Q3.2 Is the Administration now on record as rejecting the Berlin Mandate? A3.2 The Administration believes that its position is consistent with the Berlin Migration of Industry to Developing Countries Q4. A4. You testified that "the U.S. position is that developing countries should assume additional obligations in the near future to reduce their rapid growth of greenhouse gas emissions. No such actions were included in the workshop scenarios, and many of the Argonne workshop participants identified the absence of commitments in developing countries as the most critical competitiveness issue." Dr. Montgomery testified that it is unlikely that once energy-intensive industries are established in developing countries they will be willing to enter into binding agreement to limit greenhouse-gas emissions sometime in the future. Do you agree with that conclusion and if not, why not? I do not agree with Dr. Montgomery's conclusion that developing countries are unlikely to enter in a binding agreement to limit greenhouse gas emissions if energy-intensive industries invest in their economies. Many of the Annex I countries who support binding limits, for example, are among the most energy intensive countries in terms of energy consumption per capita. Moreover, developing countries are generally thought to be most vulnerable to climate change and so it is in their self interest to take steps to reduce the threat of climate disruption. Security Implications of a Shift in Strategic Industries to Overseas Locations Q5. Has the DOE or the Administration considered the security implications of a shift in strategic industries--such as oil refining, iron and steel, chemicals, and aluminum--to overseas locations that an agreement would cause? A5. The Defense Department, which participates in the interagency process, has not raised any concerns in this regard. FOLLOW-UP QUESTIONS FROM DEMOCRATIC MEMBERS Model Assumptions Q1. Al. In their study for World Resources Institute, Repetto and Austin found that just eight assumptions accounted for 80 percent of the differences in the various model projections. What do each of the models that you rely upon in your testimony assume with respect to the following factors: Q1.1 the benefits of avoiding global warming and other environmental benefits of reducing fossil fuel consumption (e.g., SO2 reduction); Q1.2 the economic benefits of “recycling” any tax revenues back into the economy Q1.3 the rate of innovation and adoption of new efficiency or non-fossil technologies? Economic forecasting models generally do not impute environmental benefits unless they directly affect productivity. The expected benefits of avoiding global climate change will depend on how emission reductions limit the growth of global greenhouse gas concentrations, the impact of greenhouse gas concentrations on climate and the effect of climate change on human and natural systems. Other benefits of reduced fossil fuel consumption will depend, in part, on existing regulatory programs. For example, no change in SO2 emissions from the electric utility sector would occur as a result of climate policies under the present SO2 allowance trading system. The economic benefits of revenue recycling are, however, incorporated in the forecasting models. These benefits can vary depending on how such revenues are recycled. The standard assumption has been to assume that the revenues were used to reduce the Federal deficit or repay the national debt. The rate of innovation and adoption of new technologies assumed in the projections to which I referred were taken from the Energy Information Agency's Annual Energy Outlook for 1996, which assumed a rate of decline in the energy to GDP ratio of approximately 1% per year. This ratio serves as a proxy measure for the economy-wide adoption of improved technologies, although it also reflects other factors such as sectoral shifts in economic activity. 46-495-16 Current Trends and Policy Impacts&Economic Factors for Industry Trends Q2. A2. The analyses discussed by Mr. Montgomery and Mr. Roberts indicate significant decreases in output, deterioration in balance of trade, lower employment, and re-location of energy-intensive industries from the U.S. to developing countries. The Argonne Report concludes a similar pattern will occur, but also indicates that some of these industries have, and are continuing, to show this pattern even without any changes in energy prices. Q2.1 Do your projections under a scenario of higher energy prices reflect a change in trends for these industries or an acceleration of current trends? Q2.2 What are the other economic factors that account for the trends we see in these industries? The Argonne analysis of the effects of fuel price adders generally showed an acceleration of current trends for new plants in energy-intensive industries to locate outside of the United States, as well as some premature retirement or shutdown of existing plants. With respect to other economic factors that account for these industry trends, as mentioned in the Executive Summary of the Argonne report, lower input costs for labor, capital, and energy, or more rapidly growing product demands in other countries might make them more attractive locations for new greenfield plants than the U.S. Top-Down vs. Bottom-Up Models Q3. A3. We have heard the terms "top-down” and “bottom-up” used to describe different types of models used to evaluate economic impacts of energy price changes. Q3.1 What do these terms mean? Q3.2 Which type of model was used to produce the results you are discussing? Q3.3 What are the strengths and weaknesses of each of these approaches? Generally, top-down models are designed to analyze the effects of changing market prices on the choices made by consumers and businesses. For example, a top-down model might be used to predict how a policy that raises the relative price of coal would affect the consumption of coal versus natural gas, the price of electricity, and the demand for different types of energy consuming products. Bottom-up models are designed to analyze how changes in the costs and performance of specific technologies might affect the optimal investment choices made by consumers and business. For example, a bottom-up model might be used to predict how efficiency standards for appliances or automobiles might effect energy consumption. Top-down models are designed to depict the big picture -- such as the effect on Gross Domestic Product, employment, or balance of payments but may ignore important details that differentiate competing technologies. Bottom-up models capture that detail but may fail to fully consider the reaction of consumers and business through markets. The DRI model used to generate the price scenarios that formed the basis for the Argonne workshop discussions is considered to be a top-down model. Voluntary Programs and Climate Goals Q4. In 1993, President Clinton announced the Climate Change Action Plan, a voluntary plan which was intended to meet our commitments under the Framework Convention for Climate Change to cap emissions at 1990 levels. Emissions today are now about 10% higher than they were in 1990. Why do you think we did not meet our goals to reduce CO2 emissions through voluntary efforts? A4. The 1997 Climate Change Action Report states that the estimate for greenhouse gas emissions is now expected to exceed its 1990 value by 188-190 million metric tons of carbon equivalent (MMTCE) more than projected under the 1993 Climate Change Action Plan (CCAP). The three most important factors for the change identified in the 1997 Report were (1) energy prices that were lower than the forecasts upon which the plan was developed (39 MMTCE); (2) reduced Congressional appropriations for fiscal years 1996 and 1997 for CCAP initiatives (30-40 MMTCE); and (3) lower estimates of projected forest sinks (23 MMTCE). Energy Prices in the U.S. vs. Other Countries Q. 5 A number of analyses appear to assume that energy price rises in the U.S. will necessarily result in our energy prices being higher than those of other countries. Q5.1 How do U.S. energy prices currently compare with those of our economic competitors? A5.1 Generally, the United States reports end use energy prices that are at the lower end of the range defined by our economic competitors. Our geographically close competitor, Canada, also reports energy prices which 1 are low compared to the remaining G-7 countries. Japan, Italy, and Germany typically report prices that are at the high end of the range of G-7 energy prices. The end use prices in Mexico--the United States' other close neighbor--often are less than or equal to U.S. prices. The range of energy prices can vary widely for any given energy source between Except for light fuel oil in the residential sector in the United Kingdom, the United States reports the lowest oil prices for every available sector and end use of all the G-7 countries. Canadian oil prices are fairly close to the U.S. prices with the possible exception of the heavy fuel oil price for electricity generation. However, the latest available Canadian price for this is from 1983, and therefore not really comparable to 1996 prices (Table 2). Among the G-7 countries, Canada and the United Kingdom's industrial natural gas prices are substantially lower relative to the United States. In fact, Canadian natural gas prices are substantially lower than U.S. prices for all available end use sectors (Table 3). The United States reported industrial steam coal prices in 1996 that were lowest of all OECD members who reported coal prices, except for Australia. Whereas U.S. industrial steam coal prices for 1996 were $57 per ton of oil equivalent (toe), Australian prices were $50 per toe (1989 was latest available Australian estimate). Industrial coking coal also cost the lowest per toe in Australia ($33 per toe-1989 estimate). Prices in France ($70 per toe) and Portugal ($65 per toe) were also lower than those of the United States ($74 per toe); and Canadian prices were fairly close ($79 per toe) (Table 4). The effects taxes have on energy prices are demonstrated in the comparison of motor gasoline and automotive diesel prices. The relative price of gasoline among OECD countries corresponds to the taxes paid for gas in that country (Figure 1). In Mexico and the United States, for example, the portion of unleaded gasoline prices attributed to taxes is less than 30 percent. These two countries define the low range of the gasoline prices across all types of gasoline except for premium leaded gasoline for which neither country reports prices. On the other end of the spectrum, Norway's gasoline price includes one of the higher tax percentages 'G-7 countries include Canada, France, Germany, Italy, Japan, United Kingdom, United States. |