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and automobiles, and in the Environmental and Climate Stabilization scenarios, shifting some of the current tax burden from income and capital to pollution.

Under making efficiency the standard, we include steady increases in CAFE standards, setting minimum performance standards on buildings, appliances, lighting and other equipment so as to minimize life-cycle costs, and requiring better energy management by federal government, including establishment of a $500 million revolving fund for efficiency improvements. Under the category investing in the future, we place a steady increase in R&D support for efficiency and renewables over next decade, making reforms in zoning practices, implementing programs to increase vehicle occupancy (HOV lanes, carpooling incentives, etc.), investing more heavily in mass transit, and expanding education, training, and certification programs in efficiency and renewables energy technologies.

Some of the policies are quantitatively linked to our analysis; for example the Environmental scenario incorporates increased taxes on gasoline and new taxes on industrial pollution emissions, to reflect the environmental and national security costs of energy use. Various of the scenarios also assume the implementation of such policies as the incorporation of environmental costs in utility planning, automobile efficiency standards, and energy-efficient building codes. Other policies are more difficult to model, such as integrating land-use and transportation planning or increasing renewable energy R&D. The study was not designed to estimate the effectiveness of each individual policy, although such evaluation would be useful. We believe that in its next version of the National Energy Strategy, DOE should employ leastcost principles to analyze these and other policies needed to achieve scenarios similar to those described in our report.

Now let me give you an overview of the results of our analysis.

For primary energy use, our Reference case projects an increase of 40 percent over the next four decades, from 1988 levels of 85 Quads to 120 Quads in 2030. Our Market case projects demand of 82 Quads in 2030, a slight reduction from current levels and some 32 percent below Reference case. Our Environmental scenario projects consumption of just 70 Quads in 2030, 42 percent less than Reference case, and 18 percent below current levels. Finally, our Climate Stabilization scenario projects demand of 62 Quads in 2030, almost half that of the Reference case, and 27 percent less than current levels.

I should note that we do predict efficiency gains in the Reference case; in fact energy intensity (the amount of energy consumed per unit of real GNP) decreases 42 percent over the 40-year period, or about 1.3 percent a year. In the other three scenarios, energy intensity decreases by 21 percent, 25 percent and 28 percent per year, respectively. By comparison, U.S. energy intensity decreased about 2.4 percent a year between 1973 and 1986; the efficiency gains in our non-reference scenarios are clearly within the range of historical experience.

Our Reference case forecasts a doubling of renewable energy production over the next 40 years from about 7.4 Quads to 15 Quads, but because of overall growth in energy demand, renewable energy's share of the market only increases to 13 percent from the current 9 percent In the Market scenario, renewable energy production increases to 29 Quads, or 36 percent of total demand. In the Environmental scenario, renewables provide a little over 29 Quads in 2030, or 42 percent of total demand. Finally, in the Climate Stabilization case, renewables supply almost 33 Quads, or some 53 percent of total energy demand. These rates of transition from fossil to renewable energy sources also have historical precedent. The shift from coal to petroleum and natural gas was comparably rapid in the middle of this century, with coal use declining from 70 percent of energy supply in 1920 to less than 20 percent in 1970.

Oil consumption, which increases about 15 percent from current levels by 2030 in the Reference case, is reduced by 40 percent in the Market case, 54 percent in the Environmental case, and by two-thirds in the Climate Stabilization case. We did not analyze domestic oil production, but our projected 2030 oil consumption of under 6 million barrels/day in the Climate Stabilization case is within hailing distance of the NES base case domestic petroleum production projections of about 4.5 million barrels/day in that year (as opposed to the nearly 20 million barrels/day in our Reference scenario, which would leave us heavily dependent on oil imports).

We projected emissions for carbon dioxide and other pollutants based on our energy demand and supply mix projections. In our Reference case, CO2 emissions increase 58 percent over the next 40 years, from 5.3 billion tons in 1988 to 8.3 billion tons in 2030. In the Market case, CO2 emissions are stabilized over the next decade and then decline gradually to 3.8 billion tons in 2030, 28% below today's levels. In the Environmental case, emissions are cut 48 percent by 2030, to 27 billion tons. Finally, in the Climate Stabilization case, with its additional efficiency improvements

and major shift from coal to gas and renewables for power generation, emissions of CO2 decrease 17% by 2000, 40% by 2010, and 71% by 2030. It should be noted that we also project substantial reductions in emissions of Clean Air Act criteria pollutants, such as nitrogen oxides and sulfur dioxide.

Our alternative scenarios require greater up-front investment in efficiency and renewables technologies than in the Reference case, but produce fuel and electricity savings to consumers. The net present value of the added investment costs over the 40-year period relative to the Reference case is $1.3 trillion in the Market case, $2.1 trillion in the Environmental case, and $2.7 trillion in the Climate Stabilization case. But the savings to energy consumers from reduced fuel and electricity consumption total $3.1 trillion, $4.2 trillion, and $5 trillion, respectively, over the 40 years. This yields net savings of $1.8 trillion, $2.1 trillion, and $2.3 trillion, respectively, to energy consumers over the next 40 years. All of these figures do not include the economic benefits associated with reduced pollution levels.

It may seem counterintuitive that the net savings are greatest in the Climate Stabilization case, but this is because the more rapid penetration of lower-cost efficiency and renewable technologies in this scenario more than offsets the use of highercost technologies at the margin to meet the carbon reduction goals.

When a 7 percent discount rate is used instead of a 3 percent rate, the net savings are reduced to about $0.6 trillion in all three scenarios, reflecting the reduced value of future fuel and electricity savings.

It should be stressed that these are just estimates-they depend on our technology cost, energy price, and discount rate assumptions. But the bottom line seems clear to us: the United States can achieve a win-win energy future-one that combines cost savings and environmental integrity. We don't have to sacrifice our natural environment or provide additional taxpayer subsidies to the coal, oil, and nuclear power industries to meet our future energy needs. Our study also demonstrates that in future rounds of climate treaty negotiations, the United States can afford to play a leadership role, rather than serving as a roadblock to further progress in reducing industrialized nation emissions of CO2 and other greenhouse gases.

We recognize that achieving this future will require basic changes in the way we price energy, construct buildings, manufacture goods, and transport ourselves. It will require new policies and more aggressive political leadership. It will not be easy. But the consequences of not moving forward-increased oil imports, higher costs of using energy, and a high risk of ecological damage from global warming-is to us, unacceptable.

Let me conclude with some basic principles that I believe must guide U.S. energy policy in the future.

The first principle should be clear from the discussion above: global warming, and in particular, the need to reduce carbon dioxide emissions, is going to be a major factor in energy policy for decades to come; those industries and nations that fail to come to grips with this basic fact do so at their own peril. In this regard, I note the recent interim decision of the California Public Utilities Commission requiring utilities in that state to obtain assurances from any prospective power supplier with significant carbon emissions that "it alone will bear . . . any future costs resulting from a carbon tax, acquisition of tradable emission permits, retrofits, or any other carbon emission control strategy or regulation applicable to the supplier's plant." Second, I believe we must recognize the desirability of securing "insurance," through investment in mitigation measures, against the risks of climate change. This was to me the central finding of last year's National Academy of Sciences report on greenhouse warming, along with their related finding that "substantial mitigation can be accomplished at modest cost. In other words, insurance is cheap." We need to reflect some modest premium for low-carbon and no-carbon technologies in our energy planning and pricing decisions, and in federal research and commercialization strategies.

The third principle is to look for multiple benefits. The efficiency and renewable energy investments that we believe should be the centerpiece of U.S. energy policy will, in addition to their greenhouse benefits, reduce our vulnerability to future oil price shocks, help mitigate other environmental impacts such as acid rain and urban smog, and in most cases, save consumers money over the life cycle of the technology. There are also large markets to be won in these technologies in the coming decades; those countries that encourage their widespread use at home will see their companies better-positioned to win shares of that growing market. Energy policy must also look at multiple impacts. While there are limited incentives in the recently passed Clean Air Act for utility investment in efficiency and renewables, much of the utility effort will involve installing scrubbers at coal plants, which will reduce sulfur emissions but is likely to slightly increase carbon

emissions per unit of electric output. The Congress is now considering federal incentives or in some cases requirements for increased use of alternative fuels. But different alternative fuels have widely varying impacts on overall greenhouse gas emissions; by not distinguishing among them, we miss an opportunity to address our oil dependency problem and the global warming threat at the same time. In the worst case, such failure to integrate greenhouse considerations into our energy and environmental policy actions could risk premature write-off of substantial investments in technologies that are, in hindsight, deemed incompatible with greenhouse gas reduction requirements.

My final point is that goals are useful. Whether set as broad objectives or as the "targets and timetables" that so spooked the White House, goals serve as both important prods to action and benchmarks against which to measure success. Would the Administration have so exerted itself to come up with additional policies and measures to reduce carbon emissions if the Europeans hadn't vigorously advocated the 1990 level CO2 stabilization target in the climate negotiations? I think the answer is clearly no. Congress has an important role in laying out broad goals for our nation on energy policy, whether it's on carbon emissions reductions, efficiency gains, or the share of our energy supply that we aim to meet through use of renewable sources. In that regard, I urge the Senate and House to remove any remaining uncertainty and mandate legislatively that the U.S. will stabilize its emissions of CO2 at 1990 levels by the year 2000. As discussed above, such a goal should not be difficult to meet; but without it, the pressure on the Administration to propose additional emissions-reducing measures will be much less.

I thank you for the opportunity to share my views with you, and I look forward to any questions you may have.

The CHAIRMAN. Thank you, Mr. Meyer.

Next we will hear from Dr. Roger C. Dower.

STATEMENT OF DR. ROGER C. DOWER, DIRECTOR, CLIMATE, ENERGY AND POLLUTION PROGRAM, WORLD RESOURCES INSTITUTE, ACCOMPANIED BY RAFE POMERANCE, SENIOR ASSOCIATE, CLIMATE, ENERGY AND POLLUTION PROGRAM AND POLICY AFFAIRS PROGRAM

Dr. DOWER. Mr. Chairman and committee members, I am Roger Dower, Director of the Climate, Energy and Pollution Program at the World Resources Institute, a not-for-profit, public policy research organization focusing on national and international issues. I am accompanied today by Rafe Pomerance, a senior associate in our Climate, Energy and Pollution and Policy Affairs Programs.

For most of its relatively short lifetime, the formal negotiations of the Intergovernmental Negotiating Committee on a framework convention for climate change has been in part a debate over the economic costs to developed and developing countries of lowering their carbon dioxide emissions. While there surely have been other important issues and concerns, as there are other important greenhouse gases, much of the controversy, at least in the United States, has been fueled by anxieties over the suspected tradeoff between CO2 reductions and economic well-being.

My written testimony suggests that these fears may be exaggerated. While I have no doubt that we could design a CO2 reduction strategy that would cost us plenty, this is by no means the only possible outcome. Economic modeling efforts undertaken over the last several years provide what I think is a clear picture of how to structure a program that leads to moderate reductions in CO2 emissions without holding our economy hostage. In fact, properly done, such a program is likely to have economic benefits, not costs for our economic welfare.

At the very least I think many of the existing economic estimates of the costs associated with reducing CO2 emissions have been substantially overestimated, at least within the levels and time frame for reductions that have been the subject of much of the current debate. In my written testimony, I outline five factors that have led me to this conclusion. Let me just highlight three of them here in the interest of time.

First, many of the existing economic studies have centered on the costs of a carbon tax as the mechanism for reducing or encouraging CO2 reductions. As a public policy matter, I think it is critical to remember that a carbon tax by design raises money and that it makes a difference in terms of the ultimate economic effects as to how that money is used. The short and long-term adjustment costs of carbon restrictions can be largely offset if the tax revenues are recycled back into the economy by lowering marginal rates of existing taxes. To assume that carbon tax revenues do not matter or should not be part of the public policy equation is to ignore what I think is one of the most important components of designing a cost effective carbon reduction program.

Second, it is becoming clear that a range of cost effective energy efficiency investments can lead to early CO2 reductions. We have heard about those this morning. The potential for such investments, in fact, is at the heart of the administration's approach to lower greenhouse gas emissions outlined in the document U.S. Views on Global Climate Change. While I think we have a lot to learn about the full extent of possible energy efficiency savings and the ultimate costs of the full range of energy efficiency gains, the potential is clearly not zero, although most of our economic models would presume that it was.

Finally, it is very hard to imagine that the pace and direction and development of low or no carbon based technologies-and here I am talking about not just on the supply side in terms of production of electricity or energy, but also on the demand side in terms of energy efficiency-would be unaffected by any real effort to limit carbon dioxide emissions. Yet, this is generally what the economic models assume. Even after a carbon tax, for example, has been in place for several years, the availability and cost of alternative energy production technologies in the models is almost always assumed to follow a path that is independent of the policy initiatives. Estimated CO2 control costs in these models are likely and have to, almost by definition, be higher than actual costs unless you are willing to assume the technological development is cast in concrete.

My written testimony reviews several other characteristics of existing economic modeling efforts that have led in my view to exaggerated estimates of the cost of controlling CO2 emissions over the next couple of decades. A carefully constructed carbon dioxide reduction strategy can almost certainly produce net economic benefits for the United States.

Mr. Chairman, in conclusion, let me note that I think it is very common to hear, and we actually had a bit of this debate earlier this morning, that industry opposes CO2 limitations because of the perceived costs. But industry on this issue I do not think is of one mind. Several major electric utilities have already announced plans

to stabilize or reduce their emissions of CO2. Some natural gas companies see a competitive advantage for their products. U.S. companies that produce or install renewable or energy efficiency technologies are already in a heated competition for national and international market share. Some of these experiences are documented in a recent WRI book written by Bruce Smart, a senior fellow at WRI and past CEO for the Continental Group. I would be happy to provide copies of this book for any interested members of the committee.

Another report issued recently by top international and national business leaders comes to similar conclusions. These companies see a competitive and economic advantage to being more efficient in their use of resources, including energy. I firmly believe that companies such as these do stand at the vanguard of an industrial order that sees environmental quality as an economic opportunity, not an economic disaster.

Thank you.

[The prepared statement of Dr. Dower follows:]

PREPARED STATEMENT OF DR. ROGER C. DOWER, DIRECTOR, CLIMATE, ENERGY AND POLLUTION PRogram, World Resources INSTITUTE

The agreement of the Intergovernmental Negotiating Committee for a Climate Change Convention announced last week constitutes an important first step in addressing the threat of climate change. In obligating industrialized countries to return greenhouse gas emissions to 1990 levels by the year 2000, the Convention recognizes the need to begin designing an insurance policy against the risks to our global environment from carbon dioxide, methane and nitrous oxide emissions. The convention is not an endpoint in itself. It recognizes explicitly the need for revisions and strengthening agreements. It is likely that in the next few years, industrialized countries will face the need to take additional steps to control greenhouse gas emissions and in particular, carbon dioxide emissions from fossil fuel combustion. CO2 emissions are still projected to grow under the U.S. proposal, although at lower rates than in the absence of any agreement.

The cost to the economy of taking steps to reduce carbon dioxide emissions will continue to be a critical element of the policy debate, as it has been throughout the negotiating process. Over the last several years, we have learned a great deal about the likely nature of these costs and economic impacts. The purpose of this testimony is to review and summarize several major issues that emerge from the numerous economic studies of domestic CO2 reduction initiatives and that relate to our ability to accurately grasp the true costs of control. The testimony focuses not so much on the specific numerical estimates, but rather on the broad lessons of the economic modelling conducted to date.

TWO COMMON ASSUMPTIONS

Virtually all of the formal economic modelling of the costs of CO2 reductions have assumed that carbon taxes will be the implementing policy tool. Carbon taxes are certainly not the only possible approach to limiting emissions: marketable CO2 permits, and traditional command and control regulatory approaches are two alternatives. There are at least two reasons, however, why carbon taxes have been the primary focal point. First, changes in energy prices resulting from carbon taxes can be directly incorporated into the macroeconomic/econometric models used in many of the analyses. Direct restrictions of energy quantities (rather than prices) are not so easily handled within the structure of the models. Second, and more importantly, there is widespread agreement among economists that carbon taxes are the least expensive way to achieve any given level of CO2 reduction. Thus, estimates of the costs of CO2 reductions resulting from a carbon tax can, everything else being equal, be viewed as the lower bound of possible costs as compared to alternative reduction

This testimony is based, in part, on a forthcoming report by the World Resources Institute, tentatively titled: Designing a Pollution Tax Strategy: The Case of a Carbon Tax.

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