crease in appropriations for solar and renewable energy R&D a 37 percent increase over 1998.

We hope that the Congress will view the President's initiative favorably and appropriate the funds and enact the tax incentives that he has requested. We look forward to working with you to put the President's proposals into action.

The President and his Administration are committed to working with you in the Congress, both to realize the potential of the Climate Change Technology Initiative and to craft the ongoing U.S. approach to climate change. The United States has the power to lead the global effort, and Congress holds the key. What is done or not done today will determine the kind of world we will leave to future generations and the conditions of life they will face.

Sustained Effort Required

Mr. Chairman, I have mentioned that Kyoto produced a framework for future action, and I have listed a number of the steps that await us.

Coming to grips with the threat of global warming is no small task. We must tackle it in a vigorous, sober and determined manner, understanding that it represents a challenge but also an opportunity. And as we have always done in the face of global challenge, we must assume the responsibilities of American leadership. Thank you.

Mr. SCHAEFER. Thank you very much, Mr. Eizenstat. Now, and I just have to say that being in Kyoto, we appreciated you coming and giving us briefings on a very reasonable basis. We think that was great, whether we agreed with them or not is something else, but the point was that you were giving them to us. The Honorable Janet Yellen.

STATEMENT OF JANET YELLEN

Ms. YELLEN. Thank you, Mr. Chairman. The President has said that we can work to avert the grave danger of climate change while, at the same time, maintaining the strength of our economy. I agree, and I'm pleased to have this opportunity to appear before the committee to elaborate on the administration's views on these issues.

The international agreement that was reached in Kyoto this past December is a crucial step forward in addressing global climate change, but it's only one step in a long journey. Since the international effort to reduce greenhouse gas emissions is still, in some respects, a work-in-progress, it's not yet possible to provide a full, authoritative analysis of it.

In my testimony today, I will attempt to identify key elements of the agreement and the administration's policy such as international emissions permit trading, meaningful developing country participation, the inclusion of land use activities that absorb carbon, mainly sinks, and six categories of gas, as well as domestic initiatives that can ensure that reductions in global greenhouse gas emissions are consistent with continued, strong, economic growth. The Intergovernmental Panel on Climate Change (IPCC) jointly established by the World Meteorological Organization and the United Nations Environment Programme, concluded in 1995 that "the balance of evidence suggests that there is a discernible human influence on global climate." As Undersecretary Eizenstat noted, current concentrations of carbon dioxide, methane, nitrous oxide, and the other so-called greenhouse gases have reached levels well above those of preindustrial times.

As a result of the increased concentration of greenhouse gases, the IPCC estimates that global temperatures will increase by between 2 and 6 degrees Fahrenheit in the next 100 years, with the

best guess of about 3.5 degrees Fahrenheit. The IPCC reports that a doubling of carbon dioxide levels would lead to approximately 10,000 additional deaths per year to the current population from higher summer temperatures even after netting out the effects of warmer winters and acclimatization. The IPCC also predicts sea level increases of about 20 inches by 2100 with greater increases in subsequent years.

Despite the difficulties of deriving quantitative assessments of the damages from climate change, researchers have, nonetheless, developed monetary estimates of damages to prompt substantial concern and range in the tens of billions of dollars per year, for temperature changes projected to occur in the next century. If left uncontrolled, disruption of the earth's climate may thus pose substantial costs in terms of harm to commerce and the environment alike.

These costs, and they are significant, provide the primary motivation for actions to reduce greenhouse gas emissions. These estimates do not, and cannot, accurately reflect the value of reducing the unknown risks of large scale, and potentially irreversible, events with potentially catastrophic consequences, such as warming of the northern tundra sufficient to release very large amounts of methane from the permafrost, and thereby leading to accelerated warming. There is, thus, a strong argument for the Kyoto Protocol as a form of insurance against a serious environmental threat.

To address climate change, the United States, and approximately 160 other nations, agreed in the negotiations held in Kyoto, Japan last December to reduce emissions of greenhouse gases. The Kyoto Protocol, which requires the advice and consent of the Senate, would place binding limits on each industrial country's combined emissions of the six principal categories of greenhouse gases. These limit apply to the 38 so-called Annex I countries which are the industrialized countries defined to include Russia, Ukraine and most Eastern European countries.

In taking action to reduce emissions, economic analysis suggests the two elements are absolutely essential: the effort must be flexible and market-based to insure that we reduce emissions in the most efficient way and the effort must be global, for without global emissions reductions, the effort would be ineffective. The nature of the climate change problem-that greenhouse gas emissions have the same effect on the climate regardless of how, where and, within limits, when they occur-suggests three basic approaches to lower the cost of achieving given levels of environmental protection. We term these, "when," "what," and "where" flexibility.

As a result of U.S. diplomatic efforts, all three forms of flexibility are broadly reflected in the Kyoto Protocol. The choice of a multiyear budget period ending later than many countries proposed, with allowance for banking of emissions reductions, constitute key elements of "when flexibility." There provisions mitigate costs by permitting reductions at times when they are less, rather than more, costly.

The inclusion of all six greenhouse gases, and certain sink activities, to promote removal of carbon from the atmosphere, provides substantial "what flexibility." The U.S. succeeded in having the Kyoto Protocol stipulate that countries with binding targets are to

reduce total greenhouse gas emissions by certain percentages, but, it does not require specific reductions or specific gases. Moreover, sinks can be used to offset emissions targets.

The inclusion of international emissions trading among countries that take on binding targets, coupled with an agreement allowing industrial countries to receive emissions reduction credit for certified investments in clean development projects in the developing world, are the critical forms of "where flexibility" incorporated in the Kyoto Protocol. Although details of these provisions need to be finalized in negotiations in Buenos Aires later this year, we believe that these mechanisms can produce substantial reductions in the cost of attaining our environmental objectives.

The problem of climate change is global and, so, it requires a global solution. Around 2030, under a continuation of business-asusual, a majority of the world emissions are projected to come from developing countries. Without developing country participation, we cannot achieve adequate climate protection. In addition, developing country participation would permit relatively low-cost emission reductions to be internationally recognized as a substitute for more expensive reductions in many industrial countries. The President has made clear that he will not submit the Kyoto Protocol to the Senate without meaningful participation from key developing countries who are not included in Annex I.

Economic analysis of climate change faces three broad categories of difficulty. First are the uncertainties that still remain over the terms of the ultimate treaty. Second are the inherent limitations of available models to analyze even short-term costs and benefits. And, finally, is the impossibility of putting a single monetary figure on the long-term benefits of climate change mitigation.

Mindful of the limitations of any single model as a tool for evaluating the economic impact of the Kyoto Protocol, we have employed a broad array of techniques to assess the various possible costs and non-climate benefits of the administration's emissions reduction policy. Ignoring the benefits of mitigating climate change itself, our conclusion is that the net costs of our policy to reduce emissions are likely to be small, if those reductions are undertaken in an efficient manner, and we're successful in securing meaningful, developing country participation, as well as, effective international trading and clean development mechanisms in future negotiations.

As I explain in my written testimony, this conclusion is not entirely dependent on, but is fully consistent with, formal model results. For example, given the factors, such as trading, just delineated, but excluding the benefits of acting and the impacts of electricity restructuring, estimates derived using Battelle's SecondGeneration Model, suggest that the resource costs of obtaining the Kyoto targets for emissions reductions might amount to just $7 billion to $12 billion per year in 2008 to 2012 which is just a tenth of a percent of projected GDP. That small net premium, in effect, purchases a partial insurance policy against a serious environmental threat.

A comprehensive economic evaluation of the administration's climate change policies must also take into account the potential payoffs from the full package of proposed administration climate change initiatives. As you know, the President's fiscal year 1999

budget includes a $6.3 billion package of tax cuts and research and development spending over the next 5 years. This package makes good sense in terms of energy policy and it could jump start our efforts. A second responsible step entails industry-by-industry consultations to prepare emission reduction plans in key industrial

sectors.

A final component of the President's climate change policy is his support for electricity restructuring in a manner that would offer approximately $20 billion in cost savings to electricity consumers while offering modest reductions in greenhouse gas emissions.

I look forward to continuing to work with members of this committee, as well as other interested parties in further analyzing the Kyoto Protocol and evaluating the effects of reducing greenhouse gas emissions.

Let me stop there. I welcome your questions.

[The prepared statement of Janet Yellen follows:]

PREPARED STATEMENT OF JANET YELLEN, CHAIR, COUNCIL OF ECONOMIC ADVISERS Thank you, Mr. Chairman. The President has said that we can work to avert the grave dangers of climate change, while at the same time maintaining the strength of our economy. I agree and am pleased to have this opportunity to appear before the Committee to elaborate on the Administration's views on these issues.

The international agreement that was reached in Kyoto this past December is a crucial step forward in addressing global climate change. But it is only one step in a journey. Since the international effort to reduce greenhouse gas emissions is still in some respects a work-in-progress, it is not yet possible to provide a full authoritative analysis of it. Many of the specifics in several crucial areas are not completely resolved in the diplomatic arena, forcing analysts to make a variety of assumptions about the ultimate form of the international regime. In my testimony today, I will attempt to identify key elements of the agreement and the Administration's policy, such as international emissions trading, meaningful developing country participation, inclusion of land-use activities that absorb carbon ("sinks") and six categories of gases, as well as domestic initiatives, that together can ensure that reductions in global greenhouse gas emissions are consistent with continued strong economic growth. I will explain the reasoning underlying our conclusion that, under these conditions, economic impacts are likely to be modest.

The Administration is strongly committed to ensuring that these key elements are reflected in our domestic and international climate change policies. We are firmly committed to meaningful developing country participation, the use of sinks to offset emissions requirements, and emissions trading both domestically and internationally. And as you know, the President's FY 1999 budget includes a $6.3 billion package of tax cuts and R&D investments over the next 5 years; this package makes good sense in terms of energy policy and will jumpstart our efforts. A final component of the President's climate change policy is his support for electricity restructuring in a manner that will offer approximately $20 billion in cost savings to electricity consumers, while reducing greenhouse gas emissions.

I. BASIC ECONOMIC RATIONALE OF THE KYOTO TREATY

To begin our analysis, it may be worth stepping back and examining the larger question of the basic rationale, from an economist's perspective, for the Kyoto Protocol.

The earth's surface appears to be warming from the accumulation of greenhouse gases from myriad sources worldwide. None of these emitters presently pays the cost to others of warming's adverse effects-a classic externality in the language of economists. As a result of these distorted incentives, disruption of the Earth's climate is likely to proceed at an excessive pace and if left uncontrolled may pose substantial costs in terms of harm to commerce and the environment alike. The fundamental economic logic of the Kyoto Protocol is thus that without such an international agreement, individual nations will not have the proper incentives to address the threats from global climate change.

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II. COSTS OF CLIMATE CHANGE

In evaluating efforts to mitigate global warming, the first step is to consider the costs of inaction. These costs-and they are significant-provide the primary motivation for actions to reduce greenhouse gas emissions.

The Intergovernmental Panel on Climate Change (IPCC) jointly established by the World Meteorological Organization and the United Nations Environment Programme, concluded in 1995 that "the balance of evidence suggests that there is a discernible human influence on global climate." Current concentrations of carbon dioxide, methane, nitrous oxide, and the other so-called greenhouse gases have reached levels well above those of preindustrial times. Of these, carbon dioxide (CO2) is the most important: net cumulative CO2 emissions resulting from the burning of fossil fuels and deforestation account for about two-thirds of potential warming from changes in greenhouse gas concentrations related to human activity. Climatic Impact

If growth in global emissions continues unabated, the atmospheric concentration of CO2 will likely double relative to its preindustrial level by midway through the next century and continue to rise thereafter. As a result of the increased concentration of CO2, the IPCC estimates that global temperatures will increase by between 2 to 6 degrees Fahrenheit in the next 100 years, with a best guess of about 3.5 degrees Fahrenheit. While scientists believe that human activities are leading to a gradual warming of the average temperature of the earth, the change in temperature in a given region at a given time may differ substantially from this average. Indeed, models predict warming will be greater in high latitudes than in the tropics, and greater over land than ocean.

Potential consequences associated with this shift in climate include a rise in sea levels, greater frequency of severe weather events, shifts in agricultural growing conditions from changing weather patterns, threats to human health from increased range and incidence of diseases, changes in availability of freshwater supplies, and damage to ecosystems and biodiversity.

Economic and Monetary Damages

The derivation of quantitative or monetary estimates of the damages from such a change in the climate is extremely difficult given the capacity of today's models. Estimates of the economic damages from climate change fall into the following broad areas: agriculture, sea-level rise, air conditioning and heating, water supply, human life and health, air pollution, and other costs (hurricanes, relocation costs, human amenity, construction, leisure activities, urban infrastructure, and ecological damages such as forest loss and species loss). Although the quantification of these effects is quite demanding, researchers have developed estimates that prompt substantial concern. The IPCC reports that a doubling of carbon dioxide levels would lead to approximately 10,000 estimated additional deaths per year for the current U.S. population from higher summer temperatures, even after netting out the effects of warmer winters and assuming acclimatization. Other researchers have predicted sea level increases of about 20 inches by 2100, with greater increases in subsequent years.

Despite the difficulties, respected researchers have developed estimates of the monetary damages expected from an average worldwide temperature increase. For example, William Cline, then of the Institute for International Economics, estimated that a temperature change of 4.5 degrees Fahrenheit would impose annual damages of about 1.1 percent of GDP per year on the U.S. economy. That amounts to $89 billion in today's terms. (Cline's original estimate is quoted in 1990 dollars. The figure given above translates this number into 1997 terms by scaling it to current GDP.) William Nordhaus of Yale University has likewise computed estimates of the dollar loss attributable to a doubling of greenhouse gas concentrations. Although he uses methods that differ from Cline's in several respects, Nordhuas estimates that a slightly larger temperature change of 5.4 degrees Fahrenheit would impose losses equal to about 1 percent of GDP. A third independent estimate reported by Nordhaus is close to Cline's. It must be noted, however, that this similarity among aggregated estimates masks the true uncertainty associated with forecasts of the damages from given increases in global warming-the estimates are all fundamentally based on extrapolations from current and past experience, and may not fully incorporate effects that will unfortunately become apparent only with future experi

ence.

One key difficulty in interpreting and monetizing these estimates of damages is uncertainty over the extent that they should be discounted because they occur in the distant future. Since the benefits of stemming future climate change accrue over not only decades but centuries, small changes in the discount rate can produce sub