problem created by greenhouse gases will go away. It is like a life insurance policy whose costs grow significantly if we delay year after year insuring ourselves.

But there is a critical difference in the case of the climate system. In most insurance policies, the loser can be made whole-restitution is possible; the building can be rebuilt, the stolen car replaced, the fire or flood damage repaired. In the case of global warming, we will not have a second chance-failure to act will lead to irreversible consequences. We will be committing ourselves, our children and our grandchildren to a very different planet, and they will never forgive us.

But the premium for this insurance policy must be reasonable. For this reason we rejected unrealistic targets in Kyoto; we insisted on full recourse to marketmechanisms; and we opposed mandatory policies and measures-like carbon taxes. The totality of our scientific information, including that on vulnerability and impacts of global warming, provides a compelling reason to act.

Let me now turn to the recent Kyoto Conference.

Kyoto Protocol

Last December in Kyoto, Japan, the nations of the world reached agreement on an historic step to control greenhouse gas emissions which cause global warming. No sooner had the negotiating session ended, however, than some critics on both ends of the political spectrum, without a full examination of the results achieved, denounced the agreement as either too little too late or too much too soon. In fact, the Kyoto Protocol, reached only through the exercise of vigorous American leadership, represents an important achievement in the best interests of the United States. But it is a framework for action, a work in progress, not a finished product ready for Senate consideration.

U.S. Negotiating Objectives

In order to secure an effective agreement that is environmentally strong and economically sound, while protecting the unique worldwide interests of the U.S. military, President Clinton and Vice President Gore established three major objectives. As a result of the Kyoto negotiations, we achieved the first two-realistic targets and timetables for reducing greenhouse gas emissions among the world's major industrial nations, which fully protect the unique role of our military in its global reach; and flexible market-based mechanisms for achieving those targets cost-effectively. The third, meaningful participation of developing countries, will be the focus of our work in the coming months and years, but with the Kyoto Protocol we have made an important down payment.

Elements of the Kyoto Protocol and Related Decisions

Our first objective-realistic targets and timetables among developed countries— had to be a credible step in reducing the dangerous buildup of greenhouse gases, yet measured enough to safeguard U.S. prosperity at home and competitiveness abroad. In the end, we secured the key elements of the President's proposal on targets and timetables, often over the initial objections of the European Union and other developed countries. The agreement and related decisions include:

• The U.S. concept of a multi-year time frame for emissions reductions rather than a fixed, single-year target. The multi-year time frame will allow the United States, other nations and our industries greater flexibility in meeting our targets. Averaging over five years, instead of requiring countries to meet a specific target each year, can lower costs, especially given an uncertain future. The averaging can smooth out the effects of short-term events such as fluctuations in the business cycle and energy demand, or hard winters and hot summers that would increase energy use and emissions.

The U.S. specific time frame of 2008-2012, rather than earlier periods preferred by the European Union and others, giving us more time to phase in change gradually and deploy new technologies cost-effectively, and thereby to cushion the effects on our businesses and workers.

• Differentiated targets for the key industrial powers ranging from 6% to 8% below baseline levels (1990 and 1995) of greenhouse gas emissions, with the United States agreeing to a 7% reduction. When changes in the accounting rules for certain gases and offsets for activities that absorb carbon dioxide are factored in, the level of effort required of the United States is quite close to the President's original proposal to return emissions to 1990 levels by 2008-2012, representing at most a 3 percent real reduction below that proposal, and perhaps less.

• An innovative proposal shaped in part by the United States, allowing certain activities, such as planting trees, that absorb carbon dioxide called "sinks"- to be offset against emissions targets. This will both promote cost-effective solu

tions to climate change and encourage good forestry practices. As a major forestry nation this will be of special benefit to the United States.

• As proposed by the United States, the Kyoto Protocol covers all six significant greenhouse gases even though the E.U. and Japan proposed and fought until the last moment to cover only three. This was an important environmental victory-also supported by many in our own industry-because gases that other countries wanted to omit and leave uncovered (including substitutes for the now banned chloro-fluorocarbons that endanger the ozone layer) are among the fastest growing and longest lasting greenhouse gases.

Flexible Market Mechanisms

Our second broad Presidential objective was to make sure that countries can use flexible market mechanisms to reach their targets rather than the mandatory "policies and measures,” such as carbon taxes, favored by the E.U. and many other developed countries.

The Kyoto Protocol enshrines a centerpiece of this U.S. market-based approach— the opportunity for companies and countries to trade emissions permits. In this way, companies or countries can purchase less expensive emissions permits from companies or countries that have more permits than they need (because they have met their targets with room to spare). This is not only economically sensible, but environmentally sound. By finding the least expensive way to reduce emissions, we will be providing a strong incentive for achieving the maximum level of emissions reductions at the least cost. The United States has had a very positive experience with permit trading in the acid rain program, reducing costs by 50 percent from what was expected, yet fully serving our environmental goals.

This was a new concept for developed and developing countries alike some of whom fought it vigorously. But we have it firmly enshrined in the Kyoto Protocol and it is a critical way of ensuring cost-effective solutions. Its inclusion was a major victory for us.

We went even further by achieving a conceptual understanding with several countries, including Australia, Canada, Japan, New Zealand, Russia and Ukraine, to trade emissions rights with each other. This “umbrella group" could further reduce compliance costs.

Ensuring that we can meet our target reductions cost-effectively will depend significantly on access to the flexibility mechanisms we fought hard to include in the Kyoto Protocol. Let me be very clear: The commitment we made in Kyoto would not have been made—could not have been made—were it not for the flexibility mechanisms that were also agreed there. Until we are satisfied with the rules and procedures yet to be established, the promise of Kyoto will never be realized. The importance of emissions trading is emphasized by CEA Chairman Yellen's economic analysis and testimony.

Meaningful Participation of Developing Countries

Our third objective was to secure meaningful participation of key developing countries, a concern that I know you, Mr. Chairman, and members of the House and the Senate obviously share, as evidenced by last summer's Byrd-Hagel resolution. Global warming is, after all, a global problem which requires a global solution-not only from the developed world but also from key developing countries.

Per capita emission rates are low in the developing world and will remain so for some time, and over 70 percent of today's atmospheric concentrations of greenhouse gases attributable to human activities are the result of emissions by the industrialized world. At the same time, it is also true that by around 2015 China will be the largest overall emitter of greenhouse gases, and by 2025 the developing world will emit more greenhouse gases in total than the developed world. So from an environmental perspective, this problem cannot be solved unless developing countries get on board.

We encountered significant resistance in Kyoto by some developing countries to meaningful participation in solving the global warming problem. For example, we had sought to include a specific process through which advanced developing or newly developed countries could take on quantified emission limitation commitments and thereby take part in the international emissions trading regime. While a number of developing countries expressed interest in our proposal and supported it in Kyoto, others rejected it, and it was not possible to include such a specific process in the Protocol. Still, developing countries may nevertheless, as a prerequisite for engaging in emissions trading, voluntarily assume binding emissions targets through amendment to the annex of the Protocol that lists countries with targets. Some developing countries believe wrongly-that the developed world is asking them to limit their capacity to industrialize, reduce poverty and raise their standard

of living. We have made clear that we support an approach under which developing countries would continue to grow-but in a more environmentally sound and economically sustainable way, by taking advantage of technologies not available to countries that industrialized at an earlier time.

The Kyoto agreement does not meet our requirements for developing country participation. Nevertheless, a significant down payment was made in the form of a provision advanced by Brazil and backed by the United States and the Alliance of Small Island States. This provision defines a "Clean Development Mechanism," which embraces the U.S.-backed concept of “joint implementation with credit." The goal is to build a bridge-with incentives-between developed, industrialized countries, and developing nations. This new mechanism will allow companies in the developed world to invest in projects in countries in the developing world-such as the construction of high-tech, environmentally sound power plants-for the benefit of the parties in both worlds. The companies in the developed world will get emissions credits at lower costs than they could achieve at home, while countries in the developing world will share in those credits, and receive the kind of technology that can allow them to grow without ruining their environment.

The Clean Development Mechanism has great potential, but developing countries will need to do more in order to participate meaningfully in the effort to combat global warming. In determining what developing countries ought to do, we should be aware that the circumstances of developing countries vary widely, along a kind of continuum. Some today are very poor; their greenhouse gas emissions are negligible and are likely to remain so for the foreseeable future. Others, whose greenhouse gas emissions are not substantial, are relatively well off. Some are poor on a per capita basis, but their greenhouse gas emissions today rival or surpass those of the most advanced industrialized nations. Still others have already joined ranks with the industrialized world in the OECD but have not yet fully accepted the added responsibility for protection of the global environment that comes with their new status.

Any "one-size-fits-all" approach to the "meaningful participation of developing countries" and to satisfy the Byrd-Hagel Resolution is thus unlikely to prevail. We found in Kyoto that even among the industrialized countries it was necessary to recognize the individual national circumstances faced by those differently situated in order to reach agreement, notwithstanding our common purpose. Similarly, any uniform, inflexible approach to the "meaningful participation of developing countries" is unlikely to prevail.

As Senator Byrd said in his letter of December 15, 1997, to the President, and recently restated on January 29 in the Senate:

"...binding commitments for developing nations should be paced according to the ability of each country to achieve greenhouse gas emission limitations appropriate to its national circumstances and economic growth. These limitations could be gradually implemented. Whether such commitments are in fact appropriate and represent best effort by each nation, will not be difficult to discern. As the saying goes, we will know it when we see it."

Recognizing our "common but differentiated responsibilities and respective capabilities" it will be necessary to develop an approach that provides for a meaningful global response to the threat of global warming, while acknowledging the legitimate aspirations of developing countries to achieve a better life for their peoples. To succeed, we will need to ensure that those responsible for a significant share of global emissions accept their responsibility to protect the global environment. We will also need to ensure that those who are able to do so contribute according to their capacities and stage of development.

Some Misperceptions

Before moving on, Mr. Chairman, let me address a few specific points on which I believe there may be some misperceptions. The first of these is that the Kyoto Protocol will damage our national security or imperil the ability of our military to meet its worldwide responsibilities-this is not true.

We took special pains working with the Defense Department and the uniformed military before and in Kyoto to protect the unique position of the United States as the world's only superpower with global military responsibilities. We achieved everything they outlined as necessary to protect military operations and our national security.

At the Kyoto Conference, uniformed military representatives from the Joint Chiefs of Staff and the Office of the Deputy Under Secretary of Defense for Environmental Security provided guidance to the delegation as we considered this issue. In the end, the Parties took a decision to exempt key overseas military activities from emissions targets, including exemptions for "bunker fuels" (those used in inter

national aviation and maritime transport) and for emissions resulting from a wide range of multilateral operations, such as peacekeeping and humanitarian relief. This exempts from our national targets not only multilateral operations expressly authorized by the U.N. Security Council (such as Desert Storm or Bosnia), but also multilateral operations that the United States initiates pursuant to the U.N. Charter without express authorization (such as Grenada). Countries may also decide among themselves how to account for emissions relating to multilateral operations (e.g., U.S. training in another NATO country) without going through emissions trading. If any other measures to preserve our national security interests are required, and there do not appear to be any, they can be addressed through future implementing legislation. As Secretary of Defense Cohen wrote in a letter of February 24, 1998, to Congressperson Bachus, "Based on achieving our international objectives, the Department is fully satisfied with the Kyoto results."

Second, it has been suggested that the Protocol will create a super U.N. Secretariat that will threaten U.S. sovereignty and national decision-making through alleged intrusive verification procedures and prior approval of individual emissions trades. That is not so. The review process contained in the Protocol largely codifies the existing practice under the 1992 Framework Convention, to which the United States is a Party. Under the Protocol, small expert review teams will continue to visit Annex I countries for brief periods to review implementation of the Convention and of the Protocol. The review process is intergovernmental, in that experts are nominated by governments. The review teams meet with government officials, and with others by invitation. In reviews under the Convention, the teams have met with Congressional staff, representatives of the private sector and representatives of environmental organizations-but only with their concurrence. Any other visits, such as site visits, would take place only if approved by the host country and, if the private sector is involved, the relevant interested persons. It is important to emphasize that no one can come onto the private property of a U.S. citizen without that individual's express approval and consent. To date under the Convention, no site visits have taken place.

In addition, let me be unmistakably clear-while trading rules must be established internationally to have emissions trading work-as our SEC must set rules for equity trading-we will not accept nor do we anticipate an approach that would require prior approval of individual emissions trades by an international body. Trading will be done between interested nations and their companies, based on market principles.

Concerns have also been raised that the Protocol is flawed, on the one hand because it will threaten U.S. sovereignty by dictating national decisions on implementation and, on the other hand, because it lacks mechanisms to verify compliance. In fact we believe that the Protocol strikes an appropriate balance between these two extremes.

• The United States firmly opposed mandatory, harmonized policies and measures that would be imposed upon us in order to reach our target. We prevailed. The Protocol leaves Parties entirely free to decide how best to meet their targets based on national circumstances.

• At the same time, we could not tolerate a free-for-all where Parties might or might not meet their commitments, particularly given the conscientious way the United States meets its international obligations. As a result, the Protocol calls for national measurement of emissions, detailed reporting, and in-depth reviews on an intergovernmental basis.

• The one area where we believe more work needs to be done is in identifying appropriate consequences for non-compliance; the Protocol provides for elaborating such consequences, with any binding consequences to be done in amendment form, so that the Senate would have the opportunity to approve them. Finally, some have suggested that the Protocol will result in a huge government transfer of foreign aid to Russia in which we will give away taxpayer money with no leverage on Russian policies with these funds. This also is not true. Under the Protocol's emissions trading provisions, we envision that U.S. private sector firms may choose to purchase international emissions credits in order to meet their emissions obligations. Indeed, the private purchase of emissions credits is one of the crucial ways to achieve cost-effective emissions reductions for U.S. firms.

As with any market transaction, purchases of these credits will have to comply with all U.S. legal and regulatory requirements. In addition, U.S. firms interested in international investment will have an incentive to ensure that other countries meet the international standards for adequate monitoring and reporting of their emissions of greenhouse gases. At the same time, Russia will have significant incentives to use the revenue generated to invest in the most modern, climate-friendly

plants and equipment so that, as its economy recovers, it continues to produce emissions credits that it can sell on international markets.

Framework for Action

Where do we go from here? While historic, the Kyoto Protocol is only one step in a long process. It is, in essence, a framework for action, a work in progress, and a number of challenges still lie ahead. We anticipate signing the Protocol within the one-year period provided for in the agreement, which runs from March 1998 to March 1999. We have not, as yet, determined the precise timing due to tactical considerations. We will sign at a time that makes the most sense in terms of the overall diplomatic situation.

In that diplomatic context, rules and procedures must be adopted to ensure that emissions trading rights, joint implementation and the Clean Development Mechanism operate efficiently and smoothly. The Kyoto Protocol establishes emissions trading, but leaves open the specifics of operations. We will work hard to ensure that the rules and procedures adopted enable emissions trading, joint implementation and the Clean Development Mechanism to work smoothly and efficiently, thereby encouraging the private sector to engage.

We will also work closely with our industries to be sure they are satisfied that the emissions trading system which is developed is as efficient and effective as possible to meet their needs.

Most significant, we must work to secure the meaningful participation of key developing countries. We must be creative in initiating bilateral agreements. We have made a promising start with an agreement we reached with China during last fall's Summit. We must also use regional and multilateral fora to achieve our objectives— such as the Summit of the Americas process, in the Asian Partnership for Economic Cooperation (APEC) process, the President's forthcoming trip to Africa, and the G8 Summit in the United Kingdom. We will put on a full court diplomatic press to bring developing nations into a meaningful role in helping solve the global climate challenge. We will accept nothing less, nor would we expect the United States Senate to do so As the President has indicated, the United States should not assume binding obligations under the Protocol until key developing countries meaningfully participate in meeting the challenge of climate change. Although the Kyoto Protocol was an historic step forward, more progress is necessary with respect to participation of key developing countries. It would be premature to submit the treaty to the Senate for its advice and consent to ratification at this time.

The Administration also plans to continue to work with the international financial institutions to promote market-based energy sector policies in developing countries that will help reduce developing country greenhouse gas emissions. Multilateral development bank policies, including those of the Global Environment Facility, strongly influence international lending and private capital flows for energy, industrial and transportation investments. Policies that favor market pricing, privatization, clean technologies and environmentally-friendly approaches will make implementing the Kyoto Protocol easier and will speed the growth of markets for new technologies that help reduce emissions in developing countries. We will work with the international financial institutions themselves from the World Bank to the regional development banks and with other countries, especially developed countries, to achieve these goals in the coming years.

The Kyoto agreement does not solve the problem of global warming, but it represents an important step in dealing with a problem that we cannot wish away. A premature decision to reject the Protocol would deprive us of the opportunity to complete its unfinished business. If we fail to take reasoned action now, our children and grandchildren will pay the price.

Mr. Chairman, before turning briefly to our domestic efforts, let me note two other key elements in this equation-the contributions that the United States provides to carry out work under the U.N. Framework Convention on Climate Change and in the Intergovernmental Panel on Climate Change (IPCC), as well as the contributions that we make to the Global Environment Facility (GEF). For FY 1999, the President has requested $314 million for the International Organizations and Programs Account, a level that represents a 6.6 percent increase over FY 1998. This amount includes $8 million for the Climate Stabilization Fund which supports the Framework Convention and the IPCC. Parties to the Convention have much work ahead of them, as I have already noted. In addition, the IPCC has now embarked on its Third Assessment Report of Climate Change, scheduled for completion in late 2000 or early 2001. These funds are vital to ensuring U.S. leadership in both of these organizations and to ensuring that our views and the work of our scientists are taken fully into account.