The Honorable Jay E. Hakes April 22, 1998 24% above 1990 levels (State Department estimate plus global international trading as defined by Dr. Janet Yellen's testimony of March 4, 1998 before the House Commerce Subcommittee on Energy and Power); and ⚫ 34% above 1990 levels (ELA reference case levels in AEO98). With this set of cases, we expect that the ELA will be able to closely estimate the impact on the U.S. energy system and economy for a wide range of values for offsets, sinks, and carbon trading. For example, if sinks and offsets from reforestation, afforestation, and reductions in other greenhouse gases relax the Kyoto target by 4 percent as the State Department has estimated, and if the United States could purchase all of the estimated 165 permits from the Annex I countries of the former Soviet Union, and if no permits were allowed for the Clean Development Mechanism, the carbon target to be examined for the United States would be 9 percent above 1990 levels, or 1,471 million metric tons. For each case examined, the target should be achieved on average for the 2008 to 2012 period and stabilize at that target post-2012. You should assume that the United States will begin to respond by 2005 to both reflect anticipatory actions by industry and consumers, and to meet the Kyoto Protocol's Article 3.2 requirement that "Each Party included in Annex I shall, by 2005, have made demonstrable progress achieving its commitments under this Protocol." We would also like you to evaluate other uncertainties regarding: (1) economic growth; (2) construction of new nuclear plants; and (3) technology cost, performance, and penetration as sensitivity cases for some of the target cases described above (e.g., carbon stabilization at 1990 and 1998 levels). If you have questions concerning these assumptions, please contact Harlan Watson and Mike Rodemeyer of the Science Committee staff. The Kyoto Protocol and the President's Policies to Address Climate Change: Administration Economic Analysis EXECUTIVE SUMMARY The primary purpose of this analysis is to examine costs and benefits of taking action to mitigate the threat of global warming. In particular, we examine costs and benefits of complying with the emissions reduction target for the United States set forth in the Kyoto Protocol on Climate Change, negotiated in December 1997. For reasons discussed at length in this paper, it is our conclusion that, with the flexibility mechanisms included in the treaty, and by pursuing sound domestic policies, the United States can reach its Kyoto target at a relatively modest cost. Moreover, the benefits of mitigating climate change are likely to be substantial. Before considering the economics of taking action, however, we ought to step back and ask the threshold question -- whether taking action to mitigate global climate change is necessary in the first place. The Rationale for Taking Action The great weight of scientific authority suggests that climate change is a serious problem and that prudent steps to mitigate it are in order. In essence, we need to take out an insurance policy with reasonably priced premiums. As long ago as 1992, the National Academy of Sciences, in a study entitled Policy Implications of Greenhouse Warming, concluded that “...even given the considerable uncertainties in our knowledge of the relevant phenomena, greenhouse warming poses a potential threat sufficient to merit prompt responses....Investment in mitigation measures acts as insurance protection against the great uncertainties and the possibility of dramatic surprises" (p. 68). What the science tells us is that greenhouse gases are rapidly building up in the atmosphere as a result of the burning of fossil fuels and deforestation; that the concentration of these gases is 30 percent higher than it was at the beginning of the industrial revolution; and that this concentration is expected to reach almost twice current levels by 2100 -- a level not seen in 50 million years. Theory and computer models suggest that this increased concentration of greenhouse gases could warm the Earth by about 1.8 to 6.3° F by 2100. By way of comparison, the last ice age was only about 9° F colder than today. Moreover, much evidence suggests that warming is already underway. For example, we know from ice cores and other data that we are living in the hottest century since at least 1400, that the nine hottest years since records were first kept in the late 19th century have all occurred since 1987, and that 1997 is the hottest year on record. Scientists predict a range of likely effects from global warming. For example, the rate of evaporation is expected to increase as the climate warms, leading to increasingly frequent and intense floods and droughts. Sea level is projected to rise 6-37 inches by 2100. A 20-inch rise could inundate about 7,000 square miles of U.S. territory. Warmer temperatures would be expected to increase the risk of mortality from heat stress, aggravate respiratory disease, and increase the range and rates of transmission of some infectious diseases. Scientific opinion is not unanimous on these points, but most independent climate scientists believe that global climate change poses real risks. A few scientists contest the notion that increasing concentrations of greenhouse gases will warm the planet, while a few others concede that the earth is indeed getting warmer, but argue that this is a good thing -- "a wonderful...gift from the industrial revolution," in the words of one. But these are distinctly minority views. The prevailing view is that the risks of climate change warrant prudent and prompt action. Prompt because to wait for greater scientific certainty could have very large costs. Greenhouse gases are longlived and the decisions being made by governments and firms in the next decade with respect, for example, to the kinds of power plants to build or the kinds of energy sources to develop, are likely to have significant consequences for our ability to limit the buildup of greenhouse gases. Consequently, there is a substantial rationale for acting now. Our task is to act in a manner that responds appropriately to the scope of the risk while at the same time being economically sensible. Domestic Policy In October 1997, the President announced a domestic program designed to reduce greenhouse gas emissions. In essence, the program contemplated (a) a set of activities that made sense as good energy and environmental policy irrespective of whether an agreement were reached in Kyoto, and (b) a mandatory domestic emissions trading system that would take effect in the 2008-2012 period if an agreement in Kyoto were reached and approved by the U.S. Senate. The Kyoto Protocol The Kyoto Protocol, which requires the advice and consent of the Senate, commits industrialized nations to take on binding targets for greenhouse gas emissions, and includes three basic kinds of flexibility provisions that were proposed by the United States. These provisions -- commonly referred to as "when", “what”, and “where" flexibility -- have great potential to significantly lower the costs of meeting the Kyoto |