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Implementation of the Emissions Trading Program

Q4.

A4.

A number of commentators have expressed the view that implementation of the emissions trading program for greenhouse gases will be far more complicated than the program used in the U.S. acid rain program.

Do you agree, and if not, why?

Comparing the complexity of the sulfur dioxide emissions trading and that of a prospective GHG emissions trading program does not necessarily lead to the conclusion that the latter would be prohibitively complicated to design or implement. On the contrary, as in the case of the sulfur dioxide program the two most crucial elements for program design and implementation - data on current GHG emissions from existing sectors and sources and reliable methodologies for quantifying ongoing GHG emissions from existing and future sources and sectors are readily available. Since current data and the ability to quantify actual emissions are the elements central to building an emissions trading system, then the ready availability of these elements suggests that the experience with the sulfur dioxide emissions trading program provides positive guidance for, rather than a contrast to, efforts to apply emissions trading to GHG emissions management strategies and policies.

It is worth noting, at the same time, that policy- and program-designers will face a much wider variety of choices in structuring GHG programs. To cite but one example, trading programs could work by placing responsibility on either fuel-producers or fueluser/emitters or by adopting hybrid approaches. While the prospect of resolving these choices may create the appearance of complexity, in fact having choice in program design ultimately would be an advantage to policy-makers and the regulated community.

Allocation of Emissions Credits

Q5.

A5.

How do you envision the process by which credits will initially be allocated?

From EDF's perspective, whatever the process selected by which emissions credits or allowances would be allocated is “environmentally neutral”, provided, of course, that the total number of credits or allowances allocated does not authorize more GHG emissions than specified for the U.S. in Annex B of the Kyoto Protocol. The process of allocation, of course, should be transparent and democratic. At the same time, the variety of possible allocation approaches is quite wide. running the gamut from revenue-neutral auctions to outright “grandfathering” to existing sources on the basis of past activity. In fact, an early reduction credit program is itself part of the allocation process: since credits awarded to early reducers would be deducted from the U.S. budget. In effect, by adopting an early reduction program, Congress would be creating an allocation rule targeted to businesses that created GHG reductions prior to 2008.

Support of the Kyoto Protocol by the Environmental Community

Q6.

A6.

Is the environmental community unanimous in its support of the Kyoto Protocol, and if not, what are the specific concerns?

EDF does not speak for the entire environmental community, whose many organizations and activists hold a range of views on various aspects of the Kyoto Protocol. While EDF believes that there might be a sound scientific case for requiring more GHG reductions than called for under the Protocol, EDF believes that the Protocol accomplishes the single most important task: establishing a viable compliance framework under which nations are subject to GHG emissions limitation responsibilities. Please see the material submitted in connection with Q3 for a discussion of the emissions trading issue, which EDF sees as indispensable to nations' success in meeting those responsibilities, as well as the concluding section of EDF's written testimony for a discussion of the developing country issue.

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COMMITTEE ON SCIENCE

U.S. HOUSE OF REPRESENTATIVES

Hearing

on

The Road from Kyoto-Part 1:

Where Are We, Where Are We Going, and How Do We Get There?

Wednesday, February 4, 1998

Post-Hearing Questions
Submitted to

Mr. Michael L. Marvin
Executive Director

The Business Council for Sustainable Energy

Post-Hearing Questions Submitted by Chairman Sensenbrenner

Department of Energy Five-Laboratory Study Underestimate of the Level and
Overstatement of the Costs of Carbon Emission Reductions

Q1.

Al.

On page 5 of your testimony you stated that the Department of Energy “sive lab study does not consider emissions trading, either domestic or international, nor does it evaluate the potential role of Joint Implementation initiatives. We believe, therefore, that the study underestimates the level, and overstates the costs, of reductions that are possible given our current technological capacity."

What is your estimate of the underestimate of the level and overstatement of the costs of carbon emission reductions that are possible given our current technological capacity?

The Department of Energy Five-Laboratory study estimated that the cost of carbon per tonne would be between $25 and $50. As the Council's testimony stated, the FiveLaboratory study did not consider the impact emissions trading might have on the costs of carbon in the United States, nor did it consider the role of sequestration. The Council believes that the inclusion of trading and other market-based mechanisms into the study's analysis would have substantially lowered the study's cost of carbon per ton estimate. Evidence of this overestimate was confirmed in Dr. Janet Yellen's, Chair of the White House Council of Economic Advisors, testimony delivered on March 4 to the House Commerce Committee. Yellen testified that emissions trading among Annex I countries could "reduce the cost to the United States of achieving its targets for 2008-2012 emissions by about half relative to a situation in which trading was not available." Further, Yellen stated that the inclusion of developing countries in a trading program could further

reduce the costs to the United States. Yellen's testimony estimated the price of emissions in the range of $14 to $23 per ton of carbon equivalent; again, this gives zero value to the role of sequestration.

Yellen's figures assume simulations conducted with the Second Generation Model of
Battelle Laboratories.

Energy Innovations Study

Q2. On page 5 of your testimony you also stated:

A2.

"Another major study, Energy Innovations, released last year by the Tellus Institute and others also supports the Council's position. In that study, a number of costeffective, achievable policy initiatives were suggested. Taken together, the report estimates these policy options could lead to a reduction of nearly seven quads of energy use by the year 2000 and more than 15 quads by 2010. The effects on carbon emissions also would be substantial. In 1990, U.S. carbon emissions totaled 1,338 million metric tons. By following this innovative approach, the report notes that emissions could be reduced to 1,207 million metric tons—almost ten percent below 1990 levels by 2010.

"Just as importantly, these reductions can be achieved while saving American households $530 per year, creating 800,000 new jobs, and reducing our oil imports by 20 percent (all by 2010).”

Please elaborate on that how U.S. carbon emissions could be reduced to 1,207 million metric tons “while saving American households $530 per year, creating 800,000 new jobs, and reducing our oil imports by 20 percent (all by 2010)."

The BCSE did not author the Energy Innovations study. Please refer the question to the
study's authors for more clarification. Please see Energy Innovations: 1997. Energy
Innovations a Prosperous Path to a Clean Environment. Washington, DC: Alliance to
Save Energy, American Council for an Energy-Efficient Economy, Natural Resources
Defense Council, Tellus Institute, and Union of Concerned Scientists.

Cost of Inaction

Q3.

A3.

On page 7 of your testimony you state that “it is important to consider the economic consequences of inaction to provide a more comprehensive understanding of how climate change and the Kyoto Protocol might affect our country."

Please elaborate on the “costs of inaction.”

The costs of inaction on climate change refer the costs associated with what the
Intergovernmental Panel on Climate Change's Second Assessment Report 1995 states as

potential adverse effects of climate change on agriculture, populations, forestry and human infrastructure. According to the IPCC, the specific threats include severe storms and draughts that could negatively impact communities and agriculture; and human health related impacts, including increases in the transmission of vector-borne infectious diseases and increases in cardio-respiratory mortality and illnesses, among others. If the projected environmental damage were to occur, i.e. draughts, strong storms, disease, etc., the U.S. economy would incur costs to remedy or re-build after such events. The costs to repair or restore property, or treat sick individuals whose illnesses result, at least in part from climate change, is what the Council terms as the 'cost of inaction."

For additional information, the Council suggests that the Committee contact the United Nations Environmental Program; Redefining Progress, the lead organization for the "Economists' Statement on Climate Change, which was signed by over 2,500 economists, and the "Global Insurance Initiative" developed by the insurance industries.

Unresolved Issues in the Kyoto Protocol

Q4.

There are many unresolved issues in the Kyoto Protocol, and many obligations and responsibilities that are ambiguous or unclear.

Q4.1. In your opinion, what are the most important issues that need to be dealt with in the year ahead, and resolved in the 4 Conference of the Parties in Buenos Aires in November of this year?

A4.1. The market-based flexibility measures are the most important issues to be negotiated and resolved during the upcoming climate change negotiations. These include, emissions trading, Joint Implementation and the Kyoto-born Clean Development Mechanism. The Council does not expect these issues to be resolved in full during COP-4. However, the Council is eager to work with Members of Congress, in a constructive manner, to explore what these mechanisms might look like and how they should be governed. The Council's goal in such a process would be to ensure that the implementation tools that are developed are costeffective, promote the utilization of clean energy technologies (natural gas, renewable energy and energy efficiency) and are responsive to the needs of the private sector.

Q4.2. What will be, or should be, the U.S. strategy and positions on these?

A4.2. The Council cannot speak for what the U.S. position will be in terms of these issues. However, the Council believes that the U.S. should work with industry to structure flexibility mechanisms that are cost-effective, flexible, transparent, decentralized and that give the private sector the most autonomy to use the regime. As a Council member recently remarked, “government's job (in terms of structuring the flexibility mechanisms) is to set clear rules and get out of the way."

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