sible for 50 percent of the emissions from developing countries and a quarter of the world's emissions by the time we get out there. So, I think it's important to also notice that in the EIA study and in our study, we find that if the United States cannot purchase permits freely on the open market, the costs will be very similar to those in the no trade case. For example, the case that EIA looks at that would be kind of half way between no trade and Annex One trading I would say is the 1990 minus 3 percent case. In that case, EIA finds GDP losses of about $130 billion to $270 billion. We find losses of about $110 billion. In addition, our work has found that in the absence of global trading that includes all developing countries, there are likely to be significant competitive impacts on the United States. Chairman SENSENBRENNER. Dr. Montgomery-you think you could wrap it up in a minute or two? Dr. MONTGOMERY. Yes, sir. Thank you. I'd just like to make one final point, which is the question of what the costs that we would incur under the Kyoto Protocol, even with participation of developing countries in permit trading, would achieve. Even if developing countries do participate, and the Kyoto Protocol is extended forever, it will have very little effect on global warming. And respected studies by Manne and Richels at Stanford, by EPRI, and by MIT suggest that the Kyoto Protocol, even if extended, would not succeed in even stabilizing concentrations of greenhouse gases at any level. The conclusion by MIT is that it would make a difference of a couple of tenths of a degree. The real question is what is being purchased in terms of protection of the climate by this expensive protocol, and in terms of technology whether we shouldn't think about the fact that technology does have great potential in the long run to reduce costs. But it may take decades. And I think the EIA report recognizes this quite clearly, and particularly in its analysis of the automotive sector and how long it will take to develop and deploy technologies. Basically the alternative to Kyoto, I think, is delaying the emission targets long enough that cost-effective technologies can be developed and deployed in a way that actually could make costs much lower, but only in a time frame much beyond 2010. Thank you. I'll be happy to answer your questions. [The prepared statement and attachments of Dr. Montgomery Prepared Statement of Charles River Associates, Incorporated Before the Committee on Science Mr. Chairman and Members of the Subcommittee: Thank you for your invitation to appear before the Subcommittee as you continue your investigation into the potential economic impacts of the Kyoto Protocol. In my prepared statement I will summarize the conclusions of a forthcoming Charles River Associates' study dealing with potential economic impacts of the Kyoto Protocol. In this study, we examine different possible outcomes of current negotiations dealing with international emissions trading and the resulting costs of ratifying the Kyoto Protocol. In December 1997, representatives of the United States and 158 other countries negotiated the Kyoto Protocol, a climate control agreement that, if ratified, would commit industrial countries to reducing greenhouse gas emissions dramatically over the next decade. Implementing the Protocol in the United States would mean capping emissions during the five-year period from 2008-2012 at 7 percent below 1990 levels. The abatement targets are for six categories of gases, including carbon dioxide (CO2), the largest single source of greenhouse emissions covered by the Protocol.1 Land-use activities such as growth in forests and other "sinks" that absorb carbon may also be counted toward the targets, based on rules to be negotiated. Before it can take effect, the Protocol must be ratified by at least 55 countries, including those responsible for 55 percent of carbon emissions from industrial countries in 1990. The United States has not yet signed the agreement, and the Clinton Administration has stated that the agreement will not be submitted for Senate ratification unless, in future negotiations, the U.S. gains agreement on its views regarding the design and implementation of an emissions trading system. Except for the targets agreed to by industrial countries, the Kyoto Protocol deferred nearly every important decision to future negotiations. These include enforcement, the responsibility of developing countries for reducing their own emissions, the nature and extent of emissions trading across countries, the defining of and accounting for sinks, measurement issues, and post-2012 commitments. Moreover, parties to the negotiations have taken incompatible positions on how emissions trading should be implemented. 1The other five greenhouse gases are methane, nitrous oxide, hydrofluorocarbons, perfluorocarbons, and sulfur hexafluoride. It is difficult to see how these differences can all be resolved in a fashion consistent with Senate Resolution 98 (SR98), the Byrd-Hagel Resolution. SR98 requires that all developing countries agree to binding caps and timetables in the same time periods as caps on U.S. emissions, and do so in a manner that prevents harm to the U.S. economy. The Clinton Administration has advocated unrestricted emissions trading, extended as rapidly as possible to include key non-Annex I countries. The language of SR98 appears to state specific requirements for how complete and rapid this inclusion of non-Annex 1 countries must be. The European Union and a number of developing countries have proposed tight restrictions on emissions trading, and oppose any efforts to include non-Annex I countries. The restrictions discussed since Kyoto include limits on the amount of its obligation a country may satisfy through permits purchased from other countries, limits on sales by Russia (or other countries) of excess credits created by targets that allow greater emissions in 2010 than expected based on current economic conditions, and creation of a "buyer liability” system. Russia has made it clear that its participation in the Protocol is contingent on its freedom to sell permits to other Annex I countries. Enforcement is equally critical. Emissions trading programs for sulfur dioxide (SO2) in the United States have all been based on a regulatory system that monitors emissions accurately and enforces the limits implied by permit holdings with stiff and sure penalties. The institutions for such monitoring and enforcement of international emissions trading have yet to be built; failure to develop them would have the same effect as a restricted trading system. In the United States, achieving reduction goals will hinge as well on a domestic emissions trading system that, like a global regime, would ideally be flexible, unrestricted, and market-based. Finally, the extent to which sinks can and should be factored into a global agreement, and how much difference inclusion of other greenhouse gases will make, remain unknown. The U.S. commitments under the treaty, and the costs of compliance depend critically on how these issues are resolved. Range of Effects in the United States The inclusion of emissions trading in the Kyoto Protocol is regarded, correctly, as a positive development, but one whose potential remains to be achieved. A system of unrestricted, comprehensive, and properly designed international emissions trading could well reduce costs and adverse competitive effects for the United States. If trading is restricted, in ways mentioned above, it might have virtually none of these beneficial effects. Assuming perfect design and implementation, unrestricted trading that includes developing countries could help reduce costs of compliance with the Kyoto targets by up to two-thirds. Trading limited to Annex I countries but absent other restrictions would provide about half those savings. Table 1 reports, for different emissions trading regimes, the change in the U.S. Gross Domestic Product (GDP) and the permit price required to ensure that the United States adheres to its carbon limits.2 Table 1. US Permit Price and GDP Loss Under Different Emissions Trading Regimes. In the absence of international trade in emissions permits, the United States would have to reduce greenhouse gas emissions on the order of 30 percent below what they otherwise would be in 2010. Even given an ideal cost-minimizing domestic emissions trading system to achieve this limit, the price of permits would range from $170 to $330 per metric ton of carbon in 2010, depending on assumptions about carbon sequestration and the cost of reducing other greenhouse gases besides carbon dioxide. Assuming no carbon sequestration and that other greenhouse gases would be reduced as carbon dioxide is abated, we arrive at a permit price of $260 per metric ton in 2010 (or the equivalent of 70 cents per gallon of gasoline). Changes in GDP, a comprehensive measure of the costs of the Protocol, would be significant. The overall estimated effect of Kyoto-required emissions reduction under a policy of no emissions trading would be a decline in GDP of 1.4 percent in 2010 from what it would have been in the absence of any policy to reduce emissions. This is equivalent to an annual loss in output of $130 billion. As baseline emissions continue to grow after 2010, the required reduction in emissions will increase as well. By 2030, the cost would increase to 2.5 percent of GDP, or $330 billion, making the loss in GDP from complying with the Kyoto Protocol greater than all of today's expenditures on environmental protection measures combined. By comparison, total spending on environmental protection equals about 1.8 percent of GDP in recent budgets; on defense, approximately 4.5 percent. The Kyoto Protocol fails to establish procedures under which developing countries would become part of an international trading system. If unrestricted Annex I trading were the broadest form of trading to be allowed, permit prices in Annex I countries in 2010 would be reduced to about $100 per tonne of carbon. At this level, the United States would satisfy approximately 40 percent of its 2010 obligation to reduce emissions by purchasing about $23 billion worth of permits from Russia and the republics of the Former Soviet Union. These economies in transition (EITs) would be the sole sellers of permits because their emissions caps for 2010 are set far above their projected emissions for that year. Under unrestricted Annex I trading, costs for the United States would be about 1 percent of GDP in 2010. 2 A permit price of $100 per metric ton (tonne) is approximately equal to a tax on gasoline of 27 cents per gallon. Understanding the pattern of competitive effects requires estimates of losses in U.S. Annex I trading would not remove the competitive imbalances with developing countries, but as long as relatively low-cost permits are available from EITs, emissions trading would reduce the magnitude of such imbalances. As an indicator of this problem, it can be seen in Figure 1 that U.S. net exports still face negative impacts, growing over time, under Annex I trading. Figure 1. US Net Exports Under Different Emissions Trading Regimes A multi-region, multi-industry approach is required to identify which industries would |