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greenhouse gases in the atmosphere will require transformational change in the global energy system, as well as research and development that leads to bold technological breakthroughs. I agree very much with what Mr. Heydlauff said a moment ago about the importance of research that is not just at the margins, but, of research that helps us understand the significant kind of changes that we could make.

Today we have technologies available that companies part of the Pew Center are using to reduce emissions. It is not impossible for us to respond to climate change this week, next week, or next month, to improve efficiency, and to adopt new sources. At the World Resources Institute, we work with a group of companies who will soon purchase several thousand megawatts of wind energy in an effort to reduce their reliance on carbon-based fuels. But none of this is a substitute for large-scale research on major new technologies.

Finally, S. 1008 recognizes that our national energy strategy cannot be shaped without paying close attention to the challenge of climate change. I want to go back to what I said at the start and emphasize again the need for early action. I think there are three reasons for slowly taking action now. First of all, if we begin to slowly take action, we will learn the answers to some of the questions that are troubling many Senators about the costs and technological and social difficulties of change. If we start slowly, we can add to our store of information about how to respond pragmatically.

Second, a slow start gives us a chance to make a stable transition. Mr. Heydlauff's company, I believe, burns 80 million tons of coal a year. Part of the national energy strategy will certainly be to encourage companies like AEP to build new plants for the generation of electricity. I do not know how AEP managers can effectively represent the interests of their shareholders if they do not know what policies government may impose in 5, 6, or 8 years that will add to the costs of burning coal. Without knowing what regulatory costs will be managed, they do not know how much to invest in efficiency, how much to invest in gas, how much to invest in pollution controls.

Finally, I do not think it is to the benefit of the United States' competitiveness to fail to invest in more efficient technologies for producing energy. Whatever long-term strategy we ultimately develop to try to stabilize concentrations, what we do in the first 10 years will likely have to be the same. Whatever the path we ultimately are going to follow, it will still involve early efforts to reduce pollution and control CO2.

Thank you very much, Mr. Chairman.

Chairman LIEBERMAN. Thank you very much, Mr. Lash, for that very interesting testimony.

Ms. Thorning, thanks for being here. We look forward to hearing

TESTIMONY OF MARGO THORNING, Ph.D., SENIOR VICE

PRESIDENT AND CHIEF ECONOMIST, AMERICAN COUNCIL FOR CAPITAL FORMATION

Ms. THORNING. Thank you very much. I appreciate the opportunity, Mr. Chairman, to appear before this Committee and to appear with such a distinguished panel of climate policy experts. I would like to request that my written testimony be included in the record.

Chairman LIEBERMAN. It will, without objection.

Ms. THORNING. My written testimony includes a discussion of some of the issues you asked about, including the macroeconomic impact of the Kyoto Protocol and near-term emission limits, the impact on U.S. budget surpluses of actions that would slow economic growth, international trading systems, and a discussion of the fact that the European Union itself will not be able to meet its Kyoto targets, and a discussion of the science. Although I am not a scientist, I did want to raise the issue that, as we heard earlier, the science is not clearly understood. Much further work, much more study, needs to be done on that.

Before launching into a little discussion of S. 1008, I would like to draw your attention to the story on the front page of the Washington Post this morning, Steven Pearlstein's story about the economic impact of global slowdown. The implication of the Pearlstein story is the United States is the engine of world economic growth. If we are unable to regenerate the strong growth that we have experienced in earlier years, it is going to be much harder for the developing economies and for Europe and for Japan to pull themselves out of their slump.

Therefore, I think it is appropriate to weigh very carefully any major policy decisions, such as measures to, in the near-term, sharply reduce the growth or cap CO2 emissions. The studies that we have looked at and that are described in my testimony suggest such policies would reduce U.S. levels of GDP by 2 to 4 percent a year, which would be a significant negative drag on the U.S. economy and on our trading partners. Also, there is a substantial body of research by scholars such as Robert Crandall at Brookings, McKibben and Wilcoxin, Yale professor Bill Nordhaus, that suggest that the cost of going ahead with sharp, near-term caps on emissions far exceed the benefits, even when you take account of the possibility of some changes to climate.

So I think the evidence suggests we need to take a cautious attitude before deciding what is the best strategy to address the potential threat of climate change, and I do not think the scholars whose work I am mentioning suggest that nothing needs to be done. Clearly it does, but we need to move forward in the most efficient, cost-effective possible way, so as not unduly burden the U.S. economy and our trading partners.

I would like to make a few comments about S. 1008. I think Senators Byrd and Stevens are to be commended for their recognition of the importance of technological innovation as the principal means of dealing with the possible threat, potential threat, of climate change. S. 1008 contains some helpful initiatives that could further the goals of maintaining strong economic growth and energy security, while reducing greenhouse gas emissions. The bill also appears to be supportive of some of the initiatives put forth by the Bush Administration, including advancing clean-coal technology

I was very pleased to hear the other comments about the importance of coal to the U.S. economy. It is clearly going to be a major energy source for the foreseeable future, and we do need to accelerate the development of clean-coal technology. However, I would like to suggest that S. 1008 falls short in some ways, in terms of promoting many of the policies I suggested in my testimony for encouraging technological innovation.

For example, S. 1008 does not address the question of how to deploy new technology. We need to develop it, but how do we get it adopted? How do we get it into the system? One thing I would like to draw your attention to is the U.S. Tax Code, which taxes new investment much more harshly than most of our competitors, whether it is productive investment or whether it is pollution-control investment. As Table 1 of my testimony shows, the United States has very slow capital cost recovery. We rank near the bottom of a list of eight countries that Arthur Andersen surveyed. If we could improve depreciation or tax incentives for pulling through, it would help to pull through the kinds of equipment that would enable us to both grow and reduce CO2 emissions.

So, taking a look at the tax code and, as the Bush Administration moves forward with tax reform, hopefully that would be part of hopefully better depreciation, particularly for energy-efficient or pollution-reduction-would be part of any tax code reform. Second, Š. 1008 does not address nuclear power. That has clearly got to be a major component, at least over the next several decades, of U.S. energy supply; France manages to produce 80 percent of its electricity and the United States only 20 percent. So it suggests that we ought to be able to move forward to rely on a source of energy that is much less polluting.

We also need more bilateral cooperation with developing countries to promote the use of existing and emerging technology. We need to expand incentives for landfill methane and biomass, the EIA Clean Technology Initiative report shows that those were the two most effective programs, and I do not believe S. 1008 addresses those. Finally, we need to avoid caps on CO2 emissions by U.S. industry and avoid setting targets at this time. We need further study of this issue. We need to move forward, but in a cost-effective, careful way.

Thank you, Mr. Chairman.

Chairman LIEBERMAN. Thank you very much. Thanks for your testimony. I appreciate the effort that all of you put into appearing before us.

Ms. Claussen, let me start with you, and you talked about the critical need for a national strategy on climate change. You have extensive experience in government. Now you are in the private sector, working with some of America's largest corporations. Just give us your reaction to what you think the impact would be of a central White House office focused on climate change, and I want not want to continue to proliferate offices in the White House, but how do you see it here?

Ms. CLAUSSEN. Senator, I was in government for about 25 years, and I participated in interagency process in the Reagan Administration and the first Bush Administration. In the early part of the Clinton Administration, I actually ran an interagency process. I hope I learned from the first two administrations and applied some of it in the third, but the fact is, this is a monster of an issue and everyone has a legitimate reason to be involved across the government for a variety of different reasons. If you do not have a way to focus the effort and coordinate the effort, you just have everybody doing their own thing based on their own set of objectives and the culture of their own agency. You do not have a coherent policy, It is extremely hard to do, but I think you have to center it in the White House and you have to put some real effort into making it work.

Chairman LIEBERMAN. Thank you. Let me go now to the economic consequences and, in a sense, some of the questions that Senator Bennett raised about the costs of complying with Kyoto or the cost of responding to the climate change problem. I was interested that, I think, Dr. Edmonds and Mr. Lash, in your prepared testimony, talked about the economic consequences of inaction here. I wonder if you could both expand on that, and if there is any way in which we could begin to quantify the economic cost of inaction.

Mr. EDMONDS. Thank you, Mr. Chairman. The Global Energy Technology Strategy Program has shown that cost does matter and is an important element that must be taken into account in framing an effective response to climate change. The climate change issue is essentially an intergenerational problem. This makes the climate change problem far more difficult than local environmental problems involving short-lived gases and aerosols, with which we are more familiar.

We largely live with the climate that we inherited from our predecessors, while we are in turn laying down the foundations of the climate that we will pass on to the next generation. But, we have very little margin to change our own climate. The actions that we take to mitigate emissions are therefore largely undertaken out of an altruistic motivation-care for our children and grandchildren. Under such circumstances the cost of emissions mitigation matters a great deal.

This observation in turn leads us back to the importance of developing technologies and energy systems that can limit emissions in a cost-effective manner. And, that is the heart of S. 1008. Without cost-effective energy technologies and systems even the bestcrafted tactics to limit cumulative global emissions of carbon to the atmosphere will ultimately prove to be either too expensive to implement, or will more likely lead to higher concentrations and greater climate change for future generations.

On the other hand, if energy technologies and systems are developed and made available at reasonable cost, all tactics for controlling emissions begin to look much more attractive, as do lower cumulative global carbon emissions and long-term CO2 concentraI think the thrust of everything we have learned under this global energy technology strategy program is that cost does matter. It is a very important element. It has to be taken into account. The climate change issue is essentially an intergenerational problem, and we largely live with the climate that we inherited from our predecessors, and we lay down the concentrations of greenhouse gases in the atmosphere that are passed onto the next generation. So, in fact, most of our margin is not on our own climate. It is an altruistic enterprise, and under those circumstances, we do altruism. We save for our kids education and we do things for the future, but cost really does matter and it matters a lot.

I think what comes out of this global energy technology strategy program is that addressing the climate change issue seriously requires that we deal with this as a century scale problem, not as a year by year problem, and that if the technology to address climate change is not available that is the core of what S. 1008 is about-if it is not available, pretty much independent of the best crafted tactics to limit cumulative global emissions of carbon to the atmosphere are ultimately going to turn out to be too expensive, and we will either not do it or we will not do as much as we could.

On the other hand, if the technology is developed and is made available, all the tactics begin to look much more attractive and it is a lot easier to do the job right. I think that is the important lesson, that if we have the technology, it is going to be a lot easier job and costs are going to be minimal.

Chairman LIEBERMAN. Mr. Lash.

Mr. LASH. Two brief comments—first, looking at the costs of action, one gets very different answers depending on the assumptions used in the models that do the calculations and on the policies that one analyzes. If the models assume that the economy is very good at changing sources of fuel, that we would use more gas and less coal as a response, and that new technologies would develop, the cost is low. If the models do not assume that kind of flexibility in our economy, the cost is high. If the models account for benefits, the cost is low. If the models do not account for benefits, the cost is high. Most models do not account for benefits because to account for benefits is very difficult.

For instance, Dr. Hansen was talking about the number of people who die from air pollution who might be saved if we reduce pollution. Certainly, it is very important what policies are used. If you have a rigid regulatory system that imposes huge and sudden cost on utilities or on the auto industry, reductions will cost a lot. If you have a market-based system that allows companies to choose how they are going to proceed over a number of years, reductions will cost less. It is important to make those distinctions as one is analyzing costs. The same is true for the benefits of action and the costs of inaction. Because we are uncertain about precisely what will happen 25 years from now if we do not take action-any assessment we make of those costs is going to involve the kinds of scenarios that Dr. Hansen was talking about, and guesses about impacts, both here and externally, and it makes counting them difficult. The assumptions going in determine the numbers coming

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