supply and-demand advantage we have with a cost of power that is going to be determined substantially by the cost of investment. If the cost of investing in new power generation is substantially higher than the current cost of capital investment in plants, we are going to have an increase in the cost of power, which would compound the impacts of the protocols from Kyoto, rather than offset them.

Dr. YELLEN. Under the Proposal and the Administration policy package that I have described, you would not, in the 2008-2012 period, see premature replacement of existing coal-fired electric capacity in the United States.

Mr. HILL. Dr. Yellen, that's, I mean those dates are picked conveniently because that's at the outer threshold when most of those plants would go out of service. You go out to the year 2020, 2025, where you are going to have to replace those coal-fired plants with alternative methods of generating, you could see a dramatic increase in the cost of generating power.

Dr. YELLEN. I would disagree with you that we would be talking about a dramatic increase. What is expensive is to take a power plant that has not reached the end of its useful life and to tear it down or to convert it from coal to natural gas. It is decidedly less expensive when a new plant is being built to make that kind of conversion and

Mr. HILL. Based on technologies though we don't even know about today.

Dr. YELLEN. Well.

Mr. HILL. I mean, otherwise, you wouldn't have about 50 percent of the power generated by coal.

Dr. YELLEN. What this policy does not do is change that substantially by asking or creating circumstances in which you would have premature replacement of coal-fired electric plants. The flexibility measures are designed precisely to avoid that and I don't believe we would see it under the President's policies.

Mr. HILL. So, in essence, you see us reaching that year 2012 and then a dramatic drop-off. You don't see us gradually reaching, slowing the rate, and then gradually declining to those targets of 7 percent reduction?

Dr. YELLEN. I

Mr. HILL. The only way you could achieve that would be to phaseout those plants between now and then.

Dr. YELLEN. The scenarios that other modelers have that result in expensive costs of meeting this Kyoto Protocol are typically anticipating precisely what you are describing,-that we would have to meet these obligations by converting electricity plants from coal to natural gas before the end of their useful life. The advantage of the whole set of flexibility mechanisms that are part of the President's proposal, it's not that we wait to do anything at all, until 2008, it's that, at no time between now and 2012, will such changes be needed to meet this commitment because we will be able to use sinks, a package of climate change initiatives that can contribute to this international trading, and other things so that costly conversions will not be necessary now or in 2012.

Mr. HILL. All of these are unquantified today. The sinks are unquantified today-that's the problem, Dr. Yellen, with many of

us looking at this, that, say, we should have a rational response to the situation, but all of the costs and all of the offsets, you have sat here for 11⁄2 to 2 hours now and basically have told us they are unquantifiable.

Dr. YELLEN. No, I'm sorry, I haven't said they are all unquantifiable.

Mr. HILL. You've declined to identify for us what

Dr. YELLEN. I have identified them and I have told you that the ones that I have identified can move the cost of the United States into a range that we are comfortable as describing as modest. Beyond

Mr. HILL. But you don't know how much it is going to cost for a gallon gas

Dr. YELLEN [continuing]. Beyond what I have told you that I've quantified, are positive things that can help that I've not quantified, like sinks. I also take that into account.

Mr. HILL. Thank you, Mr. Chairman.

Chairman. TALENT. I think we missed the vote anyway. That being the case and since you're on a time schedule, I understand, and Mr. Pappas has questions and Ms. Millender-McDonald may have more questions, I'll just go ahead and continue the hearing. I have some more issues I wanted to get into. Let me discuss, followup a little bit on what Mr. Hill was saying on what you've quantified for us and not quantified for us, Dr. Yellen, and I've tried to be very up-front with you in my questions because I think this is important. I mean, that's one thing we agree on that this is very important and the reason we're concerned here is because we are confronted with the fact, and this has been agreed to. This is not embryonic, it's not in the planning stage, it's not a process. We have agreed that we will reduce our production of greenhouse gases, which are produced through the production and use of energy, to a substantially lower level than they would have otherwise been. So we are talking about, in a very concrete way, a significant restriction on the use energy by the American economy.

Dr. YELLEN. Energy is part of it, but sinks and other gases also play a role, conceivably significant.

Chairman TALENT. Energy affects everything in the economy. It affects whether people can stay warm in the winter, it affects how much people pay for gasoline, it affects whether small businesses can expand and create jobs, and you have been unable to tell us, in fact you told me you don't know, how much a reduction down to that level would cost the average American in terms of a gallon of gas. You haven't done any modeling that would produce an estimate as to what a reduction to that level will produce in terms of a loss in GDP, lost jobs, any of those indexes, and, yet, you assure us that the network of incentives or sweeteners will be enough to reduce the costs to a negligible level in terms of the American economy.

Now I don't know how you can know how much the sweeteners would reduce it to make it an acceptable cost, if you don't know how much it would cost apart from the sweeteners.

Dr. YELLEN. We have, as I've indicated to you, model estimates in particular simulation runs of what the price would be without flexibility measures. What I am unwilling to say is that numbers

that come out of the computer represent the Administration's overall best judgment as to what the economic impact would be in the absence of flexibility measures.

Chairman. TALENT. What you've been unable to do is give me your best judgment. I'm not asking you whether you get it from a computer or use, as you say in your statement, economic intuition, tell me your best judgment-if you have it, if you don't have it

Dr. YELLEN. I've indicated to you that the likely cost to the United States would be very much higher than the modest number that I've indicated, a tenth of a percent of GDP. Models suggest permit prices in the range of $100 to $200 if one removes all of the flexibility measures and insists that all of the reductions be undertaken domestically without any voluntary initiatives, without any climate change initiatives, without any electricity restructuring, without any payoff from sinks, and one can understand how researchers obtain impacts that, measured in terms of permit prices, are in the $100 to $200 range, which is four to eight times the kinds of energy impacts, gas impacts that I've given you as Administration judgments. That's what models predict and I think I'm answering you in as straightforward a way as I can.

Chairman TALENT. I'll concede half of that; you are not answering me in a straightforward way. Are you saying, then, that it's your best judgment that the cost of a gallon of gas would be you said with the sweeteners it would be 4 to 6 cents higher. So are you saying it would be four to eight times higher than that without the sweeteners?

Dr. YELLEN. If one undertakes satisfying the commitments of the Kyoto Protocol in a manner that is dumb, which is decidedly not the Administration's policy, yes, doing something dumb could cost four to eight times as much as the Administration's policy.

Chairman. TALENT. So that would be 16 cents more for a gallon of gas to 46 cents more, that's a pretty imprecise range, but you're willing to say it would cost that much more without the sweeten

ers.

Dr. YELLEN. I'm not willing to accept the term sweeteners. The Administration's

Chairman TALENT. Whatever term you would use, it would cost 16 to

Dr. YELLEN. We could talk about let's build a new building. What is it going to cost? I give you a cost estimate: it's going to be $30 million. You come to me and say I want to know what is your cost estimate if you hire a miserable construction firm, rotten engineers, pay as much as you possibly can for the workers on the project, what is it going to cost?

Chairman TALENT. That's not the analogy that's appropriate.

Dr. YELLEN [continuing]. We could come up with a big number. Chairman TALENT. Doctor, that's not the analogy that's appropriate. I'm asking you how much is the cost of what would be the cost of a component part of the building, which is exactly what people do when they bid out a construction project. If you're not prepared to give me that cost, I would not let you bid out the construction project on a private building. I wouldn't remodel my house the way you're negotiating the Kyoto Protocol.

Dr. YELLEN. I've indicated

Chairman TALENT. Now you told Mr. Hill that you've quantified it. Well, what haven't we quantified? We haven't quantified the impact apart from the sweeteners, you did not tell Ms. Velazquez, you said specifically, I can't tell you what meaningful participation is. You don't know what the impact is going to be on the average American and you're moving ahead with it. Sometimes you treat it like a work in progress. Buenos Aires is coming up in 5 months and you're the Chair of the Council for Economic Advisers and you don't know any of these things. At what point are you planning to know them?

Dr. YELLEN. I believe we know enough to be able to conclude what I have concluded in the testimony, which is that the Administration policies, which include what you have referred to as sweeteners, but I would regard as flexibility measures which are integral to the policy and protocol, will result in costs that are bearable for the U.S. economy, I believe, they are appropriately described as modest. Whether it means-if you are asking for a degree of precision, do I think it is going to be exactly $14 as a permit price or $22 or $31, I think that you are asking for a level of certainty and precision that is fallacious.

When we examine the broad literature and an array of models and evidence, what we can see is that these flexibility measures make an enormous difference and they take the $100 to $200 numbers that most models generate as the cost of doing it stupidly entirely at home without any of these so-called sweeteners and they convert numbers like that into, in some models, almost zero, and in other models $25, $10, $20, $50.

Chairman TALENT. Dr. Yellen, let me say, I think one of the things working here very different-a gap in philosophy regarding how we approach government because we're talking about an international regulatory plan, or an international plan, for tracking and monitoring how countries all over the world reduce the amount of greenhouse gases which is going to include monitoring and regulating how they produce energy and use energy.

You are approaching it, it seems to me, from the assumption that it is more likely than not that the international and National bureaucracies that implement this, in some fashion or another, will not be stupid. In my experience with government, that has not been the case. For example, I am looking at how we are handling base closing in this country. I've had personal experience with that. Now you can believe this or not believe it, but I can personally tell you and I am willing to personally tell you, not on the basis of economic models or anything else, it was stupid the way it was handled.

I have no confidence whatsoever that this gigantic operation is not going to be done stupid. So that's the reason I am searching for a greater degree of precision than you have given me. I can just assume, regardless of what you've said that it was going to be done stupid, but I don't want to do that if you can lay out a plan, with some precision, that indicates why it is not going to be done stupid, then I guess I could accept that.

Because if it's done stupid, the impact on people is enormous. It would be worse than the effect the energy crisis in the 1970's was to real people who have real jobs, real farms, and real small busi

nesses. You really have that level of confidence that through this whole process, which is going to last decades and decades and decades you all are going to be able to plan and manage this thing so it is done in a way that isn't stupid?

Dr. YELLEN. I think this is a major undertaking. It's an important one because I think the future of the planet is at stake, and so it's one that we need to begin to undertake. I consider it essential that it be done intelligently and not stupidly, and I fully agree with you that if it is done very stupidly it could, indeed, be very costly.

Chairman TALENT. All right. I want to ask one other set of questions, and then if nobody else is here, I'll recess until they come back. I understand you have to leave in a few minutes.

I'm going to try to get at this a different way. I'll try to get at what your sense is as the Chair of the Council on Economic Advisers what you would advise the President or the Vice President or Ambassador Eisenstadt is an acceptable net cost. Because you mentioned-in essence, and I thought the phrase was very apt, you mentioned that you could think of the Kyoto Protocol as a form of planet insurance. You said that there what we're talking about is what is an acceptable net cost for purchasing planet insurance?

I'd like to give some idea of what you think would be an acceptable net cost. So if any; maybe that you say no net cost is the only thing that's acceptable. There are, according to the SBA, 323,000 small manufacturers operating in this country. Now, what would be an acceptable cost in terms of the loss of small manufacturers in your view that would justify this planet insurance. A tenth of that? A twentieth? Have you thought in those terms?

Dr. YELLEN. First of all, I don't feel it is my job to decide what is an acceptable cost. As an economic adviser, I feel it is my job to attempt to, as best I can, illuminate and quantify the costs and benefits and it's the President's job to decide what is acceptable. But I would characterize the Administration view as something like a tenth of a percent of GDP to address this very serious issue where it is very difficult to estimate what the benefits are, what the costs of climate change would be is modest. I've tried to point to some of the estimates that heroic people have made in trying to get a handle on the benefits number.

Yes, I think when you look at estimates as imprecise and as difficult as existing estimates of damages are, and take account of the risk of catastrophe, that a tenth of a percent of GDP is something we should regard as acceptable.

Chairman TALENT. Excuse me just a minute. Let me see what this vote is. This vote is going to hold other members over there. Now what time did you have to leave, Dr. Yellen.

Dr. YELLEN. I have to leave by 12:30.

Chairman TALENT. By 12:30. All right. If you wouldn't mind, I'm going to go vote. If you can stay until 12:30, Mr. Pappas, I know, had some questions, and when he comes back, if I'm not here, we'll just let him open up the hearing and chair it and ask questions up until the time when you have to leave.

Dr. YELLEN. Sure.

Chairman TALENT. I do appreciate it. If I'm not here when you leave, I want to say that I do appreciate your testimony and on a