in policy and the economy, the United States will be ever further from stabilizing its carbon emissions. The Clean Energy Future study identifies a set of policy pathways that could speed the introduction of cost-effective, efficient, clean energy technologies into the marketplace. These technologies are good for business, good for consumers, good for the economy, and good for the environment. To secure these benefits, the Nation needs to move forward on many fronts-on policies to remove market barriers, R&D to accelerate technology advancements, and programs to facilitate deployment of the new technologies. These, in combination with the political leadership that the world expects of the United States, are all necessary ingredients of a clean energy future. Thank you for this opportunity to talk with you today. I would be happy to answer any questions. Biographical Sketch Marilyn Brown is the Director of Oak Ridge National Laboratory's Energy Efficiency and Renewable Energy Program. During her 18 years at ORNL, she has researched the design and impacts of policies and programs aimed at accelerating the development and deployment of sustainable energy technologies. She currently manages a $110 million/year program of research to develop and assess advanced energy efficiency and renewable energy technologies. Prior to coming to ORNL in 1984, she was a tenured Associate Professor in the Department of Geography at the University of Illinois at Urbana-Champaign, where she taught graduate and undergraduate seminars on technological change, resource geography, and statistical analysis. She has received two NSF grants and funding from numerous other sources to support her research on the diffusion of energy innovations. She has a Ph.D. in geography from the Ohio State University where she was a University Fellow, a Masters Degree in resource planning from the University of Massachusetts, and a BA in political science (with a minor in mathematics) from Rutgers University. She has authored more than 140 publications and has received awards for her research from the American Council for an Energy-Efficient Economy, the Association of American Geographers, the Technology Transfer Society, and the Association of Women in Science. Dr. Brown sits on the boards of several energy and environmental organizations and journals. RESPONSE OF DR. MARILYN A. BROWN TO ADDITIONAL QUESTION FROM SENATOR CORZINE Question. The Clean Energy Future report contains strong conclusions about our ability to achieve greenhouse gas reductions at negative cost. By contrast, the IPCC's Third Assessment Report concludes that the cost of implementation of viable energy technologies .may at times be substantial, and must overcome other market barriers. To the extent that the two reports are directly comparable, can you highlight the differences in assumptions, data and/or methodology between the two reports? Response. The IPCC's Third Assessment Report draws its conclusions about the cost of climate change mitigation by reviewing the literature. It does not rely on a single analysis, but rather integrates and summarizes the findings of studies that had been peer reviewed and published by approximately mid-2000. Since the Scenarios for a Clean Energy Future was not published until November 2000, its findings were not included in the IPCC's literature review. Nevertheless, some of the studies reviewed in the Third Assessment Report use methodologies and data that are similar to the Scenarios for a Clean Energy Future; others use very different approaches. Based on a review of the "Summary for Policymakers: Climate Change 2001: Mitigation" (one part of the Third Assessment Report), I am struck by how similar its conclusions are to those of the Scenarios for a Clean Energy Future. For instance, consider the summary Table SPM (Estimates of Potential Global Greenhouse Gas Emission Reductions in 2010 and in 2020), from the IPCC report. It concludes the following regarding net direct costs per tonne of carbon avoided: Buildings: "Most reductions are available at negative net direct costs." • Industry: "More than half available at net negative direct costs." • Transportation: "Most studies indicate net direct costs less than $25/tC.” Electricity generation: “Limited net negative direct cost options exist." The Scenarios for a Clean Energy Future draws very similar conclusions about the cost of reducing U.S. carbon emissions to approximately 1990 levels, by 2020. One notable difference between the two studies is in the transportation sector. The Scenarios for a Clean Energy Future assumes that a doubling of Federal energy R&D resources (in combination with various supporting policies) produce several technology breakthroughs. These, in turn, enable sizable greenhouse gas emission reductions, particularly in the second decade (2010–2020), at no net direct cost. The two studies also agree that successful implementation of "no-cost" greenhouse gas mitigation options requires policy initiatives that address the market and institutional barriers impeding adoption of cost-effective emission-reduction measures. Chapter 2 of the Scenarios for a Clean Energy Future overviews these barriers as a basis for selecting the policy scenarios that are modelled in the report. RESPONSES OF DR. MARILYN A. BROWN TO ADDITIONAL QUESTIONS FROM Question 1. What is a reasonable market penetration or. generation capacity growth rate for renewables over the next 5 years, assuming today's economic factors? Response. The Business-As-Usual (BAU) scenario of the Scenarios for a Clean Energy Future report (CEF) provides a basis from which to answer the above question once updated for events that have occurred since its development, i.e. since early 1999. Table 1 shows the CEF BAU estimates of generation capacity for renewables from 1999 through 2006. The most striking features of these estimates are their small size and lack of significant growth over time. These CEF BAU-scenario values in Table 1 are essentially the same as those of the EIA's Annual Energy Outlook 1999 on which the CEF BAU scenario is based. As shown in Table 2, in the most recent Annual Energy Outlook 2001, the ETA has increased its estimate of the penetration of wind to reflect actual market installations and changes in market conditions. However even this Outlook, released only 7 months ago, has severely underestimated the market penetration of wind with its market projection of only 4.4 GW by 2005. Wind plants currently on order to be installed in 2001 will reach this level this year (2001), not in 2005. This rapid growth in actual wind capacity is largely the result of continuing improvements in wind technology, the extension of the Federal production tax credit for wind, mandates by the States for increased use of renewables, and recent volatility in natural gas prices. The Interlaboratory Working Group that produced the CEF has not examined the impact of all these recent market factors on the penetration of renewables. However it is fairly clear that their continued presence will yield significant growth in wind, biomass, and geothermal over the next 5 years. An independent estimate made for the DOE Office of Energy Efficiency and Renewable Energy in 2000 as part of its response to the Government Performance and Results Act1 projects that by 2005 nonhydro renewables could contribute as much as 22 GW (see Table 2). Given the recent rapid penetration of wind, these DOE/EERE estimates appear most reasonable. Question 2. What would be the most cost-effective incentive or program that the Federal Government could offer to encourage a reduction in greenhouse gases to 1990 levels? What's the earliest that the level could be achieved, without serious harm to the economy? Response. These are difficult questions, which I can only partially address. The Scenarios for a Clean Energy Future describes a set of public policies and programs that reduce U.S. carbon emissions to approximately 1990 levels by the year 2020. It also concludes that such an "advanced" scenario would not cause serious harm to the economy. To drive emissions down faster would require even more aggressive policies. A few examples of such policies are listed below: Buildings: mandate the demand-side management programs run by electric utility companies in the 1980's and first half of the 1990's, which were responsible for a substantial fraction of the energy efficiency improvements already realized in the buildings sector. • Industry: establish tax incentives for new capital investments in energy equipment to accelerate the rate at which technological innovation diffuses into industries, thereby more quickly retiring outmoded and inefficient production equipment and facilities. • Transportation: enact greenhouse gas standards for motor fuels that would be specified as a limit on the average greenhouse gas emissions factor of all motor fuels. • Electricity: require all coal-fired power plants to meet the same emissions standards as new plants under the Clean Air Act, thereby removing the "grandfathering" clause that has allowed higher polluting, older coal-fired plants to continue to operate unabated. Additional work would be required to model the costs and impacts of such policies. Indeed, there are numerous alternative packages of policies that would need to be assessed for costs and environmental (and other) impacts, in order to answer your question. It is my personal opinion that accelerated reductions would be more costly, but if promoted by smart policies they still might not cause serious harm to the economy. I believe that enhanced Federal investment in energy R&D is the most effective Federal program for achieving significant long-term reductions in greenhouse gases. Reducing the costs and improving the performance of an array of clean energy technologies are essential enablers of low-cost/no-cost solutions. The Scenarios for a Clean Energy Future report documents the sizable benefits that could arise from a stronger program of energy R&D. The study concludes that the following policies, in combination with doubling the Federal energy R&D budget, were most important in achieving the emission reductions of the advanced scenario: Buildings: efficiency standards for equipment and appliances; voluntary labeling and deployment programs. Industry: voluntary programs and voluntary agreements with individual industries and trade associations. • Transportation: voluntary fuel economy agreements with auto manufacturers; "pay-at-the-pump" auto insurance. Electricity Generation: renewable energy portfolio standards and production tax credits. Cross-Economy Policies: domestic carbon trading system. These would make up my short list of potentially most cost-effective policies and programs, in terms of cost of carbon reduction. However, many other policies are extremely promising, and are not in our "short list" because they are narrower in scope and impact. An example is the development of a national interconnection standard that would facilitate the development of distributed energy resources. INREL, 2000, Projected Benefits of Federal Energy Efficiency and Renewable Energy Programs fiscal year 2001-FY 2020, National Renewable Energy Laboratory, Golden CO, July. STATEMENT OF FLORENTIN KRAUSE, PH.D., DIRECTOR, INTERNATIONAL PROJECT FOR SUSTAINABLE ENERGY PATHS Short Summary This report identifies and corrects shortcomings in recent modeling studies on the economics of reducing greenhouse gas emissions in the U.S. The major assessments of the Kyoto Protocol-by the U.S. Energy Information Administration, the Clinton White House Council of Economic Advisers, the U.S. Department of Energy Interlaboratory Working Group, and the Stanford Energy Modeling Forum-are found to be seriously incomplete. Each study is shown to omit one or several of four major cost-reducing policy options, resulting in cost estimates that are far too pessimistic. The present study is the first to integrate all cost-cutting policy options into a coherent least-cost policy framework. Three domestic policies-a_national_carbon cap and permit trading program, productivity-enhancing market reforms and technology programs, and recycling of permit auction revenues into economically advantageous tax cuts-are combined with international emission allowance trading. In analyzing this integrated least-cost approach, the present study introduces no new models. It relies on established, peer-reviewed methodologies used in the major U.S. assessments to date. This reassessment leads to the following principal findings: 1) The U.S. could meet the emission reduction targets set forth in the Kyoto Protocol by 2010 and exceed them by 2020 while increasing economic output from baseline growth projections. 2) In 2010, an integrated least-cost strategy would produce an annual net output gain of about $50-60 billion/yr or roughly 0.5 percent of GDP. By 2020, this gain grows to $120 billion/yr or 1 percent of GDP. On a cumulative net present value basis, the U.S. would gain $250 billion by 2010 and $600 billion by 2020. 3) Most of these economic gains can be flexibly achieved through a purely domestic no-regrets strategy or through an international approach. 4) A strong synergy exists between a national energy policy aimed at safeguarding the economy and a least-cost policy aimed at slowing climate change. By reducing consumption of oil and natural gas relative to rising business-as-usual trends, a climate policy would help protect the U.S. against energy price shocks. 5) Net economic benefits can be realized in the early years of implementation and continue to grow over time. As energy-using equipment and capital stocks turn over, market, organizational, and institutional reforms have the effect of speeding up and completing the penetration of currently available, highly cost-effective energy efficiency technologies that require little or no time-consuming research, demonstration, and commercialization. 6) Potential economic savings from energy productivity gains far exceed the costs of technology R&D programs. Together with expanded markets under a climate protection policy, these have the effect of accelerating cost reductions for renewable energy sources and other low-carbon technology options. 7) Postponing least-cost emissions reduction policies or embarking on suboptimal policies would result in lost opportunities for the U.S. economy of $50-150 billion/ yr in 2010. 8) In the context of an integrated least-cost strategy, credits for carbon sinks and constraints on the use of the Kyoto flexibility mechanisms are of only minor signifi cance. 9) An integrated least-cost approach would more effectively insulate U.S. industries from competitiveness problems than a global emissions trading approach applied in isolation. Productivity gains and tax shifts would reduce production costs and export prices in most industries below baseline levels rather than merely limiting increases in costs and prices. 10) The perception that emission reduction targets such as those of the Kyoto Protocol are unavoidably costly or unfair is the result of outdated modeling assessments. Integrated economic analysis such as that contained in this report is needed as an input for future climate negotiations. The findings of this study are in qualitative agreement with the Economists' Statement on Climate Change signed by over 2,500 economists including eight Nobel laureates in 1997, which states: "Economic studies have found that there are many potential policies to reduce greenhouse-gas emissions for which the total benefits outweigh the total costs. For the United States in particular, sound economic analysis shows that there are policy options that would slow climate change without harming American living standards, and these measures may in fact improve U.S. productivity in the longer run." (Italics added for emphasis). EXECUTIVE SUMMARY Conventional wisdom has it that implementing the Kyoto treaty would unavoidably lead to slower economic growth and higher costs for U.S. consumers and businesses. Recent energy supply problems have heightened these concerns. As a result, many policymakers in the U.S. feel that they are faced with an unhappy tradeoff between the environmental advantage of early and stronger climate policy action and the perceived economic benefit of later and weaker action. This purported conflict between economic and environmental goals has strongly shaped the U.S. stance in the U.N. climate negotiations. In order to reduce domestic economic impacts, the U.S. has called on developing countries to make emission reduction commitments of their own, and it has demanded the unrestricted use of the Kyoto flexibility mechanisms and large credits for carbon sinks. These positions have centrally contributed to the recent collapse of the U.N. Conference of Parties (COP) negotiations: many participants and observers saw the U.S. positions on sinks and flexibility mechanisms as indirect attempts to rewrite the Kyoto targets. More recently, the U.S. administration has entirely rejected the treaty in its current form. The present report finds that U.S. perceptions of national interests in the pre-and post-Kyoto negotiations have been greatly distorted by flawed and outdated economic modeling studies. What has been missing in the assessments so far is an integration of individual policy options into a coherent least-cost framework drawing on all major cost-reducing policies simultaneously. New information presented in this report shows that such an economically efficient, integrated energy and climate approach would allow the U.S. to fully meet emission reduction targets such as those set forth in the Kyoto Protocol and significantly exceed them by 2020, and do so while increasing economic output, not decreasing it. By 2010, an integrated least-cost strategy would produce a gain of $50-60 billion/ yr to the U.S. economy (constant 1997 dollars). These gains grow to $120 billion/ yr by 2020-before accounting for the benefits of slowing climate change. The cumulative gain over the next decade would be more than $250 billion, growing to a cumulative $600 billion over the second decade (net present value in 1997 dollars). The present report also shows that these positive economic impacts are neither dependent on-nor materially augmented by-U.S. proposals on sinks and flexibility mechanisms. Furthermore, the present analysis shows that an integrated least-cost approach to climate mitigation solves two problems with one policy strategy. The most important element of a money-saving climate strategy-increased energy productivity investments—is also the most cost-efficient way for overcoming current energy supply problems in the U.S. Large opportunities for cost-effective investments in demandside efficiency and cogeneration reduce not only the projected use of coal, but also of natural gas and oil. By doing so, a climate-oriented energy policy protects U.S. consumers and firms from rising costs of energy services and from risks of supply disruptions in the electricity, oil, and gas markets. These conclusions arise from a fresh examination of the key economic analyses of the Kyoto Protocol that were published during 1997–2000, either by the U.S. Government itself or as an outflow of major academic projects. In the present report, we subject these studies to an analytical review and integrate their findings into an internally consistent economic perspective. We then use this perspective to evaluate the U.S. position in the U.N. climate treaty negotiations and proposed responses to energy challenges at home. A LEAST-COST STRATEGY: FLEXIBILITY WITH NO REGRETS To minimize abatement costs, climate change mitigation needs to combine four major policy approaches: (1) Economy-wide policies that send uniform and consistent price signals to all economic actors through taxes or, alternatively, through domestic emission caps that are linked to a permit auction and trading scheme (cap-and-trade systems). The price and cost of permits adds a carbon charge to energy prices that works in the same manner as a carbon tax. (2) Domestic reforms based on cost-benefit tested incentives, standards, and voluntary agreements. These reforms would reduce market, organizational, institutional, and regulatory barriers to highly profitable energy efficiency investments and other no-regrets technology options. Also included here are targeted technology R&D and commercialization programs for reducing the costs of renewable energy sources and other low carbon technologies. (3) Linkage of emissions tax revenues or permit auction revenues with tax shifts and subsidy reforms, such as cuts in taxes on payrolls or investments, to offset reve |