between 3 and 5 percent, an increase in fuel oil prices of about 5 to 9 percent, natural gas prices of 3 to 5 percent, gasoline prices of 3 to 4 percent (or around 4 to 6 cents per gallon), and electricity prices of 3 to 4 percent. This increase in energy prices at the household level would raise the average household's energy bill in ten years by between $70 and $110 per year, although such predictions may not be observable because they would be small relative to typical energy price changes, and nearly fully offset by electricity price declines from Federal electricity restructuring. In 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. 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 sectors -- 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 climate-friendly economy.

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.

Thank you for testifying at the Committee's hearing on the Kyoto Protocol. The hearing
was held to give you and others the opportunity to provide Members of the Committee
with a report on the potential economic impact of the Protocol on small businesses.

As mentioned at the hearing, the hearing record has been kept open for Members of the
Committee for follow-up questions. In light of this, please provide the Committee with
answers to the enclosed follow-up questions for the hearing record. Please send your
response to the Committee office at 2361 Rayburn House Office Building by July 24,
1998. If you have any questions concerning this request, please direct them to Peter
Brechtel of the Committee staff at 225-5821.

Questions for the record by Chairman James M. Talent for Dr. Janet L. Yellen, Chair, Council of Economic Advisors

1) In your written testimony, you referenced the increase in an average household's energy bill. What is your estimate of the impact of the Kyoto Protocol for the following cases:

a) Energy costs for an average household assuming that emissions
trading is not allowed (approximately $200/metric ton based on the
SGM model). This data should include the components from oil
(heating oil and gasoline), natural gas, and electricity. This data
should include a typical household in the following regions:
Northeast, Southeast, South, Mid-West, Northwest, and Southwest.

b) Direct energy costs for an average small business of 50 employees under the same conditions as listed in Item a above.

2) In addition to the direct energy costs, what is your estimate of the indirect costs of the policy for the cases described above?

On page 10 of your written testimony, you said "the emission cuts agreed upon in Kyoto are only a first step in a long journey." Since the implications of these further reductions contemplated by President Clinton are substantial in terms of the impact on the U.S. economy and the availability of emissions credits, please provide the following:

1) At the time of the President's policy statement in October the reduction target for carbon stabilization at 1990 levels was approximately 375 million metric tons (Mmt). Since this announcement the EIA outlook has added another 80 Mmt to the target and the Kyoto reduction of 7% has added another 95 Mmt. The total reduction for energy alone is now 550 Mmt. If you add the other gases the Kyoto target for reduction is 650 Mmt. Since the total amount of emissions is critical to any economic analysis, please provide the assumptions used in your analysis for the amount of emissions to be traded. Also, confirm which of the analyses you used were performed after Kyoto.

2) What are the Clinton Administration's assumed further emission reduction targets for the period of 2013-2020?

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3) What analysis of the total impact on the economy (both direct and indirect costs) of the U.S. has been performed using these assumptions? How are total costs reflected in your analysis since the SGM analysis you referenced in your testimony only treats direct costs, which is recognized to underestimate total costs by a factor of 2-4?

4) Estimates of the U.S. demand for emissions credits by year for the period 2008-2020 and the potential supply from Russia and the Ukraine based

on:

a) Projected demand relative to the Kyoto target.

b) Projected demand relative to the assumed additional reduction
targets.

Dr. Yellen, your testimony before the Committee on June 4 was that the Kyoto Protocol would have a modest economic impact on the United States and that the cost per ton of greenhouse gas reductions would be in the range of $14 to $23 per ton. You also testified that this cost estimate was predicated on achieving developing country participation and other flexibility mechanisms in future international negotiations. However, during the recent UN FCCC Subsidiary Bodies meeting in Bonn, Germany, the Group of 77 (G-77) and China voiced strong opposition to even placing voluntary responses for developing nations on the agenda for the fourth Conference of Parties (COP-4). On June 12, the closing statement by the Ambassador of Indonesia on behalf of G-77 and China stated:

"The Group reiterates that there must be no new commitments, voluntary or otherwise, introduced for all developing countries, under any guise, in such reviews."

Given this strong opposition by developing nations to even consider voluntary commitments and given the lack of progress on fleshing out the skeletal flexibility provisions (such as trading) in the protocol, isn't it unrealistic to expect savings from these areas and isn't the Kyoto Protocol likely to cost America substantially more. Please elaborate in your answer and supply details of your calculations.