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Climate Change Hearings [1]
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11
3
SEP-24-1997 15:37
OES FRONT OFFICE
202 647 0217 P.01 15
United States Department of State
Bureau of Oceans and International
Environmental and Scientific Affairs
Washington, D.C. 20520
giy
MJ
JAF
AM
JA
Date: 9/24/97
RL
Time:
AM
FAX Cover Sheet
A few reusus cutits
To:
Mizhelle Julen
marked
Org.: CEA
FAX: 395-6958
Phone:
If
From: Linda Strachan / Franz Wuerfmannsdobler
FAX: 202-647-0217
Phone: 202-647-3550 / 202-736-7781
Number of pages to follow: 14
Memo: Current Q's and As per our Conversation riday.
They are being circulated TO UMB. We still
have a's and A's to Fill in.
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Schaefer Q's & A's
1
Questions for the Record Submitted by Chairman Schaefer to
Under Secretary of State Timothy Wirth
House Committee on Commerce
Energy and Power Subcommittee
July 15, 1997
1. Q: Please identify each member of the Interagency Analytical Team (IAT) from
the date of its inception to the present time, any other participants inside or outside
the Administration, and specify their responsibilities.
A: Attached is former Under Secretary Ehrlich's list of people to call regarding IAT
meetings Members of the LAT had varying levels of participation and responsibility.
2. Q: When was the IAT formed and what were the IAT's instructions? Please
provide any documentation regarding the formation of the IAT and its mission,
responsibilities, membership or assignments.
A: Previously, Agencies worked independently on climate change economic analysis.
Beginning in February 1996, however, the Department of Energy and the Environmental
Protection Agency began to work together on global climate change analysis and called it
the IAT. Their joint efforts provided the analytical foundation for the Springfield Global
Climate Change Workshop in June 1996.
Former Under Secretary Ehrlich joined the Administration's climate change analysis
effort shortly after the June 1996 Climate Analysis Workshop. He oversaw the analysis
from mid 1996 to May 1997. Under Secretary Ehrlich's instructions were to use the IAT
to provide a set of analytic tools that would allow the Administration to better understand
the economics of the climate change issue.
3. Q: Please indicate the total costs of the IAT's efforts and the share paid annually
by each Department or Agency that was involved and please identity the source of
the funds within each Department or Agency.
keep Tarh of
A: Costs for the IAT were primarily for personnel. No effort was made to accumulate
costs related to the IAT activities. DOE and EPA, who had primary responsibility for the
analysis efforts, did have some contract costs for modeling.
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Schaefer Q's & A's
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4. Q: Is the IAT still in existence? If so, what are its current responsibilities?
No IAT economic analysis of global climate change is underway.
5. Q: Please provide a copy of all drafts of the IAT report in addition to the May
16th and 30ᵗʰ, 1997 drafts, both earlier and later.
A: Enclosed with this response are photocopies of the May 12th, May 16th, and May 30th
drafts of the IAT paper. The May 12th draft was circulated among members of the IAT
and senior members of the Administration involved in climate change policy. The May
16th draft was circulated to the peer reviewers, members of the IAT, and senior members
of the Administration involved in climate change policy. The May 30th draft was released
to the public on July 15th.
6. Q: Please explain how the peer reviewers were selected? What instructions were
those peer reviewers given? Please provide copies of any correspondence or
instructions that were sent to the peer reviewers.
A: The peer reviewers were selected based on recommendations from senior IAT
members. Former Under Secretary Ehrlich made the final selection after consultation
with the LAT and members from the White House Task Force on Climate Change.
Former Under Secretary Ehrlich sent letters and attachments to each of the reviewers as
well as personally contacting each of them. The letter dated March 20th is a copy of the
initial letter sent to Professor Jorgenson. Identical letters were sent to the other peer
reviewers over a period of weeks. Enclosed with this letter were a technology note and
information on the IAT models and baseline. The undated letter is a copy of the letter
that was sent to all reviewers on May 16th with copies of the May 16th draft of the IAT
report. Copies of materials sent to the reviewers are enclosed.
7. Q: If the LAT effort is in fact a "failed" project as indicated in Administration
testimony at the Subcommittee hearing how will the Administration determine the
appropriate level of future international climate change commitments for Kyoto and
later?
A: The IAT effort generated much useful information about how to model constraints on
greenhouse gas emissions and their potential economic effects. However, the IAT
process was unsuccessful in providing a sufficiently narrow range of estimated economic
effects to support the Administration's overall decision-making process. As part of the
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ongoing Administration decision process, a number of different economic and other
analyses are being evaluated as guides to the likely effects of reducing greenhouse gas
emissions.
8. Q: As late as last May when Dr. Ehrlich and others in the Administration held
briefings on the then draft analysis and assessment there was no hint that the
Administration considered this effort a failure and the models to be unreliable.
What occurred since May that caused the Administration to apparently reach a
different conclusion from that of Dr. Ehrlich?
A: When the Administration provided briefings on the work being done by the IAT, the
focus was on determining baselines for emissions levels, economic growth, and other key
variables. and for explaining the different models that were being used. As the work
done by the IAT proceeded, the wide range of economic outcomes called into question
the benefits of continued IAT work on these economic models, given the many other
competing claims on agency resources.
9. Q: The LAT draft Analysis referred to three scenarios which resulted in costs of
future climate commitments of approximately $200, $100, or $50 per ton carbon tax
equivalent. Has the Administration concluded that a $200 per ton carbon tax
equivalent cost will not harm the U.S. economy, jobs, and global competitiveness?
Has the Administration concluded that a $100 per ton carbon tax equivalent cost
will not harm the U.S. economy, jobs, and global competitiveness? Has the
Administration concluded that a $50 per ton carbon tax equivalent cost will not
harm the U.S. economy, jobs, and global competitiveness. Please provide the basis
for any of the above conclusions. If the Administration does not support any of the
above costs, what analysis or other information does the Administration intend to
rely on to support a different amount?
led
A: The implicit price of carbon for the Unites States reported by the IAT ranged from $9
to $145, depending on the situations models, and the assumptions and models used.
Similarly, the impact on the U.S. gross domestic product spanned a wide range. The IAT
found that the estimates of the costs to the U.S. economy of a carbon emissions reduction
policy depended on factors, including targets and timetables, technology assumptions and
the implementation of international emissions permit trading. As Dr. Janet Yellen
remarked in her July 15,1997, testimony to the House Commerce Subcommittee on
Power, "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 rum"
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10. Q: Is the paper prepared by the IAT both an analysis and an assessment? How
does it relate to the "analysis and assess merit" referred'to in Paragraph 4 of the
Berlin Mandate? Has the Ad Hoc Group on the Berlin Mandate provided an
analysis and assessment as required by the Berlin Mandate?
A: The IAT analyzed a wide range of emissions targets and timetables as well as a range
of implementation plans (such as international emissions trading and joint
implementation). The IAT analysis does not have any direct relationship to the cited
paragraph from the Berlin Mandate.
11. Q: The IAT draft states that the central policy modeled for the analysis "is
aimed at reducing carbon and other greenhouse gas emissions by stabilizing them at
1990 levels" and that policy would be "announced in 2000 and its restrictions are
phased in over a ten year period, so that the policy would take full effect In 2010."
Reports in the media after the Denver Summit that President Clinton attended also
referenced this date of 2010. In light of ELA's projection of emissions 22% above
1990 levels by 2010, is the Administration considering a target and timetable that
calls for stabilization at 1990 levels by 2010?
A: The IAT's analysis focused on a standard emissions target widely used in the
academic literature. The Administration is in the process of determining its position on
targets and timetables. The Administration's negotiating position is still in development.
12. Q: The Administration frequently cites the 2000 economists who say they
support controlling greenhouse gases. Their statement supports as the mechanism
either carbon taxes or emissions permits. In the past, the Administration has said it
opposes the use of taxes. Is that still the Administration's position?
A: The Administration's position on implementation options or strategies relating to
greenhouse gas emissions reductions is still under development. This position will be
determined in conjunction with a position on targets and timetables, which is also under
development.
13. Q: The IAT draft explains that these emissions reductions to achieve
stabilization would be through "issuing tradable permits at the earliest point of
energy production or when imported into the U.S." and that the permits "are
initially auctioned in a way that is revenue neutral: i.e., all revenues generated
would be recycled through the economy.". Would these revenues be deposited in
the treasury as miscellaneous receipts under the Economy Acts? Would they then
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have to be recycled through changes in the tax laws or by appropriation? How
would they be recycled?
A: The IAT considered a range of revenue recycling possibilities at a very abstract level.
The IAT did not examine the legal framework under which these abstract options might
be implemented in the United States.
14. Q: Does the Administration believe that permit auctions are the equivalent of a
new tax? If not, please explain.
A: In general, they are not equivalent. Auctions focus on fixing quantities and leave
prices free to fluctuate, while taxes focus on prices and allow quantities to adjust to
changed price levels.
15. Q: The IAT draft states that "among fuels, demand for coal bears the brunt of
greenhouse gas stabilization." What is the impact on the U.S. economy as a whole
and on the relevant coal regions of this policy towards coal? What will be the job
impact? Is the Administration adopting an anti-coal policy? How is the policy
consistent with President Clinton's 1995 reply to Mr. Dingell that the U.S. will not
agree to any protocol that harms our economy and jobs or our competitiveness?
A: The IAT analysis found that the implicit price of carbon would range from $9 to $145
per ton depending on the model and assumptions used and the specific scenario analyzed.
Economic and job impacts would similarly span a range depending on the factors such as
the rate of technological change, targets and timetables, and international emissions
permit trading.
It is important to stress that the IAT analysis is just that - analysis - and not policy, as the
question suggests. The LAT examined a wide variety of different analytic scenarios as
part of its work, and explicitly was not charged with making policy recommendations.
16. Q: How long after December 1997 does the Administration think it will take to
obtain Senate advice and consent of any Kyoto agreement, to ratify that agreement,
and to enact implementing legislation?
A: There is little information on which to judge the timeframe for the advice and consent
process, or for the enactment of implementing legislation in the climate arena. The U.N.
Framework Convention on Climate Change was ratified by the Senate in October 1992,
only four months after it was signed by President Bush at the Earth Summit in Rio de
Janeiro in June 1992. That Convention required no implementing legislation. However,
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other Conventions, such as the Law of the Sea, have yet to be ratified, more than a dozen
years after signature.
17. Q: Which agency or department would be responsible for implementing the
provisions of any agreement reached in Kyoto, including provisions relating to joint
implementation, emissions trading and advancing Article 4.1?
A: It is anticipated that several Departments and agencies would have a role in the
implementation of provisions related to joint implementation, emissions trading and
Article 4.1, including the Department of State, the Department of Energy, The
Department of Justice, the Treasury Department, the Department of Agriculture, the
Agency for International Development, the Environmental Protection Agency, and
possibly the National Oceanographic and Atmospheric Administration and the National
Aeronautics and Space Administration. The precise role of each could only be
determined once specific provisions had been decided upon.
18. Q: What consideration has been given or plans made regarding passage of
legislation necessary to implement any agreement reached in Kyoto?
A: While some consideration has been given to the activities required under various
agreement provisions (particularly those introduced by the United States), the lack of
general acceptance of any of these provisions in the international negotiations makes the
development of any specific legislative proposals premature. The Administration would
intend, as part of its package of material to be sent to the Senate, to include it proposals
for legislation that would be required to fully implement any agreement.
19. Q: Article 17.4 of the Framework Convention on Climate Change (FCCC)
specifies that only "Parties to the Convention may be Parties to a protocol."
However, there is no assurance that all or even a majority of the 167 Parties to the
FCCC will deposit instruments of ratification, acceptance, approval or accession to
any protocol adopted by the Parties by consensus or otherwise in Kyoto. What
assurances does the U.S. now have that most, if not all, developing country parties
to the FCCC will become Parties to a Kyoto protocol? Why is it in the U.S.
interest to agree, without assurances, to a protocol that proposes to set legally
binding post-2000 targets and timetables for Annex I Parties only and also imposes
on the U.S. new and legally binding commitments to advance implementation of
Article 4.1 of the FCCC, such as those prescribed in paragraph 1, 2, 3, and 4 fo
Article 5 of the U.S. draft protocol?
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A: [EGC]
20. Q: In a July 18, 1994, letter to the then House Committee on Energy and
Commerce [the State Department] said:
We agree that there are substantial commitments beyond 2000 for all
parties to the Framework Convention under Article 4. Article 4.1
(applicable to both developed and developing countries) contains
commitments that are not limited by any specific timetable.
a) Is there any evidence to date that the U.S. is not abiding by these Article 4.1
commitments? If there is none, why should the U.S. voluntarily agree to
reaffirm, as required by Article 5.1 of the June draft, to what the U.S.
already agreed to when it ratified the FCCC in 1992?
b) Is the U.S. asserting that other Annex I Parties are not abiding by such
commitments? If so, please identify those Parties.
A: [EGC]
21. Q: Paragraph 2 of Article 5 of the U.S. draft Protocol mandates each Party to
"strengthen its legal and institutional framework to advance implementation" of
Article 4.1 commitments. What "framework" does the Administration have in
mind? Does this suggest a new Federal or international agency or program?
Would this be done through new legislation? If not, how would it be achieved in
the U.S.?
A. The Berlin Mandate calls for the negotiating process to "continue to advance the
implementation" of Article 4.1 commitments, which also apply to developing countries.
The primary U.S. objective, in proposing paragraph 2 of Article 5, was to encourage
developing countries with inadequate legal and institutional frameworks to strengthen
such frameworks so as to improve implementation of Article 4.1. However, it was
considered that there was no reason why such an obligation could not apply to all
Parties, namely that all Parties could reasonably be asked to do something to strengthen
their frameworks. Even the United States, with its highly developed legal and
institutional system, could, for example, enhance its existing administrative abilities to
collect and report on inventories of greenhouse gas emissions. It was not intended that
any international institutions or processes would be needed to implement such a
provision.
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22. Q: Article 5.3 requires that each Party take "measures to facilitate investment
in climate-friendly technologies." What "measures" does the Administration
contemplate? How would they be implemented in the U.S.? What are their
regulatory and budgetary implementations?
A: [Seidel]
23. Q: Article 16 of the draft provides that the Parties "shall adopt, by [2005],
binding provisions so that all Parties have quantitative greenhouse gas emissions
obligations and so that there is a mechanism for automatic application of
progressive greenhouse gas emissions obligations to Parties, based upon agreed
criteria."
a) Does this mean that there could be a second protocol or another legal
instrument by [2005] which is only 7 years after the December meeting in
Kyoto?
b) Do the words "all Parties" in this Article mean that only the "Parties" to
the U.S. draft protocol would be required to "adopt" by 2005 such an
instrument? Unless developing country Parties to the FCCC, such as
China, India, and Brazil, become Parties to the Kyoto instrument (as
proposed by the U.S.) prior to [2005], how does this Article address the
issue of greenhouse gas emission growth by all non-Annex I Parties?
c) Could such a new instrument adopted by [2005] impose new and additional
obligations on the U.S. beyond those proposed to be adopted in Kyoto?
Why is that possibility a good result for the U.S. economy, trade, and
competitiveness?
d) What "mechanism for automatic application of progressive greenhouse gas
emissions obligations" does the Administration contemplate by this
proposal? What are its implications for the U.S., including its sovereignty?
A: [EGC]
24. Q: Article 16.1 of the Convention provides that "annexes shall be restricted to
lists, forms, and any other material of a descriptive nature that is of a scientific,
technical, procedural or administrative character." The U.S. draft protocol states,
that it may not be "appropriate" to adopt the Article 16.1 Convention example.
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Please explain why. Does the U.S. support annexes that would be substantive and
mandatory?
I
A: You correctly note that Article 16.1 of the Convention limits the use of annexes to
certain types of material. This is not because there is any inherent reason why annexes
should be so restricted. Rather, it is because Article 16 goes on to provide an entry-into-
force procedure for annexes (and amendments to annexes) under which an annex (or
amendment to an annex) enters into force for a Party unless a Party affirmatively does not
accept it. (Other modifications to the Convention must be affirmatively accepted by
Parties to be binding on them.)
In the context of the Convention, as well as other treaties, the U.S. insisted that the quid
pro quo for such a "tacit" amendment procedure with an "opt-out" provision was that
annexes be limited to material of a technical (scientific, etc.) nature. This view is
consistent with views expressed by the Senate. The purpose of the U.S. comment with
respect to the climate change protocol was to flag that annexes are not automatically
entitled to "opt-out" procedures; rather, it depends on their context.
25. Q: Article 9 of the U.S. draft provides that Parties "shall cooperate" in
establishing a "long-term goal" regarding concentrations of gases. Article 10 calls
for meetings at "regular intervals" to, among other things "periodically review the
adequacy" of the Protocol and Article 8 calls for periodic review of the Protocol and
guidelines "in light of evolving scientific knowledge related to climate change."
Article 2 already suggests a minimum of two budget periods. Article 16 tells the
parties to adopt "binding provisions" by [2005] for progressive "obligations." Does
-the State Department contemplate, over the next several decades a continuing
process of meetings of both the protocol and Convention Parties annually and a
series of IPCC assessments, special reports and technical papers leading to a series
of protocols or other legal instruments that are likely to have significant economic
impacts on the Parties and their people? Why is there a need for such frequent
meetings and reviews?
A: The U.S. has proposed a periodic review of the agreement to insure that any changes
in the science are fully taken into account by the Parties. Such flexibility insures that if
new information emerges indicating a reduced need to act, the agreement could be
modified; conversely, if additional actions needed to be taken to address the threat of
climate change, appropriate action would not be delayed. The U.S. proposal also seeks to
insure that Parties would be fully informed regarding the compliance of all other Parties -
thus removing a potential problem of one Party gaining a competitive advantage though
not fully meeting its obligations, while other complying Parties might be penalized.
Finally, the U.S. proposal, while setting specific commitments for developed countries,
recognizes the need for all Parties to participate. It therefore calls for the negotiation of a
new agreement by [2005] that would require all countries - including developing
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countries - to adopt legally binding limits on their emissions. We assume that at each
stage of the process, a full assessment of the costs and benefits of action would be taken
prior to committing the United States to any new legal obligation.
The U.S. proposal for an agreement does not specify the frequency of IPCC Assessments.
These reports (the third of which is anticipated to be released in late 2000 or early 2001),
have so far been scheduled on a five year cycle - long enough to allow new scientific
information to develop, but frequently enough to provide the policy community with
regular updates on the state of knowledge regarding the climate change issue.
26. Q: The Global Climate Coalition sent a letter to the Department of State on
February 14, 1997, raising a number of questions about the January 17, 1997,
version of the U.S. draft protocol, particularly in regards to trading. The
Administration has not yet responded to those questions. Please respond to them as
part of your reply to this inquiry.
A: [EGC]
27. Q: The EU proposal made recently in Denver was developed last March as an
EU "negotiating position for the ongoing negotiations on the Berlin Mandate" and it
includes burden-sharing of a 10% reduction among EU members of the "overall
emission reduction objective by the Community as a whole." This appears to be a
form of differentiation, a concept the U.S. is not supporting. The existing FCCC
bubble applicable to the EU presumably only covers policies and measures and,
when adopted, it only covered the 12 Parties that were members of the EU in 1992.
Does the U.S. understand that the EU is seeking, by its submissions and discussion
with the U.S. delegation, to extend a form of the FCCC bubble to a protocol and
another legal instrument that may be adopted in Kyoto, to expand the bubble to
cover any target and timetable or financial obligations and not just policies and
measures, and to expand the bubble to include all present and future members of
the EU, such as countries from Central and Eastern Europe? Why is such an
expanded bubble in the economic and competitive interests of the U.S.?
A: The EU has made clear that it believes the bubble covers not only policies and
measures, but also any target and timetable. IT has argued that it may use the bubble not
only in meeting the non-binding aim of the Convention, but also in meeting any new
obligations established under the protocol or other legal instrument. To date, the EU has
not discussed with us whether it also covers financial issues. They have also indicated
they have not yet determined how or under what circumstances the bubble would apply to
new member states.
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The United States believes it is the interest of a stable Europe that the European countries
continue to develop economically, and has so far been disinclined to intervene in the
domestic affairs of any European nation. However, in the context of any new agreement
under the Climate Convention, we have not yet accepted that the European member states
should be allowed to "bubble" their obligations, nor would we support their doing so
unless we were satisfied that such an agreement would not disadvantage the United
States.
28. Q: What is the potential impact of such an expanded EU bubble on the U.S.
proposal for international emissions trading? Would it ensure that the EU would
get the benefit of any emissions deficit derived from such Central and Eastern
European Members and deprive the U.S., Japan, Australia, and Canada of that
deficit? Would the U.S. then have to rely primarily on Russia's emissions deficit in
order to derive any of the benefits of trading?
A: The impact of an expanded EU on any emissions trading provisions is dependent on
the level of the target, and the restrictions placed on a trading regime. If country targets
would BUT En 5x21
or trading restrictions were set so that they required "real" reductions, no specific benefit
would necessarily accrue to the European Union, and any reductions would entail real
easy fun having
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costs. Neither is it clear that the European Union would necessarily claim all the benefits
of an expanded membership - emissions trading should in theory equalize the price of
reducing a unit of emissions regardless of whether it is in Europe or Russia or the United
commes
States. Most analysis does suggests that if the U.S. is to use emissions trading to
En
substantially offset its domestic emissions, even the entirety of the Eastern European
3
country emissions would not suffice; Russia is the only country large enough to
55
accommodate our current levels.-
5
buyer
29. Q: Article 22.3 of the FCCC requires that regional economic integration
organizations must declare the "extent of their competence" with regard to
obligations under the FCCC. Does the U.S. believe that the EU has the competence
to carry out legally binding targets and timetables and to enforce any differentiated
targets for its members if they fail to achieve them?
A: It is not yet clear how the EU competence will be applied in its implementation if any
new obligations under a new legal instrument. We, along with others (e.g., Australia and
Japan) have insisted that the issue of EU competence be made fully transparent and
provisions for compliance be made acceptable to all Parties before we would agree to
allow the EU to undertake its commitments as a single entity rather than individually
through each member state.
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30. Q: The State Department's September 9, 1996, reply to the Committee stated
that the U.S. did not agree to an "EU Bubble in Berlin" and that the U.S. delegation
"successfully opposed including language in the Berlin Mandate which might have
suggested that any country or group of countries could "bubble" in the post-2000
period." The reply then said:
Clearly, the question of "bubbling" with respect to post-2000 commitments is
complex, and one that will be closely scrutinized and carefully considered as
negotiations progress. The Administration has consistently and continuously
consulted with Congress, as well as with U.S. industry and U.S. NGOs, on all
aspects of the negotiations concerning post-2000 commitments and will
continue to do so.
The Administration has not yet held meaningful discussions with this Committee on
the issue of the EU bubbling to "meet target and timetables," its implications for the
U.S., its merits, or its complexities. Given the fact that the negotiations are just
approaching a conclusion in Bonn and Kyoto, when do you plan to consult us on
this aspect of the negotiations?
A: [EGC]
31. Q: Since 1992, the composition of the only "regional economic integration
organization," namely the EU, has grown from 12 to 15 members and several
countries want to expand it further. Under what circumstances would the U.S.
agree to an EU bubble that is or could be expanded?
A: The U.S. has made it clear throughout these negotiations that there is no EU
entitlement to a so-called "bubble" in the Kyoto agreement. Indeed, how a bubble would
operate upon EU expansion is one of the many concerns that we and others (for example,
the Japanese) have raised in connection with the EU proposal.
32. Q: The EU has proposed an amendment to the Convention to provide for a vote
to adopt all future protocols by three-fourths if all efforts at consensus are
exhausted. The proposed amendment would appear to have a retroactive effect for
Kyoto.
a) Under this proposal, is it possible that three-fourths of the FCCC Parties
could vote to "adopt" any Protocol that imposed new obligations for Annex I
and/or non-Annex I Parties and then decide not to deposit an instrument of
ratification, etc.?
H:congressionals\wirth Q's & A's (summer 1997)\Shaefer Q&As.doc
SEP-24-1997 15:41
OES FRONT OFFICE
202 647 0217 F.11915
Schaefer Q's & A's
13
b) Does the U.S. support such an amendment to the Convention?
c) Has the U.S. changed from its June 19, 1996, response to this Committee in
regards to any of these matters? Would the Administration agree to a
resolution of one of these matters, namely voting on a protocol, without a
resolution of the financial and budget matters for both the Convention and
all future protocols?
A: (a) Yes. Under the current Climate Convention, as well as this proposal, Parties could
adopt an agreement (pursuant to whatever rule of procedure governs adoption) and then
not ratify.
(b) We have substantial concerns about the provisional application aspect of the proposal.
In effect, it amends the treaty without waiting for the Parties to ratify the amendment.
(c) [Unsure of response to Committee in July 1996 - must cross-reference.]
33. Q: Does the Administration intend that any international emission trading
program would apply in the same way and to the same extent to public and private
entities internationally and in the U.S.? For example, would it apply to local
governments and to defense or other agencies of each Party and to the emissions of
such entities? What will be the impact on the U.S. Defense Department of an
international, or, for that matter, a domestic, emissions trading program?
A: [Seidel]
34. Q: Greenhouse gases not covered by the Montreal Protocol are not pollutants
within the meaning of the Clean Air Act and are not subjected to the command and
control provisions of the Act or other environmental laws. It is our understanding
that although the U.S. has cited (in a September 9th reply to this Committee)
authority to implement the Climate Change Action Plan with voluntary measures,
the U.S. draft protocol, because it may call for mandatory measures, could not be
given full effect in the U.S. without the enactment of new legislation by Congress.
Do you share that understanding? Is the Administration considering a domestic
emission trading legislative program patterned on the 1990 Clean Air Act?
A: [Seidel]
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SEP-24-1997 15:41
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15
Schaefer Q's & A's
14
35. Q: I understand that the Administration has recently established the White
House Climate Change Task Force, a Deputies Group and an Assistant Secretaries
group. Please explain the role and purpose of each in regards to the development of
the Administration's position and policies for the international negotiations for a
protocol or another legal instrument in 1997 and for the development of
implementing legislation in the U.S. Please identify the members of each group.
Please provide any documents regarding the formation of these groups, their
membership, mission, tasks, and/or assignments.
A: [Seidel]
36. Q: Please provide a table of all contracts, cooperative agreements, grants, and
interagency agreements and any extensions thereof (hereinafter referred to as
"agreements") entered into with any individual, agency, or public or private entity
(foreign or domestic) by or through any federal Department or Agency, including
the Departments of State, Commerce, and Energy, the Environmental Protection
Agency, for the period beginning July 1, 1994 to the present that relates to, or
includes (directly or indirectly) climate change matters or issues of any kind. These
should include matters relating to (a) domestic or international emission trading,
including economic and other analysis of such trading, the administration and
verification of such trading in the U.S. and elsewhere, (b) public outreach, general
and specific public education, grass roots, community outreach, workshops,
(c) transportation efficiency, alternative fuels, transportation generally, utilities,
impact on pollutants like ozone and particulate matter, and (d) any legal analysis of
these matters and of the Convention or of any statutes concerning climate change or
trading. Each table should identify the date of the agreement, the agreement
recipient, the amount of Federal funds, the term, including extensions, a brief
description, the product, and whether it is publicly available, and the status. Please
include with each table the applicable "Statement of Work," including any revision
thereof, for each agreement.
A: [Interagency]
H:congressionals\wirth Q's & A's (summer 1997)\Shaefer Q&As.doc
TOTAL .15
TOMJ
7-25
DO NOT DETACH FROM TRANSCRIPT
RETURN TO:
U.S. HOUSE OF REPRESENTATIVES
COMMITTEE ON COMMERCE
ROOM B-334,
RAYBURN HOUSE OFFICE BUILDING
WASHINGTON, DC 20515
Subject: The Economic and Environmental Impact of
the Proposed International Global
Climate Change Agreement
Hearing date: July 15, 1997
Referred to: Janet Yellen
Testimony given by you before the Committee
appears on the attached typewritten print. Please indicate
corrections, if any, in RED, and return the original within
1 week of receipt.
PLEASE NOTE: Only technical, grammatical, steno-
graphic, and typographical corrections will be accepted.
If supplemental material has been requested for the
record by the Committee, it should be of photographic
quality for reproduction. Please indicate clearly, by page
and line, where material is referenced. A copy of this
information should also be sent directly to the Member
requesting the material. Please supply a data disc of
material and prepared statement if possible.
Thank you.
Joe Patterson,
I
7/30/97
Publications Office
Ph. 225-0430
Reviewed and
made edits of
Janet's testimory
HIF196.030
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1
1
RPTS COLCHICO
2
DCMN HERZFELD
3
THE ECONOMIC AND ENVIRONMENTAL IMPACT OF THE
4
PROPOSED INTERNATIONAL GLOBAL CLIMATE CHANGE
5
AGREEMENT
6
Tuesday, July 15, 1997
7
House of Representatives,
8
Committee on Commerce,
9
Subcommittee on Energy and Power,
10
Washington, D.C.
11
The subcommittee met, pursuant to call, at 1:00 p.m., in
12
Room 2123, Rayburn House Office Building, Hon. Dan Schaefer
13
[chairman of the subcommittee] presiding.
14
Present: Representatives Schaefer, Crapo, Whitfield,
15
Rogan, Shimkus, Bliley (ex officio), Hall, McCarthy, Markey,
16
Pallone, Dingell (ex officio).
17
Also Present: Representative Sawyer.
18
Staff Present: Catherine VanWay, Counsel; Sue Sheridan,
19
Minority Counsel.
HIF196.030
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26
554
Mr. SCHAEFER. Now I would like to recognize the panel,
555
the Honorable Janet Yellen, the Chair of the Council of
556
Economic Advisors; and, of course, the Honorable Tim Wirth,
557
Under Secretary of Global Affairs, U.S. Department of State.
558
We will start with you, Dr. Yellen.
559
STATEMENT OF JANET YELLEN, CHAIR, COUNCIL OF ECONOMIC
560
ADVISORS
561
Ms. YELLEN. Good afternoon, Mr. Chairman and Members of
562
the subcommittee. I appreciate the opportunity to discuss
563
with you today the economics of global climate change.
564
In his speech to the United Nations in June, President
565
Clinton emphasized that the risks posed by global climate
566
change are real and that sensible preventive steps are
567
justified. That assessment accords with the views of more
568
than 2,300 economists, including 8 Nobel laureates, who
569
signed a statement supporting measures to reduce the threat
570
of climate change.
571
At this time, the administration has not settled on a
572
particular set of policies to reduce greenhouse gas
573
emissions. Instead, the President indicated in his U.N.
574
speech that he intends to engage in discussion with all
575
interested parties, Members of Congress, other elected
576
officials, scientists, economists, business and labor
HIF196.030
PAGE
27
577
leaders, about the problems posed by greenhouse gas
578
accumulations and the costs and benefits of corrective
579
action.
580
This discussion is intended to inform the
581
administration's decision-making process, which will
582
culminate in a U.S. policy position in the international
583
negotiations in Kyoto in December of this year.
584
Now, an important step in this and any policy process is
585
determining the impact a policy will have on the American
586
economy. President Clinton's top priority, since his first
587
days in office, has been revitalizing the U.S. economy,
588
creating jobs and investing in people and technology to
589
enhance long-term growth. And we have made tremendous
590
progress. So any policy the President ultimately endorses on
591
climate change will be informed by his commitment to
592
sustaining a healthy and robust economy.
593
In my testimony today, I would like to describe some of
Le
the
594
the principe lessons that emerge from now voluminous
595
literature, much of it relatively recent, on the economic
596
impacts of policies to address global climate change.
597
Before I begin my discussion of the economic literature,
598
though, I would first like to acknowledge the uncertainties
599
associated with estimating both the costs and the benefits of
600
reducing greenhouse gas emissions. Just to provide some
601
perspective, as you all know, it is difficult to gauge
HIF196.030
PAGE
28
602
exactly what impact the balanced budget agreement will have
603
on the U.S. economy's growth rate, levels of employment,
604
interest rates, consumption and so forth over the next 5
605
years. But when it comes to global climate change, it is
606
orders of magnitude more difficult to gauge the effects of
607
policies on the economy. We are concerned with not just the
608
next 5 years and not just the American economy, but, rather,
609
we are concerned with economic and physical processes that
610
operate globally and over decades, even centuries.
611
Both the costs and the benefits of climate protection are
612
very difficult to quantify or predict with any certainty at
613
all. In short, if anybody tells you that he or she has the
614
definitive answer as to the costs and benefits of particular
615
climate change policies, I would suggest that you raise your
616
collective eyebrows.
617
Having said that, let me turn to the economic literature
618
and try to summarize what I think we know so far about this
619
difficult topic. The economic literature includes estimates
620
using many different models to evaluate numerous alternative
621
emission reduction strategies. If fact, because there are so
622
many different models, economists initially faced huge
623
difficulties in comparing results. To solve that problem and
624
thereby enable meaningful comparisons, many economists have
a
625
calibrated the various models by performing some standardized
626
simulation. Specifically, they have assessed the
HIF196.030
PAGE
29
627
consequences of stabilizing greenhouse gas emissions at 1990
628
levels by 2010 or 2020.
629
Within the administration, a staff-level working group,
630
dubbed the Interagency Analysis Team, has attempted to
631
estimate some of the economic implications of climate change
632
policies. What they did was they took the emissions
633
scenarios most often used in the economic literature, and
634
that is stabilizing emissions at 1990 levels by 2010, they
635
took that as a starting point for their own analysis.
636
I want to emphasize that this scenario is not, and I
637
reiterate, not administration policy. Instead, it was picked
638
to make comparisons with other models easier. The modeling
639
effort produced some useful lessons, but as we found, and you
640
can see in the peer reviewers' comments, it also suffered
641
from serious shortcomings. Both the lessons and the
642
shortcomings point to one clear conclusion, which is that the
643
effort to developea model of models that are going
644
torgive initive answers as to economic impact of any
645
given climate change policy is futile? Rather, we are left
646
with a set of parameters and relationships that influence
647
estimates of the impacts.
648
I understand that a draft of the staff analysis was given
649
to the subcommittee this morning, along with the reviewers'
650
comments, and I would be happy to answer any questions that
651
you may have about that modeling effort.
HIF196.030
PAGE
30
652
I would like to draw, however, in the remainder of my
653
testimony, some lessons. Modeling efforts both inside and
654
outside the administration clearly indicate that economic
655
analysis can do no more than estimate a range of potential
656
impacts from particular policies and highlight how the
657
outcomes depend on the underlying assumptions about how the
658
economy works and the way in which policy is implemented; and
659
I want to just briefly summarize what I think some lessons
660
are that we have learned from the economics literature thus
661
far.
662
First, the magnitude of the costs of reducing greenhouse
663
gas emissions in the various models depend crucially on a
664
number of key assumptions about how the economy works.
665
Essentially, the lesson we have learned the greater the
666
substitution possibilities and the faster the economy can
667
adapt the lower the costs. Second, costs depend-critically
668
on how emiss: on reduction licies lemented, and it
669
just boils down to this: If we do it dumb, it could cost a
670
lot, but if we do it smart, it will cost much less, and
671
indeed it could produce net benefits in the long run.
672
The over 2,300 signatories of the economists' statement
673
argued that any global climate change policy should rely on
674
market-based mechanisms. These mechanisms allow for
675
flexibility in both the timing and in the location of
676
emissions reductions and thereby minimize the costs to the
HIF196.030
PAGE
31
677
U.S. economy. The economists concluded that there are policy
678
options that would slow climate change without harming
679
American living standards, and these measures may, in fact,
680
improve U.S. productivity in the longer run.
681
The third lesson that emerges from the study of economic
that
682
climate protection is the developing as well as developed,
683
countries must be part of the process. While developed
684
countries are responsible for most of the greenhouse gas
685
currently in the atmosphere, developing countries are
686
starting to catch up. Also, the table--the timetable for the
687
inclusion of developing countries is important. The sooner
688
the developing countries face incentives to move away from
689
carbon-intensive energy sources, the less likely it is that
690
they will become dependent on those types of fuels to spur
691
their own economic growth. In short, we know that global
692
problems require global solutions.
693
Let me conclude by saying that policies to promote
694
economic growth, create jobs and improve the living standards
695
and opportunities of all Americans have been and always will
696
be the top priority of the President and his administration.
697
In his remarks to the Business Roundtable on global climate
698
change, the President said, quote, "Let's find a way to
699
preserve the environment, to meet our international
700
responsibilities, to meet our responsibilities to our
701
children, and grow the economy at the same time."
HIF196.030
PAGE
32
702
I believe that some of the lessons we have learned from
703
the economic literature will help us to achieve the
704
President's goal.
705
Thank you. I would be happy to answer any questions you
706
may have.
707
Mr. SCHAEFER. Thank you very much, Dr. Yellen.
708
[The statement of Ms. Yellen follows: ]
709
******** INSERT 1-5 ********
HIF196.030
PAGE
41
893
Mr. SCHAEFER. The Chair would note Mr. Sawyer from Ohio
894
is with us. Even though he is not a Member of the
895
subcommittee, he is a Member of the full committee and will
896
be able to ask questions when everyone else is finished.
897
I have a couple here that I would kind of like to start
898
with. First of all, I am sure you both are familiar with
Argonne
899
this particular study. This is the one by the Argon National
900
Laboratory, and that was just released not too long ago, and
901
it went into the impact of six U.S. industries and what the
902
effect would be on these industries.
903
I would ask you, Dr. Yellen, could you tell me what
904
energy prices were assumed in this study? And this would be
905
for the record. And what was the result of this particular
906
study, in a synopsis?
907
Ms. YELLEN. I believe the energy price assumptions
908
Mr SCHAEFER. Turn your microphone on.
909
Ms. YELLEN Sure.
910
Mr. SCHAEFER. Thank you.
911
Ms. YELLEN. I believe the energy price assumptions that
912
were used were taken from an earlier analysis, is that from
913
1996. They would be akin to the kinds of assumptions that
914
you see in the base case, I believe, in the paper, the staff
915
paper that was released. They entailed large and implicit
916
increases in the price of carbon and were based on the
917
assumption of no flexibility in implementation. all the kinds
HIF196.030
PAGE
42
This flexibility is what
918
of things that I emphasized and Under Secretary Wirth
919
emphasized that we would be seeking to achieve and know would
920
greatly reduce the costs of implementing these policies.
921
Mr. SCHAEFER. For the record, could you quote those
922
prices for us, please?
Argonna stude
923
Ms. YELLEN. The price increases that were in the Argon?
924
Mr. SCHAEFER. Yes, ma'am.
925
Ms. YELLEN. I believe, if I have this right, that there
926
were several scenaries. I believe there were two scenarios.
927
In the first scenario, in the United States, there was anD
and
928
increase in the pricego oil in 2010 of $122.of coal of
929
Mr. SCHAEFER. $122 per what?
930
Ms. YELLEN. Per metric ton of oil equivalent and of coal
931
of $106 per metric ton. Those were some of the assumptions.
932
There were several scenarios, I believe, two scenarios.
933
Mr. SCHAEFER. Yes. Let me get this straight now. Isn't
934
one scenario by the year 2010 to be 10 percent under 1990
935
levels, another one to be 1990 levels, and another one to be
936
10 percent above 1990 levels? I think that is in the draft
937
analysis; is that correct?
938
Ms. YELLEN. I will check this out, if I might, and
939
submit it for the record, try to reconcile these two sets of
940
assumptions and get back to you, if I can.
HIF196.030
PAGE
43
941
[The information follows: ]
942
******** COMMITTEE INSERT ********
HIF196.030
PAGE
44
943
Mr. SCHAEFER. But the way that I am understanding it and
944
reading it is if we go 10 percent below 1990 levels, we are
945
talking about $200 increase per ton; and if we go to 1990
946
levels, it is around $100; and if we go 10 percent above 1990
947
levels, it is 50 or approximately. I guess what I am trying
948
to get at is, number one, has the administration adopted
a
949
policy on which one they are going to go for? And the key is
950
where is it going to kick in that we start losing industries
951
out of this country or having them fold?
952
Ms. YELLEN. Okay. I would like to reiterate what I said
953
in my opening remarks, which is that the administration has
954
not formulated a policy at this time with respect to
955
timetables or targets, that the report that we have released
956
to you today is a staff analysis and its focus on, as a
957
starting point, 1990 emissions levels by 2010 did not reflect
958
a policy choice. This is a work that is a draft. It shows
959
you where the team is at this point. This is work that we
960
that the staff will be concluding, because in a sense,
961
when you look at the reviewers' comments, you see that this
962
was not successful.
963
I believe ultimately (this is futile vexercise to try to
964
deriverse of precise forecasts as to what will Thappen to
965
energy prices? The staff report, therefore, focused on a
966
baseline scenario that is not a policy recommendation of the
967
administration. It was for them a starting point so that
HIF196.030
PAGE
45
968
they could calibrate their models, begin talking the same
969
language and make sure that they were on the same page. I
970
believe the ultimate objective was to get a sense of
971
confidence in this set of models so they could later be used
972
to analyze policies that were under contemplation.
973
I think, as you can see from what the reviewers have said
974
about these models and what we have learned from this
975
exercise, is there is sense in which this is futile and as
976
we formulate a policy, I think we will have to rely on not
977
this set of models, but input from many sources, including
978
the broad economics community, many kinds of economic
979
analysis and input from outside of economics.
980
So I want to emphasize, this kind of scenario that is the
981
baseline in this report and was the starting point in the
Argome
982
Argon Lab study is not the policy of the administration.
983
Mr. SCHAEFER. I am very pleased to hear that. The
984
question, I guess, I have is: When is the administration
985
going to have a policy so that we will know it before Kyoto?
986
Ms. YELLEN. Well, we are involved in a process of
987
attempting to engage in discussions, as I mentioned, with
988
Members of Congress, with business leaders, with labor
989
leaders, and I think we need input from all of those
990
constituencies as we try to formulate a policy and try to
991
come up with something that would put us on the path in a
992
sensible way toward reaching the goal of beginning to deal in
HIF196.030
PAGE
46
993
a meaningful way with buildup of greenhouse gas, but in a
994
manner that will be economically sensible.
995
Mr. SCHAEFER. As I can recall in the 104th Congress, it
996
was stated at this time that this was going to be
997
forthcoming, and you have only like less than 6 months now,
998
and we still don't have it. And I think that that is what
999
the committee is basically concerned with.
1000
I have used up my time. I am going to turn to the
1001
gentleman from Michigan, Mr. Dingell, for whatever questions
1002
he might have.
HIF196.030
PAGE
47
1003
RPTS STALLSWORTH
1004
DCMN KRISTOFFERSEN
1005
Mr. DINGELL. Mr. Chairman, thank you.
1006
Mr. Chairman, I would like to welcome my old friend Mr.
1007
Wirth back, a valuable member of this committee. It is good
1008
to see him.
1009
Ms. Yellen, we thank you for being with us, too.
1010
Ms. Yellen, I found your statement to be very interesting
1011
and very helpful. You indicate that the administration is
1012
not settled on a particular new set of policies to reduce
1013
greenhouse gas emissions; and there I am quoting. This would
1014
be good news. But I do have some concerns about where the
1015
administration has been headed in the post-Berlin
1016
negotiations, and I hope you can help me clarify this
1017
problem.
1018
Are you familiar with the so-called Geneva declaration of
1019
last July in which the United States concurred with the
1020
statement instructing the developed nations to accelerate
1021
negotiations on the text of a legally binding protocol or
1022
other legal instrument in time for Kyoto, which would
1023
include, for developed countries alone, quantified, legally
1024
binding objections for emission limitations and significant
1025
overall reductions within specified time frames such as 2005,
1026
2010, and 2020?
1027
Ms. YELLEN. I am familiar with the--
HIF196.030
PAGE
48
1028
Mr. DINGELL. Now, are you familiar with the statement
1029
that Ms. Claussen, who was then a part of the United States
1030
negotiating team, made on July 18, 1996, stating that the
1031
United States would like to wholeheartedly endorse this
1032
excellent declaration?
1033
Ms. YELLEN. I am not familiar with that statement.
1034
Mr. DINGELL. Mr. Wirth, she did that, did she not?
1035
Mr. WIRTH. She did. I think she probably did that at my
1036
urging, Mr. Chairman.
1037
Mr. DINGELL. Now, let's go a little further here. Ms.
1038
Yellen, are you aware of the draft text the United States
1039
submitted in January to the U.N. in which we proposed a cap
1040
and trade emissions systems to facilitate new commitments
1041
applying solely to the developed nations which are premised
1042
on specific emissions reduction obligations assumed by those
1043
countries?
1044
Ms. YELLEN. Yes.
1045
Mr. DINGELL. Now, Ms. Yellen, are you telling us now
1046
that the administration either no longer stands for these
1047
particular policies or does stand for these particular
1048
policies? I am not clear. What is the position of the
1049
administration? Is the administration proposing a plan which
1050
will cause the United States to assume responsibilities that
1051
will not be assumed by the developing nations?
1052
Ms. YELLEN. Well
HIF196.030
PAGE
49
1053
Mr. DINGELL. I mean, that is a simple question. It only
1054
requires a yes or a no.
1055
Ms. YELLEN. There are very few things so simple as to
1056
require a yes or no answer.
1057
Mr. DINGELL. I have enormous respect for you, and I know
1058
that you are an economist that can simplify these difficult
1059
questions for me. So a yes or no will help me understand
1060
this.
1061
Ms. YELLEN. The administration regards participation,
1062
meaningful participation, as Under Secretary Wirth emphasized
1063
in his statement, of developing countries to be a very
1064
important aspect.
1065
Mr. DINGELL. Maybe you and Mr. Wirth can help me. I
1066
guess Mr. Wirth is coming back to have it rest in his lap.
1067
Mr. Wirth, is it the position of the United States that
1068
we will assume responsibilities as a developed country that
1069
will not be assumed by the undeveloped countries?
1070
Mr. WIRTH. Well, it depends on when, Mr. Chairman.
1071
Mr. DINGELL. Well, no, no, no. Are we going to assume
1072
responsibilities that developing countries are not going to
1073
accept at the same time?
1074
Mr. WIRTH. At the initial point, that is the case.
1075
Mr. DINGELL. Pardon?
1076
Mr. WIRTH. At the initial time, that is the case. We
1077
are the developed countries.
HIF196.030
PAGE
50
1078
Mr.
DINGELL.
So the United States--
1079
Mr. WIRTH. And we have been, if I might, Mr.
1080
Chairman- if I might, Mr. Dingell--
1081
Mr. DINGELL. All I want to do is get the answer to my
1082
question, because I only have a little time, Mr. Wirth. You
1083
and I are good friends, and I am sure we will want to discuss
1084
it in some private capacity at a different time.
1085
Mr. WIRTH. And we have in the past, and I look forward
1086
to it, Mr. Chairman.
1087
Mr. DINGELL. Now--and I thank you. So werare going to
1088
then accept responsibilities at least in the early stages,
1089
that will not be accepted by other countries.
1090
Mr. WIRTH. That is correct.
1091
Mr. DINGELL. Very good.
1092
Mr. WIRTH. By the developing world. Only the
1093
Annex--so-called Annex I countries will have a defined set of
1094
emissions responsibilities.
1095
Mr. DINGELL. That means the answer is yes.
1096
Mr. WIRTH. The specifics. That is right.
1097
Mr. DINGELL. Now, Ms. Yellen, I note that the President
1098
has had an increased involvement in the climate change issue.
1099
And as you mentioned in your testimony, there will be a White
1100
House conference on the subject later this year. I am
1101
delighted to know that, as you see it, the process is, quote,
1102
intended to inform the administration's decision-making
HIF196.030
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51
1103
process, close quote, as we head towards Kyoto. Is that
1104
right?
1105
Ms. YELLEN. That is correct.
1106
Mr. DINGELL. Why are we getting the administration
1107
informed before we finally settle on a position? Or, rather,
1108
why are we getting the administration informed after we have
1109
settled upon a position?
1110
Ms. YELLEN. We haven't settled on a position.
1111
Mr. DINGELL. Well, our position, Mr. Wirth tells me, is
1112
that we will accept responsibilities that the developing
1113
countries will not be accepting, at least for some time in
1114
the distant future. Isn't that right?
1115
Ms. YELLEN. Well, certainly our position with respect to
1116
targets and timetables is something that is not settled. We
1117
have, in the manner that Under Secretary Wirth just
1118
explained, made it a focus to bring the developing countries
1119
into an agreement. And the flexibility provisions in terms
and
1120
of International trading, joint implementation, 'A multiyear
are
1121
emissions budgetsy these have been flexibility provisions
1122
that have been part of the--
1123
Mr. DINGELL. Perhaps you could help me. Should I give
1124
you and Mr. Wirth time to debate this question out amongst
1125
yourselves? He seems to be of the view that we are accepting
1126
responsibilities that the less developed countries and
1127
developing countries are not accepting. ; In other words, we
HIF196.030
PAGE
54
1178
constituted up to this time?
1179
Mr. WIRTH. That is up to the leadership of the House and
1180
the Senate, Mr. Chairman. And I can't speak to what the
1181
House leadership or the Senate leadership has done.
1182
Mr. DINGELL. Now, Mr. Wirth, I am delighted to see your
1183
new--your emphasis in your testimony on developing nations.
1184
You note--and I quote--the issue is not whether developing
1185
countries, especially the big and rapidly developing ones,
1186
take on quantified commitments or limit or reduce their
1187
emissions of greenhouse gases. Clearly, it will be
1188
impossible to abate the threat of climate change unless they
1189
do.
1190
Now, Ms. Yellen, what kind of economic advantage does a.
1191
country that doesn't take on these kinds of responsibilities
1192
get over a country that does? Don't they get a huge
1193
advantage in terms of costs? They don't have to impose
1194
controls. They don't have to use special high-cost fuels.
1195
They can do all kinds of wonderful things to achieve the
1196
cheapest possible production, can't they?
1197
Ms. YELLEN. Well, I would simply say it depends on the
1198
way in which an agreement is implemented, and--
1199
Mr. DINGELL. Well, there will be, according to what we
1200
know, no imposition of requirements upon the developing
1201
countries at all, will there?
1202
Ms. YELLEN. Not initially.
HIF196.030
PAGE
61
1353
together. As in the framework convention on climate change,
1354
all of the Annex I countries would have the same
1355
requirements, whatever those may be, that are agreed upon in
1356
Kyoto. We have also proposed a new group called the
1357
so-called Annex B countries--
1358
Mr. DINGELL. Who are they?
1359
Mr. WIRTH. -which would be the--well, we believe those
1360
are the countries that are growing very rapidly and moving
1361
into close to developed countries.
1362
Mr. DINGELL. Is China in them?
1363
Mr. WIRTH. Maybe those that had joined the OECD.
1364
Mr. DINGELL. Is China going--
1365
Mr. WIRTH. Well, initially, the ones that have joined
1366
the OECD, I believe, are Korea and Mexico.
1367
Ms. YELLEN. I believe so.
1368
Mr. WIRTH. Is that right?
1369
Ms. YELLEN. Korea and Mexico.
1370
Mr. DINGELL. What are they going to be bound to do?
1371
Mr. WIRTH. Well, we are proposing that there be a new
1372
category of countries of those that have matured more quickly
1373
and that they have to assume no responsibility-- to assume
1374
greater responsibilities than those in the developing world
1375
that have not reached that level.
1376
Mr. DINGELL. In point of fact--
1377
Mr. WIRTH. China aspires, for example, to OECD status, I
HIF196.030
PAGE
63
1403
at some future time to negotiate further changes, which might
1404
then bind them to limit the emissions of their greenhouse
1405
gases.
1406
Mr. WIRTH. Well, I don't believe that is either awkward
1407
or begging. I think that it is a reflection of reality. And
1408
the reality is that the developed world has put most of the
1409
greenhouse forcing gases up into the atmosphere. We have to
1410
take first responsibility.
1411
Mr. DINGELL. Mr. Wirth--
1412
Mr. WIRTH. We also have to develop, as outlined in my
1413
testimony--
1414
Mr. DINGELL. Mr. Wirth, that is a fine answer, but it is
1415
not to my question. My concern is that the United States is
1416
committing itself to a course of action which is going to
1417
pose huge economic constraints on our competitiveness and
1418
upon our ability to trade and to produce and to survive in an
1419
enormously competitive world.
1420
Now, Ms. Yellen, can you tell us, if you were negotiating
1421
out something, would you forget the facts after you had
1422
essentially laid out the framework of the agreement? Is that
1423
a good way to negotiate?
1424
Ms. YELLEN. Well, as I have emphasized, the policies
1425
certainly with respect to timetables and targets are not
1426
settled; they are under debate. We want to hear from lots of
1427
constituents. Nothing is settled about that, and there will
HIF196.030
PAGE
64
1428
be considerable analysis to ensure that whatever time tables
1429
and targets are adopted--
1430
Mr. DINGELL. Analysis?
1431
Mr. WIRTH. --are sensible.
1432
Mr. DINGELL. The agreements? The agreements that we had
1433
last year were that the information was going to be produced
1434
to this committee forthwith. It is almost a year since that.
1435
But a major part of the agreements have already been
1436
completed, and that is the structure of the treaty and who is
1437
going to be bound to do what.
1438
The United States is going to be bound to produce legally
1439
binding legislation here in the Congress which will reduce
1440
the level of emissions of greenhouse gases. There is no such
1441
requirement on the Chinese or the other developing countries.
1442
I am curious why we made these agreements to do these things
1443
before we got this document entitled "The Economic Effects of
1444
Global Climate Change Policies. "
1445
Mr. WIRTH. Mr. Dingell, if I might, first of all, the
1446
differentiation of responsibilities between Annex I and
1447
non-Annex I countries was created in the original framework
1448
convention and climate change that was agreed to by the
1449
Congress in 1992. That is not a creation of something that
1450
we just did. It does reflect reality, but it is not a
1451
creation of something that just occurred or was proposed.
1452
That has been broadly agreed to now for 5 years.
HIF196.030
PAGE
84
1918
longer run.
1919
Dr. Yellen, would you reflect on that statement and any
1920
particulars that you would like to share with this
1921
subcommittee on those potential policies. It seems to me
1922
there is a real fear out there of change and an assumption
1923
that change will be bad. But these 2,300 economists, which
1924
is quite a gathering, eight Nobel Laureates, seem to feel
1925
differently. If you can share some of your thoughts with us.
1926
And if time remains, Mr. Wirth, I wonder if you would
1927
reflect for us on the fact that the administration has been
1928
assessing the costs of climate change policies for over a
1929
year, what you were finding with regard to those. And in
1930
light of the recent assessment by the World Resources
1931
Institute, does it confirm some of those findings as well?
1932
Thank you.
1933
Dr. Yellen.
1934
Ms. YELLEN. Yes, I am happy to have a chance to respond
1935
on the 2,300 economists. I think the view that they have
1936
developed is that climate change poses real risks to the
1937
economy. We can't quantify or even describe exactly what the
1938
implications for the U.S. or other areas would be with any
1939
precision, but there is a real risk with serious possible
1940
outcomes, and it justifies taking out, as they have put it,
1941
sometimes, an insurance policy.
1942
I think an insurance policy would be a set of commitments
HIF196.030
PAGE
85
1943
to reduce greenhouse gas emissions and implement policies
1944
that would, at this time, send credible signals to the
and
1945
private sector that would lead to the development of new
1946
technologies and the implementation, particularly as capital
1947
stock turns over. and the opportunities are there to make
1948
real decisions about what sorts of energy should be used in
and
1949
new projectsy to send signals that would result in the right
1950
choices being made that would have payoffs for decades into
1951
the future.
1952
An analysis that many economists have done suggests that
1953
there are a set of policies that would produce that kind of
1954
technological change. They would stimulate investment.
1955
One of the reasons that productivity growth could rise is
1956
because some of the policies that have been under
1957
consideration in the economics community would provide
1958
stimulus to investment, and more rapid investment would have
1959
a payoff ultimately in terms of higher growth. And one can
1960
see that in many of the analyses, both in this repor the
1961
staff report that we released today, and in a much broader
1962
range of economic literature.
1963
Ms. MCCARTHY. Well, I will look forward to reviewing
1964
that staff report, because I do think there is much to be
1965
gained, many positive examples that are probably contained
1966
therein. I was very much struck, with my own State when we
1967
chose to turn to alternative fuels, and other sources of
HIF196.030
PAGE
88
2018
clean air debate for 15 years, and we were able to come up
2019
with a solution that had a major impact on clean air.
2020
It is a perfect domestic example, not a perfect parallel,
2021
but a very good example for where these kinds of flexible
2022
economic interests allow us to make major steps on the
2023
environment at very, very lowered costs, lower, by the way,
2024
than the modelers had suggested. Miraculous.
2025
Ms. YELLEN. Well, I think that you have hit really the
2026
important points in your answer. There are better and worse
2027
ways to do this. And one of the results the staff modelling
2028
paper, if it were released--you know, we don't believe there
2029
can be a single model think we are at the end of the road
2030
on that exercise
2031
But if I look back on it and say, what do you learn from
2032
that exercise, and what do you learn from the study of the
2033
World Resources Institute study that Under Secretary Wirth
2034
just mentioned- which I would also commend; it is an
2035
excellent piece of work--it is that there are ways and of doing
2036
this that really are market friendly, flexible, lower the
2037
cost. And I think that those features are flexibility over
2038
time, flexibility over places where emissions reduction is
2039
done, and, as we know from our own experience in the acid
2040
rain program and other uses, for example, the kind of thing
2041
that many of the economists have in mind would be the use of
2042
tradable permits.
HIF196.030
PAGE
89
2043
Now, the administration has no policy, but that is the
2044
kind of market-friendly policy that I think provides
2045
opportunities to lower the cost, and, as the WRI study shows
2046
there can be ways of doing this - - and the economists recognize
2047
this - that produce benefit
2048
So, for example, if some method were chosen--and
2049
economists tend to focus on this axpermit system that
2050
generated some revenues initially, they could be recycledmand
2051
it would provide an opportunity to reduce taxes that we think
2052
interfere with the incentives to work and to save and to
2053
invest And that is the kind of opportunity that creates
2054
growth.
2055
Now, again, the administration hasn't devised any
2056
domestic policy at all for how this would be implemented, but
2057
the work of the economists and the work that is summarized in
2058
that paper shows that there are opportunities here and that
2059
this can turn itself into sensible, practical, pragmatic
2060
policies and end up with a win for the economy.
2061
Mr. SCHAEFER. Would the gentlelady yield just for a
2062
second?
2063
Ms. MCCARTHY. Certainly, Mr. Chairman.
2064
Mr. SCHAEFER. How have the developing countries
2065
responded to this credit or the trading issue?
2066
Ms. YELLEN. I am going to turn that over to Mr. Wirth.
2067
Mr. WIRTH. Well, without as much enthusiasm as we would
HIF196.030
PAGE
90
2068
like.
2069
Mr. SCHAEFER. That is what I thought.
2070
Mr. WIRTH. Both to trading or joint implementation.
2071
Mr. SCHAEFER. I am not saying it is a bad idea. I think
2072
it is a good.
2073
Mr. WIRTH. I think it is a good idea. I think that
2074
there are a couple of reasons for that. One, they are
2075
holding back until they see what we do in terms of our
2076
overall commitment on targets and timetables. So they are
2077
not going to do anything in our direction.
2078
Second, I don't think that many of them have understood
2079
what is meant by "joint implementation" or by "emissions
2080
trading" as we have proposed them. I don't think that they
2081
understand that. They don't understand that this is a way of
2082
significant transfer of technology, for example, which is
2083
exactly--as we talked a little bit about China today--that is
2084
what the Chinese want. They are going to be building
2085
hundreds of very, very large power plants, and they would
2086
much rather have our cleaner technology than their dirtier
2087
technology. And this becomes a way for us all to work
2088
together on that kind of common problem.
2089
Mr. SCHAEFER. I thank the gentlelady.
2090
Ms. MCCARTHY. May I inquire further, Mr. Chairman?
2091
Thank you very much. I appreciate very much your
2092
comments with regard to flexibility, market-friendly
HIF196.030
PAGE
91
2093
policies. Certainly fiscal policies become a key component to
2094
that. While guiding my commission in the State of Missouri, I
2095
was chairing the Ways and Means Committee there and made the
2096
very strong link to sound fiscal policy and sound
2097
environmental policy turning into good economic policy.
2098
So I think that should be something we keep in mind as we
2099
go forward on this and certainly look to policies that we
2100
might set here at the Federal level to comply with the
2101
international efforts. I wanted to ask you about these
2102
models and the flexibility that you mentioned.
2103
Can we expect precise answers from climate models, or
2104
should we basically take a look at those as approximate
2105
guidelines for the future? How precise can they be? I think
2106
that is an area where we run into problems when we look to
2107
these charts and graphs and these fine reports and don't know
2108
quite how to use them.
2109
Ms. YELLEN. I think if I leave you with any message
2110
today at all, it should be that we should not place our
2111
reliance on any particular model or even a large range of
2112
models and that attempting to find precisi on with respect to
2113
estimates of GDP change or job changes.or price-changes a
2114
futile exercise. That is the reason that we are issuing the
2115
staff paper in its current state.
2116
And we are not going to continue in any search for
2117
perfection here, but there are a lot of models. If you look
HIF196.030
PAGE
92
2118
at the reviewers' comments, you will see that each model has
2119
its strength, each model has weaknesses. There are things
2120
that none of the models that our staff looked at took into
2121
account that we know to be important. Indeed, I don't think
2122
there is any model at all out there that takes into account
2123
in the analysis of global climate change all of the factors
2124
that could be important.
2125
So I don't think we should be looking for truth here in
2126
the form of a single set of numbers. As we go forward,
2127
though, I think the models, what were economic analysis, just
2128
more generally, do offer us some insights.
2129
For example, we know without needing to look at a model
2130
that market-friendly flexibility policies of the kind that we
2131
have both emphasizedy of course they are going to lower the
2132
cost or raise the benefit of any policy that we would put
2133
into effect.
2134
We know that if you want to do something efficiently
then
2135
using markets, if we are going to reduce emissions, trying to
2136
make sure that the units of emissions that we reduce are the
2137
ones that are least costly to emit, that The firms that are
2138
doing that, or the individuals, are the ones that would bear
2139
the smallest cost, not the highest cost, that the countries
2140
that do it, the real emissions reductionsy are the ones that
2141
can do it at lowest cost, not at highest cost; and when we
2142
think about flexibility, over time, that we reduce emissions
need to
HIF196.030
PAGE
93
2143
at the times when it is least costly rather than most costly.
2144
Now, the truth is, we don't need any economic models at
2145
all to know that that is the case. This is standard
2146
economics that every student of economics learns in an
2147
elementary course. What our own exercise and the other
2148
exercises that have been done throughout the economics
2149
professions show us, they give us a rough handle on how much
2150
difference it could make. And, again, I don't want to
2151
quantify anything here, I think it is a mistake, but you can
2152
just see, if you look through the report, this is not a small
2153
difference, these flexibility issues) this makes a big order
2154
of magnitude difference in terms of how much it impacts firms
2155
in our economy.
2156
Ms. MCCARTHY. Thank you, Dr. Yellen and Mr. Wirth.
2157
Mr. Chairman, thank you for indulging a new member of the
2158
committee with an extension of time.
2159
Mr. SCHAEFER. The lady asks some very good questions.
2160
The gentleman from Illinois, Mr. Shimkus.
2161
Mr. SHIMKUS. Thank you, Mr. Chairman.
2162
Mr. Wirth, when we measure global temperature with a
2163
satellite, what do we find?
2164
Mr. WIRTH. It depends on what the satellite is
2165
measuring.
2166
Mr. SHIMKUS. As far as global temperature in the past 50
2167
years.
HIF196.030
PAGE
96
2218
up and walk you through, you know, the details of
2219
this.
2220
Mr. SHIMKUS. We are always open to hear, obviously, both
2221
side of the issue and look forward to working with that.
2222
Obviously, it is a major concern.
2223
Dr. Yellen, from an economist's point of view where do
2224
we spend money best A billion dollars to eliminate 001
2225
percent of emissions from U.S. factories or the same billion
2226
dollars to the clean up 10 percent of emissions in developing
2227
nations?
2228
Ms. YELLEN. You know, it seems to me that in pursuing
2229
any kind of emissions reduction target, what we want to try
2230
to achieve is to find a mechanism where that can be done at
2231
the lowest possible cost, and it could be the United States,
2232
it could be Europe, it could be developing countries.
2233
Within the United States, it could be one industry or one
2234
firm or another industry. And the virtue of a market
2235
mechanism is that it creates the kind of incentive. Domestic
2236
trading of permits, for example, creates the set of
2237
incentives domestically; international trading,
2238
internationally; joint implementation with developing
2239
countries outside Annex I. These mechanisms create a way of
2240
having that reduction done wherever it is cheapest. It is
2241
allowing the market to work. So that if there is a firm in
2242
the United States that would find it extremely difficult and
HIF196.030
PAGE
97
2243
very costly to reduce emissions, it doesn't make sense to ask
2244
that firm to do it when there is another firm, that might not
2245
face such a constraint, that can do it very cheaply.
2246
Mr. SHIMKUS. And my point is not just within our own
2247
borders but across national borders. That is why I am
2248
interested in the joint implementation and emissions training
2249
aspect--
2250
Ms. YELLEN. It makes a lot of sense.
2251
Mr. SHIMKUS. --if we are all in the same boat together,
2252
which is the argument.
2253
Mr. WIRTH. Absolutely.
2254
Mr. SHIMKUS. I was also interested in the comments on
2255
subsidies, reducing subsidies internationally And if I can
2256
respond to what I thought was-what I heard was that if you
2257
eliminate the subsidies, power will become more expensive, so
2258
people will not consume as much power, thus alleviating one
2259
of the problems in the developing nations, which runs
2260
contrary- which I thought was alluded to earlier--which kind
2261
of runs contrary to the other debate that we are having here,
2262
which is deregulating the utility industry here in the
2263
Nation, in which we say we take away the subsidies and we
2264
allow the industries to compete. We are going to have lower
2265
cost and probably the higher consumption of power across the
2266
board nationally.
2267
So I mention that because I don't know if that
HIF196.030
PAGE
98
2268
argument--would you comment on that? I guess the best thing
2269
is to comment on that. I think the bringing down of
2270
subsidies and allowing competition nationally will
2271
allow--internationally, and of course in the developing
2272
nations, which is what was the premise, would encourage more
2273
utility usage.
HIF196.030
PAGE
99
2274
RPTS COLCHICO
2275
DCMN PARKER
2276
[3:05 p.m. ]
2277
Ms. YELLEN. I think one's normal view in a market system
2278
is that when markets work prices come down. That is
2279
beneficial to consumers and we end up with a system where
2280
that the prices that consumers or firms pay for something
2281
reflect the true cost to society of using that resource.
2282
So the kinds of restructuring of electricity that are
2283
discussed in the United States, I think, are meant to produce
2284
a more competitive industry where the costs of electricity
2285
are more reflective of the cost to society of producing that.
2286
And I think that is a good system as far as it goes.
2287
What we recognize here, though, is that the use of fossil
2288
fuels, the burning of fossil fuels, does produce
2289
environmental damage and that we need to find some way of
2290
addressing that, and that could be certainly in economic
2291
models--again, the administration has no policy, but that the
2292
cost of using those fuels, whether it is electricity or gas
2293
or coal or whatever, should be somewhat higher to reflect the
2294
adverse effects that using those fuels have on the
2295
environment.
2296
And so I think it cuts both ways.
2297
Mr. SHIMKUS. The last question, this one to Mr. Wirth,
2298
is there a provision in the agreement that would give
HIF196.030
PAGE
103
2374
that we could take to ameliorate them?
2375
Mr. MARKEY. What would be the benefits of taking the--I
2376
have already pointed out the benefits in that my home's value
2377
would go up.
2378
Mr. WIRTH. The Malden Yacht Club.
2379
Mr. MARKEY. Yes.
2380
Mr. WIRTH. I think that as we look at the--for
2381
example--let me do this. Let me ask Dr. Yellen, who is the
2382
economist in our midst, may be the most appropriate to
2383
comment on the economic sides of this.
2384
Mr. MARKEY. Okay. Dr. Yellen.
2385
Ms. YELLEN. On some of the economic benefits. Well,
2386
first, I would see the development--
2387
Mr. MARKEY. What is the cost of inaction as opposed to
2388
the cost of action? We have had a lot of discussion about
2389
the cost of action. Now, how about the cost of not doing
2390
anything?
2391
Ms. YELLEN. Well, I think the cost of inaction is that
2392
we will fail to take the steps now sooner to develop the
2393
kinds of new technologies that would be very useful in
2394
reducing our reliance on fossil fuels. By waiting to take
2395
those steps, we will, for example, have new plants built
based
2396
with making choices that would not be efficient if we were
2397
to begin to take some credible steps now. And when we
2398
finally decided later on that it was important for all of the
HIF196.030
PAGE
104
2399
reasons, all of the environmental reasons, so that your home
2400
doesn't become beach front later on to take steps, we would
2401
find that we had waited to act until a time when it was
2402
unduly expensive.
2403
So taking actions in advance to begin to buy an insurance
2404
policy and move us on the right road and acting in a timely
2405
fashion ultimately makes it less expensive to address a
2406
problem that we believe is real and I think that the
2407
scientific evidence supports as a genuine problem.
2408
Mr. MARKEY. One of the goals should be, of course, that
2409
we have energy-saving technologies, for example, that we can
2410
adopt more efficient renewables.
2411
As we debate the electricity restructuring legislation
2412
before this committee this year, what recommendation would
2413
you give to us with regard to the percentage of renewables
2414
that we should build into the portfolio of utilities as they
2415
are allowed out into the competitive retail electricity
2416
marketplace?
2417
Ms. YELLEN. I don't have a particular recommendation to
2418
give you. Electricity restructuring is under consideration,
2419
and I think that they--
2420
Mr. MARKEY. Would you recommend that there be--would you
2421
recommend that we, in fact, include some renewables
2422
portfolios so that this one-third of this utility sector
2423
does, in fact, have an agenda that we would give it so that
HIF196.030
PAGE
105
2424
it could participate in the changeover from the fossil era to
2425
the renewable?
2426
Ms. YELLEN. Well, I don't have a particular
2427
recommendation today that I want to set before you.
2428
Mr. WIRTH. If I might, Congressman, I was in California
2429
a couple of months ago and the California Public Utility
2430
Commission is talking about developing, as they are
2431
deregulating their rate structure, of developing the capacity
2432
for consumers to purchase so-called green power.
2433
There would be enough pooling of their purchasing power
2434
that that would provide a very, very significant market for
2435
renewables. And without putting that--a certain percentage
2436
of renewables into their rate base or into their new rate
2437
structure, rather putting it on the side of consumer choice
2438
was felt in this discussion to be one in which they thought
2439
they would get a 20--maybe a 20 percent return; 20 percent of
2440
consumers in California would choose to purchase green power,
2441
which would, therefore, develop a not insignificant market.
2442
Mr. MARKEY. So if we establish, for example, a 10
2443
percent minimum, that wouldn't be unduly burdensome?
2444
Mr. WIRTH. Well, that would be something that you all
2445
decide to do. I suspect--knowing the debates on this
2446
committee, I suspect that that would run into very
2447
significant controversy.
2448
I would point out just the choice side as being done in
HIF196.030
PAGE
113
2624 lot of difficulty getting these together, and it is a bit
2625
disingenuous for some of them to say we had not been sharing
2626
this, as we had been sharing the very difficult nature of
2627
putting them together and we did not have an honest result or
2628
an honest model that we could then make available.
2629
Mr. CRAPO. Would the gentleman yield briefly?
2630
Mr. ROGAN. Yes.
2631
Mr. CRAPO. Mr. Wirth, did I just hear you say that the
2632
administration is not going to continue with the economic
2633
analysis?
2634
Mr. WIRTH. No, that is not what I said.
2635
Ms. YELLEN. As we go forward and develop policy,
2636
certainly there will be economic analysis brought to bear on
2637
any policies that would be under consideration. But the plan
2638
would be to use a wide range of tools and bits of anal ysis
2639
and not any single model or any small group of models or
2640
certainly not merely the three models that are di scussed
2641
that report
2642
Mr. CRAPO. So this document that we received today, will
2643
this document- it is a draft document, I understand. Is it
2644
ever going to be finished?
2645
Ms. YELLEN. No it is never going to be finished. It
2646
represents- this committee has asked to see the state of the
2647
administration's analysis. This is the state of the
2648
analysis. As the Under Secretary just explained, the initial
HIF196.030
PAGE
114
2649
desire had been to take work that had been done in various
2650
parts of the administration, to bring together a group that
2651
would have, in essence, a tool kit that it could reliably use
2652
to analyze policies that would be under consideration.
2653
Mr. CRAPO. Well, then are we--is this committee going to
2654
be able to see a final document that constitutes the
2655
administration's economic analysis and its assessment of this
2656
issue at any time?
2657
Ms. YELLEN. I think the answer is that if a policy is
2658
proposed, naturally representatives of the administration
2659
will be ready to testify and explain what they think the
2660
impact of any proposed policy would be on the American
2661
economy. that any policy that is proposed, the President and
2662
the administration would want to feel was a good policy, that
2663
was beneficial for the American economy and we would stand
2664
ready to testify to that effect.
2665
Mr. CRAPO. But I haven't heard you say--
2666
Ms. YELLEN. And explain the logic.
2667
Mr. CRAPO. But I haven't heard you say that there will
2668
be a policy adopted by the administration before.
2669
Mr. WIRTH. Mr. Crapo.
2670
Mr. CRAPO. Yes.
2671
Mr. WIRTH. Let me just make a distinction between the
2672
original question about the specific sort of tool kit or
2673
hardware. We had hoped that there might be a powerful single
HIF196.030
PAGE
115
2674
sort of tool kit in the form of a model. That model would be
2675
the three--EPA had one, DOE had one and DRI was the third.
2676
Ms. YELLEN. DRI is the third.
2677
Mr. WIRTH. DRI is the third, and we attempted to put
2678
those three together and that everybody could kind of plug
2679
their numbers and assumptions and so on into that model.
2680
That was just a tool. We have not been successful in making
2681
that tool work so we will not have a single item that we can
2682
give to anybody and say this is going to produce--is going to
2683
tell you what the economy is going to do.
2684
We will, however, you know, obviously share all kinds of
2685
economic results and assumptions and so on as we go into the
2686
development of a specific set of policy measures.
2687
That is a different question than the one specifically
2688
asked about the model itself. That tool kit has not worked.
2689
As Dr. Yellen says, we have got a whole variety of other
2690
tools.
2691
Ms. YELLEN. This is the state of the tool kit as of May
2692
30th. You can see how far it got. It shows a standardized
2693
policy, not the administration's policy, but a standardized
2694
policy to analyze. You can see how far they got. You have
2695
reviewers' comments that said these kinds of approaches have
2696
some strengths; they have weaknesses; that as the
2697
administration developed and analyzed policies, we should be
2698
using a broad range of economic analysis, and that is what we
HIF196.030
PAGE
116
2699
will do as we go forward.
2700
So this is the state of this work, but I think that
2701
trying to develop any single model or small set of models is
2702
an approach that is futile and so this there is not I have
2703
no expectation that there will be a final draft, a final
2704
draft of this staff paper. This is where it is now.
2705
Mr. CRAPO. Thank you. I will pursue this further in my
2706
questions.
2707
I thank the gentleman for letting me interrupt there. The
2708
gentleman will not be penalized for his time.
2709
Mr. ROGAN. Thank you, Mr. Chairman.
2710
Based upon the Chairman's questions, and actually he was
2711
pursuing the line that was of interest to me, I am not sure
2712
if my confusion has been heightened from the responses. And
2713
so let me just ask you directly- and as an aside, I will also
2714
confess I have not had the opportunity to see this draft
2715
staff report. And is it my understanding that this has just
2716
either been released today or within the last few days?
2717
Ms. YELLEN. Yes. I believe it was released this
2718
morning. It was given--
2719
Mr. ROGAN. So then I have an excuse for my ignorance.
2720
Ms. YELLEN. Yes. It was given to the committee--
2721
Mr. ROGAN. So you will forgive me for asking just some
2722
basic questions about that.
2723
Do. I understand Dr Yellen this is to be a staff draft
HIF196.030
PAGE
117
2724
analysis as to the economic impact on American industry or is
2725
this merely an analysis that was put together setting forth
2726
some model or paradigm of how we should make these analyses?
2727
Ms. YELLEN. This was, as I tried to explain, in an
2728
attempt to assemble a useful tool kit to analyze a range of
2729
policies that might be under consideration, and ecause
various
2730
different models determine in different parts of the
2731
government were approaching different problems differently
and
2732
using different assumptionsy different baselines as to what
2733
energy usage would be in the absence of any treaty, they
2734
tried to get together and to better communicate by
2735
standardizing what they did. And they took an initial set of
2736
assumptions to standardize on and that is what you see in
2737
this document that is referred to as the starting point
2738
analysis. It looks at attempting to reduce to 1990 levels of
2739
emissions by 2010.
2740
They chose that not because that is the administration's
2741
policy, but because it was a common scenario and many
2742
outside outside economists who have models had also analyzed
2743
that. So it provided some comparability internally in the
2744
administration among agencies and outside.
2745
Mr. ROGAN. So if I were to ask either of you the
2746
question, for instance, if we proceed with these proposals as
2747
the administration is requesting, how will this impact
2748
American steel or iron industries, are you able today to give
HIF196.030
PAGE
118
2749
this committee an answer to that question?
2750
Ms. YELLEN. No. We are not able to give an answer to
2751
that question.
2752
Mr. ROGAN. Or to other industries or economic--
2753
Ms. YELLEN. No, we are not able to give an answer to
2754
that question.
2755
Mr. ROGAN. If--we have been at the bargaining table now
2756
for some 18 months. Is that correct?
2757
Mr. WIRTH. Actually--essentially.
2758
Mr. ROGAN. We are now at mid-July, and this is supposed
2759
to go into effect in December, as I recall it. Is that
2760
correct?
2761
Mr. WIRTH. No, it will not go into effect until we come
2762
back to the Congress. This will probably be a protocol or an
2763
amendment to the original treaty and that will have to go to
2764
the United States Senate for approval and then it will
2765
require implementing legislation to get it done. So my guess
2766
is, Congressman, that we won't--this won't go into effect
2767
until--the Chairman is smiling up there--the year 2000, 2001.
2768
There is an election that intervenes in there and I don't
2769
know if that will have anything to do with the timing or not.
2770
Mr. ROGAN. Not that that has anything to do with
2771
anything that happens up here.
2772
So December is when the negotiations are set to conclude;
2773
is that correct?
HIF196.030
PAGE
119
2774
Mr. WIRTH. Yes.
2775
Mr. ROGAN. Are we going to be able, in this committee,
2776
to hear testimony from either of your offices or from some
2777
other agency in the administration before December that will
2778
give us a solid economic analysis as to particular American
2779
industries?
2780
Ms. YELLEN. I think that the committee should expect
2781
analysis in support of a policy that we propose, that Itris
2782
our obligation to explain why we think it will be appropriate
2783
for dealing with this problem and good for the American
2784
economy but if by forecast what you are sayingris what is
2785
the impact on the number of jobs in the steel industry in
2786
2020 I think that is something that we shouldn try to
2787
produce I think that is a hopeless futile exercise. And
2788
the kinds of uncertainties that we are dealing with here, I
2789
think, preclude being meaningful with attempting to come up
2790
with that kind of detailed number.
2791
Mr. ROGAN. Although I appreciate your position, it seems
2792
to me that if we now take the position that economists cannot
2793
make forecasts thatmessentially does away with the
2794
profession of economists.
2795
Mr. WIRTH. I don't think we are saying that economists
2796
can't make forecasts. I think economists are going to
2797
continue to make forecasts until the COWS come home. The
2798
question is, do we believe that is going to be so detailed
HIF196.030
PAGE
120
2799
and specific that that will allow us, as Dr. Yellen pointed
2800
out, to make specific predictions as to what will happen to
2801
the job base in X industry in Y region of the country? And
2802
the answer to that is that it won' we won't be able to do
2803
that.
2804
Ms. YELLEN. I just think that is--
2805
Mr. ROGAN. My recollection is from one of your opening
2806
statements someone made at least passing reference to this
2807
Argonne National Laboratory draft report that was prepared
2808
after having been commissioned by the Department of Energy.
2809
And there hasn't been much discussion about that, but I get
2810
the sense that the report itself, if not the sentiments
2811
expressed in the report, may have been the basis for Mr.
2812
Dingell's concerns.
2813
In looking through the report on this draft report that
2814
was prepared February 1997, under the auspices of the
2815
Department of Energy, there doesn't appear to have been the
2816
same reluctance to make the type of analyses that I have been
2817
asking questions about and what both of you have been hearing
2818
bipartisan concern about. Specifically, this report says
2819
that in the iron and steel industries, quote, the imposition
2820
of increased energy costs will devastate the U. S. steel
2821
industry without a significant decrease in worldwide energy
2822
related emissions; that the cost of production would increase
2823
from $48 to $128 per ton and have signi ficant economic
HIF196.030
PAGE
121
2824
consequences as a result thereof. "
2825
In the petroleum refining industries, it says that
2826
refineries located in the United States would be devastated
2827
and would become noncompetitive with refineries in developing
2828
countries.
2829
This goes on to analyze the same sort of results in the
2830
paper and allied products industries, aluminum industry,
2831
chemical manufacturing, cement and so forth.
2832
I would like to hear the administration's response as to
2833
those projections.
2834
Ms. YELLEN. This was, as I understand it, an exercise in
2835
which panels of industry representatives and experts were
2836
asked to make an assumption about projected energy price
2837
increases and analyze what it would mean for their industry.
2838
Now, the projected energy price increases are certainly
2839
not those that are coming out of any policy that is a
2840
proposal of the administration
2841
Mr. ROGAN. Okay. Doctor, let me just interrupt for one
2842
moment because I want to make sure I follow the premise of
2843
your response.
2844
My understanding, and my report that I have before me,
2845
indicates that these analyses were prepared specifically to
2846
assess the impact of mandatory climate commitments as being
2847
proposed by this treaty.
2848
Do you have a different understanding of that?
HIF196.030
PAGE
122
2849
Ms. YELLEN. My understanding is that the panelists were
2850
simply given an assumed set of energy price increases, and
2851
asked to say what would happen in this particular scenario.
2852
Now, as both of us have emphasized in our testimony, we
2853
consider flexibility implementation provisions to allow
and
2854
international trading joint implementationy to be extremely
2855
important in any treaty. And these are things that would
2856
bring down markedly--even bring down impacts on prices of
2857
energy markedly, relative to the kinds of scenarios that
2858
these panelists were asked to consider.
2859
I need to look into this in more detail, but I think the
2860
sort of scenario, price scenarios, that these panelists were
2861
asked to consider, come out of relatively stringent and rigid
2862
policies. Those are not the policies of the administration.
2863
So if you say, what information comes out of this? I
2864
would say, it simply reinforces the need to pursue sensible
2865
climate change policies, not the kinds of policies that are
2866
going to have this effect. And--
2867
Mr. ROGAN. And finally--I am sorry. Go ahead.
2868
Ms. YELLEN. I mean, I would simply emphasize that
2869
President Clinton has made as his number one priority
2870
pursuing policies that are good for this economy, that
2871
generate jobs, that generate economic growth. And I simply
2872
could not imagine that he would endorse policies that he
2873
thought-would have Draconian impacts on the economy.
HIF196.030
PAGE
123
2874
Mr. ROGAN. We won't put that to a vote today.
2875
But let me just finally say that I have heard reference a
2876
couple of times in this hearing to the figure that the United
2877
States has 4 percent of the world's population and
2878
contributes 22 percent of the world's pollutants. I don't
2879
know if bantering those figures about is supposed to suggest
2880
that there is some unfair or objectionable imbalance, but as
2881
a noneconomist I am assuming that the world economic output
2882
contributed by the United States of America somehow is
2883
greater than 4 percent and so that those figures, in a
2884
vacuum, might mean one thing, but when we measure the
2885
American effect on the world economy, that perhaps 4 percent
2886
does not really tell the story.
2887
Is that at least a fair assumption?
2888
Mr. WIRTH. The purpose is not to talk about the U.S.
2889
contribution to the world economy. The purpose is to simply
2890
point out that with a small percentage of the world's
2891
population, we contribute a very significant percent of the
2892
world's greenhouse forcing gasses. Now, to say--
2893
Mr. ROGAN. We also contribute a very significant
2894
percentage of food and clothing for the world, too, isn't
2895
that a fair statement.
2896
Mr. WIRTH. Fine. I mean, one can say a whole lot of
2897
things. We are bigger than a lot of countries and we have
2898
two oceans, or whatever.
HIF196.030
PAGE
127
2974
But my question is about the number of drafts. We have
2975
just received the May 30th draft. And since we are deep into
2976
the negotiation process already and only about 5 months away
2977
from the Kyoto conference, seriously is this the last draft?
2978
Is this the one you are going to go to bat with? Is this the
2979
lineup that you are going to have when they say play ball
2980
over there in December?
2981
Ms. YELLEN. It is not the lineup. It is not the
2982
administration's analysis. It is a draft of a staff working
2983
paper.
2984
Mr. HALL. Is this the one we have been waiting for when
2985
we asked for a final draft?
2986
Ms. YELLEN. The committee has asked for this report and
2987
we are turning it over to you even though it might be less
2988
than what you or we would have hoped for when we embarked on
2989
this project.
2990
In many ways it is a failed project. It is an attempt
2991
to together, ssemble a tool that we would consider
2992
sufficiently reliable to analyze policies that might be under
2993
consideration.
And
what you see in the May 30th draft, which
2994
is the last complete draft, is where the staff got to in this
2995
exercise, and what the response of the outside reviewers were
2996
about the ability of this exercise or an expanded exercise to
2997
lead to a tool kit that we would be able to rely on solely in
2998
moving forward with analysis of policies.
HIF196.030
PAGE
128
2999
I think we have concluded that when we ultimately develop
3000
and propose a policy, we will not rely on this tool kit. We
3001
will bring to bear many pieces of economic analysis done by
3002
economists in the government and outside the government and
3003
what we are giving you is the staff work as of the end of
3004
May, according to your request.
3005
Mr. HALL. You know, we glean from speeches and drafts
3006
and testimony to try to keep ourselves abreast of it and try
3007
to be supportive of your actions in the field or wherever
3008
they might be, and in December. How will the future analysis
3009
be fed into the administration's negotiating position? How
3010
do you do that?
3011
I guess you will be wargaming it or drafting right up to
3012
the day you go over there. Is that your statement? There
3013
may be something that might cause you to change or to adjust
3014
it.
3015
Mr. WIRTH. Well, let me just tell you about what the
3016
process is inside the administration for this, Congressman.
3017
There is a sort of staff working group of very senior staff
3018
members in each agency and there is then an Assistant
3019
Secretary working group that tries to refine what comes out
3020
of the staff working group. That then goes to a group that
3021
the President has asked to convene, a so-called deputies
3022
group, and then finally to the Cabinet and the President.
3023
So there are a lot of iterations and layers that anything
HIF196.030
PAGE
132
3099
Well, is the attempt to do a Berlin Mandate analysis on
3100
track or is it dead?
3101
Mr. WIRTH. An attempt to do--
3102
Ms. YELLEN. A-Berlin Mandate analysis.
3103
Mr. WIRTH. No. I mean, that is very much--the third
3104
volume of the intergovernmental climate change is out. That
3105
was produced- - that was printed in the spring of 1996. That
3106
is a very helpful approach. We are using that, using our own
3107
economics, using our own technology group for--in all of the
3108
inputs we can get for developing a policy that we will
3109
be--from which we will be negotiating in Kyoto and which we
3110
will bring back to the Congress as part of the protocol or
3111
amendment to the treaty and which we will bring back to you
3112
for enabling legislation.
3113
Mr. HALL. And if the work isn't done, we will get an
3114
agreement anyway?
3115
Mr. WIRTH. Excuse me?
3116
Mr. HALL. And if the work isn't done, if you haven't had
3117
an opportunity to--
3118
Mr. WIRTH. We are moving in on them. We have got a lot
3119
of pieces out there, Congressman Hall; the idea of a binding
3120
treaty, flexible economic instruments; starting to get the
3121
commitments of the developing countries worked into this. I
3122
mean, we are starting to see the outlines of what may be or
3123
we hope will be an agreed-upon treaty in Kyoto.
HIF196.030
PAGE
133
3124
Mr. HALL. Mr. Chairman, I need to ask just one other
3125
thing here about what President Clinton has undertaken on the
3126
climate change issue and has mentioned the White House
3127
conference on the subject, quote, later this year, end quote.
3128
When is that to take place and how does that work into
3129
your plans for Kyoto?
3130
Mr. WIRTH. The President, in discussing the--as we are
3131
moving into the Summit of the 8 in Denver and then the United
3132
Nations General Assembly special session, the President had
3133
to develop a position for discussions with the Europeans in
3134
particular and then at the United Nations, and it was his
3135
conclusion that we in this country had to do a better job of
3136
developing a broad base of understanding of the science and
3137
the need for change, and he has initiated a process that will
3138
go on all summer long of a whole series of meetings around
3139
the country.
3140
The Cabinet are going to be engaged. He is going to be
3141
doing a number of events. Vice President Gore will be doing
3142
a number of events, and that will lead up to a White House
3143
conference which will be held mid--I think mid to late
3144
September. I don't think a specific date has been set yet.
3145
Mr. HALL. You think mid to late September?
3146
Mr. WIRTH. Approximately, or generally.
3147
Ms. YELLEN. Or early October.
3148
Mr. WIRTH. It has to be done in time that out of that, I
HIF196.030
PAGE
134
3149
think that the it is going to be done within the time frame
3150
of the final preparatory meeting which occurs in early to mid
3151
October--late October. So it has to be done before late
3152
October so we get all the final input and have that; then
3153
boil it down SO we can use it. I would guess that the White
3154
House conference would then come mid, late September, early
3155
October.
3156
Mr. HALL. Can you be a little specific about how it is
3157
going to be conducted? Would it be oral presentations? Is
3158
there going to be written material or what are the procedures
3159
going to be? Who is going to be invited?
3160
Mr. WIRTH. We can submit that to you for the record,
3161
Congressman Hall.
3162
Ms. YELLEN. I am not aware of that right now.
3163
Mr. WIRTH. That is being worked on by the White House
3164
right now.
3165
Mr. HALL. I thank you.
3166
Mr. WIRTH. Thank you very much, Congressman.
3167
Mr. CRAPO. Thank you. The time of the gentleman has
3168
expired and it has come my turn to ask questions. And I want
3169
to come back to the same issue we have been on here now for a
3170
while , because Mrs. Yellen and Mr. Wirth, it seems to me--I
3171
can only speak for myself, but I think from what I have heard
3172
from the other Members today and in previous hearings and in
3173
discussions with them, that for Lessentially 2* years now-we->
HIF196.030
PAGE
135
3174
thave been expecting the.administration to come forward with,
3175
an economic analysis and ultimately a policy based on that
3176
analysis which we could evaluate. y
3177
And to me, the revelation today is that in Mrs. Yellen' S
3178
words that we have a failed project, essentially that the
3179
effort to bring these economic models or studies together has
3180
failed
3181
Is that correct?
3182
Ms. YELLEN. To bring them together in which we can rely
3183
on that project for a complete analysis of policies that
3184
might be proposed, that is failed But any policy that might
3185
be proposed, naturally has to be supported by a variety of
3186
different kinds of economic analysis.
3187
That project of a small group of models that will be the
3188
vehicle to analyze a policy that has failed. We will bring
3189
lots of pieces of economic analysis from inside, outside, to
3190
bear.
3191
Mr. WIRTH. Let me try it this way, Congressman.
3192
Mr. CRAPO. Yes.
3193
Mr. WIRTH. Can I try it this way? We have to make a
3194
trip and let's say we have to get across the country and
3195
there are a variety of ways to get there. We can fly. We
3196
can walk. We can peddle. We can take a car. And we decided
3197
that one of the key ways of getting there was to build a car,
3198
and we wanted - there were three different models that we were
HIF196.030
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137
3224
with on this issue understood it the way I did, and that is
3225
that in previous hearings and in previous statements we were
3226
told that you were going to tell us what was going to be the
3227
economic analysis. And if I understand you correctly
3228
today--see, the reason is because Congress is supposed to
3229
have a role in all of this, and the location you were going
3230
to arrive to in your analogy would sort of be the policy you
3231
are ultimately going to come up with, and what I understand
3232
you are telling me today is that you don't know what vehicle
3233
you are going to use yet out of this three different options
3234
or maybe others, and maybe this is going to be a
3235
conglomerate, but whatever it may be you don't know what it
3236
is and, therefore, you can't tell us what it is and,
3237
therefore, we cannot participate with you in development of
3238
policy or in evaluation of the decision-making.
3239
I guess the question I have: Is there going--is this: Is
3240
there going to be some time, some point in time, at which the
3241
administration tells Congress what its economic analysis is
3242
in sufficient time for us to evaluate it before Kyoto?
3243
Ms. YELLEN. I think what the President has indicated is
3244
that over the next several months what he wants
de
to
3245
confer broadly to get input from Members of Congress about
3246
what they think our policy should be, to reach out to
3247
businesses and to labor leaders and to State and local
3248
governments and to all affected parties and to hear from
HIF196.030
PAGE
138
3249
them, what do you think the policy should be?
3250
Mr. CRAPO. So, in other words, we have been asking the
3251
President--
3252
Ms. YELLEN. Yes.
3253
Mr. CRAPO. --what he was going to do, and you are telling
3254
me now the President is going to ask us and the rest of
3255
America what he should do?
3256
Ms. YELLEN. And wants to listen to what that input is
3257
before he tries to reach a conclusion that he is going to put
3258
forward.
3259
Mr. CRAPO. I think that is very admirable for the
3260
President to seek that kind of input. But the question that
3261
we have been asking for 2 years now is, since the President
3262
is the one who goes to Kyoto, in effect, at some point the
3263
President has to make a decision.
3264
He is going to--we have heard a lot of testimony here
3265
today about the fact that there is going to be a commitment
3266
made in Kyoto, which apparently is going to be dropped in our
3267
lap to implement in terms of policy, and we are trying to
3268
influence that at the outset rather than deal with it after
3269
the fact.
3270
And the question is: Is there going to be some time,
3271
some date, at which the administration will tell this
3272
committee what its economic view of the circumstances are and
3273
what policy it is going to adopt based on that economic view?
HIF196.030
PAGE
142
3349
time when you can say to this committee, these are the
3350
economic analyses which we have used to devise this policy;
3351
am I correct?
3352
Ms. YELLEN. I think we don't want to base that analysis
3353
on one model. We want--
3354
Mr. CRAPO. Then do--
3355
Ms. YELLEN. We want--
3356
Mr. CRAPO. Are you going to base it on any models or on
3357
three models or ten models? Or is there going to be a point
3358
in time at which the administration bases its decision on
3359
some kind of economic analysis?
3360
Ms. YELLEN. Certainly economic analysis has to come to
3361
bear.
3362
Mr. CRAPO. Then will we be able to have you tell us what
3363
that economic analysis is going to be? Or are you simply
3364
going to say, there are lots of models and lots of pieces in
3365
this tool kit and here you, Congress, can look at them like
3366
we are.
3367
Ms. YELLEN. I think when a decision has been arrived a
3368
it is incumbent to explain how we arrived that
3369
decision and why we regard_it as a sensible decision. -feel
3370
we have to be prepared to exp lain that. But we are not there
3371
yet.
3372
Mr. CRAPO. But can you understand our frustration?
3373
Ms. YELLEN. Yes, I can.
HIF196.030
PAGE
143
3374
Mr. CRAPO. Because for 2 years now we have been trying
3375
to get there. And what I am hearing you tell me is that
3376
shortly before it is a done deal, you will tell us what the
3377
deal is. And at that time, we will get to know what the
3378
economic analysis on which the deal is founded is. Is that
3379
accurate?
3380
Ms. YELLEN. I can understand the frustration that you
3381
feel in this process, and I wish myself that we were further
3382
along in it.
3383
Mr. CRAPO. But I want to be sure that I am accurate
3384
there. Is what I just described accurate, that shortly
3385
before you have come to a done deal, we will find out what
3386
that deal is?
3387
Ms. YELLEN. There is no done deal until September.
3388
Mr. WIRTH. There is no done deal before September.
3389
Mr. CRAPO. Shortly before you have come to a final
3390
position, which will be taken to Kyoto, you will tell us?
3391
Mr. WIRTH. In that final position, a U.S. position going
3392
into Kyoto will be ready for the late October final
3393
preparatory meeting. We have to back up from that and have
3394
that significant--
3395
Mr. CRAPO. Is there any ability for Congress to
3396
influence that policy after October's meeting?
3397
Mr. WIRTH. What our target and timetable is going to be?
3398
Mr. CRAPO. Yes.
HIF196.030
PAGE
145
3424
question is then, has the administration done any analysis,
3425
or are you just referring to other analyses that have been
3426
done?
3427
Ms. YELLEN. Let's see. With respect to international
3428
emission trading, there is some analysis in the document.
3429
This set of models, this suite of models that are described
3430
there did permit some analysis.
3431
Mr. CRAPO. But no results were shown in the draft today.
3432
Ms. YELLEN. Yes. There are lots of results; there are
3433
loads of numbers and lots of results in the draft. And as I
3434
emphasized in my testimony earlier, I think al though you
3435
know, on the hand, I have emphasized that these are not
3436
models on which we should rely for tasks. Qualitatively,
is
3437
what you see in the analysis that is there is a very
3438
substantial reduction and impact due to international
3439
trading. That qualitative conclusion, I think is quite
3440
valid.
3441
You know, I would recommend to you that you look at the
3442
tables on pages 19 and 20 in the paper. Again, we don't want
3443
to stand by the precise numbers here, but qualitatively, I
3444
think you get a very clear sense of the kind of impact that
3445
international trading can make.
3446
Mr. CRAPO. Let me get to kind of a more general look at
3447
the issue that you are trying to raise with that specific
3448
issue, and it is this. In your earlier testimony, Mrs.
HIF196.030
PAGE
146
3449
Yellen, you indicated that you felt--and tell me if I am
3450
wrong here, but I thought you indicated that you felt that
3451
you thought the economic analysis, whatever it may be and
3452
however it may be conducted, would ultimately show that there
3453
is some--that the policy that you are moving toward will be
3454
good for the economy, these new targets and implementation
3455
dates, whatever they are going to be.
3456
Did you say that?
3457
Ms. YELLEN. I think it is incumbent on the
3458
administration, in presenting a policy, to be able to defend
3459
it and explain why it is a sensible, pragmatic, reasonable
3460
approach to the issue that we are dealing with. The
3461
President has emphasized that he is looking for such an
3462
approach, that he regards the problem as real and he wants to
3463
develop an approach that deals with it in a sensible way.
3464
I think we have to be prepared to defend that we have
3465
found such an approach. When it comes to such features as
3466
flexibility, whether it is international trading of permits
3467
or joint implementation, that the Under Secretary has told you
that
them they
3468
we already endorse A and A are already embodied in our proposal,
3469
I think you can look at this paper and see the kind of
3470
difference it can make and, even without numbers, what
3471
economists will tell you is a very good reason these things
3472
should matter and reduce costs.
3473
We could debate whether they have the costs of achieving
HIF196.030
PAGE
147
3474
a given target, make it a quarter or less. We can argue over
3475
the magnitude that the impact that these flexibility
3476
provisions have. But economics, just pure economic reasoning
3477
on its own tells us that the ability to trade enables us to
and
3478
do
for the world to achieve a given goal at lower costs,
3479
that is its purpose.
3480
So I would be prepared to defend those kinds of
3481
flexibility provisions without any numerical forecast of
3482
precisely what difference they make. On the other hand, I
3483
think the analysis shows in some models they do make a large
3484
difference.
3485
With respect to targets and timetables, I think we will
3486
have to go to a number of different pieces of analyses that
3487
are available in order to make some sensible choices there.
3488
Mr. CRAPO. Well, I recognize what you said about the
3489
targets and timetables and differences in the studies. But
3490
as I have read the report--and you can pick what you want out
3491
of the reports, but one of the studies indicated that using
3492
some of the targets and timetables, that we could look to see
3493
possibly a 26-cents-per-gallon increase in the cost of
3494
refined petroleum, $1.49 for 1,000 cubic feet in the cost of
3495
gas, and 2 cents per kilowatt hour increase in electricity.
3496
And just to give you--I am sure you know this, but to give
3497
the audience an indication that our 2-cent increase in
3498
electricity generation cost is like a 100 percent increase.
HIF196.030
PAGE
148
3499
Ms. YELLEN. Those are big impacts. And I want to
3500
emphasize, that is not a policy that is being proposed.
And
3501
the numbers you are citing, even in the models that have been
3502
examined, are numbers one gets when one assumes the absence
3503
of the kinds of flexibility that the Under Secretary has
obviously
3504
explained are eddly central to the approach you want to
3505
pursue.
3506
Mr. CRAPO. Well, I guess you can see our frustration,
3507
because it is very hard for us to conduct this kind of a
3508
discussion with you on the policy when we don't know what the
3509
promised economic analysis is to review it, to see what its
3510
peer review status is, when we don't know what policy options
3511
we are applying those economic analyses to.
3512
And this committee, I can assure you, will fulfill its
3513
responsibility to participate in the development of this
3514
policy. I am still at a loss to figure out at what point in
3515
time we are going to be given information from the
3516
administration to enable us to participate in this role.
3517
Mr. WIRTH. Well, again, we are sharing information with
3518
the committee, as we have it. We have asked the committee to
3519
come to every session. We have had briefings up here on the
3520
Hill, you know, on something of a steady basis to which all
3521
members and their staffs have been invited, explaining where
3522
we are and what is going on. We have made very clear, I
3523
think, what the overall package looks like; we have talked
HIF196.030
PAGE
149
3524
about that today. We have made significant progress on that.
3525
The one remaining piece, as you well know, is targets and
3526
timetables.
3527
Mr. CRAPO. And what you have made clear so far,
3528
including the possible range of targets and timetables that
3529
are under consideration, has raised a significant amount of
3530
concern nationwide.
3531
Mr. WIRTH. Well, it should--
3532
Mr. CRAPO. That is why we want to engage in this debate
3533
with you.
3534
Mr. WIRTH. That is true. It should raise a significant
3535
concern because we are related to climate change, which has
3536
also raised a significant amount of concern. Let's remember
3537
that what the President is attempting to do is to look at
3538
this very, very significant long-term environmental problem,
3539
which he believes is very serious and one in which we have to
3540
intervene in terms of being responsible to our children,
3541
grandchildren and great-grandchildren, that we have to begin
3542
now.
3543
So that is the environmental side of this that has to be
3544
weighted with an economic policy that makes it work, which is
3545
also very significant. We are talking here about the
3546
most--as I point out in my testimony, certainly the most
3547
complicated issue that I have ever worked on and maybe the
3548
most important one that any of us has ever worked on. And
HIF196.030
PAGE
150
3549
this is--your frustration at not having this piece or that
3550
piece exactly done is shared by us; we don't have all those
3551
pieces either.
3552
But we have come an enormous distance and, you know, we
3553
do have a long way to go in this last sprint, in the last 5
3554
months. And we, Congressmen, very much look forward to
3555
working with you and other members of the committee in
3556
getting there; and we will get there.
3557
Mr. CRAPO. With regard to the role of Congress-- I think
3558
I heard this in your testimony earlier, Mr. Wirth, but I
3559
would like both of you to respond to this question--do you
3560
acknowledge that before any of these decisions even--whatever
3561
may be agreed to by the administration at Kyoto becomes
3562
binding on the United States that it would be subject to a
3563
vote in the Senate?
3564
Mr. WIRTH. Yes. We have said this from the start. This
3565
would be either a protocol to, or a protocol or amendment to
3566
the climate treaty which would require approval of the
3567
Senate.
3568
It would also require, Congressman-- I can't imagine
3569
something that we could do to achieve what has to be done
3570
that wouldn't require enabling legislation, which will go to
3571
this committee, and to the House as well as to the Senate.
3572
Mr. CRAPO. And do you agree with that, Mrs. Yellen?
3573
Ms. YELLEN. I do.
HIF196.030
PAGE
151
3574
Mr. CRAPO. All right. Thank you. I have no further
3575
questions.
3576
Mr. Hall, do you have any questions?
3577
Mr. HALL. Mr. Chairman, I think I would. It seems that
3578
we are getting to the same situation we got into with the
3579
NAFTA situation where they--the word NAFTA itself cries out
3580
that they didn't want to have to undergo the approval of
3581
having a treaty approved by the Senate for fear they couldn't
3582
get the required number. And of course I voted against
3583
NAFTA, but NAFTA passed, and I hope it works; I fully and
3584
totally support it now.
3585
But it is--I think what the Chairman is trying to say
3586
here is that we would like to have some input before the
3587
fact; and where you make yourself available when you set
3588
hearings here and meetings and workshops, Tim, you know that
3589
doesn't fit our schedule nine times out of ten because we are
3590
going in about 90 different directions.
3591
But I think what the Chairman is almost crying out for
3592
here is some opportunity to, as you go closer to the
3593
decision, the time to make a decision, that we get to meet
3594
and have some input. And I have never known you to close the
3595
door on anybody; and I think we could ask to you come back
3596
over, could we not, if we needed to?
3597
Mr. WIRTH. Congressman Hall, we would set up whatever
3598
schedule you would like to do--members of the committee would
HIF196.030
PAGE
152
3599
like to do, members of the subcommittee would like to do. We
3600
are open to that, absolutely.
3601
Let me also add that we are as unhappy about not having
3602
all of this modeling work and all of this economic analysis
3603
out there, that we had hoped was going to be done early in
3604
this year. And that has made our job, I can tell you--as you
3605
can tell from all the questioning here, that has made our job
3606
a heck of a lot more difficult.
3607
Mr. HALL. I am frankly--well, I am worried about the
3608
world, but I am more worried about this country. And I
3609
remember cross-examining a John Connelly appointment, when I
3610
was in the Texas senate, to the EPA. They worked free, and
3611
it would have cost this guy $25- or $50,000 to even serve,
3612
for his time alone.
3613
And they pushed him so hard about, how did he feel about
3614
pollution. He gave that age-old answer, he was against it.
3615
And that made three of the senators mad. And finally the guy
3616
just said, well, pollution smells a hell of a lot better than
3617
poverty. And that got his confirmation killed.
3618
I don't know that I didn't agree with him on his reaction
3619
there. But what I guess I am hoping is that we don't let
3620
some little country, the little countries of the world take
3621
advantage of us because in the Argonne National Lab report
3622
dated February 5th of 1997, it was pointed out that it said,
3623
the main conclusion of this study is that policy constraints
HIF196.030
PAGE
153
3624
placed on these six large industries--and the ones they were
3625
talking about there were six energy-intensive industries,
3626
petroleum refining, paper and allied products, iron and steel
3627
and aluminum and cement. The constraints placed on these six
3628
large industries in developed countries, but not on their
3629
less developed trading partners, would result in significant
3630
adverse impacts on the affected industries.
3631
And the President has made a speech--I don't just
3632
remember the exact date of it, when he talked about his
3633
pledge not to undercut U.S. competitiveness. And that would
3634
be very easy to do with what some of us would think was an
3635
outrageous or ridiculous international compact or agreement
3636
that held us to it, that we are probably going to honor, that
3637
a lot of others aren't.
3638
Those are the things that we are fearful of up here. And
3639
I think that is the reason that we would like to have as much
3640
of your time as we can to get together, when we can spare the
3641
time and you can spare the time. But keep us abreast of what
3642
is going on rather than having it all hit the fan when you
3643
come back and you have entered into an agreement, been nice
3644
to one another, and hit glasses up against one another, and
3645
you come back here and have something that we in the oil
3646
patch can't live with, the John Dingell's up in Michigan
3647
can't live with, and others.
3648
I think that is what the Chairman is talking about, if I
HIF196.030
PAGE
154
3649
understand him correctly, that we would like to be in on this
3650
deal. And if you are going to have a draft analysis every 45
3651
minutes, we would like to know about it and just see them and
3652
not get a May draft analysis, dated June, and get it here in
3653
July, 10 hours before the meeting.
3654
I know you didn't set that stage, but--and you know those
3655
things happen, and when they happen, you are always fearful
3656
of what is behind it and why did it happen, why did they hold
3657
this back. Let me read it again.
3658
You know, just like when Bill Sharp and others finally
3659
passed a deal knocking out windfall profits tax, hell, I
3660
couldn't believe it, I had to read it five times to be sure
3661
it was all right.
3662
We just need someone with your intellect, your ability,
3663
your background and your experience and, I think, your
3664
commitment to spend some time with us before you go over
3665
there, that basically you weren't there a while ago. See,
3666
that is the way we are, here today and gone tomorrow.
3667
Mr. WIRTH. We appreciate your commitment and
3668
understanding and involvement, Congressman; and we really
3669
appreciate, Mr. Chairman, all the time that you have spent
3670
with us today. It has been a long afternoon and I know how
3671
much--how many other things are on your plate, so from our--
3672
Mr. SCHAEFER. It has been very productive.
3673
Mr. WIRTH. --perspective, we hope this is just the
HIF196.030
PAGE
155
3674
beginning for the next 5 months.
3675
Mr. SCHAEFER. The gentleman from New Jersey.
3676
Mr. WIRTH. Mr. Chairman, can I--
3677
Mr. SCHAEFER. Oh, I am sorry.
3678
Mr. WIRTH. Would it be possible--I was at a group
3679
downtown, and I was supposed to go tell them the truth about
3680
climate change. I was supposed to be there at 3:30.
3681
Mr. SCHAEFER. And I understand.
3682
Mr. WIRTH. Maybe I--
3683
Mr. SCHAEFER. Dr. Yellen was, too?
3684
Mr. WIRTH. I am sorry; is that all right?
3685
Mr. PALLONE. Don't worry. There is no problem. You are
3686
more than welcome.
3687
Mr. WIRTH. Thank you very much.
3688
Mr. SCHAEFER. If you had any written questions or
3689
anything--
3690
Mr. PALLONE. No, I can ask my questions of the
3691
chairwoman, Chairmen, if that's all right.
3692
Mr. SCHAEFER. Oh, okay.
3693
Mr. WIRTH. Does she have to leave too?
3694
Ms. YELLEN. I can take another question.
3695
Mr. SCHAEFER. Thank you, Mr. Wirth. I appreciate it.
3696
Mr. WIRTH. Thank you very much, Mr. Chairman, Mr. Hall,
3697
Congressman Pallone.
3698
Mr. SCHAEFER. And, yes, Dr. Yellen did rearrange her
- Dr. Yellen, you note that the permit prize would
be less than 1/10 the price estimated by
other models: Why the large discurefancy?
So if it's trading, CDM, + 6 gases, explain to me
how those will work?
Have me ene done anything like itl trading
before? CDM?
How do the models account for the costs
of conducting trades?
How do you account for the other gases in
your analysis? ? Is this approach an economic,
or an engineering approach, as you desaribed the
5 labs study? ?
Could you give an example of are of the
historical examples you assessed? One of the
sectoral examples you assessed?
- We understand that the regotiztors is Kyoto
were in constant contact with CEA.
CoLd you describe what the analysis you did
for the negotiators? Did your analy'is account
for 6 gases, siniles? Did you use any models?
Were decisions made based on only 1 model?
Isn't that a "fitile " effort. "
Q&A QUESTIONS REGARDING TRADING
International trading
It sounds like the conclusion of low costs depends on the idea that we will be buying emission
permits from other countries.
What percentage of emission reductions are achieved in this way, versus domestically?
Do you honestly believe that international trading of this sort is feasible?¹
What would be the costs if we to have to meet these targets without international trading?
Transfers
What would be the monetary value of these transfers?
Do you expect the American taxpayer to pay other countries for the right to drive their cars and
run their factories?
If it doesn't go directly through the budget, aren't you having the same effect by imposing
onerous requirements on private citizens, and then "allowing" them to pay foreigners?
Russia and paper tons
Is it true that you mainly expect the purchases to come from Russia (and the Ukraine)? What
percentage? Isn't this a disguised form of foreign aid?
Is it true that we wouldn't even be paying them to reduce their emissions, but instead be paying
them for reductions that they have already undergone (so-called "paper tons")?
What makes you think a country that can't even run a functioning legal system or maintain a
decent economy is a reliable partner in such a deal? What's to stop them from just taking the
money and doing nothing?
Domestic permit trading
How exactly is this permit trading system (2008-2012) supposed to work?
The idea is to drive up the price of energy, right?
Isn't it a disguised tax? A mandate or "taking", then?
How would you rate the relative importance of the permit trading scheme and CC Technology
Initiative in accomplishing the emission reductions called for under the treaty?
1
"However, the proposed schemes for both international permit trading and joint
implementation require enforcement and monitoring mechanisms that may be difficult to
establish in the near term." " your economic advisers are concerned that substantial barriers
would arise in implementing any workable analogue of such an idealized system--at least in the
near term. Consequently, they would stress that Annex I international permit trading and joint
implementation between the U.S. and nonAnnex I countries can realistically serve only a limited
role in reducing the costs associated with meeting a "1990 by 2010" target. " the actual
benefits of such a system are apt to fall short of this utopian portrayal." 9/20/97.
Oil price shock
The only historic experience with restraining emissions (let alone reducing them) was the 1970s,
correct? How did the reduction in emissions then compare with that required under the Treaty?²
Didn't this take a much bigger increase in oil prices than you are predicting now? Didn't it cause
the largest two post-war recessions, with huge increases in unemployment? Why should things
be different this time?
What about the study from EPI that predicts large job losses?
2 "If attained through domestic emissions reductions alone this target entails a reduction
in CO₂ emissions of about 28% relative to projected 2010 emissions in the absence of policy
intervention--a change in energy use in excess of that achieved during the decade of the oil
shocks." "Economic analysis suggests that reaching 1990 emissions by 2010 would result in a
stagflationary macroeconomic shock on the economy approximately equal in magnitude to the
effects of the combined oil shocks of the 1970's. Both unemployment and inflation would
undoubtedly rise for a time"
Hohenstein.William @ epamail.epa.gov
02/24/98 01:04:09 PM
Record Type:
Record
To:
Adele C. Morris/CEA/EOP, Randall W. Lutter/CEA/EOP, Joseph E. Aldy/CEA/EOP
CC:
Subject: Agriculture and the Kyoto Agreement
Last fall, we conducted an analysis of the impacts of potential climate
change polices on the Agriculture Sector using Bruce McCarl's Agriculture
sector Model (ASM). We examined the costs to the agriculture sector of
$25, $50, and $100/ton taxes (permit prices). We also examined the
potential of recycling revenue generated by carbon policies back to the
farm sector through a CRP-type program. The report has undergone EPA
review, but has not yet undergone external peer review. Bruce plans to
publish a paper from it later this spring. The key findings are as
follows:
An Impact Assessment of
Climate Change Policies and Carbon Permit Prices on the U.S. Agriculture
Sector
Executive Summary
The U.S. government is considering various climate change policies that may
result in economy-wide impacts. One policy option to reduce greenhouse
emissions in the U.S. is to establish a carbon cap and trade system, under
which carbon permit prices would emerge and eventually be internalized into
the farm and non-farm sectors through higher energy prices. This study
explores potential impacts on the U.S. agriculture sector from the
imposition of various carbon permit prices. Specifically, it examines
economic welfare, commodity price, and environmental impacts associated
with introducing three levels of carbon permit prices ($25, $50, or $100
per ton carbon) in 2000, 2005, 2010, 2015, or 2020. A national agriculture
model (ASMSOIL) is used to assess these impacts. The findings of this
study suggest relatively small agriculture sector losses result in any of
the years from the introduction of carbon permits, while positive local
environmental benefits occur in terms of lower soil erosion and water use.
The major observations are that when carbon permit prices are internalized
through higher energy and chemical prices: (1) the U.S. agriculture sector
is not very sensitive to these prices because the resulting higher energy
prices make up a relatively low part of the total cost of production for
the farming sector; (2) soil erosion and irrigation water use declines but
cropland and chemical (pesticide and fertilizer) usage expands slightly
initially; (3) Achieving U.S. soil erosion goals becomes cheaper but the
implementation cost of expanding or maintaining the U.S. CRP acreage; (4)
carbon price revenues are large and more than offset any higher CRP costs;
and, (5)the farm sector results are largely stable over the 2000-2020 time
period and do not imply that, within agriculture, any one time period of
implementation is better than any other for introducing a carbon trading
system. Also, the farm welfare losses may be offset by environmental gains
in terms of erosion control and greenhouse gas reduction. Given the
consistency of these results across time and farm impact measurement, this
study suggests that the minimal farm welfare losses may be compensated by
the environmental gains in terms of land management, factor use, erosion
control, and greenhouse gas reduction.
The entire report will be sent as soon as it arrives.
In addition, here are a few (very general) talking points that could be
used to respond to the Farm Bureau analysis.
Themes for Climate Change Outreach to the Agriculture Community
There is scientific consensus that global warming is occurring and that it
is driven by human activities
Agricultural communities are vulnerable. Threats to US agriculture include
increased climate variability and extreme weather events. While some
analysis indicates that parts of the US agriculture economy could benefit
from slight climate change , if climate change is not averted, higher GHG
concentrations will have major negative effects.
Natural ecosystems, including those that are of great interest to farmers,
will not be able to adapt to the rate and increased variability of climate
change.
Major opportunities exist in the agriculture sector to reduce greenhouse
gas emissions and sequester carbon cost-effectively.
The costs of the Kyoto agreement are small. Energy price increases have
been greatly exaggerated. Shifting to conservation tillage will require
less fuel.
HARVEY.REID @ EPAMAIL.EPA.GOV
02/02/98 10:02:00 AM
Record Type:
Record
To:
Joseph E. Aldy
CC:
Subject: non-CO2 cost curve -Reply
Joe:
I can respond to your questions on methane and the high-gwps, but Bill will have to respond on the sinks and n
oxide data.
Our original estimates went up to $100/ton and the only data point you are missing is our $100/ton estimate.
methane, it doesn't add much to go from $70 to $100 (about 1.3 mmtce for methane). There are no reductio
$50/ton for the high-gwps. These estimates were largely developed in 1996 using prior year data so you could
assume they are in 1996 dollars (I've checking on this but I would use this for now).
As for documentation, these were derived from bottom-up cost curves for specific sources of these gases. We
developed the methane cost estimates as part of a forthcoming report we are developing on opportunities and
of methane reductions in the U.S. (we are doing a companion report on international methane emissions and re
opportunities). For example, for methane, the reductions at various costs are the sum of 4 categories of sourc
coal mines; landfills; livestock manure; and natural gas production, transmission, and distribution systems. We
excluded some source categories that we didn't consider good candidates for an emissions trading system (e.g.
ruminant emissions) or where we believe the potential reductions are small (e.g., wastewater, rice, biomass bur
Similarly, for the high-gwp gases, we developed detailed bottoms-up cost estimates for industrial and process
sources of HFCs, PFCs, and SF6. The industrial sources include a range of industries, such as magnesium
production, HCFC-22 production, aluminum smelting, and semiconductor manufacturing. The process sources
range of end-uses for HFCs and PFCs, such as refrigeration, air conditioning, cleaning agents, sterilants, and fo
The estimates were derived by technical staff familiar with the chemical substitutes for CFCs and the degree of
market penetration and costs for various substitution technologies.
Hope this helps. We'd be interested in seeing your new draft and results when you are ready. Call me at 564-
you have questions.
Reid
historical analysis
Sectoral
analysis during Kyoto
how do you assess 6 gases?
Michele Jolin
02/23/98 10:20:21 AM
Record Type: Record
To:
See the distribution list at the bottom of this message
cc:
Subject: Yellen's mock hearing on Tuesday
Todd has asked me to assign participants at Tuesday's mock hearing the following areas for
questions:
Orszag: international competitiveness; cost estimates; impact on specific industries (e.g. jobs);
climate change policy package
(tax cuts, R&D); voluntary industry initiatives
Gruber: cost estimates; international trading; capital flows abroad; technology optimisim; sinks;
permit trading
Frankel: international trading; transfers to Russia; paper tons; distribution of costs; permit
trading; oil shocks
Lutter: Ancillary and climate benefits; electricity restructuring; developing country participation;
CAFE standards
Aldy: cost estimates; comparisons with other models
Other folks will be at the mock hearing (Sandalow, Greenfield), but you all will be the main
questioners.
Thanks
Michele
Message Sent To:
Jeffrey A. Frankel/CEA/EOP
Randall W. Lutter/CEA/EOP
Joseph E. Aldy/CEA/EOP
Peter R. Orszag/OPD/EOP
Jonathan.gruber @ ms01.do.treas. sprint.com @ inet
02/24/98
13:12
1 202 260 6405
EPA CLIMATE CHG
4
001/002
OPTIONAL FORM 99 (7-90)
FAX TRANSMITTAL
# of pages
2
To Joe Agency alay
From Bill
Dept
Phone #
William Hohenstein
Fax # 395-6870
Fax #
NSN 7540-01-317-7368
5099-101
GENERAL SERVICES ADMINISTRATION
02/24/98 01:04 PM
To:
[email protected], [email protected]. [email protected]
CC:
Subject: Agriculture and the Kyoto Agreement
Last fall, we conducted an analysis of the impacts of potential climate change polices on the Agriculture
Sector using Bruce McCarl's Agriculture sector Model (ASM). We examined the costs to the agriculture
sector of $25, $50, and $100/ton taxes (permit prices). We also examined the potential of recycling
revenue generated by carbon policies back to the farm sector through a CRP-type program. The report
has undergone EPA review, but has not yet undergone external peer review. Bruce plans to publish a
paper from it later this spring. The key findings are as follows:
An Impact Assessment of
Climate Change Policies and Carbon Permit Prices on
the U.S. Agriculture Sector
Executive Summary
The U.S. government is considering various climate change policies that may result in
economy-wide impacts. One policy option to reduce greenhouse emissions in the U.S. is to
establish a carbon cap and trade system, under which carbon permit prices would emerge and
eventually be internalized into the farm and non-farm sectors through higher energy prices.
This study explores potential impacts on the U.S. agriculture sector from the imposition of
various carbon permit prices. Specifically, it examines economic welfare, commodity price, and
environmental impacts associated with introducing three levels of carbon permit prices ($25,
$50, or $100 per ton carbon) in 2000, 2005, 2010, 2015, or 2020. A national agriculture model
(ASMSOIL) is used to assess these impacts. The findings of this study suggest relatively small
agriculture sector losses result in any of the years from the introduction of carbon permits, while
positive local environmental benefits occur in terms of lower soil erosion and water use.
The major observations are that when carbon permit prices are internalized through higher
energy and chemical prices: (1) the U.S. agriculture sector is not very sensitive to these prices
because the resulting higher energy prices make up a relatively low part of the total cost of
production for the farming sector; (2) soil erosion and irrigation water use declines but cropland
and chemical (pesticide and fertilizer) usage expands slightly initially; (3) Achieving U.S. soil
erosion goals becomes cheaper but the implementation cost of expanding or maintaining the
U.S. CRP acreage; (4) carbon price revenues are large and more than offset any higher CRP
costs; and, (5)the farm sector results are largely stable over the 2000-2020 time period and do
not imply that, within agriculture, any one time period of implementation is better than any other
for introducing a carbon trading system. Also, the farm welfare losses may be offset by
environmental gains in terms of erosion control and greenhouse gas reduction. Given the
02/24/98
13:13
1 202 260 6405
EPA CLIMATE CHG
1
002/002
consistency of these results across time and farm impact measurement, this study suggests
that the minimal farm welfare losses may be compensated by the environmental gains in terms
of land management, factor use, erosion control, and greenhouse gas reduction.
The entire report will be sent as soon as it arrives.
In addition, here are a few (very general) talking points that could be used to respond to the Farm Bureau
analysis.
Themes for Climate Change Outreach to the Agriculture Community
There is scientific consensus that global warming is occurring and that it is driven by human
activities
Agricultural communities are vulnerable. Threats to US agriculture include increased climate
variability and extreme weather events. While. some analysis indicates that parts of the US
agriculture economy could benefit from slight/climate change, if climate change is not averted,
higher GHG concentrations will have major negative effects.
Natural ecosystems, including those that are of great interest to farmers, will not be able to adapt
to the rate and increased variability of climate:change.
Major opportunities exist in the agriculture sector to reduce greenhouse gas emissions and
sequester carbon cost-effectively.
The costs of the Kyoto agreement are small. Energy price increases have been greatly
exaggerated. Shifting to conservation tillage will require less fuel.
EXECUTIVE OFFICE OF THE PRESIDENT
COUNCIL OF ECONOMIC ADVISERS
WASHINGTON, D.C. 20500
THE CHAIRMAN
October 3, 1997
MEMORANDUM FOR THE PRESIDENT
FROM:
JANET YELLEN Jy
LAWRENCE SUMMERS
SUBJECT: Targets and Timetables for Reducing Greenhouse Gas Emissions
Executive Summary
This memo provides a preliminary evaluation of the likely economic consequences for
the United States of a program to attain 1990 CO₂ emissions levels by 2010. It concludes that
the attainment of such a goal would necessitate at least a doubling in energy prices and impose
substantial economic costs. In contrast, a more gradual emissions reduction path that eliminates
emissions growth by 2010-2020 and reduces emissions to 1990 levels thereafter captures nearly
identical environmental benefits as the more aggressive approach while entailing costs between
one tenth and one third as large.
If attained through domestic emissions reductions alone the "1990 by 2010" target
requires a reduction in CO₂ emissions of roughly 30% relative to projected 2010 emissions
assuming "business as usual". The reduction in energy use needed to meet this goal would be
comparable to that achieved during the decade of the OPEC price hikes, so that energy price
increases of similar magnitude are likely. Economic analysis and historical precedent suggest
that energy price increases of this size would have stagflationary consequences. As in the decade
of the oil shocks, both unemployment and inflation would undoubtedly rise, at least for a time.
An "idealized" system of international permit trading among Annex I countries could
hypothetically halve the change in carbon emissions prices needed to attain a 1990 by 2010 goal.
This would mean paying Russia and other Eastern European countries to reduce emissions in
place of the United States. However, such an arrangement could prove infeasible for a number
of reasons, including difficulties in establishing adequate enforcement and monitoring
mechanisms in the near term. Joint implementation with non-Annex I countries is likely to
marginally reduce the impact on energy prices in the United States.
The TeTo argues that a more gradual timetable for emissions reduction can deliver
virtually identical environmental benefits at a fraction of the cost. The aggressive "1990 by
2010" path is extremely inefficient because it requires premature scrappage of capital and
foregoes the considerable advantages of waiting for the development of carbon-lean technologies
2
before replacing existing plant and equipment. In contrast, a timetable that eliminates emissions
growth in the second decade of the program (2010-2020) and reduces emissions to 1990 levels
and below in subsequent decades is consistent with a long-term goal of stabilizing atmospheric
CO₂ concentrations. The total cost of this "back-loaded" approach is likely one third to one
tenth that of the "front-loaded" 1990 by 2010 program. Implementation of the gradual timetable
requires an early, modest increase in the price of carbon emissions, along with a credible
commitment to further emissions price increases over time.
In comparison with a more gradual emissions reduction timetable, the environmental
benefits of an aggressive abatement target are minimal. For example, the expected difference in
global average temperature in 2100 along a fast-takeoff abatement path that attains 1990
emissions by 2010 and a slow-takeoff abatement path that peaks in 2015 and attains 1990
emissions by 2040 is less than 0.05 degrees Celsius. Between now and 2100, global average
temperature is expected to rise about 2½ degrees Celsius irrespective of the path chosen for
Annex I stabilization, assuming developing countries continue with business as usual.
The body of this memorandum lays out the rationale for these conclusions.
3
I. Introduction
The Framework Convention on Climate Change signed at the 1992 earth summit in Rio
de Janeiro called for carbon dioxide emissions in 2000 at 1990 levels. Most countries, including
the United States, are unlikely to achieve these emissions reductions. But the Rio approach
remains historically important, and most quantitative proposals that have been advanced in the
run up to Kyoto can be understood as variants of the Rio target and timetable. In particular, a
proposal to "stabilize CO₂ emissions at 1990 levels by 2010" (and variants thereof, including a
more stringent proposal by several EU countries to stabilize at 10% below 1990 levels by 2010)
has received considerable attention.
This memo assesses the consequences for the U.S. economy of a program to attain 1990
CO₂ emissions levels by 2010. It compares the costs and cost effectiveness of this baseline
proposal with those of alternative targets and timetables that entail a less rapid initial reduction in
CO₂ emissions levels. The conclusions described here rely on the substantial body of economic
analysis that has been conducted by researchers worldwide, including the Intergovernmental
Panel on Climate Change (IPCC), and Administration economists.
II. 1990 by 2010: The Scope of the Task
To appreciate the ambitiousness of a program to curb U.S. emissions levels to 1990 by
2010 it is necessary to recognize that, by 2010, emissions are likely to exceed their 1990 levels
by about 31 percent.¹ As of 1996, energy related carbon emissions were already 9 percent above
1990 levels. Growth in the economy through the end of the next decade would further raise
energy use and carbon emissions. Even under an optimistic assumption concerning the pace of
improvement of energy efficiency (0.9 percent per year), there would be further increases in
carbon emissions of about 22 percent over current levels by 2010 if we continue with business as
usual. A substantial increase in the price of carbon emissions will be needed to induce such a
large emissions decline.
An increase in the price of carbon emissions--whether achieved through a system of
tradeable emissions permits or a carbon tax-creates incentives to reduce emissions in two
separate ways: by reducing overall energy use; and by inducing switches among fuels, away from
high-carbon fuels like coal and toward low- and no-carbon fuels, such as natural gas and
renewable energy. Reasonable estimates suggest that interfuel substitution in response to higher
carbon emissions prices could accomplish between 25 and 45 percent of the overall task, with the
remainder occurring through reduced energy use. The implication is that overall energy use must
1
This assumes a 2.4 percent annual GDP growth rate. Even with a more moderate
assumption of 2.2 percent annual GDP growth, carbon emissions in 2010 would exceed their
1990 level by about 28 percent.
4
decline by about 15% to 18% relative to "business as usual" levels to attain the 1990 by 2010
emissions target. Energy use does respond to changes in the price of energy; but history suggests
that the responsiveness is low over periods as short as a decade. In particular, the experience of
the United States during the 1970s and 1980s suggests that energy prices would need to at least
double--as they did during the OPEC oil shock period--to attain a 1990 by 2010 target.
Comparison with the Oil Shocks. Figure 1 shows aggregate energy use in the United
States and the relative price of energy over the period 1960 to 1990. During the oil-shock period
--1973 to 1984--energy use remained virtually constant in absolute terms while GDP grew about
2.5% per annum in real terms. The relative price of energy rose about 130 percent during these
years. Again assuming a 0.9 percent pace of improvement in energy efficiency with constant
energy prices, the 130 percent energy price hike served to reduce energy use about 16 percent
relative to the "business as usual" baseline. This experience suggests that an increase in relative
energy prices roughly comparable to the 130% OPEC-induced rise will be needed to lower
energy use by the 15 to 18 percent required to reach the 1990 by 2010 target. A 130% increase
in energy prices translates into a carbon tax of roughly $170 per ton.
Model results. Numerous economic/energy models have been used to estimate the
impact of a 1990 by 2010 program on energy prices. These models arrive at the same conclusion
as was generated above using no model whatsoever: a program to achieve 1990 emissions by
2010 would likely entail at least a doubling of energy prices. A broad range of models place the
carbon permit price required to achieve 1990 emissions by 2010 in the range of $80 to $250 per
ton. If fully passed through to energy prices, a permit price of $100 per ton, for example, entails
a 76 percent increase in energy prices. The impact on the prices of different sources of energy
are all large, but the effect on coal is particularly severe. The price of coal would more than
triple, while the price of a barrel of petroleum would increase by about fifty percent. Gas at the
pump would increase in price by about 26 cents. Relative to the BTU tax proposed by the
Administration in 1993 a $100 implicit carbon tax is about 5 times as large. Thus, attaining a
goal of 1990 by 2010 would have very large effects on our economy.
Evidence from International Comparisons. A final piece of evidence confirming the
conclusion that a strong price signal over a long period of time is necessary to alter energy use
comes from comparisons of energy usage between the United States and Europe. It should
hardly be surprising that energy use per dollar of GDP is lower in Europe than the United States.
Energy prices in Europe have long been substantially higher--roughly double U.S. energy prices.
Moreover, major differences in living patterns between the United States and Europe result in
higher European energy efficiency. In addition to the geographical "advantage", from an energy
efficiency standpoint, of Europe's higher population density, resulting in lower transportation
requirements, Europe has locked in place many long-run adaptations to high energy prices.
Innovations in the design of housing and transportation systems and the configuration of
residential areas have occurred in response to high energy prices. But in spite of its natural
advantages and its long history of high energy prices, energy per dollar of GDP is only 44%
lower in Europe than in the United States. This means that even if the United States were to
5
become Europe--energywise per dollar of GDP--its energy savings, even in the long run, would
be no greater than 44 percent. This U.S.-Europe comparison supports the conclusions drawn
from the natural experiment of the oil shock: namely, a return to 1990 emissions will not occur
without very major price measures over a long period of time.
The Role of Technology and the Scope for "No Regrets" Policies. According to the
preceding assessment, a large price inducement is necessary to meet a 1990 by 2010 target. Your
economic advisers agree on this conclusion. However several of your advisers are more
optimistic about the chances of achieving a 1990 by 2010 target. They emphasize the current
availability of "no regrets" (cost-saving) technologies that promise substantial opportunities for
abatement. A recent report by the Department of Energy research laboratories, for example,
catalogues emissions-saving technologies that, by their calculations, are currently "cost
effective." If put in place now, such practices could allegedly reduce emissions by between 30 to
50 percent of the amount needed to reach a 1990 by 2010 target. Even so, the report finds that
"aggressive" and "invigorated" government policies--including potentially costly and intrusive
regulations and standards--as well as a $50 carbon tax would be necessary to reach the 1990 by
2010 target.
Your economic advisers agree that there now exist unused technological opportunities for
emissions reduction, but we question by what means, over what time frame, and at what expense
government policies could change private behavior if such opportunities are currently
underutilized. Engineering studies generally ignore the sometimes subtle disadvantages of
available cost-saving technologies or overestimate their hypothetical returns. An example is
illustrative: significant energy and cost savings could result if consumers replace incandescent
bulbs with compact fluorescents. Over the long lifetime of such bulbs there would also be a
substantial monetary gain. However, actual adoption of these light bulbs has been slow to date,
possibly due to pure inertia, possibly because consumers dislike their color, or perhaps because
they apply a high "discount rate" when valuing energy savings that accrue after the purchaser
may have switched residence. Several recent studies have demonstrated that the actual returns to
home improvement investments, such as attic insulation, often fall short of those predicted by
engineering studies.
Regardless of the reasons, if consumers have not adopted "no regrets" measures at a
faster rate, it is likely that additional incentives will be necessary for them to change their minds.
Rather than stressing the mere availability of alternative technologies, your economic advisers
insist on realistic estimates of likely rates of adoption and diffusion and they stress the need for
economic incentives--in the form of a higher implicit price for carbon emissions--to induce the
adoption of emissions-saving technology. They point out too that the baseline energy demand
estimates used to predict the price increase needed to attain a 1990 by 2010 target already assume
substantial ongoing improvements in energy efficiency due to the diffusion of existing
technologies and the development of new ones. Significant adoption of such technologies is
necessary merely to meet this assumed baseline. Finally, it is important to note that the DOE
labs study includes as part of its policy package to reach 1990 emissions by 2010 extensive
6
regulations, including stringent CAFE and appliance standards and national building codes--
command and control policies that your economic advisers would oppose--along with a $50
carbon tax.
To summarize, your economic advisers consider it unrealistic to predict a substantial
increase in the pace of adoption of new emissions-saving technologies in the absence of a large
increase in the price of carbon emissions--and hence of energy. Based in part on the evidence
from the energy shocks of the 1970s, in part on international comparisons, and in part on model
results, they are optimistic that such an increase in prices would bring forth a reduction in CO₂
emissions--with larger responses to a given price change likelier the longer the time period for
response. The evidence is strong that a very large price increase will be necessary to attain
emissions reductions of 20 to 30 percent over a period as short as a decade. Moreover, other
approaches that apparently do not involve large price increases (such as performance
standards) will impose even higher costs on the American economy.
III. Why are the costs of early emissions reductions so high?
The previous section argued that a "1990 by 2010" target would entail high carbon
emissions prices and significant economic costs. This section shows that the 1990 by 2010
timepath for emissions reductions is so aggressive as to be inefficient--in the sense of raising
substantially the total projected economic cost of reaching a given environmental goal. There are
three major reasons why an aggressive takeoff in curtailing emissions raises overall costs: (1) it
induces premature obsolescence of the capital stock because it does not allow adequate time for
the capital stock to turn over naturally; (2) it provides insufficient lead time to develop and
implement new technologies; (3) it causes a significant stagflationary short-term
macroeconomic shock. Additionally, an aggressive timetable for emissions reductions does not
allow time for the resolution of uncertainty and it does not take advantage of the time-value of
money (resources not spent on emissions reductions early on can be invested at a positive return
which could purchase more emissions reductions later).
The Role of Turnover of the Capital Stock. The most clear-cut and easily quantifiable
reason for the high price tag associated with rapid emissions reductions relates to the need for
premature replacement of plant and equipment in response to large increases in the price of
carbon emissions. It is expensive enough to replace plants that are fully depreciated, but vastly
more so if those plants are still in the prime of their productive lives. Within 20 to 40 years,
much of our existing plant and equipment will be ready for replacement anyway; therefore
building in greater carbon efficiency at that time will be relatively cheap. It is important to
emphasize that the case we are making here is not based on procrastinating for the sake of
avoiding the problem; rather, it is based on simple principles of hard-headed business efficiency.
The advantage of a more gradual emissions reduction timetable in avoiding the large
7
costs associated with premature obsolescence of the capital stock can be illustrated by
considering electrical power generation. The case of electricity generation is important in its own
right since this industry is responsible for 88% of coal use and more than one third of all carbon
dioxide emissions in the United States. But the principle concerning the costs of premature
replacement applies broadly because reduced greenhouse gas emissions may entail the
accelerated retrofitting of housing and commercial structures, the premature scrappage of
vehicles and appliances, and the premature replacement of plant and equipment in energy
intensive industries.
Figure 2 illustrates the effect of an accelerated retirement schedule for today's U.S.
electric power generation capacity installed during the last 40 years. Imagine, to take an extreme
case, that a timetable is adopted that necessitates replacing all power plants with less-polluting
technology within ten years. This would require retiring 630 out of 670 gigawatts of generating
capacity before the end of its normal life span, or 94 percent of the total. If the timetable were
extended so that all power plants instead had to be replaced within 20 years, the accelerated
replacement of capacity would affect 450 gigawatts of capacity, or 67 percent of the total.
Allowing this additional 10 years for turnover avoids the premature retirement of 27 percent of
existing electric power plant capacity. With a 30 year horizon, complete turnover would mean
accelerated retirement of only 21 percent of the total capacity and, with a 40 year timetable, there
would be almost no additional costs due to premature obsolescence. 3
The Advantage of Waiting for Superior Technologies. The example of electric power
generation also illustrates a second important reason why a gradual takeoff in curbing greenhouse
gas emissions is ultimately less costly: new technologies take a long time to develop. Waiting
until these new technologies are available before making expensive emissions-saving
investments offers the potential of both lower economic costs and higher environmental payoffs.
Under a tight target and timetable with its associated high carbon emissions price, electric
utilities will be forced to replace existing capacity in the very near future and to rely on currently
available lean-carbon technologies, likely gas-turbine plants. If some delay can be factored in,
however, they will be able to install more effective and less costly alternative technologies. A
rapid timetable forces long-term investments to be made before superior technologies have been
²The distribution has been truncated at 40 years, the average lifespan of existing electric
power plants. A few plants of yet older vintage are still in use.
³The same exercise can be performed for coal-fired power plants. These generators
produce the most carbon per kilowatt hour of electricity and thus will have a high incidence of
replacement even under a moderate abatement plan. If a complete change-over of coal plants
were to be accomplished in 10 years, 96 percent of total capacity would be retired early. If
retirement occurred over 20 years, only 64 percent would be retired early. Allowing an
additional 10 years for turnover would avoid premature retirement of one-third of existing coal-
fired plant capacity.
8
developed and refined.
Implication: The Need for a Credible, Long-Term Price Increase. The example of
electricity generation illustrates two general principles. First, the responsiveness of both demand
and supply are greater in the long run than in the short run. This means that, with a longer
horizon, any given amount of abatement can be accomplished with a smaller increase in carbon
emissions prices. Second, and perhaps even more important for policy, any credible emissions
reduction strategy must include both a price increase at the outset and also a clear commitment to
maintain and likely increase prices further over time. Without such a commitment, the changes
in behavior required to meet even a long-run target of emissions reduction will likely not occur.
Consider a utility that today is drawing up its plans for a new power plant. That utility will
choose among today's technologies, which vary in their costs and CO₂ emissions. In order to
induce the utility to choose a more costly, lean-emissions technology today, it must be clear that
CO₂ emissions will be costly enough over the 40 years or more lifetime of the plant to justify a
more expensive investment option today. A large cumulative reduction in emissions can be
achieved over the long term with only a modest carbon emissions price increase now, but only if
the commitment to still higher prices in the future is credible and clear.
Stagflationary Macroeconomic Impact. From a macroeconomic perspective, increases
in energy prices constitute an adverse "supply shock." Such developments are stagflationary--
even if anticipated--because they raise both inflation and unemployment simultaneously, creating
a painful macroeconomic dilemma. As noted above, a plan to attain 1990 emissions levels by
2010 would require a change in energy prices over the first decade of the 21st century at least
comparable in magnitude to the two oil shocks of the 1970s. Those shocks are widely
acknowledged to have raised both unemployment and inflation. Similarly, the energy price
increases required by a 1990 by 2010 program would raise inflation, lower real wages, and raise
unemployment. Unemployment in the four years after the first oil shock averaged 7.2 percent in
comparison to 5.0 percent in the four years prior; and unemployment rose further, to an average
of 8.6 percent, in the four-year aftermath of the second oil shock.4 Although the increases in
energy prices associated with a treaty to reduce greenhouse gases would be anticipated, rather
than a surprise, we should nevertheless expect that the efforts of the Federal Reserve to contain
inflation, coupled with likely efforts on the part of workers to recoup real wage losses will lead to
a period of higher unemployment.
Furthermore, it is important to note that most model-based estimates of the costs of a
program to attain 1990 emissions levels by 2010 assume that resources are fully employed,
thereby ignoring these potential short-term effects. Such models therefore provide no assessment
of the consequent increases in unemployment.
4 There is debate about how much of this was due directly to the oil shocks, because
there was a simultaneous decline in productivity growth and transfers of real income to OPEC
producers.
9
IV. Quantifying the Economic Costs of Gradual versus Fast Take-off
The relative costs of gradual versus fast takeoff timetables in curbing CO₂ emissions has
recently been analyzed by the Stanford Energy Modeling Forum (EMF-14).⁵ The Stanford group
used six large-scale economic/energy models to compare the total projected cost of two
alternative emissions reduction time paths--one "frontloaded", the second more "backloaded".
Importantly, both paths were designed eventually to stabilize atmospheric concentrations of CO2
at double the pre-industrial level--550 ppmv.⁶ Although a high degree of uncertainty is inherent
in particular numerical estimates from individual models, the simulations nevertheless point to
some robust qualitative conclusions. The major conclusion to be drawn from this project is that
an emissions reductions path characterized by an aggressive initial phase is substantially more
costly--3 to 10 times more costly--than a path with a slower takeoff but larger eventual
reductions.
To enable a comparison of the costs of gradual and rapid takeoff strategies, the EMF
investigators asked each of six modeling groups to simulate the economic impacts of two
alternative strategies to attain stabilization of CO₂ concentrations at 550 ppmv. The first strategy
(the WG-1 path) corresponds to an emissions pathway published in 1994 by Working Group 1
(WG-1) of the Intergovernmental Panel on Climate Change (IPCC). The working group
computed a set of global CO₂ emissions pathways consistent with stabilization of concentrations
at 550 ppmv and several alternative concentration levels. The WG-1 path entails an immediate
departure from the baseline or "business as usual" emissions path. Subsequently, Wigley,
Richels and Edmonds (WRE) published an alternative set of emissions profiles to achieve the
same concentration targets. In contrast to the WG-1 paths, the WRE emissions path was
constructed to follow the baseline or "business as usual" scenario in the early years with sharper
reductions after this initial phase. Wigley, Richels and Edmonds hypothesized that their more
gradual takeoff emissions pathways would yield identical environmental objectives with
substantially lower economic costs, for the reasons discussed above. The EMF-14 exercise
validates this hypothesis.
5
To enable meaningful comparisons of results across models, the EMF has coordinated a
series of projects in which a number of large scale energy models are used to estimate the impact
of given, specified emissions reduction scenarios under common standardized, benchmark
assumptions concerning population and economic activity, discount rates, energy resource
availability and prices and technology availability.
6
All energy models make numerous simplifications and approximations in order to
describe the energy sector globally and over the span of a century or more. In particular, all of
the models assume full employment, thereby abstracting from the likely short-run
macroeconomic costs of an emissions reduction program.
10
The EMF-14 comparison project assessed the total costs to the OECD, the EEFSU
(Eastern Europe and the former Soviet Union) and the non-Annex I countries of the
WG-1 and WRE pathways to stabilization of CO₂ concentrations at 550 ppmv. The appropriate
economic measure of total cost is the present discounted value of losses in future consumption
relative to a "business as usual" scenario. Estimates of regional costs depend on the extent of
burden sharing--namely, the assumed "division of labor"--between Annex I and non-Annex I
countries in controlling emissions as well as the extent of international emissions trading. Recall
that, by the end of the next century--by 2100-- assuming "business as usual"--non-Annex I
countries will have more than 90 percent of CO₂ emissions. Thus, developing country
participation is absolutely essential to achieving stabilization of concentrations. Consistent with
the Berlin Mandate, the simulations assumed that the burden of emissions reduction would fall
on Annex I countries exclusively during the early decades; that by 2030, non-Annex I countries
would begin to participate; and by 2050, a full transition to targets based on equal per capita
emissions rights is assumed.
Figure 3 plots the OECD emissions paths in the WG-1 and WRE scenarios. Under the
WG-1 scenario, OECD emissions begin to decline immediately and continue to decline for
roughly four decades. For example, OECD emissions fall 10 percent below initial levels ten
years after implementation. This corresponds roughly to the requirement of a "1990 by 2010"
timetable--that emissions decline about 15 percent from their projected 2000 level during the
decade between 2000 and 2010. In contrast, OECD emissions along the WRE path continue to
rise for roughly two decades--corresponding closely to a plan calling for emissions to peak
around 2020--return to 1990 levels around 2040 and decline substantially further in subsequent
decades.
Table 1 illustrates a robust conclusion that emerges from this exercise: fast takeoff in
emissions reductions greatly increases the costs. Table 1 shows the cost for both the aggressive
(WG-1) and gradual (WRE) paths--both with and without idealized international trading of
permits. In 10 out of 12 simulations--for six different models with and without permit trading--
the costs on the gradual WRE path is less than a third of the cost on the corresponding fast take-
off path. Taking account of the likely adverse short-run macroeconomic consequences of an
aggressive path would further strengthen this conclusion.
Table 2 illustrates a second, robust conclusion from the EMF-14 exercise: a viable system
of international permit trading would very much reduce OECD costs. With global permit
trading, the sharp, early emissions reductions required of OECD countries under the aggressive
(WG-1) approach would be avoided through the purchase of emissions permits from countries
with lower abatement costs. The average reduction in cost is 56 percent.⁷
7 The computations in Table 2 verify that the gradual (WRE) path, which permits
emissions to depart relatively little from business as usual for several decades, is a substantially
less costly than the alternative WG-1 path with its sharper immediate reductions. Since both
11
Finally, it is important to note that in most of the EMF models, policy actions to raise
carbon emissions prices must be taken at the inception of the gradual (WRE) program and a
commitment to increasing emissions prices over time is required to achieve additional emissions
reductions. Naturally, the required initial carbon emissions price is substantially lower, at the
outset, under the gradual (WRE) than under the aggressive (WG-1) path. Thus, although the
gradual emissions path initially approximates the business as usual baseline, credible incentives
must be put into place immediately, and strengthened over time, to achieve the needed
investments in carbon-efficient technologies.
V. The Environmental Consequences of Gradual versus Fast Takeoff.
While the excess cost of a fast, compared to a gradual emissions reduction path is large,
the difference in projected global temperatures over the next century between the fast and the
gradual paths is quite small, both in absolute amount and relative to temperature changes
expected even if an aggressive policy path is adopted. Under "business as usual" assumptions,
average global temperatures are expected to rise about 1 degree Celsius by 2050 and about 2½
degrees Celsius by 2100. An aggressive Annex I emissions reduction path that stabilizes
emissions at 1990 levels by 2010 and maintains emissions at the 1990 level thereafter would
mitigate this temperature increase by roughly 0.1 degrees by 2050 and 0.2 degrees by 2100.⁸ In
contrast, a more gradual Annex I emissions path that peaks around 2015, stabilizes emissions at
1990 levels by 2040, and holds emissions constant at 1990 levels thereafter yields virtually
identical environmental benefits: the temperature difference between the aggressive and gradual
paths diverges by no more than 0.05 degrees at any time over the next century. Similarly, the
temperature differences along the aggressive WG-1 and less aggressive WRE paths--both
designed ultimately to stabilize concentrations at 550 ppmv--differ by a maximum of 0.2 degrees
over the next several centuries.⁹
paths are arbitrarily chosen to conform with the 550 ppmv concentration target, a natural
question concerns the characteristics of an optimal or least-cost path for achieving this
concentration target. An important recent study by Alan Manne and Richard Richels uses their
MERGE model (included in the EMF-14 project) to compute the least-cost path with 550 ppmv
stabilization and international permit trading. The optimal path, while not identical to the WRE
path, is similar in character. This least-cost path peaks approximately three decades after the
initiation of the program and declines thereafter.
8 Successful stabilization would require very large cuts from "business as usual" in
China, India, and other non-Annex I countries.
9 If a model assumes that sulfur dioxide emissions decline with the decline in carbon
dioxide emissions under climate policy (as predicted, given the extent of sulfur emissions
associated with fossil fuel combustion, and incorporated in the IPCC's IS92 emissions
12
The limited climatological impact of even an extremely aggressive emissions reduction
program measured in terms of temperature impacts during the next century reflects the extremely
long lags involved in the underlying physical processes and the dependence of temperature on
the total stock of carbon dioxide in the atmosphere, rather than the flow of emissions at a given
time. Emissions reductions do matter to temperature, but only over an extremely long horizon.
The cumulative nature of the process suggests that there is little effect on global temperature
from a gradual rather than from a fast abatement takeoff. The addition to the total stock of
carbon from a gradual rather than a fast start to abatement adds relatively little to the total
atmospheric stock of CO₂ between now and 2100 for four separate reasons: the difference in
carbon emissions between a gradual and a fast start over the initial decades of abatement is only a
small fraction of total emissions in that period; the stock of CO₂ in the atmosphere is itself the
result of many decades of emissions; some of the CO₂ emissions of the early decades will have
been re-absorbed; and the most serious build-up in CO₂ under business as usual occurs late in the
next century, as a consequence of burgeoning emissions from non-Annex I countries.
Even the potential for a catastrophic environmental event, such as the melting of the West
Antarctic ice sheet, a runaway greenhouse effect (e.g., from release of trapped methane with the
melting of the permafrost), or a structural change in ocean currents such as the Gulf Stream,
which the preceding abstracts from, does not fundamentally affect the basic trade-offs between
the high costs of fast vs. gradual takeoff paths. These factors do, however, add--perhaps greatly--
to the urgency of adopting moderate long-term greenhouse gas concentration targets and a
program involving an immediate, albeit moderate, increase in the price of CO₂ emissions.
VI. International Trading of Permits
As has already been noted, an effective system of international carbon emissions permit
trading among Annex I countries could substantially diminish the cost of a CO₂ abatement
program. An Annex I trading system could, potentially, reduce the size of the carbon emissions
price to attain a 1990 by 2010 goal by up to 50%. Moreover, joint implementation projects with
non-Annex I countries could, hypothetically, reduce this figure by half again.
Although international trading and joint implementation--so-called "where flexibility"--
has enormous advantages in theory, your economic advisers are concerned that substantial
barriers would stand in the way of implementing any workable analogue of such an idealized
system--at least in the near term. Consequently, they stress that Annex I international permit
trading and joint implementation between the U.S. and non-Annex I countries realistically can
projections), the more aggressive WG-1 path will be warmer than the WRE path between 2000
and 2040. This result reflects the negative impact of sulfate aerosols on the greenhouse effect.
Early and substantial cuts in fossil fuel combustion, while decreasing the carbon emissions that
warm the atmosphere, also decrease the sulfate aerosols that cool the atmosphere.
13
serve only a limited role in reducing the costs associated with meeting a "1990 by 2010" target.
A hypothetical example shows how an international trading system would work, and why
it would reduce each participant country's abatement costs. Suppose, ideally, that every country
adopts a domestic permit system to implement its Kyoto target. Absent international trading, the
price of emissions permits would surely differ across countries, reflecting differing marginal
costs of abatement internationally. With different permit prices in different national markets,
profit-seeking traders would be motivated to buy permits in countries where they are cheap and
resell them in countries where they are more expensive. Such arbitrage activities would create an
international permit market, bringing permit prices into equality worldwide. This idealized
system promotes global efficiency in achieving any worldwide abatement goal. Countries with
permit prices below world levels have the incentive to reduce emissions more than they
otherwise would in order to profit in the international permit market. Countries with high permit
prices would have the incentive to purchase permits, thereby relaxing their Kyoto emissions
constraints. The U.S. government could avoid any direct participation in such a system as long
as it deems foreign-issued permits presented to the U.S. government by U.S. carbon-emitting
entities as valid as those issued by the U.S. government itself.
The preceding description of how an international permit trading system would work
provides an idealized picture of its possibilities. But the actual benefits of such a system are apt
to fall short of this utopian portrayal in part because countries are not obliged to fulfill their
Kyoto commitments via a domestic permit trading scheme; indeed, few Annex I countries have
indicated an intention to do so. For example, consider a government that has decided to limit
domestic emissions through regulatory controls. International permit sales that result in tighter
domestic constraints could well be politically unpopular so that a government would hesitate
before selling its emissions rights to the United States. Similarly, international permit sales by a
country that is meeting its Kyoto obligations through domestic carbon or energy taxes would
necessitate a hike in those taxes. In either case, international trading would involve government
to government negotiations, and difficult political decisions. In contrast, in the idealized system,
trades result from profit-oriented transactions among individuals, mediated through the market.
Monitoring and enforcement issues are also likely to be paramount in insuring the
workability of international trading. If domestic enforcement is effective in all countries, so that,
in the aggregate, consumers and firms in each country actually limit their emissions to the
national permit levels, international permit sales by private agents in the country actually
translate into lower domestic emissions. But consider the difficulties that can occur with
imperfect enforcement. If the government of a country--country X--finds it difficult either to
measure domestic emissions or to enforce the purchase of permits by domestic emitters, then
reductions in X's emissions may be insufficient to reach the Kyoto target. Those firms or
individuals in X that are lucky enough to have been assigned the rights to X's permits will be able
to sell them, at a quick profit, on the international market. With imperfect enforcement,
international sales, without corresponding domestic emissions reductions, could emanate from
countries with the weakest systems of enforcement. To prevent such "paper trades", which profit
14
some participants and increase emissions, many countries, including the United States, will want
controls to ensure the integrity of international permits. Buyers, too, will want clear concrete
guarantees of the validity of permits so as to be sure they are not being passed counterfeit goods.
These controls and guarantees will surely inhibit the efficiency of the market and render some--
possibly much--of the estimated savings illusory. In fact, most of the benefits projected from the
international sale of permits come from inducing emissions reductions from countries in Eastern
Europe and the former Soviet Union--countries with particularly weak tax collection and
enforcement mechanisms. Without these countries in the scheme the gains from international
trading of permits will be very small.
Joint implementation with non-Annex I countries also has the potential to reduce the U.S.
burden of attaining any given timetable. Under this type of approach, U.S. businesses could
receive credit for the construction of nuclear, oil, or natural gas electricity generation plants in
China if it were confidently expected that China would instead have constructed coal-fired plants
with much higher CO₂ emissions. Certification of such credits might be overseen by an
international agency to ensure that the projects were emissions-replacing. Such a project-by-
project system is likely the most that is feasible in the absence of quantitative targets. Your
economics advisers have concerns about even this level of endeavor due to the inherent difficulty
in establishing that a particular set of projects has actually reduced a country's emissions, absent
a reference path enabling a clear quantitative comparison. For example, the construction of a
nuclear power plant in place of a coal-powered plant in China could indirectly raise CO₂
emissions elsewhere in the Chinese economy--partially offsetting the direct CO₂ reducing effect
of the project--if the reduced demand for coal lowers its domestic price and encourages greater
use elsewhere in the Chinese economy. A project-oriented approach to joint implementation
will, in effect, constitute a limited form of international trading with high transaction costs. As a
result, it will probably capture only a small fraction of the total benefits of full international
trading. In contrast, model results concerning the benefits of joint implementation treat it as
equivalent to idealized international trading.
VII. Recycling of Revenues
The ultimate economic cost of an emissions abatement program depends upon how the
revenues realized from carbon taxes or auctioned permits are used. It has been estimated that the
efficiency loss from collecting an extra dollar of tax revenue amounts to around 30 cents. If the
revenues from a carbon tax or auctioned permits are used to reduce inefficient taxes inhibiting
work or investment, the resulting gains would partially offset the micro-efficiency losses from
energy curtailment. The simple lesson is that the costs of emissions abatement may be greatly
reduced if the revenues from the taxes levied can be put to good use.
So far we have approached the recycling of revenues from the standpoint of
microeconomic efficiency. There is also the potential for using the revenues to abate the
macroeconomic consequences of the emissions program. The oil shocks are believed by many
15
economists to have resulted in increased unemployment because workers resisted the fall in real
wages that was associated with the inflationary impact of higher energy prices. Increased wage
demands added inflationary pressures to the economy that could only be suppressed by tighter
monetary policy. Thus it might be argued that the effects of the real wage shock on inflation and
unemployment could be diminished by lowering payroll or other worker taxes to offset the real
wage losses from higher energy prices.
But England's experience points to the need for caution in assessing the potential for
revenue recycling to allay the macroeconomic consequences of the rising energy costs. In 1979,
immediately after her election, Margaret Thatcher increased the VAT tax and simultaneously
decreased the income tax. These two policy changes had offsetting effects on real after tax
incomes, and therefore might have been expected to have had no effect on wage bargaining.
However, the increase in the VAT tax resulted in an immediately noticeable increase in the CPI.
A wage-price spiral ensued as workers attempted to maintain their pre-tax real wages.
VIII. Policy Implications
The foregoing arguments point to the attractiveness, from both an economic and
environmental standpoint, of a U.S. policy to raise the price of carbon emissions--either through
a carbon tax or a system of auctioned permits--by a moderate amount--for example, between $5
and $15 per ton of carbon--in the near term, with further increases scheduled over the longer
term. A realistic target and timetable corresponding to such a program would entail continued
emissions growth in the first decade of the program, say 2000-2010; elimination of emissions
growth in the second decade (2010-2020) and reductions in emissions thereafter. This program
entails significant, early policy action and is consistent with a strong U.S. commitment to
attaining the ultimate objective of the Framework Convention--namely to stabilize atmospheric
concentrations of CO₂ and hence global temperatures.
Figure 1: Energy Prices and Changes in Energy Use
OPEC price hikes lowered energy use substantially
100
3
90
Trend energy use
2.5
(1959 to 1973)
80
Energy use
2
Quadrillion BTU
70
60
1.5
Normalized real energy price
50
Normalized
1
real energy price index
40
30
0.5
1959
1964
1969
1974
1979
1984
1989
1994
Figure 2: Accelerated Retirement of Electric Power Plant Capacity
700
600
500
400
Gigawatts
300
200
100
0
1
5
10
15
20
25
30
35
40
Bar height shows capacity to retire early if complete change-over occurs within
number of years indicated on the axis. Normal life span of a generator is 40 years.
Figure 3: WRE and WG-1 Emissions Pathways for OECD
to Stabilize Concentrations at 550 ppmv
billion tons of carbon
4.5
WRE
4
WG1
3.5
3
2.5
2
1.5
1
0.5
1990
2000
2010
2020
2030
2040
2050
2060
2070
2080
2090
2100
Source: Manne and Richels
Table 1
The Effects of Emissions Pathway on Consumption Losses by OECD Countries,
No International Permit Trading (trillions of 1990 U.S. dollars)
Model
WRE
WG1
WRE/WG1
CETA
1.83
5.94
0.31
CPBRIVM
0.64
3.25
0.20
FUND
9.82
11.71
0.84
MERGE
0.85
6.12
0.14
MiniCAM
1.58
6.51
0.24
SGM
1.84
6.17
0.30
Average:
0.34
The Effects of Emissions Pathway on Consumption Losses by OECD Countries,
International Permit Trading (trillions of 1990 U.S. dollars)ᵃ
Model
WRE
WG1
WRE/WG1
CETA
1.86
4.03
0.46
CPBRIVM
0.17
0.99
0.17
FUND
1.47
4.97
0.30
MERGE
0.60
3.24
0.19
MiniCAM
0.54
3.44
0.16
SGM
0.13
1.48
0.088
Average:
0.23
Losses measure the present discounted value of foregone consumption through 2100 in trillions
of 1990 U.S. dollars.
Table 2
The Effects of International Permit Trading on Consumption Losses by OECD Countries,
WRE Emissions Pathway to 550 ppmv Stabilization (trillions of 1990 U.S. dollars)ᵃ
Model
Trading
No Trading
Trading/No
Trading
CETA
1.86
1.83
1.02
CPBRIVM
0.17
0.64
0.27
FUND
1.47
9.82
0.15
MERGE
0.60
0.85
0.71
MiniCAM
0.54
1.58
0.34
SGM
0.13
1.84
0.07
Average:
0.43
The Effects of International Permit Trading on Consumption Losses by OECD Countries,
WG1 Emissions Pathway to 550 ppmv Stabilization (trillions of 1990 U.S. dollars)ᵃ
Model
Trading
No Trading
Trading/No
Trading
CETA
4.03
5.94
0.68
CPBRIVM
0.99
3.25
0.30
FUND
4.97
11.71
042
MERGE
3.24
6.12
0.53
MiniCAM
3.44
6.51
0.53
SGM
1.48
6.17
0.24
Average:
0.45
aLosses measure the present discounted value of foregone consumption through 2100 in trillions
of 1990 U.S. dollars.
- coal
1
presentionalion of benefits
Sheet1 Chart 1
180
160
140
120
Permit price (1992$/ton)
100
80
60
40
20
0
0
5
10
15
20
25
30
Coal Consumption (exajoules)
Page 1
Murkowski Questions
11/17/97, Preliminary Draft
Responses to Murkowski Questions
2. When will the Administration release to the public the economic analysis that it used in
reaching these targets and timetables?
The Administration relied on an array of economic tools and analyses during the process of
selecting its target and timetable. Administration staff drew from the substantial economic
literature on climate change, energy, and the environment in assessing options for our negotiating
position. For example, the Administration considered analyses conducted by the
Intergovernmental Panel on Climate Change, the previously released Interagency Analytical
Team draft report, and the Department of Energy's Scenarios of U.S. Carbon Reductions.
However, there is not a distinct "economic analysis" document.
3. Will the economic analysis used to arrive at these targets and timetables be peer
reviewed?
a. If not, why not?
b. If so, will the peer reviewers comments be made public?
There is not a distinct "economic analysis" document that could be peer reviewed.
9. The economic modeling effort that was abandoned by the Administration earlier this
year assumed that the mere announcement of an agreement to reduce carbon dioxide
would immediately result in a 25% increase in the rate of improvement in energy
efficiency.
a. Was this a valid and realistic assumption?
b. Did the peer reviewers feel it was a realistic assumption?
Several of the peer reviewers noted that the rate of energy efficiency improvement (the
autonomous energy efficiency improvement, or AEEI) may be on the upper range of estimates of
this variable. The Interagency Analytical Team employed this higher rate to represent the
increase in technology research and development and diffusion that would occur as the economy
operates under expectations of higher energy prices in the future. By the nature of several of the
models used in the IAT process, the modelers had to incorporate these price expectations into the
AEEI parameter. There is disagreement among informed modelers about how realistic is the
AEEI used in the IAT.
Murkowski Questions
11/17/97, Preliminary Draft
10. The Administration economic modeling effort also assumed a decrease in long term
interest rates to almost 2%.
a. Was this a valid and realistic assumption?
b. Don't new taxes and higher costs tend to increase inflation and interest rates?
The IAT report indicates that in the modeling exercises, the revenues from carbon permit
auctions are used to reduce the deficit. As we heard many times over the past several years
during the balanced budget debate, cutting the Federal deficit will lower interest rates. In the
IAT's sensitivity analyses, the IAT found that recycling revenues by cutting corporate and
payroll taxes would also lower interest rates. To the extent that revenue from carbon permits
significantly reduce the deficit, this assumption is appropriate. All of these forms of revenue
recycling stimulate saving and investment, and help raise the growth rate of the economy.
11. The Administration modeling effort did not consider the costs associated with the
development, implementation, and monitoring of a trading program.
a. Was this a valid and realistic omission?
The purpose of the IAT was not to assess any specific policy position. Since the Administration
had not yet developed a policy position internally, the IAT did not have a specific
implementation policy to model. It would not be valid for the IAT to devise a specific,
hypothetical trading program and model the costs of implementing it.
12. Did the Administration modeling effort take into account the adverse effects on U.S.
competitiveness and the potential shifting of producers in the United States?
As several of the reviewers noted, the models used in the IAT do not handle international trade
well and the IAT did not specifically account for effects on U.S. competitiveness. However, the
Administration did rely on several analyses of competitiveness in coming to its decision on a
negotiating position.
Responses to Senator Chafee's Questions
1. The President and his Administration are still going through a process of hearing the opinions
of the many interested parties on this issue. This process will culminate with a White House
Conference in October on the climate change issue.
However, the framework for the Administration's policy has been largely settled. For example,
we support the use of flexible approaches, such as joint implementation and international
emissions trading. We support the requirement that non-Annex I countries, as they become
wealthier, abide to binding emissions goals. For domestic implementation, we support the use of
flexible, market based approaches. Although the President has spoken of the need for realistic
achievable targets, the Administration is still deciding the details on targets and timetables and
domestic implementation.
2. No one model, or even a small set of models, can give a definite estimate of the effects of a
policy on the economy 20 or 30 years into the future. However, a vast array of economic tools
exists to provide us with a basis for informed judgment about the likely effects of different
climate policies. For example, we know that a market based approach to reducing carbon
emissions will be less costly than a command and control approach. The Administration intends
to bring to bear on the climate issue many analytic tools and perspectives. Some of these may
have strengths on issues where the models used in the IAT analysis were weak. I am confident
that the analytic tools and perspectives available to the Administration can provide us with
sufficient information to generate ranges of economic effects so that the Administration can
make informed policy decisions.
3. The Administration is considering an array of market based approaches to implement climate
policy.
4. Tradeable emissions permits and energy taxes share several important characteristics. First,
they both send a price signal to markets that would stimulate the development and adoption of
energy efficient technologies. Second, they both provide flexibility to achieve emissions goals.
In the case of tradeable permits, firms that find it very costly to reduce emissions may purchase
permits from firms that find it less costly. In the case of taxes, firms would reduce their energy
use until it became more costly than the tax. These both achieve emissions reductions at
substantially lower costs than through command and control approaches.
Tradeable emissions permits would provide greater certainty than energy taxes of attaining a
specified emissions cap. By specifying a number of permits and allowing firms to trade these
permits, the country can ensure that it is meeting an agreed upon carbon emissions goal. A tax,
on the other hand, would provide greater certainty than a cap-and-trade approach of limiting
costs, since the increase in unit costs would be determined by the tax.
5. For international emissions trading, all countries participating in the trading scheme will need
to have their emissions capped.
International emissions trading can significantly decrease the costs of meeting an emissions goal.
It would provide greater opportunities to reduce emissions at low costs. If some of the emissions
reductions necessary to achieve the U.S. goal can be undertaken in other countries at lower costs,
then U.S. emissions control costs will fall. In both the IAT analysis and other modeling efforts,
the costs of achieving a variety of emissions goals could decrease by more than half.
For joint implementation, all countries may participate, regardless of when their emissions will
be capped. Lower cost abatement opportunities abroad again suggest substantial savings to the
U.S. could result if U.S. companies could receive credit for incremental abatement efforts in
other counties.
6. Some innovation surely occurs in the absence of a price signal. Many studies suggest that
energy use relative to GDP falls each year regardless of the price signal by 0.5 to 1.25 percent.
To the extent that energy use is associated with climate change effects, and this causes damages
not reflected in market prices, this innovation is unlikely to be sufficient. Additional incentives
to innovation, such as price signals, or support for R&D may be needed.
7. As the question notes, some observers of the climate change issue have claimed that capping
only developed countries' emissions will result in "leakage": the escape of jobs, capital, and
polluting activity to developing countries. Any time countries negotiate international treaties that
would apply different rules to different countries, there is a concern about some countries gaining
a competitive advantage. However, the economic evidence does not support the argument that
climate policy will adversely affect U.S. economic competitiveness. First, non-tradeable sectors
account for a substantial share of carbon emissions. Transportation and residential and
commercial buildings account for approximately two-thirds of U.S. carbon emissions. For these
sectors, the "competitiveness" argument does not appear applicable. Second, energy costs
comprise only a small percentage of total manufacturing costs. According to the 1995 Annual
Census of Manufactures, energy costs for manufacturing industries averaged just 2.2% of total
costs. Given the small share of energy in total costs, differential shifts in existing energy prices
are unlikely to have substantial effects on location decisions and trade flows. Third, our
experience in this country with environmental regulation has been that it does not cause
significant leakage. Firms that decide to relocate to other countries do so because of
international differences in labor costs, capital costs, material costs, and exchange rate changes
that all swamp the costs of complying with environmental regulations.
To address the possibility of leakage occurring, we should do climate policy smart. If we do it
dumb, it will cost our economy a lot. By doing it smart, through flexible, market-based
approaches, we will make the costs of complying with an emissions goal much lower. In
addition to using market-based approaches domestically, joint implementation and international
emissions trading would also lower the costs of climate policy. These lower costs associated
with a smart climate policy would decrease the economic rationale for industries to move to
developing countries.
Responses to Senator Boxer's Questions
1. As stated in my answer to question 7 of Senator Chafee's questions, some observers of the
climate change issue have claimed that capping only developed countries' emissions will result
in "leakage": the escape of jobs, capital, and polluting activity to developing countries. Any time
countries negotiate international treaties that would apply different rules to different countries,
there is a concern about some countries gaining a competitive advantage. However, the
economic evidence does not support the argument that climate policy will adversely affect U.S.
economic competitiveness. First, non-tradeable sectors account for a substantial share of carbon
emissions. Transportation and residential and commercial buildings account for approximately
two-thirds of U.S. carbon emissions. For these sectors, the "competitiveness" argument does not
appear applicable. Second, energy costs comprise only a small percentage of total manufacturing
costs. According to the 1995 Annual Census of Manufacturers, energy costs for manufacturing
industries averaged just 2.2% of total costs. Given the small share of energy in total costs,
differential shifts in existing energy prices are unlikely to have substantial effects on location
decisions and trade flows. Third, our experience in this country with environmental regulation
has been that it does not cause significant leakage. Firms that decide to relocate to other
countries do so because of international differences in labor costs, capital costs, material costs,
and exchange rate changes that all swamp the costs of complying with environmental
regulations.
To address the possibility of leakage occurring, we should do climate policy smart. If we do it
dumb, it will cost our economy a lot. By doing it smart, through flexible, market-based
approaches, we will make the costs of complying with an emissions goal much lower. In
addition to using market-based approaches domestically, joint implementation and international
emissions trading would also lower the costs of climate policy. These lower costs associated
with a smart climate policy would decrease the economic rationale for industries to move to
developing countries.
2. The costs of reducing emissions in the U.S., and in Europe and Japan depend on how all of
these countries implement their policies. If the U.S. employs a market based approach, the costs
will not be that high relative to Europe and Japan. Regardless of the implementation approaches
used in these countries, the costs of emissions reductions are not likely to affect U.S.
competitiveness. As noted above, energy costs comprise a small share of total manufacturing
costs (2.2%). Further, two-thirds of carbon emissions occur in non-tradeable sectors. The
evidence on energy price differentials across countries suggests that they are not sufficient to
spur firm relocation to other countries.
3. The IAT report did not focus on the benefits of reducing greenhouse gas emissions. Without a
benefits assessment, the IAT could not provide estimates of the positive effects on human health
and the environment. In addition, the IAT did not study the effects of the risks of climate change
on economic activity. However, the report did assess the impacts of climate policy on the
economy. The IAT analysis confirms other economic research (for example, the recent report by
the World Resources Institute) that smart climate policy can actually lead to net benefits in the
long term. For example, the IAT analysis found that auctioning off tradeable permits and using
the proceeds of the auction to lower income and corporate taxes would help the economy grow
faster in the future than without climate policy.
4. The longer we wait to take any action can adversely affect the economic and environmental
outcomes of climate policy. However, we do know that more gradual efforts to reduce our
carbon emissions can lower the economic costs relative to very aggressive reductions efforts
while still achieving the same carbon dioxide concentration goal. For example, some
international proposals to reduce carbon emissions would have Annex I countries cutting
emissions to 20% below 1990 levels by 2005. Such a target would have very substantial
economic costs because it does not provide enough time for the capital stock to turn over. It is
very expensive to scrap the existing capital stock, while much of it is in the prime of its life, and
replace it with carbon-free technology. Further, such a target would require the economy to
employ existing low-carbon and carbon-free technologies while longer-term targets would
provide more lead time to develop and implement superior technologies. Given that it is the
stock of carbon dioxide, not the annual emissions of carbon dioxide, that drive global warming,
there is an opportunity to be flexible in the timing of emissions reductions. Less aggressive paths
that 1990 -20% emissions level by 2005 could achieve the same carbon dioxide concentration
stabilization goal in the year 2100 by increasing carbon reductions in the future when they are
less costly to the economy.
5. It is very difficult to assess the nature of the economy, and especially specific industries, 20 or
30 years into the future. If the country embarked on a policy of reducing carbon emissions,
obviously the firms and industries that can creatively and cost-effectively reduce their emissions
will benefit relative to their competitors. To reduce carbon emissions, it is reasonable to envision
that the products and services of industries that develop energy efficient technologies and
industries that develop low-carbon based energy (such as renewable energy sources including
wind, solar, and biomass) would be in greater demand.
Responses to Senator Lieberman's Questions
1. The Administration's analysis on the issue of climate policy has not occurred in a vacuum. In
fact, climate change has been one of the more active areas of research in economics this decade.
The economic literature on climate change, complemented by the IAT report, has already done
quite a lot to inform the policy development process. Based on the economic research, we have
identified some of the important characteristics of the climate policy we will develop: joint
implementation, international emissions trading, developing country participation, emissions
budgets, and market-based, flexible domestic implementation. My interpretation of the role of
economics differs -- I believe economics has informed the process, and I am confident that it will
continue to play an important role in our country's deliberations over a climate policy position.
2. As stated in my answer to question 2 of Senator Chafee's questions, no one model, or even a
small set of models, can give a definite estimate of the effects of a policy on the economy 20 or
30 years into the future. However, a vast array of economic tools exists to provide us with a
basis for informed judgment about the likely effects of different climate policies. For example,
we know that a market based approach to reducing carbon emissions will be less costly than a
command and control approach. The Administration intends to bring to bear on the climate issue
many analytic tools and perspectives. Some of these may have strengths on issues where the
models used in the IAT analysis were weak. I am confident that the analytic tools and
perspectives available to the Administration can provide us with sufficient information to
generate ranges of economic effects so that the Administration can make informed policy
decisions.
Schaefer Questions
12.
The Administration frequently cites the 2000 economists who say they support
controlling greenhouse gases. Their statement supports as the mechanism either carbon
taxes or emission permits. In the past, the Administration has said it opposes the use of
taxes. Is that still the Administration's position?
The first stage of the President's climate change plan calls for tax cuts over the next 5 years to
stimulate the development and adoption of energy efficient and carbon-lean technologies. These
targeted tax cuts -- coupled with focussed R&D spending, credit for early action by industry,
Federal leadership through improved procurement and energy use, and industry-by-industry
consultations to encourage carbon reductions -- provide a solid foundation for the President's
plan to reduce our nation's carbon emissions to 1990 levels by 2008-2012. In the next stage,
around 2004, we will review our progress and evaluate our next steps as we move toward a
market-based permit trading system for carbon dioxide. After the nation has reviewed its
decade's worth of experience, a carbon dioxide permit system, consistent with the
recommendation of the Economists' Statement on Climate Change, will be implemented.
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EXECUTIVE OFFICE OF THE PRESIDENT
SEEND
OFFICE OF MANAGEMENT AND BUDGET
/
STATES
WASHINGTON, D.C. 20503
TRANSMISSION NUMBER: 202/395-5836
ENVIRONMENT BRANCH
VERIFICATION NUMBER: 202/395-6827
ROOM 8026
NEW EXECUTIVE OFFICE BLDG.
Name
Fax # X56809
To:
Joe Aldy
From:
Bob Tucrillo
Message:
Gs/As on climate change
Number of Pages to Follow: 17
Date:
10/8/97
Time: 2:45pm
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Total Pages:
LRM ID: EHF280
EXECUTIVE OFFICE OF THE PRESIDENT
OFFICE OF MANAGEMENT AND BUDGET
Washington, D.C. 20503-0001
Tuesday, October 7, 1997
LEGISLATIVE REFERRAL MEMORANDUM
TO:
Legislative Liaison Officer - See Distribution below
FROM:
Ronald K. Peterson (for) Assistant Director for Legislative Reference
OMB CONTACT:
Robert J. Tuccillo
PHONE: (202)395-5609 FAX: (202)395-5836
SUBJECT:
STATE Qs and As on Global Climate Change
DEADLINE:
11:00 AM Wednesday, October 8, 1997
In accordance with OMB Circular A-19, OMB requests the views of your agency on the above
subject before advising on its relationship to the program of the President. Please advise us If this
Item will affect direct spending or receipts for purposes of the "Pay-As-You-Go" provisions of Title
XIII of the Omnibus Budget Reconcillation Act of 1990.
COMMENTS: State needs to provide these answers to the Senate Foreign Relations Committee
prior to the Thursday 10/9/97 hearing.
DISTRIBUTION LIST
AGENCIES:
7-AGRICULTURE - Marvin Shapiro - (202) 720-1516
25-COMMERCE - Michael A. Levitt - (202) 482-3151
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18-Council of Economic Advisers - Liaison Officer (202) 395-5084
29-DEFENSE - Semuel T. Brick Jr. (703) 697-1305
32-ENERGY - Bob Rabben - (202) 586-6718
33-Environmental Protection Agency Chris Hoff - (202) 260-5414
61-JUSTICE - Andrew Fois - (202) 514-2141
59-INTERIOR - Jane Lyder - (202) 208-4371
76-National Economic Council - Sonyla Matthews - (202) 456-6630
95-Office of Science and Technology Policy - Jeff Smith - (202) 456-6047
117 and 340-TRANSPORTATION - Tom Herlihy - (202) 366-4687
118-TREASURY Richard S. Carro - (202) 622-0650
128-US Trade Representative Fred Montgomery - (202) 395-3475
EOP:
Kathleen A. McGinty
David B Sandalow
Bruce K. Sasser
D. Forrister
Gene B. Sperling
Rodmy Bont
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Todd Stern
Joseph J. Minarik
Michele Jolin
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LRM ID: EHF280
SUBJECT: STATE Qs and As on Global Climate Change
RESPONSE TO
LEGISLATIVE REFERRAL
MEMORANDUM
If your response to this request for views Is short (e.g., conour/no comment), we prefer that you respond by
e-mail or by faxing us this response sheet. If the response is short and you prefer to call, please call the
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Please Include the LRM number shown above, and the subject shown below.
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Office of Management and Budget
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FROM:
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(Agency)
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The following is the reponse of our agency to your request for views on the above-captioned subject:
Concur
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See proposed edits on pages
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ID:
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SFRC . Hagel & Kerry Q's & A's
1
Questions for the Record Submitted by Chairman Hagel lo
Under Secretary of State Timothy Wirth
Senate Foreign Relations Committee
Subcommittee on International Economic Policy,
Export and Trade Promotion
June 19, 1997
Senator Hagel
1. Q: What enabling legislation might be accessary to implement any agreement that
would mandate legally-biuding emissions reductions on the United States?
A: Any legally binding agreement would require Senate ratification of the protocol or other legal
instrument itself. Any specific legislation to implement domestically the agreement would
depend on the nature of the international agreement itself and the policies chosen to implement it
domestically. At this time, we are still evaluating a wide range of options for domestic
implementation and therefore cannot state with any specificity what implementing legislation
might be required.
2 Q: I understand a Department of Energy official made a presentation at a May 6, 1997
meeting of the Society of Automotive Engineers. At the meeting, this official reportedly
said that to return to 1990 greenhouse gas cmissions, this country would either have to
increase average fuel efficiency to 70 mpg by 2005, or institute gasoline taxes 74 cents per
gallon by 2005. Do you agree with the assessment of the Administration official?
A: The Department official was providing a report based primarily on material developed for the
Policy Dialogue Advisory Committee 10 Assist the Fresident in the Development of Measures to
Significantly Reduce Greenhouse Gas Emissions from Personal Motor Vehicles. This
Presidential advisory committee considered ways to return personal transportation-sector
greenhouse gas emissions to 1990 levels by 2005, 2015 and 2025. While this committee did not
reach a consensus on the best policies to achieve these goals. substantial analytic work was
performed including the information you asked about.
The official did not report at the Society of Automotive Engineers meeting that the U.S. needed
to increaso automotive efficiency to any specific level or that we would need a gasoline tax in
order for the U.S. to stabilize U.S. greenhouse year emissions at 1990 levels. Rather, what was
said was that If one tried to return estimated future U.S. emissions from private motor vehicles to
their 1990 levels by 2005 assuming the use of either fuel economy standards or a gasoline tax.
that a 70 mpg standard or a 74 cent per gallon tax would be required. This is clearly not this
Administration's policy.
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The Administration favors a flexible approach to reducing emissions that would permit market
forces to select the most cost-effective approaches. These should be aided by the availability of
advanced technologies that joint government-industry research will provide. We believe there
are other preferable approaches to reducing personal transportation emissions besides fuel
economy standards or gasoline taxes. These options include the introduction of advanced
technology vehicles (now under development- Partnership for a New Generation of Vehicles)
and the use of low-greenhouse gas fuels such as cellulosic ethanol. We would note that the
Department official concluded his presentation by saying that continued federal and private
investment in these promising technologies was a prudent approach to reducing transportation
sector emissions and that they were a more cost-offective approach than fuel taxce or fuel
economy requirements.
3. Q: Last year the Administration adopted a position supporting "legally bluding
commitments" on the United States to reduce greenhouse gas emissions. What entity do
you envision enforcing these legally blading commitments on our government and our
nation?
A: The U.S. proposal calls for each Party to establish a system for national reporting and
measurement of greenhouse gas emissions. as well as putting in place national compliance and
enforcement programs relevant to implementation of its obligations. Thus, the primary
responsibility for enforcement is at the national lovel. In addition, the U.S. proposal calls for the
establishment of a review process, in which expert teams, coordinated by the Protocol Secretariat
would assess Parties' implementation of their obligations. The Parties to the protocol, based on
the results of such reviews, would have the responsibility of reviewing compliance, and
determining what consequences (if any) should be applied in cases of non-compliance.
4. Q: Do you intend any emissions trading scheme to apply equally to public and private
entities? Would it apply to city and state governments? Would It apply to the Federal
Government and our Armed Forces?
A: The draft proposal does not establish a domestic system for emissions trading; that decision
is left to each Party to determine on its own. However, the regime would permit individual
Parties to allow private sector trading as well as sub-national entities such as local or state
governments. The Administration has not yet taken a position with respect to the domostic
implementation of the protocol in this regard.
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SFRC - Hagel & Kerry Q's & A's
3
5. Q: Has the Department of Defense conducted a study on the effect the treaty's
restrictions would place on its activities?
A: DoD has a global climate change integrated product team (IPT) in place that is assessing the
impacts of the negotiations on DoD activities; however, no conclusions have yct boon roached.
6. Q: The U.S. draft protocol includes language referring to various automatic and
discretionary "consequences for non-compilance with obligations." What exactly does this
refer to?
A: In the U.S. view, a logally binding obligation will be essential to ensuring that countries
actually lower their levels of emissions. Past experience has shown that in order to implement
binding obligations, consequences for non-compliance also need to be developed. A number of
alternatives are heing considered for such consequences. We anticipate that they will range in
severity according to the Articles for which non-compliance is determined. For example,
different provisions might be Imposed for non-compliance with monitoring than for
non-compliance with meeting a budget. Different provisions may also be imposed for multiple
incidents of non-compliance than for only a single incident. We believe that allowing non-
compliance to be determined on a completely ad hoc basis will limit the effectiveness of the
regime. To this end, we have proposed that the non-compliance provisions bc made explicit
through a decision by the Parties.
7. Q: The Administration opposes "differentiated" commitments by OECD countries.
Yet, 1 understand the European Union has proposed a mechanisms whereby each of its
member states would have a different commitment for percentage reductions. Is the
Administration considering accepting an exception for the EU?
A; No. While we believe that the European Union (or any other Party or groups of Parties) may
choose to undertake a scries of agreements whereby emissions trading might be allowed, we do
not believe that the "bubble" as proposed by the EU is an appropriate mechanism. Furthermore,
while the Administration has recognized that differences do exist between countries, we do not
believe it will be possible to negotiate those differences and reach a consensus on the outcome in
time to conclude negotiations by December 1997 in Kyoto.
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SFRC . Hagel & Kerry Q's & A's
4
8. Q: I understand that Argonne National Laboratory conducted a study on "The Impacts
of Potential Climate Change Commitments on Energy-Intensive Industries." That study
was reportedly completed last November, but still has not been made public. Please
explain why It has not been released.
- Are press reports accurate that the study found a devastating impact on the steel,
aluminum, cement, chemical, petroleum, and forest products industries?
A. The Department sponsored a project at Argonne in which panels of industry representatives
experts from academia, environmental groups, organized labor, the financial community, and
government were asked to reflect on the possible industry met to discuss the possible impacts on
industry output, employment, energy usage, technology, costs, prices, imports and exports.
The negative conclusions expressed by the participants were predicated on the specific energy
price scenarios assumed in mid-1996, which do not reflect key policies advocated in international
climate negotiations by the Clinton administration in the intervening year. For example, the
assumed fuel price scenarios do not take into account the impact of multi-year emissions
budgets, international emission trading. and joint implementation. If adoptod, these provisions
would lower the costs of achieving emissions 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.
A draft paper providing a personal interpretation of the workshops was circulated prior to
completion of the report by an individual employee of Argonne National Laboratory. That paper
was apparently prepared in advance of the participants' review of the workshop summaries to
ensure that their input had been reported accurately, and prior to the lead authors' completion of
the revised focus papers based on comments received at the workshops.
The final report, The Impact of High Energy Price Soenarios on Energy-Intensive Sectors:
Perspectives from Industry Workshops, was issued on July 11, 1997. It includes an accurate and
complete summary of the workshop findings, the full text of all the lead authors' papers. and the
socnarios given to the participants.
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SFRC Hagel & Kerry Q's & A's
$
9. Q: Regarding the Administration's draft report to the U.N. body that was set up to
monitor the 1992 Framework Convention on Climate Change: I understand that this draft
report says that the U.S. is unlikely to be able to return Its greenhouse gas emissions to
1990 levels by the year 2000 for two reasons: First, U.S. energy prices are too low, and
second, the U.S. economy Is too strong. no this correct, and If so, do you agree with this
assessment?
A: This report was completed in final in August 1997, and submitted to the Convention
Secretariat. Copies have been sent to your committee. That report states that several reasons are
anticipated to lead to U.S. emissions in 2000 exceeding their 1990 levels: energy prices being
lower than projected when the U.S. emissions reduction program was first established; Congress
providing reduced funding from that proposed in the Administration program; and individual
programs working less effectively than anticipated. While the economy did perform more
robustly than expected, this factor is not considered likely to lead to significant increases in
emissions beyond those projected.
10. Q: In follow-up to my previous question, this draft U.S. report also says that due to
economic growth and population growth, U.S. energy consumption would have to be
reduced 25% by the year 2010 to return greenhouse gas emissions to 1990 levels.
- What impact would this level of reduction in energy use have on U.S. economic growth?
How does the Impact on the United States compare to that of our European and
2
Japanese competitors? I would note that these countries are experiencing much weaker
economic growth than the United States.
A: The report does Dol state that energy consumption would need to be lower- - only that to
maintain emissions at 1990 levels, emissions would need to be approximately 24% below
projected levels. This could be accomplished through changes in efficiency in energy production
and consumption, through fuel switching (away from emissions intensive fuels), through the
development of new procosses that produce fewer emissions, as well as through conservation and
reduced energy consumption. No definitive economic analysis has been performed that can
provide a guaranteed projection of the effects of such a program. However) most modelers and
economists agree that a properly designed program would have little aggregate cost to the U.S.
economy, although most recognize that there would be some distributive effects, with some
scotors and regions of the country outperforming others. The costs of emissions reductions could
be substantially reduced if market instruments such as emissions trading and joint
implementation were allowed.
Projections for both Japan and Europe suggest that their economics are unlikcly to grow at rates
similar to that of the United States over the next docado. However, due to the greater officiency
of these economies (fewer emissions are produced per unit of GDP than in the United States),
many economists have estimated that reductions in these countries will be more costly than in the
United States. Overall GDP impacts from returning emissions to 1990 levels are thus estimated
to be higher in both Europe and Japan than here.
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11. Q: You have stated the belief that technology will lower the costs of this proposed
treaty to the U.S. economy. Can you Identify which specific technologies will do so, and by
how much?
A: No. The Administration has rejected developing new technologies through a command-and-
control type approach. Rather, we are seeking to develop appropriate market signals and
maintain a robust markotplace to encourage our private sector to develop those technologies that
will generate the greatest emissions reductions at the lowest cost. Historical rates of technology
development have varied between 1 percent and more than 3 percent per year. While it seems
likely that future development will proceed at similar rates, projecting the effects changes in
technology will have on emissions reductions directly is fraught with ambiguity. Existing
forecasts suggests, however, that costs with a greater rate of technological efficiency factored in
will make it less expensive to achieve a 1990 level of emissions in 2010 than without relying on
such changes.
12. Q: Is the Administration committed to submitting for Senate advice and consent any
agreement on climate change reached at the Third Conference of Parties this December in
Kyoto, Japan? Are there any circumstances under which the Administration would not
submit to the United States Senate any such agreement?
A: The Administration would anticipate submitting for Senate advice and consent w ratification
any agreement adopted in Kyoto that would impose new legally binding commitments on the
United States. We do not envision any circumstances in which such a new legal instrument
would not be submitted to the United States Senate for Senate advice and consent to ratification.
Senator Kerry
1. Q: Based on the current scientific knowledge. how much concern should we have about
the problem of climate change? Is the Administration using the best available science In
making policy decisions?
A: The Administration's concern about climate change is predicated on the best available
scientific information This includes not only the work of the Intergovernmental Panel on
Climate Change (a group of more than 2000 scientists who contributed to an international
assessment of the science, impacts, response options and economic issues of climate change), but
also on the work of the U.S. domestic scientific establishment as reflected in governmental and
non-governmental publications. This body of information, which in its totality represents the
vast majority of all the scientific work on this complex and difficult issue, suggests that without
significant action, over the course of the next 100 years. we will be faced with substantial
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SFRC - Hagel & Keny Q's & A's
7
changes in the world's climate system, which could have enormous impacts on the human and
natural systems. The Administration views (and believes that Congress and the American people
should view) this as a matter for grave concern - not only for the future when these impacts will
be felt, but now, when the opportunity still exists to prevent such changes.
2. Q: What is known about the impacts of possible climate change for the United States?
In particular, is there any Information available about the consequences of sea level rise,
about changes in the availability of water and water resources, and possible implications
for changes in disease vectors from a change in climate?
A: Humun health, natural ecological systems, and socioeconomic systems are all sensitive to
both the magnitude and the rate of climate change. The Intergovemmental Panel on Climate
Change (IPCC) concluded in its 1995 Second Assessment that, "With the growth in almosphoric
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 groater."
Sea level risc. Global tidal gauge data shows that worldwide sea levels have risen 4 to 10 inches
over the last century. Tidal gauge data from the US shows that sea levels have risen by as much
as 3 feet over the last century in Louisiana and parts of California and Texas, to 1 foot along
most of the Atlantic and gulf coasts. In Los Angeles, sea level has risen about 4 inches over the
last 100 years.
The level of the ABR is affected by goological and climate factors. although climate has
historically had more substantial impacts on global sea level. Throughout geologic history, the
sea level has risen and Dallen over 1000 feet. Globally, this phenomenon is duo to changes in the
shape and size of ocean basins, the amount of water in the oceans and the average density of sea
water. Over the last 100 years, tide guuges used to determine global sea level trends have shown
global sea level to have risen about 4-10 inches. This rise is caused by thermal expansion of
ocean water and melting of land-based ice sheets and glaciers. Regional changes in sea level
vary from the global average because of other factors such as the independently increasing or
decreasing elevation of the land due to tectonic activity, compacting of sediments, or subsurface
pumping of petroleum or water. The net effect is referred to as relative sea level rise. Along
some of the US Coust, the relative sea level rise has been closer to 12 inches.
Previous relationships between climate and sea level, and increasing concentrations of
greenhouse gases. form the basis for expecting an accelerated rise in sca level. Increasing
concentrations of carbon dioxide, methane, and other gases released by human activities could
ralso the earth's average temperature. A warmer stmosphere would retain more water vapor,
intensifying the hydrologic cycle in coastal areas and over open ocean: Snow and floating ice
would retreat, decreasing the extent to which sunlight is reflected into space, causing additional
warming. These two feedbacks would amplify the direct warming from the greenhouse effect.
The increased warming would accelerate the rate of sea level rise by expanding ocean water,
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melting mountain glaciers, and causing ice sheets in Greenland and Antarctica to melt or
discharge ice into oceans, and by depleting groundwater tables.
According to the Intergovernmental Panel on Climate Change, rising global temperatures are
responsible for at least 2 to 5 inches of sea level riso, due to thormal expansion of occan water
and the retreat of mountain glaciers.
Estimates of future sen level rise. The amount by which sea level will rise will vary by location.
For the global average, it is projected that sea level will rise 20 inches by 2100 (6-38 inches). The
amount by which SOR level will rise will vary considerably for different segments of the US coust
line. In some cases local sca level rise will exceed the global average, in other cases it will be
less than the global average. The following are examples for a few locations:
Location
2050
2100
Galveston. TX
1.5 feet
3 feet
Miami Beach, FL
9 inches
1.5 feet
Los Angoles, CA
6 inches
1 foot
Boston, MA
1 foot
2 feet
Grand Isle, LA
2.5 feet
4.5 feet
Why is it a problem if sea level rises? Sca lovel rise will have a significant effect on the natural
environment, infrastructure in developed arcas, and on local economies. Whon we speak of
impacts to the natural cnvironment, we are referring to coastal wetlands that will be unable to
keep pace with rising sea level, resulting in overall loss in wetland areas, especially in developed
areas; loss of beaches due to an increased rate of erosion and inundation: loss of significant
habitat in wetlands, estuarios, coral reefs, bays, and wilderness; saltwater intrusion into
groundwater and upstreace movement of the salt-line in surface water; and increased ostuarino
salinity that will reduce circulation and decrease the amount of flushing, resulting in an increase
in water pollution.
Impacts to infrastructure include damage or destruction of housing, resorts, and other coastal
development; flooding of transportation facilities such as bridges, railways, airports and marinas;
disruption of utilities for electricity, communication, water supply and sewer systems: and loss of
cultural or historical assets such as national parks, monuments and cemeteries.
Finally, the impacts to the local economy include the cost of prevention and protection for
natural and manmade environments; the cost of loss and damage to natural and manmade
environments due to storm surge, flooding. erosion and inundation; and the loss of industry and
employment in tourism, local businces, factories, shipping and commercial fisheries.
Coastal wetlands. As the sea level rises, coastal wetlands will be disrupted in a number of ways.
These include inundation, erosion, and saltwater intrusion. Specific changes include conversion
from one type of vegetation to another within particular wetlands, or conversion of wetlands to
open water. Losses of wetlands at specific sites along the coast will depend on the slope of the
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land throughout the wetland and adjacent dryland, and whether developed areas lie beyond the
wetland limiting the vacant land necessary for new marsh to form.
There could be a substantial loss of coastal wetlands in the United States. Wetlands along the
low-lying consts of the Southeast from North Carolina in the Atlantic to Texas in the Gulf of
Mexico are already subsiding due to compression of estuarine or deltaic sediments by new layers
of acdimentary deposits. These areas may be either flooded or washed away as water levels rise.
About half of the 5.5 million acres of coastal wetlands that remain in the US are found along the
Gulf of Mexico, making the potential for loss great.
Salt water intrusion due to accelerated sea level rise will affect estuarine systems in some areas
of the North Atlantic and Pacific Oceans, including Puget Sound, San Francisco Bay, and
Tijuana Estuary.
Wetlands along highly developed coasts, including much of the Atlantic coast from Maryland to
Massachusetts, may become quite vulnerable to climate change because control structures such
as sea walls and bulkheads already form barriers to migration. Along undeveloped coasts, the
land just above sea level into which wetlands could migrate is generally smaller than the area of
wetlands at risk from climate change.
Thus, much of the coastal wetlands may slowly shrink until they are eliminated as the sea rises
and pushes them baok to the flood-control structures already erected or to be constructed to
protect constul properties.
The loss of coastal wetlands will have a significant effect on the human and natural environment.
Coastal wetlands provide a variety of services, such as nursing grounds for many types of fish
and shellfish, a resting place for migratory birds, and natural cleansing of ground and surface
waters. These services will bo diminished or eliminated. Coastal wetlands also protect inland
areas from floods, storms and high tides. In many developing nations, wetlands provide the only
effective barrier to surges from tropical storms.
Water resources. Climate change will likely have significant impacts on water quality and
availability. Precipitation changes and increased evaporation can affect water supplies, water
quality and drinking water, and water uses (e.g., hydropower, irrigation, fisheries).)
It is expected that climate change will lend to an intensification of the hydrologic cycle. Not only
is average global precipitation expected to increase, but the intensity of precipitation events will
also likely increase leading to more floods. Droughts are also likely to be more severe due to
increased evaporation and drier soils.
Although average global precipitation is expected to increase, there will he A regional "texture"
to precipitation changes across the United States. Average annual water supplies may decrease
significantly for large areas of the United States, resulting in lower levels in lakes, rivers, and
aquifers. This would alter flood and shore erosion patterns. impair navigation, reduce
hydropower generation, restrict irrigation and municipal water supplies, cause saltwater intrusion
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into freshwater rivers and aquifers, and disrupt wetland and shore ecologies. The regions most
vulnerable are the Great Basin, California, Missouri, Arkansas, Texas Gulf, Rio Grande, and
Lower Colorado.
Changes in disease vectors. Infectious diseases are still the leading cause of death worldwide,
killing over 17 million people in 1995, Including nine million young children. Vector-borne
diseases (i.e., diseases transmitted by insect "vectors" or small mammal "reservoir hosts")
account for a large proportion of these deaths. For example, there are 350 to 500 million new
cases of malaria annually; an estimated two million people die from malaria each year, including
more than one million children in Africa. While there are relatively few cases of malaria in the
United States, recent locally-transmitted cases in New Jersey, New York, and Texas demonstrate
the continued risk for transmission of this disease.
The geographic range and life-cycles of pathogens and vectors (e.g., mosquitoes) which transmit
disease are affected by climate. Many biological organisms and processes that contribute to the
spread of infectious diseases are influenced by fluctuations in the weather, notably temperature,
precipitation, and humidity. Outbreaks of infectious diseases (c.g., malaria, hantavirus, St. Louis
Encephalitis) have heen associated with specific weather patterns.
Frequently, outbreaks of infectious disease follow seasonal patterns related to the life cycle of
discase pathogens and vectors. (Mosquitoes, for example, are dormant during one stage of their
life cycle in order to survive winter or drought.) In this context, the projected rise in minimum
temperatures (i.e., at night and during winter) relative to increases in average global temperature
is of particular concern. The increased warming expected in temperate areas, such as North
America, also favors the spread of infectious diseases to higher latitudes and altitudes.
The IPCC concluded in its 1995 Second Assessment that climate change would, in aggregate,
increase the potential transmission of many vector-borne diseases. In North America, climate
may become more suitable the northward spread of vector-borne infectious diseases, with
potentially enhanced transmission dynamics due to warmer ambient temperatures. Conditions
suitable to the transmission of diseases currently prevalent in the tropics (such as Dengue fever)
may become more prevalent in arcas of the southern U.S., such as Texas. (For example, recent
work by Focks ct al. [1995] suggests that the number of wooks during which weather conditions
would be suitable for the transmission of Dengue fever would increase in many U.S. cities as
average temperatures increase.) Other diseases, such as Rocky Mountain Spotted Fever (RMSF)
may decline in the southern U.S. due to the intolerance of the tick vector to high temperatures
and lower humidity. However, increased risk of both Lyme disease and RMSF, however, could
be expected to be found at higher latitudes in Canada.
While health-care infrastructure may prevent a large increase in disease cases, climate change is
expected to impose increasing demands and costs on the current public health system.
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3. Q: What are other countries' position on the climate change issue? Other OECD
countries? Are these countries taking action to mitigate climate change?
A: More than 160 countries are participating in the ongoing negotiation for a new agreement
under the United Nations Framework Convention on Climate Change (FCCC). It is possible to
group country positions into several different categories - although it must be recognized that
each country has specific and often different circumstances that may distinguish it within its
group. Six groups are discussed here: the European Union: the "JUSCANZ" group (including all
OECD countries not part of the EU); the EITs (countries with economies in transition to market
cconomies, including castern Europe and the Former Soviet Union); the Alliance of Small Island
States (AOSIS); the OPEC group; the big developing countries (including China, India, and
Brazil), which strongly influence the positions of the developing country bloc.
EU With fifteen members states, the EU is often hard pressed to reach a consensus on some of
the difficult issues in the climate change debate. However, they have announced their support for
a target of Annex I Parties of a 15 percent reduction iO2 emissions by 2010, and a 71/2 percent
reduction by 2005. Current data suggests that as a group, the EU will be close to returning to
1990 levels by 2000, although this is largely the result of significant reduction by Germany and
the UK; most other countries will individually exceed 1990 levels at the end of the decade.
Nearly all countries have taken actions to reduce emissions; all have submitted their first
communication, and nearly half are in the process or have completed their second national
communication detailing programs and policies that are being taken to mitigate climate change.
As a blue, this group supports a legally binding targot, supports joint implementation (although
only with countries that have a binding cap), and supports including advanced developing
countries (specifically Mexico and Korea) in Annex I. They have argued that the next stop
should focus on developed country action. and that only following such steps should developing
countries be obligated to act.
JUSCANZ (including Canada, Japan, Australia, New Zoaland, Iceland, Norway, Switzerland).
This group supports position closest to those of the United States. They have endorsed emissions
trading, and joint implementation (although with some hesitation), they have endorsed the notion
of a multi-year budget, and they have generally been supportive of action for developing
countries (although Japan, Norway and Switzerland have been reluctant to push too hard on this
front). As & group, these countries anticipate their 2000 emissions will exceed their 1990 levels
by more than 10 percent, and each anticipates further growth unless new policies are initiated.
Both Norway and Switzerland have proposed legally binding caps on cmissions at 10 percent
below 1990 levels by 2020. This group of countries has also been the most vocal in support of
"differentiation," in which countries would take different levels of commitments as a function of
national circumstances. For most, this means their own circumstances would dictate reduced
levels of commitments from the Annex 1 average.
EITs This group of countries' emissions will be substantially below 1990 levels in 2000, and are
not expected to return to 1990 levels until approximately 2010. They anticipate having
emissions to "sell" under a trading regime and have been strong supporters of a trading regime.
These countries have supported maintaining the provisions in the FCCC that allow EITs some
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"flexibility" in implementing their obligations, arguing that their recovery from the collapse of
the early 1990's will take time and is a priority. While as A group they are taking some actions to
reduce emissions, most actions are in the nature of energy efficiency improvements, and not
actions specifically taken for climate change reasons.
AOSIS This group of 37 small island states and low lying coastal countries has been a strong
supporter of stringent action to mitigate climate change. Threatened by eca level rise, many of
these countries have maximum elevations of less than 3 meters above sea level However, in
spite of their strong rhetoric, these countries have not supported developing country
commitments, arguing that developed countries are responsible for the problem and need to act
first to find solutions. This group has advocated the most stringent target so far proposed: a 20
percent reduction in C02 emissions by Annex I Parties below 1990 levels by 2005. They have
opposed joint implementation, and have been ambivalent on the issue of emissions trading.
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OPEC Concerned that efforts to reduce global emissions will lead to a global reduction in the
amount of oil consumed, these countries have opposed action IN address climate change. Thoy
have also introduced the concepts of a componsation fund, in which countries harmed by climate
change mitigation efforts would be compensated for their economic hardship. To date, few
countries outside of the OPEC group have supported this proposal. These countries have taken
little action at home to reduce emissions, and none have yet released their first national
communications detailing their greenhouse gas inventories. They have opposed joint
implementation and been silent on the issue of emissions trading.
Big Developing Countrics These countries often crate the defining voice for the developing
country caucus, in spite of protests from both AOSIS and OPEC. In spite of the projections of
climate change which show significant damage to India, China and Brazil from significant
climate change, these countries have long argued that efforts to solve the climatc change problem
are the sole responsibility of the developed world, which due to its large share of historic
emissions, should also take on the bulk of the mitigation effort. The group has opposed joint
implementation, been silent on omissions trading, and been adamantly opposed to any action by
developing countries in the agreement in Kyoto. In spite of their rhetoric, many in this group
have taken significant action to mitigate climate change. The United States has undertaken
country studies with China, and has worked bilaterally with India and Brazil in their greenhouse
gas inventory work, and in the development or policies and nicasures to reduce omissions. While
emissions from each are anticipated to rise substantially as their economies grow, all have begun
to move off the emissions intensive path predicted without these efforts.
4. Q: What information is available on the Impacts of joint implementation and emissions
trading on the costs of mitigating climate change? What is the Administration doing to
ensure that these cost-cffoctive options are Included in any agreement in Kyoto?
A: All economic analyses done to date indicate a significant reduction in costs from the
flexibility provided in both emissions trading and joint implementation. Some analyses done
suggest that as much as 30 percent of the costs may bc climinated if emissions trading is allowed,
and up to 70 percent of the costs may be eliminated if joint implementation is allowed. While
these may be optimistic estimates, they provide a strong rationale for including both options in
any agreement. It is in light of these kinds of analyses that the Administration has included both
in its draft protocol, and that active diplomatic efforts are underway to persuade other countries
to endorse these cost-saving approaches. A number of problems have been identified with both
options - and it is addressing these concerns that has been the larget of both our domostic and
international effort. A number of projects in the U.S. Initiative on Joint Implementation are
designed to address questions about "additionality" to insure that projects really produce
environmental results, and are not merely repackaging of activities that would have occurred
anyway. With respect to emissions trading, the United States has sponsored or co-sponsored a
number of international workshops to develop methodologies for emissions trading, and to bring
together those with expertise in trading programs (many of which were developed in the United
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States) with representatives of other countries seeking information. We anticipate that these
efforts will ultimately prove effective in bringing an international consensus to our proposals.
5. Q: Please describe the Administration's efforts to seek input from the private sector, the
environmental community, and other interested constituencies in developing Its climate
change policy.
A: The Administration has maintained a long standing effort to obtain the views of various
constituancies during the course of the climate negotiations. Open meetings typically have been
held both before, during, and after major negotiating sessions to discuss relevant issues.
Informal roundtables with both industry and environmentalists have also been held prior to major
negotiating events. Within the past two months. the President has been directly involved in a
series of meetings with scientists. industry and environmental leaders to discuss climate change.
Various Cabinet officials have also been meeting with a broad range of constituency groups.
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Responses to Senator Chafee's Questions
1. The President and his Administration are still going through a process of hearing the opinions
of the many interested parties on this issue. This process will culminate with a White House
Conference in October on the climate change issue..
Fealistic, and
However, the framework for the Administration's policy has been largely settled. For example,
we support the use of flexible approaches, such as joint implementation and international
emissions trading. We support the requirement that non-Annex I countries, as they become
wealthier, abide to binding emissions goals. For domestic implementation, we support the use of
flexible, market based approaches. The Administration is still deciding the details on targets and
timetables and domestic implementation. Although the president has spoken
at the need for realistic acheivible
2. No one model, or even a small set of models, can give a precise definite estimate of the effects of a
Targets
policy on the economy 20 or 30 for years into the future. However, a vast array of economic tools
exists to provide us with a solid interpretation informed of the likely effects different of climate policy. For
example, we know that a market based approach to reducing carbon emissions will beless eastly
than a command and control approach. The economic literature on climate change KS very rich,
and we realize that we need to draw from all of it in order to adequately inform policy-
development A large, complicated issue requires more than analytic one or a few tools to assess it The
Administration intends to bring to bear on the climate issue many tools andAeispectives Some of these tools may
have strengths on issues where the models used in the IAT analysis were weak. While this larger
set of tools will not provide us with a precise estimate of the effects of climate policy on the
economy in 20 or 30 years, I am confident they can provide us with sufficient information to about
generate ranges of economic effects orthe Administration can make informed policy decisions.
that that the analytic toods and perspectives
3. The Administration is considering an array of market based approaches to implement climate available
policy.
to the
4. Tradeable emissions permits and energy taxes share several important characteristics. First,
Administration
they both send a price signal to markets that would stimulate the development and adoption of
energy efficient technologies. Second, they both provide flexibility to achieve emissions goals.
In the case of tradeable permits, firms that find it very costly to reduce emissions may purchase
permits from firms that find it less costly. In the case of taxes, firms would reduce their energy
use until it became more costly than the tax. These both achieve emissions reductions at lower
costs than through command and control approaches.
would
substantially
Tradeable emissions permits provide greater certainty to attain a specified emissions cap than
of attaining
energy taxes. By specifying a number of permits and allowing firms to trade these permits, the
country can ensure that it is meeting an agreed upon carbon emissions goal. If a tax were not set
at the right price, then the country may emit too much carbon, and miss the emissions goal, or
emit too little carbon, and be more costly than the tradeable approach to complying with an
emissions goal.
A tax, on The other hund, would provide greater
containty Am of himsting costs than a cap-and-
Trade approach of limiting costs, since the increase in
Unit costs would be determined by the tax.
The certainty associated with the meeting an emissions goal translates into uncertainty for the
firms participating in a carbon reduction policy. Under energy taxes, firms know, based on their
own costs or production, how much a tax policy would cost them. However, they have less
certainty about how much a tradeable permits policy would cost them until the permit market
begins operation and establishes a price for the permits.
5. For international emissions trading, all countries participating in the trading scheme will need
to have their emissions capped For joint implementation, all countries may participate,
regardless of when their emissions will be capped.
would provide greater
International emissions trading and joint implementation can both significantly decrease the costs
of meeting an emissions goal. These flexibility instruments take advantage of opportunities to
reduce emissions at low costs. If some of the emissions reductions necessary to achieve the U.S.
goal can be undertaken in other countries at lower costs, then us implementation emissions costs will fall.
In both the IAT analysis and other modeling efforts, the costs of achieving a variety of emissions
goals are modeled to decrease substantially under joint implementation and international trading
relative to scenarios with neither instrument. Some studies indicate that the costs could decrease
by more than half.
Lower cast abatement abroad again
suggest substantial savings to the u.s. could result it as U.S. companies would
6. Our experience after the Arab Oil Boycotts of the 1970s demonstrated that improvements in receive
energy efficiency occur primarily because of the effects of higher energy prices. Granted, some
credit
for
energy efficiency improvement does occur without a market signal. For example, if I decide to
incremental
replace my 20 year old refrigerator, it is impossible for me to purchase a new refrigerator that
abatement
requires the same high level of energy the technology of refrigerators has improved so much
effects in
over the past two decades that the new purchase automatically results in an improvement in
energy efficiency However, the economic literature indicates that the majority of energy
other
officiency improvement is price-driven. Same myovation surely occurs in countries
the absence of a price signal. minders Many studies suggest
The market signal necessary to stimulate the adoption of technologies that generate less
greenhouse gas should be provided through a flexible, market based approach. A command and
control approach that mandates specific technologies
7. As the question notes, some observers of the climate change issue have claimed that capping
only developed countries' emissions will result in "leakage": the escape of jobs, capital, and
polluting activity to developing countries. Any time countries negotiate international treaties that
would apply different rules to different countries, there is a concern about some countries gaining
a competitive advantage. However, the economic evidence does not support the argument that
climate policy will adversely affect U.S. economic competitiveness. First, non-tradeable sectors
account for a substantial share of carbon emissions. Transportation and residential and
commercial buildings account for approximately two-thirds of U.S. carbon emissions. For these
sectors, the "competitiveness" argument does not appear applicable. Second, energy costs
comprise only a small percentage of total manufacturing costs. According to the 1995 Annual
Census of Manufacturers, energy costs for manufacturing industries averaged just 2.2% of total
costs. Given the small share of energy in total costs, differential shifts in existing energy prices
are unlikely to have substantial effects on location decisions and trade flows. Third, our
that energy use relative to GAP falls each year
regardless of the price signal by .5 to 1.25
percent. To the extent that energy
use is associated with climate change
effects, and this curses
damages not orr reflected in market prices,
this innovation very is unlikely to G subjecient.
Additional incentives to invirvation, such
as price signals, or researced
support for R&D may be needed. (?]
signaticant
experience in this country with environmental regulation has been that it does not cause leakage.
Firms that decide to relocate to other countries do so because of international differences in labor
costs, capital costs, material costs, and exchange rate changes that all swamp the costs of
complying with environmental regulations.
To address the possibility of leakage occurring, we should do climate policy smart. If we do it
dumb, it will cost our economy a lot. By doing it smart, through flexible, market-based
approaches, we will make the costs of complying with an emissions goal much lower. In
addition to using market-based approaches domestically, joint implementation and international
emissions trading would also lower the costs of climate policy. These lower costs associated
with a smart climate policy would decrease the economic rationale for industries to move to
developing countries.
Responses to Senator Boxer's Questions
As stuted in my ansule to
1. Refer to the answer to question 7 of Senator Chafee's questions.
Copy here that answer.
2. The costs of reducing emissions in the U.S., and in Europe and Japan depend on how all of
these countries implement their policies. If the U.S. employs a market based approach, the costs
will not be that high relative to Europe and Japan. Regardless of the implementation approaches
used in these countries, the costs of emissions reductions are not likely to affect U.S.
competitiveness. As noted in the answer to question 7 of Senator Chafee's questions, energy
costs comprise a small share of total manufacturing costs (2.2%). Further, two-thirds of carbon
emissions occur in non-tradeable sectors. The evidence on energy price differentials across
countries suggests that they are not sufficient to spur firm relocation to other countries.
3. The IAT report did not focus on the benefits of reducing greenhouse gas emissions. Without a
benefits assessment, the IAT could not provide estimates of the positive effects on human health
and the environment. In addition, the IAT did not study the effects of the risks of climate change
on economic activity. However, the report did assess the impacts of climate policy on the
economy. The IAT analysis confirms other economic research (for example, the recent report by
the World Resources Institute) that smart climate policy can actually lead to net benefits in the
long term. The 2300 signatories of the economist statement noted that some policy options
may, in fact, improve U.S productivity in the long run." For example, the IAT analysis found
that auctioning off tradeable permits and using the proceeds of the auction to lower income and
not.
corporate taxes would help the economy grow faster in the future than without climate policy.
4. IAT actually notes that a 5 year delay is bad why?
to
]?
5. It is very difficult to assess the nature of the economy, and especially specific industries, 20 or
30 years into the future. If the country embarked on a policy of reducing carbon emissions,
obviously the firms and industries that can creatively and cost-effectively reduce their emissions
will benefit relative to their competitors This illustrates the importance of flexible, market-
based approaches. A stringent, command and control approach would constrain the private
be
sector's creativity to achieve the goals of a climate policy. As we learned through our experience
with the sulfur dioxide emissions tradeable permit market, a flexible approach provides the
correct incentives for pollution control investment and other creative methods of decreasing
sulfur dioxide emissions. To reduce carbon emissions, it is reasonable to envision that the
products and services of industries that develop energy efficient technologies and industries that
develop low-carbon based energy (such as renewable energy sources including wind, solar, and
biomass) would be in greater demand.
Responses to Senator Lieberman's Questions
1. The Administration's analysis on the issue of climate policy has not occurred in a vacuum. In
fact, climate change has been one of the more active areas of research in economics this decade.
The economic literature on climate change, complemented by the IAT report, has already done
quite a lot to inform the policy development process. Based on the economic research, we have
identified some of the important characteristics of the climate policy we will develop: joint
implementation, international emissions trading, developing country participation, emissions
budgets, and market-based, flexible domestic implementation. My interpretation of the role of
economics differs -- I believe economics has informed the process, and I am confident that it will
continue to play an important role in our country's deliberations over a climate policy position.
2. Refer to the answer to question 2 of Senator Chafee's questions,
As stated in
Repeat and uh lere.
Responses to Senator Chafee's Questions
1. The President and his Administration are still going through a process of hearing the opinions
of the many interested parties on this issue. This process will culminate with a White House
Conference in October/on the climate change issue.
However, the framework for the Administration's policy has been largely settled. For example,
we support the use of flexible approaches, such as joint implementation and international
del.
emissions trading. We support the requirement that non-Annex I countries, as they become
all
wealthier, abide to binding emissions goals. For domestic implementation, we support the use of
nefs
flexible, market based approaches. Although the President has spoken of the need for realistic
to
JI
achievable targets, the Administration is still deciding the details on targets and timetables and
domestic implementation.
2. No one model, or even a small set of models, can give a definite estimate of the effects of a
policy on the economy 20 or 30 years into the future. However, a vast array of economic tools
exists to provide us with a basis for informed judgment about the likely effects of different
climate policies. For example, we know that a market based approach to reducing carbon
emissions will be less costly than a command and control approach. The Administration intends
to bring to bear on the climate issue many analytic tools and perspectives. Some of these may
have strengths on issues where the models used in the IAT analysis were weak. I am confident
that the analytic tools and perspectives available to the Administration can provide us with
sufficient information to generate ranges of economic effects so that the Administration can
make informed policy decisions.
3. The Administration is considering an array of market based approaches to implement climate
policy.
4. Tradeable emissions permits and energy taxes share several important characteristics. First,
they both send a price signal to markets that would stimulate the development and adoption of
energy efficient technologies. Second, they both provide flexibility to achieve emissions goals.
In the case of tradeable permits, firms that find it very costly to reduce emissions may purchase
permits from firms that find it less costly. In the case of taxes, firms would reduce their energy
use until it became more costly than the tax. These both achieve emissions reductions at
substantially lower costs than through command and control approaches.
Tradeable emissions permits would provide greater certainty than energy taxes of attaining a
specified emissions cap. By specifying a number of permits and allowing firms to trade these
permits, the country can ensure that it is meeting an agreed upon carbon emissions goal. A tax,
on the other hand, would provide greater certainty than a cap-and-trade approach of limiting
costs, since the increase in unit costs would be determined by the tax.
5. For international emissions trading, all countries participating in the trading scheme will need
to have their emissions capped.
International emissions trading can significantly decrease the costs of meeting an emissions goal.
It would provide greater opportunities to reduce emissions at low costs. If some of the emissions
reductions necessary to achieve the U.S. goal can be undertaken in other countries at lower costs,
then U.S. emissions control costs will fall. In both the IAT analysis and other modeling efforts,
the costs of achieving a variety of emissions goals could decrease by more than half.
For joint implementation, all countries may participate, regardless of when their emissions will
be capped. Lower cost abatement opportunities abroad again suggest substantial savings to the
U.S. could result if U.S. companies could receive credit for incremental abatement efforts in
other counties.
6. Some innovation surely occurs in the absence of a price signal. Many studies suggest that
energy use relative to GDP falls each year regardless of the price signal by 0.5 to 1.25 percent.
To the extent that energy use is associated with climate change effects, and this causes damages
not reflected in market prices, this innovation is unlikely to be sufficient. Additional incentives
to innovation, such as price signals, or support for R&D may be needed.
7. As the question notes, some observers of the climate change issue have claimed that capping
only developed countries' emissions will result in "leakage": the escape of jobs, capital, and
polluting activity to developing countries. Any time countries negotiate international treaties that
would apply different rules to different countries, there is a concern about some countries gaining
a competitive advantage. However, the economic evidence does not support the argument that
climate policy will adversely affect U.S. economic competitiveness. First, non-tradeable sectors
account for a substantial share of carbon emissions. Transportation and residential and
commercial buildings account for approximately two-thirds of U.S. carbon emissions. For these
sectors, the "competitiveness" argument does not appear applicable. Second, energy costs
comprise only a small percentage of total manufacturing costs. According to the 1995 Annual
Census of Manufactures, energy costs for manufacturing industries averaged just 2.2% of total
costs. Given the small share of energy in total costs, differential shifts in existing energy prices
are unlikely to have substantial effects on location decisions and trade flows. Third, our
experience in this country with environmental regulation has been that it does not cause
significant leakage. Firms that decide to relocate to other countries do so because of
international differences in labor costs, capital costs, material costs, and exchange rate changes
that all swamp the costs of complying with environmental regulations.
To address the possibility of leakage occurring, we should do climate policy smart. If we do it
dumb, it will cost our economy a lot. By doing it smart, through flexible, market-based
approaches, we will make the costs of complying with an emissions goal much lower. In
addition to using market-based approaches domestically, joint implementation and international
emissions trading would also lower the costs of climate policy. These lower costs associated
with a smart climate policy would decrease the economic rationale for industries to move to
developing countries.
Responses to Senator Boxer's Questions
1. As stated in my answer to question 7 of Senator Chafee's questions, some observers of the
climate change issue have claimed that capping only developed countries' emissions will result
in "leakage": the escape of jobs, capital, and polluting activity to developing countries. Any time
countries negotiate international treaties that would apply different rules to different countries,
there is a concern about some countries gaining a competitive advantage. However, the
economic evidence does not support the argument that climate policy will adversely affect U.S.
economic competitiveness. First, non-tradeable sectors account for a substantial share of carbon
emissions. Transportation and residential and commercial buildings account for approximately
two-thirds of U.S. carbon emissions. For these sectors, the "competitiveness" argument does not
appear applicable. Second, energy costs comprise only a small percentage of total manufacturing
costs. According to the 1995 Annual Census of Manufacturers, energy costs for manufacturing
industries averaged just 2.2% of total costs. Given the small share of energy in total costs,
differential shifts in existing energy prices are unlikely to have substantial effects on location
decisions and trade flows. Third, our experience in this country with environmental regulation
has been that it does not cause significant leakage. Firms that decide to relocate to other
countries do so because of international differences in labor costs, capital costs, material costs,
and exchange rate changes that all swamp the costs of complying with environmental
regulations.
To address the possibility of leakage occurring, we should do climate policy smart. If we do it
dumb, it will cost our economy a lot. By doing it smart, through flexible, market-based
approaches, we will make the costs of complying with an emissions goal much lower. In
addition to using market-based approaches domestically, joint implementation and international
emissions trading would also lower the costs of climate policy. These lower costs associated
with a smart climate policy would decrease the economic rationale for industries to move to
developing countries.
2. The costs of reducing emissions in the U.S., and in Europe and Japan depend on how all of
these countries implement their policies. If the U.S. employs a market based approach, the costs
will not be that high relative to Europe and Japan. Regardless of the implementation approaches
used in these countries, the costs of emissions reductions are not likely to affect U.S.
competitiveness. As noted above, energy costs comprise a small share of total manufacturing
costs (2.2%). Further, two-thirds of carbon emissions occur in non-tradeable sectors. The
evidence on energy price differentials across countries suggests that they are not sufficient to
spur firm relocation to other countries.
3. The IAT report did not focus on the benefits of reducing greenhouse gas emissions. Without a
benefits assessment, the IAT could not provide estimates of the positive effects on human health
and the environment. In addition, the IAT did not study the effects of the risks of climate change
on economic activity. However, the report did assess the impacts of climate policy on the
economy. The IAT analysis confirms other economic research (for example, the recent report by
the World Resources Institute) that smart climate policy can actually lead to net benefits in the
long term. For example, the IAT analysis found that auctioning off tradeable permits and using
the proceeds of the auction to lower income and corporate taxes would help the economy grow
faster in the future than without climate policy.
4. The longer we wait to take any action can adversely affect the economic and environmental
outcomes of climate policy. However, we do know that more gradual efforts to reduce our
carbon emissions can lower the economic costs relative to very aggressive reductions efforts
while still achieving the same carbon dioxide concentration goal. For example, some
international proposals to reduce carbon emissions would have Annex I countries cutting
emissions to 20% below 1990 levels by 2005. Such a target would have very substantial
economic costs because it does not provide enough time for the capital stock to turn over. It is
very expensive to scrap the existing capital stock, while much of it is in the prime of its life, and
replace it with carbon-free technology. Further, such a target would require the economy to
employ existing low-carbon and carbon-free technologies while longer-term targets would
provide more lead time to develop and implement superior technologies. Given that it is the
stock of carbon dioxide, not the annual emissions of carbon dioxide, that drive global warming,
there is an opportunity to be flexible in the timing of emissions reductions. Less aggressive paths
that 1990 -20% emissions level by 2005 could achieve the same carbon dioxide concentration
stabilization goal in the year 2100 by increasing carbon reductions in the future when they are
less costly to the economy.
5. It is very difficult to assess the nature of the economy, and especially specific industries, 20 or
30 years into the future. If the country embarked on a policy of reducing carbon emissions,
obviously the firms and industries that can creatively and cost-effectively reduce their emissions
will benefit relative to their competitors. To reduce carbon emissions, it is reasonable to envision
that the products and services of industries that develop energy efficient technologies and
industries that develop low-carbon based energy (such as renewable energy sources including
wind, solar, and biomass) would be in greater demand.
Responses to Senator Lieberman's Questions
1. The Administration's analysis on the issue of climate policy has not occurred in a vacuum. In
fact, climate change has been one of the more active areas of research in economics this decade.
The economic literature on climate change, complemented by the IAT report, has already done
quite a lot to inform the policy development process. Based on the economic research, we have
identified some of the important characteristics of the climate policy we will develop: joint
implementation, international emissions trading, developing country participation, emissions
budgets, and market-based, flexible domestic implementation. My interpretation of the role of
economics differs -- I believe economics has informed the process,-and I am confident that it will
continue to play an important role in our country's deliberations over a climate policy position.
2. As stated in my answer to question 2 of Senator Chafee's questions, no one model, or even a
small set of models, can give a definite estimate of the effects of a policy on the economy 20 or
30 years into the future. However, a vast array of economic tools exists to provide us with a
basis for informed judgment about the likely effects of different climate policies. For example,
we know that a market based approach to reducing carbon emissions will be less costly than a
command and control approach. The Administration intends to bring to bear on the climate issue
many analytic tools and perspectives. Some of these may have strengths on issues where the
models used in the IAT analysis were weak. I am confident that the analytic tools and
perspectives available to the Administration can provide us with sufficient information to
generate ranges of economic effects so that the Administration can make informed policy
decisions.