Q8. A8. If a country can use energy subsidization to attract industry to locate within their boundaries what would prevent them from doing so now apart from any agreements related to carbon dioxide reduction? Any nation presumably is free to offer subsidies to its industries. The constraints would be the cost to its treasury and whether the money could be better spent on other programs. To subsidize energy costs to attract industry would be a direct cost on the subsidizing country and its citizens. In the case of carbon reduction efforts in developed countries only, the cost of the "subsidy" would be borne by the citizens and consumers in the developed country to the benefit of the non-participating developing country. HEARING OF THE SUBCOMMITTEE ON ENERGY AND ENVIRONMENT U.S. HOUSE OF REPRESENTATIVES on Countdown to Kyoto-Part 2: The Economics of a Global Climate Change Agreement Thursday, October 9, 1997 Post-Hearing Questions and Answers Dr. Stephen J. DeCanio Professor of Economics University of California, Santa Barbara Five-Lab Study Q1. Al. According to Dr. Romm's testimony, you have high praise for the Five-Lab study. I was one of the outside referees for the Five-lab study, and I can quote from my referee's report: "This is a solid and substantive piece of work. It makes very good use of the modeling and data resources available to the five laboratories. The coordinators in particular are to be commended for managing such a complex project and producing a coherent product. The analysis is both timely and relevant; the findings of the study will make an important contribution to the current debate on greenhouse gas emissions reduction policies. The Report reaches a number of conclusions, including: (1) stabilization of carbon emissions at 1990 levels by 2010 is possible, (2) achieving this target will require ‘a vigorous national commitment to develop and deploy cost-effective energy-efficient and low-carbon technologies, along with utility sector investments,' (3) the goal can be achieved at a positive net benefit to the economy, and (4) next-generation low carbon technologies can enable continuation of an aggressive pace of carbon reductions over the next quarter century.' I believe these conclusions are well supported by the data and analysis contained in the Report. The Report represents the best kind of careful, technology-specific modeling that can be done prior to direct observation of the market consequences of a clear, unambiguous policy signal (including a price component) indicating the nation's determination to reduce greenhouse gas emissions." Argonne Study Q2. A2. One finding of DOE's Argonne study is that, "The assumed fuel price adders would permit developed countries, not subject to the assumed fuel price adders, to capture an increasing share of the world and U.S. markets.” In your view, is it likely that once energy-intensive industries are established in these countries they will be willing to enter into binding agreement to limit greenhouse-gas emissions sometime in the future? First, even if there were some redistribution of economic activity in response to differential energy price increases in developed and developing countries, it does not follow that in the aggregate the developing countries would capture "an increasing share of the world and U.S. markets." Some sectors would be likely to expand and others to contract in response to differential energy-price increases. If growth in sectors producing energy-efficient technologies were concentrated in the developed countries, those countries' shares of world and U.S. markets for energy-efficiency products and services would increase. Second, there is no persuasive evidence that the kinds of differential energy price increases that might be brought about by the kinds of emissions reduction plans being contemplated would cause any major relocation of economic activities. As I said in my written submission, "[e]conomic research has found no convincing evidence that environmental regulations have a significant effect on businesses' locational decisions or competitiveness." Third, existing energy price differentials (after taxes are included) across regions of the U.S. and across countries have not caused all energy-intensive industries to become located in regions of low energy costs. Finally, the "Porter Hypothesis" referred to in my written submission suggests that companies' efforts to meet or exceed well-designed environmental targets can, in some instances, make a positive contribution to the companies' productivity and competitiveness. It is also likely that developing countries will become more willing to cooperate in efforts to reduce global emissions as time goes on. First, scientific understanding of the climate system will increase over time. Second, the developing countries will see that the developed countries are able to reduce their emissions in ways that are technologically progressive and economically beneficial. Third, developing countries will want to participate in the adoption and use of the new energy-efficient technologies as the developed countries innovate in this direction. Industries located in developing countries, whether subsidiaries of multinational corporations or locally-owned enterprises, will not want to be stuck with "orphan technologies" that have been bypassed by the latest methods brought on-line elsewhere. As the experience of the Montreal Protocol on Substances that Deplete the Ozone Layer shows, the leadership of the developed countries makes it easier, not more difficult, for developing countries to join in protection of the U.S. Greenhouse Gas Emissions Q3. It is estimated that the average American produces more than five times the greenhouse gas emission of the average person on Earth. Concerning this: Q3.1. How much does the average American produce in economic output compared to the average person on Earth? A3.1. Average per capita GDP in the United States was approximately $21,866 as of 1990 (1990 GDP in 1990 dollars from the World Bank's World Tables 1994, 1990 population from the United Nations publication, The Sex and Age Distribution of the World Populations, The 1994 Revision); average world per capita GDP was approximately $ 4,000 using data from the same sources and the same years. Q3.2. Is the U.S. average of CO2 emissions per unit of economic output above, below, or equal to the world average? A3.2. The U.S. annual rate of CO2 emissions was 1,346.8 million metric tons of carbon per year in 1990 (from Carbon Dioxide Information Analysis Center, Oak Ridge National Laboratory, Trends '93). The annual rate of global CO2 emissions was 6,098 million metric tons carbon per year (ibid.). U.S. GDP was $5,464,798 million in 1990, while world GDP was $21,141,430 million (same source as cited in 3.1 above). Thus, the rate of U.S. CO2 emissions per unit of output was 0.246 kg. carbon/dollar of GDP, and the rate of global CO2 emissions per unit of output was 0.288 kg. carbon/dollar of GDP in 1990. U.S. Economists Calling for “Preventive Steps" Q4. A4. Page 2 of your paper makes reference to the public statement signed by over 2,500 economists calling for "preventive steps" to deal with the risks of global climate change. How many economists are there in the U.S., and why did the vast majority not endorse the statement? To the best of my knowledge there are about 20,000 members of the American Economic Association. Of course, I cannot know why the people who did not endorse the Economists' Statement on Climate Change chose not to sign it. However, it should be noted that the circulation of the Economists' Statement with an invitation to sign was in no sense a "poll" of the members of the AEA. It can be presumed that someone who signed the statement agreed with it, but no opposite inference can be drawn about the views of those who did not sign. People do not sign documents such as the Economists' Statement for any number of reasons, including not agreeing with its points, agreeing with the points but not with the wording, agreeing with some but not all of the points, agreeing with the Statement but not wanting to take a public position, not having enough information to feel comfortable signing a particular policy statement, etc. Not signing the Economists' Statement does not imply opposition to it, nor does it imply acceptance of some (hypothetical) alternative. Risks and Damages vs. Benefits of Climate Change Q5. AS. Part IV of your paper focuses on the risks and damages of climate change, and on all the potential negative consequences while ignoring any positive consequences. Why is that, or do you believe that there are no possible “winners” and only “losers”? Part IV of my written submission focuses on the risks and potential damages of climate change because those are the predominant effects that have been discussed in the scientific and economic literature, and because even if the probability of a large gain and a large loss were equal, a risk-averse person would want to avoid being subjected to the uncertainty. However, it is my judgment that the probability of large gains and large losses are not equal. I believe that the potential losses are both larger and more probable than the potential gains, and that the most severe downside risks far outweigh any benefits from climate change that might accrue to some sectors or regions. Policy Options That Would Slow Climate Change Without Harming American Living Standards Q6. A6. Point 2 of the Economists' Statement says: "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." What are these policy options? These policy options include, but are not limited to, the following: (1) Eliminate subsidies for the production and consumption of fossil fuels; (2) Reduce institutional and regulatory barriers to adoption of cost-effective energyefficient technologies; (3) Promote and subsidize research and development in basic science and engineering to increase energy efficiency and speed the innovation and diffusion of energy-efficient technologies; (4) Implement a "tax shift" that would reduce some of the most distortionary taxes in our economy (such as taxes on capital or payroll taxes) and replace the revenues by either a tax on carbon emissions or the auction by the government of tradable carbon emissions permits; and (5) Join in an international agreement to reduce carbon emissions that would involve participation by as many countries as possible, so that (a) low-cost or negative-cost emissions reductions would be encouraged through market-based incentives operating internationally, and (b) the economic growth prospects of the developing |