limits in industrial countries. Our conclusions are not based on the assumption that U.S. energy prices will exceed those in developing countries, but rather that they will rise relative to prices in developing countries. Our analysis of impacts of unilateral emission limits in the OECD countries concludes that there will be energy price increases in the U.S. and energy price decreases in developing countries that do not adopt emission limits. The increases in energy prices required to hold industrial countries to carbon limits are far greater than any current pricing differences between these countries, and shift comparative advantage in a direction that leads to shrinkage of energy intensive industries in the OECD and expansion in the developing countries. OECD exports of energy intensive goods fall and imports rise. Developing country exports of energy intensive goods rise and exports fall. Energy Cost Subsidization by the U.S. and Other Nations Q6. A6. Q7. A7. Don't all nations currently have ways of subsidizing energy costs to attract industry to their country? Yes and no. A country could offer energy subsidies to a specific industry, but it would be subject to antidumping and other challenges through the World Trade Organization. Such subsidies would probably also cost the subsidizing country more than it gains in total economic performance. Current institutions designed to maintain a level playing field and liberalize international trade and economic self-interest tend to limit subsidization. One of the problems of an agreement to limit emissions in the industrial countries alone is that it would subvert the very international agreements that are designed to promote free trade. By giving industries in the industrial countries a reason to request protection from industries in developing countries with lower energy costs, it could jeopardize the gains from trade liberalization that have been achieved since World War II. Are fossil fuels directly or indirectly subsidized in the U.S.? No, not in the sense relevant to claims that energy subsidies lead to inefficient use of fossil fuels. Recent studies by CBO and EIA concluded that there are no subsidies present in the U.S. that lead to noticeably greater consumption of fossil fuels. This is not to say that there are no special tax provisions for some fossil fuel production, such as the oil depletion allowance. But that tax provisions is carefully circumscribed, and can only be claimed by small producers and for a small amount of production. It provides no incentive for increased production, and does not affect the price paid by consumers. Likewise, Federal R&D expenditures were not found to increase fossil energy use. A number of subsidies for energy efficiency and renewable fuels that probably decrease consumption of fossil Q8. A8. If a country can use energy subsidization to attract industry to locate within their boundaries what would prevent them from doing so now apart from any agreements related to carbon dioxide reduction? Under current conditions, developing countries would not gain by subsidizing energy to attract industry. Their overall economic welfare is advanced most by development of industries in which they have a real economic advantage. Emission limits in the industrial countries raise costs in industrial countries and give developing countries a comparative advantage in energy-intensive industries. With emission limits on industrial countries, expansion of energy intensive industries in developing countries will occur in response to market forces and be beneficial to those countries. The fact that these cost increases are imposed on the industrial countries because of their own policy choices does not alter their effect on comparative advantage and the incentives for expansion of energy intensive industries in countries not adopting emission limits. An agreement to reduce carbon emissions has nothing to do with individual developing countries subsidizing energy. Rather, it raises energy costs in all of the industrial countries, thus creating a pervasive distortion of prices between industrial and developing countries. Moreover, those distortions are on balance economically harmful to the developing countries as well as to the industrial countries. A climate agreement would create price distortions between countries by increasing prices in the industrial countries relative to those in developing countries. It would impose those distortions on the entire world economy, leading to competitive harm for industries in the industrial countries and raising the costs of achieving global emission reductions by causing "leakage" of emissions to the developing countries. Paradoxically, most of the developing countries would also lose on balance, because of a pervasive "terms of trade" effect. The prices they receive for exports to the industrial countries would fall because of lower demand, and the prices they pay for imports from industrial countries would rise because of higher costs in the industrial countries. For some countries, such as South Korea, there might be gains from such distortions, because they are oil importers and have the industrial base to take advantage of lower energy costs and expand exports. Most developing countries lose more on the terms of trade effect than they can gain from increased exports. HEARING OF THE SUBCOMMITTEE ON ENERGY AND ENVIRONMENT COMMITTEE ON SCIENCE U.S. HOUSE OF REPRESENTATIVES on Countdown to Kyoto-Part 2: The Economics of a Global Climate Change Agreement Thursday, October 9, 1997 Post-Hearing Questions Submitted to Mr. Marc W. Chupka Acting Assistant Secretary for Energy Efficiency and Renewable Energy Argonne Study Q1. Concerning the findings of the Argonne Study: Q1.1 With the assumed fuel price increases, did the Argonne Report find that about 20 to 30 percent of the energy-intensive_basic_chemical industry would move to developing countries over 15 to 30 years, with accompanying job losses that could be as high as 200,000? Q1.2 With the assumed fuel price increases applied to hydro-based and thermal-based electricity, did the Argonne Report find that all primary aluminum plants in the U.S. would close by the year 2010, resulting in the loss of U.S. 18,000 jobs? Q1.3 With the assumed fuel price increases, did the Argonne Report find that shipments from U.S. steel producers might be cut about 30 percent, with the accompanying loss of 10,000 jobs? Q1.4 With the assumed fuel price increases, did the Argonne Report find that overall the domestic paper and pulp industry would experience serious negative employment and output effects, as imports into the U.S. would displace domestic production? Q1.5 With the assumed fuel price increases, did the Argonne Report find that in the petroleum refining industry, demand reduction alone would likely cause a loss of 20 percent of the industry output? Al. Q1.6 With the assumed fuel price increases, did the Argonne Report find that for the cement industry, 17 to 26 million metric tons of clinker capacity would be shut down, causing the loss of 3,700 to 5,800 jobs, and that these job losses are significant because cement plants are often located in small communities where the plant is major employer? Yes, the statements cited in your question are all contained in the Executive Summary of the Argonne report. The figure for the possible loss in employment in the steel industry is 100,000 jobs, not 10,000. It is important that these projections by the workshop participants not be taken out of context. In particular, we would note: The Argonne workshop panel noted that the domestic chemical industry is healthy and diverse, and could survive a large energy cost increase. An important point was that while the U.S. chemical industry would remain economically healthy, growth in the most energy intensive segments of the industry would be occurring most rapidly in developing countries and the U.S. would be seeing a declining share in the world market, even in the absence of any new environmental constraints. • About 40 percent of current primary aluminum production in the U.S. is fueled by hydropower. If hydro-based electricity were excluded from the assumed fuel price adders, the costs of production at these facilities would be unaffected. The aluminum industry is already a net importer, with imports coming primarily from Canada, Latin America, Australia, New Zealand, and Russia. It is estimated that about 15 percent of the aluminum firms in the U.S. are foreign-owned. The workshop participants found that even in the absence of any new environmental constraints, practically all new alumina reduction plants will be built in developing countries, with the only exception being areas with low-cost hydro power. The U.S. steel industry would be expected to import raw steel in the form of slabs for domestic processing, and scrap-based producers (mini-mills) would be less affected than integrated producers. If the assumed fuel price increases do not affect wood waste, the integrated pulp and paper mills would continue to have an advantage in using selfgenerated fuels such as spent pulping liquors, bark removed from pulpwood, and residue wood. The Northeast and Gulf Coast refineries would be severely impacted by low cost foreign competition, while Midwest and Rocky Mountain refineries would The U.S. cement industry is already a large net importer, with imports coming primarily from Canada, Spain, Venezuela, and Greece. It is estimated that about two-thirds of the cement firms in the U.S. are foreign-owned, a dramatic change from about 5 percent in the late 1970's. Regional Impacts Q2. The Argonne study notes that the effects of higher energy prices would vary across industry sectors and regions. Could you please explain for us which regions might be the big losers. A2. Given our interest in comparing model results regarding effects of energy price increases on industrial energy use, the Argonne workshops focused exclusively on energy-intensive industries. Region-specific effects were mentioned in some of the workshops and papers where such industries are geographically concentrated or where an uneven distribution of industry impacts was anticipated. For example, as mentioned above, the report notes that in the refining industry, the Northeast and Gulf Coast refineries would be severely impacted by low cost foreign competition, while Midwest and Rocky Mountain refineries that compete less directly with offshore suppliers would be less impacted: Aluminum production using hydrobased electricity in the Pacific Northwest may not be affected as much as aluminum production in the Southeast using coal-based electricity. To the extent that some industries are regionally concentrated, like integrated steel making in the Great Lakes region, industry-specific impacts will also be regionally concentrated. Participation of Other Nations Q3. In the July 11, 1997 DOE press release, you are quoted as saying that, “What we've learned [from the Argonne study] affirms the wisdom of this administration's approach--to negotiate an agreement based on a set of flexible policies and the participation of all nations.” Q3.1 Does that mean that in Kyoto the U.S. will be proposing binding emissions reductions for developing countries as well as for developed countries, contrary to the Berlin Mandate? A3.1 The U.S. calls on developing countries to strengthen their existing commitments and to agree that their obligations must increase over time to include binding emissions limits. In an October 22, 1997 statement, the President stated that the U.S. will not assume binding obligations until key developing countries agree to participate meaningfully in the challenge of |