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Answers to Questions From Chairman Talent

to Dr. Yellen, Chair of the CEA

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 and gasoline), natural gas, and electricity.

This question does not apply to the Kyoto Protocol because Article 17 of the Protocol establishes the right to trade emissions among parties with emissions targets. However, our informal analyses of such a policy suggest that the effects on energy prices would be nearly 10 times greater than under the policy conditions that were identified in Dr. Yellen's testimony. The testimony indicated that effective international trading and meaningful developing country participation could result in permit prices of about $14 to $23/ton. We believe that this difference of nearly a factor of 10 underscores the importance of international permit trading and developing country participation, two comerstones of the Administration's climate change policies.

This data should include a typical household in the following regions: Northeast, Southeast, South, Mid-West, Northwest and Southwest.

We have no data on spending by region and have not undertaken such analysis.

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

We have no data on spending on energy by small businesses and have not undertaken such analysis.

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

We do not have quantitative estimates of indirect compliance costs.

(3)] 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 percent 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.

As with any conventional economic model, our model assumed simply that the amount of
emissions permits to be traded would be determined by the supply and demand for
emissions permits among the trading countries. All of the quantitative analyses
underlying Dr. Yellen's testimony were developed after Kyoto.

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

We have made no assumptions about the emissions targets for the periods beyond 2012.
The Administration has not proposed emissions targets for the second or subsequent
commitment periods. We acknowledge that Kyoto is a first step, and the President in
October said that we must work toward further reductions in the years beyond 2012. The
Administration, however, is not prepared at this time to propose an emissions target for

a

these years.

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?

The analysis that we have performed is summarized in Dr. Yellen's testimony to
Congress and in the July 1998 report titled “The Kyoto Protocol and the President's
Policies to Address Climate Change: Administration Economic Analysis.”

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?

Our approach follows the practice of the researchers who have developed the SGM model and is consistent with other uses of this model. It reports costs as the sum of 1) the cost of emissions reductions achieved in the United States, calculated to reflect only the incremental cost of each reduction, i.e., the minimum compensation that a profit-oriented firm would need as compensation for such reductions, and 2) the total value of payments to firms outside of the United States for emission permits acquired through international trading.

Although we have followed a practice accepted by many modelers the measurement of total costs in the computable general equilibrium models used to assess the economic impacts of mitigating climate change is an area of ongoing study. For example, researchers within the Energy Modeling Forum recognize that modelers need a better understanding of why the costs are so different across models and some way to decompose the many components contributing to the overall cost of mitigation.

Differences in cost have not yet been decomposed into distinct components in a manner that lets independent researchers evaluate the validity of such claims.

4) Estimates of the U.S. demand for emissions credits by year for the period 2008-2012 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 reductions targets.

The Administration has no estimates of the demand for emission credits by year for the period 2008-2012. Demand will be sensitive to a variety of factors that are quite difficult to forecast 10 to 14 years in advance, especially the rate of technological innovation and the diffusion and adoption of current innovations and those placed on the market over the next ten years. For the same reason we have no estimates of the supply of emission credits.

In addition, as mentioned above, the Administration has not proposed additional
reductions targets for periods beyond 2012.

(4)] 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.

The President will not submit the Kyoto Protocol to the Senate for its advice and consent to ratification without the meaningful participation of developing countries. Some forms of developing country participation, together with emissions trading among Annex I countries, can produce significant cost-savings in meeting the Protocol's targets. For details, see the discussion surrounding Table 4 (p. 52) in “The Kyoto Protocol and the President's Policies to Address Climate Change: Administration Economic Analysis.”

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HEARING ON ECONOMIC IMPACT of KYOTO PROTOCOL

REGARDING THEORY OF CLIMATE CHANGE

HOUSE COMMITTEE ON SMALL BUSINESS

JUNE 11, 1998

1320 18th Street, N.W., Suite 200 • Washington, D.C. 20036
Tel: (202) 785-0238 Fax (202) 822-8118

www.sbsc.org

INTRODUCTION

On behalf of the Small Business Survival Committee (SBSC), an advocacy and

information organization of approximately 40,000 members supporting policies that

promote the growth and survival of the entrepreneurial sector of the United States'

economy, I am pleased to offer the following statement in opposition to the Kyoto

Protocol, or “Global Warming Treaty,” and on the economic costs of the treaty.

SBSC appreciates the opportunity to provide comment today. Our opposition is

based in part on that against which SBSC constantly fights -- proposed and actual

regulations which simply do not carry benefits to substantiate their costs, are unnecessary,

or which threaten to cause more harm to individuals than good. In this case, the theory of

global warming remains so suspect, and the costs are predicted to be so crushing, that a

"global warming treaty” must serve as an example of many things gone awry in modern

regulatory policy, and opposed vehemently.

Overregulation remains a tremendous problem for those seeking to engage in

economic activity in the United States, particularly for small and mid-sized businesses,

which create the vast majority of jobs created in the country. This burden is particularly

egregious for start-up efforts. For companies with fewer than 20 workers -- which

comprise 90 percent of U.S. companies -- a Small Business Administration (SBA) study

found that the annual cost of red tape per worker is $5,532. By contrast, the per-worker

cost for companies with more than 500 workers is $2,979 (numerous such surveys vary

by a slight percentage but are all in the same neighborhood).

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