Charles Conclusions Analysis of Dr Yellen's March 4, 1998 testimony before the Senate Foreign Relations The United States would have to purchase a large share of its emissions reduction obligation to achieve the savings estimated by the Administration. With the permit prices cited by the Administration for full global trading, the U.S. would only lower domestic emissions by some 65 to 125 million metric tons in 2010. This means that the United States would need to purchase 82% to 88% of its 550 million metric ton emissions reduction obligation from other countries - a figure well above that the EU and other countries have indicated they find acceptable. • Fewer opportunities to purchase emissions credits would mean higher costs. U.S. costs could reach $170 per ton with limited emissions trading – or more than 10 times what the Administration estimates. Under alternative assumptions about ease of gas for coal substitution and energy efficiency improvement and a scenario in which only restricted Annex I trading is permitted, the Kyoto agreement could cost the U.S. economy 1.1% of GDP in 2010- over $110 billion - while the permit price would be over $170 per ton. Given her assumptions, Dr. Yellen's analysis is internally consistent and compatible with mainstream economic analysis. However, her cost estimates include only direct costs, not the full impacts to the economy of implementing the Kyoto Protocol, and very optimistic assumptions are made about the economy's ability to reduce emissions at low cost. Further, Dr. Yellen has assumed worldwide permit trading and very extensive purchases of these permits by the U.S., whereas the Kyoto Protocol includes only limited trading possibilities and may preclude such extensive U.S. purchases. If these assumptions fail to materialize, the Administration's estimates of permit prices and GDP costs will need to be adjusted upwards by a factor of ten or more. CRA W. David Montgomery Dr. Montgomery is Vice President of Charles River Associates and an internationally recognized authority on the economic impacts of climate change policies. He was a Principal Lead Author of the Second Assessment Report of the Intergovernmental Panel on Climate Change (IPCC), Working Group III, and the author of a number of studies of climate change policy over the past 7 years. His testimony on climate change issues has been requested on numerous occasions by the U. S. Congress. Dr. Montgomery directs the group at Charles River Associates that developed a set of integrated economic models for the analysis of international, national, and industry impacts of proposed emission limits. He and his colleagues have been participating over the past year in IPCC studies assessing economic impacts on developing countries. Dr. Montgomery has led major studies of the economic impacts of climate change policies commissioned by the Electric Power Research Institute, the American Petroleum Institute, and the American Automobile Manufacturers Association. Prior to joining Charles River Associates, Dr. Montgomery held a number of senior positions in the United States Government. He was Assistant Director of the U. S. Congressional Budget Office and Deputy Assistant Secretary for Policy in the U. S. Department of Energy. He taught economics at the California Institute of Technology and Stanford University, and was a Senior Fellow at the environmental research organization, Resources for the Future. Dr. Montgomery holds a Ph. D. in Economics from Harvard University and was a Fulbright Scholar at Cambridge University. Selected Publications: "Markets in Licenses and Efficient Pollution Control Programs." Journal of Economic Theory Vol. 5, No. 6, December 1972. Natural Gas Markets after Deregulation. With H. Broadman. Washington, DC: "Costs of Reducing Greenhouse Gas Emissions in the USA and Canada." With Mark Jaccard. In Energy Policy, Vol. 24, No. 10. pp. 889–898. October/November 1996. "Framework for Short- and Long-Term Decisions." In Critical Issues in the Economics of Climate Change, ed. B. Flannery and N. Kennedy, IPIECA, London, 1997. Climate Change, International Trade, and Economic Growth. With Paul Bernstein and Statement of Federal Government Funding Vice President Charles River Associates, Incorporated To the best of my knowledge, Charles River Associates has received funding from the Federal Government for work on climate change issues on only one occasion during the past 3 years. CRA received a small contract from the Energy Information Administration during 1998 to update data in our Multi-Sector, Multi-Region Trade model and provide model runs for inclusion in the EIA Service Report on economic impacts of Kyoto. Chairman SENSENBRENNER. Thank you, Dr. Montgomery. And next is Mr. Howard Geller, Executive Director of the American Council for an Energy-Efficient Economy in Washington. Mr. Geller. TESTIMONY OF HOWARD GELLER EXECUTIVE DIRECTOR, AMERICAN COUNCIL FOR AN ENERGY-EFFICIENT ECONOMY, WASHINGTON, DC Mr. GELLER. Thank you, Mr. Chairman and members of the Committee. The American Council for an Energy Efficient Economy is a nonprofit organization dedicated to advancing energy efficiency as a means of promoting both economic prosperity and environmental protection. I appreciate this opportunity to appear before the Committee. In my testimony, I make three points, which I would like to summarize in my statement. First, the Energy Information Administration's new study is seriously flawed. Second, promoting greater energy efficiency can substantially reduce U.S. greenhouse gas emissions while saving consumers and businesses money. And third, the Federal Government should provide greater support for innovative energy technologies for a host of reasons, including, but not limited to, global warming concerns. Concerning the EIA study, I believe the study has a number of serious flaws. The first flaw is ignoring ongoing and likely policies, programs, and technological trends, such as issuing new appliance efficiency standards, which the Department of Energy is currently establishing under existing legislative authority; tougher Clean Air Act standards, especially for particulates, which the EPA is in the process of establishing; utility restructuring in additional States and possibly at the federal level; expansion of voluntary programs that are helping to stimulate energy efficiency improvements on a large scale; and the growing willingness on the part of the private sector to take early action, as witnessed by the recent announcement of British Petroleum that they will limit their carbon emissions to 10 percent below 1990 levels by the year 2010. Ignoring these policies, programs, and technologies inflates the amount of carbon emissions reductions that must be obtained through other means, thereby raising the level of carbon tax required in the EIA analysis. The second flaw in their study is that emission reductions don't start until 2005. EIA assumes emissions reductions begin just 3 years before the targets take effect. This ignores the reality of voluntary commitments and early action. It is also inconsistent with the Kyoto Protocol, which states "each party included in Annex One shall, by 2005, have made demonstrable progress achieving its commitments under this Protocol." Forcing large emissions reductions in just 3 years results in higher costs than would be the case if emissions reductions started sooner and were more gradually phased in. A third major flaw in this study is its limited technological response. EIA ignores or limits adoption of key technologies for re ducing greenhouse gas emissions. About 75 percent of the carbon reduction in their low emissions cases come from switching from coal-fired to natural gas-fired electricity generation, brought about by imposing a very large carbon tax. However, there are a wide range of available energy efficiency measures that can reduce emissions at much lower cost and, in many cases, with a net economic benefit. EIA also ignores a number of technologies that are rapidly advancing and are emerging in the marketplace, such as advanced cogeneration systems, fuel cells for power production, and hybrid and fuel cell vehicles. A fourth flaw is that there is no consideration of new policies, except higher carbon taxes. EIA fails to analyze a scenario where other policies, such as new energy efficiency standards, tax incentives, revenue neutral fees and rebates, federal utility restructuring legislation, or expanded R&D efforts are used as the main policy drivers for achieving our Kyoto targets. Some of these policies have already been proposed by the Clinton Administration, which I thought the EIA was a part of. Also, there is no consideration of international trading and other flexibility mechanisms contained in the treaty and strongly advocated by the United States. Without consideration of alternative policies and the flexibility mechanisms, EIA has not provided a clear picture of the potential impacts of the Kyoto Protocol. In spite of the serious flaws, the EIA study shows that a dumb approach to implementing the Kyoto Protocol would still have a negligible impact on long-term economic growth if the carbon tax revenue is offset by reductions in either the Social Security or income tax. Mr. Chairman, the EIA study does not show that economic growth would be jeopardized by the Kyoto Protocol. In fact, the chart on page eight of Dr. Hakes' testimony shows that there is virtually negligible impact on average GDP rate growth rate between 2005 and 2020, the long-term economic growth rate. I think given this result, policymakers should really be asking the question: could a smart approach to implementing the Kyoto Protocol have an even more favorable impact than the approach considered by EIA? In response to this question, I suggest that a smart approach, emphasizing greater energy efficiency can substantially reduce greenhouse gas emissions while saving money. U.S. energy intensity declined 34 percent in 1973 and 1997. Most of this decline was due to energy efficiency improvement. A new study by my organization, titled, "Approaching the Kyoto Targets: Five Key Strategies for the United States," shows how the United States can achieve further energy efficiency improvements on a large scale. This study, which I would be happy to submit for the hearing_record, examines five major policy initiatives: new appliance efficiency standards; a public benefit trust fund, as part of electric utility restructuring; new fuel economy standards and market incentives, to improve vehicle fuel economy; removing barriers inhibiting greater use of co-generation systems; and power plant efficiency standards. |