Q33.2 What is the range of possible charges for payments to non-Annex I countries for impact on their economies? A33.2 No specific charges for payments to non-Annex I countries have been assumed in the AEA. A proposal for "compensation (albeit one which does not propose specific amounts) has been made by a number of OPEC countries; the United States and our allies have strongly rejected it. We will continue to reject payments to non-Annex I countries for actions we take to mitigate climate change. Q33.3 What is the range of possible fees to be paid to non-Annex I countries through the CDM? A33.3 As part of any clean development mechanism transaction, a project developer would be free to work out contractual details of payments to the host government or cooperative partner in the host country, such arrangements would not be dictated by the international system. Payment could be taken in any of a number of ways, e.g., as a reduced price for project development, as tons of carbon equivalents, or in hard currency. It should be noted that the Protocol calls for a share of the proceeds to be used to assist vulnerable developing countries to adapt to climate change itself; we anticipate this being a very small percentage of the total CDM project cost. Q33.4 What contingencies are there for changed economic circumstances in nonAnnex I countries that could restrict access to emissions credits beginning in 2000? A33.4 The model used to assess opportunities through trading and the Clean Development Mechanism assumes long-term economic growth for developing countries and is not set up to model "changed economic circumstances" such as business cycle fluctuations. While it is not clear how changed economic circumstances would actually restrict access to credits, no contingencies have been developed or assessed. Administration Assumptions About Future Emissions Reductions Beyond 2012 Q34. It is my understanding that Dr. Yellen has testified that knowing the range of future reductions is important to any analysis since it will influence trading. Q34.1 What assumptions have been made by the Administration about further reductions beyond 2012 as suggested by the President in his October 1997 policy announcement? A34.1 No assumption about emissions targets for the second or subsequent commitment periods has been made because the Administration does not yet have a position on Q34.2 Have these further reductions been factored into the CEA evaluation, and if not, why not? A34.2 Since there is no Administration position on subsequent emissions targets, the Administration analysis does not include any arbitrary assumptions about targets in the second or later commitment periods. Use of Treasury Department Economic Model in Kyoto Negotiations Q35. I understand that when you testified before the Senate Foreign Relations Committee on February 11 you stated that the Administration “didn't even sneeze” in Kyoto without consulting an economic model prepared by the Treasury Department. Q35.1 Is my understanding as stated above correct, and if not, what is the correct information? A35.1 During the Kyoto negotiations, staff from the Treasury Department and the Council of Economic Advisers used model outputs from the Second Generation Model to analyze economic implications for the United States of different negotiating positions that arose, as well as the economic implications of the flexibility mechanisms we sought to achieve at Kyoto. Q35.2 What was this model? A35.2 The Second Generation Model. Q35.3 What specifically were/are the results of this model with regard to the commitments you made in Kyoto? A35.3 For the results from the Second Generation Model, please see the illustrative modeling analysis in "The Kyoto Protocol and the President's Policies to Address Climate Change: Administration Economic Analysis, July 1998” (see pp. 39-72). (Pages 39-72 of the AEA follow.) ASSESSING THE COSTS AND BENEFITS OF REDUCING GREENHOUSE GAS EMISSIONS Preliminary Assessment The Administration employed a variety of tools to assess the various possible costs and non-climate benefits of our emissions reduction policy. Our overall conclusion is that the net costs of the Administration's policies to reduce emissions are likely to be relatively modest, assuming those reductions are undertaken in an efficient manner with effective international trading, the Clean Development Mechanism, meaningful developing country participation, and sound domestic policies. That potential small net premium, even excluding the benefits of mitigating climate change, purchases a partial insurance policy against a serious environmental threat. Further, although we think the economic benefits of mitigating climate change are subject to too many uncertainties to quantify, those benefits over time are likely to be real and large (see p. 69). In reaching this conclusion, the Administration has drawn on the insights of a wide range of models of the energy sector and economy over the next 25 years, including but not limited to the results of the Stanford Energy Modeling Forum (Gaskins and Weyant 1993, Weyant 1997), the Intergovernmental Panel of Climate Change's review of the economic and social dimensions of climate change (Bruce et al. 1996), the work of the OECD on the economic dimensions and policy responses to global warming (OECD 1998), and the Administration's staff-level interagency analysis (Interagency Analytical Team 1997). In addition, the Administration used other tools, such as a meta-analysis (Repetto and Austin 1997), overviews of the domestic and international energy sectors (Energy Information Administration 1997a, d), simple statistics regarding energy efficiency, greenhouse gas emissions, and economic indicators from World Bank, International Energy Agency, and Energy Information Administration databases, and basic economic reasoning. The conclusion that the impact of the Administration's policies to address the risks of climate change will be modest is not entirely dependent upon, but is fully consistent with, formal model results. The Administration continues to believe that there are limitations to relying on any single model to assess the economic impact of the Kyoto Protocol. However, model results can further inform and improve the understanding of the effects of climate change policy. To complement the economic analysis of the Administration's policy to address climate change, we have conducted an illustrative assessment with a modified version of the Second Generation Model. The results from the SGM substantiate the conclusion that the economic effects of an efficient, effective, and global policy to address the risks of climate change will be modest. Difficulties of an Economic Analysis of Climate Change The difficulties associated with economic analysis of climate change fall into three broad categories. First are the uncertainties that still remain over the operational considerations of the treaty, necessitating assumptions on which the analysis is predicated. Second are the inherent limitations of available models to analyze the costs of abating emissions. Third, it is extremely difficult to quantify the long-term economic benefits of climate change mitigation, although such benefits are the motivation for the Kyoto Protocol. Economists have a difficult time projecting the behavior of the economy over the next quarter or year, let alone over the next two decades. The scale of the forecasting exercise is therefore daunting, and any specific results should be treated with substantial caution. Uncertainties in the International Effort to Combat Climate Change The Kyoto Protocol provides the foundation for the international effort to address climate change. However, the Protocol is still a work-in-progress. Uncertainties about the ultimate characteristics of the international climate change policy regime provide challenges in conducting an economic assessment. For example, some of the rules pertaining to the flexibility mechanisms in the Kyoto Protocol, such as emissions trading and carbon sinks, require further delineation. These issues and others, including the role of developing countries, will be addressed in future negotiations. More importantly, the international community has not yet negotiated agreements to limit greenhouse gas emissions beyond the 2008 to 2012 window. The emissions targets established in Kyoto provide for the first of many necessary steps to address the risks of climate change. The first step is critical because it sends a signal to the private sector regarding the value of reducing greenhouse gas emissions and it begins the task of reducing emissions relative to the business as usual path. However, subsequent steps are also necessary to address climate change risks adequately. Lack of knowledge regarding what the subsequent steps will be complicates any analysis of climate change mitigation. Inherent Limitations of Models In addition to these uncertainties about the details of the international effort to address climate change, there are the inherent limitations of the models used to evaluate that effort. Even within a given model, answers depend critically on the precise nature of the question asked. For example, the costs of emissions reductions depend on the extent of global participation and international trading that a treaty is assumed to feature. But in addition to the dependence of the results from a given model on the precise assumptions, different models can give different answers even when all the assumptions are specified to be the same a concrete illustration of the range of uncertainty surrounding the predictions of any one individual model. Benefits of Averting Climate Change - As discussed in the risks of climate change section, it is evident that the benefits of averting climate change are potentially very large. There are several difficulties associated with monetizing the benefits of averting the risks of climate change. First, there is the uncertainty relating to the specific effects of climate change (e.g., would the planet be 2 or 6 °F warmer in 2100, or some level within that range, without any measures to abate emissions). Second, the uncertainty over the extent that benefits should be discounted because they occur in the distant future presents challenges. Since the benefits of stemming future climate change accrue over not only decades but centuries, small changes in the discount rate can produce substantial changes in the results. Third, the benefits depend on global emissions paths after the 2008 to 2012 budget period specified in Kyoto. To calculate the benefits of averting climate change-induced damages, it is necessary to know the emissions path for many years beyond 2012. Thus while the benefits of getting started on the Kyoto path to reducing greenhouse gas emissions may be large over time, we cannot estimate these benefits without knowing where the path goes in the years after the Kyoto compliance period. |