particular, this increase in energy prices is small relative to the average of year to year real energy price changes experienced by U.S. consumers since 1960: such annual changes have averaged 3.8 percent. In addition, by 2008-2012, the anticipated 10 percent decline in electricity prices from the restructuring that is part of our climate change agenda is projected to lead to expenditure reductions of about $90 per year for the average household. As highlighted earlier, there are substantial but unavoidable uncertainties surrounding estimates like these. For example, the estimate just discussed is predicated, among other things, on the developing country participation that we are insisting upon as a condition for our ratifying the Kyoto Protocol, but which is not yet part of that Protocol, and on effective international trading. Moreover, other models will yield other answers and much work remains to be done by the modeling community to test the robustness of these results. Preliminary comparisons of the SGM model to the few other models that have attempted to evaluate the Kyoto accord, suggest that its predictions concerning the impact of the Kyoto Protocol on carbon permit prices are neither the most conservative nor the most optimistic of the models that have been developed. [PAGE 32] The predictions of the SGM model are robust in the sense that virtually all energy models reveal the potency of effective, flexible, domestic and international trading mechanisms to reduce substantially the cost and energy price impact of meeting the Kyoto targets. Of course, the most important factor that has been left out of the above assessment is the benefit of mitigating climate change itself. A full cost-benefit analysis would include mitigation in the benefits column. The only reason we have not done so, explained repeatedly above, is the difficulty in coming up with a number to capture the monetary benefits. But nobody should lose sight of our ultimate objective -- keeping our planet the hospitable home that we enjoy today. Effects on employment and aggregate output So far we have said nothing about job losses resulting from climate change policy. Although there may be job gains in some sectors and job losses in others, we do not anticipate any significant aggregate employment effect if we achieve the conditions we have discussed. The effects on energy prices described above will occur only 10 to 14 years in the future. Not only are these effects small relative to historical variations in energy prices, and offset by other policies like electricity restructuring, they would occur sufficiently far in the future to enable monetary policy to keep the economy operating at its potential. In energy-intensive sectors some employment reduction could occur, although given the very small predicted change in energy prices, impacts in most such sectors are apt to be minimal. Furthermore, a large number of jobs will be created in other many of them high-tech jobs paying high wages. The President is firmly committed to assisting any workers who are adversely affected during the transition to a sectors - VII. Conclusion In conclusion, the Kyoto Protocol and the President's general approach to climate change reflect the insight of economic analysis. The Kyoto Protocol includes key provisions on international trading and Clean Development projects. The President's approach relies on market incentives first, with a system of tax cuts and R&D investments, and then later with a market-based system of tradeable permits -- to ensure that our objectives are achieved as efficiently as possible. Our overall conclusion is that the economic impact of the Protocol will be modest under the conditions we have identified. The purpose of this testimony has been to explain the reasoning underlying this conclusion, which draws insights from not only the forecasts of individual models, any one of which has its own strengths and limitations, but also a broad variety of additional analyses. 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 net effects of reducing greenhouse gas emissions. It is my hope that economic analysis will continue to play a key role in designing policies in this area. I welcome your questions. Administration Plans for Legislation and Regulations Q22. In the President's State of the Union Address and in the Budget he submitted to the Congress on February 2, there were provisions for federal research and development expenditures and for certain tax incentives for the purpose of reducing U.S. greenhouse gas emissions. Q22.1 What is the reason the President has made those proposals prior to his signing the Kyoto Protocol and prior to his submitting the Protocol to the Senate for its advice and consent? A22.1 The President's proposals for tax incentives and research and development expenditures were announced in October, 1997, well before the Kyoto meeting. They are aimed at spurring enhanced efficiency in the way we produce and use energy. These proposals make good economic sense, while also making good environmental sense. They do not in any way impose binding targets as called for under the Protocol and are not implementations of the Protocol. Q22.2 Is the Administration contemplating submitting to Congress any other legislative proposals, or is it contemplating proposing any new or amended regulations, any of which are intended to reduce U.S. greenhouse gas emissions, prior to the President's signing the Kyoto Protocol and submitting it to the Senate for its advice and consent? If so, please describe the substance of any such legislative or regulatory proposals that are being contemplated? A22.2 No. The Administration has no plans to submit legislation or regulations that would be aimed specifically at implementing the requirements contained in the Protocol prior to its submission to the Senate for its advice and consent. Q23. Has any Department or agency of the Executive Branch, or any interagency body, been given the responsibility to develop potential proposals for legislation or regulations that would be intended to facilitate compliance by the United States with the Kyoto Protocol if the Protocol ever were to become binding on this nation? A23. No. The plan announced by the President focused on a first stage of voluntary based efforts and actions aimed at providing incentives and removing barriers to achieving greater efficiency in the way we produce and use energy. Q23.1 If your answer is yes, please identify the Departments, agencies, or interagency body; and, if it is an interagency body, who is the head of it. Q23.2 If there is no interagency body, who in the Executive Branch has the responsibility to coordinate or review these efforts for the purpose of making recommendations to the President? A23.2 Not applicable. Entry Into Force Q24. It will require ratification by 55 countries, representing 55% of developed country greenhouse gas emissions, for the treaty to enter into force. The United States accounts for nearly 40% of these emissions. Q24.1 Do you see any chance that the treaty would enter into force if the United A24.1 While it is possible that nations with 55 percent of developed countries emissions could ratify without the United States, given the leadership role the United States plays on global environmental issues, we believe it is unlikely that the treaty would enter into force without U.S. ratification. However, we do not believe it is in our nation's best interest to prevent the world community from acting against this serious environmental threat. Q24.2 Do you expect other countries ratify the treaty if the United States does not, and if so, which countries? A24.2 It is too soon to predict which countries will ratify and when. Q24.3 What is the earliest you would expect the treaty to enter into force if the A24.3 Please see answer 24.2. Q24.4 If there is a prolonged delay in entry into force, what are the consequences for this treaty? For climate change? A24.4 Many important decisions are being made each day that have long-term implications for greenhouse gas emissions. The sooner the treaty enters into force, the clearer the signal concerning the need to factor greenhouse gas emissions into decisions. Contradictions between the Kyoto Protocol and the Montreal Protocol Q25. Among the six gases to be limited under the Kyoto Protocol are substitutes for chlorofluorocarbons (CFCs) that deplete the stratospheric ozone layer. Therefore, the world's nations have agreed under the Montreal Protocol (to reduce ozone depleting chemicals) that they will seek the use of these substitutes, yet under the Kyoto Protocol they seek to limit use of the substitutes. Q25.1 How will this contradiction be dealt with? A25.1 The majority of substitutes for ozone-depleting substances are not greenhouse gases. In the case of those that have shifted to HFCs or PFCs, the market-basket approach called for in the Kyoto agreement provides ample flexibility for their continued use. This flexible approach has been supported by both the producers of these compounds and industries that use them. Q25.2 What will the United States do to reconcile these opposing goals? A25.2 See answer 25.1. Electricity Restructuring and Emissions Reductions Q26. The Administration has suggested on several occasions that electricity restructuring is one of the means by which the United States will reduce its emissions of greenhouse gases because it will result in greater efficiency and therefore lower emissions of greenhouse gases. However, the October 1997 report by the Energy Information Administration (EIA), An Analysis of Carbon Stabilization Cases, projects more emissions of carbon dioxide—not less—as a direct result of currently developed state restructuring efforts. Q26.1 How do you explain this apparent direct contradiction? A26.1 The Administration's electricity restructuring plan calls for enactment of several measures that will reduce carbon emissions from the electricity sector beyond that which would occur in the marketplace without enactment of such measures. These include a public benefits fund to enhance demand side management, conservation, energy efficiency and use of renewable energy; and a renewable portfolio standard that will almost triple the amount of electricity currently generated by renewable technologies. In addition, the Administration estimates that competition as a result of restructuring will increase demand for energy efficiency services, thereby increasing the use of cogeneration and other energy efficient production paths. The Administration estimates that the complete restructuring package as proposed will reduce carbon emissions between 25 - 40 million metric tons below the baseline estimates by 2010. The EIA forecast is of a base case without enactment |