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in the atmosphere that matter for climate change, not annual rates of emissions.

That means there are many different time paths we could choose for at what rate to reduce emissions, which would all take us to the same point in terms of protecting the global climate. This is a case where, clearly, haste makes waste.

Since I want to keep my comments brief, let me just say that I find studies, such as those of the National Laboratories, that claim there are technologies that can be deployed between now and 2010, that are not currently being taken up by the marketplace, that would reduce emissions sufficiently to meet these goals at no cost to be extremely implausible.

They fly in the face of simple economic reasoning that, right now, energy markets work very efficiently in the United States.

We have deregulated natural gas prices, we have deregulated oil prices, we have a restructuring of the natural electric power energy, which has largely eliminated regulatory distortions on prices and inappropriate incentives for energy consumption.

People have incentives already to choose energy-efficient technologies, and I think most of us who try to do economic models that are market based assume that what is cost effective will be adopted in our baseline. Getting more than that, in the very short run, I think is a result of some fundamental flaws in these studies.

I would be happy to expand on this in the colloquy, but let me kind of bring that out in my summary statements.

Moving, then, to just a brief summary of the impacts that we see on the U.S. economy, I would say first, it's clear that 2010 and 2030 are a long way off, and we all are uncertain about what will happen then to the economy, and any estimate of the costs is uncertain. But I am convinced that the idea that there is, that there will be costs, is something about which I have no uncertainty at all.

We estimate losses in GDP of about 1 percent in 2010 from the targets I was talking about-that's about close to $100 billion in 2010, in today's dollars—and rising thereafter as a firm cap is harder to meet as the economy is growing.

It's impossible to make these costs go away by declaring that the United States won't use carbon taxes or other fiscal measures to implement these limits. We've kind of heard statements to that effect recently.

These estimates I'm giving you do assume smart, market-based policies. Dumb mechanisms—use of regulatory programs like fuel economy standards instead of market-based programs-would make the costs higher, not lower.

I see most of the cost risks being on the side that we will not address the problem squarely and use visible policies like carbon taxes or tradable permits, but try to get it indirectly through regulatory programs, which will make it much more expensive.

Second, on job impacts. It is clear there is no way to reduce carbon dioxide emissions without reducing the use of oil, gas, and coal. That means that there will be job losses in those industries.

We estimate fairly large job losses in the coal industry, but we actually assume that, by 2010, the economy will be back at employment as full as it is today.

The losses we see in the economy don't come from that shift in jobs. They come from the fact that workers are less productive everywhere when they have less energy to assist them and that workers will shift jobs in the service industries out of, perhaps, coal, but at lower wages for everyone in the economy.

Mr. Chairman, I see you're holding the gavel. Let me stop my remarks at this point.

(The prepared statement and attachments of Mr. Montgomery follow:)

Prepared Statement

Of
W. David Montgomery

Vice President
Charles River Associates

Washington, DC

Before the Subcommittee on Energy and Environment

Committee on Science
U.S. House of Representatives

October 9, 1997

Mr. Chairman and members of the Subcommittee, I am honored to appear before you to discuss the potential impacts of a climate change agreement on the U.S. economy. For the record, my name is David Montgomery and I am Vice President of Charles River Associates (CRA) and head of the CRA environment practice. I have been involved in the analysis of economic impacts of climate policies since the late 1980s, when as Assistant Director for Natural Resources and Commerce, I directed the Congressional Budget Office study of carbon taxes. I was a principal lead author of the Second Assessment Report of the Intergovernmental Panel on Climate Change (IPCC), with responsibility for sections on the economic impacts of limiting carbon emissions. Under my direction, CRA has conducted a series of studies of the economic impacts of climate change policies, with support from the Electric Power Research Institute, the American Petroleum Institute, the American Automobile Manufacturers Association, and other private sector clients. I have received no federal government funding, of any kind, for global climate change research during the current or two preceding fiscal years. To the best of my knowledge, CRA has never sought or received federal funding in this area.

In particular, my colleagues and I have developed a set of integrated economic models that deal with international trade and national economic impacts of agreements to limit carbon emissions. We are about to release new estimates of the economic and trade impacts of limits on carbon emissions, and I will draw on these results in this testimony. I will be happy to provide more information on these estimates for the record.

I will use our estimates of the economic impacts of a proposal to cap emissions at 1990 levels from 2010 onward to illustrate the potential impacts of an agreement in Kyoto. Any of the other proposals under consideration (such as the European Union's proposal to limit emissions to 85% of 1990 levels) would have similar, but larger, impacts. Any agreement within this range, if adopted, would have serious consequences for the United States economy as a whole, affect the trade position of the United States, and reduce the international competitiveness of U.S. energyintensive industries.

The conclusions we have reached can be summarized as follows:

1. Near-term emission limits will be costly. There is some uncertainty about how large the

costs will be, but no uncertainty that there will be costs. We estimate that holding carbon emissions to 1990 levels from 2010 onward would cause GDP losses on the order of 1% of GDP in 2010, rising to 2.7% by 2030 as greater efforts are necessary to hold to the cap with rising energy demand. To calibrate these numbers, GDP is presently over $7 trillion, so that 1% of GDP is $70 billion). This is a lower-bound estimate. Depending on how

such limits were implemented, the costs could be substantially higher. 2. It is impossible to make these costs go away by declaring that the United States will not

use carbon taxes or other fiscal measures to implement any limits we agree to at Kyoto. Even an ideally-functioning regulatory program can do no better than mimic the effects of - and therefore generate costs comparable to -- carbon taxes, and experience with actual regulatory programs is that they never function ideally. Therefore, their costs invariably

are higher. 3. No matter what policy is chosen, energy and energy-related costs will become much

higher in the U.S. than in countries that do not adhere to the same emission limits. In percentage terms, emission limits in 2010 would produce about a 25% increase in the cost of electricity, a 45% increase in the cost of heating oil and a about a 50% increase in the

cost of natural gas to households. 4. Output of energy intensive industries in the United States will fall as investment shifts to

developing countries with lower energy costs. In 2010, aggregate output will of energy intensive sectors will fall by about 3%, and in 2030 by about 6%, with metals industries

suffering larger losses - 4% in 2010 and over 10% in 2030. 5. Job impacts on energy-producing and energy-intensive industries will range from a loss of

two-thirds of the jobs in the coal industry by 2030 to losses of about 7% in motor vehicles and 4% in metals.

6. Increases in emissions from developing countries that do not participate in emission limits

(“leakage”) will offset U.S. efforts to reduce emissions. For every three tons of emission reduction accomplished by the U.S., developing country emissions could increase by 1 ton.

7. Avoiding leakage and damage to energy intensive industries requires a level playing field

through full participation of developing countries in emission limits. This participation would reduce, but not eliminate, costs to the U.S. More limited emission trading would be significantly less beneficial. And, as noted above, even perfectly-functioning emissions trading can never reduce costs below those that a carbon tax would produce.

8. Development of low cost technologies to replace fossil fuels can reduce costs of climate

policy dramatically. However, there is a great deal of uncertainty about how much R&D can achieve in the next 10 years. Studies that have estimated benefits of flexibility in timing allow much longer time periods for technology development and deployment to occur.

9. Uncertainty about the results of R&D programs and the costs of controlling emissions

makes an emission cap, even with emissions trading, more risky than a carbon tax.
Agreeing to a fixed ceiling on emissions in 2010, no matter what it costs to keep emissions
below that level, is betting the U.S. standard of living on uncertain expectations about
what technology can accomplish.

10. The highest priority economic research should focus on how international trade and

national economic interests of all the countries that signed the Framework Convention are
likely to be affected by proposals currently under consideration. There are major gaps in
understanding of implications of climate policies for international trade. Priority should
also be given to studies on how to design policies that will stimulate effective private
sector R&D into the range of possibilities for reducing carbon emissions.

In discussing these economic issues, I will also comment on two recent developments:

• Reports released by the national laboratories on the costs of reducing emissions

Statements by the President about the use of “carbon taxes” and effects of a climate
agreement on energy prices

Current proposals for near term emission limits excluding developing countries impose unnecessary costs

As you are aware, international negotiations are now in progress leading up to a meeting in Kyoto, Japan in December. These negotiations are taking place under a set of groundrules known as the “Berlin Mandate,” referring to the location of the First Conference of the Parties to the Framework Convention on Climate Change (COP-1). Negotiations under the Berlin Mandate are intended to produce a “protocol, or other legally binding agreement” incorporating quantitative objectives for limiting and reducing greenhouse gas emissions, for the years 2005 to 2015, and excluding any additional commitments on the part of developing countries.

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A number of proposals for such emission limits have been introduced. The range of serious negotiation appears to be from the U.S. position to that of the European Union, with the U.S. appearing to lean toward capping emissions at 1990 levels from 2010 onward and the EU favoring at least a 15% reduction below 1990 levels. The U.S. has favored new commitments by developing countries, while nearly all of the other participants have rejected such commitments.

All of the proposals currently being discussed in these negotiations will have major impacts on the countries of the world - even on countries not committing to make emissions reductions. They will raise energy costs for the industrialized countries, distort patterns of international trade between the developing and the industrialized countries, and slow the growth of both industrial and developing economies. In the United States, these proposals will have significant adverse impacts on the oil, gas, coal and electric power industries, as well as on energy intensive industries, automobile manufacturers, and states and regions of the U. S. economy in which these industries operate. Whether or not “taxes” or “fees” are actually levied, these proposals will raise

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