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multilateral study

unilateral study + total cost of carbon tax ist percentage of GNP Note: DOE study takes the National Energy Strategy as its baseline. OECD results are for North America.

economic variables without directly incorporating market mediation. Because of this different orientation, the methodology chosen will affect the interplay between endogenous factors, the adjustment process and the model results. Thus, analysis conducted with DRI's econometric models will differ from that of the CGE models. However, although the scope and approach of all the studies vary, they are sufficiently similar to allow rough comparisons (see Table I.8).

2100. The latter study also allows for the purchase of emissions allowances from the less developed countries by the industrial countries. This DRI study, by comparison, requires reductions to 100% of 1988 emissions level by 2000, and 80% of 1988 levels in 2020. No provision is made for the trading of emissions allowances.

The two multilateral studies with which this study is compared project the levels of taxation over time that would be required for car. bon emissions in the industrialized countries to be reduced to 80% of their 1990 levels. In the OECD study, this level must be reached by 2010, and maintained through 2020, the end of the study period. In the Manne and Richels study, the same emissions level must be reached by 2020, and maintained through

For the scenarios described above, the OECD, Manne and Richels, and the present study project U.S. tax rates in 2020 of 230, 475, and $721/tonne C, respectively. In the same year, GNP/

GDP is projected to be reduced from the no-tax baseline by 0.8%, 1.5%, and 1.8%, respectively. While clearly higher than the tax rate predicted by the OECD study, the results of the present study can be considered comparable to those of the Manne and Richels study, which provides for the sale of emissions allowances.

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Executive Summary

The three unilateral studies examine the level of carbon emissions in the U.S. for specified tax rates, rather than the magnitude of the taxes required to effect a specified level of emissions. The PCAEO and DGEM model results are for a tax rate of $11/tonne C in 1991 rising steadily to $110/tonne C in 2000, the final year of the analysis. In contrast, the DOE study provides results for carbon taxes ranging from $25/tonne C to $750/tonne C for the period 1991 through 2030. The DOE study takes the National Energy Strategy as its baseline.

C in Italy. Some of the differences may be attributable to the allowance of trading rights in the Manne and Richels study and the use of 1985 dollars in the OECD study. Differing assumptions about the ease with which econo mies can adapt to carbon taxes are probably a greater source of the disparities.

The results of the present study are similar to those of PCAEO model. In the year 2000, the PCAEO model indicates that carbon emissions would be 5% higher than 1988 levels for the scenario described above. The present study projects that holding emissions to their 1988 levels, would require a slightly higher tax, $120/tonne C.

The OECD and Manne and Richels studies predict a smaller effect on GNP/GDP than the present study, as would be expected with their lower tax rates. The present study predicts GNP/GDP in 2020 to range from 2.6% less in France to 3.8% less in the United Kingdom for tax rates of $859/tonne C and $981/tonne C, respectively. For Europe and the OECD exclusive of the U.S., the OECD and Manne and Richels studies project 2020 GDP losses of 0.7% and 1%, respectively, for the lower tax rates described above.

The DGEM model suggests a much greater reduction in carbon emissions than either the DRI or the PCAEO studies. For the same tax scheme as in the PCAEO study, a 27% reduction from 1988 emissions is predicted for the year 2000. The DGEM model indicates a larger reduction in emissions for a given level of taxation than any of the other models considered, reflecting the high degree of flexibility in the economy that the model assumes. The DGEM model also predicts a smaller reduction in U.S. GNP/GDP than the present study, 1% versus 1.4% less in the year 2000.

Both the present study and the OECD study predict the highest carbon tax levels to be in the Pacific. (The Manne and Richels study does not consider the Pacific as a separate region.) The OECD study indicates a tax of $1051/tonne C in 2020 for the region consisting of Japan, Australia, and New Zealand. This DRI study predicts rates of $2428/tonne C and $1469/tonne C in Japan and Australia, respectively. The OECD study indicates GDP losses of 3.7% in the Pacific region in 2020, while this study predicts the same loss in GNP/GDP for Australia and a loss of 1.8% in Japan.

The models show greater variability in their results for areas outside of the U.S. For the scenario of reducing carbon emissions in industrialized countries to 80% of their 1990 levels, the OECD study projects taxes of $234/tonne C for Europe, and the Manne and Richels study projects $220/tonne C for the OECD exclusive of the U.S. (both in 2020). The present study projects tax rates several times higher to reduce emission to 80% of their 1988 levels by 2020. These rates range from $858/tonne C in Germany to $1534/tonne

In summary, the carbon tax rates in the U.S. 'indicated in the present DRI study are comparable, or slightly higher than those of other studies. Tax rates for European countries are several times those reported in two other studies, which consider these countries collectively. Taxes for the Pacific countries are roughly 40–115% higher than that predicted for this region as a whole by the OECD study. Reductions in GNP/GDP appear generally to be consistent with the her studies for comparable tax rates.

January 1992 11 Executive Summary

Conclusions Achieving the stabilization and reduction targets in the U.S. will require carbon taxes of: $120 per tonne of carbon for stabilization at 1988 levels in 2000, $384 per tonne of carbon for a 10% reduction from 1988 levels in 2010, and $721 per tonne of carbon for a 20% reduction from 1988 levels in 2020. (See Table 1.9) The taxes required for each country vary, ranging from a low of $58 per tonne of carbon for Sweden to stabilize at 1988 levels in 2000, to a high of $2,428 per tonne of carbon for Japan to achieve a 20% reduction from 1988 levels in 2020.

Implementation of such taxes will lead to measures such as fuel switching, increased investment in efficiency and structural economic changes, all of which will mitigate the output effects that major, tax-induced, energy price changes would suggest. All nations will see some degradation in economic output, with cumulative reductions from 1.0% to 3.5% of GNP.

While the average cost over the study period of 1995–2020 for the 12 countries is $723 per tonne of carbon removed, individual countries will experience costs ranging from a low of $320 per tonne in Greece to a high of $986 per tonne in Japan. (See Table 1.10)

TABLE 1.9 Carbon Tax (1989 Dollars per Tonne Carbon)

TABLE 1.10
Real GNP/GDP Loss per Tonne of
Carbon Reduced

1995

2000

2010

2020

31.4 120.1 33.0 143.6

United States. Canada........

384.3 431.5

720.6 673.5

Japan........ Australia.....

156.9 401.4 1,090.7 2,427.9 72.5 201.5 783.2 1,468.9

Germany....... 110.1 293.3 France........

139.1 346.0 Italy.

80.3 198.0 United Kingdom 26.8 72.5

655.4 859.7 617.6 1,473.3 860.9 1,573.5 199.1 980.9

Sweden........ Spain......... Netherlands... Greece......

20.2 57.8 457.6 199.4 181.7 442.0 1,312,1 2,016.9 66.1 168.2 707.4 1.069.9 97.2 252.6 934.0 1,581.9

The report, "Economic Effects of Using Carbon Taxes to Reduce Carbon Dioxide Emissions in Major OECD countries," may be ordered by calling the National Technical Information Service (NTIS) at (703) 487-4650 and requesting order number PB92-127562.

Country

95-2000 2001-10 11-2020 95-2020

B01DIDO

United States...
Canada....

489.0 1,044.9
365.3 822.5

635.6
666.2

755.4
704.2

Japan..
Australia.......

1,205.9 1.052.3

367.2 444.8

914.4
503.7

986.0
464.4

Europe........

667.6

628.2

642.1

639.6

Germany.
France....
Italy.....
United Kingdom
Sweden....
Spain.....
Netherlands...
Greece........

507.4

$72.2
1,247.1

900.5
676.9
729.2
437.0
543.9

536.3
561.3
996.9
794.2
605.6
540.0
401.6
336.1

608.3 655.4 910.6 689.9 513.0 550.4 426.8 297.4

571.0 615.1 961.4 721.5 550.3 567.0 419.1 319.8

Average.........

658.7

844.2

664.1

722.6

(1) 1989 Dollars per Tonne Reduced.

12 DRI/McGraw-Hill

Mr. SHARP. Mr. Gruenspecht, we will be happy to hear from you at this point.

STATEMENT OF HOWARD GRUENSPECHT Mr. GRUENSPECHT. Thank you, Mr. Chairman.

My testimony today covers three areas. First, it addresses some of the analytical and conceptual challenges that arise in quantifying the impact on greenhouse gas emissions of individual actions, with particular attention to actions that promote energy conservation and efficiency; second, it presents information regarding the role of the National Energy Strategy actions in reducing greenhouse emissions; finally, it provides information regarding the cost of other measures to reduce greenhouse emissions.

Let's begin by noting that energy system analysis is a complex undertaking. Because individual policy actions can have significant overlapping impacts or positive synergies, efforts to estimate the likely impact of a series of individual programs require an integrated analysis rather than a simple summation of single action effects.

For example, energy efficiency information programs and investments by utilities to promote more efficient use of energy by their customers—so called IRP or DSM—would each be projected to reduce greenhouse emissions relative to some base case scenario. However, to the extent that these two types of actions would lead to some of the same efficiency investments, their combined impact on energy use and greenhouse emissions may be less than the sum of their individual effects. There are other examples in the testimony.

Let me turn now to the role of increased energy efficiency. The NES, as you know, the administration's energy strategy, places major emphasis on increasing energy efficiency, reducing both future energy demand and associated emissions of CO2 and other greenhouse gases. Energy efficiency is a major reason that by 2030 carbon dioxide emissions are projected to be one-third lower in the NES policies case than in the current policies base case. However, administration policies do not seek to reduce energy demand at any cost. Rather, a test of balance is applied that weighs the cost of energy saving investments against other investment opportunities in the economy.

Changes in energy prices and in the cost of efficiency investments as well as changes in the value of nonenergy-related uses of scarce investment resources, such as investments in manufacturing technology, education, and employee training, ultimately determine the right mix between energy use and demand reducing efficiency investments. This balance can best be determined by individual businesses and households that are most directly aware of their own energy use patterns and competing needs. This principle underlies both the National Energy Strategy initiatives and additional voluntary efforts such as EPA's Green Lights Program.

As you know, the administration supports a number of programs that assist the public and industry in identifying profitable conservation opportunities. The NES seeks to move the knowledge frontiers outward through research and development and to remove

barriers to the application of that knowledge. For example, as I have noted, we are supporting broader use of integrated resource planning, a process which allows the same investment criteria to be used to evaluate conservation investments and investments in new generation. The aim is to remove a current regulatory bias that favors new capacity over conservation in meeting our energy needs.

Let me get behind the NES and look at the two main thrusts that affect projected greenhouse emissions, the improvement in energy efficiency in all sectors of the American economy and the increased availability of energy supply technologies with improved environmental properties. Combined progress in both of these areas translates into the significantly reduced greenhouse gas emissions noted above.

When we think of the National Energy Strategy, we often think of legislation, and clearly legislation is one key component, but I want to emphasize today that legislation is only one part of the National Energy Strategy. The 1-year progress report on the Strategy issued late last month details many administrative actions that we are taking to implement over 90 NES initiatives.

As one example, we are making a substantial effort to increase the use of energy efficient mortgages. These programs are good for home buyers, they are good for the housing industry, and they are good energy policy. However, according to a recent article in American Banker, only one out of every 37,500 mortgages underwritten during the 1980's considered energy efficiency: That is a pretty low percentage. This is true despite the fact that agencies such as Fannie Mae, Freddie Mac, and the Department of Veterans' Affairs all have provisions for energy efficient mortgages in their financing programs. Therefore, we have some programs but they are not being used as much as we would like.

To increase the utilization of these programs, DOE, together with HUD, formed a national collaborative on home energy rating systems and mortgage incentives for energy efficiency. This consortium this past January agreed to a blueprint for action which outlines several key actions, including development of common standards across the Federal and quasi-public mortgage agencies, development of a voluntary home energy rating program, and initiation of educational and training programs. This work will clear the way for greater use of energy efficient mortgages.

In the interest of time, I'll skip over the full review of the NES actions that is contained in the written testimony and jump to the options for reducing greenhouse gas emissions beyond the National Energy Strategy actions.

A recent DOE report, “Limiting Net Greenhouse Gas Emissions in the United States," analyzes further options for reducing greenhouse emissions. This study was prepared in response to a congressional request. Using the National Energy Strategy as a starting point, the study considered technologies and policy instruments that might be employed to achieve specified carbon dioxide emissions levels, specified in the congressional request.

Generally, we found the cost of achieving specific objectives involving the reduction of emissions to some fraction of their 1990 levels rose between the years 2000 and 2015 and fell thereafter.

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