or five years have been the result of
greenhouse gas emissions. Mr. President, we believe that you have been
seriously misinformed about the state of knowledge on this subject.
A U.S. position in the UN climate negotiations premised on such conclusions
is at odds with the body of scientific knowledge expressed in the Second
Assessment Report of the Intergovernmental Panel on Climate Change (IPCC)
and the views of established scientists that were published in the May 16 issue
of the journal Science.
We agree that potential for human-induced climate change deserves serious
attention. The Global Climate Coalition shares your view that a realistic policy
is required and we have made suggestions that are likely to be supported by
Congress and the American people. The United States has an enviable record
of improving energy efficiency while leading the world in economic
performance. Already U.S. industry has made significant progress in reducing
the rate of emissions growth, largely through participation in Climate Action
Plan programs initiated by your administration in 1993. We should not
jeopardize our record of achievement by actions that are driven by political
expediency rather than hardheaded analysis.
1331 Pennsylvania Avenue, NW
Suite 1500 - North Tower
Washington, DC 20004-1703
Telephone: (202) 637-3162
Fax: (202) 638-1043
Fax: (202) 638-1032
The Honorable William J. Clinton
Page Two
July 2, 1997
Any climate policy that is ultimately adopted will have global implications for
decades to come. Therefore, it is imperative that there be a clear link to the
scientific foundation that underpins it. Over the past few weeks eminent
scientists have underscored the significant degree of uncertainty about the
detection and attribution of climate change elucidated in the IPCC assessment.
Indeed, recent modeled forecasts have not only reinforced the extent of
uncertainty about the future changes in climate, but they also have revised
downward the possible sea level rise and temperature increase in 2100 to
perhaps as little as three inches and 1.5 degrees Celsius.
We believe that the most reasonable and defensible path forward will be guided
by a U.S. policy that recognizes both the global and the long-term nature of the
climate issue; recognizes that time properly used is an asset; and emphasizes
investment in information to better inform policymakers of the costs and
benefits associated with their decisions. Such a policy would increase research
to reduce uncertainties; promote research and development of new technology;
emphasize the diffusion of existing technology into developing countries;
promote the economic turnover of our own capital stock; recognize different
national circumstances; continue to promote voluntary initiatives to reduce
greenhouse gas emissions; and balance greenhouse gas abatement activities
with our national economic objectives.
You have expressed a desire to work with American business in addressing
potential climate change. We stand ready to work to fashion a policy that will
demonstrate both responsible action and protection of the nation's economic
well being.
Yours truly,
William F. O'Keete
Chairman
IP
American
1220 L Street, Northwest
William F. O'Keete
Petroleum
Washington, D.C. 20005-4070
Executive Vice President
Institute
Tel 202-682-8300
Fax 202-682-8198
June 10, 1997
Dr. John H. Gibbons
Assistant to the President
for Science and Technology Policy
424 Old Executive Office Building
17th and Pennsylvania Avenue, NW
Washington, D.C. 20504
Dear Dr. Gibbons:
As a result of our recent discussion of climate change at the German Embassy, I have re-
reviewed the study, Changing by Degrees, by the Office of Technology Assessment.
Further, I am told that Changing by Degrees has been one of the more influential
engineering studies on the feasibility of curbing CO₂ emissions. Nonetheless, neither
Changing by Degrees nor any of the other similar studies demonstrate that Americans can
substantially curb their use of fossil fuels (and, hence, their emissions of CO₂) at negligible
economic cost. The costs of such curbs, in fact, would be substantial.
Like other technology-based studies, Changing by Degrees attempts to show that
Americans-both at work and at home-waste substantial amounts of energy. Also, like
the other studies, it then simply takes it for granted that government representatives are
wise enough and can implement the right policy tools to eliminate the alleged massive
waste, and thereby cut carbon emissions at an economic cost approaching zero. Assuming
such perfection in the political marketplace is quite a leap of faith.
If Americans really do waste vast amounts of energy, the implications would be
enormous-extending far beyond energy and CO₂ emissions. Changing by Degrees
presents findings that strongly imply that economic reasoning and evidence do not apply to
energy markets, no matter how well they may explain behavior in other markets. Since
the U.S. economy is and has been one of the most robust on the world stage, Americans
must be using labor, capital and raw materials extraordinarily well to compensate for their
alleged incompetence in using energy. But, if Americans know how to use other
resources well, why do their intelligence and talents fail them when burning a gallon of
gasoline or using a kilowatt of electricity? No engineering study to date has offered an
answer for such inconsistent economic behavior-or even acknowledged this larger issue.
An equal opportunity employer
Dr. John H. Gibbons
June 10, 1997
Page 2
More specifically, Changing by Degrees projects that by 2015 the U.S. industrial sector
will emit 556 million metric tons of carbon, and then asserts that the adoption of cost-
effective practices would reduce those emissions by 17 percent. OTA offers no
explanation why profit-seeking U.S. industrial firms literally throw away billions of dollars
annually, year after year, on needless energy use in an era of "downsizing" and cost-
cutting. Surely, this anomaly deserves recognition and an explanation.
Economist Dr. Robert Hahn, of the American Enterprise Institute and Carnegie-Mellon
University, and who has published extensively on government regulation, observes that
regulatory agencies often claim "that it would be in the interest of firms to adopt [the
agencies' proposed] rules for purely economic reasons. Thus, the agencies effectively
claim that firms are not maximizing profits without government intervention." Dr. Hahn
concludes that "one must be skeptical" of such claims since "companies are in the business
of making money, while the government is not."
Other findings in Changing by Degrees also raise important questions about the
assumptions behind the study. For example:
What will be the consequences elsewhere in the economy if Americans start
making the "correct" investments in energy-saving technology? If Americans are not
investing enough in energy-saving equipment, they must be spending too much money
somewhere else. Dr. David Montgomery and his colleagues at Charles River Associates
have found that, to finance the additional "cost effective" energy-saving investment, an
implausibly large amount of money would have to be shifted away from other sorts of
capital investment-thereby imposing substantial opportunity costs on the U.S. economy.
Why do consumers all make the same mistake: using too much energy? Inherent
human fallibility assures that it will never be cost-effective to attempt eliminating all
mistakes-including all mistakes about energy use. However, while some mistakes are
always to be expected, it is not realistic to believe that many millions of human beings will
all make the same mistake-over and over again, decade after decade. Yet, this is what
Changing by Degrees implies. Some people probably buy too much energy and others
too little. As a consequence, total energy use in a world free of mistakes may not be that
much different from what we observe in the real world. Furthermore, and most important,
markets send signals and produce information. Why have not people learned from their
mistakes and the pressures of competition?
How well can analysts measure the benefits and costs faced by energy users?
For instance, Changing by Degrees uses a discount rate of 7 percent to measure the cost
of financing investments in energy-saving technologies. Since many (if not most) actual
energy users use higher rates implicitly or explicitly in making investment decisions,
Dr. John H. Gibbons
June 10, 1997
Page 3
Changing by Degrees has undercounted the actual cost of making such investments and
inferred "irrational" behavior when none may in fact exist. Furthermore, government
intervention meant to improve energy efficiency will not change the financing costs faced
by energy consumers. Also, OTA presumes that rational and cost-conscious energy users
should expect higher energy prices. For instance, OTA assumes that the price of gasoline
in 2015 will be $1.85 a gallon in 1987 dollars, or about $2.40 in 1995 dollars. It is
interesting to note, however, that the U.S. Energy Information Administration's Annual
Energy Outlook: 1997 projects the average U.S. retail gasoline price in 2015 at $1.17 a
gallon measured in 1995 dollars. Obviously, higher expected future energy prices make
energy-saving technologies more attractive investments today-and OTA's projected
price for 2015 is more than twice that of ELA. While I have no idea whether a gallon of
gasoline in 2015 will cost $2.40, $1.17 or something else, neither do the authors of
Changing by Degrees. I will simply state for the record that the dominant long-term trend
for the price of gasoline (and other fossil fuels), adjusted for inflation, has been downward
during the 20th century. I note, too, that proved world reserves of crude oil are at historic
levels-representing nearly a half century of supply at current rates of consumption. In
light of these facts, energy users-rational and cost-conscious-could be expecting lower
future energy prices than the authors of Changing by Degrees.
In short, Changing by Degrees and other engineering studies raise provocative questions
about energy use-and, indeed, about how capitalist economies function in general-that
deserve further study. However, these studies do not show that we should junk
mainstream economic reasoning or that a vast reservoir of "free" energy savings exists for
enlightened government policies to tap.
Indeed, besides violating both reason and experience, promises of a "free lunch" invite
people to give short shrift to the enormously important scientific and
policy issue of potential climate change. Without a clear grasp of the basic economics, we
cannot expect the political system to produce a comprehensive, flexible and cost-effective
climate policy.
Sincerely
Sill
William F. O'Keefe
American Petroleum Institute
1220 L Street, Northwest
Washington, D.C. 20005
(202) 682-8300
AP
William F. O'Keefe
Executive Vice President
March 20, 1996
The Honorable Laura D'Andrea Tyson
Assistant to the President for Economic Policy
The White House
2nd Floor, West Wing
Washington, D.C. 20500
Dear Dr. Tyson:
In response to your request at our meeting on March 6, I have attached an API list of
"Additional U.S. Actions to Address Greenhouse Gas Emissions".
I hope these ideas stimulate further White House discussion of this complex issue and that
industry can continue to contribute in a positive way to the domestic and international climate
change policymaking process.
Please call me if you would like further elaboration or clarification of the attached list. I look
forward to opportunities in the future to continue the dialogue on the climate policy issue.
Thank you.
Sincerely,
Enclosure
cc
E. Holstein
E. Seidman
R. Brown
An equal opportunity employer
Additional U.S. Actions
to Address Greenhouse Gas Emissions
U.S. industry recognizes the legitimate concerns about the potential long-term
effects of increasing greenhouse gas emissions on the Earth's climate system.
Increased energy efficiency reduces greenhouse emissions and most companies
have sought to improve energy efficiency--and lower costs--since the 1970s. The
EOP Group, for example, reported in 1993 that the U.S. achieved a 30 percent
reduction in total energy consumption per unit of GDP from 1970 to 1990.
More recently, companies have launched their own initiatives or joined in
government/industry voluntary programs aimed at limiting carbon dioxide,
methane and other fossil fuel emissions, both in response to the Framework
Convention on Climate Change, which entered into force on March 21, 1994, and
to the U.S. Climate Change Action Plan that was released in October 1993. To
date, while overall results of industry's efforts are positive, the magnitude
remains uncertain, both because the greenhouse gas programs are so new and
because the federal reporting system does not capture all private sector actions.
Some have responded to this uncertainty and to statements that we face
catastrophic consequences if emissions are not reduced promptly by proposing
policies and measures that would mandate substantial near-term emission
reductions. This strategy is inconsistent with the current state of climate science
and with a growing body of economic analyses. Current proposals for near-term
emission reductions would be extremely harmful to the U.S. economy, reducing
output, costing jobs and placing U.S. industry at a competitive disadvantage.
Moreover, the only way to achieve such reductions in a 10-15 year timeframe is
by a large energy tax.
A more productive approach would include the following actions:
O government and industry cooperatively identify and assess
cost-effective, flexible voluntary programs;
a policy and investment environment that would be conducive to
increased private investment in new technologies and processes;
impediments to the economic turnover of energy-inefficient capital
stock should be identified, reviewed and modified or removed;
O tax rules should be reviewed to explore the possibility of fostering
greater investment in new energy-efficient R&D; and,
o an investment climate should be developed to encourage the export of
U.S. energy-efficient technologies to developing nations.
The following list identifies several opportunities for government/industry
cooperation.
o Identify, Expand and Report Cost-Effective Near-Term Actions
- work with government to expand vehicle scrappage programs
aimed at reducing emissions from older vehicles
- work with government officials to identify, assess and expand the most
cost-effective programs within the U.S. Climate Change Action Plan
- ensure intellectual property rights and patents protection for climate
change technologies and discoveries
- remove impediments to the voluntary reporting of company programs
and public/private programs aimed at limiting emissions
o Stabilize the Policymaking and Investment Environment
- focus funding of policy-relevant research on reducing major
uncertainties about the climate system and on improving the accuracy of
climate models, particularly with respect to possible regional impacts,
and the role of oceans, clouds and water vapor
- encourage private investment in climate change research
- encourage corporations to include climate change considerations in
their long-range business plans
o Accelerate Capital Stock Turnover
- reduce corporate tax rate
- revise depreciation rules to remove any disincentives to the early
retirement of energy-intensive equipment and facilities
2
- change regulations that now discourage capital stock turnover (e.g.,
Superfund and impediments in the Clean Air Act to new investments)
0 Stimulate Investment in Climate Change R&D
- explore the desirability of incentives aimed at increasing private sector
R&D in energy-efficient technologies
- request the Treasury Department identify tax barriers that discourage
investment in new energy-efficient R&D technologies and processes
- identify ways to encourage corporations to review current R&D plans
and budgets and to consider enhancing investments in new energy-
efficient technologies and processes
- explore ways to identify promising private technologies and whether
accelerated commercialization would help limit greenhouse gas
emissions
o
Strengthen Climate Change Technology Investment Abroad
- take steps to remove "additionality" as a criteria for "Joint
Implementation" activities
- work with international bodies to broaden "sovereign risk insurance" to
cover political and other risks to foreign direct investment in
technologies aimed at reducing greenhouse gas emissions
- examine export restrictions to see if any unnecessarily constrain the
export of U.S. climate technologies
- work with foreign governments to increase direct investment
opportunities in a way that provides an opportunity to earn an adequate
return on investment
- protect intellectual property rights and patents on technologies
transferred
3
EXECUTIVE OFFICE OF THE PRESIDENT
COUNCIL OF ECONOMIC ADVISERS
WASHINGTON, D.C. 20500
THE CHAIRMAN
Statement before the
Senate Committee on Environment and Public Works
Dr. Janet Yellen
Chair, Council of Economic Advisers
Thursday, July 17, 1997
Good afternoon, Mr. Chairman and members of the Committee. I appreciate the
opportunity to discuss with you today the economics of global climate change.
Introduction
In his speech to the United Nations Special Session on Environment and Development in
June, President Clinton emphasized that the risks posed by global climate change are real and that
sensible preventive steps are justified. This assessment accords with the views of the more than
2300 economists, including 8 Nobel laureates, who signed a statement supporting measures to
reduce the threat of climate change. The economists endorsed the conclusions from last year's
report by the Intergovernmental Panel on Climate Change (IPCC), which said that governments
should take steps to reduce the threat of damage from global warming, and went on to argue that
market-based policies can slow climate change without harming the American economy.
At this time the Administration has not settled on a particular set of new policies to reduce
greenhouse gas emissions. Instead, the President indicated in his U.N. speech that he intends to
engage in a discussion with all interested parties about the problems posed by greenhouse gas
accumulations and the costs and benefits of corrective action. To this end, the President will hold
a White House conference on climate change later this year, and Members of his Cabinet and
other senior Administration officials will meet with Members of Congress, scientific and economic
experts, environmentalists, local government officials, and business and labor leaders on a regular
basis over the next several months to discuss issues related to climate change. This process is
intended to inform the Administration's decision-making process, which will culminate in a U.S.
policy position in the international negotiations in Kyoto in December of this year.
An important step in this -- and any -- policy process is determining the impact it will have
on the American economy. President Clinton's top priority, since his first days in office, has been
revitalizing the U.S. economy, creating jobs and investing in people and technology to enhance
long-term growth. And, we have made tremendous progress. The President is not going to
jeopardize that progress. Any policy he ultimately endorses on climate change will be informed by
his commitment to sustaining a healthy and robust economy.
In my testimony today, I would like to describe some of the principal lessons that emerge
from the voluminous literature, much of it relatively recent, on the economic impacts of policies
to address global climate change.
Underlying Uncertainties
Before I begin my discussion of the economic literature, I would like first to acknowledge
the uncertainties associated with estimating both the costs and benefits of reducing greenhouse
gas emissions. To provide some perspective: as you all know, it is difficult to gauge exactly what
impact the balanced budget agreement will have on the U.S. economy's growth rate, levels of
employment, interest rates and consumption over the next five years. But with global climate
change, it is orders of magnitude more difficult to gauge the effects on the economy: we are
concerned with not just the next five years and not just the American economy, but, rather, we are
dealing with economic and physical processes that operate globally and over decades, if not
centuries.
Although a great many scientists believe that global climate change is already underway,
the more serious potential damages associated with increasing concentrations of greenhouse gases
are not predicted to occur for decades. This means that the benefits of climate protection are very
difficult to quantify. And, while the potential costs of reducing greenhouse gas emissions may be
more immediate, they too, as I will discuss below, are difficult to predict with any certainty.
Many unanswered questions exist about the biophysical systems, potential thresholds, and
economic impacts. In short, if anybody tells you that he or she has the definitive answer as to the
costs and benefits of particular climate change policies, I would suggest that you raise your
collective eyebrows.
Lessons from the Economic Literature
Let me now turn to the economic literature and try to summarize what I think we know so
far about this difficult topic. Most economists have not addressed the benefits of climate
protection, but rather have focused on the costs associated with alternative paths for reducing
greenhouse gas emissions. The economic literature includes estimates using many different
models to evaluate numerous alternative emission reduction strategies. In fact, because there are
so many different models, economists initially faced difficulties in comparing results: they could
not sort out the extent to which differences in results stemmed from differences in models and
assumptions versus differences in baseline emission paths and policies. To solve this problem,
thereby enabling meaningful comparisons, many economists have calibrated the various models by
performing a standardized simulation. Specifically, they have assessed the consequences of
stabilizing greenhouse gas emissions at 1990 levels by 2010 or 2020.
Within the Administration, a staff level working group -- the Interagency Analysis Team
(IAT) -- has attempted to estimate some of the economic implications of climate change policies.
They took the emissions scenario most often used in academic literature -- that is, stabilizing
2
emissions at 1990 levels by 2010 -- as the starting point for their own analysis. I would
emphasize that this scenario is not Administration policy; instead, it was picked to make
comparisons with other models easier. The staff group employed 3 different models -- the DRI
model, the Second Generation Model (SGM) and Markal-Macro model, all commonly available in
the public sphere. In running these models, the staff adopted a common baseline and, to the
maximum extent possible, similar economic assumptions. This modeling effort produced some
useful lessons, but as we found from the peer reviewers' comments, it also suffered from some
serious shortcomings. Both the lessons and the shortcomings point to one clear conclusion: the
effort to develop a model or set of models that can give us a definitive answer as to the economic
impacts of a given climate change policy is futile. Rather, we are left with a set of parameters and
relationships that influence estimates of the impacts. In my view, it is more productive to employ
a broad set of economic tools to analyze policy options than to seek to develop a single definitive
model.
I understand that a draft of the staff analysis was given to the Committee earlier this week,
along with the reviewers' comments. I would be happy to answer any questions you may have
about this modeling effort.
The Lessons. Modeling efforts both inside and outside the Administration clearly indicate
that economic analysis can do no more than estimate a range of potential impacts from particular
policies and highlight how outcomes depend on underlying assumptions about how the economy
works and the ways in which policy is implemented. However, the economics literature on
climate change does point to several important lessons:
How the economy works. First, the magnitude of the costs of reducing greenhouse gas
emissions in the various models depends crucially on a number of key assumptions about
how the economy works. For instance:
If firms in the economy can shift from high-carbon to low-carbon energy sources
quickly, the costs of climate protection will be lower.
If the economy has significant opportunities, even now, to employ energy-saving
technology at low costs, the costs of climate protection will be lower.
If technological change occurs at a rapid rate, or is highly responsive to increases
in the price of carbon emissions, the costs of climate protection will be reduced.
If the Federal Reserve pursues a monetary policy oriented toward keeping the
economy at full employment, transitional output costs will be lower.
In short, the greater the substitution possibilities and the faster the economy can adapt, the
lower the costs.
How the plan is implemented. Second, costs depend critically on how emission
reduction policies are implemented. It boils down to this: if we do it dumb, it could cost a
lot, but if we do it smart, it will cost much less and indeed could produce net benefits in
the long run. The over 2300 signatories of the economists' statement argued that any
3
global climate change policy should be rely on market-based mechanisms. Such
mechanisms allow for flexibility in both the timing and location of emission reductions,
thereby minimizing the costs to the U.S. economy. The economists concluded that "there
are policy options that would slow climate change without harming American living
standards, and these measures may in fact improve U.S. productivity in the longer run."
The speed at which emissions reductions are required can have large effects on the
estimated costs. It is important to allow sufficient lead-time for orderly
investment in new equipment and technology. Alternatively, if emission reduction
requirements are too far off in the future, the incentives to adopt energy efficient
technologies are weakened because people may not view the policy as credible.
A "cap and trade" system in which emission permits are issued and then traded
among firms can substantially reduce the cost of meeting an emissions target by
creating incentives for emissions to be reduced by those firms and in those
activities where costs are lowest.
International emission permit trading substantially lowers costs by applying the
same cost-minimizing principle globally.
So-called "banking" and "borrowing" of permits increases flexibility and lowers
costs by allowing firms to change the timing of their emission reductions.
Joint implementation, whereby US firms would receive credit for undertaking
emission reductions in countries with low abatement costs, would also lower the
domestic burden.
An additional aspect of implementation that profoundly affects the costs of
reducing emissions concerns "revenue recycling." In many model simulations, emissions
are reduced by using various market mechanisms. For many of these scenarios, the
Federal government realizes an increase in revenues. Economic growth can receive a
long-term boost if these revenues are used to reduce distortionary taxes that diminish the
incentives to invest, save or work, or if the revenues are channeled into deficit reduction,
thereby lowering interest rates and boosting investment. In fact, in some models and
scenarios, emissions reduction generates a net economic benefit when the revenues are
recycled in a growth-promoting fashion.
Which countries participate. The third lesson that emerges from a study of the
economics of climate protection is that developing, as well as developed, countries must
be part of the process. While developed countries are responsible for most of the
greenhouse gas currently in the atmosphere, developing countries are starting to catch up.
By 2040, the largest fraction of emissions is estimated to come from developing countries.
Thus, any comprehensive plan to deal with this global problem must include a mechanism
to bring developing countries into the process.
The timetable for the inclusion of developing countries is also important. The sooner that
developing countries face incentives to move away from carbon intensive energy sources,
4
the less likely it is that they will become dependent on those types of fuels to spur their
economic growth. In short, global problems require global solutions. We must find the
technologies and solutions to lead the way.
Conclusion
Let me conclude. Policies to promote economic growth, create jobs, and improve the
living standards and opportunities of all Americans have been and always will remain the top
priority of the President and his Administration. In his remarks to the Business Roundtable on
global climate change, the President said "[l]et's find a way to preserve the environment, to meet
our international responsibilities, to meet our responsibilities to our children, and grow the
economy at the same time."
Some of the key economic lessons we have learned that will help us achieve the
President's goal include:
Inherent uncertainty dictates that models should be expected to generate only a range of
economic impacts, not definitive answers.
Key assumptions about how the economy works directly influence the estimated costs of
climate protection.
Implementation of any policy needs to be market-based and flexible over time and space to
achieve the lowest cost reductions.
All nations, both developed and developing, need to participate.
Thank you. I would be happy to answer any questions you may have.
5
EXECUTIVE OFFICE OF THE PRESIDENT
COUNCIL OF ECONOMIC ADVISERS
WASHINGTON, D.C. 20500
THE CHAIRMAN
Statement before the House Commerce Subcommittee on Energy and Power
Dr. Janet Yellen
Chair, Council of Economic Advisers
Tuesday, July 15, 1997
Good afternoon, Mr. Chairman and members of the Subcommittee. I appreciate the
opportunity to discuss with you today the economics of global climate change.
Introduction
In his speech to the United Nations Special Session on Environment and Development in
June, President Clinton emphasized that the risks posed by global climate change are real and
that sensible preventive steps are justified. This assessment accords with the views of the more
than 2300 economists, including 8 Nobel laureates, who signed a statement supporting measures
to reduce the threat of climate change. The economists endorsed the conclusions from last year's
report by the Intergovernmental Panel on Climate Change (IPCC), which said that governments
should take steps to reduce the threat of damage from global warming, and went on to argue that
market-based policies can slow climate change without harming the American economy.
At this time the Administration has not settled on a particular set of new policies to
reduce greenhouse gas emissions. Instead, the President indicated in his U.N. speech that he
intends to engage in a discussion with all interested parties about the problems posed by
greenhouse gas accumulations and the costs and benefits of corrective action. To this end, the
President will hold a White House conference on climate change later this year, and Members of
his Cabinet and other senior Administration officials will meet with Members of Congress,
scientific and economic experts, environmentalists, local government officials, and business and
labor leaders on a regular basis over the next several months to discuss issues related to climate
change. This process is intended to inform the Administration's decision-making process, which
will culminate in a U.S. policy position in the international negotiations in Kyoto in December
of this year.
An important step in this -- and any -- policy process is determining the impact it will
have on the American economy. President Clinton's top priority, since his first days in office,
has been revitalizing the U.S. economy, creating jobs and investing in people and technology to
enhance long-term growth. And, we have made tremendous progress. The President is not
going to jeopardize that progress. Any policy he ultimately endorses on climate change will be
informed by his commitment to sustaining a healthy and robust economy.
In my testimony today, I would like to describe some of the principal lessons that emerge
from the voluminous literature, much of it relatively recent, on the economic impacts of policies
to address global climate change.
2
Underlying Uncertainties
Before I begin my discussion of the economic literature, I would like first to acknowledge
the uncertainties associated with estimating both the costs and benefits of reducing greenhouse
gas emissions. To provide some perspective: as you all know, it is difficult to gauge exactly
what impact the balanced budget agreement will have on the U.S. economy's growth rate, levels
of employment, interest rates and consumption over the next five years. But with global climate
change, it is orders of magnitude more difficult to gauge the effects on the economy: we are
concerned with not just the next five years and not just the American economy, but, rather, we
are dealing with economic and physical processes that operate globally and over decades, if not
centuries.
Although a great many scientists believe that global climate change is already underway,
the more serious potential damages associated with increasing concentrations of greenhouse
gases are not predicted to occur for decades. This means that the benefits of climate protection
are very difficult to quantify. And, while the potential costs of reducing greenhouse gas
emissions may be more immediate, they too, as I will discuss below, are difficult to predict with
any certainty. Many unanswered questions exist about the biophysical systems, potential
thresholds, and economic impacts. In short, if anybody tells you that he or she has the definitive
answer as to the costs and benefits of particular climate change policies, I would suggest that
you raise your collective eyebrows.
3
Lessons from the Economic Literature
Let me now turn to the economic literature and try to summarize what I think we know so
far about this difficult topic. Most economists have not addressed the benefits of climate
protection, but rather have focused on the costs associated with alternative paths for reducing
greenhouse gas emissions. The economic literature includes estimates using many different
models to evaluate numerous alternative emission reduction strategies. In fact, because there are
so many different models, economists initially faced difficulties in comparing results: they could
not sort out the extent to which differences in results stemmed from differences in models and
assumptions versus differences in baseline emission paths and policies. To solve this problem,
thereby enabling meaningful comparisons, many economists have calibrated the various models
by performing a standardized simulation. Specifically, they have assessed the consequences of
stabilizing greenhouse gas emissions at 1990 levels by 2010 or 2020.
Within the Administration, a staff level working group -- the Interagency Analysis Team
(IAT) -- has attempted to estimate some of the economic implications of climate change policies.
They took the emissions scenario most often used in academic literature -- that is, stabilizing
emissions at 1990 levels by 2010 -- as the starting point for their own analysis. I would
emphasize that this scenario is not Administration policy; instead, it was picked to make
comparisons with other models easier. The staff group employed 3 different models -- the DRI
model, the Second Generation Model (SGM) and Markal-Macro model, all commonly available
in the public sphere. In running these models, the staff adopted a common baseline and, to the
maximum extent possible, similar economic assumptions. This modeling effort produced some
4
useful lessons, but as we found from the peer reviewers' comments, it also suffered from some
serious shortcomings. Both the lessons and the shortcomings point to one clear conclusion: the
effort to develop a model or set of models that can give us a definitive answer as to the economic
impacts of a given climate change policy is futile. Rather, we are left with a set of parameters
and relationships that influence estimates of the impacts. In my view, it is more productive to
employ a broad set of economic tools to analyze policy options than to seek to develop a single
definitive model.
I understand that a draft of the staff analysis was given to the Subcommittee this morning,
along with the reviewers' comments. I would be happy to answer any questions you may have
about this modeling effort.
The Lessons. Modeling efforts both inside and outside the Administration clearly
indicate that economic analysis can do no more than estimate a range of potential impacts from
particular policies and highlight how outcomes depend on underlying assumptions about how the
economy works and the ways in which policy is implemented. However, the economics
literature on climate change does point to several important lessons:
How the economy works. First, the magnitude of the costs of reducing greenhouse gas
emissions in the various models depends crucially on a number of key assumptions about
how the economy works. For instance:
5
If firms in the economy can shift from high-carbon to low-carbon energy sources
quickly, the costs of climate protection will be lower.
If the economy has significant opportunities, even now, to employ energy-saving
technology at low costs, the costs of climate protection will be lower.
If technological change occurs at a rapid rate, or is highly responsive to increases
in the price of carbon emissions, the costs of climate protection will be reduced.
If the Federal Reserve pursues a monetary policy oriented toward keeping the
economy at full employment, transitional output costs will be lower.
In short, the greater the substitution possibilities and the faster the economy can adapt,
the lower the costs.
How the plan is implemented. Second, costs depend critically on how emission
reduction policies are implemented. It boils down to this: if we do it dumb, it could cost
a lot, but if we do it smart, it will cost much less and indeed could produce net benefits in
the long run. The over 2300 signatories of the economists' statement argued that any
global climate change policy should be rely on market-based mechanisms. Such
mechanisms allow for flexibility in both the timing and location of emission reductions,
thereby minimizing the costs to the U.S. economy. The economists concluded that "there
are policy options that would slow climate change without harming American living
standards, and these measures may in fact improve U.S. productivity in the longer run."
6
The speed at which emissions reductions are required can have large effects on the
estimated costs. It is important to allow sufficient lead-time for orderly
investment in new equipment and technology. Alternatively, if emission
reduction requirements are too far off in the future, the incentives to adopt energy
efficient technologies are weakened because people may not view the policy as
credible.
A "cap and trade" system in which emission permits are issued and then traded
among firms can substantially reduce the cost of meeting an emissions target by
creating incentives for emissions to be reduced by those firms and in those
activities where costs are lowest.
International emission permit trading substantially lowers costs by applying the
same cost-minimizing principle globally.
So-called "banking" and "borrowing" of permits increases flexibility and lowers
costs by allowing firms to change the timing of their emission reductions.
Joint implementation, whereby US firms would receive credit for undertaking
emission reductions in countries with low abatement costs, would also lower the
domestic burden.
An additional aspect of implementation that profoundly affects the costs of
reducing emissions concerns "revenue recycling." In many model simulations, emissions
are reduced by using various market mechanisms. For many of these scenarios, the
Federal government realizes an increase in revenues. Economic growth can receive a
7
long-term boost if these revenues are used to reduce distortionary taxes that diminish the
incentives to invest, save or work, or if the revenues are channeled into deficit reduction,
thereby lowering interest rates and boosting investment. In fact, in some models and
scenarios, emissions reduction generates a net economic benefit when the revenues are
recycled in a growth-promoting fashion.
Which countries participate. The third lesson that emerges from a study of the
economics of climate protection is that developing, as well as developed, countries must
be part of the process. While developed countries are responsible for most of the
greenhouse gas currently in the atmosphere, developing countries are starting to catch up.
By 2040, the largest fraction of emissions is estimated to come from developing
countries. Thus, any comprehensive plan to deal with this global problem must include a
mechanism to bring developing countries into the process.
The timetable for the inclusion of developing countries is also important. The sooner that
developing countries face incentives to move away from carbon intensive energy sources,
the less likely it is that they will become dependent on those types of fuels to spur their
economic growth. In short, global problems require global solutions. We must find the
technologies and solutions to lead the way.
8
Conclusion
Let me conclude. Policies to promote economic growth, create jobs, and improve the
living standards and opportunities of all Americans have been and always will remain the top
priority of the President and his Administration. In his remarks to the Business Roundtable on
global climate change, the President said "[l]et's find a way to preserve the environment, to meet
our international responsibilities, to meet our responsibilities to our children, and grow the
economy at the same time."
Some of the key economic lessons we have learned that will help us achieve the
President's goal include:
Inherent uncertainty dictates that models should be expected to generate only a range of
economic impacts, not definitive answers.
Key assumptions about how the economy works directly influence the estimated costs of
climate protection.
Implementation of any policy needs to be market-based and flexible over time and space
to achieve the lowest cost reductions.
All nations, both developed and developing, need to participate.
Thank you. I would be happy to answer any questions you may have.
9
1
RESPONSE TO IAT
2) technology
While some worthwhile insights have emerged from the staff level analysis, the results in this
document do not constitute an Administration forecast. I have tried to summarize the things we
learned that have some general validity--they concern the importance of flexibility in the design of
any climate change mitigation policy. The numbers in this document have some utility, but they
are limited. We found out that flexibility really has the potential to mitigate the economic effects
of any policy we would propose. But we do not have a policy, and we recognize that it is futile to
rely on any single model or even any small group of models for economic analysis of climate
change policy.
As we work to develop a policy, we will rely on the advice of experts in a variety of fields and use
a broad range of economic tools of analysis.
It is utterly futile to try to perfect a model.
WHAT WAS THE PURPOSE OF THE IAT EXERCISE?
I believe that Under Secretary Ehrlich and the staff were trying to facilitate communication among
the staff of the various agencies with capabilities in the energy modeling area. These staff inpoly only
engaged in a useful exercise in which they were able to see why they were arriving at different
answers with different models. To the maximum extent possible, the different staff chose a
standardized set of economic assumptions and baseline forecasts and were able to run their
models and compare results. By choosing a rather standard policy exercise, the staff were able to
compare their own approaches with those of outside researchers.
We wanted to get a sense of what the value would be of having flexibility in the various-
proposals. And we found it that it matters a lot--this justifies the U.S. approach in emphasizing
flexibility.
Some may have hoped that this exercise would arrive at a good forecast for use in Administration
policymaking but there were also, as I understand it, many skeptics of the project.
DOES THE IAT ANALYSIS REPRESENT THE ADMINISTRATIONS' POSITION?
No. It is useful staff work but does not represent the views of the Principals. The models used
are not the Administration's models.
IS THIS THE BEST EFFORT THAT CAN BE DONE?
No. There is no best to be achieved. It is just futile to try to get a best estimate of any economic
impact. We ended up recognizing the same things as every other researcher in this field--the
morals I have tried to summarize in my testimony.
Modelling gives a misleading sense of certainty. It relies on assumptions that are untested and
assumed to hold over decades. The models just are not robust enough to be a definitive guidepost
for policy. At the end of the day, we will need to use good judgement. To reach a policy
decision we will use all of the tools of economic analysis and make what we think is a sensible
policy judgement.
WHAT CRITERIA WILL THE PRESIDENT USE IN EVALUATING A PROPOSED
POLICY? Doesit begin oaddress The pubblan - tsitsemsble,
Some believe that climate change is not an established scientific fact and that no policy actions are
justified now to address it. Others argue that climate change is so serious that we should make
large policy changes to address it immediately. The President has made it clear that he believes
the science is clear with respect to policy change, that the risks are real, and we should address it
now. But he endorses a practical, pragmatic, sensible approach that will put us on the right road
without damaging the economy.
The President has made the economy his top priority since day one on the job and he continues to
consider it the top priority. This President will not endorse policies that would damage the
economy. Growth and job creation are key goals and he has a record of success which he is not
about to damage.
He agrees with the 2000 economists who argued that there are sensible policies that can address
climate change without damaging the economy and he will be judging policies in reference to that
standard.
We don't have a policy. The President will engage people in this issue to find out what's best.
WHY ACT NOW? WHY NOT WAIT?
The science is clear. It is prudent to begin to address the risks and to create incentives for
improvements over time. We need to make a credible commitment now to induce the appropriate
private sector investments and to achieve a global solution.
THE IAT MODEL SAYS THAT ADDRESSING CLIMATE CHANGE COULD RESULT
IN GDP LOSSES BETWEEN .2 - 1.0% AND JOB LOSSES OF 900,000.
Those estimates come from one model with one very special set of assumptions about Federal
Reserve policy and are transitory losses. The losses refer to a policy we have not proposed and
use a model we would not endorse which received criticism from the reviewers.
There are certainly people who would advocate proposals that would hurt people to deal with
climate change just like there are those who want to do nothing. The President wants a sensible
policy that will not harm the economy but he has also indicated that the process of climate change,
left unattended, will also cause harm and that we should begin to address that now.
Some would do a lot
Some would do nothing
We will try to do something sensible.
WON'T THIS BE HARD ON THE POOR?
The President is not about to endorse a set of policies that will harm America's families. He will
have to be satisfied that any package of policies is good for hardworking families. But remember,
this is an important problem. If we con't address it, it will also hurt the poor.
It is really premature to be discussing policy options and impacts. Everything depends on the
package of policies we adopt and how they are implemented and on the assumptions one makes
about how the economy makes.
One thing I can say is that we have concluded that market mechanisms are important and will
lower the impact of policies we might adopt.
ARE YOU CONSIDERING A TAX HIKE?
1. POTUS has just proposed to cut taxes while balancing the budget. He is committed to cutting
taxes to help hardworking families trying to raise children and send their kids to college.
2. He certainly doesn't want to raise taxes.
3. Modellers and outsiders analyzing climate change policy sometimes focus on options that
could result in revenue increases, but most consider revenue neutral policies to be a natural
baseline.
4. At this point, I don't think we should be ruling anything in or out at all with respect to climate
change. We have no policy position.
DON'T YOU HAVE TO HAVE HIGHER ENERGY PRICES TO SOLVE THIS
PROBLEM?
Climate change is a long term problem and to solve it, we will have to figure out how to reduce
our dependence on fossil fuels We need a technological fix. That will require new technologies
and signals to the private sector to undertake the kinds of investments necessary to reduce that
reliance and develop new technologies.
Certainly, many would suggest market policies that impact the price of carbon as part of the
solution to this problem. Technology and R&D can go a certain way-alone. However, the large
numbers that you see in the staff report are based on models that are not official Administration
models and have been criticized and on policies that are not Administration policy. Moreover, the
implied price change depends dramatically on how policy is implemented--whether it is
implemented flexibly or not.
AUTOMOBILES: The President emphasized in his speech at the U.N. that a program to address
climate change would create opportunities for the private sector and not just costs. Autos are a
Public -Pricate
case in point. I believe there are opportunities for us to work with the auto industry in a
partnership to develop a new generation of fuel-efficient vehicles that will be good for the industry
and good for the environment. The President cares enormously about jobs and there have been
over 100,000 new jobs in the automobile industry over the last four years.
COAL: The President's top priority is jobs. He is not about to propose the kind of radical
policies that are sometimes suggessted. He will look for a sensible policy. He is focused on jobs.
DEVELOPING COUNTRIES:
1. Yes, LDCS must be in.
2. The U.S. pushed this strongly.
3. Developing countries must be part of the solution.
Nobody can be allowed to evade their responsibilities on this critical issue. Clearly, POTUS
would not want to see industry move off shore. That would not help redcuce CO2 in the
environment and it would harm American jobs. As we look at policies, this is a very important
criterial. We don't think it makes economic or environmental sense to have that happen.
We don't have a policy position, so it is really premature to address the issue.
Remeber, we have 4% of the world's population and emit over 20% of the GHGs. We have a
responsibility hear. We need to take it on and show leadership. But the developing countries also
need to be involved.
WHY NOT JUST ADAPT RATHER THAN PREVENT?
An ounce of prevention is worth a pound of cure. Climate change can have very harmful side
effects. Remember that about 1/3 of the U.S. population lives near the coastline.
iat-rep.q&a
Page 1
Draft Q&A on the IAT Report
July 15, 1997
Q: What is the Interagency Analytical Team?
A: When the Administration evaluates possible policies, it normally sets up a variety
of staff-level working groups to inform the principals' discussions. The Interagency
Analytical Team (IAT) was one such group -- an informal group of modelers from
various agencies in the Federal government who conducted a preliminary analysis of
various hypothetical emissions reduction policies. Once the relevant principals
reviewed the work and the peer review comments on it, it was decided that further
activity would be futile because of the difficulty of developing a model or set of
models that can give us a definitive answer as to the economic impacts of a given
climate change policy. Professional and policy judgement will always be necessary.
Q: What is the Interagency Analytical Team (IAT) Report?
A: The staff-level Interagency Analytical Team wrote a report of their early results
from modeling a few emissions reduction policies that are widely examined in the
literature. I should emphasize that the scenarios examined were not and are not
Administration policy; instead, they were picked to make comparisons with other
models easier.
The working group's draft report, which was released on July 15, summarizes the
preliminary results of the team's modeling effort. That modeling effort produced
some useful lessons, but -- as illustrated by comments from peer reviewers -- it also
suffered from some serious shortcomings. As Chairman Yellen emphasized in her
testimony on July 15, the lessons and the shortcomings of the exercise point to
one clear conclusion: the effort to develop a model or set of models that can give
us a definitive answer as to the economic impacts of a given climate change policy
is futile. Rather, we are left with a set of parameters and relationships that
influence estimates of the impacts. As she indicated, it is more productive to
employ a broad set of economic tools to analyze policy options, than to seek to
develop a single definitive model.
[I would refer any more technical questions about the draft report to Chairman
Yellen.]
Q: Why was the release of the Interagency Analytical Team (IAT) report delayed?
A: After the staff-level working group received comments from peer reviewers of
the draft report, and after the relevant principals reviewed the draft report and the
comments, it became apparent that it was futile to refine the modeling process
further -- that it would be more productive to employ a broad set of economic tools
iat-rep.q&a
Page 2
to analyze policy options, rather than seeking to develop a single definitive model.
After the decision had been made that further refinement of the econometric
analysis would be futile, the draft report was issued on July 15.
[I would refer any more technical questions about the draft report to Chairman
Yellen.]
iat-rep.q&a
Page 3
Q: The Interagency Analytical Team (IAT) draft report indicates that energy prices
will rise markedly as a result of the Administration's climate change policies. Are
substantial price increases necessary to reduce greenhouse gas emissions?
A: First, let me emphasize that the Administration has not settled on any climate
change policies. The results generated in the staff report suggest that policies to
reduce emissions to 1990 levels by 2010 -- which is a common metric, and not
necessarily the Administration's policy -- tend to rely on price signals that call forth
new technologies and induce fuel switching. However, even within that
hypothetical scenario, the staff results also suggest that various assumptions have
the potential to substantially change the outcomes. For example, more flexible
implementation plans, more rapid development and deployment of technology, and
more pro-investment fiscal policy all act to mitigate any upward pressure on prices.
[I would refer any more technical questions about the draft report to Chairman
Yellen.]
Q: The Interagency Analytical Team (IAT) report indicate that economic growth will
slow markedly as a result of the Administration's climate change policies. Must
economic growth suffer to reduce greenhouse gas emissions?
A: First, let me emphasize that the Administration has not settled on any climate
change policies. The results generated in the staff report suggest that reducing
emissions to 1990 levels by 2010 -- which is a common metric, and not necessarily
the Administration's policy -- tend to leave economic growth rates somewhat below
baseline levels in the medium term. However, even within that hypothetical
scenario, the staff results also suggest that the particular policies relied on have the
potential to substantially change the outcomes -- with more flexible implementation
plans (including international emissions permit trading), more rapid development and
deployment of technology, and more pro-investment fiscal policy all acting to
mitigate any reduction in growth rates.
[I would refer any more technical questions about the draft report to Chairman
Yellen.]
Q: The Interagency Analytical Team (IAT) report indicates significant job losses will
occur as a result of the Administration's climate change policies. Must American
workers suffer to reduce greenhouse gas emissions?
A: First, let me emphasize that the Administration has not settled on any climate
change policies The results generated in the staff report suggest that policies to
reduce emissions to 1990 levels by 2010 -- which is a common metric, and not
necessarily the Administration's policy -- tend to leave employment growth
somewhat lower than it would otherwise be the case. However, even within that
iat-rep.q&a
Page 4
hypothetical scenario, the staff results also suggest that the particular policies
relied on have the potential to substantially change the outcomes -- with more
flexible implementation plans (including international emissions permit trading),
more rapid development and deployment of technology, and more pro-investment
fiscal policy all acting to attenuate any impact on overall employment.
[I would refer any more technical questions about the draft report to Chairman
Yellen.]
Q&A for Global Climate Change
from meeting in Janet's Office
15 July 1997
Answers
Decide what you want to say
1. This is a potential long-term problem
2. Requires: a change in consumption patterns
a change in production patterns
a technological fix
3. Price signals are needed
4. Many ways to send price signals
5. The President is exploring all the different options
Don't let them get you to say what you do not want to say. Therefore, frame the answer to
bridge to your message:
A "what if" question:
"I don't answer hypothetical questions it depends on "
A #s question:
A. "In the middle" approach
1. Some want to take such stringent
response
2. Others want to take much less action
3. The President wants a sensible policy because job
creation and economic growth has been and
remains his top priority
B. "Qualitative not quantitative" glad to discuss how the
think about that issue"
A tax question:
The 1-2-3 response
1. President--cut taxes in balanced budget deal
2. President clearly does not want to increase taxes
3. People outside the Administration who think
about increasing taxes usually explore a
revenue neutral plan
4. The right approach is to consider all the options
Questions
1. Ev Ehrlich, former Undersecretary at Commerce, ran the IAT--do you consider him staff?
Dr. Ehrlich was asked to coordinate an interagency effort at the staff level so as to achieve
a standardized baseline and a common set of assumptions.
2. Why was this exercise started and who authorized?
Although I wasn't here when this all started, it is my impression that the IAT was
started so as to provide directional information on the effectiveness of
flexible policy options.
3. Yes or no: Are you now distancing yourself for the IAT?
The IAT is one attempt to understand the directional impacts of climate change,
and many other modeling efforts exist outside the Administration that attempt to
do the same directional analysis. Sound economic judgement requires input from
many sources.
4. Is the IAT the best the Administration can do?
GCC is too big and too uncertain for any one modeling effort. The
President will base his decision on the best information available.
5. If the science is so uncertain, why is the Administration dumping this policy on the American
people?
6. When this policy is decided, when will you give us some information on the impact on the
economy?
The Administration will use the best tools and minds to get good economic
analysis to understand the impacts of any policy. Sound economic judgement will
help guide the President's decision.
7. These are Administration policies that have big projected impacts--how can you justify this?
Some people out there who might make these proposals; other people have
argue for less significant changes. The President will take a sensible approach to
this pròblem. His Administration's top priority has been and will continue to be
economic growth and job creation.
8. If GDP goes down by 2%, what happens to the personal income of African-Americans?
It is not useful to try and answer hypothetical questions. It depends: Some people
have made strong proposals; others have argue for less significant changes. The
President will take a sensible approach to this problem. His Administration's top
priority has been and will continue to be economic growth and job creation.
9. How can you contemplate a policy that will raise the price of energy--a policy that punishes
the poorest citizens on a wild goose chase?
The President believes that GCC is an issue. But no policy has been decided on
yet. The President has set the wheels in motion to begin engaging in a dialogue
with the American people to understand
10. Are you considering raising taxes--yes or no?
The President is very committed to cutting taxes in his balanced budget proposal.
Clearly he is not interested in raising taxes. Those out there who propose tax
increase usually talk about a revenue neutral plan. But the President has not made
a decision yet.
11. Can you make a commitment today that the Administration will not raise taxes?
We are not proposing policies, we are looking at everything. The President is very
committed to cutting taxes in his balanced budget proposal. Clearly he is not
interested in raising taxes. Those out there who propose tax increase usually talk
about a revenue neutral plan. But the President has not made a decision yet.
12.What about taxes on carbon-intensive energy? How can the Administration avoid an
increase in the price of energy?
This is a potential long term problem. It will require a change in consumption
patterns. Price signals are an important tool to help make these changes. Many
ways exists to send a price signal. Flexibility, technology, R&D in any policy are
key factors to help send these price signals. We are not proposing policies, we are
looking at everything.
13. A Dingle question: There will be a negative impact on the coal sector and the automobile
industry. What are you going to do about the hard-working people put out of work in the
automobile industry because of the Administration's policy?
Some people out there who might make these proposals; other people have
argue for less significant changes. The President will take a sensible approach to
this problem. His Administration's top priority has been and will continue to be
economic growth and job creation.
14. What will be done for the workers in the coal industry who lose their job because of climate
change policy?
Some people out there who might make these proposals; other people have
argue for less significant changes. The President will take a sensible approach to
this problem. His Administration's top priority has been and will continue to be
economic growth and job creation.
Flexibility is a key to keeping costs low.
15. Will the Administration be exploring any transition policies?
The President has not yet made a decision on any policy.
16. You praised the letter of the 2300 economists. Professor Jorgenson signed that letter; and
he also testified last week that the best policy was to start with a $5 tax that rises up to a $10 tax.
Does this sound like a good policy?
Some economists out there who might make these proposals; others have argued
for more significant changes. The President will take a sensible approach to this
problem. His Administration's top priority has been and will continue to be
economic growth and job creation. All options are being considered.
17. Should developing countries sign a binding emission agreement too?
Developing countries are an important part of any GCC treaty. The US has
pushed this point stronger than any other nation.
Pass to Tim Wirth
18. Won't this treaty without developing countries just push US industry off-shore?
The President's top priority has been job creation and economic growth. It does
not make any sense, economically or environmentally, to shift carbon emissions
elsewhere.
19. Is the developing country issue a deal-breaker in Kyoto?
Pass to Tim Wirth
Q&A for Climate Change Hearings
7/14/97
IAT Questions:
Models:
Under-Secretary of State Wirth stated at the June 19 hearing before the Senate Foreign Relations
Committee: "These are the same models [IAT models] that were very wrong about what
happened with the energy bump up in pricing after the Arab Oil Boycott of 1972. They were the
same models that, for the most part, were very wrong about the cost of the Clean Air Act." Why
should we base our policy on models that have a track record of being "very wrong"?
I would not characterize these models as being "very wrong". These models have
provided and continue to provide useful information on how the economy
operates, especially when government implements new policy. While the models
may not pinpoint the exact state of the economy 15-25 years into the future, they
do provide a reasonable range of the state of the economy. Further, they illustrate
how different sectors and different energy inputs vary through time with policy
implementation.
If one model cannot fully describe the effects of climate policy on the economy, then why 3? Why
not 4 or 5, or 16 (as in the Repetto and Duncan analysis)?
The IAT selected the 3 models it did because the strengths of each one
compensates for weaknesses in the others. The IAT process was designed to
provide policy-makers with economic information on the effects of climate policy.
The process did not necessitate an assessment with every available economic
model in existence. The IAT process is another useful set of information that
complements the existing economic literature on climate change.
The panel of reviewers of the draft of the IAT report made several significant criticisms of this
process. Regarding the selection of the models, do you share their concerns about them?
Specifically, do the models insufficiently address international trade? If they cannot capture
international trade well, then how can we estimate the effects of climate policy on
competitiveness?
Every model has a weakness, and in the case of the models used in the IAT
process, none of them do a good job of describing the international trade
implications of climate policy. Economists, both within the government and in the
private sector, continue to conduct research on this issue. The key to minimizing
negative impacts to U.S. competitiveness is ensuring that a climate change
agreement requires non-annex I countries to participate in emissions reductions.
1
Do you have faith in the assumptions used in creating the baseline projection? Should there be
more than one baseline so that we have a range of possible predictions? Is the baseline sensitive
to the assumptions that oil and gas prices will rise in the future (even though they have been
declining thus far this decade)? What about new discoveries of fossil fuel reserves that can push
down prices of these energy sources even more (and result in higher costs for a carbon
constraint)?
Any forecasting exercise involves a large set of uncertainties, as I mentioned in my
opening statement. Our efforts to assess the economic impacts can provide us
with information on the range of costs, but cannot give a definitive answer.
Drawing from the economic literature and further analyses on the sensitivity of
these assumptions can assist in improving our confidence in the range of estimates
we generate for policy-makers.
Benefits:
What are the benefits of preventing climate change estimated by the IAT models? If there are no
estimates of benefits, how do we know what we are getting with these expensive policies? If the
state of the science and the economics is insufficient to generate estimates on benefits, doesn't
that imply that we don't know enough about the problem to enact costly policy measures?
The benefits of climate policy have not been quantitatively assessed in this process,
in large part because of the uncertainties in the biophysical and economic
responses to climate change. However, the benefits from reducing the risk of
climate change are significant enough to warrant the statement by 2000 economists
in support of cost-effective climate policy.
GDP:
Some of the studies on this issue indicate that climate change policy might actually increase U.S.
GDP. How can this be? If there are great win-win technologies already in existence, why hasn't
the private sector already adopted them? Isn't the Administration's Climate Change Action Plan
supposed to encourage voluntary adoption of these energy efficiency technologies?
Some of these "win-win" technologies aren't fully adopted in part because of the
bias in favor of low energy costs (for example, by subsidizing coal and hydro
power and ignoring the-environmental costs such as carbon dioxide emissions).
The Climate Change Action Plan does attempt to encourage the adoption of these
technologies, but low funding levels have prevented the program from being more
successful.
2
Based on the three models used in the IAT analysis, it is difficult to determine if the hypothetical
climate policy subsumed in the analysis will lead to an increase or a decrease in GDP over the
baseline by 2020? The DRI model yields results that the economy under climate policy would be
0.3% larger in 2020, while the economy is about 0.2% smaller than baseline with the SGM model,
and the Markal-Macro model generates estimates that the economy would be about 0.6% smaller
under climate policy in 2020 than otherwise. The report notes that these values should serve as
brackets about a reasonable range. However, this range is much smaller than the one provided in
the Repetto and Duncan (WRI) analysis (about 2% gain to 2% loss in 2020). Why should an
analysis of 3 models generate a more reliable range than an analysis of 16 models?
The report is correcting in using these point estimates simply as markers of a range
of expected responses by the economy to climate policy. The more broad range in
the Repetto and Duncan analysis represents greater variation in assumptions than
the IAT analysis. Several of their low estimates of losses in GDP reflect
assumptions not considered by the IAT (such as no low-cost substitute for fossil
fuel energy, inefficient economic responses, and no joint implementation). Several
of their high estimates of gains in GDP include other assumptions not considered
by the IAT (such as averted air pollution damages and climate change damages).
It should be noted then that the IAT range is fairly consistent with the Repetto and
Duncan analysis.
The DRI model indicates that consumer expenditures fall below baseline and do not at anytime
reach baseline. The report notes that consumer expenditures are "closer to consumer 'welfare'
than total GDP". Doesn't this mean that individual consumers will be made worse off under
climate policy, even if we do have a positive effect on GDP? Should the appropriate evaluation of
policy then be based on GDP or consumer expenditures?
IAT reports most modeling results in terms of GDP. This is consistent with most
economic analysis on climate change where researchers have estimated the effects
of emissions reductions on economic output. Further, providing only information
on consumption misses the larger picture that includes potentially substantial
increases in investment. To paint a fuller picture of the effects of climate change,
however, both consumption and GDP results should be provided to inform policy-
makers.
3
Revenue Recycling:
Do some of these gains in GDP reflect revenue recycling? Is the argument for revenue recycling
unique to climate change? Isn't it just a reflection of the more basic idea that the economy would
improve if government removed more distorting taxes and replaced them with less distorting
taxes?
Many of the modeling efforts use economic instruments that increase federal
revenues. Effectively targeting these revenues, towards deficit reduction or cuts in
income or investment taxes, can help the economy grow. While this is not unique
to climate change, it is important in considering the implementation of climate
change policy.
The IAT analysis assumes that the revenues from a permit auction would go towards deficit
reduction. How would the results change if the revenues financed a tax cut? Or additional
government spending?
The economic literature indicates that revenue recycling that targets investments
better stimulates economic growth than alternative recycling strategies. Therefore,
revenue recycling through deficit reduction, which has the effect of reducing the
real interest rate, or through tax cuts for investments are likely to generate more
economic growth than other forms of recycling.
The IAT analysis assumes that by using the revenues from an auction of carbon permits to reduce
the deficit, the real interest rate will fall and thereby stimulate investment. How far will it fall?
How far the real interest rate falls depends on how the Federal Reserve Board
interprets the economic conditions after the implementation of climate policy. The
decision about whether or not to employ revenue recycling and the method of
recycling used are very important. Different revenue recycling approaches can
affect the inflation rate and the unemployment rate differently, yielding different
responses by the Federal Reserve. IAT analysis found that climate policy with
recycling through deficit reduction resulted in almost a 2% fall in the real federal
funds rate relative to the base case.
4
If we allocate permits to existing emitters of carbon dioxide instead of auctioning them, what will
be the economic impacts? The IAT analysis indicates that the economy under climate policy will
be larger by 2012 than it would have been under baseline conditions with this grandfathering of
permits. The reviewers doubt that this is plausible. In fact, grandfathering of permits appears to
outperform an auction with revenues used to reduce the deficit and any auction with revenues
used to reduce personal income taxes. Should we grandfather permits?
As you note, the reviewers questioned the likelihood that grandfathering could be
that effective. On issues as important as permit allocation, we will do a careful and
comprehensive assessment of the economics literature to ensure that any
mechanism the administration supports can achieve our emissions goals cost-
effectively.
Announcement Effect:
Could you explain this "announcement effect" phenomenon described in the IAT Report? The
reviewers of the report appeared to be skeptical of the impact and magnitude of this effect.
The announcement effect implies that announcing a policy to curb carbon dioxide
emissions in the future will provide a stimulus for the private sector to invest in
R&D and smoothen the transition to climate policy. The reviewers differed on
what the appropriate rate of gains in energy efficiency should be resulting from this
effect, and recommended that future analyses assess a range of values.
Why would an agreement in Kyoto increase the diffusion of technologies at a faster rate through
the "announcement effect", but the President's Climate Change Action Plan, the primary purpose
of which is to increase technology diffusion, apparently does not have this effect in the IAT
modeling?
The IAT modelers could make this assumption for two reasons. First, the Climate
Change Action Plan includes a set of voluntary actions for the private sector to
take. Since these are voluntary, they may not generate the same kind of incentive
as a mandatory cap-and-trade program. Second, the announcement effect is
weakened for circumstances where the private sector discounts the likelihood of
the policy actually being implemented. In this case, the low levels of funding for
CCAP may make the private sector hesitant to invest in energy efficiency
technologies.
5
How sensitive are the results to the assumption on the improvements in energy efficiency and the
"announcement effect"?
For climate policy, the costs of achieving emissions reductions are sensitive to the
diffusion of energy efficiency technologies. The size of the announcement effect in
the analysis affects the results generated by the models. The IAT tested two
values for the announcement effect, and based on the recommendations by the peer
reviewers, we will cast a wider net across the economic literature to identify the
impacts of different announcement effects.
Couldn't an announcement result in higher emissions prior to implementing the announced climate
policy than under a baseline scenario with no announcement?
Private firms undertake behavior to maximize their profits. Under the baseline
scenario, firms are assumed to be producing at an optimal level. This question
assumes then that under the announcement, but prior to policy implementation,
firms would find it optimal to increase carbon emissions. Since the announcement
generates expectations of higher prices in the future, firms are likely to invest in
energy efficiency R&D. It is not likely that they would pump up emissions prior to
policy implementation, unless the government implemented a grandfathering
permit allocation scheme that rewarded that kind of behavior.
Do the models account for the opportunity costs of investing in energy efficiency? The reviewers
believe that the models do an inadequate job of representing these costs.
The reviewers made some valid comments on the capacity of these models to
account for the opportunity costs of capital. The IAT process is simply another
piece of knowledge on the economics of climate change. On issues such as this,
we will incorporate some of the pool of knowledge to complement our
understanding of the potential effects of climate policy.
If this "announcement effect" is supposed to increase the rate of diffusion of energy efficient
technology, then shouldn't investment expenditures parallel this faster diffusion rate? If so, then
why is investment under climate policy lower than baseline investment between 2000 and 2005?
By instituting a climate policy, there will be a short period of time for the economy
to make the transition to energy-efficiency. Since there will be real costs, the
economy will actually contract. During this period, investment falls below the
expected baseline investment level. However, the surge in investment after this
transition period brings the economy to well above the expected GDP under
baseline in the later years.
6
Energy Prices:
Why do the models yield such different results? DRI estimates that in 2010 the price of carbon
will be $95 per ton while Markal-Macro estimates that the price will be $145 per ton.
Interestingly, DRI estimates the price of carbon will increase through 2020, while Markal-Macro
estimates that the price will decrease through 2020.
These models vary in their results because they model how the economy works in
different manners. By providing a set of estimates from several models that
employ different assumption about the opportunities for substitutions, investments
in energy efficiency, and the effects on business activity generates a reasonable
range of information for policy-makers.
The IAT analysis estimates the price of carbon to be about $100 per ton in 2010. The report
notes that this will have the effect of raising gasoline prices by 26 cents per gallon, natural gas by
$1.50 per thousand cubic feet, and electricity by 2 cents per kilowatt hour. These are very
substantial price hikes. How will they affect businesses? Consumers?
The exact value can vary based on the assumptions used. Other simulations by the
IAT found that the price of carbon could be as low as $9 per ton with annex I
country trading and joint implementation with non-annex I countries. How
businesses and consumers are affected depends on the magnitude of the price
increase. We do know that businesses and consumers will adapt to changes in the
price, by investing in more energy efficient technology for example, thereby
mitigating the effects of higher carbon prices.
How will the higher energy prices affect lower income households? Won't these prices translate
into higher heating costs and higher food bills, and make life tougher for households just trying to
make ends meet?
This depends on the extent of higher prices. Research by several economists have
found that the burden of higher energy prices does not fall disproportionately on
lower income households. Adaptive behavior by industry, by making substitutions
in their production of goods, and investing in energy efficiency, can minimize the
costs of higher energy prices.
Why do two models (SGM and Markal-Macro) estimate that climate policy will increase natural
gas consumption in 2010, while DRI has natural gas consumption falling more than 15%?
This is a result of how different models model the nature of the economy. Some
economic models assume that the prices for renewable energy sources will become
competitive and utilities will substitute them for coal and natural gas. Other
models do not assume that substitution can occur that quickly.
7
Based on the IAT analysis, how much of the reductions will be achieved by cutting coal
emissions? How will this affect the coal-producing states? What kinds of job losses are
predicted?
Estimates on the reductions based on cutting coal emissions range between 50-
80% of all carbon dioxide reductions. Again, this range is broad because of the
uncertainties associated with how businesses and individuals adapt to a new set of
economic incentives. Employment values in the IAT report assumed no
international trading - with trading, they would likely be lower. Mining
employment in the west-south central region will decrease by about 15,000 in
2010, or 6% of its total mining employment. The east-south central region will
lose about 8,000 mining jobs in 2010, or 22% of its total mining employment. It
should be noted that regions that can support production in goods and services
that take advantage of the need for improvements in energy efficiency could
experience gains in employment.
Based on the IAT analysis, how much of the reductions will be achieved by cutting car emissions?
How will this affect the price of gasoline and the price of cars? What kinds of job dislocations
does the IAT predict?
It should be noted that two counteracting influences affect the impacts of climate
policy on transportation. Higher energy prices can negatively impact
transportation by increasing variable costs of transport, while lower interest rates
can positively impact transportation by increasing capital investments. The IAT
analysis indicates that these lower interest rates actually increase automobile
production by 2.2% in 2010 over the baseline scenario. This illustrates again the
importance of effective revenue recycling.
Employment:
The DRI model indicates that the unemployment rate is higher under climate policy than under the
baseline assumption of no-policy for all but 3 years between 2000 and 2020. How many jobs will
be lost because of this policy?
Given the uncertainties in the modeling, it is more important to consider
employment effects in terms of a range. DRI estimates in 2010 a drop in
employment of 400,000, assuming no international trade. With international trade,
the costs of implementing a climate policy drop significantly, and the effects on
employment would be lessened.
8
International Cooperation/Non-Annex I
Some economic analyses indicate that attempting to stabilize U.S. emissions by 2010 without
stabilization assurances by non-annex I countries is worse than doing nothing. Why should we
then implement an expensive climate policy?
To achieve the goals of a global climate policy and to minimize the costs of such a
policy, non-annex I countries must participate. As I noted before, "any
comprehensive plan to deal with this global problem must include a mechanism to
bring developing countries into the process."
Flexibility
What does the IAT analysis tell us about the value of emissions budgets?
The IAT analysis did not focus on the effect of emissions budgets. We do know
from other economic analyses that emissions budgets can increase the flexibility of
climate policy and lower the costs to the economy.
9
Q. The Administration is planning to implement a climate change agreement which would require
developed countries to reduce emissions, but not require developing countries to do so. Won't
this agreement negatively affect the international competitiveness of U.S. industry?
A. Work that the U.S. government has commissioned by DRI, a private consulting firm, suggests
that the international competitiveness implications for U.S. economy will be slight. DRI
estimates that only 1% of all U.S. industrial sector energy use (and emissions) will shift
overseas as a result of the agreement. The degree to which particular industry is vulnerable to
overseas competition will depend upon (1) its energy intensiveness (2) the degree to which it is
in direct competition with imports from countries not likely to be subject to our binding targets
for emissions and (3) whether the particular U.S. industry exports to countries not subject to
the agreement.
For most industries, either (a) energy is not a large fraction of their costs, or (b) the
industries do not have direct competitive pressure on their products. However, there may be
particular industries that will be more adversely affected.
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ARGONNE REPORT Q'S AND A'S
Q1.
WHAT WAS THE PURPOSE OF THIS STUDY?
Al.
The purpose of this study was to explore the possible effects of a set of hypothetical fuel
price increases on six energy-intensive industries that are subject to significant foreign
competition:
basic chemicals:
iron and steel;
petroleum refining;
paper and allied products;
aluminum; and
cement.
Panels of industry representatives and experts from academia, environmental groups,
organized labor. the financial community, and government were asked to assume a
projection of energy price increases that incorporated specific assumptions about the
energy price effects of a postulated climate change agreement, and reflect on the possible
industry responses. Panels for each of the industries met to discuss the possible impacts
on industry output, employment. energy usage, technology, costs. prices, imports, and
exports.
Q2.
WHAT DID THE PANELISTS FIND?
A2.
Overall. the participants reported negative impacts on the six industries under the assumed
energy price increases. Panelists predicted that the industries would experience reductions
in output and employment from the projected baseline levels.
Less-developed countries. which were assumed in the workshops not to adopt binding
commitments to lower greenhouse gas emissions in the timeframe considered, would
capture an increasing share of the respective markets. Some industries would locate new
plants in the less developed countries, and some would increase the utilization of existing
production facilities already located in these areas.
Q3. WHAT IS THE DEPARTMENTS RESPONSE TO THIS INPUT FROM INDUSTRIAL
EXPERTS?
A3.
The workshops provided valuable information that reinforced the need to pursue sensible
climate change policies. The negative conclusions expressed by the participants and
summarized in this report are predicated on the specific energy price scenarios assumed in
mid-1996, which do not reflect key policies advocated in international negotiations by the
Clinton administration in the intervening year. For example, the assumed fuel price
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scenarios do not take into account the impact of multi-year emissions budgets:
international emission trading, and joint implementation, If adopted, these provisions
would lower the costs of achieving emission reductions in the U.S. and other developed
countries and would significantly lower the energy price increases assumed in the
workshop scenarios. The Administration has also argued that the developing countries
should assume additional obligations in the near future to reduce the projected rapid
growth of greenhouse gas emissions. No such actions were reflected in the workshop
scenarios.
The environmental and socio-economic issues surrounding the stabilization of greenhouse
gas emissions have been the subject of considerable debate, but are especially sensitive
now as participating nations are engaged in a new round of negotiations for further
commitments within the Framework Convention on Climate Change that will conclude in
December of 1997 in Kyoto, Japan. The U.S. position taken in these negotiations stresses
that international agreements to combat the threat of climate change must be flexible.
cost-effective, realistic, achievable, and ultimately global in scope.
By examining scenarios that do not reflect such policies, the workshops identified
important economic risks in key industrial sectors that realfirm the wisdom of the U.S.
approach.
Q4.
HOW DOES THIS VERSION OF THE REPORT COMPARE TO THE EARLIER
(DRAFT) PAPER BY SUTHERLAND?
A4.
A draft paper providing a personal interpretation of the workshops was circulated prior to
completion of this report by an individual employee of Argonne National Laboratory.
That paper was apparently prepared in advance of the participants' review of the
workshop summaries and prior to the lead authors' completion of the revised focus papers
based on comments received at the workshops. The Argonne report issued this week
provides an accurate and complete summary of the workshop findings.
Q5.
DOESN'T THIS REPORT UNDERCUT THE ADMINISTRATION'S POSITION ON
CLIMATE CHANGE?
A5.
No Rather, it highlights the need for flexibility in implementing emissions reduction and
the need to engage developing countries in the process of emissions reduction. Flexibility,
including emissions trading. joint implementation, and multi-year emissions budgets and
provisions to ensure the future participation of developing countries in binding emissions
reductions are central elements of the Administration's climate change strategy.
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Q6.
HOW DOES THIS STUDY RELATE TO DOE'S INITIATIVES TO INCREASE
INDUSTRIAL ENERGY EFFICIENCY?
A6. The study is unrelated to the activities of the Department's Office of Industrial
Technologies, which is actively cooperating with many of these industries to achieve
dramatically improved energy efficiency. Success of these efforts has the potential to
improve the competitiveness of U.S. producers while reducing their energy use and
greenhouse gas emissions. Increased energy efficiency also makes U.S. producers less
sensitive to the adverse effects of any future energy price increases. regardless of their
source.
Q7. WHAT WAS THE BASIS FOR THE PRICE SCENARIOS ASSUMED. AND HOW DO
THEY COMPARE TO THE PRICE SCENARIOS BEING USED FOR THE INTERAGENCY
ANALYSIS TEAM WORK?
A7. The hypothetical fuel price scenarios used in this project are within the range suggested by
analyses presented at the inter-agency Climate Change Analysis Workshop held at Springfield,
Virginia in June, 1996. These analyses were preliminary in nature and did not incorporate
cost-saving features currently included in the U.S. negotiating position such as emissions trading.
joint implementation, and multi-year emission budgets. The industry workshop participants did
not assume any complementary technology-oriented policy measures. nor were they asked to
consider price scenarios which included ameliorative policy measures that could offset the impact
of energy price increases on industry.
Q8. WHAT IS THE BASELINE STATUS OF THESE INDUSTRIES IN THE ABSENCE
OF CLIMATE POLICY?
A8.
In many of these industries, recent U.S. investment has been in the form of refurbishing
existing plants rather than building new "greenfield" plants. Even without the assumed fuel price
increases. countries with lower costs for energy and other inputs or more rapidly growing
demands may be more attractive than the U.S. as sites for new greenfield plants.
Q9. HOW IMPORTANT ARE DEVELOPING COUNTRY COMMITMENTS TO THE
LONG RUN RESULTS?
A9. The Administration has argued that developing countries should assume additional
obligations in the near future 10 reduce growth in their GHG emissions. While developed
countries now account for the lion's share of emissions, developing country emissions are
projected to grow rapidly. The potential for shifting production of energy-intensive products to
developing countries identified in the Argonne report would exacerbate emissions growth. It will
not be possible to achieve the long run objective of the Climate Convention without substantial
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emissions reductions by developing countries: Their commitment to such reductions, which were
not reflected in the workshop scenarios, would be likely to significantly reduce the potential for
shifts in industry location identified at the workshops.
It is likely that energy-intensive industries in other developed countries would be subject
to similar challenges as their U.S. counterparts under the energy price increase scenarios
developed for this study. Energy -intensive industries in other Annex I would also benefit from
the cost-reducing flexibility provisions included in the U.S. proposal. and from an approach that
assures developing country participation in emissions reductions will occur in the near future.
Q10. DOESNT THIS REPORT PROVE SENATOR BYRD'S POINT THAT ENTERING
INTO INTERNATIONAL AGREEMENTS WITHOUT THE FULL PARTICIPATION OF
DEVELOPING COUNTRIES WOULD BE RUINOUS TO THE U.S. ECONOMY?
A10. The panelists felt that if less-developed countries did not adopt binding commitments to
lower greenhouse gas emissions. they would capture an increasing share of the markets. The
current Administration position, which was not reflected in the energy price scenarios considered
by the panelists in mid-1996, is that developing countries should assume additional obligations in
the near future to reduce the projected rapid growth of greenhouse gas emissions.
Q11. WHY DID IT TAKE THE DEPARTMENT SO LONG TO RELEASE THIS
REPORT? WEREN'T THESE WORKSHOPS HELD OVER A YEAR AGO?
A11. The participants at the workshops focused their discussions around an initial
draft of an expert author's paper. The expert authors then revised and clarified their
papers over the following months in response to the panelists suggestions. Summaries
of both the papers and the workshop proceedings were then forwarded to all
participants for their review and to confirm that the workshop summary provided an
accurate characterization of the workshop discussions.
Q12. THIS REPORT SHOWS HOW SOME INDUSTRIES WOULD BE HURT BY
LARGE ENERGY PRICE INCREASES. WOULDN'T SOME INDUSTRIES, LIKE
COMPACT FLUORESCENT BULB MANUFACTURERS. ACTUALLY BE HELPED?
HOW COME THEY WERE NOT INCLUDED IN THE STUDY?
A12. The study focused on energy-intensive industries in order to develop information
that would help in assessing the validity of the existing approaches to modeling the
impacts of regime changes on energy use in the industrial sector, which accounts for
over 1/3 of total U.S. energy use. The industries considered in this study account for
over 80 percent of energy use in manufacturing. An understanding of the forces driving
production decisions in these sectors is critical to comprehending and projecting the
implications of alternative policy scenarios for the national energy market, a primary
function of the Policy Office. Identifying changes in the relative performance of different
economic sectors is also important. A second phase of our effort, which is now
ongoing, is examining those industries that might benefit from higher energy prices.
Jul-14-97 03:25P Climate Change Task Force
P.02
Friendly questions
Q. Why are you and 2000 other economists optimistic that we can address climate change
without hurting our economy?
A. The cornerstones of smart climate change policy are:
--market based approaches (such as emissions trading) that will result in the most
economically efficient response
-technological innovation
--reasonable targets and timetables
Q. What is the role of technology in mitigating climate change?
A. As President Clinton stated at the United Nations. if we can channel the ingenuity of American
industry, academia and government labs to work on solving this problem. this could become an
economic opportunity rather than a burden. Our goal in developing a specific proposal will be to
allow for adequate lead time to avoid costly capital stock retirements and to allow for the
development of alternative technologies that can reduce the costs of compliance.
Our partnership with the U.S. automakers is a good example of what we hope to be able to
achieve through technological progress. The goal of the Parnership for a New Generation of
Vehicles is to achieve three times today's fuel efficiency without increasing costs or sacrificing
safety. If successful. this one technological program would go a long way toward reducing
greenhouse gas emissions.
Q. Are we sure market-based approaches can work?
A. Yes. The acid rain program under the Clean Air Act is just one of many examples of how
we can reconcile our economic and environmental goals and reduce pollution at the lowest
possible cost. Under the acid rain program. we have an excellent record of early compliance. low
costs. and an active emissions trading market.
Q. What targets and timetables are reasonable?
A. The Administration has not yet decided, although it has decided that the targets and timetables
advocated by the European Community are not reasonable. The Administration will be engaging
in internal and external discussions over the next several months before finalizing our position on
targets and timetables.
-
I
-
Jul-14-97 03:25P Climate Change Task Force
P.03
Q. What is the potential role of nuclear power in addressing climate change?
A. Nuclear power faces enormous challenges including the waste disposal question, and whether
new plants can be economically competitive. particularly as a deregulated electric utility industry
will be less favorable to capital-intensive technologies.
However. nuclear power is playing a role in mitigating greenhouse gas emissions now. It is a
zero-carbon-emitting technology that provides 22% of our electric generation. Improvements
in reliability and availability of nuclear plants have been reducing. and can continue to reduce
greenhouse gas emissions. In fact. a significant fraction of the utility industry's voluntary
greenhouse gas reductions under the Department of Energy's voluntary programs come from
nuclear power plant improvements.
Most analysts believe that these plants will retire over the next few decades and be replaced by
new gas-fired generation. resulting in some increase in greenhouse gas emissions. DOE recently
began an initiative designed to resolve technical issues around extending the lives of these plants.
This program could contribute to greenhouse gas reductions.
Jul-14-97 03:25P Climate Change Task Force
P.04
Q. Senator Byrd and 64 other Senators have expressed concern that U.S. competitiveness will be
badly damaged by a climate treaty that requires developed countries only--and not developing
countries--to reduce greenhouse gas emissions. In addition, the recently released Argonne study
shows a devastating impact on U.S. energy-intensive industries. What is your view of the
competitiveness implications of the current U.S. policy?
A. First of all. let me say that there is a much greater difference between the U.S. negotiating
position and the rest of the world than there is between the Administration and Senator Byrd. We
agree that developing countries have to he part of the solution to the problem of climate change.
We believe that the U.S. must lead. and that the developing countries must follow. The U.S.
negotiating position is that (1) we should go first and (2) there should be an agreement on a date
certain by which developing countries would agree to negotiations for them to take on binding
obligations.
The Argonne study assumed that developing countries never take on obligations. This is not the
U.S. position. The Argonne study assumed no international trading. That is not the U.S.
position. The Argonne study assumed no technological advances in energy efficiency. That is not
the U.S. position.
The Administration believes that addressing climate change will result in both impacts and
opportunities. In general, we believe that with the help of smart policies and American ingenuity,
we can minimize the impacts and maximize the opportunities.
We need to do more work on the competitiveness question. but my view of this problem is more
sanguine than what is reflected in the Argonne report. First of all, energy prices are only one of
many factors that affect competitiveness. And the energy price changes that might occur under a
climate change mitigation policy are small compared to the differences that now exist between
nations.
Secondly. most of our trade is with other Annex I countries. who would have similar obligations
to us. Thirdly, there are trends affecting our basic industries which are much bigger than climate
change. After shakeouts in the past decades. our competitive position in many of these industries
is solid, based on the utilization of existing world class facilities. However, there is a trend of
locating new facilities overseas due to a host of factors which have nothing to do with climate
change.
Finally, technological innovation is the key to maintaining competitiveness. and American industry
has demonstrated again and again that it has an enormous ability to innovate. Thus 1 believe that
our energy intensive industries will respond to the challenge of climate change with innovation
rather than movement offshore.
Jul-14-97 03:26P Climate Change Task Force
P.05
Q:
Several of the peer reviewers were highly critical of the Administration's analysis. Some
argued that the models selected were inappropriate, that our treatment of technology was biased,
and that we failed to adequately consider issues related to international trade impacts. What is
your response on these issues and what changes do you intend to make over what time frame?
A:
MODEL SELECTION
The IAT spent several months evaluating a wide range of models before selecting
three to use DRI. Second Generation Model, and Markal-Macro). These models
represented a range of analytical tools covering key issues.
Reviewers criticized the lack of a true general equilibrium model. However, one of the
models we employed (Second generation Model) has many of the features of a general
equilibrium model.
Other reviewers criticized our reliance on a macromodel, stating that because it is
structurally inflexible, should only be used for projections over several quarters to a few
years and would overestimate costs for a problem that will be addressed over several
decades.
B. TECHNOLOGICAL CHANGE
Many reviewers criticized our use of an "announcement effect" to raise the rate of
technological change. Two reviewers suggested that technological change will occur at a
greater rate than our analysis assumed.
Predicting technological change is one of the most challenging elements of this analysis.
Any credible analysis must include a range of assumptions about the rate of technological
change.
The President made it clear in his speech at the United Nations that we intend to more
fully engage the research community within industry. our universities and government
research labs in developing the technologies of the future needed to reduce greenhouse
gas emissions.
We need to accelerate our research activities both to reduce our own emissions but also to
insure continued leadership of U.S. industry in these future high growth sectors in the
global marketplace.
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Likely
friendly
Q:
I have a copy of a statement which I understand has been signed by more than
question
2300 economists, including eight Nobel laureates. That many economists agreeing on
anything is impressive enough, but listen to what they said:
"Economic studies have found that there are many potential policies to reduce
greenhouse gas emissions for which the total benefits outweigh the total costs.
For the United States in particular, sound economic analysis shows that there are
policy options that would slow climate change without harming American living
standards, and these measures may in fact improve U.S. productivity in the longer
run."
If understand this correctly, they're saying that policies to curb greenhouse gas
emissions could actually improve the economy. How can this be?
A:
Flexible policies, investments in new, more efficient technologies and substantial
environmental benefits together produce outcomes where benefits of climate policies
exceed costs.
The Administration is confident that the US private sector, given flexible policies
and clear market signals, will move rapidly to provide the technologies the world will
need to combat climate change. Under smart policies, U.S. businesses will not only
save money and reduce dependence on foreign oil, but they will be better positioned to
lead markets for the high efficiency technologies the-world will need in the future.
Given flexible implementation, US businesses have outperformed even the most
wildly optimistic expectations:
in acid rain, EPA predicted a cost of $500-$600/ton of sulfur emissions; under
emissions trading the cost is only $100/ton;
in the Montreal Protocol, we predicted a cost of $3.50/kilo for a 50% reduction of
CFCs; we're now looking at $2.45/kilo for a complete phase-out.
The economists also recognize the great benefits of policies that improve the
environment. Avoiding the human health, natural resource and economic impacts of
climate change will greatly benefit the economy.
Clearly, we have a great opportunity to design policies which simultaneously
protect the environment and boost economic performance. We look forward to working
with the Congress and the American people to do that.
OPTIONAL FORM 02 17 an,
FAX TRANSMITTAL
# of pages
09
TO
Judy Greenwall
From
Bill White
Dept./Agency
Phone a
260-1385
Fax #
E911-CHE
For ,
260-0275
NSN 7540-01-317 7368
5000-1111
GENERAL SERVICES ADMINISTRATION
-
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ECONOMISTS' STATEMENT ON CLIMATE CHANGE
We the undersigned agree that:
I.
The review conducted by 2 distinguished international panel of scientists
under the auspices of the Intergovernmental Panel on Climate Change has
determined that "the balance of evidence suggests a discernible human influence on
global climate." As economists, WC believe that global climate change carries with it
significant environmental, economic, social, and geopolitical risks, and that
preventive steps arc justified.
II.
Economic studies have found that there are many potential policies to reduce
greenhouse-gas emissions for which the total benefits outweigh the total costs. For
the United States in particular, sound economic analysis shows that there are policy
options that would slow climate change without harming American living standards,
and these measures may in fact improve U.S. productivity in the longer run.
III.
The most efficient approach to slowing climate change is through marker-
based policies. In order for the world to achieve its climatic objectives at minimum
cost, a cooperative approach among nations is required-such as an international
emissions trading agreement. The United States and other nations can most
efficiently implement their climate policies through market mechanisms, such as
carbon taxes or the auction of emissions permits. The revenues generated from such
policies can effectively be used to reduce the deficit or to lower existing taxes.
ENDORSEMENT FORM
NAME
SIGNATURE
TITLE/AFFILIATION
DATE
Do YOU HOLD A PHD IN ECONOMICS
YES
No
IF NO, DEGREE
ADDRESS
CITY
STATE
Zip
PHONE
- FAX
E-MAIL
WOULD YOU LIKE TO RECEIVE MORE INFORMATION ON REDEFINING PROGRESS
YES
No
PLEASE COMPLETE AND SEND TO REDEFINING PROGRESS
BY FAX:
BY MAIL:
FAX:
(415) 781.1198
ONE KEARNY STREET 4TH FLOOR
PHONE: (415) 781-1191
SAN FRANCISCO, CA 94108
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Q:
The Administration has been assessing the costs of climate change policies for
question
over a year. What are you finding?
A.
The Administration's results are consistent with the lessons learned
from a recent assessment by the World Resources Institute. Specifically:
Developing and diffusing new technologies will be a key to minimizing the
costs of reducing greenhouse gas emissions. Investing in the development and
dissemination of new energy-saving and low-carbon technologies will reduce
overall costs and enable US companies to capture the emerging international
market for these technologies.
International trading and joint implementation of commitments, as called for
by the US, will increase the flexibility of countries in meeting treaty obligations
and greatly reduce costs.
Actions will be implemented efficiently. Options being considered by the
Administration will provide resources that can be used to offset distortionary
fiscal policies.
Local air pollution will be reduced. Improving energy efficiency and increasing
our use of clean-burning fuels will reduce both our emissions of greenhouse gases
and traditional air pollutants. Greenhouse gas policies will significantly lower the
costs of complying with new air quality standards.
The benefits of avoiding climate change are large. It is important to remember
why we are taking these actions in the first place. The potential damages from
climate change are great, including
These costs will occur across countries
and generations. It is not feasible or proper to attempt to add up the costs of
climate change in a simple balance sheet. While we cannot simply monetize all
of these costs, we should qualitatively compare the costs of our policies with the
costs of doing nothing.
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&
Is it the intention of the Administration to adopt policies which would triple
the price of coal, raise gasoline prices by 25 cents, and put thousands in energy
intensive industries like coal mining out of work?
A:
No, and the best and most recent work on the subject clearly shows that this
would not be necessary. Robert Repetto of the World Resources Institute recently
published a study of the cost of mitigating greenhouse gas emissions in which he
concluded that efficiently implemented flexible policies that encourage investments in
new technologies would actually generate net benefits to the overall economy. In
addition, more than 2300 economists, including 8 Nobel Laureates, have said that many
policies exist to reduce greenhouse gas cmissions for benefits outweigh the costs.
We are confident that, working together, we can design policies that will meet the
challenge of climate change while improving the US economy.
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Revenue Recycling
&
The Administration is considering an emissions cap-and-trade system. How
will the Administration allocate permits? Does the Administration plan to
auction permits, what does it plan to do with the revenue?
A:
The Administration is considering an emissions cap-and-trade system. Market-
based mechanisms are among the most efficient for addressing long-term environmental
problems. We are evaluating a number of allocation and auction systems as well and
other policies that could complement a cap-and-trade system or that could work in place
of a cap-and-trade system.
As noted by Robert Repetto, in his recent review of climate change analysis,
revenue recycling can be used to significantly offset the direct costs of reducing
greenhouse gas emissions. We will continue to solicit comments from you, the public,
and stakeholders on how to efficiently implement greenhouse gas reduction strategies.
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Q: What are the potentially impacts on human health and the environment if
climate change is left unabated? What are the consequences of inaction?
A: Climate change will have wide ranging impacts on human health, ecological systems.
and socioeconomic sectors. Human health, natural ecological systems (e.g., water
resources, coastal zones including wetlands and drylands, biodiversity), and
socioeconomic systems (e.g., agriculture, commercial timber) are all sensitive to both the
magnitude and the rate of climate change. The Intergovernmental Panel on Climate
Change (IPCC) concluded in its 1995 Second Assessment that, "With the growth in
atmospheric concentrations of greenhouse gases, interference with the climate system
will grow in magnitude, and the likelihood of adverse impacts from climate change that
could be judged dangerous will become greater."
Human health. The IPCC concluded that if climate change is left unabated, it
"...is likely to have wide-ranging and mostly adverse impacts on human health, with
significant loss of life." Health effects will potentially include increased incidences of
illness and death from: (1) increased contributions of heat stress to cardiovascular and
respiratory disease; (2) reduced air quality and increased levels of air bome pollen and
spores which exacerbate respiratory disease, asthma, and allergic disorders; (3) extended
geographic ranges of insects such as mosquitos and other disease carrying vectors which
can increase the populations exposed to diseases such as malaria, dengue and yellow
fever; and (4) ecological changes that can increase the incidence of cholera, diarrheal and
other infectious discases.
Socioeconomic sectors. Climate change poses risks to agriculture, coastal zones,
and water resources. Climate change could adversely impact food production and
increase the incidence of hunger and famine among the poorest populations of the world.
Although total global food production may not substantially change, the effects will vary
considerably across regions and localities, and some areas, including parts of the US,
could sustain severe reductions in their ability to produce food. Rising sea level, if not
addressed, can inundate large land areas, displace human populations, and place more
people at risk of flood from storm surges. In the US, a 50 cm rise in sea level is estimated
to inundate more than 5,000 square miles of dryland and 4,000 square miles of wetlands
if no protective measures are taken. Mcasures to prevent or limit these effects would cost
billions of dollars. Finally, climate change poses risks to the availability of fresh water.
Relatively small changes in temperature and precipitation can cause large changes in
water runoff, affecting the quantity and quality of water supplies for domestic and
industrial uses, irrigation, hydropower generation, navigation, instream ecosystems and
water based recreation. Also affected will be the frequency and intensity of floods and
droughts.
Ecological systems. The impacts of climate change on the natural environment
are difficult to predict. But impacts there most assuredly will be; some of them dramatic
and many of them irreversible. The environmental impacts of climate change threaten to
undermine our efforts to protect natural areas that provide habitat for wildlife, reservoirs
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of genetic material for future medicines, foods and fibers, regulation of water runoff and
flood control, and refuge from a modern world. For example, precipitation changes and
salt water intrusion from sea level rise could adversely affect the ecological communities
of the Florida Everglades and degrade this critical and unique habitat for many species of
wading birds. The wetlands of the prairie pothole region of North America, which
supports half the waterfowl population of this continent, could diminish in area and
change dramatically in character in response to climate change. Such changes could be
devastating to migratory bird populations and species survival.
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Q: Why should we act today to reduce greenhouse gas emissions when there are 30
many uncertainties especially about the expected impacts? Shouldn't we wait
until these uncertainties can be resolved?
A: It is a scientific fact that since the Industrial Revolution, the aunospheric
concentrations of greenhouse gases have been increasing substantially due to human
activities. There is strong scientific evidence that the continued addition of these gases
into the atmosphere will alter global climate, increasing temperatures, changing rainfall
and other weather patterns, and causing sea level to rise.
It is true that uncertainties remain about the timing, magnitude and regional
patterns of these changes. But the best available science (as summarized in the 1995
Second Assessment of the IPCC) suggests that the wide range of potential impacts of
climate change poses wide-ranging risks to human health, the economy, and the
environment, that will add to existing stresses on resources caused by other factors such
as population growth, land use changes, and pollution, resulting in a world very different
than that which exists today. Climate change will pose risks for forests, wetlands,
fisheries, coral reefs, and other ecosystems. In turn, these environmental effects will
translate into economic impacts, and have possible repercussions for expenditures on
health care, timber production, expenditures to protect our coastal areas and wetlands,
prospects for hydropower generation, and agricultural productivity.
We need to deal with this problem now. The greenhouse gases that we emit into
the atmosphere today will remain there for many decades -- and in the case of carbon
dioxide, for centuries. How much we cmit over the next years and decades will be
determined hy economic decisions we make today: for example. decisions about the type
and energy efficiency of capital equipment that we invest in now. Consequently, if we
delay taking action, more greenhousc gases will be emitted over time and we will leave
the atmosphere with a higher concentration of greenhouse gases for the next century and
beyond.
The emission reductions that we invest in today are a "down payment" to ensure
that we can sustain our quality of life and economic growth in the future - a down
payment to ensure that human health, welfare and the environment are protected.
Although scientific uncertainties still exist, current commitments may be viewed as an
"insurance" investment; i.e., insurance against uncertain future "bad" impacts of climate
change.
Furthermore, as the science of climate change improves and uncertainties are
reduced, we may very well discover that the magnitude of the global warming problem is
even worse than expected. Therefore, failing to reduce emissions now will mean that the
eventual reduction will be even more drastic, if we want to prevent concentrations from
exceeding a particular level. It is less expensive to begin to gradually reduce greenhouse
gas emissions today, than to take no action and later institute draconian reductions.
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Q: Won't we simply be able to adapt to any adverse effects? Haven't we done this
for changes that we already have seen?
A: The rate at which climate change occurs may be the most important factor affecting
both natural and managed ecosystems. The faster the warming, the harder it will bc to
adapt.
Temperature changes of the magnitude expected from the enhanced greenhouse
effect have occurred in the past, but the previous changes took place over centuries or
millennia instead of decades. The rate of increase in global temperatures will be greater
than those which have occurred naturally over the last 10,000 years. However, the ability
of natural ecosystems (forests, wetlands, barrier islands, national parks) to adapt to a
rapidly warming climate is limited. Rates of natural migration and adaptation could be
much slower than the rate of climate change. Populations of many species and inhabited
ranges could decrease, and many may face extinction. The ultimate effects could last for
centuries and would be virtually irreversible.
Intensively managed systems, such as agriculture, water resources and developed
coastlines, may show more resilience to climate change than natural systems.
Technological and management options exist which can, to some extent, cope with the
stresses associated with a changing climate. However, it is difficult to currently design
effective adaptation strategies because of uncertainties about the geographic location of
impacts. These strategies also may be costly to implement.
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Q: Isn't it true that any of the actions that are being contemplated for a protocol
(e.g., stabilization of greenhouse gas emissions at 1990 levels) would have a
negligible impact on future climate change and the resulting impacts?
A: It is not true that actions taken today will have a negligible impact on future climate
change and the resulting impacts. Policy decisions in the near term - particularly
decisions about whether or not to begin reducing greenhouse gas emissions now -
will have long-term consequences.
Human-induced climate change is a complex problem, which can affect the
quality of life for this and future generations. The lag time between emission of
greenhouse gases and their impacts is on the order of decades to centuries; so too is the
time needed to reverse any effects. Proactive measure taken today to begin reducing
emissions of greenhouse gases will have two important effects: (1) They will influence
the ultimate level of concentrations of greenhouse gases that occurs in the atmpsphere;
and (2) They will begin to slow the rate at which climate changes, which may have
important implications for the ability of natural ecosystems to adapt to long-term climatic
changes. The rate at which climate change occurs may be the most important factor
affecting both natural and managed ecosystems. The faster the warming, the harder it will
be to adapt.
In contrast, decisions not to reduce greenhouse gas emissions will have important
long-term implications for human health and the environment. The longer emissions
continue to increase, the greater reductions would eventually have to be to stabilize
concentrations at a given level. However, the long atmospheric lifetime of many
greenhouse gases, coupled with the thermal inertia of the oceans, means that the warming
effect of anthropogenic emissions will be long-lived. Even with a stabilization of
greenhouse gas concentrations in the year 2100, temperatures would continue to increase
for several decades, and sea level would continue to rise for centuries.
Finally, actions taken today to begin reducing greenhouse gas emissions can be
viewed as consistent with the "precautionary principle." If the climate changes more than
expected, we will not have the option of returning the climate to that of today because the
CO2 will stay in the atmosphere for more than a century. It is therefore prudent to
undertake some emissions policies that do not pose extreme risks to the U.S. economy as
a precaution ("insurance") against this potential outcome.
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a
000 '010
&
The World Resources Institute recently published "The Costs of Climate
Protection: A Guide to the Perplexed" which shows that the assumptions made in
the analysis have a great deal of influence over the results. What are the key
assumptions being made by the Administration?
A:
Administration's
englysis.
I can say that the Administration's results
are consistent with the lessons learned from the WRI assessment:
Developing and diffusing new technologies will be a key to minimizing the
costs of reducing greenhouse gas emissions. Investing in the development and
dissemination of new energy-saving and low-carbon technologies will reduce
overall costs and enable US companies to capture the emerging international
market for these technologies.
International trading and joint implementation of commitments, as called for
by the US, will increase the flexibility of countries in meeting treaty obligations
and greatly reduce costs.
Actions will be implemented efficiently. Options being considered by the
Administration will provide resources that can be used to offset distortionary
fiscal policies.
Local air pollution will be reduced. Improving energy efficiency and increasing
our use of clean-burning fuels will-reduce both our emissions of greenhouse gases
and traditional air pollutants. Greenhouse gas policies will significantly lower the
costs of complying with new air quality standards.
The benefits of avoiding climate change are large. It is important to remember
why we are taking these actions in the first place. The potential damages from
climate change are great, including [sec climate benefits 9 & a]. These costs will
occur across countries and generations. It is not feasible or proper to attempt to
add up the costs of climate change in a simple balance sheet. While we cannot
simply monetize all of these costs, we should qualitatively compare the costs of
our policies with the costs of doing nothing.
:
NOTE TO MICHELLE JOLIN
RE: Climate Change Hearings
Attached are a number of background questions and answers for next week's climate change
hearings. These should also be reviewed with Mark and in light of any relevant discussions
on Friday.
If you have any questions, I can be reached at home this weekend at 301/656-3272.
Thanks,
Steve Seidel
wouldyonendorsea policy of 1990 by 2010? Vo youthert the costs as reasonchle?
what other policies are under consideration? Howaill youevelucte then?
draft 7/12
BACKGROUND QUESTIONS AND ANSWERS ON CLIMATE CHANGE
Q. When will the Administration release its economic analysis of the costs of acting to
reduce greenhouse gas emissions?
A.
- We intend to release this report by the end of the month.
-- The report will summarize the current understanding from the economics
literature and discuss how the analysis we have undertaken fits into that
broader picture.
Q. The Administration has been working on this analysis for several years and promising it
to Congress and the public for almost that long. Why have you withheld this information for
so long a time?
-- By its very nature, climate change is a long-term issue requiring analysis that
spans many decades.
-- Needless to say, neither energy models or economics models do a very good
job of forecasting over a such a long period of time.
-- It's critical to recognize that there is no "right" model and no "right" answer.
-- Nonetheless, as the analysis has progressed we have learned quite a bit both
about the models themselves and about the implications for policy design.
-- This has taken time. Longer than we thought it would take. But it nonetheless
has and will continue to be useful in guiding our policy process.
-- We look forward to issuing this report and continuing the dialogue about the
appropriate actions to address climate change and its impact on the
economy.
Q: How can the Administration be off negotiating an international treaty without having
completed its analysis and without having had a public dialogue about the impact of such
actions on American jobs and our economy?
A:
-- The Administration's position in the negotiations has been informed throughout
by the economic analysis in the literature and its on-going analytical efforts.
-- For example, we have rejected proposals calling for significant near-term
reductions in emissions because we think they are too costly.
-- We have also pushed for flexibility in how a target is set (e.g., multi-year,
banking and borrowing) and for the use of market-based approaches
(emissions trading and joint implementation), because we believe that these
approaches will be substantially reduce the costs of achieving any given
target.
-- We have not, however, yet proposed any specific target or timetable. This
obviously critical dimension of our position must await further analysis and
dialogue as the President clearly stated in his speech at the United Nations
last month.
Q: A copy of the Administration's draft analytical report has been circulated widely. How
will the final report differ from that draft?
-- I believe it is generally inappropriate to comment on details of a draft report.
-- I will say however that we got a number of useful comments from the peer
reviewers that will substantially alter the draft report.
-- For example, the reviewers thought it was important to put our analysis in the
context of the existing economics literature on climate change impacts. We
will be doing this in the final draft.
-- The reviewers also thought we placed far too great an emphasis on the results
from a macroeconomic model (DRI) and that such a modeling approach is
largely inappropriate for looking at changes on a timescale beyond a few
years.
Q:
When will the Administration release its peer review comments?
A:
-- We intend to release the comments received from peer reviewers by the end of
the month when our report is made publicly available.
Q: We remain very concerned that the Administration is going to agree to actions in Kyoto
that will cripple our economy and drive jobs overseas? Can you assure us that we would not
sign on to any such agreement?
A:
-- The President has stated that he would oppose any plan that would be harmful
to our economy, but that he believes we can take and need to take prudent
steps to begin addressing this issue, and that we can do so consistent with
continued economic prosperity.
-- We have opposed proposals calling for significant near-term reductions that
could adversely impact on our economy.
-- We need to avoid causing costly premature retirement of our nation's capital
stock, while at the same time spurring research and investment in the
energy technologies that will lead us and the world into the next century.
-- In his recent speech at the United Nations, the President made a strong
commitment to channel our technological prowess toward producing the
energy solutions for the next century.
-- While taking steps to reduce greenhouse gas emissions will not be free, we also
have to keep in mind that there are costs of a changing climate associated
with not acting to reduce greenhouse gas emissions.
Q: Many in Congress are very concerned that the current negotiations are simply a bad deal
for the American public. Why should we incur costs to reduce emissions when developing
countries are not required to do anything? From an economic perspective, how can you
advise the President that this path makes sense?
A:
-- Equity is often an important part of any economic discussion. Since the U.S. is
the largest emitter of greenhouse gas emissions and developed countries
are responsible for about 75% of emissions in the atmosphere, we have a
responsibility to show leadership.
-- However as developing countries economies grow and as their emissions grow.
the U.S. proposal calls on them to incur increasing obligations.
-- Specifically, the U.S. proposal calls for agreement on a date certain by which
developing countries would agree to negotiations for them to take on
binding obligations.
Q: The Dept. of Energy through Argonne Labs conducted a study of 7 basic manufacturing
industries that are critical to the U.S. industrial base. Press accounts report that thus study
concluded that the current negotiations are likely to lead to widespread shifts in these
industries from the U.S. to developing countries with huge job loss here. Why has DOE
withheld this study from the public? Do you disagree with its findings?
-- I am not personally familiar with this study. But I have been told that the
Argonne study does not take into consideration any of the flexibility
contained in the U.S. position and assumes incorrectly that developing
countries never take on any obligations. Thus, the study in no way
represents an analysis of what the U.S. has proposed during these
negotiations.
Q: The draft Administration analytical report states that stabilizing greenhouse gas
emissions at 1990 levels in 2010 would result in throwing 900,000 workers out of jobs.
How can the Administration even contemplate entering into such an agreement?
A:
-- I am certain that we would not agree to a proposal that would have that impact.
-- There are many dangers in working from a draft report.
-- The numbers you cite are based a scenario that doesn't reflect U.S. positions in
these negotiations calling for flexibility and market-based approaches. In
addition, they are based on a macroeconomic model that our peer
reviewers criticized as being inappropriate for this type of analysis.
-- We have worked hard to achieve the most robust economy in the world and if
we continue to work together we can develop the technologies that address
this problem and enhance our economic prowess.
-- Our partnership with the U.S. automakers is a good example of what we hope to
be able to achieve through technological progress. The goal of the
Partnership for New Generation of Vehicles is to achieve three times
today's fuel efficiency without increasing costs or sacrificing safety. If
successful, this one technological program would go along way toward
reducing greenhouse gas emissions.
Q :
The draft Administration's analysis suggests that gasoline prices will increase 35
cents per gallon and coal prices will triple in order to stabilize emissions at 1990 levels. Is
the Administration prepared to ask Congress for this new tax and does it really think we
would approve such a measure?
A:
-- The Administration has not made any decision on a specific target and timetable
and therefore, I cannot comment on possible increases in energy prices that
might result.
-- Our goal in developing a specific proposal will be to allow for adequate lead
time to avoid costly capital stock retirements and to allow for the
development of alternative technologies that can reduce the costs of
compliance.
-- As President Clinton stated at the United Nations, if we can channel the
ingenuity of American industry, academia and government labs to work on
solving this problem. this could become an economic opportunity rather
than a burden.
4
Jason Shogren
07/12/97 02:40:18 PM
Record Type:
Record
To:
Janet L. Yellen/CEA/EOP
CC:
Subject: Re: analysis question
the climate tsar finally asks the right question.
we have not done enough of this to answer todd's question--we do not have a benefit side in any of
the three IAT models, so the benefits have not really been debated. OSTP is drafting "impact"
papers separately. we need, if we are going to do more analysis, an Integrated Assessment style
model to answer todd's question. otherwise, the enviro-side will always claim dooms day is just
around the bend.
below are two potential responses to Jorgenson's "worse than nothing"
Is the Administration's approach worse than doing nothing at all?
First, the Administration's final policy has yet to be decided on by the President.
Projecting the Berlin statement of target and timetables as final Administration policy is
premature. The Administration recognizes the importance of global climate change
policy and the US economy. And that is why the President has called for a national
dialog over the next few months to layout the pros and cons of alternative climate
change policies.
We know good climate policy depends on a good understanding of the relative
magnitudes of benefits and costs. While costs of abatement are relatively
straightforward to evaluate, the benefits of climate protection are more difficult to
quantify. Reasonable people can disagree over the potential short-term and long-term
benefits of climate protection. This is a complex question. Again the national debate
asks for the people to reveal what they perceive as the potential benefits from climate
protection. Damage
Need a cardible policy giving clear signals
Can give impetus to anorldwite tech. push.
Need to show leading get. int 1- cooperation
July 4, 1997
THE IAT REPORT: ECONOMIC EFFECTS OF GLOBAL CLIMATE CHANGE
POLICIES
Produced by a team of staff from many agencies. Purpose is to understand the economic
effects of climate change policies. This is not an official White House forecast or analysis.
It is a helpful working paper to facilitate understanding of economics of climate change.
Uses a group of economic models to assess the economic effects of policies to limit
emissions of greenhouse gases. No model is perfect--trying to bracket an estimate of the
economic effects and study the sensitivity of outcomes to assumptions and policies.
DRI (identifies transition issues for specific industries and regions and the
economy as a whole based on short-run behavior); (Reviewers:) But uses a fixed-
coefficient input-output model which goes against the primary objective of
climate policy.
Second Generation Model (SGM) - a CGE model good at identifying an
economy's long-term trends in economic growth, consumption and energy use in
response to climate policies--international in scope. Used to look at permit trading
and JI. (Reviewers:) May fail to adequately capture the opportunity costs of
technical substitution and understate the costs of abatement policies; models
based on technical options may fail to fully recognize the tradeoffs faced by real
economic agents.
Markal-Macro model (DOE). An integrated energy supply and demand
modeling system combined with a macro model--useful for translating
technological assumptions into economic outcomes. Recognizes 11 primary fuel
sources and dozens of fuel conversion technologies. Useful for answering the
question: How do we get there from here? Focuses on technology and its
interaction with the economy and helps determine whether expected energy
efficient technologies hold the key to continued economic growth.
Each model has strengths and weaknesses. The models do not deal well with trading
program, effects on international flows and U.S. competitiveness; technical progress and
its costs; benefits.
There is no attention in the IAT report to deriving an optimal-policy by working backward
from a long term goal. There is no comparison of how different policies attain various
goals.
Baseline estimates for energy use and carbon emissions are questionable--assume faster
price increases and slower reductions than in the past. Need to use alternative baseline
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estimates.
Start from a consistent, common baseline with regard to projections of baseline GDP,
total energy consumption and carbon emissions. Carbon emissions in the baseline are
projected to increase by about 1.2% per year through 2010 and by 0.6% per year from
2010 to 2020. In 1990, carbon emissions were 22% below the 2010 baseline projection
and 36% below DRI's projection for 2020.
Technological change in the baseline: In the 1970s and 1980s, energy intensity
declined about 2% per year--1.5% due to price effects and 0.5% due to nonprice
effects. Baseline projection incorporates a 1% annual reduction in energy
consumption per unit of output.
Starting point scenario: Focuses on limiting emissions to 1990 levels by 2010--subject
of numerous analyses by academic researchers. Facilitates comparison with outside work.
Assumes tradable emission permits at earliest point of energy production or when
imported into the U.S. The policy is announced in 2000 and phased in over a ten year
period to reach the 2010 goal. Permits are initially auctioned so that all revenues
generated through permits would be recycled through deficit reduction. Assumes no
international cooperation or trading.
Technological change in the starting point scenario: Incorporates an
improvement in the pace of energy efficiency from 1.0% to 1.25% over the
baseline due to forseeable increases in the future price of energy in the climate
change policy undertaken, because of implementation of the CCAP, or other
policies. The announcement effect leads to a faster rate of diffusion of energy
efficient technologies and a higher rate of innovation through R&D in anticipation
of future higher energy prices.
Starting Point Results:
Implicit price of carbon in the economy (the estimate of the permit price) rises to about
$100 per ton of carbon in 2010 in 1995 dollars. This result is reasonably consistent
across models. A permit price of $100 per ton is the equivalent of a price increase of 26
cents per gallon of refined petroleum product, $1.49 per thousand cubic feet of natural
gas, $52.52 per ton of coal and 2 cents per kilowatt hour of electricity produced.
The price of carbon rises somewhat over time, reflecting the fact that the 1990 emission
ceiling becomes progressively more binding over time given projected growth in base case
emissions.
Higher energy costs impose burdens on households but these are partially offset by
3
conservation and subsequent efficiency improvements.
GDP losses, at peak, are between 0.2 and 1.0% of GDP by 2005 and -0.6% to +.2% in
2020.. Economy eventually bounces back or stabilizes. Losses in the model are real but
transient.
The IAT baseline policy of 1990 by 2010 implies about 26% reduction below
baseline emissions in 2020. In the Repetto-Austin analysis, looking at all the models,
they find that, under unfavorable assumptions, GDP would be 2.4% lower in 2020
than under baseline and under favorable assumptions, 2.4% higher. The 4 key
influences are (whether there are significant short term adjustments--macro model;
whether Л; whether recycling of revenues via reducing other taxes; whether benefits from
abating pollution. Under reasonable assumptions, the predicted GDP impact would be
neutral or even favorable.
Consumption declines even through 2020--peaking at about 1.5% in 2007 and declining
to about -0.30% in 2020 in the DRI model. This is a better measure of the change in
economic welfare.
Impact on investment: If the permit revenue is saved, the cost of capital declines. Also,
the marginal profitability of investment rises because new investment allows firms to
neutralize higher energy costs. Capital is a long-term substitute for energy and is favored
after a transition period. The faster rate of investment creates a newer and larger capital
stock, raising growth modestly after a transition.
Sensitivity to policy: Size of losses and carbon price increase depend on size of
emission reduction.
Some sectors, particularly energy producers, bear large burdens. Energy-intensive sectors
face greater losses. Other sectors expand as the economy undergoes the adjustment.
Coal bears the brunt of greenhouse gas stabilization. The reduction of coal use
under utility boilers is generally the largest, cheapest option to reduce carbon
emissions in the economy. This is accomplished through better operating rates and
substitution of gas-fired combined cycle units for coal fired units. The implicit
price of carbon in most model runs is usually the one that accomplishes this
transition in electricity baseload. And the $100 per ton estimate is as high as it is
because most coal-fired units are fairly old and already fully amortized. The price
of coal, therefore, must rise considerably to make coal-fired electricity more
expensive on the margin than electricity generated by a new gas-fired plant that
entails new capital costs.
The effect of the emisssions policy is to raise unemployment about 0.2% from 2001
4
through 2011 in the DRI model. Inflation rises about 0.3%. The increase in the energy
tax is akin to the oil shock
Paths depend critically on revenue use and monetary policy.
International trading of carbon permits among the Annex I countries leads to
sizable reductions in costs needed to stabilize emissions. This has been proposed by
the U.S. for inclusion in a multinational agreement. It would increase efficiency and lower
the cost of reducing global emissions by giving all emitters the incentive to search for
least-cost solutions across national boundaries.
The U.S. could purchase additional emissions rights (permits) from other countries
(with low emissions reduction costs.) The forces of supply and demand would set
the permit price and market incentives would push the group as a whole to
institute the least cost emissions reductions first. International trading reduces
the implicit price of carbon dramatically-from $82 to $56. The source of
cheap emissions is the FSU and the Eastern European nations with lax
environmental standards and slow economic growth. Trading is a win-win
situation. The U.S. is projected to purchase $4 billion of permits from FSU and
Eastern Europe. This saves $12.2 billion of higher costs under domestic
implementation only.
FSU countries are below 1990 emissions levels and would be allowed to sell to
other nations their right to emit up to those levels. In this instance, emissions
trades would not result in corresponding reductions in annual emissions.
Joint implementation with non Annex I countries would further reduce costs. Under
this scenario, the FSU and Eastern Europe lose their monopoly on permit sales. We
would likely buy from China and India pushing them to reduce their use of coal.
The United States has smaller output losses than Japan or Western Europe predominatly
because it has more "cheap" carbon-abating opportunities. It is somewhat easier for the
U.S. to reach emission targets than other regions which have already picked the low
hanging fruit.
Sensitivity analysis.
cross-border trading of emissions rights or permits
Pace of technological progress as measured by energy intensity--energy use
per dollar of GDP greatly affects the GDP losses and carbon price. This measures
the growing efficiency with which the economy uses energy. The results are very
sensitive to this assumption. (Faster efficiency--the 1.25% rate assumed in the
5
starting point simulations) could be achieved through faster diffusion of off the
shelf technology and new technologies that are near commerical viability.
However, a 1.75% pace of change requires a new set of advanced energy
efficiency technologies. These include fuel efficient cars (55 mpg) The models
fail to account for the costs of the investments needed to reach a higher rate of
technological progress.
Increasing the implementation period from 5 to 10 years dampens the negative
effects on GDP. A 5-year ramp up between 2005 and 2010 results in a maximum
output loss in 2010 that is 65% greater than that associated with a ten year ramp
up and a return to the baseline two years later.
Raising or lowering emission targets lead to larger/smaller economic losses.
Using any resulting revenues--to reduce growth distorting taxes or deficit
reduction--leads to less impact on the economy during the transition and greater
returns to the economy in the long term. Better outcomes are associated with
greater investment and capital formation. Recycling to consumers results in the
worst GDP path but a better consumption path.
The economic effects of recycling and of a carbon limitation per se should be
separated.
Reducing carbon emissions would also reduce other pollutants, creating some
economic benefits.
The Federal Reserve's reaction affects the results. For example, if the FR
maintains nominal reserves at baseline, the size of the GDP loss is approximately
doubled. Since the IS curve has shifted to the left, the Fed can offset through
easing. The willingness to ease is likely to be related to the impact on price
inflation.
Regional effects--analysis hinges on use of revenue for savings cum investment.
PROBLEMS WITH THE MODELS:
Some questionable results--See a bigger long term GDP gain with a stricter emission
standard. DRI is prone to depicting large effects of interest rates on investment. Thus,
the use of the revenue for deficit reduction stimulates growth a lot.
Grandfathering of permits raises investment--impossible.
6
ISSUES:
1. Increase in carbon tax is like an oil shock.
2. Concern that forcing an energy price increase on U.S. producers will disadvantage them
substantially through trade, particularly with those countries outside of Annex I that may not be
subject to emissions limits. This is proxied in the IAT model by a lower pace of import price
increase. This has an impact on the exchange rate.
7
Reviewer Critiques of the IAT Report
Models are inadequate for the purpose--cannot deal sufficiently well with emissions
trading, international flows, technical progress and its costs.
None of the models focuses adequately on how economic agents respond to
market and non-market signals.
Should add more models to the suite (EMF)
International Issues. The analysis ignores the possibly large effects of international flows
resulting from an international carbon trading system. These could affect the U.S. current
account requiring currency and or capital adjustments. Existing models cannot deal with
this. Also investment diversion needs to be examined if only Annex 1 nations are
included.
Technology: Most reviewers were skeptical of the assumed rate of autonomous
technological change and the representation of the announcement effect. Models can not
easily represent industry response to government policies. There is little consensus among
experts as to how technological change will affect the costs of emissions reduction policies
or how to model that process. No empirical support for the values chosen for the
announcement effect.
Need more sensitivity analysis to bound the range of costs and more than one set of
baseline assumptions. Objective is to describe the range of possible outcomes.
Current modeling focuses on a few limited scenarios--not enough to answer questions of
timing and optimal reduction.
Cannot address the timing debate on 2010 VS. later. Issues of intertemporal
trading should be included
What are cost effective strategies for limiting concentrations to alternative levels?
May be better to use discounted PDV of costs to compare scenarios.
Revenue recycling
Need to place the IAT exercise in the context of other models (Stanford EMF etc.)
8
REPETTO-AUSTIN ANALYSIS
Most recent scientific assessment by the Intergovernmental Panel on Climate Change
emphasized that the continued buildup of greenhouse gases could have long-lasting
climactic effects, some of which would impose significant economic burdens on nations
and vulnerable populations. The effects are warming are hard to predict but a
precautionary approach seems warranted.
Voluntary efforts, as pledged in Rio, are insufficient. The U.S. has pledged to accept a
legally binding commitment in the Kyoto protocol.
Efforts to limit CO2 will imply significant changes in energy use and sources,
probably changing energy costs substantially. Household budgets and business profits
will be affected. There could be an impact on inflation, international trade, patterns of
investment and the macroeconomy.
The cost can be reduced by taking action using market-friendly instruments and
implementing changes with adequate time and flexibility for economic adjustments
to occur. One of the most effective and efficient mechanisms to reduce emissions is a
carbon tax--levied on all fossil fuels in proportion to their carbon content. A tradable
permits program in which a permit is required in order to sell or use fossil fuel is an
alternative. The permit price in the marketplace would signal how much firms should
spend on abatement. The permits could be auctioned and the revenues used to reduce
other taxes or deficits.
Emissions trading: may be difficult to include small fuel users through their aggregate
energy use is important, without creating administrative burdens. If new scientific
information necessitated further emissions reduction, canceling carbon permits could be
difficult--more so than raising a carbon tax.
As interest in climate change has accelerated, more than a dozen models have been
constructed. Many predictions have been derived from many models. There are some
systematic reasons that the models reach different conclusions. Assumptions matter.
Repetto-Duncan reviewed 162 analysis of climate change policy coming from 16 models.
All models reviewed show an initial loss-in-aggregate economic output, but the loss is
not very large.
Key assumptions: Size of loss depends predictably on assumptions: although the models
are very complex, important results depend more on different key assumptions than on
structure.
9
Extent to which substitution among energy sources (substitute less carbon-
intensive fuels like gas for more intensive fuels like coal; substitute non-fossil
energy for fossil fuel), energy technologies, products (substitute less energy-
intensive goods for energy-intensive ones), and production methods (substitute
L, K and materials for E) is possible. The longer the time for adjustment, the
lower the burden of adjusting and the larger the substitution possibilities.
Producers can bring in new technologies with new equipment and consumers can
adapt when they replace durable goods.
Bottom-up models examine technological options for energy savings and
fuel switching that are available in individual sectors of the economy.
Information on the costs of these options is aggregated to calculate the
overall cost of reducing CO₂ emissions. These models estimate
substitution possibilities by considering the actual technologies firms
can use, not historical substitution possibilities. These models are more
optimistic than top-down models, partly by overlooking barriers to
implementation, such as management and retraining tim, risk-aversion,
capital constraints, household preferences, or lack of information. They
highlight energy inefficiencies and technological opportunities.
Companies that joined EPA's voluntary Green Lights Program
found numerous opportunities to save energy and money
There are inefficiencies that can be remedied through building
improvement measures such as better insulation and low-energy
lighting; through conversion of industrial processes. Engineering
studies suggest 20-25% of emissions could be eliminated at an
overall cost savings and that further cuts could be made at relatively
low cost.
Some inefficiencies are due to energy market imperfections such as
divergence in incentives between tenants and landlords etc.
However, some savings may entail overlooked costs. Energy
service companies which seek to find and implement energy saving
opportunities on a contract basis have not found unlimited business
opportunities at current low energy prices.
We currently have energy subsidies that encourage excessive
fuel use. These include favorable tax and credit treatment for
energy producers. Hydropower subsidies reduce carbon emissions.
Tax breaks for independent oil drillers merely replace foreign oil
10
with domestic oil. On balance, removing U.S. energy subsidies
could significantly reduce CO2 emissions according to one study.
Top down models that assume limited substitution, slow technological
change and limited response to price signals and low availability of non-
fossil energy sources predict high costs.
Extent to which market and policy distortions create opportunities for low-
cost (or no-cost) improvements in energy efficiency
Rate of technological innovation and responsiveness of such change to price
signals. Hard to reach consensus on AEEI but value is critical. For example, a
change from 0.5% to 1.0% cuts projected 2100 emissions levels by half and
markedly affects the cost of meeting a CO2 target. Induced technological change
in response to price increases is a distinct possibility.
Availability and likely future cost of non-fossil backstop energy sources
(hydroelectricity, nuclear power, wind and solar energy and biomass) Alternative,
low carbon energy sources exist but aren't currently cost-effective. They will
become increasingly so as carbon energy sources rise in price and technology
makes them less expensive. The availability of these backstop non-carbon energy
technologies has a large impact on the costs of meeting whatever emission
reduction goal is chosen.
Number of years available to achieve a specified CO2 reduction. Merely
stabilizing emissions rates will allow concentrations to continue rising for
centuries. Recent analysis shows that adopting an explicit long-term target for
atmospheric concentrations and then choosing policies to achieve the most
efficient time path for emissions reductions to meet the target could
significantly lower the economic impact. A target for concentrations is like a
carbon budget limiting CO2 emissions within a specified period of years. Under
some circumstances, it is cheaper to use more of the budget early on and postpone
cutbacks because the capital stock is so durable. In a system of emissions trading,
there should be banking and borrowing of permits to allow flexibility over
time. When time is allowed for capital stock to be replaced, overall abatement
costs could be reduced. Also, R&D will yield new technologies so postponing
costs reduces them. Flexibility in timing of global reductions could lower costs
by more than 35% compared to a less flexible program to achieve the same
concentration.
Under some assumptions, we should adopt a carbon tax now to encourage
early development of energy efficient and low-carbon technologies and
11
discourage long-lived investments in carbon-intensive energy facilities.
Realistically, action today is likely to be necessary to induce investors
to make commitments and not just the expectation of a tax in a
decade or more. To quell doubts, a credible policy signal is necessary at
the outset--e.g., a carbon tax introduced at a low level that rises, perhaps
significantly, in future years.
Potential for international joint implementation. This would allow a utility in
Norway to achieve reduced emissions by contracting to pay a factory in Poland to
install more fuel-efficient furnaces. Finding the lowest cost abatement possibilities
is cost effective. JI cannot be used more widely until countries have set binding
emissions reduction targets. But getting countries to agree on the baselines that
should apply to each, from which emissions reductions will be measured is a
formidable task. Monitoring and verification and a mechanism to enforce
contractual obligations is essential if л is to work. The potential savings are
substantial.
Recycling to reduce economically burdensome tax rates or lump sum rebates.
Without recycling the carbon tax is highly deflationary, lowering GDP
substantially. Lump sum recycling enables a modeler to separate the economic
impact arising from climate abatement from that arising from other tax cuts.
However, it would be possible to reduce taxes that distort economic activity--
payroll taxes, on investment earnings. Some economists have argued that there
could be a double dividend--a gain purely from substituting an energy tax for a
more distoring tax on labor or capital income. This is questionable. etc.
Benefits in form of avoided economic damages from climate change and
other pollution reduction damages. Can avoid pollution associated with auto
emissions and higher medical expenditures.
Under a reasonable standardized set of assumptions, most models predict a small
macroeconomic effect of a carbon tax to stabilize emissions and potentially favorable
outcomes.
The IAT baseline policy of 1990 by 2010 implies about 26% reduction below
baseline emissions in 2020. Looking at all the models we find that, under unfavorable
assumptions, GDP would be 2.4% lower in 2020 than under baseline and under favorable
assumptions, 2.4% higher. The 4 key influences are (whether there are significant short
term adjustments--macro model; whether JI; whether recycling of revenues via reducing
other taxes; whether benefits from abating pollution. Under reasonable assumptions, the
predicted GDP impact would be neutral or even favorable.
12
A carbon tax might have a disproportionate impact on low income households but it could
be offset through other taxes reductions.
The impact of a tax on coalmining and coal carrying railway lines would be substantial.
However, the baseline predicts a substantial expanison in coal mining in the western U.S.
Reduced energy demand in the U.S. would help hold down world oil prices, improving
our terms of trade.
Impact on competitiveness. If the U.S. alone imposes a significant carbon tax,
international trade and investment in some energy intensive industries might shift abroad.
However, evidence suggests that differential environmental policies have a weak impact
on trade and investment flows and many nonOECD countries have raised energy prices
unilaterally. Coordinated international action could avoid these trade effects.
13
MAJOR POINTS:
2000 economists endorsed taking measures to reduce the threat of climate changes on the
grounds of the Intergovernmental Panel on Climate Change finding that "the balance of
evidence suggests a discernible human influence on global climate." The economists
concluded that global climate change carries with it significant environmental, economic,
social and geopolitical risks, and that preventive steps are justified. They concluded that
proper policies can significantly reduce greenhouse gas emissions without harming the
American economy. Some policies could even improve U.S. productivity in the longer
run. Market based policies (such as carbon taxes or emissions permits) would lower the
costs of control substantially. They said that there are many policies with total benefits in
excess of costs. Revenue could be used to lower the deficit or reduce existing taxes.
Nations need to cooperate to achieve climactic objectives at minimum costs--international
emissions trading.
A great deal of controversy surrounds the issue of climate change with some saying that
climate change is one of the greatest threats facing humankind and others saying the risks
are weakly documented. The same kinds of divides arise in discussing costs and benefits
of various policy options. The President believes there is a risk so that policy action is
needed, but will look for policy actions that are sensible, cost effective and consistent with
continued economic growth and job creation.
It is particularly difficult to measure the benefit of climate change action especially when
one takes a broad interpretation and thinks about the value of reducing risk related to
ecological impacts.
Economists differ in their views about emissions policies, some advocating a "broad, then
deep" approach in which we begin with a broad but low cost agreement and others
favoring a deep, then broad perspective, by first establishing a narrow coalition of
developed nations and then reaching out to developing countries to join later via
evolution. The problem with the latter approach is that costs rise for a narrow coalition of
countries leading carbon intensive industries to migrate and making nonparticipant
countries even more carbon dependent.
Any agreement without the cost flexibility provided by international trading or JI will at
least double the US costs.
Models are helpful in understanding implications of climate change policies--give orders of
magnitude and sensitivities to assumptions. There is no single correct set of assumptions
or appropriate model. It is a mistake to offer just a best guess assessment of either costs
or benefits. One should think about ranges of possible outcomes
14
IAT exercise is an attempt to get different modelers from different parts of the
government using different tools to begin to speak a common language--standardizing
assumptions and understanding where the differences in results come from.
Some useful morals emerge. Results are in same ballpark as broader literature.
No analysis in IAT of optimal policy.
No policy has been chosen by the Administration. Administration wants to conduct a
dialogue with the public over how best to go about choosing a policy to deal with climate
change.
President Clinton's top priority has been to restore prosperity to the American economy
and he would not take a step that would bring serious damage to it. We need to proceed
pragmatically--taking steps that are reasonable and justifiable given what we know and the
dangers.
This is an effort that will need to be maintained over decades rather than years. Especially
since we will be in this for years it is important to proceed sensibly. We must make sure
that any policies that are adopted are cost effective and flexible (market based). A system
of tradable permits at the international level and over time (when and where (bank and
borrow) flexibility) receives wide support from economists. Faster technological change
will decrease the cost:
The benefit of proceeding slowly is that we will have more time to invest and benefit from
technological change, as well as more time to allow existing capital to depreciate.
Thre is some consensus on the need to take low-cost medium-term actions than can
reduce the costs of substantial reductions in future emissions hould they become
necessary.
Developing country participation is important
Need to carefully consider the timetable for emission reductions.
15
THE SCIENCE
There is now fairly wide scientific consensus that anthropogenic climate change is
occurring.
While uncertain, the possible risks include loss of coastal areas from rising sea levels,
changes in rainfall and agricultural productivity, and increased incidence of diseases such
as malaria, yellow fever, and cholera.
Nordhaus has estimated that U.S. GDP would drop 1% with a 3 degree C warming.
Jorgenson estimates a 1.34% loss in world GDP by 2050 as a result of climate change.
Agriculture and forestry would probably benefit from climate change.
Carbon dioxide accounts for approximately 86% of the total global warming potential of
all U.S. anthropogenic emissions not covered by the Montreal Protocol to protect
stratospheric ozone and combustion of fossil fuels, primarily coal and oil, is the main
source.
16
U.S. POLICY
In July 1996, UnderSecretary Wirth announced that the
"United States recommends that future negotiations focus on an agreement that sets a
realistic, verifiable and binding medium-term emissions target."
Call for "market-based solutions that are flexible and cost-effective."
In December 1996, the U.S. issued a position paper expanding:
Need to examine an intl. Greenhouse gas emissions trading system among annex I (OECD
plus former Soviet block) countries.
Joint implementation (projects that reduce emissions below baseline in host country which
are credited to the target of the partner country) between Annex I and the rest of the
world.
Need for a concerted global effort that eventually would mean targets for all countries.
Support for multi-year, rather than single year, targets.
Urge consideration of a right to bank and borrow permits.
07/14/97 MON 18:10 FAX 2024566474
CEQ
4
002
de: JAV
THE WHITE HOUSE
WASHINGTON
JS
TR
July 14, 1997
MEMORANDUM FOR DISTRIBUTION
FROM:
MARK MAZUR
DAVID SANDALOW
SUBJECT:
Climate Change
Per our discussion today, our next meeting will be tomorrow, Tuesday, July 15 from 2:00-4:00
in OEOB Rm. 231. The agenda is:
1. Domestic emissions trading (one hour)
2. Technology programs (one hour)
The meeting will start promptly at 2:00. Everyone on the attached list has been cleared into the
building. For questions concerning clearance, please call Adam Cox (456-5145).
07/14/97 MON 18:10 FAX 2024566474
CEQ
4.
001
DISTRIBUTION:
Organization
Name
Fax
Phone
State
Eileen Claussen
647-0217
647-1554
Rafc Pomerance
647-2232
Commerce
Jeffrey Hunker
482-4636
482-6055
OSTP
Rosina Bierbaum
456-6025
456-6077
CEA
Alicia Munnell
395-6958
395-5036
Jeff Frankel
395-6947
395-5046
NEC
Mark Mazur
395-6809
395-5147
Treasury
Robert Gillingham
622-2633
622-2220
Justice
Lois Schiffer
514-0557
514-2701
Jim Simon
Interior
Brooks Yeager
208-4561
208-6182
Brooke Shearer
208-1873
208-6291
Mark Shaefer
208-4811
NOAA
Terry Garcia
482-6318
482-3567
OMB
T.J. Glauthier
395-4639
395-4561
Josh Gottbaum
395-1005
395-3060
USTR
Jennifer Haverkamp
395-4579
395-7320
USDA
Charlic Rawls
720-5437
720-6158
DOE
Dan Reicher
586-0148
586-9500
Mark Chupka
586-0861
586-5523
Joe Romm
586-9260
586-9220
EPA
Mary Nichols
260-5155
260-7400
David Doniger
David Gardiner
260-0275
260-4332
DOT
Frank Kruesi
366-7127
366-4544
OVP
Pete Jordan
456-9500
456-9513
PCSD
Marty Spitzer
408-6839
408-5296
Christine Ervin
CCTF
Dirk Forrister
343-1162
343-1060
Steve Seidel
USAID
Sally Shelton-Colby
647-3028
647-1827
David Hales
703-875-4639
703-875-4205
DOL
Ed Montogmery
219-4902
219-5108
DOD
Sherri Goodman
703-693-7011
703-695-6639
07/15/97 TUE 10:26 FAX 62235
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Department of Energy
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OFFICE OF THE ASSISTANT SECRETARY
ENERGY EFFICIENCY AND RENEWABLE ENERGY
Facsimile Cover Sheet
To:
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From: Joe Romm
Office:
Date: 7/15/97
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Number of pages (including cover): 10
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Distribution:
Rafe Pomerance
647-0217
Jeffrey Hunker
482-4636
Rosina Bierbaum
456-6025
Alicia Munnell
395-6958
Mark Mazur
395-6809
Robert Gillingham
622-2633
Lois Schiffer
514-0557
Jim Simon
208-4561
Brooks Yeager
Mark Shaefer
Terry Garcia
482-6318
T.J. Glauthier
395-4369
Josh Gottbaum
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Jennifer Haverkamp
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Charlie Rawls
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Dan Reicher
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Mark Chupka
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David Doniger
260-5155
David Gardiner
260-0275
Frank Kruesi
366-7127
Pete Jordan
456-9500
Marty Spitzer
408-6839
Christine Ervin
Dirk Forrister
343-1162
Steve Seidel
Sally Shelton-Colby 647-3028
David Hales
(703)875-4639
Ed Montogmery
219-4902
Sherri Goodman (703)693-7011
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The Role of Technology Policies in Limiting Greenhouse Gas Emissions
"Economics studies have found that there are many potential policies to reduce greenhouse gas
emissions for which the total benefits outweigh the total costs. For the United States in particular.
sound economic analysis shows that there are policy options that would slow climate change without
harming American living standards, and these measures may in fact improve U.S. productivity in the
long run."
-
The Economists' Statement on Climate Change, Feb. 13, 1997 (signed by more than
2,400 economists, including eight Nobel Laureates)
A strategy to accelerate the diffusion of existing technologies and the research, development and
deployment of more advanced technologies is a critical component of any U.S. policy to stabilize
greenhouse gas emissions. Any emissions control program - without such a technology strategy
- would result in higher prices for carbon allowances than would otherwise be the case. Analysis
suggests than an accelerated technology effort has a large potential for bringing down this price, and
thus the cost to the economy.
In addition to major studies in the early 1990s¹, forthcoming analysis by five leading Nadonal
Laboratories finds that a large potential remains for reducing U.S. energy consumption and
greenhouse gas emissions while meeting the full energy needs of U.S. businesses and families. In the
long term, stabilizing concentrations at even twice pre-industrial levels; which will likely still have
severe national and global environmental impact, poses an unprecedented challenge that can only bc
met with superior technology brought about by aggressive diffusion and significantly higher levels of
R&D.
Two types of technology provide significant opportunities to reduce greenhouse gas emissions in the
near- to mid-termwhile providing our full energy needs. First, energy-efficient technologies are
currently underutilized in all sectors of the economy. These technologies allow us to do more while
consuming less energy and reducing pollution. Through increased energy efficiency, we can maintain
GDP growth while cutting energy usage and associated greenhouse gas and other air pollution.
Second, a variety of low- and zero-carbon technologies, such as solar, wind and biomass power,
advanced industrial processes and highly efficient fuel cells, are becoming increasingly competitive.
These technologies can supply energy or produce energy services with little or no carbon emissions.
allowing' us to further sever the link between GDP and greenhouse gas emissions and other air
pollution. Working together, energy efficiency and low-to-zero carbon technologies provide the
means of sustaining economic growth while meeting medium- and long-term limits on greenhouse
gas emissions. In the longer term, greater technology opportunities exist- including a variety of
advanced low-to-zero carbon technologies and carbon sequestration.
In addition to reducing greenhouse gas emissions, these technologies provide other benefits to the
nation that have long been the basis of national policy, including: achieving major reductions in
criteria air pollutants, decreasing dependence on foreign oil, increasing productivity of domestic
'See National Academy of Sciences, Policy Implications of Greenhouse Warming (1991) and Office
of Technology Assessment, Changing by Degrees: Steps to Reduce Greenhouse Gases (1991).
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2
industries, and promoting U.S. leadership in the large and growing international market for advanced
technologies. Greater penetration of today's energy-efficient technologies can also enhance
economic productivity through more efficient use of our energy resources. Shifting capital from
energy expenditures to new investments elsewhere in the economy will help drive economic growth.
employment and consumer income.
A clear policy on limiting U.S. greenhouse gas emissions would help to focus attention on energy
consumption and will provide important incentives for the diffusion of existing technologies and the
development of even more advanced technologies. The technological response to past
environmental policies, such as acid rain controls and the ban on CFCs, has been dramatic. In both
cases, the actual cost of control has been substantially less than early projections.
Unfortunately, even with a clearer market signal, the technology response to a greenhouse gas policy
will continue to be restrained. A host of market barriers contribute to today's large energy efficiency
gap - the significant underutilization of existing, cost-effective, energy-efficient technologies. Many
federal programs, many of which were launched in the President's Climate Change Action Plan, are
successfully overcoming market barriers to key energy-efficient technologies through partnerships
with the private sector. These programs need to be fully supported, and additional initiatives need to
be put in place to target the remaining barriers to the use of energy efficiency and low-to-zero carbon
technologies.
Additional barriers lead to systematic under investment in important research and development of
new technologies. To achieve a sustainable emissions pathway through the year 2010 and beyond,
there is an unavoidable need for advances in low-to-zero carbon energy technologies. As global
population and energy demand continue to rise, technological advances provide the key to stabilizing
global concentrations of greenhouse gases at safe levels without jeopardizing our quality of life. In
order to stabilize greenhouse gas concentrations at safe levels, new technologies will have to reduce
emissions by more than a factor of ten during the next few decades and be competitive enough to
achieve deployment throughout the world. This need for major and continual advancements can only
be met through a strong commitment to Federal RD&D.
Existing Technologies Offer Significant Potential to Control Emissions
There is clear evidence that the full potential of existing, profitable technologies is not being realized
Many of these energy-efficient technologies have relatively small market shares and low rates of
technology diffusion. Their penetration is restrained because of a number of institutional,
organizational, and other barriers that work against the diffusion of existing, energy-efficient
technologies and the development of advanced technologies. Consumers and decision makers in
business are often not aware of the availability of reliable, energy efficient equipment, nor the
significant cost savings this equipment can offer. Even if they are aware, they may lack the
information needed to make important investment decisions, or access to reasonable finance terms.
A number of federal, voluntary programs are currently enhancing markets by overcoming the barriers
to energy efficiency. The Administration's Climate Change Action Plan (CCAP) launched over 40
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initiatives in 1993. Building on other DOE and EPA programs, the CCAP's goal was to return U.S.
greenhouse gas emissions to 1990 levels by the year 2000. Despite large Congressionalf
cuts,² the CCAP programs are successfully overcoming market barriers and are currently expected to
deliver approximately 70% of the emissions reductions originally projected. With continued support
beyond the year 2000, these programs will significantly restrain growth in U.S. greenhouse gases
through 2010 and beyond. Even at current funding levels, Administration projections indicate that
these programs will eliminate 1/4 of total emissions growth through the year 2010, resulting in
annual energy bill savings of approximately $30 billion (in 1995 dollars). A sustained commitment to
these programs beyond the year 2000 is needed to achieve these results, and restored full funding of
CCAP programs will further cut the growth in greenhouse gas emissions. Some examples of CCAP
programs include:
DOE's Rebuild America program and EPA's Green Lights and ENERGY STAR Buildings
programs are demonstrating that many of the barriers to energy efficiency in the commercial
buildings sector can be overcome. By providing valuable information (no subsidies are
provided), these programs have formed over 2500 partnerships to improve energy efficiency
in buildings. Partners can reduce their energy use by up to 40% through technology
investments with annual rates of return of 20-50%. This potential is significant because total
greenhouse gas emissions from energy use in commercial and Industrial buildings is equal to
all emissions from U.S. light duty vehicles. Program partners have already invested over $1
billion dollars in energy efficiency improvements, and partners are saving over $280 million
per year on their energy bills.
EPA and DOE's ENERGY STAR Consumer Labeling programs are removing barriers that
consumers have faced in purchasing energy-efficient home products, such as heating and
cooling equipment and appliances. The programs have already transformed a number of
markets, including cutting the energy used by computers, monitors, and printers by 50% at
virtually no incremental cost to the customer. Other energy-efficient technologies, such as
heating and cooling equipment, do have higher initial price tags. The programs are providing
important information to consumers through a national education campaign on the highly
profitable opportunities that efficient equipment offers when energy bills are considered.
Manufacturers of home products are partnering with the federal government and labeling
their more efficient products with the Energy Star logo. Through 1996, this program has
seen thousands of products labeled and billions of dollars invested in ENERGY STAR products.
Consumers are savings over $500 million per year on their energy bills.
Because the CCAP's focus on the year 2000 limited the options that were implemented, a longer
term goal provides significant new opportunities to overcome remaining market barriers and develop
key technologies.
2 Total expenditures on CCAP programs in 1997 is $183 million, 40% million below the President's
requested budget of $305 million:
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Research, Development, and Deployment of Clean Technologies
A strategy of continued diffusion of energy efficient and low-carbon technologies and accelerated
development of key new low-carbon technologies during the next decade sets the stage for
development and diffusion of a number of longer term low-to-zero carbon technologies that may
begin to see limited penetration by 2010, but will have substantial impacts after 2010. The
accelerated technology development effort must focus on four strategic thrusts: (1) clean power
generation, (2) energy efficiency, (3) carbon sequestration accompanying a transition to a
hydrogen-based economy, and (4) basic and very advanced research. Responding to the climate
problem may require breakthroughs in all of these areas, and in any case the high-risk nature of R&I
requires the pursuit of multiple pathways.
Increasing the probability of achieving these desirable outcomes will require expanding the
government's current R&D spending in these areas, which is roughly $1.3 billion per year. Also, the
policies described in the previous section, including partnerships with industry, market pull
deployment initiatives, and improved regulatory processes, will be required to ensure technological
success and accelerated market penetration. The benefits could be enormous. A 1997 study by
Pacific Northwest Laboratory found that developing and deploying advanced technologies over the
next 15 to 30 years could substantially lower the cost to the U.S. and global economy of achieving
major reductions in emissions of greenhouse gases.
Clean Power Generation
Natural gas technologies now set the benchmark for low cost, cleaner power generation. Further
advances in natural gas turbines could yield overall energy conversion efficiencies of 60% or more in
the next decade, double conventional plants. High temperature fuel-cells, such as molten carbonate
and solid oxide, may have significant application in power generation with further R&D, promising
high efficiency and low emissions. Molten carbonate fuel cells could eventually cut greenhouse gas
emissions by as much as 50%. Continued advances in high efficiency coal power plants, such as
integrated gasification combined cycle, could approach 50%, allowing some continued use of
abundant U.S. coal even in a greenhouse gas constrained world while helping the U.S. realize
domestic and global market opportunities for these superior technologies.
While electricity from fossil fuels continue to become cleaner and cheaper, expanded R&D and
deployment could make a number of renewable technologies competitive on purely economic
grounds in the next two decades: wind power, PV, biomass power, solar thermal, and geothermal.
In a greenhouse-gas constrained world, these zero-carbon emitting sources of power would be even
more competitive. Royal/Dutch Shell projects these technologies to be the dominant global source
of energy by the middle of the next century.
Renewable technologies are becoming more economically competitive over time. Both wind and PV
are experiencing a 20% cost reduction for every doubling of cumulative production. Photovoltaic
(PV) cells, which convert sunlight into electricity, have dropped from 90 cents per kilowatt-hour in
1980 to under 20 cents today while wind power has dropped from 25 cents per kWh to 5 cents.
These cost reductions will continue to occur not just because of R&D, such as advances in thin film
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PV, but also through economies of scale and improvements in manufacturing that come with
increased production. A number of different PV technologies are being pursued, providing multiple
opportunities for breakthroughs. Accelerated RD&D for wind could potentially have an impact on
CO2 emissions in 2010.
Finally, life extension of nuclear power plants could provide substantial carbon reductions, so
technology R&D to provide safe and economic extension of at least some nuclear plants is a vital
component of the technology strategy.
Energy Efficiency
Technology R&D in transportation is essential because the sector produces one third of U.S. CO2,
and large reductions are unlikely without major regulatory changes or substantial technology
advances. Also, two other major national problems- urban air pollution and dependence on
foreign oil stem largely from the transportation sector. The current federal strategy is to develop
cars and trucks that are highly fuel-efficient as well as ones that run on fuels other than petroleum,
including natural gas, electricity, and biofuels (ethanol). An aggressive RD&D strategy could result
in significant penetration of much more efficient vehicles and biofuels in the next two decades.
The Partnership for a New Generation of Vehicle (PNGV) with the U.S. auto industry is pursuing
multiple technology pathways for both advanced engines and energy storage. These vehicles could
be commercially available just prior to 2010 and be 3 times more efficient than today's - providing
large potential to reduce greenhouse gás emissions. In the slightly longer term, vehicles powered by
proton exchange membrane (PEM) fuel cells have perhaps the greatest long-term potential for
reducing transportation CO2- To ensure that the R&D leads to commercially viable vehicles, a
number of programs are needed to guarantee that the infrastructure is available to support vehicles
that run on non-traditional fuels.
Federal RD&D into buildings technologies has been remarkably successful. Consider just five
technologies developed or advanced by the national laboratories in the past two decades at a cost of
roughly $40 million - building design software and advanced lighting, windows, oil burners, and
refrigerator compressors. These have provided cumulative net savings of more than $28 billion to
consumers and businesses, exceeding the $8 billion spent on all energy efficiency R&D since 1978.
They now provide 16 million metric tons of annual CO2 savings.
Continued RD&D in the buildings sector is likely to prove just as cost-effective. Key near-term
technologies include improvements in lighting, superwindows, advanced design software,
high-efficiency appliances, heat-pump water heaters, gas heat pumps, improved insulation and duct
systems, more efficient cooling including gas cooling. Longer term R&D could result in
electrochromic glazings for windows, building-integrated PV systems, and building fuel cells, all of
which could see some market share before 2010 and make a large impact in the following decade.
The Industries of the Future visions and technology roadmaps identify the best R&D opportunities
for increasing energy efficiency and reducing emissions in the industrial sector while increasing
productivity. These include advanced materials development, separation technology, catalysis,
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bioprocessing, renewable feedstocks, sensors and controls, and industrial cogeneration. All of these
industries hope to dramatically improve their environmental performance while increasing their
competitiveness. The pulp and paper industry, for example, sees the possibility of becoming a
no-net-CO₂ industry, through a combination of efficient use of energy and biomass cogeneration.
Carbon Sequestration
In addition to the portfolio of R&D options related to less CO₂ intensive technologies for energy
supply and use, capture and disposal of CO2 offers an additional a
Iternative for reducing atmospheric concentrations of CO2 If major reductions in CO2 emissions arc
necessary, and global reliance on fossil fuels continues beyond the middle of the next century, then
some form of CO2 sequestration will almost certainly be needed. A long-term R&D strategy would
include demonstration of a number of sequestration options and research into their possible
environmental impacts; converting CO2 into an industrial chemical feedstocks; other novel
sequestration options, such as CO2 fixation by micro-algae; selectively permeable membranes for
CO₂ capture; processes for converting fossil fuels and biomass into CO2 and hydrogen; development
of hydrogen infrastructure technology, including transportation and storage; and PEM fuel cells.
Basic and Advanced Research
A number of areas of basic research could prove crucial to responding to climate change, including
biotechnology, fermentation microbiology, combustion research, polymer and ceramic science,
process engineering, supercritical CO2, new materials synthesis, and nanotechnology. We need to
better understand the underlying biochemistry of the bioconversion of carbon dioxide to methane or
to other potential fuels and feedstocks. This new research includes the ability to sequence the
genetic material of microorganisms and plants, to develop new molecular genetic engineering
techniques, ánd to understand biophysical and biochemical pathways of photosynthesis.
New and Expanded Efforts to Accelerate Diffusion and the Development of Clean
Technologies
New initiatives are currently being designed to take advantage of the many areas of opportunity. All
initiatives described are very preliminary.
Residential/Commercial Sectors
Split Incentives - An initiative to overcome the unique split incentive barriers of landlord/
tenant and builder/buyer relationships. In these cases, the people who make investment
decisions (i.e., the builder of new buildings, or the landlord) do not pay the energy bills.
Energy Information - An initiative to empower consumers and businesses by providing
better information is their monthly energy bills, including benchmark comparisons to efficient
homes.
Advanced Buildings Technology Development - Accelerated development of a portfolio of
buildings technologies - such as fuel cells in buildings, reflective surfaces and materials, and
advanced windows.
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Industrial Sector
Acceleration of Industries of the Future - The Industries of the Future process for the seven
most energy intnsive industries will be accelerated, resulting in successful development of
new technologies sooner. These investments will be targeted on those elements of industry'
Technology Road Maps which will have the greatest potential to reduce emissions.
Cogeneration and Biomass Gasification - The development of advanced industrial turbines
and biomass gasification technologies will be accelerated to provide many industries with not
only inexpensive electricity, but also a means to reduce fossil-based electricity generation.
Industrial Partnerships - The federal government will work more aggressively with other
major industries to achieve significant emissions reductions by 2010.
Transportation
Accelerated PNGV Initiarive - The PNGV initiative will be expanded to accelerate the
vehicle development and decrease the costs -making these vehicles even more attractive to
consumers.
Light Truck Diesel R&D -- The light truck diesel R&D initiative will increase light truck fuel
economy by 40% - cutting emissions from the fast-growing sport-utility vehicles, light truck
and minivans market.
Increased Ethanol Fuel R&D -- Increased ethanol R&D will accelerate commercial
competitiveness of biofuels by supporting greater feedstock work and accelerating
completion of production facilities - bringing ethanol costs down faster than anticipated.
Cross-Cutting Opportunities
Financing for Energy Efficiency Investments - Programs to improve access to financing for
energy efficiency investments.
"Set Aside" for Clean and Efficient Technologies - A new U.S. climate change policy
would provide unique opportunities to provide further incentives to improve the penetration
and innovation of energy efficiency and renewable technologies. For example, under a
domestic trading system with a cap on greenhouse gas emissions, a reserve of allowances or a
portion of auction revenues could be set aside to spur new R&D investment and production
and use of energy efficiency and low-to-zero carbon technologies.
Business Accounting Practices - An initiative to work with businesses to develop new
practices that more accurately reflect energy liabilities.
Government Procurement - An initiative to harness the combined purchasing power of all
levels of government and provide large markets for efficient and clean technologies. efficient.
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Electric Utility Sector
Biomass Co-firing with Coal - Biomass, particularly waste biomass, has been co-fired with
coal for over 10 years. This initiative will continue technology development to allow greater
fractions of biomass to be co-fired and sponsor technology demonstrations at coal plants and
offer technical assistance to plant operators, suppliers, farmers and others.
Expanded Renewable Energy Technology Development and Deployment - This initiative
will expand technology development efforts on key renewable energy technologies such as
photovoltiacs, wind and biomass while aggressively working with power companies, States
and communities to accelerate their use.
CO₂ Sequestration and Hydrogen Production -- This initiative would include demonstration
of a number of sequestration options and research into their possible environmental impacts:
converting CO2 into an industrial chemical feedstocks; and other other novel sequestration
options - such as converting fossil fuels and biomass into CO2 and hydrogen.
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cc JAF
7/10/97
JS
TO:
David Sandalow
David Gardiner
TR
David Doniger
Alicia Munnell
Steve Seidel
FROM:
Jim Simon
Based on our discussion this morning and later discussions
with all of you except David S., I think that there is a
consensus about the story that we want to tell and the framework
for releasing the economic analysis. I told you that I would put:
my perception of the consensus on a piece of paper and fax it
back.
1.
As he said at the U.N., the President believes there should
be public discussion about the problem of global warming.
We have been assembling the best sources of information as 11
basis for this discussion.
2.
a.
It is clear that the globe is warming.
b.
The best judgment of scientists is that mankind has had
a hand in the warming.
[release version of paper on science]
3.
a.
Global warming will have serious effects.
b.
Quick action by the world is necessary if we are to
have any hope of avoiding the most draconian effects
that would occur from uncontrolled continued release of
GHGs.
[release version of paper on effects]
4.
a.
We have done an economic analysis, based on existing
models and a review of the literature. We have
subjected the analysis to peer review. We have
incorporated comments and diverging views.
b.
The clear answer from all the models run by us or
anyone else is that, for targets of the type that so
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far have been discussed by the international community
there need not be a negative effect on the GDP if we
accomplish reductions in sensible ways, including:
accelerating technology diffusion
using market mechanisms
reinvesting any revenue wisely
[others]
[release economic analysis including Reppetto]
5.
We are planning regional and national meetings to
discuss how the country can contribute to a world-wide
solution to this problem.
[release any information about meeting plans?]
***
We would thus accomplish several goals:
- get the economic analysis out, in the context of information
about the problem
- get out the range of possible economic results, but put forward
reasons to hope that the low-cost scenarios can be achieved
- focus debate on the problem and the policy solutions that
appear promising for reducing cost
- at the request of the economic agencies, not suggest a position
at this time on which international target we adopt.
I hope this is helpful.
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U.S. Department of Justice
Environment and Natural Resources Division
Office of the Assistant Attorney General
Washington. D.C. 20530
CONFIRMATION NUMBER: (202) 514-2701
FAX NUMBER: (202) 514-0557
NO. OF PAGES:
3 (INCLUDING COVER PAGE)
DATE:
7/10/97
TO:
D. Sandalow, D. Gardiner, D. Doniger,
TELEPHONE NO.
: A. Munnell, S. Seidel
FAX NO. :
FROM:
Jim Simon
MESSAGE:
PLEASE NOTIFY SENDER IMMEDIATELY IF YOU HAVE ANY PROBLEMS
RECEIVING THESE PAGES.
From: White House Climate Change Task Force Fax: 202 343 1163 Voice: 202 343 1060
To: Alicia Munnell at: CEA
Page 1 of 3 Thursda. July in 1997 4:26:45 PM
FAX
corn Mosen
M
Date: Thursday, July 10, 1997
Time: 4:09:01 PM
3 Pages
To:
Alicia Munnell
From: White House Climate Change
CEA
Task Force
Fax: 3956958
Fax: 202 343 1163
Voice:
Voice: 202 343 1060
Comments:
:
From: White House Climate Change Task Force Fax: 202 343 1163 Voice: 202 1060 To: Alicia Munnell at: CEA
Page 2 of 3 Thursday July in 1997 4:27:32 PM
Predecisional draft -- do not quote or cite
ISSUE FOR DECISION: How should the Administration proceed in making public its analysis of the
economic impact of possible actions on climate change?
BACKGROUND
For some time, the Administration has been under pressure from other nations, Congress.
industry and environmental groups to state its position on targets and timetables for the on-going
climate negotiations. The Administration has repeatedly stated that a position on a target and
timetable would only follow the completion of an exhaustive analytical process including an
opportunity for peer review and public input. Most recently in his speech at the United Nations,
President Clinton stated his intent to work to convince the American people that climate change is a
real and imminent problem and to lay out both the scientific and economic facts "so that they
understand the benefits and the costs."
The Interagency Analytical Group (IAT) completed a draft report that was sent to peer
reviewers in May. The peer review comments highlighted a number of key areas that needed to be
addressed including: the need to put our analysis in the context of the existing literature on this
subject; concerns that we had inappropriately dealt with the issue of technological change; concerns
that the report relied too heavily on a macroeconomic model instead of a general equilibrium model:
and that none of the current models adequately analyzed international trade impacts.
This draft report has found its way to the public, and has now been widely circulated.
Over the coming days and weeks. the Administration faces several upcoming Congressional
hearings and numerous meetings with industry leaders where the issue of the status of our economic
analysis will be center stage.
OPTIONS
Option 1: Substantially revise the IAT report to focus primarily on the existing literature. Include a
brief review of IAT results demonstrating that our analysis was within the range of the literature.
Include qualitative "lessons learned" from the analysis.
PROs: Recognizes the difficulty inherent in analyzing long term economic impacts of climate
change actions;
Avoids putting out Administration-sanctioned numbers for key economic impacts;
Responds to concerns of peer reviewers by focusing on broad range of possible results from
the literature.
CONs: Provides little to show for 2 year Administration analytical effort and little basis for making
future policy decisions.
From: White House Climate Change Task Force Fax: 202 343 1163 Voice: 202 343 1060 To: Alicia Munnell at: CEA
Page 3 of 3 Thursdav July 10 1997 4:28:14 PM
Leaves largely unaddressed the detailed numbers in contained in the draft IAT report and
in industry studies.
Undercuts Administration's efforts to work openly with the public, Congress and business
community.
OPTION 2: Revise IAT paper to include extensive discussion of WRI study (Repetto). but also to
respond to peer review comments and to focus more on current Administration proposals based on
market-based trading mechanisms and technology policies. Reduce current emphasis on
macroeconomic model (DRI). Focus more on international trading cases. Expand to include G-
Cubed model as suggested by several peer reviewers.
PROs: Shifts IAT report from high-cost case in leaked draft (e.g., DRI model, no-trading) to much
lower cost cases that more closely reflect current Administration positions.
Satisfies demands by industry and Congress for credible, peer reviewed analysis as basis
for on-going and future dialogue and decisions.
Contains multiple models, scenarios and assumptions thereby avoiding focus on any one
set of numbers.
CONs:Puts out authorized Administration numbers on economic impacts.
Further emphasizes potential cost savings associated with emissions trading and
technology programs.
RELATED ANALYSIS:
1. Under Option 2, a paper providing a closer look at specific sectors has also been prepared and could
be used as the basis for discussions with specific industry groups. This paper would not provide any
more detail from models than contained in the IAT report, but would include sector specific general
background information not contained in the IAT report and would address in more detail issues
related to impacts on U.S. industrial competitiveness (e.g., raised in the Byrd Resolution).
2. Paper being prepared that look in detail at potential changes in key energy sectors would be
completed under either option for use as guiding future internal decisions.
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CC:AHM
Fax Cover Page
SR
IS
To:
Alice Williams
Subject:
Date:
07/10/97 05:27 PM
Pages:
9, including cover page
From:
Melissa Green
Agency:
Organization:
Office Phone:
Fax Phone:
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Please deliver the following agenda and dicussion paper to your principal for tomorrow's 2:00pm Climate Change Meeting.
If there are any problems with the transmission please call Melissa Green at 456-5804. Thank you.
agenda.wpd wkgrps.wpd emtradin.wpd
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Agenda
NEC/CEQ Principals Meeting
Climate Change
July 11, 1997
I.
Interagency Decision Process
II.
Domestic Emissions Trading
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CLIMATE CHANGE POLICY WORKGROUPS
1. Domestic Policies
A. Domestic Emissions Trading
B. Technology Policy
C. Transition Assistance
D. Regulations and Standards
2. International Policies
A. International Emissions Trading & Joint Implementation
B. Developing Country Issues
C. Enforcement/Compliance
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DISCUSSION PAPER:
DOMESTIC EMISSIONS TRADING PROGRAMS
FOR GREENHOUSE GASES
1. Introduction
Under emissions trading programs, emissions allowances are first allocated or auctioned.
These allowances may then be traded. Allowances can have substantial value, so distributional issues
are an important component of program design.
Emission trading programs offer both static and dynamic efficiency advantages over more
traditional forms of regulation. Trading allows those with higher abatement costs to purchase
allowances from those whose costs are lower. Total costs will therefore be lower than under traditional
regulation, which require all polluters to comply with a specific standard. Nevertheless, emissions
trading may often involve people and firms adjusting to higher prices.
Under traditional regulation. firms have little incentive to abate pollution by more than the
minimum required. As a result, firms under-invest in pollution control R&D. Emissions trading offers
dynamic efficiency gains by creating incentives to continuously improve pollution abatement
technologies in order to generate surplus allowances for sale.
2. US Experience with Emissions Trading
The US has had more experience with emissions trading than any other country. Examples
include:
Sulfur Dioxide (SC) Allowance Trading: The Clean Air Act Amendments of 1990 required a 50%
reduction in SO₂ emissions from electric utility boilers. To accomplish this goal, a fixed number of
emission allowances were allocated to electric utilities based on a formula reflecting historical
emissions. In addition, a small portion of allowances are auctioned every year to facilitate price
discovery and new entrants. Allowances are specifically excluded from being defined as rights to
pollute, may be traded to any party anywhere, and may be banked for use in future years.
Participants need to conduct regular monitoring of emissions and make an annual accounting of
their emissions. Penalties are imposed if emissions exceed the number of allowances held by a
source.
A functioning market in SO₂ allowances now exists, involving both bilateral exchanges between
companies, and brokered exchanges through third parties. This market, along with other factors.
These include the fact that the target that was actually adopted was not as onerous as many un andustry had feared the low price and widespt ead availability of low sulfur coal, the swerding of Ibonus allowances, the postponem
investments,
and
lower
then
expected
tansportation
costs
has helped to dramatically reduce the cost of the abatement program.
Initially, forecasters claimed that a 50% reduction (10 million tons) in SO2 would correspond to
allowance prices in the range of $400 to $1000.
Hehn
Robert
and
Carol
May,
The
Behavior
of
the
Allowance
Market
Theory
end
Evidence,1
The
Elect
, March, 1994. However, prices for allowances that would be needed in the next decade to achieve
this level of emission reduction currently range between $100 to $120. In addition, 1995 emissions
were actually 40% below the legally required levels for that year.
Water Effluent Trading: The US generally has regulated surface water quality through a system of
discharge limits for large sources of water pollution. In addition, states have standards for ambient
water quality which are often not attained even after large dischargers apply best technology. The
reason is that small (nonpoint) sources (such as runoff from farms) contribute significantly to water
pollution. A number of state and local governments are employing trading systems for watersheds
that either permit trading among large dischargers, or allow large dischargers to fulfill their
requirements by controlling nonpoint sources. These include the Fox River in Wisconsin, the
Dillon Reservoir in Colorado, and the Tar-Pamlico River in North Carolina. The latter two
programs are designed to manage future economic growth. Thus, the quantity of effluent
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allowances allocated exceeds current discharge levels. Once growth consumes this excess, trading
is expected to reduce compliance costs.
Inter-refinery Lead Trading EPA operated a lead trading program from 1983 to 1987 as it phased
out lead from gasoline. Lead trading allowed refiners and importers to trade lead reduction credits
in order to meet limits for the lead content of gasoline. The quantity of allowances to which a firm
was entitled was determined by the amount of leaded fuel produced by the firm and the
contemporaneous EPA standard. Those who bettered the standard could sell their credits to others.
Some 10 billion grams of lead were traded during the course of the program at prices ranging from
0.75 to 5 cents per gram. Allowing the trading of lead credits reduced the costs of the program by
approximately 20 percent.
Criteria Air Pollutant Trading: EPA first began incorporating aspects of emissions trading in its air
program in 1974, when it allowed a modified source to use credits earned by another source within
the same plant to avoid additional regulatory requirements. Since then, emission trading has
substantially expanded. Trades have numbered in the thousands and have been estimated by Hahn
and Hester (1986) to have achieved savings between $525 million and $12 billion.
Market Mechanisms for Chlorofluorocarbon (CFC) Phaseout: Under the 1987 Montreal Protocol to
limit stratospheric ozone depletion, the U.S. required the phase out of the production of CFCs by
1996. As part of its program, the U.S. adopted a tradeable permit regime covering CFC
manufacturers and importers. These allowances were allocated based on each firms 1986 market
share. As the market for CFCs declined, the system allowed firms to allocate production among
different facilities according to the least-cost pattern of supply. It also gave CFC users the
flexibility to switch between different CFC compounds, within the overall limit on allowances.
This program helped reduce the costs of the phaseout. In 1988, EPA estimated that the cost to
halve CFC use would be $3.55 per kilogram. By 1993, it became clear that all uses could be
eliminated by 1996 at a cost of $2.45 per kilogram.
3. Emissions Trading of Greenhouse Gases
A greenhouse gas emissions trading program would likely contain several elements. First,
emissions budgets would be established. Some entity or entities would be given responsibility for
verifying compliance and the integrity of allowances. Noncompliance with allowance limitations or
reporting requirements would result in penalties. The program would establish permit lifetimes,
monitoring and enforcement provisions, and rules for permit banking. borrowing. and trading.
Among the important issues to be addressed in designing a domestic emissions trading
program are:
--Where the constraint is imposed. A primary fuel trading program would limit the production
or import of fossil fuels. A sectoral trading program would limit emissions from one or more
key sectors (e.g. utilities, transport or heavy manufacturing).
--How permits are distributed. Permits could be given to existing emitters, given to others
(who could then sell them back to existing emitters), auctioned, or some combination of the
foregoing. If permits are auctioned, substantial revenues could be raised. (Options for using
these revenues include tax cuts, deficit reduction and support for transitional or technology
programs). If permits are given away, recipients would potentially receive a windfall.
These and related issues are discussed below.
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A. Where the constraint is imposed.
Carbon dioxide from fossil fuel combustion currently accounts for about 85% of U.S.
greenhouse gas emissions. A trading program could be implemented at various points in the energy
market, including fuel import, fuel extraction, processing, refining, distribution, and secondary
conversion (e.g., coal to electricity). These points could vary by sector. For example, an emissions
trading program could focus on the point of final combustion for coal, but on refining for oil, or
distribution for natural gas.
Possible programs are described below:
Primary Fuel Emissions Trading
The primary fuel producing sector extraction, processing, refining. and distribution has many
levels where a permit program could be implemented. One option would be to require permits at the
point of first sale (a permit is surrendered with the first inter- or intra- company transaction). Such a
system would include transactions between a coal company and an electric utility, between a natural
gas producer and its marketing arm, between a natural gas producer and a broker, or between an oil
extraction company and its refinery operations. Fuel importers would also require permits to import
fuel. This would capture the carbon from fuel consumed in the refining process. The number of market
actors under this program design would be under 5000 and virtually all carbon in the energy sector
would be included in the program.
Sectoral Emission Trading
An emissions trading program could also be applied at the point of combustion, allowing
trading among affected sources. This system would be most comparable to the current so, emissions
allowance trading system.
Including the six largest industrial CO -emitting sectors (electric utilities, cement, primary
metals, pulp and paper, petroleum refining and chemicals) in a trading program could encompass as
many as 20,000 market participants and 90 percent of industrial CO₂ emissions. Mobile source
emissions could be indirectly included in the system by allocating transportation equipment
manufacturers permits for emissions associated with their automobile fleets or by including refiners in
the program. Residential and commercial emissions could be similarly addressed by focusing upstream
in infrastructure. the energy system. The electric generating sector could use existing monitoring and reporting
In determining where constraints would best be imposed, the following factors may be relevant:
Administrative and compliance feasibility: The number of sources involved in the trading
program should be small enough to be administratively feasible and large enough to ensure market
competition. In addition, monitoring and verification of permit compliance must be possible for
those included in the program.
Public Acceptance: The program must consider the ease or difficulty with which various
allocation approaches would be accepted by the public.
Potential to Diffuse Low Greenhouse Gas Technologies: Alternative points of intervention should
be evaluated for their ability to provide incentives for research, development, adoption and
diffusion of low greenhouse gas technologies.
Market Impacts: The permit program will have economic impacts on firms that vary depending on
program design. For example, exempting certain sizes or categories of sources from permit
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requirements because of administrative or equity concerns (e.g., small boilers or home heating oil)
has competitive implications within the energy market.
Consistency with the international trading system: The domestic program should be consistent
with any international prescriptions concerning the coverage of sources and gases.
2. Who gets permits
In an emissions trading system, permits can be given to existing emitters on the basis of
baseline/historical emissions or other formulae, given to others (who can then sell them to emitters).
auctioned (where revenues accrue to the government). or some combination of the foregoing.
Permit allocation formulae could take into account the market impacts of the mitigation
program. Set asides could be made available to those industries, workers or consumers who
experience a disproportionate share of the costs of control. A set aside could also be auctioned, with
the revenues used for the same purpose.
Allocation Based On Baseline/Historical Emissions
Under this approach, sources are given a number of permits based on baseline fuel production
or emissions and an allocation formula. Various allocation formulae can be devised, weighted to
greater or lesser degrees in favor of sources with high historical emissions. Emissions allowances are
endowed to facility operators for no cost and would be transferable. Those receiving permits thus
obtain assets of potentially large value from the government at no cost.
Such an allocation mechanism could create entry barriers. In a capital intensive sector like
primary fuel production, where entry barriers are already substantial, new entrants would be further
disadvantaged if they had to purchase permits especially if existing holders hoard permits. This
problem could be mitigated by setting aside a number of permits for purchase by new entrants or by
auctioning a portion on the open market. Such an auction would also facilitate price discovery in a
new market. Although new firms will still be disadvantaged (as they will pay for all of their permits).
they would be able to enter the market. The pool of permits would need to be withheld from existing
sources to ensure compliance with budgeted national emission levels.
It may be desirable to design an allocation that would allow credit for early emissions
reductions (those achieved prior to the start of the program. but after the baseline period) in
particular for those that reduced greenhouse gas emissions as part of government sponsored voluntary
programs. If credits for past actions are given, the total credits allowed would need to be deducted
from the overall permit allocation for the first budget period in order not to exceed the national
greenhouse gas emissions target. In addition, mechanisms may be necessary to ensure verification of
these credits.
Auction
Alternatively, an auction could be used to allocate permits. The price permit holders pay would
depend in part on the auction design or method used. Auctions ensure that permits cannot be hoarded
(a concern often expressed regarding allocation approaches), are available for trade, and would serve
to inform potential traders about current price levels. Auctions would put new entrants on the same
footing as existing emitters. As discussed earlier, since an auction could produce substantial revenues.
some decision would have to be made with respect to what to do with the proceeds.
Given that an auction could produce substantial revenues, some decision would have to be
made with respect to what to do with the proceeds. They could be used exclusively to reduce taxes or
the deficit. Alternatively, as discussed below, a portion of the revenues could be used to address
inequities in the distribution of control costs and to fund R&D for less carbon intensive energy sources
and end uses.
Supporting Technological Progress and Transitions
The allocation of permits, or the use of auction revenue, could be used to promote more rapid
diffusion of existing climate-friendly technologies and accelerated R&D for new technologies. For
example, a reserve of allowances could be set aside to encourage more rapid development and
diffusion of low greenhouse gas emitting technologies. Manufacturers of energy consuming equipment
could compete for the set aside based on the degree to which they produce equipment more efficient
than the average in use or than required by current mandatory efficiency standards. Such a program
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could yield reductions in energy demand and help buffer the consumer from the impact of higher
energy costs. Similar results could be achieved with the use of auction revenue.
Permit allocation formulae could take into account the market impacts of the mitigation
program. Set asides could be made available to those industries, workers, or consumers who
experience a disproportionate share of the costs of control. Auction revenues could also used for this
purpose.
C. Non-carbon greenhouse gases
Greenhouse gases include not only carbon dioxide, but also methane, nitrous oxides,
hydrofluorocarbons (HFCs), perfluorocarbons (PFCs), and sulfur hexafluoride (SF6). Gases differ
both in their atmospheric lifetimes and in their ability to trap heat in the atmosphere. In addition,
carbon is not only emitted through the combustion of fossil fuels, but is also absorbed by sinks su h as
trees and soils.
Gases other than carbon dioxide account for the 15% of U.S. greenhouse gas emissions. Most
important is methane, which accounts for 11% of national emissions. Since gases differ in their
lifetimes and in their potential to trap heat in the atmosphere, an exchange rate or trading ratio must be
established to convert all gases into common units for inclusion in a trading program. Such ratios have
been developed by climate researchers and could be applied here. These should be consistent with the
rules established in the international protocol.
Several, although not all, of the many sources of non-carbon greenhouse gases could likely be
included in a trading system. For example, methane emitting coal mines, landfills, livestock manure
management facilities and potentially natural gas distribution systems may meet the criteria described
above for inclusion in a greenhouse gas trading program. These sources account for 7% of national
greenhouse gas emissions. Similarly, emissions of some sources of other gases could potentially be
included (e.g., magnesium production).
Forests in the United States currently remove an amount of carbon equal to 8% of national
emissions from the atmosphere. Their inclusion in the trading program would enhance the systems
flexibility, although there could be considerable methodological challenges with such an approach.