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doesn't require specific reductions for specific gases and sinks can be used to offset emission targets.
The inclusion of international emissions trading among countries that take on binding targets, coupled with an agreement allowing industrial countries to receive emissions reduction credit for investments in clean development projects in the developing world, are the critical forms of where flexibility in the Kyoto Protocol.
Although details of these provisions need to be finalized in negotiations in Buenos Aires, and other negotiations, we believe that these mechanisms can produce substantial reductions in the cost of attaining our environmental objectives.
Economic analysis also points to the need for a global solution to a problem which is global. Around 2015, under a continuation of business as usual, a majority of world emissions are projected to come from developing countries. Without developing country participation, we cannot achieve adequate climate protection. In addition, developing country participation would permit relativ lowcost emissions reductions to be internationally recognized as a substitute for more expensive reductions in many industrial countries. The President has made clear that he will not submit the Kyoto Protocol to the Senate without meaningful participation from key developing countries.
An economic analysis of climate change faces three broad categories of difficulty. First are the uncertainties that still remain over the terms of the ultimate treaty. Second are inherent limitations of models. Finally is the impossibility of putting a single monetary figure on the long-term benefits of climate change mitigation.
Mindful of the limitations of any single model as a tool for evaluating the economic impact of the Kyoto Protocol, we have employed a broad array of techniques to assess various possible costs and nonclimate benefits of the Administration's emissions reduction policy. Ignoring the benefits of mitigating climate change itself, our conclusion is that the net cost of our policies to reduce emissions are likely to be small if those reductions are undertaken in an efficient manner and we're successful in securing meaningful developing country participation as well as effective international trading and clean development mechanisms in future negotiations.
As I explain in my written testimony, this conclusion is not entirely dependent on, but is fully consistent with formal model results. For example, given the factors such as trading, that I've delineated, but excluding the benefits of acting and the impact of electricity restructuring, estimates derived using Battelle's Second Generation Model suggest that the resource costs of attaining the Kyoto targets might amount to just $7 to $12 billion per year in the 2008–2012 timeframe, or just one-tenth of a percent of projected GDP. That small net premium, in effect, purchases a partial insurance policy against a serious environmental threat.
A comprehensive economic evaluation of the Administration's climate change policies must also take into account the potential payoffs from the full package of proposed Administration climate change initiatives. As you know, the President's Fiscal Year 1999 budget includes a $6.3 billion package of tax cuts and R&D over the next 5 years. This is a package that makes good sense in terms of energy policy, even ignoring any payoff for climate change.
A second responsible step entails industry-by-industry consultations to prepare emission reduction plans in key industrial sectors. A final component of the President's climate change policy is his support for electricity restructuring in a manner that will offer approximately $20 billion in cost savings to electricity consumers while offering modest reductions in greenhouse gas emissions.
I look forward to continuing to work with members of this Committee and other interested parties in further analyzing the Kyoto Protocol and evaluating the effects of reducing greenhouse gas emissions. Thank you. I welcome your questions.
(Dr. Yellen's statement may be found in the appendix.]
Chairman TALENT. Thank you, Dr. Yellen, for that succinct summary of your statement, which I would commend to all the Committee Members.
Now I wanted to focus primarily in this hearing on the economic impact of the protocol rather than the science behind it, although you adverted to, I think, quite appropriately and I think other witnesses will as well. I'll just say, so that I'm put on the record, there's a considerable amount of evidence
I expect to have further hearings on this subject—that, in fact, the Earth may not be warming. That if it is warming, that may not be a bad thing. If it warming, and if it is a bad thing, that may not be attributable to greenhouse gases and if it is attributable to greenhouse gases, it might be attributable mostly to greenhouse gases over which human agencies have no control. I just say that so I don't leave the impression that your statements regarding the danger of global warning are uncontested in the scientific community. That also is an issue where we are gathering more and more facts, and it is obviously vital that we resolve that before moving ahead with the protocol as well.
I'm certainly not going to try to foreclose any members who may wish to go into that; it's a vital issue, and I'm going to focus mostly, and the hearing is going to focus mostly, on the economic impact.
Now, I think you capsulized your conclusion in a very helpful fashion, up-front in your testimony on page 12, where you say our conclusions is as follows regarding the economic impact: That the net costs of our policies to reduce emissions are likely to be small, assuming those reductions are undertaken in an efficient manner, assuming we're successful in securing meaningful developing country participation, as well as effective international trading, aná assuming the clean development mechanism in future negotiations.
Now, I presume that you have done economic modeling and analysis to support this conclusion.
Dr. YELLEN. We, as I indicate in the testimony, have used results from Battelle's Second Generation Model, modified by work we've done to take account of some important features of the Kyoto Protocol. More broadly, there is a large literature on this topic concerning the impact of various flexibility mechanisms and we have carefully reviewed the broad literature in arriving at our conclusion.
Chairman TALENT. Now my understanding, and I certainly want you to correct me if I'm wrong about this, is that your use of that literature and your analysis is not at this point available for the public to inspect. Is that correct?
Dr. YELLEN. Well, I've tried in my statement to indicate quite carefully the reasoning on which this conclusions is based. Documents that we used, internal documents that were used in preparing this testimony, have been made available to committees that have requested access to them through White House counsel.
Chairman TALENT. So, then the underlying economic analysis would be available to the Committee if we requested it?
Dr. YELLEN. Under arrangements-White House counsel has made arrangements for members of the Committee and their staff to view these documents at the White House.
Chairman TALENT. So it's not available for the public, but it would be available for Members of Congress?
Dr. YELLEN. That's correct.
Dr. YELLEN. There are broad documents, many of which were used in internal deliberations at the White House, and some of which have material that could influence ongoing negotiationsinternational negotiations that are ongoing, pointing to a need for some confidentiality. We hope, also, in the not-too-distant future to release a further technical analysis document that would provide further detail to the public about the basis for these conclusions.
Chairman TALENT. Let me go into that because I think it's an important point. In the not-too-distant future, I mean, can you tell us when you will be able to do this?
Dr. YELLEN. I don't have a precise date for you, but the Administration is working on a technical analysis document that would elaborate some of the reasoning that has gone into the testimony that I've presented. Even so, I believe that the testimony that I've given is sufficiently detailed as to provide quite a solid basis for understanding the reasoning.
Chairman TALENT. I'd assume that the underlying documentation goes into greater detail regarding your methodology, which aspects of these reports that you've used.
Dr. YELLEN. That's correct. It explains in greater detail the methodology.
Chairman TALENT. The reason that that's important is there are a number of other studies outstanding which reach radically different conclusions than the one you've reached, and the only way we can determine which conclusion is accurate is to be able to look at the underlying methodology.
Dr. YELLEN. I understand that.
Chairman TALENT. Let me try to get at it a different way, then, and to summarize this—and I'm just trying to understand this as a lay person rather than as an economist-the thrust of your testimony is that the economic impact of the reduction to 7 percent below 1990 levels is, perhaps, quite significant, but is substantially mitigated by a number of factors, having your Annex 1 trading. Basically, I guess, you could summarize this as the trade permits or trade emissions permits with other countries, the Annex 1 trading, the umbrella trading, meaningful development country participation, carbon sinks, energy-efficient policies, a network of policies that mitigate the impact of the program. Is that a fair way of putting it?
Dr. YELLEN. That is absolutely fair.
Chairman TALENT. Rather than have to have to refer to each one of those elements every time I ask a question about this, I'm going to refer as the sweeteners, I just thought of that as an appropriate word. You can call it whatever you want, but when I refer to that, that's what I mean, that network of mitigating policies. I want to try to determine your view on the actual impact of this and examine the impact on real people in America.
So let me ask you this: We have the Kyoto Protocol without the sweeteners—how much more would a gallon of gasoline cost the average American at the pump?
Dr. YELLEN. The sweeteners are the Administration's policies. I think it is inappropriate to act as though the policy is simply to do it-for the Administration to undertake an obligation to do something in an extraordinarily inefficient and potentially expensive manner. Sweeteners make it sound as though something that's thrown on at the end, that isn't essential to the undertaking. These sweeteners are the essence of the Administration policy and have been from the start.
When everyone undertakes something that is a large-scale project, we know from all of our experience there are smart ways to do it and there are dumb ways to do it. If the point is that doing something in a dumb way can result in high costs and an expensive project, that is absolutely correct.
Chairman TALENT. The reason I get at this is I'm trying to examine the components through which you reached the conclusion that you reached. In order to do that, I need to go through the chain of reasoning. I assume that you have some kind of a baseline. I'm not suggesting that your policy is to do this without the sweeteners. I'm trying to examine the accuracy of the conclusion that you've reached. So, I mean, if somebody comes to me with a gallon of water in a tub and says we drained out the bathtub, before I know whether they did that, I have got to know how much water was in the bathtub to begin with.
So, that's why I am asking you, apart from the sweeteners, how much would the reduction in emissions to 7 percent below 1990 levels, how much more would that mean an American could pay for a gallon of gasoline?
Dr. YELLEN. The President's policies are the baseline and the starting point that we have used in our analysis. Under the relevant baseline, which is the President's policies, and the flexibility measures that are in the protocol, namely trading, the Clean Development Mechanism, the ability to use six categories of gasses and the ability to use sinks, along with electricity restructuring, which is a proposal the President has already made, in that baseline the costs are modest. If you ask, remove all of those things that are already in the protocol and President's policies would it cost substantially more? Absolutely yes.
Chairman TALENT. How much is substantially? Would it cost up to maybe $1 per gallon of gasoline? Dr. YELLEN. We've not tried to do a careful estimate of that
precisely because that's not the President's policies. We've tried to estimate his policies, but there are a large number of studies that have been done and well publicized that suggest permit prices in the
range of $100 or more in the event that none of these flexibility measures
Chairman TALENT. I don't know what a permit price means to the average American. What bothers me about this is what it is going to do to the people I represent. OK? The people who buy gasoline, the senior citizens who heat their homes, the farmers, the small businesses. I'm trying to be very straightforward with this. The reason I want to go into this is because I want to try to test the accuracy of your conclusion. Now it seems to me you've got to have some concept of how much it would cost, without the sweeteners-call them whatever you want—I thought that was a pretty neutral term. Without these sweeteners, unless you don't know, how much would it cost the average America at the pump? If we do the protocol without the sweeteners, how much more would it cost. Can you give me a range?
Dr. YELLEN. Our estimates that we've included in the testimony with respect to gas prices, for example, is that we could expect to see, with a $14-$23 permit price, 4 to 6 cents a gallon on gas prices.
Chairman TALENT. But that's including the sweeteners, right?
Dr. YELLEN. That includes the so-called sweeteners, now if you
Chairman TALENT. Let me go back and try to get this again, and I don't want this take as long as it's taking but how much would it cost an American at the gasoline pump if we were to do the Kyoto Protocol without the sweeteners? And I don't think it is unreasonable I try not to be unreasonable.
Dr. YELLEN. It's a perfectly reasonable question. If this were undertaken in a completely dumb manner, which is certainly not the President's policy, a $100 permit price, which is generated by some models, translates to around 25 cents a gallon.
Chairman TALENT. So, your testimony is that
Dr. YELLEN. Other models, that have looked at policies which aren't the President's policies have, as you know, given you impacts on gas prices of say 25 to 50 cents. But such impacts are not the outcome of the policies that the President is putting forward.
Chairman TALENT. I understand your saying that but now we have, so we have 25 to 50 cents is what the reduction to 7 percent below 1990 levels in greenhouse gas emissions would cost the average American at the gasoline pump in your estimation. An estimated
Dr. YELLEN. No, the estimation of a variety of models. Not in my own estimation.
Chairman TALENT. What's your own estimate?
Dr. YELLEN. As I've indicated to you, we have focused on trying to figure out what the impact of the President's policies and the Kyoto Protocol are.
Chairman TALENT. Dr. Yellen, when Mr. Eisenstadt went in to negotiate this, I presume he had a consciousness about the impact of this protocol on the American people. That's certainly correct, right?
Dr. YELLEN. Yes.
Chairman TALENT. In doing that, he went in-he had to have some kind of a baseline for what the raw cost of an emission to 7