EIA tends to show more severe economic impacts than other studies during the transition period of 2005-2010. Many of the reasons for this difference (e.g., equipment turnover) were discussed earlier. Most other models do not incorporate year-to-year analysis. In addition, many assume that the economy operates at full-employment with perfect knowledge of the future, and, therefore, do not incorporate all of the transitional effects in the ELA analysis. Over the longer period to 2020, many models seem to agree that the projected impacts on the overall economy should be small, and in some cases, even imperceptible.

Even in the ELA cases showing more severe economic impacts than other studies, the effects might be smaller than many would anticipate, given the magnitude of the increases in energy prices discussed earlier. In recent American history, big run ups in energy prices have been associated with economic slow downs. Each of our major recessions since 1970 has occurred during periods of extremely large increases in energy prices (i.e., 1974-75, 1980-82, 1990-91). There are two major factors, however, mitigating the impact of higher energy prices on the economy today.

First, energy is a smaller part of the economy now, muting the impact of that sector on the overall economy. In 1972, the year before a major Arab oil embargo against the United States, the U.S. consumed more than 19 thousand Btu for each dollar of GDP ($1992). Twenty five years later, the number had fallen to 13 thousand Btu per dollar, a drop of 32 percent. Shifts to less-energy intensive industries (e.g., information-based industries) and to higher levels of energy efficiency provide some protection to the overall economy from any possible energy price increase.

Second, the revenues from the higher energy prices projected in our analyses can be recycled back into the American economy. Earlier price increases often resulted in a surge of U.S. dollars being sent to foreign oil producers. In the Kyoto Protocol scenarios in our study, the majority of the money from higher energy prices is recycled domestically (only the revenue used to purchase permits internationally flows abroad). Most other models assume implicitly or explicitly that the money from higher energy prices is recycled domestically. Individuals and firms with high energy costs may turn out to be negatively affected, but some with low energy costs may turn out to be positively affected. The projected benefits of revenue recycling are time sensitive. Recycling is less able to cushion the impacts of higher energy prices during the transition period 2005 to 2010, when the energy using characteristics of the capital stock are relatively fixed, than over the longer term.

Impacts on the Energy Economy

Macroeconomic analysis (that is, analysis of the entire domestic economy) often blurs shifts that are occurring within the overall economy. Of all such shifts, the most dramatic is the projected impact of reduced carbon emissions on the coal industry. The projected production of coal drops sharply, as it is replaced by other fuels -- particularly natural gas -- and the overall demand for energy declines.

Increases in coal productivity in the base case are projected to reduce employment in the coal industry from 83,462 in 1996 to 68,519 in 2010 (a decrease of 18 percent) while allowing coal production to increase by almost 18 percent. Domestic gas production is projected to increase by 24 percent in the same period. In the least stringent case for carbon reduction, coal use drops 18 percent from the base case by 2010 and 40 percent by 2020. Production drops well below current levels and by 2020 has returned to the levels of the early 1980's.

In the most stringent case for carbon reduction, coal use drops 77 percent from base by 2010 and 92 percent by 2020. From another perspective, coal would be produced at about 16 percent of 1996 levels in 2020.

Natural gas and renewable energy (mainly wind and biomass) grow faster in the carbon reduction cases, and there are fewer retirements of nuclear plants. These fuels replace the energy share lost by coal. Overall energy consumption, however, drops below the base case in all the carbon reduction cases we analyze in our projections. Because of fuel switching, however, energy consumption is higher than current levels, even in the most stringent case.

Jay E. Hakes was nominated by President Clinton to be the Administrator of the Energy Information Administration (EIA), U.S. Department of Energy (DOE), on July 22, 1993. He was confirmed by the United States Senate on September 23, 1993.

EIA is the branch of the Department of Energy responsible for collecting and analyzing energy data for the Federal Government. It is recognized as the authoritative source of U.S. energy information by government policymakers, industry, and the public. The Agency has adopted a strategic planning process emphasizing the goal of accuracy, timeliness, accessibility, efficiency, and customer satisfaction. EIA was one of the original case studies on performance measures analyzed by the American Society for Public Administration.

Energy is the fourth Federal agency in which Dr. Hakes has served. From 1977-80, he held positions at the Agency for International Development, Department of the Interior, and the Executive Office of the President.

From 1980 to 1993, Dr. Hakes worked in various capacities for Florida Governor and later U.S.
Senator Bob Graham, including positions as State Energy Director and Governor's Chief of Staff.

A 1966 graduate of Wheaton College, with a masters degree from Duke University in 1968, and a doctor of philosophy degree from Duke University in 1970, Dr. Hakes taught political science at the University of New Orleans from 1970 to 1977.

In the past year, he has published two articles in Public Administration Times on performance measures--"Comparing Outputs to Outcomes" (October, 1996) and "Performance Measures and Organizational Change" (July, 1997)

Dr. Hakes was born in Gallipolis, Ohio. He is married to Anita Zervigon.

Chairman SENSENBRENNER. Well, thanks very much, Dr. Hakes. Dr. Montgomery?

TESTIMONY OF DR. W. DAVID MONTGOMERY, VICE PRESIDENT, CHARLES RIVER ASSOCIATES, INC., WASHINGTON, DC Dr. MONTGOMERY. Thank you, Mr. Chairman.

I was honored by your invitation to appear before the Committee and also by the opportunity to be present here at the table with Dr. Hakes. I think that he and his staff have prepared an excellent study of the potential impacts of the Kyoto Protocol on energy markets and the economy.

The written testimony that I submitted summarizes a forthcoming study we've done at Charles River Associates that covers many of the same topics as those in the Energy Information Administration's study.

But I thought that it might be most useful to the Committee if I take this 5 minutes to go beyond what's in my prepared statement and try to compare my own work on this topic, the EIA study, and the earlier analysis that's been released by the Administration. I apologize to the Committee for not including this in my written testimony, I didn't have access to the EIA report in time to meet the deadline for written testimony; I thought I would try to cover those topics here today.

My first observation is perhaps surprising, but on some of the most important points I think that we three are in complete agree

ment.

The first such point is that there is no free lunch. Compliance with the Kyoto Protocol will have a cost, even under the most ideal circumstances, and I think all three studies, including that of the Administration recognize that. The three studies basically apply the same mainstream tools of economic analysis. They make a slightly different selection out of that toolkit, and that accounts for some of the differences. But these are the same analytical methods that we would have used to study any other topic of energy policy or regulation.

Where we differ are in certain assumptions, and I think these differences are readily identifiable and legitimate between EIA, our work, and the Administration's.

I think what is really important is we all start with the observation that if there really were technologies available today that could reduce energy use at no cost, they would already be in use in response to market incentives. So the question is not whether there will be a cost of Kyoto, but how large that cost will be.

On this point, there is some difference across the studies. The clearest comparison, I think, can be made in the case where there's no international emission trading, corresponding to EIA's 1990 minus 7 percent case. EIA estimates GDP loss in the range, I think, from $160 billion to $340 billion in this case, if we take their total costs, including the transitional effects, and the price of carbon of about $348 a ton. The Administration doesn't state directly what its estimates of costs are in this case, but it's actually quite easy to calculate it, given the things that are stated in their analysis. And the attachment to my written testimony goes through this.

Based on that, I've figured that their estimate would be that a comparable case would have a direct cost of about $75 billion and a permit price of $175 per ton in 2010. Our estimate is in between these two. I'd be happy to discuss some more of the reasons for these differences in the colloquy if the members are interested. But I think I'll pass over the explanation now, and my conclusion is that there's about a two-to-one range between the Administration's estimates of costs and EIA's estimates of costs when we look at cases where the same assumptions are made about international emission trading. And I think that range is far less important than the agreement that there will be a significant cost to compliance with Kyoto without international permit trading. That's shared by the Council of Economic Advisors, by EIA, and by us. And I think it's very important to notice that that is a shared opinion among the economists.

The second finding is that there can be significantly lower costs if the United States succeeds in convincing other countries, including all developing countries, to participate in an unrestricted system of international permit trading. EIA's 1990 plus 24 percent case is the closest that they come to something that's comparable to the administration's analysis of full global trading and our analysis of full global trading. This results in the United States satisfying about 80 percent of its obligation to reduce emissions through purchase of permits from other countries.

For this case, EIA estimates a permit price of $67 a ton; the Administration, a price of $23 a ton. EIA has costs of around $77 billion to $110 billion per year. We're close to that: $55 billion. The Administration is down to around $12 billion. I admit that, in this case, I can't understand how the Administration concludes there is such a low cost from international permit trading because it implies savings from global trading that are proportionally larger than any that I can find in any other study of the subject.

But where we do agree is that failing to achieve unrestricted trading, including all developing countries, could increase the costs by a factor of three to four. It's here that I think the EIA report is particularly valuable, and the failure of the Administration to discuss the costs with limited trading leaves a real void in their analysis. Because the real risk is that we'll not even come close to achieving the degree of international permit trading that it takes to get to the low cost that the Administration believes in.

Ŏther industrial countries have objected to virtually every part of the U.S. position in favor of unrestricted trading. They have objected to our being able to buy 80 percent of permits. They've objected to Russia being allowed to sell its permits. They've tried to set hurdles like buyer liability that would effectively gut an international permit trading system.

And developing countries have indicated very little willingness to undertake the obligations that the United States is trying to convince them to undertake. In fact, Mr. Eizenstat, who you referred to, has indicated recently that they don't expect China and India to make commitments to reduce emissions, to join a program where they would cap their emissions, and trade effectively in the 2008 to 2012 budget period. And those countries are likely to be respon

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