PREPARED STATEMENT OF DALE HEYDLAUFF ON BEHALF OF THE GLOBAL CLIMATE

COALITION

Mr. Chairman, members of the subcommittee: The Global Climate Coalition (GCC), a leading business voice on climate change, is a broad-based organization of over 55 business trade associations and companies representing virtually all sectors of United States industry, including utilities, coal, oil, paper, automobile, railroad, steel, aluminum and chemical. The Coalition was established in 1989 to coordinate business participation in the scientific and policy debate on the global climate change issue. The members of the GCC have been very active on the issue, and have participated in the proceedings before the Congress; in the development of the administration's Climate Change Action Plan and the U.S. Climate Action Report; and in the sessions of the Intergovernmental Negotiating Committee for a Framework Convention on Climate Change (INC), both during negotiation of the Framework Convention on Climate Change (FCCC) and in the deliberations leading to the first meeting of its Conference of the Parties (COP), as well as in the work of the Intergovernmental Panel on Climate Change (EPCC). A list of our members is attached (Attachment I).

The first meeting of the Conference of the Parties (COP-1) in Berlin, March 28 to April 7, 1995, will address two issues of great importance to U.S. business, trade competitiveness and the future of the U.S. economy. These issues are the so-called "adequacy of commitments" of developed countries (Annex I Parties) contained in Article 4.2 (a) and (b) of the FCCC, and the development of "criteria" for "joint implementation" projects that two countries engage in whereby greenhouse gas emissions are reduced or sequestered in the host country. The result of decisions by the COP or any ministerial declaration at the time of the meeting may set our Nation and the world on a course that could have significant economic consequences. Adequacy of Commitments

Article 4.2 (d) of the FCCC requires that the COP review the adequacy of the commitments of Annex I Parties contained in Article 4.2 (a) and (b) at COP-1, and periodically thereafter, until the objective of the Convention is met to stabilize concentrations of greenhouse gases (GHG's) at a level that will prevent "dangerous" manmade interference with the climate system. Article 4.2 (a) requires Annex I Parties to adopt policies and measures to limit man-made emissions of greenhouse gases and enhance sinks for those gases. Article 4.2 (a) also states that to demonstrate that they are taking the lead in modifying long-term emission trends, the developed countries "recognize" that returning to earlier emission levels by 2000 would contribute to such modification. Article 4.2 (b) merely commits the Annex I Parties to communicate detailed information on the policies and measures adopted, as well as the projected resulting emissions under the "aim" of returning to 1990 levels by the year 2000. It is agreed, and in ratifying the FCCC the US Senate made it clear, that such "aim" does not constitute a legal obligation.

The commitment to limiting GHG emissions under 4.2 (a) does not stop in the year 2000 or any other year, and should not be confused with the "aim" of returning to 1990 levels by 2000. Indeed, the administration's Climate Change Action Plan projects that most of the emission and energy savings in the United States will be generated in the 2001-2010 time frame ($61 billion between 1990 and 2000 versus $207 billion between 2001 and 2010). Many of the Plan's proposed voluntary programs will only be getting into full swing by 2000 as American industry makes the necessary investments. While an in-depth review of the National Action Plans filed by the other Annex 1 Parties under 4.2 (b) is just now getting underway, we believe that they also rely heavily on the voluntary efforts of industry which will not stop in the year 2000.

Nevertheless, the U.S. delegation to the INC, and several other Parties, have taken the position that the commitments in Articles 4.2 (a) and (b) are inadequate. The GCC does not agree that the current commitments are "inadequate." We strongly believe it is premature to make such a determination. Article 4.2 (d) states that the adequacy review by the COP is to be based on "the best available scientific information" and "relevant technical, social and economic information." This is the process spelled out in the Convention, and it has not even started yet. The results of this review process should not have been pre-judged.

The science of climate change contains a great many unanswered questions, including substantial uncertainty regarding the timing, magnitude, rate and regional impacts of any changes in global temperatures that may result from further accumulation of man-made greenhouse gases. The dire predictions of elevated temperatures, rising sea levels, agricultural dislocation, etc. that are made by some are primarily based on certain general circulation computer models (GCM's) which were not developed for policy setting purposes. These models, which tend to be crude be

cause they do not fully incorporate the role of clouds, oceans, polar ice caps, solar activity and a host of other physical processes, are not validated, and should not be the cornerstone for setting national and international policy that may adversely affect the world economy. The Second Assessment of the Intergovernmental Panel on Climate Change (IPCC) is scheduled to be concluded in December and should be utilized in any review of "adequacy" of Annex I Parties' commitments. This assessment will also address the economics of climate change. Evaluation by policymakers of such work is crucial for there to be any rational basis for addressing the adequacy of commitments.

Last but not least, the ultimate objective of the FCCC, which is to achieve stabilization of GHG concentrations at a level that will prevent "dangerous" man-made interference with the climate system, remains undefined and may be undefinable for some time to come. Without such definition, the “adequacy” of current and, clearly, any future commitments by Annex I and non-Annex I Parties cannot be judged on an informed basis.

AOSIS Draft Protocol

Last month the INC received a draft protocol to the FCCC from the Alliance of Small Island States (AOSIS). It would require that Annex I Parties reduce their CO2 emissions below 1990 levels by 20 percent by 2005 and provide for targets and timetables for further CO2 reductions and to reduce their other GHG's. This draft protocol is being submitted to COP-1 for "appropriate action." The proponents of the draft protocol made it clear that it contains no additional commitments by nonAnnex I Parties. Some Parties at INC 11 expressed the view that this draft protocol should form the basis for negotiation among the Parties on a new protocol. The GCC believes this view is fatally flawed for at least two major reasons. First, it applies only to Annex I Parties, and reductions by Annex I Parties alone can never stabilize concentrations of GHG's. The developing countries and the former Soviet Bloc already emit more than 50 percent of CO2 emissions and by 2025 and 2100 the percentages will be 67 percent and 78 percent, respectively, according to the IPCC 1992 Special Assessment. To believe that the problem of potential climate change, to the extent it may become a problem, can be "fixed" solely by the efforts of the developed countries is naive at best and misleading at worst. Second, the 20 percent reduction in CO2 by 2005 seems to have been pulled out of thin air. We know of no scientific justification or economic studies that would warrant such a Draconian requirement. As a basis for assessing the impacts of an AOSIS-type proposal on the U.S. economy, it is instructive to review the results of a 1992 study prepared by DRI McGraw-Hill for the Department of Commerce. This study estimated the economic impacts of CO2 emissions limits on the United States and selected Organization for Economic Cooperation and Development (OECD) countries. Specifically, the study analyzed a policy under which the OECD countries were required to stabilize their CO2 emissions at 1988 levels by 2000, reduce emissions to 10 percent below 1988 levels by 2010, and further reduce emissions to 20 percent below 1988 levels by 2020. Carbon taxes were introduced in all economies beginning in 1994, and increased as necessary to meet the emission reduction requirements.

This study shows that the U.S. economy would experience significant losses. By the year 2000 under this policy:

-Annual real GDP in that year alone would be reduced by $92 billion (1989$); -Price levels (as measured by the Consumer Price Index) would be 4.4 percent higher.

By 2010 under the policy:

-Annual real GDP in that year alone would be reduced by $370 billion (1989$); -Price levels would be 15.4 percent higher.

Obviously, job losses associated with such reductions in GDP would be in the hundreds of thousands. The report indicated that such losses would average 600,000 per year.

Further, the United States would suffer some of the worst losses of all the countries analyzed in this study as a result of the policy. By the year 2010, both annual and per capita real GDP in our Nation would be 4.6 percent lower than it would be without the emissions limitations policy. This is greater than the loss suffered by any other country in the study. The comparable percentage loss for France, Germany, the Netherlands, Sweden, and Japan ranges from 1.5 percent to 2.3 percent, a half or less of the loss suffered by America. These figures also indicate the strong likelihood that Americans would suffer the greatest proportional loss in standard of living of all residents of the countries analyzed.

It is reasonable to interpret the losses estimated by this study as a lower limit to the economic losses that would be expected under an AOSIS-type proposal for at least two reasons:

-1. The AOSIS proposal is more stringent than the policy analyzed by DRI. Under AOSIS, a 20 percent reduction in CO2 emissions is required by 2005; in the DRI study, countries have until 2010 to achieve only a 10 percent reduction. This would mean that the level of carbon taxes and rate of capital stock turnover needed to achieve the AOSIS limitations would be greater than that required under the DRI study. This, in turn, would lead to greater economic losses for the United States and other countries under AOSIS.

-2. DRI's analysis relies on a market-based mechanism to achieve each country's emissions reductions. Even though the economic consequences set forth in the study are devastating and the GCC does not endorse the use of CO2 taxes, market-based mechanisms are generally more cost-effective than other types of policies. To the extent that command-and-control or other non-market policies might be used to achieve the AOSIS targets, the cost of the policy and the resulting economic losses would increase.

Finally, it should be noted that these economic losses will not be distributed evenly across regions or economic sectors. The more energy-intensive industries and regions of the country can be expected to suffer a proportionately greater share of the overall losses noted above.

German and Swiss Proposals

INC-11 also has forwarded to the COP a proposal put forward by Germany identifying its views on further elements of a protocol such as that of AOSIS. In addition to mandatory targets and timetables for CO2 reductions after 2000, they want the Annex I Parties to commit, not just "aim", to tabilize their emissions in 2000 at 1990 levels and permanently maintain them thereafter. This would be a fundamental rewrite of the carefully negotiated and drafted 1992 FCCC, and should be opposed. It is not justified by the state of the science and might result in changing voluntary programs into mandatory programs requiring Congressional legislation. Such absolute limits would bind our Nation regardless of the economic growth which we all hope will be realized.

In addition to future mandatory targets and timetables, the proposal visualizes "coordinated policies and measures", meaning internationally mandated regulations or policies, which presuppose standards for the efficiency of large scale combustion plants, various end use products and buildings, and fuel consumption of new cars. These policies and measures also would be promoted by "economic instruments, for example charges such as taxes, fee, contributions and special levies, including a CO2/energy tax and the Parties shall "dismantle fiscal and other benefits which promote conduct contrary to the objective of the protocol." The only scheme more costly than taxes to change human behavior are command-and-control regulations and standards.

In a "Non-Paper" discussed at INC-11, the Swiss elaborated on the German proposal by proclaiming that "Potential areas/instruments for international coordination are" emission standards, efficiency standards or best-available technology for heating installations, appliances and consumer products, fuel consumption standards for motor vehicles, transport-related taxes and carbon and/or energy taxes. It seems clear that some of our trading partners believe that an international scheme of taxes and regulations is the way to go for the "next steps" to implement the FCCC. The United States should oppose such ideas as unjustified and counterproductive to a growing international economy necessary for environmental improvement. The GCC wishes to state that we are extremely disappointed that the delegation representing the United States as INC-11 did not forcefully and candidly state its opposition to the schemes proposed by AOSIS, Germany and Switzerland. There was nothing but silence in the face of proposals that would produce harm to the consumers and workers of our Nation.

United States Position at COP 1

The GCC believes that the U.S. delegation should maintain the following position on the issue of "adequacy of commitments" in the deliberations at COP 1:

1. Continue to insist that the COP decide on a two-phase process. Phase 1 should consist of a review and evaluation of the best science (including the IPCC Second Assessment Report), and relevant technical, social and economic information (including in-depth reviews of the National Communications filed by Annex I Parties). Such a review may very well not be completed in 1996, as called for by the United States at INC 11. The Second Assessment by the IPCC will not even be completed until December 1995 and the Report published until March/April 1996. An arbitrary end date for the review is not warranted.

We should be clear about this "first Phase." At INC-11, the U.S. delegation also used that term, but it was cast as the first phase of the negotiations. That would mean that a decision would be made to commence negotiations by a date certain,

and negotiations actually could begin, before the scientific and economic information was available and analyzed. That approach is flawed because:

First: Logically one cannot know whether the commitments under Articles 4.2 (a) and (b) are or are not "adequate", which determination, in turn, will affect the decision as to whether or not negotiations are necessary, until the scientific and economic information is analyzed.

Second: The United States should not sit down at a negotiating table until, on the basis of the review and analysis, it can decide what its negotiating objectives and strategies should be. If the administration wants the Parties to negotiate a "new aim", what does it want to "aim" for? How can it know until it figures out what policies and measures would likely be necessary to achieve any given "new aim?" "How can it know until it figures out what the impact of necessary policies and measures would be on the U.S. economy and American consumers and workers? Sitting down to the negotiating table, just to demonstrate that we are ready for undefined "next steps", does not make sense compared to knowing what you hope to realistically achieve in those negotiations.

Third: "Negotiations" especially if they have a termination date declared in advance, inexorably will establish a dynamic that leads to bargaining before the "homework" is done. This leads to the risk that, if bargaining begins before the factgathering and analysis are completed, the effort and analysis could be compromised by bargains already taking shape.

Phase 2 negotiations on appropriate "next steps" under the FCCC should begin only if the review and evaluation phase results in a COP finding that Articles 4.2 (a) and (b) are "inadequate." Moreover, as discussed above, arbitrary end date for the negotiations such as "1997", suggested by the United States and some other Parties at INC-11 is not warranted. The date 1997 seems particularly bad because if the dates put forth by the U.S. delegation were adopted, there could be only a year or less between the review in 1996 at COP-2 and completion of negotiations for COP-3 in 1997. This is too short a timeframe to negotiate an amendment or protocol to the treaty, which might have significant effects on the economy of the United States and the world.

2. Continue to insist that all Parties to the FCCC participate in any further efforts that may be needed as a result of the review process. Recognizing that the developing countries will dominate the emissions of GHG's in the 21st century, meaningful commitments by those countries must be a condition of further commitments by the developed countries. This does not mean that the commitments of all Parties must be equal or even that all developing countries must have the same commitments, since some are more developed than others.

3. Continue to insist that any "next steps" address all GHG's and sinks in order to maintain_flexibility, to assure cost-effectiveness and to deny competitive advantage to any Party.

4. Oppose any negotiations of amendments, protocols, or ministerial declarations based on or operating off of the AOSIS protocol, the German proposal and the Swiss "non-paper." As discussed earlier, these proposals are a sure formula for economic disaster for the United States and world economy.

Joint Implementation

As the subcommittee knows, American industry is very supportive of the concept of limiting future greenhouse gas emissions and enhancing sinks for such gases by joint implementation of policies and measures between Parties to the FCCC. It is a process whereby emissions can be reduced in a cost-effective manner and result in technology transfer to developing countries that is beneficial to entities in both host and donor nations. An economic development benefit would, therefore, accompany the environmental enhancement. However, at INC-11 the delegates could not agree on a recommendation to COP-1 on "criteria" for joint implementation. This leaves it up to COP-1 to make decisions regarding criteria under Article 4.2(d) of the FCCC. The sticking points seem to be: (1) which Parties may participate in "joint implementation" projects under the FCCC; and (2) whether any "credits" for emission reductions should be allowed to any Party to such a project.

At COP-1, the United States should continue its strong support of joint implementation and a pilot international program similar to the U.S. Initiative on Joint Implementation. It should:

1. Continue to insist that the international program be open for participation by any Party to the FCCC. Some country Parties take the position that participation should be limited to Annex I Parties. Such a position not only is contrary to the FCCC, but would result in the failure of any pilot program to reach the goals of technology transfer to developing countries and reductions in emissions at lower

costs.

2. The issue of “credits” should be placed in perspective. It is a term that is irrelevant to the current Convention for the reason that there are no binding "targets" or "timetables"; that is, a "credit" is applied against an obligation or a "cap" on a nation's emissions, but neither currently exists. At the same time, a day conceivably could come when nations, such as Germany, could succeed in introducing emissions "caps" into the Convention, by means of a protocol or otherwise. In that event, it would be essential that the United States be able to claim "credit" for whatever emissions were reduced or sequestered by reason of the activities of the U.S. Government or by U.S. entities pursuant to any form of "joint implementation", in a pilot phase or thereafter. For this reason, it is crucial that there be no decision by COP-1 that contains any language which would prohibit or limit "taking credit" for any such activities.

3. Continue to insist that any joint implementation program be as broad and flexible as possible, so that all reduction, avoidance and sink enhancement projects are allowed to be counted. After all, the purpose of joint implementation is to decrease the atmospheric concentration level of emissions, and it makes no difference whether this is the result of not producing them or sequestering them.

Conclusion

The first meeting of the Conference of the Parties to the FCCC is a watershed event in the infant life of the Convention. Much needs to be learned about the science of climate change and its timing, magnitude and impacts, as well as the economic consequences of any mitigation actions that may go beyond actions that are voluntary and cost-effective in their own right. Before setting off on a new round of negotiations for further commitments, the COP should obtain as many answers as possible. The U.S. delegation should oppose negotiations that would involve even discussion of any amendment, protocol or ministerial declaration that would move the world towards arbitrary "targets and timetables", whether legally binding or not, or towards a mandatory regulatory regime. It should continue to insist that the developing countries must participate meaningfully in any future commitments under the FCCC. "Joint implementation" should be open to all Parties who wish to participate, without restrictions impairing its effectiveness, in or to move forward in reducing emissions on a cost-effective basis.

Mr. SCHAEFER. I thank the gentleman, and again to this panel, you may have heard before, but any part of your testimony that will not be presented will be submitted in full for the record.

Mr. Lashof.

STATEMENT OF DANIEL LASHOF

Mr. LASHOF. Thank you Mr. Chairman.

In my oral comments today let me, just apart from my written testimony, depart from my written testimony and try to make four key points. First, sound science. The panel has asked a number of questions about the science of this issue, and I want to just reiterate some of what was discussed before.

The need for sound science is why the Bush administration played a leading role in establishing the Intergovernmental Panel on Climate Change in 1988 which led to the scientific assessment in 1990 and subsequent updates which have been the scientific basis for negotiating the climate treaty which has now been ratified by 120 countries.

We know that the concentrations of greenhouse gases in the atmosphere have increased dramatically since the beginning of the Industrial Revolution. Concentration of carbon dioxide is about 30 percent higher than it was in 1800. The concentration of methane is more than double what it was in the natural pre-industrial atmosphere. We know that those gases absorb infrared energy and the result of increases in those gases will be climate change.

We project, based on models and observations both in the recent historical past and over geological time scales using ice cores to reinstruct previous data, that continued buildup of these gases will