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OVERSIGHT HEARING ON THE KYOTO PROTOCOL: THE

THE UNDERMINING OF AMERICAN PROSPERITY

Thursday, June 4, 1998

HOUSE OF REPRESENTATIVES,
COMMITTEE ON SMALL BUSINESS,

Washington, DC. The Committee met, pursuant to notice, at 10:09 a.m., in room 2360, Rayburn House Office Building, Hon. James M. Talent (Chairman of the Committee) presiding.

Chairman TALENT. (presiding) Good morning. I'd like to welcome everybody to this hearing and we will now convene.

Today the Committee on Small Business will be examining the impact of the Kyoto Protocol on the backbone of the American economy-small businesses. Small businesses account for 99 percent of the Nation's employers, employ 53 percent of the private work force, contribute 47 percent of all sales in the country and are responsible for 50 percent of the private gross domestic product. Any treaty or protocol that hurts the small business sector poses a threat to the jobs, goods, and services available to the American people.

The Kyoto Protocol, often referred to as the climate change agreement, was agreed to in negotiations which were completed on December 11, 1997. The protocol commits the United States to a target of reducing greenhouse gases, mainly carbon dioxide, by 7 percent below 1979 levels during a commitment period between the years 2008 and 2012. Moreover, while the protocol mandates that America reduce its carbon dioxide emission reductions to 1997 levels, it exempts huge emission producers, such as China, India, South Korea, Brazil, and Mexico, as well as other developing nations.

As a result, according to the U.S. Energy Information Agency, the developing countries will surpass the industrialized countries in carbon output by 2010 under this protocol. All of this is important because, in plain terms, greenhouse gases are emitted by the production and use of energy, so the Kyoto Protocol is a substantial, comprehensive, and unprecedented restriction on the use of energy by the American economy both in absolute terms and relative to the rest of the world.

It is vital that we understand the impact of this kind of new order on the real lives of real people in the communities of America. The Committee will hear testimony on a number of different issues on this issue.

(1)

As an example of the Committee's concern, according to the Wharton Economic Forecasting Associates, ratification of Kyoto would mean residual fuel prices for industrial facilities would increase by roughly 140 percent; natural gas prices for industry would increase by 90 percent; the price of a gallon of gasoline would increase by 65 cents; the United States' GDP would decline by more than 2.5 percent per year; and a million good, high-paying jobs would be lost, and the U.S. trade deficit would jump sharply.

What would the protocol mean to the small business community in America?

Small energy-intensive industries, such as bakeries, dry-cleaners, auto repair shops, small manufacturers, and, ironically, recycling businesses would be hit immediately upon ratification of the protocol. Many other small businesses that sell to large industries, such as steel, aluminum, chemical manufacturers, paper, and cement, would find that their major customers have packed their bags and moved to countries with no emission restrictions, such as Mexico. Moreover, small exporting companies would be forced to raise their prices due to increased energy prices and would not be able to compete with companies in developing countries such as China and Mexico.

As a result, U.S. exports would become relatively more expensive in the world market and the trade deficit would skyrocket. Ultimately under this protocol, small businesses would be forced to pay higher utility bills, higher gas taxes, would have to operate smaller, less vehicles, and, unfortunately for many small entrepreneurs, would be run out of business.

These kinds of concerns are the reason I've called the Kyoto agreement the selling out of American jobs, American enterprise, and American prosperity.

We have two panels of witnesses who have graciously consented to appear before the Committee today, including the distinguished Chair of the Council of Economic Advisers, Dr. Janet Yellen. Before we turn to those witnesses, I want to turn to the distinguished ranking member for any statement she may wish to make.

(Chairman Talent's statement may be found in the appendix.)

Ms. VELAZQUEZ. Thank you, Mr. Chairman. Thank you for holding this hearing today. The effects of greenhouse gases on our environment are now becoming more and more evident. In the last century the Earth's temperature rose by one degree Fahrenheit. In fact, recent data not only shows that this is the warmest century on record, but that the 1990's are shaping up to be the warmest decade ever. The forecast is not any better. Scientists estimate that over the next century, temperatures will continue to rise another 1.8 to 6.3 degrees.

We are already witnessing severe weather patterns occurring with greater frequencies. The resulting damage to our ecosystem has drastically escalated. Shifts in agricultural growth conditions are beginning to rob regions of their ability to produce food.

The threat to human health has also increased. There is a reduction in the availability of fresh water. We have also seen an increase in the range and incidence of disease. Estimates show that by the year 2100, we may see 50 to 80 million more cases of malaria alone.

My colleagues, these problems are not going away. Most importantly, they cannot be ignored. As a global industrial leader, we possess only 5 percent of the world's population. Yet we produce over 20 percent of the global emission of greenhouse gases. It is incumbent on us to work toward a solution.

On December 10, 1997, the United States, along with leaders from 161 other nations, concluded the Kyoto Protocol to the United Nations Framework Convention on Climate Change. The aim of this agreement is to set binding targets for the reduction of emissions of greenhouse gases worldwide.

While far from perfect, the Kyoto Protocol recognizes a critical problem that needs to be addressed. I would like to congratulate the Administration for their realistic approach. They have acknowledged that Kyoto is not perfect and is still a work-in-progress. The flexibility in enforcement and emission reductions that the Administration secured were important in creating a workable solution to the problem of global warming.

Still, one critical component—the participation of other developing nations and China-is lacking. All countries must operate on a level playing field. Until we face the need for meaningful participation by these countries, the success of the Kyoto Protocol remains questionable. Otherwise, the agreement has the potential to harm our Nation's competitive edge while failing to accomplish the desired goal of significant reduction in greenhouse gases.

I am glad to see that the President recognizes this and has stated that he will not seek approval until this issue is resolved. I am also hopeful that today's hearing will give us the opportunity to examine one critical area affected by Kyoto—the impact on small businesses. Small and medium businesses should not be asked to pay an unfair share of the burden of reducing global warming.

I will, however, caution everyone that a solution must be found to the problem of greenhouse gases. We cannot simply criticize the protocol without offering solutions. If the answers that lay in this agreement are unworkable, then I am interested in hearing others. But we must address the problem of increased greenhouse gases.

Let me close by once again thanking Chairman Talent for holding these hearings. I know this issue has been one of particular interest to him, and I am looking forward, not only to the insights offered by today's witnesses, but also the Chairman's leadership on this issue.

Thank you.
[Ms. Velazquez' statement may be found in the appendix.]
Chairman TALENT. Thank you.

The Committee is honored today to have as its first witness on its first panel the Honorable Janet L. Yellen, who is the Chair of the Council of Economic Advisers. I won't go into your extensive resume, Dr. Yellen. It's very kind of you to come here today and give us your time. Dr. Yellen has an extensive statement which will be admitted into the record, without objection. The Committee is eager to question her and members are, of course, on a restricted schedule and she is as well, so we have just talked about and she has graciously agreed to summarize her testimony for us. With that I will introduce Dr. Yellen.

STATEMENT OF JANET L. YELLEN, CHAIR, COUNCIL OF

ECONOMIC ADVISERS, WASHINGTON, DC Dr. YELLEN. Thank you very much, Mr. Chairman, and members of the Committee. The President has said that we can work to avert the grave dangers of climate change while at the same time maintaining the strength of the economy. I am pleased to have this opportunity to appear before the Committee to elaborate on the Administration's views concerning this issue.

Before discussing the likely cost of United States efforts to avert climate change, it's important to recognize the costs and the risks facing our Nation should we fail to act. Current concentrations of greenhouse gases have reached levels well above those of preindustrial times. As a consequence, the Intergovernmental Panel on Climate Change estimates that global temperatures will increase between 2 and 6 degrees Fahrenheit in the next hundred years with the best guess of about 3.5 degrees Fahrenheit.

Despite the difficulties of deriving quantitative assessments of the damages from climate change, researchers have, nonetheless, developed monetary estimates of damage that prompt substantial concern and range in the tens of billions of dollars per year for temperature changes projected to occur in the next century. If left uncontrolled, disruption of the Earth's climate may thus pose substantial costs in terms of harm to commerce and the environment alike, and it is these costs, and they are significant, that provide the primary motivation for actions to reduce greenhouse gas emissions.

Moreover, these estimates do not and cannot accurately reflect the value of reducing the unknown risks of large-scale and potentially irreversible events with possibly catastrophic consequences. There is a strong argument for the Kyoto Protocol as a form of insurance against a serious environmental threat.

In taking action to reduce emissions, economic analysis suggests that two elements are absolutely essential. The effort must be flexible and market-based to ensure that we reduce emissions in the most efficient way and the effort must be global, for without global emissions reductions, the effort would be ineffective.

The nature of the climate change problem, which is that greenhouse gas emissions have the same effect on the climate regardless of how, where, and, within limits, when they occur, suggests three basic approaches to lowering the costs of achieving given levels of environmental protection and we term these when, what, and where flexibility.

As a result of U.S. diplomatic efforts, all three forms of flexibility are broadly reflected in the Kyoto Protocol. The choice of a multiyear budget period, ending later than many countries proposed, with allowance for banking of emissions reductions, constitutes key elements of when flexibility. These provisions mitigate costs by permitting reductions at times when they are less, rather than more, costly. The inclusion of all six greenhouse gases and certain sink activities that promote removal of carbon from the atmosphere, provides substantial what flexibility.

The United States succeeded in having the Kyoto Protocol stipulate that countries with binding targets are to reduce total greenhouse gas emissions by certain percentages. But the protocol

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