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COUNTDOWN TO KYOTO, PART II: THE ECO

NOMICS OF A GLOBAL CLIMATE CHANGE AGREEMENT

THURSDAY, OCTOBER 9, 1997

U.S. HOUSE OF REPRESENTATIVES,

COMMITTEE ON SCIENCE,
SUBCOMMITTEE ON ENERGY AND ENVIRONMENT,

Washington, DC. The Subcommittee met, pursuant to notice, at 9:30 a.m., in room 2318, Rayburn House Office Building, Hon. Ken Calvert, Chairman of the Subcommittee, presiding.

Chairman CALVERT. This hearing of the Energy and Environment Subcommittee will come to order.

This is the second in a series of hearings titled, “Countdown to Kyoto.” It is there that 169 nations, including the United States, will meet in December to consider a treaty mandating cutbacks in greenhouse gas emissions.

On Tuesday, we heard from a panel of distinguished scientists who presented very different views on human influence over the Earth's climate. Today, we will look at the impacts U.S. climate change policy could have on the American economy and whether the scientific evidence we heard Tuesday would justify imposing new economic costs at the present time.

In particular, we will focus on two studies produced by the Department of Energy's national laboratories and three independent studies. It will become quickly apparent that, as with the projections of temperature made from climate models, the projections from economic models vary greatly, depending on what the assumptions are.

It is also apparent that, just as scientists still have a lot to learn about the human influence on climate, we still have a lot to learn about the shape of a binding climate treaty only 8 weeks before it is due to be signed.

We don't know whether the United States will stick to the goal agreed to in the Rio Treaty to reduce greenhouse gas emissions to the 1990 levels by the Year 2000 or agree to a more stringent requirement, as every nation in the world except the United States is insisting on.

We don't know whether the treaty will only be binding on the socalled Annex I countries—that is, the United States and other developed nations or will include countries such as China, which are expected to dramatically increase greenhouse gas emissions over the next 20 years.

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We don't know whether the treaty will set arbitrary timetables or allow enough flexibility for business to adapt to new technologies as they become available.

We do know a few things, however:

We know that, even under the most optimistic scenario, with the minimum emissions reductions given to us by the Department of Energy, meeting the goals will require new taxes on energy, which may force the American people to adjust their standard of living.

And, we know that leaving many countries out of an immediate ban on CFCs has resulted in a black market which has been described by the United States prosecutors as "more profitable than drugs."

Let me say in no uncertain terms that a treaty which would lead to the imposition of new taxes, while giving an unfair economic advantage to other countries, will be unacceptable to the American people. This is particularly true in light of testimony at our Tuesday hearing that the science behind the theory of human influence on our future climate is so uncertain.

If the United States is to put its signature to a binding document in Kyoto, the Administration must be candid with the American people about what kind of treaty it will be willing to sign and what the consequences will be.

I look forward to exploring with our witnesses today why they believe we are or are not headed in the right direction.

Before I introduce our panel, let me turn to my friend from Indiana, the distinguished Ranking Minority Member, Mr. Roemer, for his opening remarks.

Mr. ROEMER. Thank you, Mr. Chairman. I again commend you for holding these very timely hearings.

On Tuesday, we heard from a distinguished group of scientists about the state of scientific knowledge relating to climate change issues. All of the scientists acknowledge continuing scientific uncertainties, but we heard nothing to cast doubt on the conclusions of the IPCC's 1995 report that “the balance of evidence” shows a "discernible human influence on the Earth's climate.

Unfortunately, the best science that we have does not afford much in the way of guidance to us policy makers. Science can tell us that the Earth is warming, but cannot tell us precisely how fast and how much.

If the warming occurs at the lower end of the plausible projections, we may have time to adapt and to wait for the development of technologies to help reduce the use of fossil fuels.

On the other hand, if the warming occurs at the upper end of the plausible projections—and we saw the 2 degrees, the 9 degrees plausible projections on that screen-we will then need to act quickly, and on a global basis, to avoid major economic and environmental harm.

Scientific uncertainty does not mean that cannot act. Faced with real but uncertain risks, we should do for the Earth just what we are doing for ourselves: consider taking out an insurance policy by reducing CO2 emissions. And, just as with any insurance purchase, a wise buyer first needs to ask the key question: How much will this insurance policy cost?

Some of the economic witnesses we hear today will suggest that reducing CO2 emissions will be costly and that the impacts on some U.S. workers and industries will be severe and intolerable.

Other witnesses will testify that, to the contrary, reducing CO2 emissions can create jobs and the net economic benefits to the country will be large. In effect, they will argue that the insurance policy will pay for itself.

Given the profusion of economic analyses released by various interest groups on the climate change issue, we should probably not be surprised that the conclusions of these studies have wild variations, ranging from predictions of net losses to the U.S. GDP of 2.5 percent to net gains of the same magnitude. Much of the variation is due to the use of very different key assumptions about economic, energy, and policy options.

Our own experiences should teach us to take all of these numbers with a dose of salt-maybe a liberal dose of salt. Just a few years ago, Congress and the White House were locked in a bitter battle over whose economic model we would use to score the balanced budget proposal. Would we use CBO's or OMB's?

The arcane differences between the two economic models resulted in billions and billions of dollars in difference in revenue and outlay projections. It sure seemed significant at the time.

However, in retrospect, we now know that neither model came close to predicting the actual budget deficit. We've seen budget deficits come down all the way to about $23 billion projected this week.

To put this in context, the CBO's single-year deficit projection "errorof somewhere between $130 and $140 billion is equal to the annual GDP losses or gains predicted in 2010 by some of the economic models.

I do not raise this point to criticize the CBO or to get our panelists jousting already. The point is simply that it would be foolish to give great credence to any specific projections of the Year 2010 or the Year 2020 based on only and solely on one economic model.

At the same time, it is very important that we understand what the economic analyses are telling us.

They show us that the cost of our "insurance policy" can be sharply cut if we adapt policies that provide for market-based mechanisms and technology to reduce CO2 emissions.

They show us that the energy efficient and renewable energy technologies have great potential to substitute, possibly, for fossil fuel use and to lower the cost of CO2 emission reductions.

As Janet Yellin, the President's economic advisor, testified to Congress in July, “It boils down to this: if we do this dumb, it could cost a lot. If we do it smart, it will cost much less and, indeed, could produce net benefits in the long run.”

Today's expert panel will, I'm hopeful, help us tell the difference between smart and dumb. The panel will hopefully give us some policy options, should we decide to pursue policy options. The panel can distinguish between smart technology options and dumb care standards. I'm looking forward to this helpful testimony today.

Chairman CALVERT. Thank you, Mr. Roemer. I appreciate your opening remarks.

the way.

We have with us today W. David Montgomery of Charles River Associates in Washington, DC. Mr. Montgomery is a former Assistant Director for Natural Resources and Commerce of the Congressional Budget Office.

Dr. Joseph Romm is the Acting Assistant Secretary for Energy Efficiency and Renewable Energy at the Department of Energy. He is accompanied by Marc Chupka, DOE's Acting Assistant Secretary for Policy and International Affairs.

Michael Buckner is a Research Director for the United Mine Workers of America. Mr. Buckner is representing the United Mine Workers' President, Cecil Roberts, who could not be with us today.

Dr. Stephen DeCanio–I believe I pronounced that correctly—is a Professor of Economics at the University of California at Santa Barbara.

Gentlemen, it is the policy of the Science Committee to swear in all of the witness, so if you will please rise, we'll get that out of

Do you swear to tell the whole truth, nothing but the truth, so help you, God?

Witnesses. I DO.

Chairman CALVERT. Please be seated. Without objection, the written testimony-which is quite substantial, by the way, and we appreciate all the time that you put into that for each witness will be entered in the record.

I would ask that each of you summarize your remarks in 5 minutes or so, so there will be adequate time for questions.

With that, Mr. Montgomery, your opening statement. TESTIMONY OF W. DAVID MONTGOMERY, VICE PRESIDENT,

CHARLES RIVER ASSOCIATES, WASHINGTON, DC Mr. MONTGOMERY. Thank you very much, Mr. Chairman. I'm honored to appear before you today to talk about the potential economic impacts of the climate agreement.

I can't resist mentioning, after walking into this room, that I remember this was the first place in which I testified before a Congressional Committee, which I think was 21 years ago, when I was a junior analyst at Congressional Budget Office and was talking about a study of synthetic fuels loan guaranties, when we were trying to convince utilities and others to stop using natural gas and start using coal.

It's a great pleasure to be back here, because I haven't been in this room since then, though in many other places.

I'd like to summarize my testimony, to be brief, under three headings.

The first one, I think, really responds to Mr. Calvert's opening statement, because I would like to talk about some of the problems with the Berlin Mandate and the issues of the timing of emission targets under the Berlin Mandate which governs the concurrent negotiations and the possibilities for cost savings through flexibility in both timing and through bringing in developing countries, which I think is the most really important issue we all face in these negotiations.

Second, I'll summarize some of the economic impacts that we have estimated for the U.S. economy, and I would like also to kind of tie those remarks to Mr. Roemer's comments, which I thought also focused on the very important issues.

Third, to address briefly the question of uncertainties and research needs, which you mentioned in your letter of invitation and, in particular, you talk there just a little bit about contentions that smart choice of policies can do more than reduce the cost but can, in fact, make this free or beneficial to the economy, which is, I think, a proposition which I find no support for in the economic literature.

Let me begin, then, with a brief discussion about the Berlin Mandate itself.

You know, the range of proposals in the negotiations that are now underway—and it ranged from something which we at least see the Department of Energy studying within the United States, of capping emissions at 1990 levels from 2010 onward to a large number of proposals from other countries that would have even deeper cuts being required.

All of these proposals, we have found in our research, would have major impacts on all countries of the world, even the countries that would not be committing to make emission reductions.

Particularly, they would raise energy costs for the industrial countries, they would distort patterns of international trade between the developing and the industrialized countries, and that would slow the growth of both. Many of these impacts are unnecessary.

Effectively addressing climate change won't be cheap, even if all countries got together and agreed to institute policies that would cause their citizens to reduce carbon dioxide emissions, but the approach in the negotiations leading up to Kyoto makes this unnecessarily costly.

First, imposing a requirement for carbon dioxide reductions just on the industrial countries is going to introduce trade distortions and open up possibilities that make it potentially self-defeating.

The first is that, for a number of reasons, because of changes in international trade patterns, developing countries are likely to increase their emissions because the industrial countries are reducing their emissions.

The reasons are because they will be getting cheaper energy in world markets, because the drop in demand for oil from the industrial countries will depress its price and, second, they will become havens for energy-intensive industries because energy costs will be much lower in the developing countries under the way the negotiations are developing now.

We estimate that one out of every three tons of emission reduction the United States would accomplish would be offset by increases in emissions from the developing countries.

Even worse, I think we're setting the stage for serious long-term problems by leaving the developing countries out. Rob Stavins of Harvard has made this point. Once they become havens for energyintensive industries, they will even have less reason, in the long run, to join in a treaty to limit their carbon dioxide emissions.

There is also the problem of timing. As I think this Committee has heard numerous times, it's concentrations of greenhouse gases

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