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percent below 1990 levels would be, if you did not do these other things. Didn't he? Did you give him any information with regard to that before he went in to negotiate this?
Dr. YELLEN. We have done a large amount of analysis and conducted simulations and simulations produce numbers. The kinds of high numbers that modelers have obtained certainly can be obtained through model simulations that have none of the flexibility measures that were the essence of what Ambassador Eisenstadt was trying to negotiate. He went off to Kyoto with a clear vision of what he wanted to accomplish and what he knew he needed to accomplish there was to negotiate a treaty that would make this viable and doable for America at a cost that would be modest and reasonable and enable us to get moving in addressing what we regard as a serious environmental threat. So, what he was thinking about, and asked us to look into, is how important is it that we get a clean development mechanism, that we get international trading. Sinks. How important is it for us to make sure that the ability to mitigate using sinks is in that Kyoto Protocol.
Chairman TALENT. There is simply no way he could make a determination in negotiating with other countries how important those various mechanisms were unless he knew what the cost would be without the mechanisms. Now, I mean, let me ask again—do you know-or am I asking for what other models say because we are people who are going to testify as to what other models say. Do you know or are you willing to tell the Committee how much this protocol would cost, apart from the sweeteners, in terms of an increase in the price of a gallon of gas at the pump for the average American?
Dr. YELLEN. I have not attempted to derive what I would consider to be a good, solid estimate of what the real cost would be to America in the absence of these so-called sweeteners. It would depend on a wide variety of things. The President has proposed a climate change policy. We have a variety of voluntary initiatives that are already being undertaken with businesses. For example, just a month ago we signed an agreement with the housing industry for a partnership to reduce emissions from houses by fuel efficient, more energy-efficient new housing construction.
Chairman TALENT. Doctor, let me just-you're certain that the sweeteners will mitigate the net cost of this to an acceptable level, but you made no attempt to determine how much of a cost apart from the sweeteners?
Dr. YELLEN. We have a variety of simulations that we have done with computer models that give answers to the question of what would the cost be without flexibility provisions. But, I wouldn't present such estimates—you know we have—there are a variety of numbers, we have derived such numbers, but I would not stand behind such numbers that come out of a computer as the Administration's considered judgment as to what the impact would be without these so-called sweeteners. These sweeteners are the essence of our policy and we would need to carefully decide what do you mean by a baseline in which we do not have them. Do we have the President's climate change initiatives? Do we have electricity—
Chairman TALENT. I would suggest the baseline is the agreement that we made to reduce to 7 percent below 1990 levels. I thought I was going to be concerned about your analysis. I have to tell you, I am much more concerned about the fact that you tell me you made no attempt to come up with that kind of an estimate. I mean, this has a real impact on real people.
Dr. YELLEN. Absolutely, and I've indicated to you that it is very clear that without any of these flexibility mechanisms, the ost of this project would be substantially higher. There are a variety of estimates that have been made by a number of models, models including the SGM model and those used by other modelers. Some estimates of this sort were presented in an interagency analytic team report that was put out last summer, and permit prices in the $100 to $200 range under different assumptions and different models is the range of possibilities one tends to get and that translates into impacts on, for example, gasoline prices that are four to eight times what I've given in my testimony.
Chairman TALENT. Just in concluding this phase then, for me, anyway, so your testimony is that you came to no conclusion or reached no estimate about what the cost would be apart from this network of sweeteners to the average American in terms of the price of a gallon of gas in producing the 7 percent below 1990 levels of greenhouse gas emissions. Dr. YELLEN. We have not tried to arrive at a considered judg
. ment about that. But we have, as I've indicated, used computer models and done simulations that have predictions about that.
Chairman TALENT. All right. So I suppose if I were to ask about the cost of natural gas to the average American, you would give me the same answer?
Dr. YELLEN. Yes. The impact is a multiple.
Chairman TALENT. Same thing about the reduction in GDP, or the loss of jobs? You'd give me the same answer?
I'm going to save the Committee Members' time and not go into great detail about those because that's what I was going to ask about. I don't know how we're in a position to formulate an estimate, or a conclusion, about whether these mitigating factors, these sweeteners as I call them, are adequate if we don't know what the cost would be absent the sweeteners. I have to tell you, I'm not an economist, just an old labor lawyer. I've negotiated a few thing and if you don't have a baseline about what something is going to cost you, absent certain other things, it is impossible to determine what the ultimate cost is going to be with those things.
Dr. YELLEN. It seems to me that the logical starting point is the treaty itself and the President's policies and that there is an arbitrariness in asking the question of "What if?” It is purely-the question you are asking me is purely hypothetical. You are asking me to price out the economic impact of something that goes against
Chairman TALENT. Something we've agreed to. We've agreed to reduce to 7 percent below 1990 levels in terms of greenhouse gas emissions. I mean to say it's hypothetical or arbitrary is like saying you're trying to test the validity of a mathematical formula when you don't know what one aspect of the formula is going to be. You haven't tried the formula I'm asking about.
Dr. YELLEN. We have a protocol that contains a wide variety of flexibility mechanisms. It already is very clear in allowing use of six categories of gases, flexibility across six gases. It clearly includes sinks as a way of meeting emissions reductions obligations. It includes a clean development mechanism. It includes trading among Annex 1 countries. All of these things are part of the Kyoto Protocol. They are there. I've indicated, and others have, that this is a work in progress to the extent that there remain things to be negotiated like meaningful developing country participation. Work needs to be done these, but there are things that are clearly part of the Kyoto Protocol. I believe that's the natural starting point. Beyond that, there are a million hypotheticals that you could ask about, and I've already indicated that clearly the cost is much larger if you remove those things. That's the purpose of my testimony, to indicate that.
Chairman TALENT. Let me go into the trading system, or the other points that you mentioned and then I will defer to the other members for questions. The trading system. Again, I'm trying to understand this from the point of view of the average small businessperson or family farmer. Once this system were set up, it would be some system whereby we could, our businesses or our farmers could rely in some manner on emission credits generated by other countries who were below the levels they were supposed to be at under this agreement.
So, let me just ask how that would actually work for somebody. I mean suppose you had a small trucking firm, you wanted maybe 10 trucks and you wanted to buy a couple of additional trucks because your business was good and you wanted to expand. Now that would mean you would use more energy. Obviously, you are not going to call up Russia and ask to buy some of their permits, right? So what do you do? How would you get the permit to be able to expand?
Dr. YELLEN. In order to answer that question, one would have to have a clearer notion of what the design of the domestic permit system would be. There are a number of alternative designs that are possible, and the President has indicated that this is something to be worked out in the future. He's proposed a domestic emission trading mechanism, but the features of it are not yet determined.
One could envision a system where your small business person would never have any contact with it at all. For example, if permit requirements were imposed upstream, then a coal producer might have to have a permit in order to market coal. Or an oil producer might have to have a permit in order to sell domestic oil or to import oil and in that kind of setup, not that that's decided—this is simply an example of how it could work-a small business or any business in the United States would simply see the tiniest impact on fuel prices at the pump, but in terms of burden or having to deal with permits or worrying about can I buy a permit from a Russian, this is something that would never be seen by any downstream business.
Certainly, burden and complexity for small businesses or for businesses in general should be an important consideration when the time comes to design such a system.
Chairman TALENT. What would we do if the Russians sold off, or however this is going to be done, all of the permits that they were allowed to sell off and then allowed people in their own country to expand anyway.
Dr. YELLEN. Clearly monitoring and compliance are important features of the agreement and we would need to make sure that there are reasonable mechanisms in place so that countries selling emission permits in fact are meeting their obligations to cut their own emissions below what they are entitled and in saying that this agreement is a work in progress, negotiations that are ongoing will—there will be meetings in Buenos Aires next November. A major issue there will be to devise arrangements that will make such an emission trading system workable and efficient.
Chairman TALENT. Yes. Here's what I'm concerned about. Some sort of situation where in order to grow your business or to plant a new field of soybeans, I mean you have to get permission from somebody to be able to do that, then the government will be deciding which sectors—well, let me finish, then you can—which sectors of the industry or the economy can expand; which can't expand. What it's going to do if people try and corner the market on permits, what it is going to do I don't know how in the world the government is going to be able to police all the economic activity in Russia or China. We can't even keep track of the nuclear facilities that they are building in Iraq, and we're supposed to keep track of everybody who is builds a facility in Russia or China or Mexico? And this, I think, is vital because it goes to what you now say is the heart of this scheme which is what I've called the sweeteners, and we're going to develop huge government mechanisms that are going to be inadequate to police other countries and are going to spend their time policing our people and that's my concern.
Dr. YELLEN. We certainly don't envision huge mechanisms or gigantic new institutions, but there is a challenge in ensuring that countries comply with the agreements that they've made and monitoring their performance and that is critical to having a viable trading system. But from the point of view of small businesses, a trading system is one that is designed to avoid burden, not to produce burden, but to avoid burden. I think we have seen that in the many instances in which permit schemes are now being tried in the United States, the most notable example being the sulpfur dioxide permit system. The benefit of such a system is it is flexible, it is market-based, and it avoids the kind of command and control where a government agency comes and tells the soybean producer what he can or can't do. It's a market-based flexible mechanism that can be all but invisible to the typical business. That's why we've pushed trading arrangements, marketable permits, and flexible market-based measures to avoid burden, not to produce it.
Chairman TALENT. the Sulphur dioxin trading system, it doesn't rely on good faith of other countries in telling us what's going on in their own.
Dr. YELLEN. But it does require monitoring and enforcement compliance mechanisms. One always has to be have such a mechanism in place for a tradeable permit system. We've devised it domestically and we believe it can be devised internationally as well.
Chairman TALENT. I may have other questions later, but I'll defer now to the distinguished ranking member for her questions.
Ms. VELAZQUEZ. Thank you, Mr. Chairman. Thank you, Dr. Yellen. I would like to know, do you know whether the scientific and economic analysis on which you are relying are being called into question as seriously in other countries as is in the case here in the United States? If not, do you have any opinion as to why that might be?
Dr. YELLEN. With respect to the scientific analysis, I'm not a scientist and if you have detailed questions, my suggestion would be to have someone from OSTP to testify on the science, but for my own part
Ms. VELAZQUEZ. What about the economic aspect?
Dr. YELLEN. From the scientific perspective, just on the scientific part, the Intergovernmental Panel on Climate Change brought together a large and distinguished group of scientists who were asked to review the science, and offer their best judgment. Their best judgment is there is a discernible human influence on the climate and that, in the absence of intervention, just within the next hundred years, we will see a clear temperature change with global mean temperatures rising between 2 and 6 degrees Fahrenheit. They've also documented a large number of adverse consequences of that, including sea level rises and a number of the other things that you mentioned in your opening statement.
So, I've read that and to me, the analysis is convincing. With respect to the economics, there are a variety of economic models that have been produced and summarized also by the IPPC and, in general, their conclusions again are to my mind reasonably clear. That is, that there are smart ways to address this problem and dumb ways and the things that we have made central to Administration policy is flexibility mechanisms. All models that I have reviewed, or that the IPPC has reviewed, show a lowered cost by a large order of magnitude.
Ms. VELAZQUEZ. Do you know what type of reactions in other countries have been to those analyses?
Dr. YELLEN. Most countries, European countries, certainly, I believe, take it as a given most-I can't speak for everybody obviously, but as I meet with Europeans, they seem fully convinced that the science is correct and quite willing to undertake the actions that are necessary to address this threat.
Ms. VELAZQUEZ. Would you also please comment on the comment on the analysis which, contrary to that of the Administration, indicates serious job loss in the United States if we proceed to implementation of the Kyoto Protocol?
Dr. YELLEN. Yes. There are a number of studies that estimate that the costs of meeting our obligations under Kyoto would be very large, but they obtain that answer by failing to include the flexibility factors that have been central to the Administration's position and that are clearly incorporated in the Kyoto Protocol.
Ms. VELAZQUEZ. In light of the fact that the developing nations of the world will produce over half of man-made greenhouse gases by the year 2025, can you tell us that steps are planned to ensure greater participation in this effort by those countries. Specifically, can you tell us what the Administration uses as a definition of quote meaningful participation unquote with regard to additional