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S. HRG. 109–1016

KYOTO PROTOCOL: ASSESSING THE STATUS OF

EFFORTS TO REDUCE GREENHOUSE GASES

HEARING

BEFORE THE

COMMITTEE ON ENVIRONMENT AND

PUBLIC WORKS

UNITED STATES SENATE

ONE HUNDRED NINTH CONGRESS

FIRST SESSION

OCTOBER 5, 2005

Printed for the use of the Committee on Environment and Public Works

(

Available via the World Wide Web: http://www.access.gpo.gov/congress.senate
(II)

COMMITTEE ON ENVIRONMENT AND PUBLIC WORKS

ONE HUNDRED NINTH CONGRESS

FIRST SESSION

JAMES M. INHOFE, Oklahoma, Chairman

JOHN W. WARNER, Virginia

CHRISTOPHER S. BOND, Missouri

GEORGE V. VOINOVICH, Ohio

LINCOLN CHAFEE, Rhode Island

LISA MURKOWSKI, Alaska

JOHN THUNE, South Dakota

JIM DEMINT, South Carolina

JOHNNY ISAKSON, Georgia

DAVID VITTER, Louisiana

JAMES M. JEFFORDS, Vermont

MAX BAUCUS, Montana

JOSEPH I. LIEBERMAN, Connecticut

BARBARA BOXER, California

THOMAS R. CARPER, Delaware

HILLARY RODHAM CLINTON, New York

FRANK R. LAUTENBERG, New Jersey

BARACK OBAMA, Illinois

ANDREW WHEELER, Majority Staff Director

KEN CONNOLLY, Minority Staff Director
(III)

CONTENTS

Page

OCTOBER 5, 2005

OPENING STATEMENTS

Carper, Hon. Thomas R., U.S. Senator from the State of Delaware ................... 16

Inhofe, Hon. James M., U.S. Senator from the State of Oklahoma .................... 1

Isakson, Hon. Johnny, U.S. Senator from the State of Georgia, prepared

statement .............................................................................................................. 119

Jeffords, Hon. James M., U.S. Senator from the State of Vermont .................... 4

Murkowski, Hon. Lisa, U.S. Senator from the State of Alaska ........................... 18

Obama, Hon. Barack, U.S. Senator from the State of Illinois ............................. 20

Voinovich, Hon. George V., U.S. Senator from the State of Ohio ........................ 6

WITNESSES

Grubb, Michael, Ph.D., chief economist, the Carbon Trust, senior research

associate, Faculty of Economics, Cambridge University, and visiting professor of Climate Change and Energy Policy, Imperial College, London ........ 50

Position paper, The Economics of Greenhouse Gas Mitigation .................... 222

Prepared statement .......................................................................................... 217

Lawson, Lord Nigel, House of Lords, United Kingdom ........................................ 45

Position paper, Piece on Climate Change for Prospect ................................. 122

Prepared statement .......................................................................................... 119

Report, House of Lords Select Committee on Economic Affairs ................... 126

Responses to additional questions from Senator Jeffords ............................. 121

Thorning, Margo, Ph.D., senior vice president and chief economist, American

Council for Capital Formation ............................................................................ 48

Analysis, The Kyoto Protocol: Impact on EU Emissions and Competitiveness ................................................................................................................ 66

Prepared statement .......................................................................................... 211

Responses to additional questions from:

Senator Jeffords ......................................................................................... 215

Senator Obama .......................................................................................... 217

Watson, Harlan L., Ph.D., Senior Climate Negotiator and Special Representative, Bureau of Oceans and International Environmental and Scientific

Affairs, U.S. Department of State ...................................................................... 21

Budget Table from the OMB Fiscal Year 2006 Report to Congress on

Federal Climate Change Expenditures ....................................................... 81

Prepared statement .......................................................................................... 69

Report, European Environment Agency ......................................................... 82

Responses to additional questions from:

Senator Lautenberg ................................................................................... 78

Senator Obama .......................................................................................... 79

ADDITIONAL MATERIAL

Letter from John Bruton, Ambassador, European Union, Delegation of the

European Commission ......................................................................................... 26

(1)

KYOTO PROTOCOL: ASSESSING THE STATUS

OF EFFORTS TO REDUCE GREENHOUSE

GASES

WEDNESDAY, OCTOBER 5, 2005

U.S. SENATE,

COMMITTEE ON ENVIRONMENT AND PUBLIC WORKS,

Washington, DC.

The committee met, pursuant to notice, at 2:30 p.m. in room 406,

Dirksen Senate Building, Hon. James M. Inhofe (chairman of the

committee) presiding.

Present: Senators Inhofe, Voinovich, Murkowski, Thune, DeMint,

Isakson, Jeffords, Carper, and Obama.

Senator INHOFE. We will come to order.

We always start on time, even when some of our members are

a little bit late. I have been informed that on our side, we are going

to have a pretty good showing, and I don’t know, Senator Jeffords,

about how many you will be having.

OPENING STATEMENT OF HON. JAMES M. INHOFE,

U.S. SENATOR FROM THE STATE OF OKLAHOMA

This committee today will examine the Kyoto Protocol and the

status of the efforts to reduce greenhouse gases. This subject is relevant to policy discussions here in the United States.

Shortly after the Protocol came into force in February 16, the

President stated, ‘‘the Kyoto debate is beyond us, as far as I’m concerned.’’ Nevertheless, some policymakers continue to clamor for

the United States to join in the Kyoto agreement or in creating a

follow-on to Kyoto. Perhaps more importantly, the Kyoto framework forms the basis of several legislative proposals to mandate

unilateral cuts in carbon dioxide emissions in the United States.

If our Nation were to follow Europe down this path it has chosen,

we should understand whether their efforts are working or not.

They are not.

Let me be clear at the outset. I believe the countries that have

ratified the Kyoto Protocol are wasting their economic resources,

because the science does not justify it. Anthropogenic climate

change is, I have characterized, is perhaps the greatest hoax ever

perpetrated on the American people. Even if humans were causing

global warming—and we are not—but even if we were, Kyoto

would do nothing to avert it.

At most, Kyoto is projected to reduced temperature growth by

only 0.07 degrees Celsius by 2050, which is negligible. Again, that

is assuming anthropogenic global warming is happening and also
2

that parties were meeting their targets. But of course, we will find

out, as we know already, that they are not meeting their targets.

I will not mince words: the Kyoto Protocol is a failure and the

basic approach it embodies is a failure. The European Union was

the primary champion of the Protocol as the best approach to deal

with global warming. Yet all but two of the original 15 European

Union countries, as well as Canada and Japan, will fail to meet

their emissions reductions targets. In fact, some countries are increasing the emissions by more than 40 to 50 percent as these

charts show.

Canada, for instance, has a Kyoto target of 6 percent below 1990

levels. But as of 2003, it was already 24 percent above 1990 levels

and is projected to be up at least 45 percent in 2010. Meanwhile,

New Zealand, which had thought it would have surplus credits of

54 million tons instead will have a credit deficit of 36 tons, leading

the National Party to call for an immediate formal review of the

country’s participation in Kyoto.

Serious questions are being raised not only by critics, but by government agencies that support the Kyoto Protocol. As the European

Environment Agency stated in a release in June: ‘‘Modest total

greenhouse gas emission reductions since 1990 were the result of

a combination of one-off structural changes and specific policies

and measures. Since 2000, CO2 emissions in the [original 15 EU

countries] have been rising. On present policies, this rise will continue after 2010 with a projected overall 14 percent rise above 1990

levels by 2030.’’

Some have dismissed these problems by suggesting that these

countries would be able to meet their targets by adopting aggressive additional measures. But that ignores economic realities. Europeans are complaining about the high cost of gasoline. Businesses

are complaining as well. For instance, on June 28, the International Federation of Industrial Energy Consumers wrote that the

EU emissions trading scheme has caused systemic problems with

serious negative consequences to the economy and markets. It

hinders competition, but does not provide clear incentives to reduce

carbon dioxide.

These problems have not gone unnoticed at the political level. On

September 15, in speaking of the Kyoto Protocol and efforts to reduce emissions, Prime Minister Tony Blair stated, ‘‘We have got to

start from the brutal honesty about the politics of how we deal

with it. The truth is no country is going to cut its growth or consumption substantially in light of a long-term environmental problem.’’

This and other comments he made that day have caused quite

a bit of hand-wringing in the environmental community and some

have tried to say his comments were out of context, but they were

not. I have his full comments here and I am entering them into the

record at this time.

[The referenced document was not received at time of print.]

Senator INHOFE. Prime Minister Blair had it right. Countries will

not sacrifice their economies, and now when reality is setting in,

they are demonstrating that fact. Clearly, Kyoto’s approach to capping the economy by capping carbon is not working.
3

I am looking forward to hearing the testimony of our witnesses

today. On the first panel we have Dr. Harlan Watson. Why don’t

you just step up to the table, Dr. Watson. He is the chief negotiator

for climate issues in the United States.

On the second panel, we are joined by Lord Nigel Lawson, who

I have had a great deal of respect for for quite some time. We certainly will be looking forward to your testimony, Lord Lawson. He

has a distinguished career in the British Government and co-authored the House of Lords report that calls for far more scrutiny

in climate decisions in many respects.

Also appearing is Dr. Margo Thorning, an economist with the

American Council for Capital Formation and Professor Michael

Grubb of the Imperial College of London. We thank all of you for

coming today.

I am going to ask our members to confine opening comments to

about 6 minutes, and we recognize Senator Jeffords.

[The prepared statement of Senator Inhofe follows:]

STATEMENT OF HON. JAMES M. INHOFE, CHAIRMAN, U.S. SENATOR FROM THE

STATE OF OKLAHOMA

The committee today will examine the Kyoto Protocol and status of efforts to reduce greenhouse gases. This subject is relevant to policy discussions here in the

United States.

Shortly after the Kyoto Protocol came into force on February 16th, the President

stated that ‘‘the Kyoto debate is beyond us, as far as I’m concerned.’’ Nevertheless,

some policymakers continue to clamor for the United States to join in Kyoto or in

creating a follow-on to Kyoto. Perhaps more importantly, the Kyoto framework

forms the basis of several legislative proposals to mandate unilateral cuts in carbon

dioxide emissions in the United States. If our Nation were to follow Europe down

the path it has chosen, we should understand whether their efforts are working or

not. They are not.

Let me be clear at the outset. I believe the countries that have ratified the Kyoto

Protocol are wasting their economic resources because the science does not justify

it—anthropogenic climate change is the world’s greatest hoax. Even if humans were

causing global warming—and we are not—but even if we were, Kyoto would do

nothing to avert it. At most, Kyoto is projected to reduce temperature growth by

0.07 degrees Celsius by 2050, which is negligible—and again, that’s assuming anthropogenic global warming is happening. Also that parties were meeting their targets. But they will not meet their targets.

I will not mince words—the Kyoto Protocol is a failure. The basic approach it embodies is a failure. The European Union was the primary champion of the Protocol

as the best approach to deal with global warming. Yet all but two of the original

15 European Union countries, as well as Canada and Japan, will fail to meet their

emission reduction targets. In fact, some countries are increasing emissions by more

than 40 or 50 percent, as these charts show.

Canada, for instance, has a Kyoto target of 6 percent below 1990 levels. But as

of 2003, it was already 24 percent above 1990 levels and is projected to be up at

least 45 percent in 2010. Meanwhile, New Zealand, which had thought it would

have surplus credits of 54 million tons instead will have a credit deficit of 36 tons,

leading the National Party to call for an immediate formal review of the country’s

participation in Kyoto.

Serious questions are being raised not only by critics, but by government agencies

that support the Kyoto Protocol. As the European Environment Agency stated in a

release in June:

‘‘Modest total greenhouse gas emission reductions since 1990 were the result of

a combination of one-off structural changes and specific policies and measures.

Since 2000, CO2 emissions in the [original 15 EU countries] have been rising.

On present policies, this rise will continue after 2010 with a projected overall

14 percent rise above 1990 levels by 2030.’’

Some have dismissed these problems by suggesting that these countries would be

able to meet their targets by adopting aggressive additional measures. But that ignores economic realities. Europeans are complaining about the high cost of gasoline.
4

Businesses are complaining as well. For instance, on June 28, the International

Federation of Industrial Energy Consumers wrote that the EU emissions trading

scheme has caused systemic problems with serious negative consequences to the

economy and markets. It hinders competition, but does not provide clear incentives

to reduce carbon dioxide.

These problems have not gone unnoticed at the political level. On September 15,

in speaking of the Kyoto Protocol and efforts to reduce emissions, Prime Minister

Tony Blair stated,

‘‘We have got to start from the brutal honesty about the politics of how we deal

with it. The truth is no country is going to cut its growth or consumption substantially in light of a long-term environmental problem.’’

This and other comments he made that day have caused quite a bit of handwringing in the environmental community and some have tried to say his comments

were out of context, but they were not. I have his full comments here and am entering his full comments into the record.

Prime Minister Blair had it right. Countries will not sacrifice their economies, and

now when reality is setting in, they are demonstrating that fact. Clearly, Kyoto’s

approach to capping the economy by capping carbon is not working.

I am looking forward to hearing the testimony of our witnesses today. On the first

panel is Dr. Harlan Watson, the chief negotiator for climate issues for the United

States. On the second panel, we are joined by Lord Nigel Lawson, who has had a

distinguished career in the British government and who co-authored a House of

Lords report that calls for far more scrutiny in climate decisions in many respects.

Also appearing is Dr. Margo Thorning, an economist with the American Council for

Capital Formation, and Professor Michael Grubb of the Imperial College London.

Thank you all for coming to testify today.

OPENING STATEMENT OF HON. JAMES M. JEFFORDS,

U.S. SENATOR FROM THE STATE OF VERMONT

Senator JEFFORDS. Thank you, Mr. Chairman. I want to extend

a welcome to the witnesses, two of whom have traveled across the

Atlantic to share their views with us. We appreciate the time you

have taken to appear today, very much.

Today’s hearing tracks the progress that other nations are making to meet the requirements of the Kyoto Protocol which entered

into force last February. We are taking this testimony despite the

fact that the United States is still not a party to the agreement.

The Protocol imposes limits on emissions of greenhouse gases that

scientists blame for increasing world temperatures.

The Administration decided to abandon the protocol and any serious international negotiations on this matter in March 2001.

Rather than taking testimony about what other countries are doing

to implement the Kyoto agreement, we should be finding ways that

the United States can join the international community.

Other countries are left to wonder why the Nation that contributes the most greenhouse gas emissions to the global atmosphere

refuses to accept responsibility for these emissions. But if Kyoto

was the wrong solution for the United States, we should find away

to cooperate with the international community so our country can

be a player in efforts to stabilize the world’s climate.

As we will hear from witnesses today, while the international

community builds and expands its own carbon markets, American

businesses are missing out on new technologies and jobs. That is

why several U.S. States have been developing their own carbon

markets, despite the lack of national leadership.

This hearing is not about whether the United States should consider its decision, or reconsider its decision, not to join Kyoto. We

have missed that boat for now. It is my hope this hearing will provide insights about the actions we can take to unleash the power
5

of the American marketplace and allow our companies to fully compete in the alternative energy, energy efficiency and carbon markets. We need to join the nations that have made the decision to

address global climate change if we are to see benefits for our

health or economy in our environment.

On the event of the Kyoto Protocol entering into force, a White

House spokesman stated that the United States has made an unprecedented commitment to reduce the growth of greenhouse gas

emissions in a way that continues to grow our economy. However,

we have to see evidence of that commitment. As we all know, actions speak louder than words.

I look forward to hearing more from the Administration’s witnesses about the current actions taken by the United States to reduce greenhouse gas emissions. It would be my hope that this hearing would prompt us to craft legislation that imposes credible deadlines to cap and reduce our Nation’s sizable and growing contribution to greenhouse gases.

For my part, I have already introduced the Clean Power Act of

2005. I also introduced the Renewable Portfolio Standard Act of

2005 and the Electric Reliability Security Act of 2005, two bills designed to use our resources more effectively.

Thank you, Mr. Chairman, and I look forward to hearing from

the witnesses.

[The prepared statement of Senator Jeffords follows:]

STATEMENT OF HON. JAMES M. JEFFORDS, U.S. SENATOR FROM THE

STATE OF VERMONT

Thank you Mr. Chairman, I want to extend a welcome to the witnesses, two of

whom have traveled across the Atlantic to share their views with us. We appreciate

the time they have taken to appear before us today.

Today’s hearing tracks the progress that other nations are making to meet the

requirements of the Kyoto Protocol, which entered into force this past February. We

are taking this testimony, despite the fact that the United States is not a party to

this agreement. The Protocol imposes limits on emissions of greenhouse gases that

scientists blame for increasing world temperatures. The Administration decided to

abandon the Protocol and any serious international negotiations on the matter in

March 2001.

Rather than taking testimony about what other countries are doing to implement

the Kyoto agreement, we should be finding ways that the United States could join

the international community. Other countries are left to wonder why the nation that

contributes the most greenhouse gas emissions to the global atmosphere refuses to

accept responsibility for those emissions. Even if Kyoto was the wrong solution for

the United States, we should find a way to cooperate with the international community so our country can be a player in efforts to stabilize the world’s climate.

As we will hear from witnesses today, while the international community builds

and expands its own carbon markets, American businesses are missing out on new

technologies and jobs. That’s why several U.S. States have been developing their

own carbon markets, despite the lack of national leadership.

This hearing is not about whether the United States should reconsider its decision

not to join Kyoto. We have missed that boat for now. It is my hope this hearing

will provide insights about the actions we can take to unleash the power of the

American marketplace, and allow our companies to fully compete in the alternative

energy, energy efficiency and carbon markets. We need to join the nations that have

made the decision to address global climate change if we are to see benefits for our

health, our economy, and our environment.

On the eve of the Kyoto Protocol entering into force, a White House spokesman

stated that the United States has made an unprecedented commitment to reduce

the growth of greenhouse gas emissions in a way that continues to grow our economy. However, we have yet to see evidence of that commitment, and as we all know,

actions speak louder than words. I look forward to hearing more from the Adminis-
6

tration’s witness about the current actions taken by the United States to reduce

greenhouse gas emissions.

It would be my hope that this hearing would prompt us to craft legislation that

imposes credible deadlines to cap and reduce our nation’s sizeable and growing contribution of greenhouse gases. For my part, I have already introduced the Clean

Power Act of 2005. I also introduced the Renewable Portfolio Standard Act of 2005

and the Electric Reliability Security Act of 2005, two bills designed to use our resources more efficiently.

Thank you, again, Mr. Chairman, and I look forward to hearing from the wit- nesses.

Senator INHOFE. Thank you, Senator Jeffords.

I don’t want to put the pressure on you, Senator Voinovich, but

I told both Dr. Watson and Lord Lawson that you probably know

more about air issues than any member of the U.S. Senate.

Senator Voinovich.

OPENING STATEMENT OF HON. GEORGE V. VOINOVICH,

U.S. SENATOR FROM THE STATE OF OHIO

Senator VOINOVICH. Thank you, Mr. Chairman.

I would like to say that you know more about climate change

than any member of the U.S. Senate and I expect that one of these

days you are going to write a book on the subject.

I welcome our witnesses, especially Lord Nigel Lawson and Professor Michael Grubb, who have traveled from Britain to testify before us today. We really appreciate your attendance and we look

forward to hearing from you.

As chairman of the Clean Air, Climate Change and Nuclear Safety Subcommittee, I feel it is my responsibility to put this hearing

into context with what the United States is doing to address the

issue of climate change. Our Nation is often attacked for not doing

anything. But this criticism is not warranted.

First, I believe the Bush administration is taking action on many

fronts. I would like to share a litany of those that will be in my

statement that I would like to have submitted to the record, for my

distinguished colleague from Vermont.

President Bush has established a national policy to reduce the

greenhouse gas intensity of our economy by 18 percent over the

next 10 years. The Administration will have spent over $20 billion

by the end of 2005 for climate change activities, including extensive

technology and source programs, more than any other nation. Additionally, it is a little known fact that the United States is by far

the largest contributor to activities under the United Nations’

Framework Convention on Climate Change and the Inter-Governmental Panel on Climate Change. Since I do not have time to go

into everything, I will, as I say, insert this record into the record.

Second, Congress recently passed and the President signed an

energy bill that deals with climate change in several ways. It provides research and development funding for long-term zero or lowemitting greenhouse gas technologies. These include fuel cells, hydrogen fuels and coal gasification. The bill includes intensive provisions to increase energy efficiency and conservation. It also promotes the growth of nuclear power, which is emissions-free power.

Third, on top of all these initiatives, I worked with Senator

Chuck Hagel and Mark Pryor to include an amendment specifically

on climate change in the Energy bill. Our amendment, which

passed by a vote of 66 to 29, and was enacted as part of the Energy
7

bill, promotes the adoption of technologies that reduce greenhouse

gas intensity both domestically and internationally, and directs the

Department of State to work with developing countries.

This amendment addresses one of the main weaknesses of the

Kyoto Protocol. I recently visited China and saw first-hand that

their involvement in any initiative is critical as they are planning

to build a substantial number of new coal-fired power plants. As a

developed economy, we are willing to do our part, the United

States. But if other nations increase their emissions exponentially,

what have we gained?

I have also spoken with British Prime Minister Tony Blair in

London and most recently at a breakfast he hosted at their embassy, which brings me to my fourth point. I recommended that he

sit down with President Bush and the world’s top emitters to work

out something realistic, because the Kyoto Protocol will not work.

I was pleased that the G8 leaders, including Prime Minister Blair

and President Bush, agreed this summer to a plan of action on climate change, clean energy and sustainable development, to speed

the development and deployment of clean energy technologies.

Furthermore, the United States recently joined with Australia,

China, India, Japan, and South Korea to create a new Asia Pacific

partnership on clean development, energy security and climate

change. These are exactly the kinds of initiatives that we need to

be promoting.

The fact of the matter is, our Nation continues to take comprehensive action, both domestically and internationally, to address

climate change. Again, I am glad that we are holding this hearing,

Mr. Chairman. I look forward to hearing from our witnesses.

[The prepared statement of Senator Voinovich follows:]

STATEMENT OF HON. GEORGE V. VOINOVICH, U.S. SENATOR FROM THE STATE OF

OHIO

Mr. Chairman, thank you for holding this hearing. I welcome our witnesses, especially Lord Nigel Lawson and Professor Michael Grubb, who have traveled from

Britain to testify before us today. Thank you for your attendance, and I look forward

to hearing from you.

As chairman of the Clean Air, Climate Change, and Nuclear Safety Subcommittee, I feel that it is my responsibility to put this hearing into context with

what the United States is doing to address the issue of climate change. Our nation

is often attacked for not doing anything—but this criticism is not warranted.

First, this Administration is taking action on many fronts. President Bush has established a national policy to reduce the greenhouse gas intensity of our economy

by 18 percent over the next 10 years. The Administration will have spent over $20

billion by the end of 2005 for climate change activities, including extensive technology and science programs—more than any other nation!

Additionally, it is a little known fact that the United States is by far the largest

contributor to activities under the United Nations Framework Convention on Climate Change and the Intergovernmental Panel on Climate Change. Since I do not

have time to go into everything, I will insert into the record a summary of these

many activities.

Second, Congress recently passed and the President signed an energy bill that

deals with climate change in several ways. It provides research and development

funding for long-term, zero, or low emitting greenhouse gas technologies. These include fuel cells, hydrogen fuels, and coal gasification. The bill includes extensive

provisions to increase energy efficiency and conservation. It also promotes the

growth of nuclear power, which is emissions-free power.

Third, on top of all of these initiatives, I worked with Senators Chuck Hagel and

Mark Pryor to include an amendment specifically on climate change. Our amendment passed by a vote of 66 to 29 and was enacted as part of the energy bill. It

promotes the adoption of technologies that reduce greenhouse gas intensity both do-
8

mestically and internationally and directs the Department of State to work with developing countries.

This amendment addresses one of the main weaknesses of the Kyoto Protocol. I

recently visited China and saw firsthand that their involvement in any initiative is

critical as they are planning to build a substantial amount of new coal-fired power

plants. As a developed economy, we are willing to do our part, but if other nations

increase their emissions exponentially, what have we gained?

I have also spoken with British Prime Minister Tony Blair in London and most

recently at a breakfast he hosted at their embassy—which brings me to my fourth

point. I recommended that he sit down with President Bush and the world’s top

emitters to work out something realistic because the Kyoto Protocol will not work.

I was pleased that the G-8 Leaders—including Prime Minister Blair and President Bush—agreed this summer to a Plan of Action on Climate Change, Clean Energy, and Sustainable Development to speed the development and deployment of

clean energy technologies. Furthermore, the United States recently joined with Australia, China, India, Japan, and South Korea to create a new Asia-Pacific partnership on clean development, energy security, and climate change. These are exactly

the kinds of initiatives that we need to be promoting.

The fact of the matter is that our nation continues to take comprehensive action

both domestically and internationally to address climate change.

Mr. Chairman, I again thank you for holding this hearing and look forward to

hearing from our witnesses.
9
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14
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Senator INHOFE. Thank you, Senator Voinovich.

Senator Carper.

OPENING STATEMENT OF HON. THOMAS R. CARPER,

U.S. SENATOR FROM THE STATE OF DELAWARE

Senator CARPER. Thanks, Mr. Chairman.

Dr. Watson, welcome. We look forward to hearing from you and

the other witnesses today.

I would just say to my colleagues and to our witnesses, I believe

the Senate rightly rejected the Kyoto Protocol in 1997, because it

called for what I think were unrealistic cuts over an unrealistic

timeframe. I personally liken the Kyoto Accord to one of us driving

down a road at 60 miles an hour in our car, and trying to put the

car in reverse. If you have ever tried that, it doesn’t work.

What makes a whole lot more sense is to, as we all know, slow

the car down, stop the car and then put the car in reverse. That

is really the approach that I and others, I believe, have advocated

for reducing the growth of CO2 emissions: slow the growth of CO2

emissions, stop the growth of CO2 emissions and then reduce CO2

emissions. In the near future, I hope we can actually start talking

about what we can do and focus a bit less on what we cannot do.

When it comes to climate change, I think there is some good

news and there is some bad news. First the bad news, the bad

news is that the Earth is warming, climate change is real and

human beings are the primary cause. What is even worse is that

it is turning out not to be a 100-year issue or even a 50-year issue.

I believe we are seeing the effects of global warming today.

Just this month, another sobering report was released. In this

case it was NASA, along with researchers from the University of

Colorado and the University of Washington. They released the latest data showing that during the summer of 2005, the polar ice cap

in the Arctic Ocean shrank to its smallest size I believe in over a

century. At the current rate of decline, these researchers predict

that sea ice in the Arctic will melt entirely by the year 2060.

The effects of this trend are not likely to be pleasant. As the

Earth’s temperature increases, the extra heat energy in the atmosphere could trigger even greater extremes of heat and drought, of

storms, of wind and rain, and sometimes of even more intense cold.

Now for the good news. We can do something about it. We can

begin reducing the growth of greenhouse gas emissions and still

grow our economy. Forward thinking business has already started

to realize that doing something proactive on global warming represents an opportunity to enhance their bottom line. More American businesses are coming to realize that controls on carbon dioxide emissions are becoming necessary. They are saying it makes

sense to take small steps now to avoid bigger problems later.

In addition, many companies are realizing that addressing climate change now is having a positive impact on their bottom lines.

Let me just give you a couple of examples. In May 2005, General

Electric committed to reducing their carbon emissions by simultaneously moving to double revenue from carbon friendly technologies

and products to $20 billion within 5 years.

Last week, IBM announced that by reducing more than 1 million

tons of greenhouse gas emissions, they saved $115 million. Wayne
17

Balter, the vice president for corporate and environmental affairs

and product safety there at IBM said, these are his words: ‘‘While

some assume that cutting CO2 emission costs money, we found just

the opposite. Addressing climate change makes business sense.’’

The Dupont Company meanwhile has reduced their greenhouse

gas emissions by more than 60 percent. They believe they have

saved the company some $2 billion.

These and others companies have shown that reducing our

greenhouse gas emissions is both profitable and possible. I believe

it is time to take the next step. It is time for the Federal Government to get in the game. On June 22, the Senate adopted a Senate

Resolution as part of the Energy bill. The resolution called on Congress to enact a mandatory, market-based climate change program.

Some of you know Senators Chafee, Gregg, Alexander, and I have

proposed just such a program for the utility sector in our bill that

we introduced in the last two Congresses. It is a modest and

achievable approach that has been endorsed by a number of utility

companies.

If I could conclude with one sentence, Mr. Chairman, and then

I’m done, what do you think?

Senator INHOFE. I think it’s all right.

Senator CARPER. Thanks.

Our approach would slow down carbon dioxide emissions from

power plants at 2006 levels and 2009, and it would then require

power plants to reduce their emissions to 2001 levels by 2012.

Thank you very much.

[The prepared statement of Senator Carper follows:]

STATEMENT OF HON. THOMAS R. CARPER, U.S. SENATOR FROM THE

STATE OF DELAWARE

This Senate rightly rejected the Kyoto Protocol in 1997 because it called for unrealistic cuts over an unrealistic timeframe.

I liken the Kyoto Accord to one of us driving down the road at 60 miles an hour

and immediately putting our car in reverse. Obviously, we can’t do that and expect

good results.

What we can do is slow down the car, eventually bring it to a stop, and then put

the car in reverse. That’s the approach I have advocated for. Slow the growth of CO2

emissions. Stop the growth of CO2 emissions.

And, after doing that, reduce CO2 emissions.

I hope in the near future we can start talking about what we can do, not what

we can’t do.

When it comes to climate change, I have some good news, and I have some bad

news.

First, the bad news.

The earth is warming. Climate change is real, and we are the primary cause.

What’s even worse news, is that this is turning out not to be a 100-year issue,

or a 50-year issue. We are seeing the effects of global warming, today.

Just this month, another sobering report was released. NASA along with researchers from the University of Colorado and the University of Washington released the latest data showing that during the summer of 2005 the polar ice cap

in the Artic Ocean shrank to its smallest size in over a century.

At the current rate of decline, they predict the sea ice in the Arctic will melt entirely by 2060.

The effects of these trends could be catastrophic. As the earth’s temperature increases, the extra heat energy in the atmosphere could trigger even greater extremes of heat and drought, of storms and wind and rain and even sometimes of

more intense cold.

Now for the good news.

We can do something about it. We can begin reducing our greenhouse gas emissions, and still grow our economy.
18

Forward thinking businesses have already started to realize that doing something

proactive on global warming represents an opportunity to enhance their bottom line.

More American businesses are coming to realize that controls on carbon dioxide

emissions are becoming necessary. They’re saying it makes sense to take small steps

now to avoid bigger problems later.

In addition, many companies are realizing that addressing climate change now is

having a positive impact on their bottom line. Let me give you a few examples.

In May 2005, General Electric committed to reducing their carbon emissions while

simultaneously moving to double revenue from carbon-friendly technologies and

products—to $20 billion within 5 years.

Last week, IBM announced that by reducing more that 1 million tons of greenhouse gas emissions, they saved $115 million. Wayne Balta, vice president for corporate environmental affairs and product safety at IBM said: ‘‘While some assume

that cutting CO2 emissions costs businesses money, we have found just the opposite.

Addressing climate change makes business sense,’’ DuPont Corporation reduced

their greenhouse gas emissions by more than 60 percent, and SAVED the company

$2 billion.

These and many other companies have shown that reducing our greenhouse gas

emissions is possible and profitable.

It’s time to take the next step. It is time for the Federal Government to get in

the game.

On June 22, the Senate adopted a Sense of the Senate Resolution as part of the

Energy bill.

The resolution called on Congress to enact a mandatory, market-based climate

change program.

I, along with Senators Chafee, Gregg, and Alexander have proposed just such a

program for the utility sector in our bill the Clean Air Planning Act. It is a modest

and achievable approach that has been endorsed by a number of utility companies.

Our approach would slow down carbon dioxide emissions from power plants at

2006 levels in 2009. It would then require power plants to reduce their emissions

to 2001 levels by 2012.

And by allowing these reductions to be achieved through offsets, it will be very

affordable.

We’ve seen the states show leadership on this issue, and begin developing regional

climate action plans.

We’ve seen forward looking companies like DuPont, IBM, and General Electric

show leadership and vision and develop a business plan for operating in a carbon

constrained economy.

What we haven’t seen is leadership from the Federal Government. While we continue to do nothing, our international competitors are preparing for the future.

While we provide no direction to our businesses, foreign companies are already developing new technologies.

Therefore, I urge my colleagues to support a mandatory, market-based approach

to reducing our country’s greenhouse gas emissions. As members of the U.S. Senate,

we have a responsibility to lead.

Senator INHOFE. Thank you, Senator Carper. I do apologize you

weren’t in when I announced we are trying to stay within our time

to give maximum time to our witnesses who came all this way

today.

Senator CARPER. Thanks, Mr. Chairman.

Senator INHOFE. Senator Murkowski.

OPENING STATEMENT OF HON. LISA MURKOWSKI,

U.S. SENATOR FROM THE STATE OF ALASKA

Senator MURKOWSKI. Thank you, Mr. Chairman. I hope that I do

not exceed my time.

I do want to thank you for continuing this series on climate

change, a very important discussion that we have had here and

that needs to be continued. I too want to welcome those that will

be testifying this afternoon and those that have come from so far

away to participate with us.
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I wish we didn’t have so many conflicting things this afternoon.

I won’t be able to stay for the full hearing. But again, I do appreciate the opportunity to focus on this issue.

When we talk about the status of our efforts to reduce emissions

and focus on the Kyoto Protocol, I really appreciate what Senator

Voinovich has said, and focusing on what the United States has

done as we attempt to reduce our emissions. We have done that not

as a signatory to Kyoto, but we have done that because it is the

right thing to do.

Regardless of where you stand on Kyoto, I think that as we look

at it now, most everyone is saying, and I think even some of the

Protocol’s very staunch supporters, that there needs to be a new

approach taken. The Kyoto Protocol has simply not worked, and it

is because most of the world’s largest emitters of the greenhouse

gases, including China, India and South Korea, were exempt from

the requirements of the Protocol. It was rejected by the United

States and Australia. Many of the nations participating in Kyoto

are nowhere close to meeting the treaty’s targets.

We know that in order to meet or to reach Kyoto’s goals, that in

terms of the actions that will be taken, and Senator Carper, you

have mentioned this, you just can’t shove it into reverse going 60.

There is an effort that needs to be made, a slowing, before you can

reverse gears like that. We must be aware of what is happening

within the economy.

So in going forward on a post-Kyoto solution, and Mr. Chairman,

you mentioned Tony Blair, and I believe you did as well, Senator

Voinovich, I too will invoke his name in a comment that he made.

His statement was, ‘‘What countries will do is work together to develop the science and technology. There’s no way that we’re going

to tackle this problem unless we develop the science and the technology to do it.’’

Again, it was mentioned, the United States has entered into a recent agreement with Australia, China, India, Japan, and South

Korea. This agreement is a pro-growth response to climate change

that focuses on the innovative technologies and the sharing of these

technologies between nations to truly help reduce greenhouse gas

emissions. When you consider that China and India emit twice as

much CO2 per GDP than the United States, we are hopeful that

we will see some results.

So I hope to join those who have advocated strongly with Kyoto,

that they will now join with us in perhaps a more realistic approach to climate change, utilizing the technology. This technology

and the innovation is really going to be the way that we change,

the way that the world produces and uses energy.

So I look forward to the comments from those this afternoon and

again, thank you, Mr. Chairman.

Senator INHOFE. Thank you, Senator Murkowski. That is exactly

what this hearing is all about.

Senator Obama.
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OPENING STATEMENT OF HON. BARACK OBAMA,

U.S. SENATOR FROM THE STATE OF ILLINOIS

Senator OBAMA. Thank you, Mr. Chairman.

We very much appreciate your holding this hearing. I think it

can be a productive way for us to all focus on what I consider to

be a very significant problem.

I think that it is unfortunate that the issue of Kyoto Protocol has

been conflated all too often in the debate with the issue of greenhouse gases. Because I view these two issues as somewhat separate. There has been, unfortunately, I think, some resistance and

foot-dragging on the part of not just this Administration but the

United States generally about the significance and potential severity of greenhouse gas emissions and their effects on climate change.

I am one who believes that in fact the science is not in dispute,

that we may not know all the details of how it is proceeding and

how rapidly some of the adverse effects may be. But what’s clear

is that our atmosphere and the temperatures around the globe are

changing. I think Senator Murkowksi probably knows this better

than anybody, because she is seeing it in her backyard.

So my hope in this hearing will be to get some sense from the

Administration that there is a sufficiently strong acknowledgement

that this is in fact a problem and that we feel some urgency about

addressing the problem, particularly since we are the single largest

emitter of greenhouse gases and consume a disproportionate share

of the world’s energy.

The Kyoto Protocol was one effort to deal with this. I think it

was a valiant effort in the sense that at a time when more of the

science was still in dispute, people were farsighted enough to recognize that we needed to come up with some sort of international response to it.

I actually share the view of a number of my colleagues here, Republican and Democrat, that an agreement that was unevenly applied did not project forward the enormous energy utilization and

potential emissions from countries like China and India. That did

not set out the sorts of meaningful and achievable targets required

to make a real difference, probably was not the best way to go.

So from this hearing, what I hope to learn is not only how has

the objectives in the Kyoto Protocol been achieved, but also what

kinds of alternatives are we presenting that will allow for us to

participate with other countries to address this problem in the future in a constructive way.

I will just close, Mr. Chairman, by saying, though, that I do hope

that this Administration takes leadership in this process and is not

an idle bystander. I hope that our primary response as a country

is not simply to try to study the problem more to death, or to think

that voluntary initiatives by the private sector alone are somehow

going to achieve the important goals that need to be achieved.

Thank you, Mr. Chairman.

Senator INHOFE. Thank you, Senator Obama.

It should be obvious now to our distinguished panel, both the

first panel and the three visitors we have for the second panel, that

there is a difference of opinion on this side of the table. When I became Chairman of this committee, I made an effort to see where

the science was. You could certainly persuasively argue that the
21

science is not there, but certainly is not settled, whether you are

talking about the Oregon Petition or the Heidelberg Accord or the

Smithsonian-Harvard Review or any of the rest of them. Certainly

that doubt is there.

But one doubt that is not there is the cost of complying to some

type of mandated emissions reductions. The Horton Econometrics

Survey made it very clear what it would cost the United States or

other countries, which we will hear from today.

So with that, I would say any other members coming in will have

to forego any other opening statements. We will now turn to our

panel. Dr. Watson, take whatever time you would like, 7 or 8 minutes, if that would do it. Your entire statement will be entered into

the record.

STATEMENT OF HARLAN L. WATSON, PH.D., SENIOR CLIMATE

NEGOTIATOR AND SPECIAL REPRESENTATIVE, BUREAU OF

OCEANS AND INTERNATIONAL ENVIRONMENTAL AND SCIENTIFIC AFFAIRS, U.S. DEPARTMENT OF STATE

Dr. WATSON. Thank you very much, Mr. Chairman, members of

the committee. It is a pleasure for me to be here. In fact, it is a

real honor for me to be here today.

I will try to summarize the testimony, I won’t read all 15 pages.

It sounds as though perhaps Senator Voinovich has stolen my

thunder by his submission. I appreciate your warm comments, Senator.

In February 2002, President Bush reaffirmed America’s commitment to United Nations Framework Convention on Climate Change

and its ultimate objective, which is stabilization of atmospheric

greenhouse gas concentrations at a level that prevents dangerous

human interference with the climate system.

But he also made clear in that same statement that he would not

commit the United States to the Kyoto Protocol that would have

cost, according to some estimates at that time, the U.S. economy

up to some $400 billion annually and some 4.9 million jobs. I know

there are a lot of different studies and numbers thrown out there.

But I would agree with you, Mr. Chairman, that it would certainly

be costly to our economy.

Addressing the global climate change challenge will require a

sustained global effort over many generations. The President has

established a robust and flexible climate change policy, with four

elements that harness the power of markets and technological innovation, that also maintains economic growth and that encourages

global participation.

These four elements are first, implementing near-term voluntary,

incentive-based, and mandatory policies and measures to slow the

greenhouse emissions growth. Second is to advance our understanding of climate science. Third is accelerating our climate

change technology development and deployment, and fourth is promoting international collaboration.

With respect to the first element, in February 2002, President

Bush did set out an ambitious national goal to reduce the U.S.

economy’s greenhouse gas intensity, that is, our emissions per unit

economic output, by 18 percent by 2012, a goal if which achieved

is estimated to reduce by more than 1.8 billion metric tons of car-
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bon dioxide equivalent relative to where we would be under the 14

percent business-as-usual projection of our Energy Information Administration.

Flexibility, which is the hallmark of the intensity approach, is especially important when confronted with the many uncertainties

surrounding climate change—uncertainties suggesting a measured

response that concentrates first—and I pick up on Senator Carper’s

comments—first the importance of slowing the emissions growth

before trying to stop and eventually reversing it.

Unlike the Kyoto approach, an intensity type of goal can encourage reductions of greenhouse gas emissions without risking adverse

economic consequences, which would jeopardize our ability to invest in long term scientific and technological solutions.

Now, Energy Information Administration analyses suggest we

are ahead of schedule in meeting the President’s goal, and indeed,

our performance over the first 3 years of the Bush administration

ranks high compared to that of other developed countries while at

the same time we have substantially grown our economy, as well

as our population.

The second and third elements of the President’s policy are advancing climate change science and technology. The U.S. Climate

Change Science Program, with a fiscal year 2006 budget request of

nearly $1.9 billion, has taken on some of the most challenging

questions in climate science.

The climate change technology program, which was created to coordinate and privatize the Federal Government’s fiscal year 2006

request of nearly $3 billion in climate related technology research,

development, demonstration and deployment in a suite of technologies, a broad potpourri of technologies including energy efficiency and renewable energy, hydrogen, carbon capture and sequestration, clean coal and nuclear fission and fusion. These are technologies that, which if successfully developed, can put us on a path

to ensuring access to clean, affordable energy over the longer term,

while basically dramatically reducing our greenhouse gas emissions

profile over that time.

The deployment of these technologies in developing countries like

China and India can make a huge difference in altering the global

energy picture.

Turning to the fourth element, promoting international collaboration, I would emphasize that President Bush has repeatedly highlighted its importance in developing an effective and efficient global

response to the complex and long term challenge of climate change,

which does require developing country participation.

We believe the most effective way to engage developing countries

is to focus not solely on greenhouse gas emissions, but rather on

a broader development agenda that promotes economic growth, reduces poverty, provides access to modern sanitation, enhances agriculture productivity, provides energy security, reduces pollution

and mitigates greenhouse gas emissions.

Under President Bush’s leadership, the United States has

brought together key nations, both Kyoto and non-Kyoto parties,

both developed and developing countries, in well-designed multilateral and bilateral initiatives, collaborations that are focused on producing practical results to achieve these ends.
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These collaborations, such as the Asia-Pacific Partnership on

Clean Development and Climate, as was mentioned earlier, the

Carbon Sequestration Leadership Forum, which we hope will lead

to the development of zero emissions coal-fired power plants; the

International Partnership for the Hydrogen Economy; the Generation IV International Forum, aimed at developing a new generation

of nuclear reactors; the Methane to Markets Partnership; ITER,

the fusion project which is to be built in France over the coming

decade; the Clean Energy Initiative, which we initiated at the

World Summit on Sustainable Development in Johannesburg in

2002; and the Group on Earth Observations.

In addition, our 15 now bilateral and regional partnerships encompassing over 400 collaborative activities mirror the main strategic thrusts of our domestic research programs, while addressing

complementary concerns, such as energy security, climate change

and environmental stewardship.

Mr. Chairman and members of the committee, I hope my testimony this afternoon, and particularly my submitted testimony, conveys a sense of the vast extent and breadth to which the United

States is working to address global climate change and transforming the way the world produces and consumes energy over the

next generation and beyond. That is why we are leading many

global efforts to advance the science as well as to develop and deploy breakthrough transformational technologies.

Thank you for this opportunity to testify before the committee,

Mr. Chairman, and I look forward to responding to your questions.

Senator INHOFE. Thank you, Dr. Watson.

We will begin a 5-minute round of questioning. Most likely we

will only get to one for this panel.

Dr. Watson, you used the figures of how many billions of dollars

it would cost and all that. I think sometimes it is meaningful to

bring it down a little closer to home. It works out to in the neighborhood of $2,715 per family of four, according to the Horton Econometrics. Does that sound like it’s very far off?

Dr. WATSON. I’ve seen those numbers, yes, it’s very much in the

ballpark that I have seen, sir.

Senator INHOFE. Dr. Watson, how many of the European Union

countries look like they are on track to meet the Kyoto targets?

You might hold up that blue chart?

Dr. WATSON. I think probably the best gauge of that is a report

which was issued by the European Environment Agency, this is

from December 2004. It made projections for the first Kyoto period,

both progress by the EU, the European Union and its Member

States. I would be happy to submit a copy for the record, if you

would like, sir.

Senator INHOFE. Is that similar to this chart up here?

Dr. WATSON. I am assuming probably the numbers came out of

there, yes, that’s very similar.

Basically, if I could just summarize what their results are, again,

this is a December 21, 2004 report, which again is based on 2002

data and I did note, I believe, that Ambassador Bruton, the EU

Ambassador, had provided, some updated figures from 2003. But

again, this is based on 2002 emissions data.
24

This report says that only two EU countries, the United Kingdom

and Sweden, now anticipate meeting 2010 Kyoto targets purely

through existing domestic policy and measures, with Germany

being close. I want to emphasize, you see, right there, Germany is

minus 20 percent, and Germany’s target under the European

Union, the 15 members of the European Union at that time, their

target was minus 21 percent. So they are very close.

Finland, France, Greece, and Ireland project they can meet their

targets with additional domestic policies and measures currently

being planned. Austria, Belgium, Luxembourg, and the Netherlands project achieving their targets by 2010 by a combination of

additional domestic policies and measures and the use of the Kyoto

mechanisms, such as the Clean Development Mechanism, Joint Implementation, and emissions trading.

Finally, they named four Member States, Denmark, Italy, Portugal, and Spain, who were not on track at the time of this report

and do not project to reach their targets with a combination of additional domestic policies and measures and use of the Kyoto mechanisms. That is almost literally a quote out of that report.

I might note also, Senator, that the recent figures that were provided to you in the Ambassador’s letter were based upon a subsequent report, a May 27, 2005 report, which was submitted to the

Secretariat of the United Nations Framework Convention on Climate Change. This is the annual emissions report which is required by all the developed country parties. They actually indicated

for most of the European Union countries, at least among the 15

of the 25, emissions have grown over the last period from 2002 to

2003, which again would make these targets more difficult to attain.

Senator INHOFE. Dr. Watson, I will wait and ask the next panel

the question, it is my understanding that the way Germany got to

where it is, they had a rather abrupt cessation of coal-powered

plants. But we will ask the next panel that.

Looking at the process of Kyoto, do you realistically think that

a process of targets and time lines would ever be embraced by the

very large developing nations, India, China and others?

Dr. WATSON. No. Particularly China and India have made it very

clear that their focus is on economic development and poverty reduction. They will not, certainly not, I don’t believe in my lifetime,

and I hope to live to be older, that they will be willing to take on

specific targets and timetables. They are very, very willing to talk

about, and they are very concerned about environmental issues.

They are obviously willing to talk in the context of a broad development agenda, which gives them multiple benefits, while also addressing greenhouse gases. This is the context that we have been

able to engage both China and India and a number of the other developing countries.

Senator INHOFE. My time has expired, but I would agree with

that. One of the problems you have when you look at this is that

you have so many countries whose major thrust is on the economy.

They are trying to grow. Africa, I have spent a lot of time in Africa,

and I think we have made our position as the U.S. Senate very

clear by a vote of 95 to nothing that we would reject an approach
25

that would treat developing countries differently from developed

nations.

Senator Jeffords.

Senator JEFFORDS. Yes, Mr. Chairman. Before I begin my questions, I want to ask consent to submit a letter to you that I received yesterday from the European Union Ambassador John

Bruton to the record. In this letter, the Ambassador details the

EU’s greenhouse gas emissions are currently 2.9 percent below the

1990 levels.

Senator INHOFE. Without objection, so ordered.

[The referenced document follows:]
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Senator JEFFORDS. Mr. Watson, you have outlined the Administration’s current and prospective policies to address climate change.

For a point of comparison, how much money did the United States

spend in fiscal year 2005 to address climate change?

Dr. WATSON. I believe the current estimate is $5.2 billion. I will

get the exact figures and exact breakout for you, though, Mr.

Chairman. [See figures on page 81.]

Senator JEFFORDS. How much reduction was achieved?

Dr. WATSON. Our emissions actually were, I can tell you what we

have achieved in the period of 2000 to 2003, our overall greenhouse

gas emissions are approximately eight-tenths of a percent below

year 2000 and 2003. So we have achieved emissions reductions.

There are a lot of reasons for that, obviously.

Senator JEFFORDS. That was one-tenth of a percent?

Dr. WATSON. Eight-tenths of a percent, yes.

Senator JEFFORDS. Much has been made, and other witnesses

will testify later in the hearing about the potential economic impact

of Kyoto on participating nations. Yet these nations have taken on

these risks to alleviate the devastating effects of climate change.

I know you have participated in all the recent negotiation meetings. Do you have a sense about how the Kyoto implementation has

affected economic growth, poverty, energy security and pollution reduction objectives among participating countries?

Dr. WATSON. Well, we really don’t get into those discussions

within those negotiating sessions. I believe it’s hard to sort out

what the impact of those implementing Kyoto is versus those that

are not. Because basically, it is too soon to tell. As a matter of fact,

even though the Protocol entered into force on February 16 of this

year, the actual real implementation will not occur until decisions

are taken at the next Conference of the Parties’ meeting in Montreal. There are still some 19 outstanding decisions to be made before the full implementation of the Protocol itself.

So I think it’s too soon to tell, sir.

Senator JEFFORDS. Thank you. While the Energy Policy Act of

2005 promotes the development, demonstration and commercialization of innovative technologies, it protects information from public

disclosure for 5 years. Since 80 percent or more of the costs of developing these is taxpayer funded, would you support the wider,

quicker dissemination and adoption of new energy efficient and carbon capture technologies, and do you think that that would help

your negotiating efforts with developing countries?

Dr. WATSON. I am really not qualified to comment on this, but

let me just say that what we are doing within the context of our

initiatives, such as the Carbon Sequestration, Leadership Forum

and our International Partnership for the Hydrogen Economy, to

give you two examples. When members come forward with a

project and to have a project, for example, endorsed by the Carbon

Sequestration Leadership Forum, or the IPHE, it must be supported by two or more members of the partnership and the results

of that work, which comes out of the project, are made available

to all the other members within.

Obviously, the closer you get to the development world, there are

going to be intellectual property issues, which will need to be handled on a case-by-case basis. But we certainly share the philosophy
36

that obviously the sharing of information, particularly at the basic

research side, is very important.

Senator JEFFORDS. Well, the Energy Policy Act of 2005 promotes

the development, demonstration and commercialization of innovative technologies. It protects information from public disclosure for

5 years.

Since 80 percent or more of the costs of developing these technologies is taxpayer funded, would you support the wider, quicker

dissemination and adoption?

Dr. WATSON. Yes. As I say, sir, we are very much, when we are

dealing with basic research and say, on the basic research side, we

fully support, obviously, the sharing of information. As I say, when

we get more into the applied end of research, we do have to deal

with intellectual property issues.

Once again, I am really not qualified to take a position on that

right now. I would be happy to respond for the record, however.

Senator JEFFORDS. Thank you very much.

Senator INHOFE. Thank you, Senator Jeffords.

Senator Voinovich.

Senator VOINOVICH. Dr. Watson, we recently had a debate on the

Senate floor about mercury emissions from power plants. As you

know, the President has recommended a 70 percent reduction in

mercury emissions, the first country to come forward and initiate

such a program.

At the time we debated this, I think many of my colleagues and

the public did not understand that mercury pollution is a global

issue and that it can travel hundreds and thousands of miles. In

fact, from 1990 to 1999, EPA estimates that U.S. emissions of mercury were reduced by nearly half, which have been completely offset by increases in emissions from Asia.

I think this is very similar to the issue of climate change. During

the last several years before this committee, we have been trying

to deal with an emissions bill or pollution bill, whatever you want

to call it. Senator Jeffords had a bill in a couple of years ago, and

I fought it because part of the reason, one of the things they wanted to do was cap greenhouse emissions. The President’s Clear Skies

Legislation, which I co-sponsored, fell on the rocks because many

of the members of this committee wanted us to cap greenhouse

emissions.

The argument that we made at the time is that in terms of technology that is available today that it would be penny-wise and

pound-foolish; i.e. if we would cap greenhouse gases, it would drive

up our energy costs, which are already astronomical, 600 percent

of natural gas, we have the highest natural gas costs today in the

country, electric rates are skyrocketing. My argument is, and I

guess maybe it is a little bit narrow, because I come from Ohio, and

we are a manufacturing State. We have seen thousands of jobs

leave our State because of high energy costs. In some instances,

they have gone to China.

So we have shut down our manufacturing in this country by unrealistic goals in greenhouse emissions and moved the jobs overseas, and the question you have to ask yourself is, what have we

done to improve greenhouse gas emission in the world today? I
37

would like you to comment on that in terms of what you see from

your vantage point.

Dr. WATSON. I appreciate your comments, I am certainly concerned. My wife is a native of Ohio, Senator, and we visit there

quite often.

You are absolutely right, that is obviously one of the concerns

that we had and obviously the U.S. Senate had in its debate in

1997, that we would just spur the movement of jobs overseas. The

pollution is not going to go away, it is a global issue, whether it’s

mercury or carbon dioxide or whatever.

Senator VOINOVICH. By the way, many of the countries those jobs

are going to don’t have the environmental policies in place that we

have here in the United States.

Dr. WATSON. That is absolutely correct. That is one of the reasons, of course, we are investing lots and lots of Federal money,

along with a great partnership with the private sector, on trying

to develop our carbon capture and storage. I am sure you have

heard of a FutureGen project, which the Department of Energy has

proposed, to demonstrate a zero emission coal-fired plant by later

in the decade.

We are pleased that that is moving ahead. We have lots of technical work to do on it. As you say, the technology is not there currently to address greenhouse gas emissions from coal. We know

that coal is a vital part of our country’s energy mix. It is typically

some 55 percent of our electricity production and higher, I know,

in Ohio. We are working very hard on developing that technology

and making it economical, sir.

Senator VOINOVICH. I must say to you that we did pass a decent

Energy bill. But I am at the point that I think we need a second

declaration of independence, and that is energy independence. I

think we rely far too much on foreign sources of energy for this

country. If we don’t wake up very quickly and have some kind of

a Sputnik-like commitment to doing something about this problem

that we are going to hurt our economic competitiveness, and it will

hurt our national security.

I would hope that some thought is being given to that now. You

have again the global picture. But I think we are in jeopardy today,

and I would hope that some folks over in the Administration are

giving some serious thought to what we can do to make that happen.

Dr. WATSON. Yes, sir.

Senator INHOFE. Thank you, Senator Voinovich.

Senator Carper.

Senator CARPER. There are one or two things that Senator

Voinovich and I do not agree on. What he just said, there is a lot

we do agree on, we agree a lot more than we disagree. But what

he just said about energy independence, I could not agree more.

Our reliance on foreign oil, the way it boosts our enormous and

growing Federal trade deficit is unsustainable and deplorable.

Around here, Dr. Watson, we have a way of characterizing budget cuts that I want to share with you. When someone wants to

deter or discourage the rest of us from adopting a reduction in

spending, or a reduction in the growth of spending, they will de-
38

scribe a cut, say it’s like an 18 percent cut in a particular program,

spending for a program.

When you actually look at the amendment or whatever is being suggested, it’s not an 18 percent, well, we’ll say it is a $100 million

program, 18 percent cut, they will suggest it is reducing the spending to $82 million instead of $100 million. But when you actually

looking at the amendments being proposed, it is a cut below what

the program would otherwise grow to, given changes in population

and inflation and so forth. So it’s not really an 18 percent growth.

I just want to understand, if you can just explain, simply and

clearly for me, the 18 percent reduction that I think you talked

about in CO2 emissions, is that an outright reduction of 18 percent

or is it, are we talking about an 18 percent reduction in the growth

of emissions? Which is it?

Dr. WATSON. We are talking about an 18 percent reduction in

greenhouse gas intensity. It still means a growth in emissions. The

latest projections that I have seen anyway from the Energy Information Administration would indicate that if we did not, if we followed their business-as-usual path, we normally expect some improvement in greenhouse gas intensity just through normal technological improvements, it would be 14 percent through 2012. The

President has said we want to do better than that, 18 percent.

What that basically amounts to is, rather than our emissions by

2012 being 34 percent above 1990, they will be some 27 percent

above 1990. So yes, our emissions are still growing, but again, it

is a bending of the curve, it is a slowing down that you referred

to in your opening statement. One can argue whether it is slowing

down fast enough, but it is slowing down.

Senator CARPER. What I would like to get to is, I was writing out

some notes here trying to do a little bit of calculation to try to figure out if we were to continue the rate of reduction of growth that

you have described here, when would we get to the point, going

back to my earlier example of, slow the car, stop the car, put the

car in reverse, when would we get to the point, given the approach

that we are taking here, where we would actually see growth in

CO2 emissions stopped under this approach?

Dr. WATSON. What needs to happen, we need to get new technology and better technology into the marketplace, so that basically, we really need to make sure that our improvement in efficiency is matching our economic growth, so there is a net zero

there. Hopefully we can bend that over to get to the stop and then

to reverse.

We are not there, our improvement right now in intensity is

something on the order of, it has been a little over 2 percent, 2.3

percent in the latest figure. But our economy is still growing at 3

plus percent, which is good. So we need to figure out ways to boost

the productivity and efficiency of our economy. We are working on

that.

Senator CARPER. What I’m trying to get at is a number. When

is the year, when do you think, just roughly, is the year that we

are going to be able to say, the car has stopped, or in this case,

the rate of growth has stopped.

Dr. WATSON. Well, to a certain extent, Senator, we have stopped

the car over the period of 2000 to 2003. We stopped the car. In fact,
39

over the period of 2000 to 2003, as I mentioned earlier, our absolute greenhouse gas emissions have decreased by .8 percent.

But there are a lot of reasons and we don’t know if we can maintain that. A lot is going to depend on various factors: How fast is

our economy going to grow, how fast do we get new technologies

out there, are we going to have a warm summer, are we going to

have a cold winter, and so on. So there are a lot of variables.

We have stopped it temporarily, but I cannot guarantee that it

will continue. We just don’t know yet.

Senator CARPER. A lot of times I talk to people and we talk about

trying to reach certain goals, and I ask them, how do you measure

success. How do we measure success with respect to the goal that

we might be discussing? How should we measure success with regard to alleviating and reducing the threat of global warming?

Dr. WATSON. It is relatively easy to measure success by the

President’s measure. We know what our greenhouse gas emissions

are in any given year, and report those to the United Nations every

April. We know what our GDP growth is, so we can do the simple

arithmetic and measure the progress toward meeting the President’s 18 percent reduction goal over the period to 2012.

Senator CARPER. I think my time has expired. Thanks, Mr.

Chairman.

Senator INHOFE. Thank you, Senator Carper.

Senator Thune.

Senator THUNE. Thank you, Mr. Chairman. I want to thank you

for holding the hearing on the Kyoto Protocol. It is not an issue

that I hear a lot about in my home State of South Dakota. In fact,

it is probably the furthest thing from a lot of the minds of some

parts of western South Dakota today, because they woke up to

snow.

Given that, I am very much looking forward to hearing the testimony of our witnesses do want to make clear that I support the

concept of dealing with global climate change with flexibility. I believe our policy measures in this area ought to include many of the

incentives and voluntary programs that I think will help us make

progress toward our goal. So I appreciate your having the hearing

today, Mr. Chairman. I think it is an important subject for us to

be discussing.

I would ask, I guess, one question of our witness, Dr. Watson,

and that is, with respect to the goals that you have and the 18 percent reduction in the intensity over the course of the next several

years, we have had an opportunity up here enacted on in this committee, or at least voted on, I should say, Clear Skies Initiative,

which would implement some policy changes and put some goals in

place for sulfur and nitrates and mercury and some other things.

I guess my question would be, how would that change if we were

to adopt or implement the policy that is included in the Clear Skies

Initiative help us achieve some of those goals, and does that accelerate our ability to reach those goals? We unfortunately didn’t have

the votes on this committee to report that to the Senate floor. But

I am hopeful that eventually we will be able to get that done, because I think it’s important.

Dr. WATSON. I appreciate that. I know that the Council on Environmental Quality Chairman, Jim Connaughton, has been very in-
40

terested in this, and I believe has tasked out a study on the contribution that the passage of Clear Skies can make. We know it is

going to have a positive impact on our greenhouse gas emissions

profile, it is going to lead to more efficient use of coal, more efficient generation of electricity.

That ought to have the co-benefit of also reducing our greenhouse

gas emissions. I can’t give you an exact figure on that now, but I

do believe a study is underway.

Senator THUNE. That is data, though, at some point when the

study is completed, that we would have access to?

Dr. WATSON. Absolutely, sir.

Senator THUNE. Again, I appreciate your answer to that, and Mr.

Chairman, I would suggest that hopefully we will be able to jump

start that initiative at some point. I know that there is a lot of interest in the subject and different views and approaches about how

best to achieve these goals. But I think that was definitely a step

in the right direction. I think if we are able to implement some of

those policy changes, I would be anxious to see if that changes the

schedule in terms of reaching the ultimate goal.

But it seems to me at least that that really was a good piece of

legislation and I hope that eventually we will be able to get the

votes on this committee to bring it to the floor where we can have

a good debate about it.

I yield back the balance of my time.

Senator INHOFE. Thank you, Senator Thune. That is a huge step

in the right direction. We are talking about 70 percent mandated

reductions in SOx, NOx and mercury. No other president has ever

suggested something like that.

Senator Obama.

Senator OBAMA. Thank you, Mr. Chairman.

Dr. Watson, I know you are not a scientist, and the purpose of

this hearing is not to rehash all the arguments about whether or

not climate change is happening or is a problem or it is not. But

it just strikes me that the only way we can intelligently assess our

approach and the Kyoto Protocol approach is to determine how urgent of a crisis is this. If it is not a major crisis, then the Kyoto

Protocol makes no sense and all these countries that are involved

are engaging in a great deal of fuss and trouble for no reason. If

it is a problem, then that means that maybe we are a little slow

on the uptake.

So I guess I am just trying to figure out, what is the Administration’s position right now, just in terms of how much of a problem

this is? Is climate change, from the perspective of the Administration, a significant problem, not just to the world, but to the United

States in particular?

Dr. WATSON. Yes, the President has made that clear, I believe

going back to his first address on climate change, back in June, as

I recall, June 11, 2001. He recognizes that climate change is an important issue, an important problem, an important matter of concern. He certainly hears it from his colleagues as he travels and he

engages with leaders around the world. We have responded I think

robustly——

Senator OBAMA. I don’t mean to interrupt you, but before we establish the response, I just want to be clear, I want to make sure
41

on the record. From the Administration’s position, the science indicates that in fact climate change is occurring at a fairly rapid rate

that has some sort of potential adverse consequences in terms of

ice caps melting or the fluctuations in ocean temperatures, changing weather patterns, is that the Administration’s position now or

not?

Dr. WATSON. I am going to repeat what the President most recently said in June, I believe, when he addressed the subject. We

know the average global mean temperature is increasing. We know

that man, human actions, are increasing greenhouse gas concentrations in the atmosphere. There is no doubt, there is no scientific

doubt about that. That is associated obviously with warming. So

there is a human contribution to that.

But many uncertainties still remain, Senator.

Senator OBAMA. Absolutely. I am not disputing that there may

be differences of opinion in terms of how fast this is happening,

how much greenhouse emissions are contribution to this process

rather than other factors external to human behavior. But there is

an acknowledgement by the President that in fact this is a problem?

Dr. WATSON. Yes.

Senator OBAMA. OK. The only reason I wanted to establish that

for the record is that is at times sort of a first principal issue that

ends up being disputed in this committee.

If in fact the Administration didn’t think it was a problem, then

even all the stuff that you’re doing here wouldn’t make much

sense, it would be a big waste of money, wouldn’t it?

Dr. WATSON. That’s true.

Senator OBAMA. Second question that I guess I have is, if it is

a problem, did I understand correctly that the President’s goal set

up an 18 percent reduction in greenhouse gas emission intensity,

but that if we did nothing at all that the intensity would have decreased by 14 percent anyway?

Dr. WATSON. That is the projection by the Energy Information

Administration, yes, sir.

Senator OBAMA. So all these efforts that are outlined in your

briefing are resulting in a 4 percent improvement in the intensity

levels of our greenhouse gas emission intensities although the actual emission of greenhouse gases is increasing?

Dr. WATSON. Well, actually, as I said, we have had a very short

time to measure this. We are actually a bit ahead of schedule on

meeting the President’s goal and we are hoping to actually do better than that. But yes, that is correct.

Senator OBAMA. I guess I’m just curious then, what practical impact is a 4 percent improvement in intensity levels? What does that

mean in the sense that, as I understand it, the Kyoto Protocol

standards that had been set up called for actual reductions and we

have got, for example, Sweden, I’m not saying this is a model we

should emulate or can emulate, but they reduced their actual emissions by 3 percent from 1990 levels.

Dr. WATSON. Yes.

Senator OBAMA. So I guess I’m sort of comparing apples and oranges here. What’s intensity versus reductions of actual emissions

and how can we measure whether these efforts are worthwhile at
42

all if all we’re doing is simply reducing intensity levels as opposed

to the emissions themselves?

Dr. WATSON. I will just refer you back to, I think Senator Carper’s opening comment, the importance of not slamming on the

brakes but trying to reduce the growth. This is part of the effort.

We are doing better than business-as-usual, which is this President’s goal. It will amount to a significant, over the cumulative

2002 to 2012 time period we are talking about 1.8 billion metric

tons of carbon dioxide equivalent that will not be released to the

atmosphere.

Senator OBAMA. That sounds like a big number, but I guess I

just don’t know what it means.

Dr. WATSON. It’s pretty big.

Senator OBAMA. I’m sorry, am I out of time, Mr. Chairman?

Dr. WATSON. Just to give you an idea, we’re emitting about 6.9

billion metric tons of CO2 equivalent annually.

Senator OBAMA. OK. Thank you, Mr. Chairman.

Senator INHOFE. Thank you, Senator Obama.

Senator DeMint.

Senator DEMINT. Thank you, Mr. Chairman, and Dr. Watson, I

apologize for being a little late.

Just a couple of questions. Watching this from a distance and not

having been real involved with a lot of the Kyoto debate, the statistics, my concern just as an American businessman in the context

of us being competitive as a Nation, the cost of doing business,

being competitive with the rest of the world, that perhaps some of

the motivation for the participants are not just environmental.

My question to you is are the Kyoto targets fair, and why is it

that the European Union targets are so much less costly than the

United States, Canada and Japan. They appear to be, and maybe

you could first of all say, are they. Are the targets fair, and would

the United States be paying an unfair share of the burden?

Dr. WATSON. Fairness is a bit of a value judgment. It’s not clear

whether things are fair or unfair. It was something that was

agreed to in the previous Administration. I don’t want to characterize it as fair or unfair. I think it was something that people

thought at that time, the people in charge honestly thought that

the United States had a chance of doing. So I don’t want to cast

any doubts on the motives of particular targets.

But the reality was, it was a very difficult target for the United

States. We have a growing population. Just take during the 1990s,

for example, our population’s growth rate was 3.7 times that of

Japan and 3 times that of Europe. Our economy grew at a much

greater pace than either Japan or Europe, something like 1.7 times

for Japan and a similar, maybe 1.5 times that of Europe’s GDP

growth.

So we had a lot of factors at work which ultimately, of course,

made a target just impossible to meet. A lot, very much depends

on natural and national circumstances. I don’t want to get into particularly Europe’s situation, we have certainly one of the world’s

experts, Professor Grubb who is very learned in this area.

But it was mentioned earlier, we did have the situation where

in the United Kingdom where Prime Minister Thatcher liberalized

the electricity market that led to basically the collapse of the coal
43

industry. There happened to be plentiful North Sea gas, so you had

enormous reductions occurring because of that. Germany of course,

you had the reunification of East and West Germany, which led to

an economic restructuring, which led to a lot of emissions decrease

overall in Germany.

So you just have these circumstances, and a lot really depends

on national circumstances. If I could fault the process, again, I

think there were not enough economic studies done on what would

be the impact. If we agree to something, what do we really know

this is going to cost us?

Senator DEMINT. Just another quick question. Kyoto aside, are

American businesses working closely with the Administration to

voluntarily reduce emissions? That question may have already

been asked, but if it hasn’t, just enlighten me a little bit.

Dr. WATSON. I appreciate that, and I have given you a fairly extensive list of activities in my written testimony, which I did submit for the record, Senator. But yes, we are pleased the President

has challenged business to step up to the plate, and they have. We

are very pleased that they have.

For example, we have a number of new programs which have

been initiated in this Administration. One is the so-called Climate

VISION Program, which is a Department of Energy program engaging literally hundreds of businesses in 14 different sectors. Of

course, we have also our Business Roundtable involved in that effort. It covers some 40 to 45 percent of all U.S. emissions.

We are working through trade associations and companies in

those trade associations that are making specific commitments to

if not absolutely reduce their greenhouse gas emissions to slow

their growth from what they otherwise would be. Our Environmental Protection Agency has initiated, back in February 2002, as

a matter of fact, a very innovative program called Climate Leaders,

which now has some 70 members, some of the largest corporations.

In fact, we heard some examples, I think Dupont, General Electric,

IBM and others that are members of that and made substantial reductions in their absolute emissions profile.

We have something called the SmartWay Transport Partnership,

which is also an EPA program, involving our freight companies. So

business has responded in a large manner. We hope that they will

continue to respond and meet those commitments. We are very

pleased with their progress so far.

Senator DEMINT. Thank you, Dr. Watson.

Mr. Chairman, I think I’m out of time, so I yield back.

Senator INHOFE. Thank you, Senator DeMint. Senator Isakson.

Senator ISAKSON. Thank you, Mr. Chairman.

I am late, and I apologize. So as not to ask a redundant question,

I will submit them for the record. However, I did have the opportunity to read part of your testimony while I was sitting here, and

I wanted to ask you one question, if I could.

There is a statement in your written testimony that over 80 percent of the current global anthropogenic greenhouse gas emissions

are energy related. Although there are arguments over how much,

a tripling of global demand by the year 2100 is not unimaginable.
44

Do you have any estimate of where that tripling will come from

around the world? Has it been analyzed to see where that amount

is going to come from?

Dr. WATSON. Yes, there are numerous studies out there and forecasts out there and a lot depends on the assumptions being made.

But I think almost, if I could characterize—and I’m sure Professor

Grubb can help with this, perhaps if I get this wrong, and correct

it in the next panel—basically you’re going to see a large growth,

obviously, in the large developing countries, China, with 1.3 billion

people, Indian, going on 1.1 billion people and growing.

So that is roughly a third of the world’s population. So you are

clearly going to see large growth in that area, the whole Asia region.

I think most of the projections of growth in the developed countries, in Europe and even the United States are somewhat robust.

Of course, we have to remember that we have some 2 billion people

without access to modern energy services. So if we really are able

to get energy services to the third of the world’s population that

does not have them right now, that would again lead to a huge demand and potential growth in energy.

That is the basis of the forecast that it might be tripling by the

end of the century.

Senator ISAKSON. That was my assumption, that certainly in the

remainder of this century, which most of it is left, that most of the

demand is going to come from other parts of the world, because we

are so developed. It seems, on this whole greenhouse gases, and I

am not by any means an expert, but one of the reasons we are

burning so much natural gas right now is because we got out of the

coal business because of its contribution to greenhouse gases, is

that right?

Dr. WATSON. I think we got out of the coal business, as I understand, because of straight economics—that is my understanding of

the situation, in the 1990s. We did build very little coal because,

quite frankly, natural gas was the cheapest.

Senator ISAKSON. The worm has turned.

Dr. WATSON. Yes, the worm has turned now. That is correct, Senator.

Senator ISAKSON. But I think, and Senator Carper knows a lot

more about this than I do, but I think the contribution of coal to

the carbon in the atmosphere is a major allegation of the greenhouse gas, is that not correct?

So my guess is I am taking more time than I should have, but

the whole point I am getting to, your next statement in here talks

about cost-effective technology development, you didn’t say this,

those were your words, my words, is the only way that you can reduce the increase of greenhouse gases while meeting the demand

of a tripling of energy, is that correct?

Dr. WATSON. That is certainly what we believe, Senator, yes.

Senator ISAKSON. So we should be doing everything we can as

Members of the U.S. Senate to promote incentives for cost-effective

technology developments and a broad based development of energy

resources, both renewable as well as nuclear as well as coal gasification. That’s the best way, rather than penalties, to solve that

problem.
45

Dr. WATSON. We certainly believe that. We certainly believe the

U.S. Senate and Congress made a great contribution to that effort

in the passage of the Energy bill.

Senator ISAKSON. It took us a long time to get it, 11 years, I

think, but a great effort. That was my point, and Mr. Chairman,

I yield back.

Senator INHOFE. Thank you, Senator Isakson.

Dr. Watson, thank you very much for your time and your excellent testimony. We will excuse you at this time and ask for the second panel to come forward.

We previously introduced the panel, but Lord Nigel Lawson is

here from the House of Lords. We are delighted to have you. Dr.

Margo Thorning, senior vice president and chief economist, American Council for Capital Formation, and Professor Michael Grubb,

the Department of Environmental Science and Technology, the Imperial College of London. We are delighted to have all three of you

here.

We would like to ask you to make an attempt to restrict your

opening remarks to 6 or 7 minutes and your entire statement of

course will be made a part of the record.

Lord Lawson, we will begin with you.

STATEMENT OF LORD NIGEL LAWSON OF BLABY,

HOUSE OF LORDS, UNITED KINGDOM

Lord LAWSON. Mr. Chairman and gentlemen, Senators, thank

you very much indeed for your invitation. I am greatly honored to

appear before you.

Let me tell you, since I am not a local figure, perhaps by way

of background who I am. I am a member of the House of Lords,

as you mentioned. I was a member of the Economic Affairs Committee for the House of Lords which produced the report on the economics of climate change, which is the reason I assume that you

have asked me here today.

I might point out about that report that it was an all-party committee and the report was unanimous. We didn’t have any votes,

it was unanimously agreed by the conservative members, the labor

members and the liberal members.

Just to put my cards on the table, my only business interest is

that I am chairman of a private company called Central Europe

Trust Company, which is engaged in advisory work and private equity in what Secretary Rumsfeld has called the New Europe, the

former communist countries of Central and Eastern Europe.

Before entering the House of Lords in 1992, I was for many years

a member of the House of Commons. During my time in the House

of Commons I served as a senior government minister in all three

of Prime Minister Thatcher’s administrations. To be precise, from

1979 until 1981, I was financial secretary to the treasury. From

1981 to 1983, I was energy secretary. From 1983 to 1989, I was

chancellor of the exchequer, which is the quaint name that we give

for treasury secretary.

Therefore, I have come to know Washington quite well, having

visited in the past quite frequently to see my opposite numbers

from four, in fact, American administrations, the end of the Carter

administration, both Reagan administrations and the beginning of
46

the Bush Sr. administration. Of course, meetings of the International Monetary Fund and what used to be known in my days

as the G5, ministerial meetings of the G5.

But this is the first time that I have the honor of appearing before the Senate, or really having anything much to do with the

Senate. So it’s a new experience for me, and at my time of life, new

experiences are few and far between. So I am particularly grateful

to you for giving me this opportunity.

I don’t want to encroach on your time, particularly. I would obviously direct you to this report, which I think you’ve all received

and I hope some of you in your busy lives have had time to read

it. Also, the very brief written testimony which I have provided

you.

I just want to say one or two things, principally by way of explanation, why it is a bit odd that I should be giving evidence on this

issue. I actually came very late, some time before this report, but

nevertheless in my life very late to the issue of climate change. I

had always assumed, unthinkingly, as many people do, that this is

a scientific issue. I am no scientist, and I have no pretensions to

being a scientist.

I have, of course, as a minister, been frequently called upon, as

all ministers and all governments are called upon to do, to take decisions on the basis of expert advice, whether it is scientific advice

or other kinds of expert advice. I have some experience at assessing

that sort of advice, but I make no pretensions to being a scientist

or a scientific expert.

I was drawn to it because I then came belatedly to realize that

this was even more of an economic issue than it is a scientific

issue. I think that the science, as far as I can understand it, is very

clear, that growth of carbon dioxide emissions or other kinds of

greenhouse gas emissions, that is overwhelmingly the most important in terms of volume.

Growth in carbon dioxide emissions does enhance the greenhouse

effect. That does, other things being equal, lead to a warming of

global temperatures. Other things being equal, of course, is necessary to say, but it throws up a whole lot of questions, which I

don’t have the competence to go into. Also, I think it is clear that

as economic growth continues, other things being equal, again,

these emissions are going to increase.

So there is a problem there, but its magnitude is extremely difficult. Nevertheless, it is a problem and it has to be addressed.

Now, how should it be addressed? It is a curious thing that the

world’s governments, certainly the British government and most of

the world’s governments have done is something which I can’t believe would have happened just like that in my time, is that the

provision of advice to government has been outsourced. It has been

outsourced to the Intergovernmental Panel on Climate Change.

Now, it is perfectly true that this is a global issue. Nevertheless,

the more you look at the operations of the IPCC, the more doubts

I think you are bound to have about the objectivity and rigor of

that advice.

Therefore, I think it is essential, and this is one of the recommendations we made in our report, that certainly the British

government and I think all governments make their own inde-
47

pendent assessment on a matter as important as this, of what is

likely to happen on the scientific and on the economic side. This

should be under lead of the treasury, which has no departmental

axe to grind.

I am glad to say that one of the consequences of our recommendations is that indeed in the United Kingdom, an inter-departmental working group has now been set up, which wasn’t the

case before, under the leadership of the treasury, but including all

interested departments, to make just this sort of estimate.

Now, what are you trying to look at? Well, one of the things you

are trying to look at of course is the scale of the problem. This is

not a scientific matter, primarily, obviously science comes into it.

But basically what are you trying to guess or make an estimate of

is what is likely to be the rate of world economic growth over the

next 100 years, and second, what is going to be the energy intensity of that growth.

The curious thing about the IPCC’s estimates, which is a persistent upward bias, that doesn’t mean to say their scenarios can’t

happen, but there is a clear upward bias in what they are saying.

The project not merely a heroic rate of growth, particularly in the

developing countries, so that for example, at the end of this century, and I hope this will happen, but the fact that all their scenarios do this, by the end of the century, living standards in the

developing world are projected to be substantially higher than they

are in the United States or the United Kingdom today.

I hope that will be so. But it is a pretty heroic assumption. All

their scenarios are posited on that.

Second, energy intensity. It is established that over the past 40

years, the energy intensity of economic growth has steadily declined. That is not surprising. First of all, the efficiency, economies

develop by greater efficiency in all factors of production, greater efficiency in the use of labor, greater efficiency in the use of land and

greater efficiency in the use of energy.

There is a tendency in the world, which is likely to continue, for

a shift in the balance from manufacturing to services. Of course,

service industries are much less energy-intensive. They use energy,

but they are much less energy-intensive than manufacturing is.

Yet, if you look at the IPCC’s scenarios, every single one of them,

without any explanation, assumes an abrupt reversal of that trend.

The various scenarios show either a significant increase in energy

intensity over the next 100 years or a even as far as a doubling

of energy intensity over the rate of growth of carbon dioxide emissions over the next 100 years.

But anyhow, the question then is, and this is again an economic

question, not a scientific question, OK, we have a problem, we are

not sure about its magnitude, but we certainly have a problem or

we might, and we need to take out an insurance policy, we need

to be prudent, we need to be careful. There might well be a problem, what do we do about it? What is the most cost-effective way

of dealing with it?

In sum, just to conclude, there are two ways of doing that, and

I think both are necessary. One is adaptation. That kicks in much,

much earlier. Because Kyoto is not going to have any effect at all,

that is accepted. An adaptation, that is to say, taking measures to
48

bolster defenses, taking measures to improve strains of crops which

will cope better with a warmer climate if that happens, and so on

across the board.

And mitigation. Mitigation not by Kyoto. There is an economic

reason. Not only have we seen on the figures already produced, Mr.

Chairman, that the Kyoto targets are not going to be reached, and

even if they are reached, they are not going to do anything about

global warming.

But there is the so-called free rider problem, classic in economics.

That is to say, if you have a public good, a collective good, not having an excessive world global temperature, then the market is not

going to solve the problem. We do this with defense, we have the

market providing our national defense. The government has to step

in, the government has to make sure that everybody pays through

their taxes for our national defense and provides defense.

But there is no world government. The way in which we deal

with public good on the national level cannot work on the global

level. Any country which is particularly zealous in meeting its targets is going to lose out eventually. So we need something where

there is possibly a benefit. Investing, government supporting investment in technology has been discussed. There the incentive

works the other way, because a country or a company that has this

technological breakthrough will benefit competitively.

So that goes with the grain, whereas Kyoto goes against the

grain. It’s not going to happen. The sooner we get off that track,

the better.

Senator INHOFE. Thank you, Lord Lawson.

I would say to Dr. Thorning and Professor Grubb, feel free to go

over your time, because we want to give you equal time.

Dr. Thorning.

STATEMENT OF MARGO THORNING, PH.D., SENIOR VICE

PRESIDENT AND CHIEF ECONOMIST, AMERICAN COUNCIL

FOR CAPITAL FORMATION

Dr. THORNING. Thank you, Mr. Chairman, members of the committee. I very much appreciate the chance to appear before this

committee. I would just like to make maybe points and then hopefully there will be some time for questions and answers.

To reiterate the point that Dr. Watson made, the fact is that the

European Union’s 15 original members, are not on track to meet

their emission reductions. As figure one in my testimony (that I

would like to be included in the record) shows, countries like Spain

are approximately 33 percent, projected to be 33 percent above

their Kyoto target in 2010, according to the European Environmental Agency. Denmark, 37 percent above, Austria, even though

Austria has a lot of hydropower, still 22 percent above, given the

existing measures.

In fact, the United Kingdom, which is one of the two countries

supposed to meet their target, and I think for the United Kingdom

it is a 121⁄2 percent reduction, they may meet that target, they certainly won’t meet their 20 percent aspirational reduction by 2010.

But Cambridge Econometrics, a United Kingdom consulting firm,

has shown that by 2015, UK emissions will be approximately 31⁄2

to 4 percent above 2010 levels. So UK emissions will, under current
49

measures, continue to rise. To hold them to the Kyoto level after

2010, that would require much higher emission trading fees. So

that issue is something to think about. Even the two countries that

are on track may not be able to hold to their Kyoto levels post-2010

because of economic growth.

The second point I would like to make is that there are very significant GDP and employment effects from forcing emissions, forcing energy use down. When accurate models are chosen and used,

when for example, macroeconomic models are used to analyze the

impact of sharp increases in energy prices, or emission trading fees

to drive down energy use, we see very significant impacts on countries’ GDP levels, as well as employment levels. These studies are

on the ACCF global Web site, that is the Brussels-based affiliate

of the American Council for Capital Formation. We have studies on

five major EU countries, detailing the negative consequences.

For example, in 2010, if Spain had to meet their emission target,

their Kyoto target, their GDP would be approximately 4.8 percent

below the baseline forecast, and employment, I think about 800,000

fewer jobs. So there are real consequences. What has made a difference, I think, in some policymakers’ thinking in the EU is that

groups like the ICCF have been showcasing good, credible research

with good, credible macroeconomic models, not energy sectoral

models, such as DG Environment uses, to point out there are real

costs for trying to meet these very stringent targets.

The third point I would like to make is that in the EU, the emission trading system is beginning to bite. Figure 3 in my testimony

shows that the energy prices are rising fairly sharply since the imposition of the emission trading system. Part of that is due, not all

of it, certainly, but part of it due to the cost of buying the right

to emit a ton of carbon. So the emission trading system is raising

energy prices, which of course will tend to slow growth and reduce

employment.

The fourth point I would like to make is that an international

trading system, which many proponents of the Kyoto Protocol are

advocating, is not likely to be an effective way of reducing emissions. First, for an international trading system to work, investors

have to believe that the price of emission credits will stay high. It

has to be high enough to justify the initial investment in the R&D

to come up with alternative technologies.

Second, they have to believe that that price will hold. Given what

we’ve seen about, for example, in the European Union, their stability pact, which requires that countries keep their deficit at 3 percent or less of GDP, and of course, many of the major EU economies are not doing that, and there is no enforcement of that.

So if in the EU they can’t even force their own member states

to hit these targets that were mandated by the stability pact, think

about trying to get an international organization like the U.N. to

enforce emission targets made, let’s say, in 2005, by the Chinese

government in 2020. Think about how we would enforce the agreement if the Chinese government decided that target conflicted with

the needs of their economy.

So enforcing the property rights that investors would need to

make these kinds of investments through an international trading

regime is fraught with difficulty.
50

To conclude, the question of how to move forward in a productive

way on climate change, which is of course an important issue, very

important issue, although the Copenhagen Consensus that was released last year, which brought together a dozen or so top Nobel

prize winning economists, listed the world’s most critical problem,

not climate change, but in fact HIV/AIDS and the lack of sanitation

and clean water in the developing world. I think climate change

was way down, like twelfth or something, in their list of where the

world should put its resources.

Nonetheless, climate change is an important issue, and if we

want to address it, I think a more fruitful approach would be, as

Dr. Watson outlined in his excellent testimony, encouraging the

technology development and transfer through partnerships,

through the Asia Pacific Partnership, encouraging the use of nuclear power, and in the United States in particular, looking at our

tax code. The U.S. tax code doesn’t treat investment of all types

very favorably.

We have a high capital cost for all types of new investment, and

for example, some of the work that the ACCF has produced, and

I have testified on, shows that the capital cost recovery, for example, for combined heat and power, after 5 years, a U.S. company

gets only 29 cents back on the dollar after 5 years. But in China,

an investor would get $1.04 back, and in Germany 50 cents back.

So we have real slow capital cost recovery and we have high corporate tax rates. We now have higher corporate tax rates than the

EU average. Of course, many developing countries also have lower

tax rates.

So in the United States, not only can we move ahead on the technology side, through many of the international agreements that we

have adopted, but we do need to take a hard look at the tax code

and see if there aren’t ways to incentivize the kind of spending that

will help us reduce emissions intensity.

Last, I would like to point out that the United States has reduced its emissions intensity at twice the rate of the European

Union. We have reduced our emissions intensity over the past decade by 17 percent. The EU has only reduced its emissions intensity

by 7 percent, and part of that is due to our faster economic growth,

pulling through the cleaner, less-emitting capital stock more rapidly.

Thank you, Mr. Chairman.

Senator INHOFE. Thank you, Dr. Thorning.

Professor Grubb.

STATEMENT OF MICHAEL GRUBB, PH.D., CHIEF ECONOMIST,

THE CARBON TRUST, SENIOR RESEARCH ASSOCIATE, FACULTY OF ECONOMICS, CAMBRIDGE UNIVERSITY, AND VISITING PROFESSOR OF CLIMATE CHANGE AND ENERGY POLICY, IMPERIAL COLLEGE, LONDON

Dr. GRUBB. Thank you very much, Chairman and Senators. I am

quite honored to be here. Thank you for the invitation.

Perhaps I should start by updating you on my affiliation. I am

Chief Economist for an organization called the Carbon Trust, which

is a legally independent government-funded company that assists

UK business in implementing carbon reductions and implementing
51

low carbon technologies. That is a half-time post that I combine

with positions both at the Cambridge Economics Department at

Cambridge University and a visiting professorship at Imperial. My

background is in the academic research side.

A couple of opening comments on the context. First, I am sure

that all of you will, and following Lord Lawson’s comments, we

have experience not to judge the full state of debate in another

country just from any one report or one presentation of that. I

could call your attention to a number of other reports by the House

of Lords’ Science and Technology Committee, the House of Commons Environmental Audit Committee, others that have come out

this year, which broadly support the government’s policies, support

Kyoto. A major complaint is they think the actions should be

stronger. But as in any healthy democracy, there is a good debate

around the issues.

I would add I find the tone of the comments perhaps about IPCC

a little surprising, simply in the sense that the report itself does

say the IPCC publications, as a whole, contains ‘‘some of the most

valuable summary information of what we know about climate

change, the standards employed are clearly very high.’’ But I do not

wish to get involved in a discussion here about the IPCC. I’m sure

like any institution or indeed any agreement it is never perfect and

certainly needs to be improved. I do share the conclusions of Lord

Lawson’s committee that a stronger influence from economists in

this issue and in the IPCC debate would be welcome.

I think the main thrust of issues before this inquiry appear really to be around claims first that, if I can caricature it, that Europe

is all talk and no action on this issue and is simply not on a track

to deliver anything serious or to comply. The other is that it is implementing costly measures severely hurting its economy.

I am not actually sure how those two statements can be logically

consistent. I do believe that neither are actually true. The EU Ambassador here has written a letter that I believe Senator Jeffords

referred to setting out in some detail the policy instruments employed in the European Union and the compliance strategy thereof.

Now, I am an independent witness. I am not here to represent

any government view on the United Kingdom or European position.

What I would actually like to do in the remainder of my comments

is to say that I think to understand what is going on in Europe.

I would like to illustrate it with respect to the issue of low carbon

technology. Because I think almost every Senator here has mentioned the importance of low carbon technology. It is crucial for

solving this problem.

I am not sure that any European government would disagree.

Nor would they disagree that economic growth is absolutely crucial

as well, from all respects.

But what I do want to do is to set down five points about this

technology in relation to business and also drawing upon a piece

published in the Financial Times this morning jointly with the

chief executive at the Carbon Trust, Tom Delay, no relation, I believe.

[Laughter.]

Dr. GRUBB. The five key points on technology. No. 1, the need to

learn from history. That history leads me to be very cautious about
52

the idea that government should solve this problem by throwing

taxpayers’ money at very large R&D programs. Both of our countries have had frankly very expensive failures when we’ve tried

this. R&D is obviously crucial, but I think it is market-based innovation that is really required to deliver. One needs the private sector investment and innovation skills in this.

No. 2, from a business perspective, innovation is an ongoing and

dynamic process. It responds to incentives, it builds upon established technologies, develops, improves, expands scale. There are

actually a huge variety of low carbon technologies already available, more efficient vehicles, buildings, appliances, better production process controls as well as smart combustion and renewable

sources.

For example, in my testimony I have appended a presentation I

gave at Columbia and gone through charts relating to technology

issues and the economics of diffusion of low carbon technologies

that are with us now. Drawing directly on the Carbon Trust experience, we spent about 25 million pounds, about $40 million last

year. We estimate that the Carbon Trust clients co-invested something between $120 million to $220 million, U.S. terms. The net

benefits of that were between $400 million and $700 million.

That’s not a bad business. It’s a payback rate on energy efficiency programs of between 2 and 4 years.

That reflects the broader UK experience, that actually emission

reductions have been consistent and accompanied with good economic news. You will be familiar with the fact that UK greenhouse

gas emissions have gone down substantially. They are now around

12 percent below 1990 levels. The UK economy grew 37 percent in

that period. In intensity terms, the UK economy improved over

that period by more than 40 percent. Over the 10-year period within that, the period of the U.S. goal, the UK intensity improvements

was over 30 percent.

That’s really frankly, I should say in part, thanks to Maggie

Thatcher. It was the privatization of industries, the getting rid of

industries that had become bloated and inefficient, and the privatization of the energy industries with introduction of competition

and natural gas. Not climate policy, per se, but economic gains that

were associated with emission reductions. In that sense, the United

Kingdom already had slowed and stopped greenhouse gas emissions by about 1990. The challenge we see is to maintain the descent of the emissions in absolute terms.

No. 3, in this context and from a business perspective, I think

national emission targets give business a sense of where the ship

is going and emissions cap and trade systems actually give bankable value to emissions reductions. So it is a package that gives a

beacon to private investment in both cost-effective and emerging

technologies.

The limitations of a purely voluntary approach are such that a

group of senior CEOs recently wrote to Tony Blair and said, ‘‘if we

are going to deliver more, it needs to be bankable and we need government to set the regulations that make those initiatives work in

the bankable sense.’’

No. 4, I mentioned emission cap and trade. I do believe that’s

necessary. I do not believe it’s sufficient. Both our countries over
53

the years have failed to extract the full value of our government

research and development. Commercialization is the real challenge.

Innovation is a long, costly chain. There are lots of things, again,

in my presentation, covered that needs to be done, not only from

the push side, but also the market pull side, to help industries pull

technologies through the innovation chain.

No. 5, finally, let me just say, the powerhouse of innovation is

in the rich, industrialized countries and the global diffusion of low

carbon technologies to developing countries will be largely driven

through multinationals and foreign investment. In that sense, my

final comment is that the clean development mechanism of Kyoto

is very important as a diffusion method for clean technologies.

Let us remember, it is the gap between national targets and delivery domestically that drives the need for credits under the CDM.

If countries delivered their targets domestically, there would be no

foreign investment in helping to clean up developing countries

under the Kyoto system. But I know of no country that is planning

to, in a sense, break this investment elastic that ties them to their

Kyoto targets.

Thank you very much.

Senator INHOFE. Thank you, Professor Grubb.

You partially approached a question that I asked of Dr. Watson

when I observed that it was my understanding that this transition

from coal-fired plants to natural gas was accountable for a lot of

the reduction in emissions. I kind of wanted to get an idea in my

mind as to how much would that be, 50 percent, or what percentage that might be, No. 1.

No. 2, if that’s the case, isn’t that pretty much behind us now

and how is that going to affect the future? In other words, you have

already taken that reduction.

Oh, by the way, these will be 6-minute rounds, and then afterwards, if someone wants to stay, we will maybe stay for a couple

more minutes.

Any comments on that?

Dr. GRUBB. Yes. No question, it is a very important part of the

story. It has helped to give us a more balanced energy mix. Generally, the move to gas in power generation is considered to contribute between a third and a half of the overall UK emission reductions. Obviously with gas prices in the last couple of years, it

has reversed some of that, and hence some of the data to which

Harlan Watson referred.

Senator INHOFE. Do you all agree with that?

Lord LAWSON. Yes, that is absolutely right, Mr. Chairman. You

are also right that that is now behind us, because that great shift

which occurred as a result of the privatization undertaken by the

government of which I was a member, that has happened. It is finished. There is nothing further to go there.

If I may just add very briefly, and I will try and be very brief,

I welcome the fact that Tony Blair has now publicly conceded that

Kyoto is not going to work and that there is going to be no successor agreement of that kind. That is quite important, because

when he gave evidence to our committee, and incidentally, if you

read the report you will see it is severely critical of the IPCC process, documented reasons for that.
54

But when he gave evidence, he said, and I am sure he’s right,

that the existing Kyoto accord, even if it were accepted by everybody, is not going to lead to any dilution in temperature. But this

is the important point, he said it will lead to further agreements

of that kind. That’s pie in the sky. There is not going to be. It is

quite clear, anyhow, that India and China are not going to sign up

to this.

It is also clear that the only Kyoto sanction is a complete Alice

in Wonderland sanction. It is a sanction that if you don’t attain

your targets, and most countries are not going to, and it may well

be even for the reason you have just indicated the United Kingdom

doesn’t, I don’t know, that if you don’t attain it, then you will have

to have a stiffer regime next time around.

As I say, this is just Alice in Wonderland. It’s totally unrealistic.

Of course, the cost of this route is massive. That is why even if it

were politically workable, which it is not, it would not be cost effective.

Senator INHOFE. Yes, one last thought on that, Dr. Thorning.

Dr. THORNING. I would just like to take a moment to respond to

something Dr. Grubb said about the inconsistency of saying that

the European Union is imposing very costly regimes to curb emissions. An emission trading system, which affects I think only 9,000

to 12,000 industrial plants is not going to curb emissions adequately across the EU, because households and transport and so

forth are not included.

So I didn’t say that the European Union was actually imposing

the measures on its economy to bring down emissions. I said if they

did, our econometric work shows that it would be very costly. An

important thing for our friends in Europe to understand is that

here in the United States, we have a whole different system. If our

industry signed up to meet the mission targets under the Kyoto

Protocol, we would be sued and forced to meet those targets.

In the EU, that’s not the case. Meeting, for example, with regulators in Brussels a couple of years ago, I said to someone in DG

industry, well, what will happen if your industries don’t meet their

targets in 2010? He said, we’ll give them more time. So we have

a whole different regulatory regime here. To expect the United

States to sign up to something that we would be forced and compelled to meet and impose, as our Department of Energy found,

perhaps a 3.8 percent reduction in the level of GDP in 2010, when

our friends in Europe would not be forced to actually impose the

kinds of costs on their own economies is just unrealistic.

Dr. GRUBB. May I add a final point on that?

Senator INHOFE. Make it real quick, because this is running out

of time here.

Dr. GRUBB. Simply that those industrial facilities account for 46

percent of European emissions, and the penalty for non-compliance

is 40 euros a ton in the pilot period, and 100 euros a ton in the

Kyoto period.

Senator INHOFE. Thank you, Professor Grubb.

Lord Lawson, in the report of the Select Committee on Economic

Affairs that you were very much involved in, I noticed that there

is some discussion of the Michael Mann so-called hockey stick approach. Could you comment on why a controversy over a single
55

study was highlighted and why it matters so much that the science

underlying the study is right or wrong?

Lord LAWSON. That is a good question, Mr. Chairman. I think

there are two reasons why we highlighted that, as you say.

The first is that it has achieved, what I think, iconic status, this

hockey stick thing, which shows this sort of flat temperature from

the year 1000 AD to 1860 when records began. Then a very period,

as you can see on the short, when records existed, and then a projection of a huge increase for the future.

It is very suggestive. In fact, when you look at it carefully, I

think it is fairly widely agreed now that the law of this straight

line is a myth. There is ample evidence, which is even accepted by

many people on the other side of the debate, that for example,

there was a pronounced medieval warming period around about the

14th century which in many expert’s view, I am not a climate expert, led to warmer temperatures than we have today. There was

a little ice age around about the end of the 18th century, very early

19th century. So there have been fluctuations.

Also, you have seen this recorded, during the recorded period.

There hasn’t been a straight line upward, even though emissions

have been going up. It went up then down then up again. So this

very persuasive, apparently persuasive and iconic chart is extremely doubtful.

But the second reason because, you are right, what we are concerned about is the future. So why do we worry about the past? It

is a symptom of how the IPCC works. Michael Mann’s findings

have been challenged very robustly by other climate experts, experts over this period. In fact, there are very few, there are some

others, but very few who would agree with this.

These challenges, very coherent, very well researched challenges,

have been put to the IPCC, which after all, first published this in

2001. The IPCC has neither rebutted any of these challenges nor

is it prepared to entertain them. There is no scientific objectivity

about that in my book. So I think it is a good microcosm, a good

snapshot of the problems that we have with the IPCC.

Senator INHOFE. I would actually go further to say that

McKittrick and McIntyre and others not just challenged but refuted the science.

Also, I see Dr. Watson is still here. While I can’t ask him a question on this panel, I would only observe a question he was asked

about, doesn’t the Administration agree with the increased temperatures at this time, he said yes, but let’s keep in mind that during the medieval warming period, temperatures were actually higher than they are now. These fluctuations have gone back and forth

and have nothing to do with anthropogenic gases.

I am sorry, Senator Jeffords, I went a little over my time, feel

free to do the same thing. That doesn’t go for you, Senator Carper.

[Laughter.]

Senator JEFFORDS. Lord Lawson, the House of Lords report is

critical of the Intergovernmental Panel on Climate Change for their

lack of monetary comparisons between the costs to control greenhouse gases and the benefits. With 56 nations ratifying the Kyoto

Protocol, won’t the results of their implementations and efforts

yield valuable information upon the cost and the benefits, and how
56

should such implementation data be collected and used, or how

could it be collected and used, and what other approach should be

taken to look at the costs and benefits of controlling greenhouse

gases?

Lord LAWSON. Senator, if I may answer your question in a slightly oblique way, it may be that if the signatories to the Kyoto agreement carry out what they have pledged themselves to do, that indeed we will discover what the costs are. I think we will discover

that they are very great indeed.

But normally, before embarking on a policy, it is wise to make

your best estimate of the costs in advance. Because if the cost is

prohibitive, then you don’t want to go down that route.

That is why one of our recommendations is that the British government should come clean, it may need more work by the British

treasury, but it should come clean with the people, which it has not

yet done, precisely what the costs of what is official government

policy still despite what Prime Minister Blair said in New York last

month. I hope there will be a change, but the policy is still allegiance to Kyoto.

Then it should tell the public openly, OK, this is our policy and

this will be our best estimate of the costs. It hasn’t done that, and

we suggest that it should, costs in terms of increased energy prices,

which would need to go far higher than we see at the present time,

and costs in terms of reduced economic growth, which is of course

important, incidentally, not just for the United Kingdom, but perhaps even more so for the developing world.

So these costs need to be spelled out before one can take a view,

not, let’s do this and see from experience what the costs turn out

to be.

Senator JEFFORDS. The House of Lords July report says that it

is ‘‘far better at government-set goals and the price signals to

achieve that goal, leaving the market to select the technologies and

the rate of diffusion through the economy.’’ Isn’t that what the

Kyoto Protocol sets out to do?

Lord LAWSON. What we had in mind, Senator, was that the

present policy of the British government is to fix on one particular

renewable source of energy, wind power, and to subsidize that and

to support that very substantially. We felt that yes, there are a

whole lot of ranges of ways, technological ways of reducing carbon

emissions.

We have heard a lot to talk about them today, carbon sequestration, various renewable sources, there is also nuclear power, of

course, a whole range. And that it is far more sensible for the government, rather than trying to pick one particular winner and to

support that heavily, to increase—because in all of our countries

there is a governmental research project. This is nothing new, to

have a form of assistance to companies to engage in these areas of

research in whatever form of technology they believe is most likely

to bring profitable results.

Senator JEFFORDS. Dr. Thorning, the northeastern and Pacific

Northwest regions of this country are developing climate change

programs. Twenty-one Fortune 500 companies joined the Business

Environmental Leadership Council to address climate change.
57

How do you think these States and companies are moving to address climate change in the absence of a concerted U.S. effort?

Won’t the actions of these States provide important information

about costs and benefits to addressing climate change that could

help the United States?

Dr. THORNING. I’m glad you asked that question, because the

American Council for Capital Formation has done a substantial

amount of research on what it would cost the northeastern States,

for example, to meet the New England Governors Plan, which requires emission reductions by 2010, I think down to approximately

10 percent below current levels, and then get on a trajectory to reduce emissions by 60 to 70 percent below 1990 levels by 2050.

On the ACCF Web site is an econometric analysis by Charles

River Associates and also another firm which shows that the costs

to these States, for example, if the nine New England States were

to embark on a plan to reduce emissions, they would face significantly slower economic growth than the other States that didn’t

participate and also face significantly lower employment levels. I

believe we have also analyzed the NCEP plan, and that is on our

Web site. That too shows less impact than the New England Governors Plan, because it doesn’t require emissions as steep.

So while the States are talking about moving in that direction,

oh, and by the way, we also have analysis on some other States,

in particular Oregon and Washington State and so forth of emission reduction targets. While the States are discussing that, to my

knowledge, they have not imposed the sort of legislation that would

actually force down energy use in their States.

For example, Maine had been discussing joining the New England Governors Plan, but their legislature enacted a bill this year

requiring the use of cost benefit analysis before any future environmental polices are imposed. That bill was signed into law in May.

So I think States are going to be taking a hard look before they

impose additional costs on their citizens and on their industry to

meet a Kyoto-type target, particularly as they learn that their efforts, given the global nature of the climate change challenge, will

mean almost nothing in terms of reducing global concentrations of

CO2. So while there is a lot of talk, I’m not sure there is a lot of

action in terms of actually enacting legislation. I would invite everyone to look at the ACCF State by State analyses. I think we

have maybe 30 States analyzed.

Senator JEFFORDS. Thank you very much.

Dr. Grubb, you testified that the UK companies invested $120

million to $220 million on energy-saving efforts that resulted in

$400 million to $700 million in savings. Do you think there are still

more energy-saving efforts companies can invest in or have gains

ready to be realized?

Dr. GRUBB. First, let me clarify that figure was about the Carbon

Trust’s own programs on energy efficiency. The Carbon Trust was

set up jointly between government and industry to help the United

Kingdom deliver cost-effective emission reductions and to build a

low carbon industry technology sector.

There are many other, both policy instruments and initiatives in

the United Kingdom, including perhaps most significantly in terms

of overall delivery the fact that the government in 2000 introduced
58

the climate change levy, which is a tax on energy. It reduced corresponding the tax on labor and reached a set of agreements with

heavy energy users. They set the emission targets in return for a

rebate on that climate change levy.

Those companies have also substantially over-delivered on their

targets. They have essentially found that once they had a serious

look, they could deliver more than they thought they could in terms

of efficiency and improvements.

Overall, we have estimated the total incentive value of the UK

policy instruments at about $2 billion a year, incentives toward low

carbon investments. The UK energy white paper estimates that the

savings from energy efficiency overall, savings potential amounts to

several billion pounds. I think that would correspond with our experience at the Carbon Trust.

Senator JEFFORDS. Thank you.

Senator INHOFE. Thank you, Senator Jeffords.

Senator Voinovich.

Senator VOINOVICH. Thank you, Mr. Chairman.

Dr. Thorning, I am tickled to hear what you just said about the

northeastern States and Maine and cost benefits. One of the bills

I introduced when I first came to the Senate was to ask for cost

benefit on our air regs. We were able to get it on water, but for

some reason, we haven’t been able to get it on air regs. The reason

is because they said that doing that wouldn’t lend itself to really

cleaning up our air, that that ought to be not taken into consideration.

There is a disconnect in this country, I think, about our environmental policies and our economy. Our clean air regulations and

laws have put us in a situation today where our natural gas costs

are the highest in the world. We have lost over 100,000 jobs in the

chemical industry. We have seen fertilizer costs go up dramatically.

We have seen companies that produce fertilizer go out of business.

People who live in areas where I live, in Cleveland, Ohio, have seen

their energy costs, their natural gas costs go up over 100 percent,

which has been just terrible on those that are poor and on the elderly.

It seems to me that we have missed the boat in this country

somewhere in terms of harmonizing our environmental, our energy

and our economy. I would like you to comment on just what impact

you believe this has had on where we are in terms of our competitiveness in the global marketplace. In spite of it, we are doing better than some of the other countries. But the fact is that this has

had a major impact on our economy.

Last but not least, if we went to cap and trade on greenhouse

emissions, what impact do you think that would have on further

exacerbating an almost intolerable situation in this country for our

businesses and for those that are the least of our brothers and sisters?

Dr. THORNING. Thank you, Senator. Let me take the last part of

your question first. The research which again is on the ACCF Web

site from a variety of good modeling firms and from our own Department of Energy shows very clearly when you use either a macroeconomic model or a general equilibrium model, which is designed to measure the impact on economy over 20, 30, 40 years of
59

changes in energy prices, a variety of independent research shows

that if we impose cap and trade, including some of the new work

I mentioned on the State level, we would face GDP levels anywhere

from 2 to close to 4 percent less by 2010 than what we have now.

In terms of overall dollar amount, we might have as much as

$400 billion less GDP in 2010, if we imposed that sort of situation.

Bear in mind, every time you reduce GDP by a dollar, the Government gets less tax revenue. So it would mean negative impact on

Federal budget receipts and spending policies and so forth, if we

slow growth under a cap and trade sort of system or impose the

taxes on industry sufficiently high and households and transport to

force down emission use. It would be undoubtedly a negative impact.

That is the reason, of course, the Senate had that information before the Kyoto Protocol. In 1997, our Members of Congress understood the economics of policies to curb emissions along the lines of

the Kyoto Protocol.

Now, back to your first point about the negative impact that high

energy prices are having, it is undoubtedly true that we could have

done a better job over the last decade of improving our sources of

supply and probably policies to promote conservation. One problem

right now, which I know you are acutely aware of, is our lack of

refinery capacity to try to do something to bring down high gasoline prices.

Part of the reason we don’t have more refineries is our environmental regulations have been so burdensome, so difficult that companies have simply abandoned the hope of doing much to put in

place new facilities. The only reason they are doing as well as they

have is they have managed, I think, to get more out of existing

physical refineries.

But again, clearly if we do not manage to address the United

State’s growing energy needs, and by the way, another factor which

I don’t think was mentioned is that our population is growing

about nine times faster than is the EU population. So we naturally

have to have more energy for job growth, for taking kids to school,

for all sorts of purposes.

So we really do have to focus on expanding our supply of energy.

I am hoping that nuclear power will be given more consideration,

that we will some new build in nuclear facilities. Obviously we

need to increase where we can pipelines and refinery capacity. Of

course coal, clean coal has to be there, too.

Senator VOINOVICH. You would be interested to know that the

chairman of this committee and I are co-sponsoring a piece of legislation that is going to encourage the building of at least one new

refinery in this country. We haven’t built one for 30 years because

of our environmental policies and our red tape and the NIMBY, not

in my backyard.

The other thing that we tried to do in the Energy bill was to provide some incentives to move forward. I would be interested in your

comment, have you observed or have you reviewed those provisions

in the Energy bill? I would be interested in your opinion.

Last, do you think it’s time for us to sit down and talk about having a declaration of independence in terms of energy?
60

Dr. THORNING. Well, I’m not an expert on the Energy bill. I know

there are probably many people in this room who are. But I think

many of the provisions that are in there to incentivize, for example,

some of the faster depreciation for pipelines, for example, there are

some very helpful provisions in the Energy bill.

But as I said earlier, I think we need to go farther in terms of

the tax code to try to lower the cost of capital for all types of new

investment and particularly for energy investment. What was the

second part of your question?

Senator VOINOVICH. The second part is that at this stage of the

game, if you look at those incentives that are in the Energy bill,

should we——

Dr. THORNING. Oh, energy independence.

Senator VOINOVICH. Independence, and review where we’re at,

and try to make some kind of a national commitment to becoming

less reliant on foreign sources of energy.

Dr. THORNING. As attractive as it would be to be independent of

outside sources, I am not sure that in the next 20, 30 years that’s

very realistic. I think we are going to be, until we move away from

combustion engines, I think we are going to be dependent on foreign oil. We can perhaps try to mitigate that, as people respond to

higher price signals and move toward more efficient means of

transport.

But I don’t think it would be possible to be totally independent

in the foreseeable future.

Senator VOINOVICH. I’m not suggesting that. I’m talking about a

long range plan to move toward more energy independence. For example, back in 1973, when we had those awful lines, we were 34

percent reliant on foreign oil. Today we are up to about 68 or 70

percent. The world is a lot more unstable, or less stable today than

it was then.

Dr. THORNING. Clearly, if we were able to have access to more

offshore sites, if we were able to be drilling for oil in places that

right now we can’t, that would certainly help reduce dependence on

foreign oil. Of course, our coal supply is so large and it may be that

in due course we will be able to do more in terms of making that

a very clean source of energy. Then with nuclear power, I think we

are about 20 percent nuclear right now for our electricity production. That could increase.

So there could be a variety of ways over the long term to move

toward energy independence. But again, I think we need to take a

look at our tax code, which gives the U.S. investor a very high capital cost for new investment, compared to competitors around the

world. Of course, environmental regs need to be made less cumbersome, so that they don’t preclude good new sources of energy.

Senator VOINOVICH. You don’t think the provisions in the Energy

bill go far enough in terms of encouraging private sector investment? It does deal with tax incentives.

Dr. THORNING. I think it’s a good start. But I don’t think it’s

broad enough. I think it’s a good start. But there are many types

of investments whose tax lives weren’t changed. Also the corporate

tax rate has not been lowered. As I said, it’s now quite high compared to our competitors.

So those two factors give our competitors a high cost of capital.
61

Senator VOINOVICH. I would be very interested, and I’m sure the

committee would, in fact we will put it into the record if you will

suggest what we need to do to get this investment that we need.

Dr. THORNING. I would be happy to. Thank you.

Senator INHOFE. Thank you, Senator Voinovich.

Senator Carper.

Senator CARPER. Thank you, Mr. Chairman.

To each of our witnesses, welcome. We are grateful for your presence and for your testimony. Lord Lawson, I was sitting here when

you were sort of going through your testimony. I was wondering,

who in the United States has had the kind of portfolio that you

have as a cabinet secretary. That is an impressive array of responsibilities. Thank you very much for coming a long way to be here

with us today.

I just want to say again, Senator Voinovich, I think he is onto

something with this energy independence. It is not just, I know

there is coal in the ground, we certainly have the opportunity and

I think the obligation to find better ways. We have the technology

to burn it, we have the technology to burn it clearly. We simply

need to invest and do it.

With respect to nuclear, I think I am encouraged to see Generation Next, progress toward building the next generation of nuclear

power plants. I think that is needed and is sound.

I would also remind us that down south, in Brazil, I don’t know

what the percentage is now but they meet a large and growing percentage of the fuel needs for their cars, trucks and vans out of the

things they grow in their fields, whether it is sugar cane or corn

or soybeans or what all. It’s plain that we can do that in that regard and we are endeavoring to do that.

I want to ask a question, too, if I could, of Professor Grubb. Dr.

Thorning, when I was listening to your testimony, at first I wasn’t

sure I heard you right, but then I believe when I went back and

looked at your testimony, I think I understood you to say that the

adoption of a cap and trade approach with respect to global warming would lead to, I think you said a 2 to 4 percent drop in GDP

by 2010. I think that’s what you said. Looking at your testimony,

apparently it is what you said.

Let me just say to Professor Grubb, any comments that you

might have, any observations you might have on that assertion?

Dr. GRUBB. Yes. I have to say I simply don’t recognize the numbers put forward here.

Senator CARPER. Say that again, just a little louder.

Dr. GRUBB. I simply don’t recognize the numbers put forward

here. I don’t see them correlating with anything that I’ve seen published in the serious academic literature. I don’t think I’ve seen any

government assessments of numbers like these. The EU letter, I

believe, put forward its assessment.

Certainly the statement in Dr. Thorning’s testimony that fully

macroeconomic models always produce higher numbers than the

kind of model the European Commission was using is simply

wrong. Those models can produce all kinds of results, depending on

exactly how one designs them.

I do note with interest that she herself referred to one of the

major UK models. She referred to the Cambridge Econometrics re-
62

sults. So it may be of interest to say of the Cambridge Econometrics studies, that one of the interesting things in it is that it

predicts that as a consequence of climate policies, UK employment

would be increased. In fact, GDP, under a number of their control

scenarios, increases slightly. Both are pretty small, the jobs increase is between 5,000 and 50,000 extra jobs.

Essentially the key question to ask about any of these macroeconomic models when they affect an economic instrument is, what

is happening to the money? Economists have long said economic instruments are the efficient way to deal with this kind of problem.

They raise the costs of things, they allow the market to respond in

what seems the most efficient way.

But they raise money. As far as I can see, almost the only way

of running a model that generates more than a percent of GDP loss

is the model runs that I have seen which simply take the money

from those instruments and throw it into the sea. It does not go

anywhere in the models.

Those are key questions. In the Cambridge econometrics model

what actually happens is they raise the energy price and they reduce the employment costs, the taxes on national insurance. That

reduces the cost of labor supply to companies. That leads to a small

positive boost to employment, which also feeds through to a slight

boost in GDP. I don’t want to exaggerate those effects, the specific

functions can be debated, etc. You could easily run macro models

which will produce a loss in GDP, I don’t deny that for a moment.

But the key thing is, no government in my knowledge raises tax

money and then throw it out of the economy. It goes somewhere.

If the model does not tell you what’s happening to that money, it

will give you a fundamentally misleading result.

I think the only other circumstance in which I’ve seen models

produce the kind of numbers that Margo Thorning is talking about,

and to which Harlan Watson also referred, is if they actually impose emission targets as a draconian, sudden cutback. My understanding is that the U.S. Energy Information Administration 4 percent GDP loss came from a scenario in which effectively the United

States did nothing until 2005. It was then forced to cut 30 percent,

to achieve its scheduled target within the space of 3 years.

Now, I have no problem in agreeing that that produces a massive

macroeconomic shock to any economy. I think it would be a ridiculous way for any country to approach climate change. As you said,

the key is slow, stop—I believe we’ve already achieved that far in

a number of the leading European economies—and reverse. I think

the more one defers the mechanisms that introduce regulations

that really start that process, the greater the risk of being faced

with a big shock if the science actually turns really nasty on us.

Senator CARPER. Let me ask maybe one more question before my

time expires. We have had, as we have tried to develop a comprehensive four pollutant or four emission bill here dealing with

sulfur dioxide, nitrogen oxide, mercury and CO2, we have had a lot

of discussions with the private sector. We have asked them, particularly the utility companies, to come in and to talk with us about

how, if they were in our shoes, how would they go about reducing

emissions of all four, but especially CO2.
63

I don’t know to what extent you have relied on businesses in the

United Kingdom to help develop your own compliance agenda, but

I presume you have, and I would just ask, have you, because it

could be a model for us.

Dr. GRUBB. Certainly the evolution of policy in the United Kingdom has been really interesting in this respect. It goes back again

to Mrs. Thatcher. She set up the Advisory Council on Business and

Environment that has been a very constructive dialog between government and business, stretching back to 1990. That has helped to

design and craft the regulatory instruments that are in place.

As part of that, I should say also led to the creation of the Carbon Trust, which was a joint deal between British government and

industry to help British industry deal with this problem cost effectively and to develop the carbon technology industries that we believe is going to be a place where the United Kingdom can make

money in the future.

Senator CARPER. I would just say in closing, really to my colleagues as much as anyone, I cited three companies earlier, IBM,

GE and Dupont as companies that have decided to reduce CO2

emissions rather significantly. It is really part of their business

plan as a company. They are not doing it to lose money. They believe you can do good and do well at the same time.

I think they are onto something. I think they are onto something.

Again, our thanks to each of you. Thanks so much for being here

today, and Mr. Chairman, thanks for that extra 2 minutes.

Senator INHOFE. Take another two.

Senator CARPER. I yield my extra 2 minutes to Mr. Isakson.

Senator INHOFE. All right, thank you, Senator Carper, very

much.

Senator ISAKSON. Thank you, Senator Carper, I appreciate it.

Dr. Thorning, what does emission intensity mean? What is a

good definition for emission intensity?

Dr. THORNING. The definition, as I understand it, it’s the amount

of energy used to produce a dollar of output or a euro of output.

Senator ISAKSON. On your chart that you showed us earlier that’s

in your printed materials, those countries in the United Kingdom,

have all of them ratified and signed the Kyoto Protocol?

Dr. THORNING. As I understand it, it’s the government that

would sign the treaty, not——

Senator ISAKSON. But are all of them attempting to meet the

2010 standards under the Protocol?

Dr. THORNING. In the United Kingdom?

Senator ISAKSON. Yes. In the EU.

Dr. THORNING. In the EU, they all are attempting to meet these

targets, yes.

Senator ISAKSON. The reason I ask the question is you said, I

think, and please correct me if I am wrong, that the United States

has reduced emission intensity by 17 percent and over the same period of time the EU had reduced it by 7 percent, is that correct?

Dr. THORNING. Over the 1992 to 2002 period, our energy information data shows that the United States has reduced emissions

intensity almost 17 percent compared to about 7 percent in the EU.

Senator ISAKSON. So I guess my point, I am sorry Senator Carper

left, because it was kind of going to ratify something he said, so
64

is it reasonable for me to presume then that the United States that

has not ratified the treaty is exceeding what would be the goals of

the treaty, I guess in part, at a faster rate than are those that are

signers to the treaty?

Dr. THORNING. We are reducing our rate of growth, as Dr. Watson testified. Our emissions are still growing, but the emissions intensity per dollar of output is being reduced very much faster than

is the case in Europe. Given our much faster population growth, it

would be difficult for us right now to absolutely stop growth and

emissions. But we are certainly doing a credible job in terms of energy intensity, and as Dr. Watson said, are on track to meet the

Administration’s goal.

Senator ISAKSON. I am going to give Dr. Grubb—he either has

to leave or he really wants to chime in here, one of the two, but

before I recognize him, back to Senator Carper’s statement, and I

would add that in my State, Southern Company has established

the same self-imposed goals in terms of reductions, that obviously

if that analogy is a correct analogy, which I’m sure it is, the U.S.

companies on their own, I think because of our Congress and our

country’s emphasis on clean air, is doing a pretty good job of lowering that.

Now, with that said, Professor Grubb?

Dr. GRUBB. Thank you very much. I should say I very rarely venture to question a number when I don’t have the exact data in

front of me. I don’t know that——

Senator ISAKSON. We do it all the time, so you just feel free.

[Laughter.]

Dr. GRUBB. I simply do not understand how the 7 percent figure

can possibly be true. EU emissions were more or less static, declined slightly over the period considered. I can assure you the European economy grew by more than 7 percent during that period.

Therefore, I just do not see how only a 7 percent reduction in emissions intensity would be possible.

Senator ISAKSON. I think her statement was the emission intensity in the United States was 17 and in Europe, the EU, it was 7.

Dr. THORNING. Reduction in emissions intensity per dollar of output.

Senator ISAKSON. Per dollar of output, right.

One night I would love to take the two of you to dinner and

watch you debate that subject. It would be interesting.

Dr. THORNING. I’ll send you the spreadsheet we used.

Senator ISAKSON. Good.

Professor, let me ask you a question. I love your all’s accents——

[Laughter.]

Senator ISAKSON. I guess I gave away where I’m from when I

said you all, but Lord Lawson and Professor Grubb have beautiful

accents. The only problem with them is, sometimes you start listening more to what it sounds like they are saying than what they are

saying.

[Laughter.]

Senator ISAKSON. So let me ask you a question. It sounded like

to me that you were saying, in part of your testimony, you were

saying that you greatly preferred market-based solutions to really
65

solve the problems of carbon emissions, clean air, all of that. Is

that correct?

Dr. GRUBB. Yes. I think an appropriate mix of policies is needed,

but market-based solutions are very much the grounding of an efficient policy.

Senator ISAKSON. You referred to Maggie Thatcher’s period of

privatization and private enterprise empowerment, I guess is what

it was, as being a part of that. Then I thought I heard you say,

a reference to doing that through impositions of targets and penalties. Did I hear that right? What did you say?

Dr. GRUBB. To an economist, a market-based solution to an environmental is using an economic instrument to address the pollution, so that rather than, say, mandating the technology that companies have to use, you say, either we’re going to tax this pollution

so it becomes more expensive and you, the company, choose how

best to respond to that, or you say we’re going to cap the emissions

and set up a trading market in the allowed emissions, so that we

will reach an equilibrium price and the companies who think they

can do it more efficiently can do more and sell the allowances to

others. That’s what I mean by market-based solutions.

Senator ISAKSON. Thank you. What do you have to say about

that, Lord Lawson?

Lord LAWSON. I would differ slightly, Senator. I think that a system which begins by setting arbitrary caps, and advocating the different countries, is not a market-based system. You can’t call that

a market-based system, because the setting of the caps is entirely

an arbitrary fiat.

The second thing I would say is that there is no question in any

recommendation in the House of Lords report, nor any recommendation I would make, that we should mandate what technologies businesses and companies use. What I suggested, what the

report suggested, is so far from that, which the government in the

United Kingdom has hitherto done, by going bingo for wind energy,

is to have a research budget which will allow companies to investigate all forms of reductions in carbon in the production of energy,

whether it’s cleaner conventional energy, whether it’s unconventional energy, whatever.

Explore them all and decide which they feel makes the most

business sense, is the most likely to become profitable within a reasonable period of time. That is much closer, I think, to a genuine

market approach.

The only other thing that I would say if I may is that believing

as I do in the marketplace, I hope that the United States will not

go along the road of a protectionist energy policy, which one of your

colleagues suggested might be wise. I think it would be profoundly

unwise, it would not be in the interest of the United States. I think

it would certainly not be in the interest of the world economy,

where globalization, the extinction of the market across borders to

a greater extent than has ever happened before has proved to be

extremely beneficial. We don’t want to roll back from that, in my

judgment, in any way.

Senator ISAKSON. Thank you very much. Thanks to all the panelists.

Senator INHOFE. Thank you, Senator Isakson.
66

I noticed during the very articulate and somewhat lengthy answer, Professor Grubb, that you had to Senator Carper’s question,

that Dr. Thorning, you were making a lot of notes. Is there anything you would like to share with us from the notes you were taking?

Dr. THORNING. Yes, thank you very much, Senator. I would like

to correct a possible misinterpretation of the testimony I submitted.

What our results show when we analyzed economic impact of the

Kyoto Protocol on Germany, United Kingdom, Netherlands, Spain,

Italy is that those particular countries, if they actually imposed the

taxes high enough to force down energy, would experience GDP levels of, in the case of Spain, 4.8 percent less in 2010 than under the

baseline forecast.

Now, in these simulations we did recycle the revenue in terms

of personal tax cuts, so the money didn’t go into a black hole. These

simulations, which were done in 2002 and 2003, assumed the

United States was not participating. So there was obviously some

leakage of jobs outside the EU.

But the numbers were not for the global economy, as Senator

Carper said. It was simply for the five countries we modeled. Perhaps I might submit this paper for the record, which is a document

with the detailed country results.

Senator INHOFE. Without objection, that will be made a part of

the record.

[The referenced document follows:]

THE KYOTO PROTOCOL: IMPACT ON EU EMISSIONS AND COMPETITIVENESS BY MARGO

THORNING, PH.D.

EXECUTIVE SUMMARY

EU Not Meeting Emission Targets: The original 15 members of the European

Union are projected to be 7 percent above the 1990 emission levels by 2010. Data

from the European Environmental Agency show that only Sweden and the United

Kingdom are likely to meet their Kyoto targets. Spain, Denmark and Portugal are

projected to be 25 percent to 35 percent above their targets in 2010. EU policymakers are beginning to worry about the additional steps required to meet the targets, including impact of emission trading schemes on industry.

GDP and Employment Effects of Emission Reduction Targets: An accurate portrayal of the costs of complying with GHG emissions reduction targets depends

largely on choosing an economic model that captures all the short- and mediumterm costs of adjusting to higher energy prices or regulatory mandates on the economy as a whole. When macroeconomic models are used to measure Kyoto’s effects

on the EU, the impacts are greater 0.5 to 5 percent less GDP in 2010 than under

the baseline forecast. The Global Insight simulations also show job losses in 2010

ranging from 51,000 in Italy to 800,000 in Spain.

The Impact of the Emission Trading System on EU Electricity Prices: Although

the ETS has only been in operation for a short time, electricity prices in the EU

are rising. EU electricity prices are closely tracking the cost of the emissions trading

permits. While some of the increases in electricity prices are doubtless due to rising

global energy prices, part of the 31 percent rise in power can be attributed to higher

prices for the right to emit a ton of CO2.

Effectiveness of an International Emission Trading System: Emission trading will

work only if all the relevant markets exist and operate effectively; all the important

actions by the private sector have to be motivated by price expectations far in the

future. The international framework for climate policy that has been created under

the UNFCCC and the Kyoto Protocol cannot create confidence for investors because

sovereign nations have different needs and values.

Conclusion: Near-term GHG emission reductions in the developed countries

should not take priority over maintaining the strong economic growth necessary to

keeping the United States one of the key engines for global economic growth.
67

Dr. THORNING. Second, the number that DG Environment has

used for many years, Margo Walstrom, the previous commissioner

of DG Environment, often was publicly quoted as saying that their

models showed that imposing the Kyoto Protocol on the EU would

cost only .12 percent of GDP. That’s using their primus model

which is an industry sector model.

I think that’s one reason EU policymakers did not ask questions

the real cost of these policies that they signed up to, because they

were given information that was not based on an appropriate

model, appropriate to answer the question of what does it cost to

force down energy use.

Another study which I cited in my testimony was done by DG

Research for DG Environment in Brussels about 2 years ago, and

their simulations showed that if the EU got on track to reduce

emissions, the Kyoto Protocol and then a tighter target in a post2012 period, their own numbers showed a reduction in EU GDP of

1.3 percent a year by 2030. So they too are beginning to in some

of their work show rather significant costs for emission reduction

targets.

Finally, the point that Michael Grubb made about the U.S. numbers, the EIA numbers of 3.8 percent, or 4.0, 3.8 percent reduction

in GDP by 2010, if the United States had signed up to the Kyoto

Protocol, the EIA did another study which hasn’t been so much

noted showing that the cost to the United States would have been

even greater had we started earlier. So starting earlier would not

have, according to EIA, have materially, it would have actually

made our situation worse, because our economy would have been

less strong and we would have slowed our growth even sooner.

So I just wanted to mention that there is, there would have been

no bonus to us had we embarked quickly in, say, 2000 on forcing

energy taxes up high enough to reduce emissions.

Senator INHOFE. When you mentioned Margo Walstrom, I was

reminded of a quite I use quite often, I have that on the easel up

there, you might glance at it.

Senator Isakson, do you have any other questions for the panel,

since it’s down to you and me?

Senator ISAKSON. No, thank you, Mr. Chairman.

Senator INHOFE. All right. Why don’t I do this. I would like to,

I don’t think we’ve ever, since I’ve chaired this committee, had a

more distinguished panel, and that includes panel one, I might also

say, Dr. Watson. If there is anything that you would like to say as

a last parting thought, we will start with you, Professor Grubb. I

would also include you, Dr. Watson, if there is any other last comment you would like to make also, feel free to do so.

Professor Grubb?

Dr. GRUBB. Thank you for the opportunity.

Perhaps the only other thing that I would add in relating to

some comments that have come up during the whole session, since

the session is about Kyoto and compliance and what you are doing,

etc., I did just want to underline the distinction that as set out, I

think also in the European Commission’s letter, European countries are in varied states and are taking varied strategies toward

Kyoto compliance.
68

Some, like the United Kingdom, intend to deliver virtually the

whole lot domestically. The majority intend to actually make a significant contribution through the use of the flexibility mechanisms

as very much designed and built into the treaty that involves foreign investment. But I still don’t see that any EU country or the

EU as a whole is not going to comply.

With respect to the references to Tony Blair and his comments,

the British government has made it very clear, including a ministerial statement, that does not represent a backing away from Kyoto

or the United Kingdom’s commitment to Kyoto. It is simply saying,

this is a big and complicated problem. We are willing to look at all

kinds of options going forward in the next round.

But Tony Blair himself in that very same address referred to the

need to build markets for these technologies. That is really what

this whole process, I think, needs to be about.

Senator INHOFE. Thank you, Professor Grubb.

Dr. Thorning.

Dr. THORNING. I would just like to say that climate change is obviously, as we all recognize, a global problem and there will be

many ways to approach emission reductions and alterative technologies. But we have to keep in mind climate change is not the

world’s worst problem. There are many others, as obviously the Copenhagen Consensus came up with. Governments have need for

strong economic growth to fund a variety of programs, not the least

of which is fighting terrorism, I think.

So we need to balance how we spend our money. If we slow our

economic growth here in the United States unnecessarily through

near term targets, we will certainly be less able to be a powerhouse

for economic growth and for leadership in a variety of areas. So I

think the approach the Administration is advocating is the only

practical, sensible approach to move forward.

Senator INHOFE. Thank you. I know your council, you said something that I thought was interesting in your opening remarks,

when you talked about capital recovery being so low in the United

States, mostly due to our taxation system. I would like to see any

paper you have on that. That might be helpful to us.

Dr. THORNING. I would be delighted to submit that to you.

Senator INHOFE. Please do, for the record.

Lord Lawson.

Lord LAWSON. I will say very little, I am extremely grateful to

you, I must say again, for your having given me the opportunity

to come here and meet you and answer some of your questions to

the best of my ability.

I would just first of all echo one of the things that Dr. Thorning

said, and that is, we must not be obsessed with this problem. Not

because there isn’t a problem, but because as she said, there are

a number of other more, certainly arguably more imminent problems, which the world has to grapple with. Nuclear proliferation is

one. International terrorism is another, and these two of course can

lead to a very ugly way.

The question also of humanitarian aid to the world’s poorest is

another important matter for the world’s economy. I think that

there is a real danger in Europe, it’s not the case in the United

States, but there’s a real danger in Europe of there being, for var-
69

ious reasons, an obsession with this particular issue, which, as I

tried to suggest, can be more sensibly be met and dealt with in a

different way which is more cost effective and which is likely to

give more time for technologies to develop.

Because technology doesn’t stand still. We can’t predict how it’s

going to develop. But I think all history shows that it is going to

develop in some areas faster than others, and we don’t know which.

Therefore, tackling in a more cost-effective way at the present

time, developing measures to adapt, adaptation is tremendously

important. It will buy time and enable us both better to meet these

other threats as the world as a whole and also better to develop

the sort of technological means of mitigating that I think everybody

in this room accepts is of first importance.

Senator INHOFE. Thank you, Lord Lawson. Both you and Dr.

Thorning mentioned how obsessed we are. Well, this is Washington, DC. We live obsession every day. I have made some speeches on the floor and reflected that many of those who are so obsessed with global warming today were equally obsessed with the

new ice age that was coming in 1978. So that was a point well

made.

Dr. Watson, did you have anything final comments to make?

Dr. WATSON. I just wanted to thank you, Mr. Chairman, express

my appreciation for appearing before the committee. I think you

did an outstanding job, and the members of the committee, on airing the issues. I think we’ve had a very good exchange here.

I obviously would like to echo, the comments by Lord Lawson

and Dr. Thorning, about the importance of keeping things in perspective. Once again emphasize, again, we believe that the way to

engage developing countries is to put climate change in a broader

context so that we’re addressing multiple issues that are of importance to them—economic growth, reducing poverty, etc., as I said.

I believe that’s the only sensible way you’re really going to engage

them.

Thank you, sir.

Senator INHOFE. Thank you very much, Dr. Watson and thank

all of you for coming. I know you’ve come a long way. It was immensely helpful and I thank you so much for being here.

We are adjourned.

[Whereupon, at 5:18 p.m., the subcommittee was adjourned.]

[Additional statements submitted for the record follow:]

STATEMENT OF HARLAN L. WATSON, PH.D., SENIOR CLIMATE NEGOTIATOR AND SPECIAL REPRESENTATIVE, BUREAU OF OCEANS AND INTERNATIONAL ENVIRONMENTAL

AND SCIENTIFIC AFFAIRS, U.S. DEPARTMENT OF STATE

Mr. Chairman and Members of the Committee, thank you for the opportunity to

appear before you today to discuss the Kyoto Protocol and assess efforts to reduce

greenhouse gases. I would like to begin with a discussion of the Bush Administration’s overall climate change policy, including a description of our broad international engagement in carrying this policy forward. Finally, I would like to touch

upon U.S. expectations at the Eleventh Session of the Conference of the Parties

(COP 11) to the UN Framework Convention on Climate Change (UNFCCC).

PRESIDENT BUSH’S CLIMATE CHANGE POLICY

As a Party to the UNFCCC, the United States shares with many other countries

its ultimate objective: stabilization of greenhouse gas concentrations in the atmosphere at a level that prevents dangerous human-induced interference with the climate system. In February 2002, President Bush reaffirmed America’s commitment
70

1http://www.whitehouse.gov/news/releases/2002/02/20020214-5.html.

2 Energy Information Administration (EIA). 2005. Annual energy outlook 2005: with projections to 2025, DOE/EIA-0383(2005). Washington, DC: U.S. Department of Energy, p. 55.

(http://www.eia.doe.gov/oiaf/aeo/index.html) 3http://www.whitehouse.gov/news/releases/2002/02/20020214.html.

4http://www.climatevision.gov/.

5http://www.epa.gov/climateleaders/.

to the Framework Convention and its central goal, while also making clear that he

could not commit the United States to the Kyoto Protocol that would have cost the

U.S. economy up to $400 billion dollars and 4.9 million jobs.1

Addressing the challenge of global climate change will require a sustained, longterm commitment by all nations over many generations. To this end, the President

has established a robust and flexible climate change policy that harnesses the power

of markets and technological innovation, maintains economic growth, and encourages global participation. Major elements of this approach include implementing

near-term policies and measures to slow the growth in greenhouse gas emissions,

advancing climate change science, accelerating climate change technology development, and promoting international collaboration.

Near-Term Policies and Measures to Slow the Growth in Greenhouse Gas Emissions

Although climate change is a complex and long-term challenge, the Bush administration recognizes that there are cost-effective steps we can take now. In February

2002, President Bush set an ambitious national goal to reduce the greenhouse gas

intensity (emissions per unit of economic output) of the U.S. economy by 18 percent

by 2012, which represents about a 29 percent improvement in the ‘‘business-asusual’’ rate of change of 14 percent projected by the Energy Information Administration (EIA) over this period.2 The Administration estimated that its 18 percent intensity improvement goal will reduce cumulative emissions by more than 1,833 million

metric tons of carbon dioxide equivalent by 2012,3 and recent EIA projections suggest that achieving the 18 percent goal will reduce emissions by 366 million metric

tons of carbon dioxide equivalent in 2012 alone.2

A hallmark of the intensity approach is flexibility, an especially important consideration when confronted with the many uncertainties surrounding climate change.

These uncertainties suggest that a measured response is required that concentrates

first on slowing emissions growth before trying to stop and eventually reverse it. A

greenhouse gas emissions intensity goal can encourage reductions without risking

economic consequences that could jeopardize our ability to invest in long-run scientific and technological solutions.

To this end, the Administration has developed an array of policy measures, including voluntary programs and financial incentives.

In setting the 18 percent decade goal, President Bush issued a challenge to the

private sector to do its part. The President’s call resonated with business, which has

responded positively through its participation in a number of new voluntary programs, including DOE’s Climate VISION program and EPA’s Climate Leaders and

SmartWay Transport Partnership programs:

• Climate VISION (Voluntary Innovative Sector Initiatives: Opportunities Now) 4:

In February 2003, the Federal Government and industry organizations representing

thousands of companies from 12 energy-intensive economic sectors (since expanded

to 14) and The Business Roundtable also joined in a voluntary partnership known

as Climate VISION. Climate VISION is unique in that it focuses on economic sectors, not specific companies, with each industry association making a commitment

on behalf of its members to reduce greenhouse gas emissions intensity. These Climate VISION partners, which include some of the largest companies in America,

represent a broad range of industry sectors—oil and gas, electricity generation, coal

and mineral production and mining, manufacturing (automobiles, cement, iron and

steel, magnesium, aluminum, chemicals, and semiconductors), railroads, and forestry products—accounting for about 40 to 45 percent of total U.S. greenhouse gas

emissions. Four Federal agencies participate in the program: DOE (lead), Department of Agriculture (USDA), Department of Transportation (DOT), and the Environmental Protection Agency (EPA).

• Climate Leaders5: Climate Leaders, established in February 2002, is an EPA

partnership encouraging individual companies to develop long-term, comprehensive

climate change strategies. Under this program, partners set corporate-wide greenhouse gas reduction goals and inventory their emissions to measure progress. By reporting inventory data to EPA, partners create a lasting record of their accomplishments and also identify themselves as corporate environmental leaders, strategically

positioned to address climate change policy issues. Seventy-one major companies
71

6http://www.epa.gov/smartway/.

7http://www.nhtsa.gov/portal/site/nhtsa/template.MAXIMIZE/

menuitem.f2217bee37fb302f6d7c121046108a0c/

?javax.portlet.tpst=1e51531b2220b0f8ea14201046108a0cwsMX&javax.portlet.prp 1e51531b2220b0f8ea14201046108a0cviewID=detail view&javax.portlet.begCacheTok=token&javax.portlet.endCacheTok=token&

itemID=d674acd2593e5010VgnVCM1000002c567798RCRD&overrideViewName=PressRelease.

8http://www.eia.doe.gov/oiaf/1605/ggrpt/pdf/057303.pdf, p. 15.

9http://www.eia.doe.gov/neic/press/press257.html.

10 National Research Council. 2001. Climate Change Science: An Analysis of Some Key Questions, Committee on the Science of Climate Change, National Research Council, National Academy Press, Washington, DC. (http://www.nap.edu/catalog/10139.html). 11http://www.climatescience.gov.

from diverse industries representing 8 percent of U.S. emissions are now participating.

• SmartWay Transport Partnership6: Launched in February 2004, the SmartWay

Transport Partnership is designed to reduce fuel consumption and emissions by encouraging shippers and carriers to improve the overall environmental performance

of the freight delivery system. Currently, 225 companies have joined SmartWay, including 170 Trucking Carriers, 25 Shippers, 7 Shipper/Carriers, 8 Railroads, 7 logistics companies and 8 Affiliates. Based on the actions taken by these partners to

date, EPA projects savings of at least 175 million gallons of fuel by the year 2007.

Further, the USDA is using its conservation programs to provide an incentive for

actions that increase carbon sequestration. Under the Farm Security and Rural Investment Act of 2002, the United States will invest about $40 billion over 10 years

for conservation measures on its farms and forest lands—including measures that

will enhance the natural storage of carbon.

DOE is also pursuing many energy supply technologies with comparatively low or

zero carbon dioxide emissions profiles, such as solar, wind, bioenergy, and combined

heat and power. In addition, the Bush Administration also has increased fuel economy standards for new light trucks and sport utility vehicles by 1.5 miles per gallon

over the next three model years, and a new round of standards was proposed on

August 23.7

These and other initiatives may be contributing to greenhouse gas emission intensity reductions that we have seen already. The President’s 18 percent 10-year goal

represents an average annual rate of 1.8 percent. According to Energy Information

Administration’s (EIA) Emissions of Greenhouse Gases in the United States 2003 report8, the greenhouse gas intensity was 2.3 percent lower in 2003 than in 2002, and

a June 2005 EIA flash estimate of energy-related carbon emissions—which account

for over four fifths of total greenhouse gas emissions—suggests an improvement in

carbon dioxide emissions intensity of 2.6 percent in 20049. Overall, then, the Nation

appears to be ahead of schedule in meeting the President’s goal.

Advancing Climate Change Science

In May 2001, President Bush commissioned the National Academies National Research Council (NRC) to examine the state of our knowledge and understanding of

climate change science. The NRC’s report makes clear that there are still important

gaps in our knowledge.10

Based on the resulting NRC report and the Administration’s ongoing climate

science planning activity, President Bush created a new cabinet-level management

committee (the Committee on Climate Change Science and Technology Integration)

in February 2002 to oversee climate change science and technology activities. The

President’s direction resulted in the creation of the U.S. Climate Change Science

Program (CCSP), combining the existing U.S. Global Change Research Program

(USGCRP) and the Climate Change Research Initiative (CCRI), as well as the creation of the Climate Change Technology Program (CCTP).

The Climate Change Science Program (CCSP) 11 integrates the federal research

on global change and climate change across thirteen federal agencies (the National

Science Foundation (NSF), the Department of Commerce, the DOE, EPA, the National Aeronautics and Space Administration (NASA), the Department of State, the

Department of Interior, the Department of Agriculture, the Department of Health

and Human Services, the Department of Transportation, the Department of Defense, U.S. Agency for International Development, and the Smithsonian Institution)

and overseen by the Office of Science and Technology Policy, the Council on Environmental Quality, the National Economic Council and the Office of Management

and Budget. The Administration requested $1.9 billion for CCSP in FY 2006.
72

12http://www.climatescience.gov/Library/stratplan2003/final/default.htm. 13 National Research Council. 2004. Implementing Climate and Global Change Research: A

Review of the Final U.S. Climate Change Science Program Strategic Plan, Committee to Review

the U.S. Climate Change Science Program Strategic Plan, National Research Council, National

Academy Press, Washington, D.C., p. 1 (http://books.nap.edu/catalog/10635.html). 14http://www.climatetechnology.gov/.

In July 2003, CCSP released its Strategic Plan for the U.S. Climate Change

Science Program12, the first comprehensive update of a national plan for climate

and global change research since the original U.S. Global Change Research Program

strategy was issued at the inception of the program in 1990. The plan is organized

around five goals: (1) improving our knowledge of climate history and variability;

(2) improving our ability to quantify factors that affect climate; (3) reducing uncertainty in climate projections; (4) improving our understanding of the sensitivity and

adaptability of ecosystems and human systems to climate change; and (5) exploring

uses and identifying limits of knowledge to manage risks and opportunities. A review of the CCSP plan by the NRC, which concluded that it ‘‘articulates a guiding

vision, is appropriately ambitious, and is broad in scope,’’ shows the Administration

is on the right track.13

Twenty-one Synthesis and Assessment Products are identified in the Strategic

Plan in fulfillment of Section 106 of the 1990 Global Research Act to be produced

through 2007. These reports are designed to address a full range of science questions and evaluate options for response that are of the greatest relevance to decision

and policy makers and planners. The products are intended to provide the best possible state of science information, developed by a diverse group of climate experts,

for the decision community.

Since CCSP was created in 2002, the program has successfully integrated a wide

range of research, climate science priorities of the thirteen CCSP agencies. CCSP

has taken on some of the most challenging questions in climate science and is developing products to convey the most advanced state of knowledge to be used by federal, state and local decision makers, resource managers, the science community,

the media, and the general public.

CCSP will hold a public workshop on November 14–16 in Arlington, VA. The

CCSP Workshop will address the capability of climate science to inform decisionmaking and will serve as a forum to address the progress and future plans regarding CCSP’s three decision-support deliverables as described above. The Workshop

will provide an opportunity for scientists and user communities to discuss decisionmaker needs and future application of scientific information on climate variability

and change, as well as discussion on expected outcomes of CCSP’s research and assessment activities that are necessary for sound resource management, adaptive

planning and policy.

Accelerating Climate Change Technology Development

While acting to slow the pace of greenhouse gas emissions intensity in the near

term, the Administration is laying a strong technological foundation to develop realistic mitigation options to meet energy security and climate change objectives.

The Bush administration is moving ahead on advanced technology options that

have the potential to substantially reduce, avoid, or sequester future greenhouse gas

emissions. Over 80 percent of current global anthropogenic greenhouse gas emissions are energy related, and although projections vary considerably, a tripling of

global energy demand by 2100 is not unimaginable. Therefore, to provide the energy

necessary for continued economic growth while we reduce greenhouse gas emissions,

we may have to develop and deploy cost-effective technologies that alter the way we

produce and use energy.

The Climate Change Technology Program (CCTP) 14 was created to coordinate and

prioritize the Federal Government’s climate-related technology research, development, demonstration, and deployment (RDD&D) activities, for which the Administration has requested $2.865 billion in FY 2006. Title XVI of the Energy Policy Act

of 2005 authorizes CCTP within the Department of Energy (DOE).

Using various analytical tools, CCTP is assessing different technology options and

their potential contributions to reducing greenhouse gas emissions. Given the tremendous capital investment in existing energy systems, the desired transformation

of our global energy system may take decades or more to implement fully. A robust

RDD&D effort can make advanced technologies available sooner rather than later

and can accelerate modernization of capital stock at lower cost and with greater

flexibility.

On August 5, Energy Secretary Bodman, who currently chairs the President’s

Cabinet Committee on Climate Change Science and Technology Integration, re-
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15http://www.climatetechnology.gov/vision2005/index.htm. 16http://www.climatetechnology.gov/stratplan/draft/index.htm. 17http://www.hydrogen.gov/president.html. 18http://www.eere.energy.gov/vehiclesandfuels/. 19Much of the funding dedicated to the Hydrogen Fuel Initiative is accounted for within other

technology areas here. 20http://www.fe.doe.gov/programs/sequestration/index.html. 21http://www.fe.doe.gov/programs/sequestration/partnerships/. 22http://www.energy.gov/engine/content.do?PUBLIC

ID=18031&BTCODE=PRPRESSRELEASES&TTCODE=PRESSRELEASE. 23http://www.fe.doe.gov/programs/powersystems/cleancoal/index.html. 24http://www.fe.doe.gov/programs/powersystems/futuregen/index.html.

leased the CCTP Vision and Framework for our forthcoming draft Strategic Plan.15

CCTP’s strategic vision has six complementary goals: (1) reducing emissions from

energy use and infrastructure; (2) reducing emissions from energy supply; (3) capturing and sequestering carbon dioxide; (4) reducing emissions of other greenhouse

gases; (5) measuring and monitoring emissions; and (6) bolstering the contributions

of basic science. The DOE also released for public review and comment the larger

CCTP Strategic Plan on September 22.16

The Administration continues strong investment in many strategic technology

areas. As the President’s National Energy Policy requires, the strategic technology

efforts with respect to energy production and distribution focus on ensuring environmental soundness, as well as dependability and affordability.

• Energy Efficiency and Renewable Energy: Energy efficiency is the single largest

investment area under CCTP and it provides tremendous short-term potential to reduce energy use and greenhouse gas emissions. Renewable energy includes a range

of different technologies that can play an important role in reducing greenhouse gas

emissions. The United States invests significant resources in wind, solar

photovoltaics, geothermal, and biomass technologies. Many of these technologies

have made considerable progress in price competitiveness, but there remain opportunities to reduce manufacturing, operating, and maintenance costs of many of

these technologies.

• Hydrogen: President Bush announced his Hydrogen Fuel Initiative17 in his 2003

State of the Union Address. The goal is to work closely with the private sector to

accelerate our transition to a hydrogen economy, on both the technology of hydrogen

fuel cells and a fueling infrastructure. The President’s Hydrogen Fuel Initiative and

the FreedomCAR Partnership18 which was launched in 2002 will provide $1.7 billion through 2008 to develop hydrogen-powered fuel cells, hydrogen production and

infrastructure technologies, and advanced automotive technologies, with the goal of

commercializing fuel-cell vehicles by 2020.19

• Carbon Sequestration: Carbon capture and sequestration is a central element

of CCTP’s strategy because for the foreseeable future, fossil fuels will continue to

be the world’s most reliable and lowest-cost form of energy. A realistic approach is

to find ways to capture and store the carbon dioxide produced when these fuels are

used. DOE’s core Carbon Sequestration Program20 emphasizes technologies that

capture carbon dioxide from large point sources and store it in geologic formations.

In 2003, DOE launched a nationwide network of seven Regional Carbon Sequestration Partnerships21, involving State agencies, universities, and the private sector, to

determine the best approaches for sequestration in each geographic region represented and to examine regulatory and infrastructure needs. On June 9th of this

year, Secretary of Energy Bodman announced a major expansion of the Regional

Partnerships program22.

• Coal-Fired, Near-Zero-Emissions Power Generation: The United States has vast

reserves of coal, and about half of its electricity is generated from this fuel. Advanced coal-based power and fuels, therefore, is an area of special interest from both

an energy security and climate change perspective. The Coal Research Initiative

(CRI) consists of research, development, and demonstration of coal-related technologies that will improve coal’s competitiveness in future energy supply markets.

The Clean Coal Power Initiative (CCPI) 23, within the CRI, is a cost-shared program

between the government and industry to demonstrate emerging technologies in coalbased power generation and to accelerate their commercialization. A major initiative

under CCPI is the FutureGen project24, a 10-year, $1 billion government industry

cost-shared effort to design, build, and operate the world’s first near-zero atmospheric emissions coal-fired power plant. This project, which cuts across many CCTP

strategic areas, will incorporate the latest technologies in carbon sequestration, oxygen and hydrogen separation membranes, turbines, fuel cells, and coal-to-hydrogen
74

25http://www.ne.doe.gov/NucPwr2010/NucPwr2010.html. 26http://www.ne.doe.gov/infosheets/geni.pdf. 27http://www.ne.doe.gov/infosheets/hydrogen.pdf. 28http://www.ne.doe.gov/infosheets/afci.pdf. 29http://www.whitehouse.gov/news/releases/2001/06/20010611-2.html and

http://www.whitehouse.gov/news/releases/2002/02/20020214-5.html.

gasification. Through the CRI, clean coal can remain part of a diverse, secure energy

portfolio well into the future.

• Nuclear Fission: Concerns over resource availability, energy security, and air

quality as well as climate change suggest a larger role for nuclear power as an energy supply choice. While current generations of nuclear energy systems are adequate in many markets today, new construction of advanced light-water reactors in

the near term and of even more advanced systems in the longer term can broaden

opportunities for nuclear energy, both in industrialized and developing countries.

The Nuclear Power 2010 program25 is working with industry to demonstrate the

Nuclear Regulatory Commission’s new licensing process, while the Generation IV

Nuclear Energy Systems Initiative26 is investigating the more advanced reactor and

fuel cycle systems that represent a significant leap in economic performance, safety,

and proliferation-resistance. One promising system being developed under the Nuclear Hydrogen Initiative27 would pair very-high-temperature reactor technology

with advanced hydrogen production capabilities that could produce both electricity

and hydrogen on a scale to meet transportation needs. Complementing these programs is the Advanced Fuel Cycle Initiative28, which is developing advanced, proliferation resistant nuclear fuel technologies that can improve the fuel cycle, reduce

costs, and increase the safety of handling nuclear wastes.

• Fusion: Fusion energy is a potential major new source of energy that, if successfully developed, could be used to produce electricity and possibly hydrogen. Fusion

has features that make it is an attractive option from both an environmental and

safety perspective. However, the technical hurdles of fusion energy are very high,

and with a commercialization objective of 2050, its impact would not be felt until

the second half of the century, if at all. Nevertheless, the promise of fusion energy

is simply too great to ignore.

Advances in these and other technology areas in the CCTP portfolio could put us

on a path to ensuring access to clean, affordable energy supplies while dramatically

reducing the greenhouse gas profile of our economy over the long term. Moreover,

the deployment of cleaner energy technologies in developing economies like China

and India can make a huge difference in altering the future global energy picture.

Promoting International Collaboration

President Bush—in both his June 2001 and February 2002 climate change policy

speeches—highlighted the importance of international cooperation in developing an

effective and efficient global response to the complex and long-term challenge of climate change.29

Any effective international response to climate change requires developing country

participation, which includes both near-term efforts to slow the growth in emissions

and longer-term efforts to build capacity for future cooperation. Central to achieving

global cooperation to address climate change will be the participation of developing

countries.

The Bush administration believes that the most effective way to engage developing countries is to focus not solely on greenhouse gas emissions, but rather on a

broader development agenda that promotes economic growth, reduces poverty, provides access to modern sanitation, enhances agricultural productivity, provides energy security, reduces pollution, and mitigates greenhouse gas emissions.

The Administration also believes that well-designed multilateral collaborations focused on achieving practical results can accelerate development and commercialization of new technologies and advance climate change science. In particular, under

President Bush’s leadership, the United States has brought together key nations to

tackle jointly some tough energy challenges. These multilateral collaborations mirror the main strategic thrusts of our domestic technology research programs, and

they address a number of complementary energy concerns, such as energy security,

climate change, and environmental stewardship. Another characteristic of the collaborations is that they include as partners Kyoto countries, non-Kyoto countries,

industrialized countries, developing countries, and countries with economies in transition.
75

30Partners include Australia, China, India, Japan and South Korea and the United States.

Fact sheet at http://www.whitehouse.gov/news/releases/2005/07/20050727-11.html. 31http://www.state.gov/s/d/rem/50326.htm. 32http://www.epa.gov/methanetomarkets/ and http://www.methanetomarkets.org/. Founding

Methane to Markets member governments include the United States, Argentina, Australia,

Brazil, China, Colombia, India, Italy, Japan, Mexico, Nigeria, Russian Federation, Ukraine, and

the United Kingdom. The Republic of Korea became the 15th member in June and Canada the

16th member in July. 33http://www.iphe.net/. Founding IPHE members include the United States, Australia, Brazil,

Canada, China, European Commission, France, Germany, Iceland, India, Italy, Japan, Norway,

Republic of Korea, Russia, and the United Kingdom. New Zealand became the 17th member in

January 2005. 34http://www.cslforum.org/. CSLF members include the United States, Australia, Brazil, Canada, China, Colombia, Denmark, European Commission, France, Germany, India, Italy, Japan,

Mexico, Netherlands, Norway, Republic of Korea, Russian Federation, South Africa, and the

United Kingdom. 35http://gen-iv.ne.doe.gov/. GIF members include the United States, Argentina, Brazil, Canada, Euratom, France, Japan, Republic of Korea, South Africa, Switzerland, and the United

Kingdom.

• Asia-Pacific Partnership for Clean Development and Climate30: In July 2005,

Deputy Secretary of State Zoellick announced plans to create the Asia-Pacific Partnership for Clean Development and Climate to focus on voluntary practical measures to create new investment opportunities, build local capacity, and remove barriers to the introduction of clean, more efficient technologies.31 The partnership is

designed to help each country meet nationally designed strategies for improving energy security, reducing pollution, and addressing the long-term challenge of climate

change. We view the partnership as a complement, not an alternative, to the UN

Framework Convention on Climate Change. It is critically important to be able to

build on mutual interests and incentives to tackle global challenges effectively. The

six countries that currently comprise this partnership represent about half of the

world’s economy, population, energy use and greenhouse gas emissions. We are actively engaging with our Partners toward a formal launch early next year. • Methane to Markets Partnership32: Launched in November of last year, the

Methane to Markets Partnership, led on the U.S. side by EPA, now includes 16

partner countries. This Partnership is an international initiative that focuses on advancing cost-effective, near-term methane recovery and use as a clean energy source

to enhance economic growth, promote energy security, improve the environment,

and reduce greenhouse gases. Initially, the Partnership will target three major

methane sources: landfills, underground coal mines, and natural gas and oil systems. The Partnership has the potential to deliver by 2015 annual reductions in

methane emissions of up to 50 million metric tons of carbon equivalent or recovery

of 500 billion cubic feet of natural gas. When fully achieved, these results could lead

to stabilized or even declining levels of global atmospheric concentrations of methane. • International Partnership for the Hydrogen Economy (IPHE) 33: Recognizing the

common interest in hydrogen research that many countries share, the United States

called for an international hydrogen partnership in April 2003, and in November

2003, representatives from 15 national governments and the European Commission

gathered in Washington to launch IPHE. IPHE provides a vehicle to organize, coordinate, and leverage multinational hydrogen research programs that advance the

transition to a global hydrogen economy. It reviews the progress of collaborative

projects, identifies promising directions for research, and provides technical assessments for policy decisions. IPHE also will develop common recommendations for

internationally-recognized standards and safety protocols to speed market penetration of hydrogen technologies. Through IPHE, the United States has assisted Brazil

and China in developing hydrogen roadmaps. • Carbon Sequestration Leadership Forum (CSLF) 34: CSLF is a U.S.-launched initiative that was established formally at a ministerial meeting held in Washington,

D.C., in June 2003. CSLF is a multilateral initiative that provides a framework for

international collaboration on sequestration technologies. The Forum’s main focus is

assisting the development of technologies to separate, capture, transport, and store

carbon dioxide safely over the long term, making carbon sequestration technologies

broadly available internationally, and addressing wider issues, such as regulation

and policy, relating to carbon capture and storage. In addition to these activities,

CSLF members and other interested nations are invited to participate in the

FutureGen clean coal project. • Generation IV International Forum (GIF) 35: In 2002, nine countries and

Euratom joined together with the United States to charter GIF, a multilateral collaboration whose goal is to develop the fourth generation of advanced, economical,
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36 ITER member countries include the United States, China, European Union, Japan, Russian

Federation, and the Republic of Korea. 37http://www.whitehouse.gov/news/releases/2003/01/20030130-18.html. 38Partners include Australia, Brazil, Canada, China, Central America (Belize, Costa Rica, El

Salvador, Guatemala, Honduras, Nicaragua, and Panama), European Union, Germany, India,

Italy, Japan, Mexico, New Zealand, Republic of Korea, Russian Federation, and South Africa. 39http://www.sdp.gov/sdp/initiative/cei/28304.htm. 40http://www.sdp.gov/sdp/initiative/cei/44949.htm. 41http://www.sdp.gov/sdp/initiative/cei/29808.htm and http://www.pciaonline.org/. 42http://www.sdp.gov/sdp/initiative/cei/29809.htm and

http://www.unep.org/pcfv/main/main.htm.

43http://www.sdp.gov/sdp/initiative/cei/28304.htm.

safe, and proliferation-resistant nuclear systems that can be adopted commercially

no later than 2030. A technology roadmap developed by the GIF and DOE’s Nuclear

Energy Research Advisory Committee in 2003 identified six technologies as candidates for future designs. Based on the Roadmap, GIF countries are jointly preparing a collaborative research program to develop and demonstrate the projects. • ITER36: In January 2003, President Bush announced that the United States was

joining the negotiations for the construction and operation of the international fusion experiment known as ITER.37 If successful, this multi-billion-dollar research

project will advance progress toward producing clean, renewable, commercially—

available fusion energy by the middle of the century. It was recently agreed that

the experimental reactor will be sited in Cadarache, France.

Regional and Bilateral Activities: Since 2001, the United States has established

15 climate partnerships with key countries and regional organizations that, together

with the United States, account for almost 80 percent of global greenhouse gas emissions.38 These partnerships encompass over 400 individual activities, and successful

joint projects have been initiated in areas such as climate change research and

science, climate observation systems, clean and advanced energy technologies, carbon capture, storage and sequestration, and policy approaches to reducing greenhouse gas emissions.

• Clean Energy Initiative39: At the 2002 World Summit on Sustainable Development (WSSD) held in Johannesburg, South Africa, the United States launched a

‘‘Clean Energy Initiative,’’ whose mission is to bring together governments, international organizations, industry and civil society in partnerships to alleviate poverty

and spur economic growth in the developing world by modernizing energy services.

The Initiative consists of four market-oriented, performance-based partnerships:

• Global Village Energy Partnership (GVEP) 40 is an international partnership

with over 700 public and private sector partners including the World Bank,

UNDP, and leading energy companies. The U.S. implementation of GVEP, led

by the U.S. Agency for International Development, is a 10-year initiative that

seeks to increase access to modern energy services for those in developing countries in a manner that enhances economic and social development and reduces

poverty.

• Partnership for Clean Indoor Air41, led by EPA, which is addressing the increased environmental health risk faced by more than 2 billion people in the

developing world who burn traditional biomass fuels indoors for cooking and

heating.

• Partnership for Clean Fuels and Vehicles42, which is helping to reduce vehicular air pollution in developing countries by promoting the elimination of lead

in gasoline and encouraging the adoption of cleaner vehicle technologies; and

• Efficient Energy for Sustainable Development (EESD) 43, led by DOE, which

aims to improve the productivity and efficiency of energy systems, while reducing pollution and waste, saving money and improving reliability through less

energy intensive products, more energy efficient processes and production modernization.

• Renewable Energy and Energy Efficiency Partnership (REEEP): Also formed at

the 2002 WSSD, the Renewable Energy and Energy Efficiency Partnership (REEEP)

seeks to accelerate and expand the global market for renewable energy and energy

efficiency technologies. As the world’s largest producer and consumer of renewable

energy, and with more renewable energy generation capacity than Germany, Denmark, Sweden, France, Italy, and the United Kingdom combined, the United States

is one of 17 countries who are partners in REEEP. The United States also actively

participated in the Renewables 2004 conference sponsored by the German Government in June 2004, and submitted five action items intended to provide specific

technology plans and cost targets for renewable energy technologies using solar, biomass, wind, and geothermal resources.
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44http://www.ren21.net/. 45http://earthobservations.org/. 46http://iwgeo.sse.nasa.gov/docs/EOCStrategicPlan.pdf. 47http://www.ipcc.ch/. 48http://www.gefweb.org/. 49http://www.usaid.gov/ourwork/environment/forestry/introtfca.html. TFCA agreements

have been concluded with Bangladesh, Belize, Colombia, El Salvador, Jamaica, Panama (two

agreements), Peru and the Philippines.

• Renewable Energy Policy Network for the 21st Century (REN21) 44: REN21 is

a global policy network, which connects governments, international institutions and

organizations, partnerships and initiatives and other stakeholders on the political

level with those ‘‘on the ground,’’ aimed at providing a forum for international leadership on renewable energy. Its goal is to allow the rapid expansion of renewable

energies in developing and industrial countries by bolstering policy development and

decisionmaking on sub-national, national and international levels. The United

States serves as one of the 11 governments serving on REN2l’s Steering Committee. • Group on Earth Observations45: Of particular importance is the need for a broad

global observation system to support measurements of climate variables. On July

31, 2003, the United States hosted 33 nations—including many developing nations—

at the inaugural Earth Observation Summit (EOS), out of which came a commitment to establish an intergovernmental, comprehensive, coordinated, and sustained

Earth observation system. While the use and benefits of these observations are extensive, the climate applications of the data collected by the system include the use

of the data to create better climate models, to improve our knowledge of the behavior of carbon dioxide and aerosols in the atmosphere, and to develop strategies for

carbon sequestration. The United States was instrumental in drafting a ten-year implementation plan for a Global Earth Observation System of Systems, which was

approved by 55 nations and the European Commission at the 3rd EOS summit in

Brussels in February 2005. The United States also released its contribution through

the Strategic Plan for the U.S. Integrated Earth Observing System in April 2005.46

The plan will help coordinate a wide range of environmental monitoring platforms,

resources, and networks.

Other examples of our engagement across the globe in advancing climate change

science and addressing greenhouse gas emissions include our participation in the

Intergovernmental Panel on Climate Change (IPCC), the Global Environment Facility (GEF) and activities under the Tropical Forest Conservation Act.

• Intergovernmental Panel on Climate Change (IPCC) 47: The IPCC was established by the World Meteorological Organization (WMO) and the United Nations

Environment Programme (UNEP) in 1988 to assess scientific, technical and socioeconomic information relevant for the understanding of climate change, its potential

impacts and options for adaptation and mitigation. It is open to all Members of the

United Nations and of WMO. The United States has played an active role in the

IPCC since its establishment and has provided more of its funding than any other

nation. Dr. Susan Solomon, a senior scientist at the National Oceanic and Atmospheric Administration’s Aeronomy Laboratory in Boulder, Colorado, serves as cochair of the IPCC Working Group I, which is assessing the scientific basis of climate

change. The United States hosts the Working Group’s Technical Support Unit and

hundreds of U.S. scientists are participating in the preparation of the IPCC’s Fourth

Assessment Report, which is due to be completed in 2007. • Global Environment Facility (GEF) 48: The GEF is the financial mechanism

under the UN Framework Convention on Climate Change. It focuses on innovative

and generally small scale projects and funds only the incremental costs involved in

producing global environmental benefits. The GEF has committed about $5.4 billion

to date, leveraging over $17 billion from other sources, including the private sector,

international development banks and organizations, governments, NGOs and bilateral agencies. It has designed and initiated nearly 1,600 investment and capacity

building projects that are now being implemented by developing countries with the

help of ten agencies, including the UN Development Program and the International

Fund for Agricultural Development. The GEF has also provided nearly 5,000 small

grants directly to NGOs and community groups in over 70 countries. U.S. contributions will fund solely technology transfer and capacity building in developing countries.

• Tropical Forest Conservation Act49: Many of our international activities also

help to promote the biological sequestration of carbon dioxide, an important tool for

addressing climate change that can have benefits both for conservation and climate

change. The Tropical Forest Conservation Act (TFCA) offers eligible developing

countries opportunities to reduce concessional debt owed to the United States while
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generating local currency funds to support programs to conserve tropical forests.

Since 1998, the United States has concluded nine TFCA agreements with eight

countries that will generate more than $95 million for tropical forest conservation

over the next 10–25 years. Three U.S.-based international NGOs (The Nature Conservancy, the World Wildlife Fund and Conservation International) contributed approximately $7.5 million to six of the nine agreements, thereby increasing the

amount of debt we were able to treat. In FY 2006, the Administration has requested

a total of approximately $100 million for certain debt restructuring programs. These

programs include bilateral Heavily Indebted Poor Countries (HIPC) and poorest

country debt reduction, contributions to the HIPC Trust Fund and TFCA debt reduction.

ELEVENTH SESSION OF THE CONFERENCE OF THE PARTIES (COP 11) TO THE UNFCCC

The Conference of the Parties (COP) to the United Nations Framework Convention on Climate Change will hold its 11th Session in Montreal from November 28

to December 9, 2005. Under Secretary of State for Democracy and Global Affairs

Paula J. Dobriansky will head the U.S. delegation to this meeting. As the Kyoto

Protocol entered into force on February 16 of this year, the Montreal meeting will

also be the first ‘‘meeting of the Parties (MOP)’’ under that instrument.

While the COP and the MOP will take separate decisions, reflecting the different

legal instruments involved and the different membership in these two bodies, there

will be a joint ‘‘High Level Segment’’ from December 7–9. It is likely that statements

of ministers and other heads of delegation will take up a good portion of the time,

rather than the more interactive and successful roundtables that characterized the

High Level Segments of COP 9 in Milan in 2003 and COP 10 in Buenos Aires in

2004. In addition, there will be a heavy workload under the MOP as the Parties

to that instrument seek to adopt the ‘‘Marrakech Accords’’ and other decisions to

begin implementing the Kyoto Protocol.

We intend to work constructively within the COP framework and to carry forward

our positive message, as we have in the last two COPs, and anticipate that it will

have increased resonance as a result of the positive G-8 outcomes and the positive

response to the approach of our Asia Pacific Partnership. At those previous COPs,

we have highlighted all that the United States is doing with respect to science and

technology, and with respect to our domestic actions and international partnerships

related to climate change.

CONCLUDING REMARKS

Mr. Chairman and Members of the Committee, I hope that my testimony this

afternoon conveys a sense of the vast extent to which the United States is working

to reduce greenhouse gas intensity, promote energy efficient technologies and advance climate science, while also placing primary importance on supporting economic growth and prosperity.

We see economic growth, reducing poverty, providing access to modern sanitation,

enhancing agricultural productivity, providing energy security, reducing pollution,

and addressing the climate change problem, as integrally related. Meeting the challenge of the expected future growth in global energy demand and reducing greenhouse gas emissions will require a transformation in the way the world produces

and consumes energy over the next generation and beyond. This is why we are leading global efforts to develop and deploy breakthrough technologies for both the developed and developing world.

I thank you for this opportunity to testify before this Committee. I look forward

to responding to any questions you may have.

RESPONSE BY HARLAN WATSON, PH.D., TO AN ADDITIONAL QUESTION

FROM SENATOR LAUTENBERG

Question. What historical evidence leads you to believe that reliance on a voluntary approach to reducing greenhouse emissions will result in reductions sufficient to forestall continued global warming?

Response. Given that the global warming experienced since the beginning of the

industrial age is a combination of natural and human-induced factors, it is not clear

any approach—whether mandatory or voluntary—will result in reductions sufficient

to forestall continued global warming.

However, given the U.S. experience with a large number of voluntary programs,

such as EPA’s Climate Leaders and DOE’s Climate VISION programs, which covers

some 40–45 percent of total U.S. emissions, we are optimistic that these can result
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in substantial reductions in the growth of greenhouse gas emissions—and in many

cases to absolute reductions in such emissions—while maintaining economic growth.

The EPA Climate Leaders website at http://www.epa.gov/climateleaders/ and the

Climate VISION website at http://www.climatevision.gov/ and the accompanying

links contain a wealth of information on the actions of individual companies and

sectors and the progress they are making. EPA’s voluntary methane partnership

programs—the AgSTAR (see http://www.epa.gov/agstar/), Coalbed Methane Outreach (see http://www.epa.gov/cmop/), Natural Gas STAR (see http://www.epa.gov/

gasstar/), and Landfill Methane Outreach (see http://www.epa.gov/lmop/)—helped

achieve absolute reductions in U.S. methane emissions of 10.0 percent below 1990

levels in 2003.

RESPONSES BY HARLAN WATSON, PH.D., TO ADDITIONAL QUESTIONS FROM

SENATOR OBAMA

Question 1. Next winter, in 2006, the world will discuss the next steps beyond the

2012 Kyoto deadline. If either China or India indicates a willingness to negotiate

commitments would the Administration consider signing a future treaty?

Response. Under Article 9.3 of the Kyoto Protocol, Kyoto Parties are obligated to

begin discussions this year on the second phase of the Protocol after the first compliance period ends in 2012. China and India, like the vast majority of Parties to the

Kyoto Protocol, are classified as developing countries and thus are exempt from all

emissions reductions requirements. Whether or not China or India might indicate

a willingness in these new negotiations to take on emissions reduction commitments

for themselves, is, of course, hypothetical. For the United States, we oppose any policy that would achieve reductions by putting Americans out of work, or by simply

shifting emissions from one state to another, or from the United States to another

country. Like us, developing countries are unlikely to join in approaches that foreclose their own economic growth and development.

We would note that to date China and India have been resolute and crystal clear

in indicating that they do not support applying to themselves a target-and-timetable

approach to greenhouse gas emissions imposed through the UN process—an approach they consider to be a threat to the economic growth that is crucial in solving

their more immediate problems of poverty alleviation and development. Pushing for

these countries to take on binding emissions reductions under a new climate change

agreement would undermine U.S. efforts to engage them in cooperative approaches

that are consistent with their aspirations to achieve prosperity and well-being for

their people.

Outside the context of targets, we have found through our bilateral and regional

partnerships, countries like China and India are willing and even eager to address

these issues, especially where meeting climate change goals also advances more immediate social and economic objectives, such as economic development, poverty reduction, access to modern sanitation, enhanced agricultural productivity, energy security, pollution reduction, and greenhouse gas emissions mitigation.

Question 2. Under the Protocol, countries can achieve their commitments through

means other than reducing their own emissions. For example, they can partner with

developing countries to transfer environmentally friendly technology. With regard to

developing countries, what options are most promising for curtailing future emissions?

Response. Because developing countries have different national resource endowments there is no single option that addresses their needs. In the last three years,

the United States has launched a series of bilateral and multilateral initiatives—

such as the Carbon Sequestration Leadership Forum, the International Partnership

for a Hydrogen Economy, the Methane to Markets Partnership, and the World Summit on Sustainable Development Partnerships—to help developing countries adopt

new energy sources, from cleaner use of coal to hydrogen vehicles, to solar and wind

power, to the production of clean-burning methane, to less-polluting power plants.

And we continue to look for more opportunities to deepen our partnerships with developing nations, and will soon be launching our most ambitious partnership agreement yet, the Asia Pacific Partnership for Clean Development and Climate. The

countries that make up this Partnership—Australia, China, India, Japan, South

Korea, and the United States—account for about half of the world’s population, economic output, energy use, and greenhouse gas emissions. The whole world benefits

when developing nations have the best and latest energy technologies.
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1 A copy of the complete study is available at http://www.eia.doe.gov/oiaf/kyoto/pdf/

sroiaf9803.pdf.

Question 3. When calculating whether the United States should ratify the Kyoto

Protocol, did the Administration factor in the costs of increased droughts, wildfires,

and flooding, as well as the corresponding crop and property losses?

Response. No. The Energy Information Agency, an independent statistical and analytical agency in the U.S. Department of Energy, conducted the most extensive

analyses of the cost to the United States of meeting a Kyoto target in an October

1998 study entitled Impacts of the Kyoto Protocol on U.S. Energy Markets and Economic Activity.1 That study analyzed impacts of the Protocol on U.S. energy use,

prices, and the general economy in the 2008–2012 time frame, when the United

States under the Kyoto Protocol was to reach an average level of net greenhouse

gas emissions 7 percent lower than they were in 1990. It is not possible to link specific droughts, etc. to climate change, and thereby to estimate costs avoided from

specific emissions reduction policies.

Question 4. If not, should these costs be calculated in any future decision of

whether the United States should be involved in similar international protocols in

the future?

Response. A cost-benefit analysis of any similar international protocol should take

into account both the costs of meeting the requirements of the protocol as well as

the value of the benefits that will be derived from the protocol—similar to a costbenefit analysis that might be applied to any government program.

The standard criterion for deciding whether a government program can be justified on economic principles is net present value—the discounted monetized value of

expected net benefits (i.e., benefits minus costs). Net present value is computed by

assigning monetary values to benefits and costs, discounting future benefits and

costs using an appropriate discount rate, and subtracting the sum total of discounted costs from the sum total of discounted benefits. Programs with positive net

present value increase social resources and are generally preferred. Programs with

negative net present value should generally be avoided.

Question 5. During the question and answer period following your testimony, you

stated that the President believes global climate change is an important issue and

that human actions are contributing to an increase in greenhouse gas concentrations in the atmosphere. What steps is the Administration willing to take to convince the skeptics here in Congress that the problem is real and that mankind, including the United States, must take action to reduce greenhouse gas levels?

Response. President Bush has addressed the important issue of global climate

change on many occasions—including, most recently in his November 16, 2005

speech in Kyoto, Japan, in his June 30, 2005 speech just prior to the G8 meeting

in Gleneagles, Scotland, in his February 21, 2005 speech in Brussels and in two

major climate change policy addresses on June 11, 2001 and February 14, 2002,

when the President set a national goal of reducing the greenhouse gas intensity of

the U.S. economy 18 percent 2012.

The U.S. budget devoted to climate change—more than $5 billion annually and

by far the largest in the world—as well as the many actions we are taking both domestically and internationally, which were elaborated in my written testimony of

October 5, 2005 to the Committee demonstrate our resolve.
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STATEMENT OF HON. JOHNNY ISAKSON, U.S. SENATOR FROM THE

STATE OF GEORGIA

Thank you Mr. Chairman:

Thank you for holding this hearing. This is an opportunity for us to discuss the

progress, if any, that has been made by the countries that have ratified Kyoto.

I have found that some are reconsidering their early ardent advocacy for the

Kyoto Protocol. In fact, at this year’s Association of South East Asian Nations regional summit, the Asia-Pacific Partnership on Clean Development and Climate was

announced. It brings together Australia, China, India, Japan, South Korea and the

United States, which together account for nearly half of the world’s greenhouse gas

emissions.

The partnership’s vision statement speaks of:

• developing, deploying and transferring existing and emerging clean technology

• exploring technologies such as clean coal, nuclear power and carbon capture

• involving the private sector.

Missing, in stark contrast to the Kyoto Protocol, is any mention of mandatory reduction targets for greenhouse gas emissions. Although the statement says the partnership would not replace the Kyoto process, the implication at the July announcement was clear in my mind: here was an alternative model through which countries

could combat climate change without risking the economic pain that is inflicted on

them by the onerous Kyoto protocol.

Even just last month, British Prime Minister Tony Blair who has in the past supported the Kyoto concept, indicated a possible change of mind. To quote him: ‘‘Probably I’m changing my thinking about this in the past two or three years.’’ He further

went on to extol the importance of technology in curbing emissions.

I look forward to hearing from our witnesses their views on the international community’s progress on Kyoto.

Thank you, Mr. Chairman.

STATEMENT OF LORD NIGEL LAWSON OF BLABY, HOUSE OF LORDS, UNITED KINGDOM

Ladies and Gentlemen of the Committee,

I am grateful for your invitation to testify before you today. I am aware that you

have been provided with the Report of the House of Lords Select Committee on Economic Affairs on The Economics of Climate Change in advance of these proceedings,

so I intend simply to summarise our key findings and to provide some commentary

of my own.

By way of background, the Economic Affairs Committee is one of the four permanent investigative committees of the House of Lords, and fulfils one of the major

roles of our second chamber as a forum of independent expertise and review of all

UK government activity. It is composed of members of all three main political parties. Its climate change report, which was agreed unanimously, was published on

6 July 2005, just ahead of the G8 summit at Gleneagles in Scotland.

In summary, the Committee concluded that:

• The Government should give the UK Treasury a more extensive role, both in

examining the costs and benefits of climate change policy and presenting them to

the public, and also in the work of the Intergovernmental Panel on Climate Change

(IPCC);

• There are concerns about the objectivity of the IPCC process, and the influence

of political considerations in its findings;

• There are significant doubts about the IPCC’s scenarios, in particular the high

emissions scenarios, and the Government should press it to change its approach;

• Positive aspects of global warming have been played down in the IPCC reports:

the IPCC needs to reflect in a more balanced way the costs and benefits of climate

change;

• The Government should press the IPCC for better estimates of the monetary

costs of global warming damage and for explicit monetary comparisons between the

costs of measures to control warming and their benefits;

• A more balanced approach to the relative merits of adaptation and mitigation

is needed, with far more attention paid to adaptation measures;

• UK energy and climate change policy appears to be based on dubious assumptions about the roles of renewable energy and energy efficiency, and the costs to the

UK of achieving its objectives have been poorly documented, and the Government,

with much stronger Treasury involvement, should review and substantiate the cost

estimates involved and convey them in transparent form to the public;
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• Current UK nuclear power capacity should be retained;

• International negotiations on climate change reduction will prove ineffective because of the preoccupation with setting emissions targets. The Kyoto Protocol makes

little difference to rates of warming, and has a naive compliance mechanism which

can only deter countries from signing up to subsequent tighter emissions targets.

Any future Protocols might be more fruitfully based on agreements on technology

and its diffusion.

I cannot of course speak for the Committee as a whole, but my own understanding

of the issue is clear:

• The IPCC’s consistent refusal to entertain any dissent, however well researched,

which challenges its assumptions, is profoundly unscientific;

• Although its now famous ‘‘hockey stick’’ chart of temperatures over the last millennium, which inter alia featured prominently in the UK Government’s 2003 Energy White Paper, is almost certainly a myth, the IPCC refuses to entertain any

challenge to it;

• The IPCC’s scenarios exercise, which incidentally incorporates a demonstrably

fallacious method of inter-country economic comparisons, manifests a persistent upward bias in the likely amount of carbon dioxide emissions over the next hundred

years. For example, a combination of steadily increasing energy efficiency and the

growth of the less energy-intensive service economy has led to a steadily declining

rate of growth of carbon dioxide emissions over the past 40 years: all the IPCC’s

scenarios unaccountably assume an abrupt reversal of this established trend.

So why is the IPCC so adamant that it will not revisit its conclusions?

It may be that they are so profoundly concerned about the perils of global warming that the darkest possible picture is painted in order to secure urgent action.

There may also be the inevitable institutional characteristic of making the problem more serious than it is in order to command greater attention. This too may

be a consequence of the way research funding is administered—it is a cold, isolated

world for the climate change contrarian in the modern scientific community.

Whichever reason—and I suspect it may be both—the IPCC’s absolutist position

is unhelpful. The world faces a number of other, and arguably more imminent, challenges and competing claims on resources: the threats from nuclear proliferation

and international terrorism, and the need for humanitarian aid for the world’s poorest, are obvious examples. Choices always have to be made, and they need to be

based on rational assessment.

So far as climate change is concerned, I am not qualified to pronounce on the

science. While it seems clear to me, as a layman, that—other things being equal—

increasing carbon dioxide emissions will, in time, warm the planet, I note that the

science of climate change is uncertain and that reputable scientists hold greatly differing views about the rate at which such warming is likely to occur—which in any

case is not simply a matter of the science: it depends just as much on the likely

rate of future economic growth and the pattern and nature of that growth.

The key question, which is not a matter for scientists at all, is what should be

done about such global warming as may occur.

• There are two possible approaches, which are not of course mutually exclusive:

mitigation, that is, seeking to stabilize and if possible reduce the amount of carbon

dioxide in the atmosphere, and adaptation, that is to accept that the climate may

well be warming, and to take action to counter any harmful consequences that may

flow from this.

• The IPCC and its acolytes make only the most perfunctory acknowledgment of

adaptation. Their estimates of the damage from global warming are based on the

assumption that very little adaptation occurs, and focus almost exclusively on the

need for mitigation. In my view, however, the most important conclusion of the

House of Lords report is that adaptation needs to take centre stage.

• Numerous studies have shown that adaptation is the more cost-effective option,

which is hardly surprising. Not only is that the way in which we normally come

to terms with climatic vagaries, but there are benefits as well as costs from global

warming. There are, of course, regional variations: in northern Europe, for example,

including Britain, for the rest of this century the benefits are likely to exceed the

costs, whereas for the tropics the reverse is the case. But adaptation, which implies

pocketing the benefits while acting to diminish the costs, has obvious attractions.

• The four principal costs potentially involved in global warming are damage to

agriculture and food production, water shortage, coastal flooding (as sea levels rise),

and—allegedly—malaria:

• In the case of agriculture, adaptation, much of which will occur autonomously,

that is, without the need for government action, would consist of cultivating
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areas which have hitherto been too cold to be economic and, in other cases,

switching to crops better suited to warmer climates.

• In the case of water shortage, there is massive wastage of water at the

present time, and ample scope for water conservation measures which incidentally would also help on the farming front.

• The most serious likely cost is that caused by coastal flooding of low-lying

areas, where government action is clearly required, in the form of the construction of effective sea defences—as the Dutch, incidentally, put in place more than

500 years ago. With modern technology this becomes an admittedly expensive

but nonetheless highly cost-effective option.

• Finally, as to malaria—which leading malaria experts, whom the IPCC was

careful to exclude from its deliberations, argue is in any event unrelated to temperature, noting that the disease was endemic in Europe until the 17th century—the means of combating if not eradicating this scourge are well established.

• By contrast, the Kyoto and emissions caps and targets approach seems a most

unattractive option:

• Even if the existing Kyoto targets were attained they would make little if any

difference to the predicted rate of global warming. Kyoto’s importance is presented as a first step to other, stiffer future agreements. But this is pie in the

sky.

• The developing countries, including major contributors to future carbon dioxide emissions such as China and India are—and are determined to remain—

outside the process.

• Since the only sanction against non-compliance with Kyoto (which is likely to

be widespread) is even stricter targets in any successor agreement, the realism

of this approach is even harder to detect.

• In addition, even if targets were achievable, the cost of reaching them would

be horrendous. Essentially, it would work by raising the cost of carbon-based

energy to the point where carbon-free energy sources, and other carbon saving

measures, become economic. For Kyoto-style mitigation to be seriously effective,

it would involve a substantially greater rise in energy prices than anything we

have yet seen despite recent spikes.

• The real cost of this approach is not so much dearer energy as the reduced

rate of world economic growth which this would imply. It is far from self evident, not least for the developing countries, that over the next hundred years

a poorer but cooler world is to be preferred to a richer but warmer one. Nor

should it be overlooked that the Kyoto strategy requires the present and next

generation to sacrifice their living standards in order to benefit more distant

generations who are projected in any event to be considerably better off.

• Mitigation can however, be a desirable complement to adaptation. Far better

than the Kyoto approach is additional support for research into reduced carbon technologies of all kinds, thus bringing forward the time when at least some of these

technologies may become economic. A nation which performs relatively well in terms

of cutting back emissions is bound to lose out competitively whereas a nation which

achieves a technological breakthrough is likely to benefit competitively.

In conclusion, I believe that the IPCC process is so flawed, and the institution,

it has to be said, so closed to reason, that it would be far better to thank it for the

work it has done, close it down, and transfer all future international collaboration

on the issue of climate change, where the economic dimension is clearly of the first

importance, to the established Bretton Woods institutions.

It is profoundly important that all governments, most importantly their Treasury

departments, make their own independent and rigorous economic analysis of the

issue. At the time the Lords committee was taking evidence this, for whatever reason, had not happened in the UK. I very much hope that, following our report, it

will.

We appear to have entered a new age of unreason, which threatens to be as economically harmful as it is profoundly disquieting. It must not be allowed to prevail.

RESPONSES BY LORD NIGEL LAWSON TO ADDITIONAL QUESTIONS FROM

SENATOR JEFFORDS

Question 1. To make clear for the record, did you appear before the Committee

to testify on behalf of the British government? If not, in what capacity did you appear?
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Response. I no more testified on behalf of the British government than Senator

Jeffords represented the United States administration. I appeared before the Committee because I was invited to do so, and it would have been discourteous to have

declined. As I made clear in my opening statement at the hearing on 5 October, I

did so in my capacity as a member of the House of Lords Select Committee on Economic Affairs, which published its Report on The Economics of Climate Change on

5 July. This is an all-party committee, and its Report was unanimous. The Committee’s members bring to bear a wide range of experience and expertise; and, as I told

your Committee on 5 July, my own includes a decade as a senior British government Minister, from 1979 to 1989—to be precise, as Financial Secretary to the

Treasury 1979–1981, Energy Secretary 1981–1983, and Chancellor of the Exchequer

(equivalent to your Treasury Secretary) 1983–1989.

Question 2. You are critical of the Intergovernmental Panel on Climate Change

for not looking at how nations might work together to prepare for adaptation and

mitigation of the inevitability of climate change. What steps are you recommending

the IPCC take?

Response. Chapter 9 of the House of Lords Committee’s report, which I submitted

as a background document to my own written testimony, contains its unanimously

agreed conclusions and recommendations. Those which concern the IPCC may be

found in particular in paragraphs 145, 154, 158, 159, 161, 162, 168, 169, 170, and

174. In my opinion these are the minimum steps the IPCC needs to take; and, if

it does not do so, it would—as I submitted in my written testimony to your committee—‘‘be far better to thank it for the work it has done, close it down, and transfer all future international collaboration on the issue of climate change, where the

economic dimension is clearly of the first importance, to the established Bretton

Woods institution’’.

Question 3. The House of Lords July Report says that it is ‘‘far better that government sets the goal and the price signals to achieve that goal, leaving the market

to select the technologies and their rate of diffusion through the economy.’’ Isn’t that

what the Kyoto Protocol sets out to do? Does not the cap and trade program move

those participating countries in that direction? If not, what other policy would be

effective at sending a clear signal to the private sector?

Response. The House of Lords Report’s criticism of governments selecting which

technologies to back was explicitly aimed at the UK’s approach in its White Paper

on energy policy of picking winners—basically wind power and energy efficiency.

That is quite different from a possible international agreement on the development

of low-carbon technologies and their diffusion, which would be based on supporting

those low carbon technologies the energy industry was prepared to back with its

own money in the light of market criteria. I set out the severe drawbacks of the

Kyoto/cap and trade approach in my written testimony, and it would be otiose to

repeat them here.

Question 4. Developed nations have benefited the most from the burning of fossil

fuels but the low-lying areas likely to be flooded as a result of climate change are

likely to be poor communities and the developing world. You advocate construction

as an effective defense. Who should bear the costs of this construction and why?

Response. The cost should be borne partly by the developing countries themselves

(whose GDP per head of population by the end of this century will, according to the

IPCC’s scenarios, be higher than that of the developed world today) and partly by

the developed nations, through earmarking a significant proportion of their overseas

aid budgets to this specific purpose. The relative size of these two components

should vary according to the specific circumstances of each developing country concerned.

Question 5. You refer to numerous studies showing adaptation is a more cost-effective option. Are these peer-reviewed studies? Will you provide copies of these

studies for the record?

Response. I would refer the Committee to the substantial paper by Dr. Indur

Goklany, entitled ‘‘A Climate Policy for the Short and Medium Term: Stabilization

or Adaptation’’, published in the journal Energy & Environment, volume 16, no 3

& 4, 2005.

POSITION PAPER, PIECE ON CLIMATE CHANGE FOR PROSPECT,

BY LORD NIGEL LAWSON

Nothing could better illustrate the intellectual bankruptcy of what might be

termed the climate change establishment than Dr. Michael Grubb’s September Pros-
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pect essay ‘‘Stick to the Target’’. He is clearly outraged by the fact that, in July,

the House of Lords Select Committee on Economic Affairs published a report, ‘‘The

Economics of Climate Change’’, which had the temerity to express considerable

scepticism about both the reliability of the IPCC process—the Intergovernmental

Panel on Climate Change, set up under the auspices of the United Nations to inform

and advise governments on what is clearly a global issue—and the desirability of

the Kyoto/emissions targets approach to tackling the problem.

Although a member of that Committee, whose report was agreed unanimously

(those who are interested in it would do better to read it than rely on Dr. Grubb’s

travesty), I cannot speak for the Committee as a whole. But my own understanding

of the issue is clear.

The IPCC story, which appears to have been swallowed hook, line and sinker by

most governments, not least our own, is essentially as follows. Over the past millennium, from 1000 AD, the world’s mean temperature scarcely changed at all until

around 1860, when direct records first began. Since then it has risen (not steadily,

in fact: there was a period of cooling between 1945 and 1965) by an unprecedented

0.6 degrees centigrade. This can only be due to the simultaneous growth in the

amount of carbon dioxide in the atmosphere as a result of industrialisation, which

warms the planet by the so-called greenhouse effect. Unless something is done about

it, this warming is set to continue, and probably to accelerate, as world economic

growth continues apace, and with it carbon dioxide emissions. On this basis, a range

of possible scenarios can be produced, showing further increases in world temperature ranging from 1.7 degrees to 6.1 degrees by the end of the present century, with

dire consequences on a number of fronts. The only solution is to cut back on carbon

dioxide emissions as much and as soon as possible, and the best way to do this is

by the Kyoto process of internationally agreed emissions targets.

While there is little doubt that carbon dioxide emissions, other things being equal,

do warm the atmosphere—although reputable climate scientists differ over how

much they warm it—every other aspect of the IPCC story is seriously flawed.

First, the history. The ‘‘hockey-stick’’ chart of temperatures over the past millennium (so-called because the constant temperature over the long period up to 1860

resembles the straight handle and the subsequent rise the curved blade), which featured prominently in the Government’s 2003 energy white paper, is almost certainly

a myth. There is, for example, ample evidence of a warm period—warmer than

today—in the middle ages and of a very cold period around 1800. Historical treeline

studies—showing how far up mountains trees are able to grow at different times,

which is clearly correlated with climate change—confirm this variation. This would

not matter very much, merely indicating that the climate fluctuates all the time and

that the present warming phase is by no means without precedent, were it not for

the IPCC’s consistent refusal to entertain any dissent, however well-reseached, over

the issue since it first published the ‘‘hockey-stick’’ chart in 2001—a profoundly unscientific attitude which is all too characteristic of that body.

Next, the scenarios. It is of course hard, to say the least, to form a view of the

likely rate of world economic growth over the next hundred years; but it is striking

that all the IPCC scenarios—which incidentally are based on a demonstrably fallacious method of inter-country economic comparisons—incorporate a heart-warmingly

rapid rate of growth in the developing world, so that by the end of the century income per head in the developing world is well above what it is in the rich world

today. This may happen—I hope it does—but it is clear that the IPCC scenarios do

not capture the true range of realistically possible outcomes.

This upward bias is further compounded by the translation from economic growth

to growth in carbon dioxide emissions. The recent historical record shows a steady

decline in this rate of growth, from 2.3 percent a year over the past 40 years, to

1.6 percent a year over the past 30 years, to 1.3 percent a year over the past 20

years, to 1.2 percent a year over the past 10 years. This should not be surprising.

In the first place, economic progress is a story of increasing efficiency in the use

of all factors of production. In the case of labour this is customarily referred to as

growth in productivity, but precisely the same applies to land and energy. Secondly,

the pattern of world economic growth has been changing, with services, which are

less energy-intensive, growing faster than manufacturing, which is more so.

What is surprising, however, is the IPCC’s assumption, without offering any evidence, that this trend will now be reversed. Its six scenarios for the 21st century

are based on an annual rate of growth in carbon dioxide emissions ranging from 1.4

percent a year (appreciably greater, rather than less, than in the recent past) to 2.3

percent a year (almost double the rate of the recent past). Once again, although the

future is inevitably uncertain, it is clear that the IPCC scenarios do not capture the

true range of plausible futures. And of course this upward bias feeds directly into

an upward bias in projected climate change.
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There are two possible reasons why this should be so, and why the IPCC is so

adamant that it will not revisit its assumptions; and they are not incompatible: both

may be true. The first is that those involved in the exercise are so profoundly concerned about the perils of global warming, and the risk of governments deferring

the action they believe is needed, that the scarier the outlook they can produce the

better. The second is a characteristic of any institution looking into any problem:

the more serious the problem can be made to appear, the more important the institution and its personnel become and the more attention they can command.

But however understandable, this is not helpful in a world of limited resources

where there are many other problems jostling for attention and the devotion of additional resources: to take just two examples, dealing with the more imminent dangers posed by Islamic terrorism and by nuclear proliferation—and by the possible

interaction between them. Humanitarian aid to the world’s poorest is another obvious candidate for more resources.

At the margin, choices have to be made, and it is essential they are made on the

basis of the most rational assessments we can achieve.

Which brings us to the question of what is to be done about such global warming

as is likely to occur. There are two possible approaches, which are not of course mutually exclusive: mitigation, that is, seeking to stabilize and if possible reduce the

amount of carbon dioxide in the atmosphere, and adaptation, that is to accept that

the climate may well be warming, and to take action to counter any harmful consequences that may flow from this. The IPCC and its acolytes make only the most

perfunctory acknowledgment of adaptation, base their estimates of the damage from

global warming on the assumption that very little adaptation occurs, and focus almost exclusively on the need for mitigation. By contrast, perhaps the most important conclusion of the House of Lords report (a conclusion not even addressed by

Dr. Grubb in his Prospect attack) is that adaptation needs to take centre stage.

Numerous studies have shown that adaptation is the more cost-effective option,

which is hardly surprising. Not only is that the way in which we normally come

to terms with climatic vagaries, but (a fact which the IPCC does its best to play

down) there are benefits as well as costs from global warming. There are, of course,

regional variations: in northern Europe, for example, including Britain, for the rest

of this century the benefits are likely to exceed the costs, whereas for the tropics

the reverse is the case. But adaptation, which implies pocketing the benefits while

acting to diminish the costs, has obvious attractions.

The four principal costs potentially involved in global warming are damage to agriculture and food production, water shortage, coastal flooding (as sea levels rise),

and—allegedly—malaria. In the case of agriculture, adaptation, much of which will

occur autonomously, that is, without the need for government action, would consist

of cultivating areas which have hitherto been too cold to be economic and, in other

cases, switching to crops better suited to warmer climates. In the case of water

shortage, there is massive wastage of water at the present time, and ample scope

for water conservation measures—which incidentally would also help on the farming

front.

The most serious likely cost is that caused by coastal flooding of low-lying areas,

where government action is clearly required, in the form of the construction of effective sea defences—as the Dutch, incidentally, put in place more than 500 years ago.

With modem technology this becomes an admittedly expensive but nonetheless highly cost-effective option. Finally, as to malaria—which leading malaria experts, whom

the IPCC was careful to exclude from its deliberations, argue is in any event unrelated to temperature, noting that the disease was endemic in Europe until the 17th

century—the means of combating if not eradicating this scourge are well established.

By contrast, the Kyoto/emissions targets approach seems a most unattractive option. Even Dr. Grubb admitted, in his evidence to the House of Lords committee,

that even if the existing Kyoto targets were attained they would make little if any

difference to the rate of global warming: Kyoto’s importance for him was as a first

step to other, stiffer, such agreements. But this is pie in the sky. The developing

countries, including major contributors to future carbon dioxide emissions such as

China and India are—and are determined to remain—outside the process, while the

United States, the biggest emitter of all, has declined to ratify the treaty. Moreover,

since the only sanction against non-compliance with Kyoto (which is likely to be

widespread) is even stricter targets in any successor agreement, the realism of this

approach is even harder to detect.

This is no bad thing, since the cost of going the emissions targets route, if it were

effective, would be horrendous. Essentially, it would work by raising the cost of carbon-based energy to the point where carbon-free energy sources, and other carbon

saving measures, become economic. Given that only last month the present Chan-
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cellor of the Exchequer told the annual TUC Conference that the recent rise in oil

prices was a global problem requiring a global solution, and called on the oil-producing nations to reduce their prices, there seems to be some lack of coherence in

the Government’s approach. For Kyoto-style mitigation, to be seriously effective, involves a substantially greater rise in energy prices than anything we have yet

seen—although the Government’s energy white paper was curiously silent about

this.

But the real cost of this approach is not so much dearer energy as the reduced

rate of world economic growth which this would imply. It is far from self evident,

not least for the developing countries, that over the next hundred years a poorer

but cooler world is to be preferred to a richer but warmer one. Nor should be overlooked that the Kyoto strategy requires the present and next generation to sacrifice

their living standards in order to benefit more distant generations who are projected

in any event to be considerably better off.

To the extent that mitigation is a desirable complement to adaptation, far better

than the Kyoto approach is additional support for research into reduced carbon technologies of all kinds, thus bringing forward the time when at least some of these

technologies may become economic. At least this goes with the grain. Whereas a nation which performs relatively well in terms of cutting back emissions is bound to

lose out competitively, a nation which achieves a technological breakthrough is likely to benefit competitively.

The IPCC process is so flawed, and the institution, it has to be said, so closed

to reason, that it would be far better to thank it for the work it has done, close it

down, and transfer all future international collaboration on the issue of climate

change, where the economic dimension is clearly of the first importance, to the established Bretton Woods institutions. Meanwhile, whether this happens or not, it

is imperative that in this country the Treasury becomes fully involved in all this.

In my time as Chancellor, it would have been unthinkable, on a matter as important as climate change, for the Treasury not to have made its own independent and

rigorous economic analysis of the issue. At the time the Lords committee was taking

evidence this, for whatever reason, had not happened. I very much hope that, following our report, it will.

But the IPCC’s apparent determination to suppress or ignore dissenting views

and reasoned criticism, which has become little short of a scandal, is part of a wider

problem.

It is, I suspect, no accident that it is in Europe that climate change absolutism

has found the most fertile soil. In part this no doubt reflects the widespread European distaste for President Bush—the great Kyoto non-signer—and all he stands

for. But much more fundamental, I believe, is the fact that it is Europe that has

become the most secular society in the world, where the traditional religions have

the weakest popular hold. Yet people still feel the need for the comfort and higher

values that the transcendent certainties of religion can provide; and it is what might

be termed the quasi-religion of greenery in general and the climate change issue in

particular which has filled the vacuum, with reasoned questioning of its mantras

regarded as a form of blasphemy.

We have recently seen a further example of this in the widespread assumption

that the Mexican gulf coast hurricanes, Katrina and Rita, are a consequence of global warming—a punishment, it is implied, for our heedless materialism and disregard of the planet. One wonders, in that case, what caused the region’s worst recorded hurricane, which devastated Galveston in 1900. In fact, the balance of scientific opinion is that there is no convincing evidence that the further climate

change which is feared might occur over the coming decades will lead to an increased incidence and severity of hurricanes, let alone the modest degree of warming that we have seen so far.

In primitive societies it was customary for extreme weather events to be explained

as punishment from the gods for the sins of the people. Little, it seems, has

changed.

As Dick Taverne has pointed out, we appear to have entered a new age of

unreason, which threatens to be as economically harmful as it is profoundly disquieting. It must not be allowed to prevail.
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STATEMENT OF MARGO THORNING, PH.D., SENIOR VICE PRESIDENT AND CHIEF

ECONOMIST, AMERICAN COUNCIL FOR CAPITAL FORMATION

INTRODUCTION

Mr. Chairman and Members of the Committee, I appreciate the opportunity to

present this testimony before the Senate Environment and Public Works Committee

The American Council for Capital Formation represents a broad cross-section of

the American business community, including the manufacturing and financial sectors, Fortune 500 companies and smaller firms, investors, and associations from all

sectors of the economy. Our distinguished board of directors includes cabinet members from prior Republican and Democratic Administrations, former Members of

Congress, prominent business leaders, and public finance and environmental policy

experts.

The ACCF is celebrating nearly 30 years of leadership in advocating tax, regulatory, environmental, and trade policies to increase U.S. economic growth and environmental quality.

BACKGROUND

The European Union has a target of an 8 percent reduction from the 1990 baseyear level for the Kyoto Protocol’s 2008–2012 commitment period. To assist in meeting its target, the EU has put in place an emissions cap and trade system (ETS)

covering carbon dioxide emissions for selected large industry and utility sectors.

WHERE DOES EUROPE STAND ON ACTUALLY COMPLYING WITH KYOTO?

The original 15 members of the European Union are projected to be 7 percent

above the 1990 emission levels by 2010. Data from the European Environmental

Agency show that only Sweden and the UK are likely to meet their Kyoto targets.

(See Figure 1.) Spain, Denmark and Portugal are projected to be 25 percent to 35

percent above their targets in 2010. EU policymakers are beginning to worry about

the additional steps required to meet the targets, including impact of emission trading schemes on industry. They realize they cannot reconcile goals of increased EU

industrial competitiveness as well as tighter future targets for GHG emission reductions. UK Prime Minister Terry Blair said on September 15, 2005 at the Clinton

Global Initiative, ‘‘The truth is no country is going to cut its growth or consumption

substantially in the light of a long-term environmental problem. To be honest, I

don’t think people are going, at least in the short term, to start negotiating another

major treaty like Kyoto.’’

MEASURING THE ECONOMIC IMPACT OF THE KYOTO PROTOCOL ON THE EU:

GDP and Employment Effects

As studies by the International Council for Capital Formation (ICCF) illustrate,

an accurate portrayal of the costs of complying with GHG emissions reduction targets depends largely on choosing an economic model that captures all the short- and

medium-term costs of adjusting to higher energy prices or regulatory mandates on

the economy as a whole. (See ‘‘Economic and Modeling of Climate Change Policy’’

at www.iccfglobal.org.)
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For example, some economic models such as the PRIMES model used by the EU

environmental agencies are designed only for measuring sectoral effects, not economy wide effects. PRIMES is primarily designed to show the effect of policy changes

on energy markets. It can calculate the direct cost implications of reduced energy

use but not the economy-wide impact on gross domestic product (GDP), employment,

investment, etc. Thus, the results of this model, which show a reduction of only 0.12

percent in GDP to the EU in 2010 from complying with the Kyoto Protocol, are not

an accurate measure of the total costs to EU households, businesses, the economy,

and government. (See Figure 2.) These sectoral models underestimate the negative

economic effects by a factor of 10 to 15 times (0.12 vs. 1.5 to 2.0). Such reliance on

results from PRIMES has led EU officials, industry, and households to believe that

the costs of achieving the Kyoto Protocol’s targets and the further cuts planned for

the second and subsequent commitment periods will be relatively small. However,

as the study ‘‘ACROPOLIS,’’ released by DG Research of the European Commission

in September 2003 noted, the tighter targets that are being discussed under the second commitment period could reduce GDP by 1.3 percent annually by 2030.

Even general equilibrium models, which measure ‘‘big picture’’ impacts on an

economy after it has had time to adjust (over 30 to 40 years) to higher energy prices,

show GDP losses of about 1 percent per year under Kyoto, which are an order of

magnitude greater than PRIMES. (See Figure 2.) Even though general equilibrium

models look at a period of time much longer than the Kyoto timetable, their results

more accurately reflect the consequences of curbing emissions than does a sectoral

model like PRIMES. General equilibrium models reflect the full economic impact of

reducing emissions, not just the impact on the energy sector. Given their long time

frame, general equilibrium models are unable to capture short-term adjustment

costs and therefore probably underestimate near term impacts. Despite that fact,

they still indicate that the economic impact of meeting Kyoto and post-Kyoto emissions targets will have an economic impact far greater than PRIMES.
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1Ofgem, ‘‘Emission Trading: Impacts on Electricity Consumers,’’ February 2005.

Macroeconomic models provide an assessment of the overall economic costs of

meeting emission targets where the short-term, frictional cost of adjustment is included. These models, which U.S. scholars and climate policy modelers began using

in the early 1990s to measure the impact of Kyoto on the U.S. economy, quantify

the impact on employment, investment, budget receipts, and GDP growth when an

economy is ‘‘shocked’’ by having to make quick changes in its capital stock, production processes, lifestyles, etc. Results of macroeconomic models show that Kyoto

would have negative effects on the U.S. economy in the range of 1.5 percent to about

4 percent of GDP in 2010.

When macroeconomic models are used to measure Kyoto’s effects on the EU, the

impacts are greater 0.5 to 5 percent less GDP in 2010—than those derived from sectoral models like PRIMES. For some countries like Spain, the GDP loss due to reduced energy use will be severe Spanish GDP in 2010 is estimated to be about 4.8

percent smaller than under the baseline forecast. (See Figure 2.).

Employment in the EU would also be negatively affected by the imposition of an

emission trading system with carbon prices high enough to force down energy use.

The Global Insight simulations show job losses in 2010 ranging from 51,000 in Italy

to 800,000 in Spain. (See www.iccfglobal.org.)

The Impact of the Emission Trading System: Impact on Electricity Prices

The European Union’s Emission Trading System (ETS) was established in 2003.

The goal was to implement a policy that was both cost-effective and operated in a

similar way across the whole EU market, to reduce emissions of carbon dioxide and

potentially other greenhouse gases, both to comply with the EU’s commitments to

2012 under the Kyoto Protocol and to achieve further emission reductions thereafter.1
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2 International Council for Capital Formation: Climate Change Policy And Economic Growth:

A Way Forward to Ensure Both; page 65–79. April 2005 (see www.iccfglobal.org).

The first Phase of the ETS will run from 2005–2007, and Phase 2 will coincide

with the commitment period of the Kyoto Protocol, 2008–2012. Subsequent phases

will be of 5 years duration.

The ETS applies to installations throughout the 25 Member States of the EU that

engage in the following activities and are above a specified size: combustion installations (most importantly for power generation, but excluding municipal and hazardous waste incineration), mineral oil refineries, coke ovens, steel manufacturing,

and production of cement, lime, glass and glass fibre, ceramics and pulp and paper.

It has been estimated that the ETS will apply to 9,200 to 12,000 installations that

are responsible for about 46 percent of EU carbon dioxide emissions. The Directive

also provides for other sectors (perhaps chemicals, aluminum and aviation) and

gases to be included in Phase 2 at the discretion of Member States.

Although the ETS has only been in operation for a short time, electricity prices

in the EU are rising, as shown in Figure 3. EU electricity prices are closely tracking

the cost of the emissions trading permits. While some of the increases in electricity

prices are doubtless due to rising global energy prices, part of the 31 percent rise

in power can be attributed to higher prices for the right to emit a ton of CO2.

COULD AN INTERNATIONAL EMISSION TRADING SYSTEM FUNCTION EFFECTIVELY?

Many Kyoto proponents want to see the EU’s ETS system spread to the rest of

the world. However, as a new study by Dr. David Montgomery of CRA International

shows, a global emission trading system is not workable.2 Emission trading will

work only if all the relevant markets exist and operate effectively; all the important

actions by the private sector have to be motivated by price expectations far in the

future. Creating that motivation requires that emission trading establish not only

current but future prices, and create a confident expectation that those prices will

be high enough to justify the current R&D and investment expenditures required

to make a difference. This requires that clear, enforceable property rights in emissions be defined far into the future so that emission rates for 2030, for example,

can be traded today in confidence that they will be valid and enforceable on that

future date. The international framework for climate policy that has been created

under the UNFCCC and the Kyoto Protocol cannot create that confidence for investors because sovereign nations have different needs and values. Therefore, it seems
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likely that the ETS system which the EU is trying to implement will fail to spread

to other parts of the world and will eventually be replaced with a more practical

approach to climate change policy. Several provisions of the 2005 Energy bill should

have a positive impact on climate change. The new Asia-Pacific Partnership for

Clean Development and Climate should also play a key role in transferring new

technology to developing countries and help provide the practical assistance that is

needed for a global approach to emission reduction.

CONCLUSIONS

There are many urgent global problems such as lack of food, sanitation and potable water that are daily imposing hardship and death on the world’s least fortunate

citizens. Energy use and economic growth go hand in hand, so helping the developing world improve access to cleaner, more abundant energy should be our focus.

Near-term GHG emission reductions in the developed countries should not take priority over maintaining the strong economic growth necessary to keeping the U.S.

one of the key engines for global economic growth. Establishing a mandatory cap

and trade system in the United States would impede, not promote, U.S. progress

in reducing emissions intensity. U.S. climate change policies should continue to

strive to reduce energy intensity as the capital stock is replaced over the business

cycle and to develop new, cost-effective technologies for alternative energy production and conservation and encourage the spread of economic freedom in the developing world. This approach is likely to be much more productive than having the

U.S. adopt an ETS and thereby sacrifice economic well-being and job growth with

little or no long-term impact on global GHG emissions.

RESPONSES BY MARGO THORNING TO ADDITIONAL QUESTIONS FROM

SENATOR JEFFORDS

Question 1. What would be the appropriate economic incentives for companies to

develop cost-effective carbon capture technologies?

Response. The private sector is the United States is currently developing way to

capture carbon. Some oil and gas companies, for example, are able to ship the CO2

produced when oil and gas are extracted for injection in to old wells in order to enhance production. In this case, the market is providing the economic incentive to

capture the carbon. Additional incentives to develop carbon capture technology could

be provided by more favorable tax treatment for these investments. The U.S. lags

behind many of its international competitors in capital cost recovery for energy and

pollution control equipment. For example, after 5 years a U.S. investor recovers only

65.8 percent of his investment in a scrubber compared to 105 percent in China, 100

percent in Taiwan and 80 percent in Japan. Slow U.S. capital cost recovery raises

the cost of capital and impedes investment in cleaner, more efficient energy equipment and hinders the achievement of environmental goals.

In addition to the ongoing efforts of the private sector to develop technologies to

sequester and capture carbon, the U.S. government has budgeted about $3 billion

per year for its Climate Change Technology Program, including research on carbon

capture and sequestration. In 2003, DOE initiated a nationwide network of regional

Carbon Sequestration Partnerships involving State agencies, universities, and the

private sector.

Question 2. I know you have looked at the economics of the implementation of carbon control. What, in your view, are the most informative peer-reviewed studies that

have been done on the economic impacts of a cap and trade program for CO2?

Response. The most informative analyses make use of either macroeconomic models which are designed to capture the near term effects of curbing energy use or general equilibrium models which capture the long run (30–40 years) effects of policies

to curb energy use. Other useful studies make use of cost-benefit analysis to evaluate the appropriate policy decisions to address climate change. Among the peer reviewed studies for the U.S. are those by Professors Willian Nordhaus, Thomas Rutherford, Alan Manne, and Dr. David Montgomery and Dr. Brian Fisher (see sources

in my testimony of July 18, 2001 before the Governmental Affairs Committee of the

U.S. Senate, the link is http://www.accf.org/pdf/TestSenFin701.pdf). Other useful

analyses, while not peer-reviewed have been released by the U.S. Department of Energy’s Energy Information Administration, and by the macroeconomic forecasting

firm, Global Insight Inc. (formerly DRI-WEFA).

Question 3. I want to ask a question about the role the market can play in addressing climate change. If the increasing price of carbon intensive goods does not

encourage manufacturers to seize market forces and develop less carbon intensive
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goods, as we are now seeing, is there a role for government to see that the market

does so?

Response. In my view, the policies put in place by the Bush Administration to encourage reductions in energy intensity (energy used per dollar of GDP) will be more

effective than government mandates or a cap and trade system for reducing the

growth in emissions. For example, most of the original 15 EU members are projected to substantially exceed their Kyoto Protocol targets in 2010. In contrast, U.S.

emission intensity has fallen by 16.9 percent over the 1992–2002 period compared

to only 9.3 percent in the EU. Our faster economic growth (over 3 percent per year

compared to 1 percent in the EU) allows for faster replacement of the capital stock

and faster reductions in emission intensity.

Question 4. If not by having developed nations, which reaped the benefits of carbon intensive energy for the last hundred years, lead the charge for developing new

technologies to reduce carbon emissions, then how would you propose we as a nation

encourage China, India and other developing nations reduce their carbon emissions?

Response. According to an analysis by the Canadian Fraser Institute, countries

which rank high on their index of Economic Freedom also grow more rapidly. Economic freedom is defined as protection of property rights and contracts, openness

of internal markets, overall share of output absorbed by government, political freedom and lack of import restrictions and lack of subsidies through state run enterprises. New research by David Montgomery of CRAI, Inc. shows that countries

which rank high in terms of economic freedom use much less energy per dollar of

output than countries ranking low on the index of economic freedom (see link to my

power point presentation, slide #11 http://www.iccfglobal.org/pdf/ICCF-SloveniaOct2005.pdf).

Question 5. In your June 24th letter to the editor in the Washington Post, you

wrote, ‘‘If economic freedom and economic growth could be accelerated in developing

countries, emissions intensity would decline as countries get richer and able to

adopt cleaner energy technologies.’’ If wealthy developed nations fail to take action

to curb greenhouse gases through use of innovative technologies, why would you

think that developing nations would make such a different choice?

Response. Research shows that as countries grow and develop, environmental

quality may at first decline. However as GDP per capita rises, gradually environmental quality rises, water and air become cleaner and other measures of environmental quality improve. As noted in my response to question number 3, emission

intensity is slowing faster in the U.S. than in the EU. Developed country emission

growth is slowing; in fact U.S. CO2 emissions actually fell by 0.3 percent from 2000

to 2003 even though U.S. population grew by 8.6 million during that time. As developing countries grow, they are likely to choose less emitting, more energy efficient

technologies so as to improve air quality. For example, China plans to build 40 new

nuclear power plants over the next 20 years.

Question 6. You conclude that near-term greenhouse gas emissions reductions

should not take priority over U.S. economic growth. Will there ever be a time when

you think reducing greenhouse gases should take precedent? What peer reviewed

scientific evidence do you have that limiting gas emissions today will have little or

no long-term impact on global greenhouse gas emissions?

Response. Studies cited by Bjorn Lomborg in his book ‘‘The Skeptical Environmentalist (2001)’’ shows that even if Annex I countries met their Kyoto Protocol targets the temperature in the year 2100 would be only 0.5C lower than under a business as usual scenario. Because of the long life of CO2 in the atmosphere and the

projected growth of emission in developing countries it is not a cost-effective strategy to impose near term targets and timetables on developed countries. Instead the

focus needs to be on promoting strong economic growth to enable countries to invest

in less emitting energy and manufacturing and transport technologies. Promoting

economic growth will also enable countries to adapt more easily to possible changes

in temperature, no matter what the underlying cause.

Question 7. Specifically, which provisions of the Energy Policy Act of 2005 will

lead to reduce carbon emissions?

Response. The tax incentives in the Energy Policy Act of 2005 (9.2 billion over

the 2005–2015 period) for renewable energy, nuclear power, clean coal facilities, energy transmission, conservation and alternative motor vehicle and fuels would all

help to reduce carbon emissions. In addition, provisions in Title XVI, Subtitle B will

help DOE identify technology options which could reduce GHGs and are suitable for

transfer to developing countries.
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1 Article 4.2 of the UNFCCC commits industrialised countries to adopt ‘policies and measures

that will demonstrate that developed countries are taking the lead in modifying longer-term

trends in anthropogenic emissions consistent with the objective of the Convention’, with the initial ‘aim’ of returning their emissions of CO2 and other greenhouse gases to 1990 levels. This

became the focus of attention in the years immediately after the Convention and the failure of

key industrialised countries to move in this direction was a principal reason why Kyoto moved

to binding commitments focused on the industrialised countries.

RESPONSE BY MARGO THORNING TO AN ADDITIONAL QUESTION FROM SENATOR OBAMA

Question. At the end of your written testimony, you conclude that rather than risk

harm to the economy from reducing greenhouse gas emissions, it would be better

to keep the U.S. as a key engine for global economic growth. That engine can then

be used to spur development of clean energy in developing countries. If global climate change is having any hand in African drought and subsequent death from

famine, does your view of U.S. responsibility for speeding up reductions in our

greenhouse gas emissions change despite the possible risks to the economy?

Response. Adopting caps on U.S. carbon emission will do very little to reduce the

growth in man made CO2 emissions as developing country emissions from China,

India, Brazil and other countries will soon outstrip those of the developed world. In

addition, CO2 stays in the atmosphere for approximately 100 years so reducing CO2

concentrations is a very long term proposition. The tragedy of poverty and famine

in Africa is best addressed through promoting economic freedom and reducing government corruption so that economic growth and improved living standards will

occur. Policies which impose caps on U.S. carbon emissions will only slow our own

economic growth, thus making it harder for the U.S. to provide funds and technical

support for the world’s poor.

STATEMENT OF MICHAEL GRUBB, PH.D., CHIEF ECONOMIST, THE CARBON TRUST, SENIOR RESEARCH ASSOCIATE, FACULTY OF ECONOMICS, CAMBRIDGE UNIVERSITY, AND

VISITING PROFESSOR OF CLIMATE CHANGE AND ENERGY POLICY, IMPERIAL COLLEGE, LONDON

My name is Michael Grubb. I am Chief Economist of the UK Carbon Trust, an

independent company funded by the UK government with turnover approaching

US$150m/yr, established jointly between UK government and industry in 2001. The

aim of the Carbon Trust is to help UK business and public sector implement CO2

emission reductions cost-effectively and to develop a competitive low carbon industry

technology sector.

My post is half time, which I combine with academic research through a post at

the Faculty of Economics at Cambridge University, and a Visiting Professorship at

Imperial College, where I was Professor of Climate Change and Energy Policy before

joining the Carbon Trust. I am also editor-in-chief of the Climate Policy journal.

In this testimony I set out some key points in relation to the UK’s delivery of its

emission targets and the design of the Kyoto Protocol, and append a presentation

that I gave yesterday to the Columbia University School of International and Public

Affairs.

This submission contains the following components: key points about the emissions context for the Kyoto Protocol; implementation policies and prospects; observations about the economics of implementation of carbon management and low-carbon

technology; and a concluding section that summarises my points in relation to what

appear to some ‘‘common myths’’ about the Protocol.

1. The global emissions context

Policy on climate change is set in a context of large divergence of emissions between countries. This is illustrated in Chart 9 in the attached presentation, which

shows the global distribution of CO2 emissions in terms of three major indices: emissions per capita (height of each block); population (width of each block); and total

emissions (product of population and emissions per capita = area of block).

Per capita emissions in the industrialized countries are typically as much as ten

times the average in developing countries, particularly Africa and the Indian subcontinent. This is one of the reasons why industrialized countries accepted the responsibility for leading climate change efforts in the UNFCCC and subsequent

Kyoto negotiations: unless they can control their own high emissions there is little

prospect of controlling emissions from developing countries that start from a very

much lower base.1 There are also large differences among the industrialized coun-
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2The COP 1 meeting agreed that the UNFCCC commitments were inadequate, and consequently to ‘begin a process to enable it to take appropriate action for the period beyond 2000,

including the strengthening of the commitments of Annex 1 Parties, i.e. the industrialized

world’, to (a) ‘elaborate policies and measures’; and (b) ‘set quantified limitation and reduction

objectives within specified time-frames, such as 2005, 2010 and 2020. It was agreed that these

negotiations ‘should not introduce new commitments for developing countries’, but should enhance the implementation of their existing commitments under the UNFCCC. Thus were

launched the intensive negotiations that finally culminated in Kyoto.

tries, with per capita emissions in the EU and Japan at about half the levels in

the United States and Australia.

The main aim of the Kyoto Protocol is to contain emissions of the main greenhouse gases in ways that reflect underlying national differences in emissions, wealth

and capacity, following the main principles agreed in the UN Framework Convention on Climate Change (UNFCCC). These include the need for evolutionary approaches and the principle of ‘common but differentiated’ responsibilities, including

leadership by the richer and higher emitting industrialised countries. Following the

agreed negotiating mandate,2 in Kyoto the countries that took on quantified commitments for the first period (2008–12) are the industrialised countries as listed in

Annex I to the Treaty, which correspond roughly to those with per-capita emissions

in 1990 of two tonnes Carbon per capita (2tC/cap) or higher—the ‘Other EIT’

[Economies in Transition] category and all to the left of it in the Chart.

At the same time, the currently low emissions and large population of the developing countries indicates the huge potential for global emissions growth, if and as

their emissions climb towards anything like levels in the industrialized world. The

Kyoto negotiations were marked by big tensions on this issue. In the final agreement, in addition to the provisions on national reporting and technology transfer,

the Clean Development Mechanism is intended to provide a mechanism to start

reigning in the rapid growth of developing country emissions without these countries themselves bearing the costs. The intent is that developing countries will engage more over time, in subsequent negotiation rounds, if and as the richer countries fulfil their commitments.

2. Current implementation policies and prospects

I shall speak in relation to policies principally in the UK, where a variety of instruments have been in place since about the year 2000 in the context of the UK

Climate Change Programme (HMG, 2000), more recently complemented by the European Emissions Trading Scheme. At the core of the programme is a set of measures to encourage investment in established low carbon technologies, particularly relating to energy efficiency, combined with increased government expenditure along

the ‘innovation chain’ of low carbon energy technologies. Already by FY 2002–3

these efforts amounted to a diverse set of instruments with a total incentive value

for low carbon-related investments of around US$2bn.

The UK has generally found emissions reductions to be associated with positive

economic developments. UK emissions reduced substantially during the 1990s as a

result of privatisation in energy-consuming industries, that helped to boost their efficiency, and liberalisation of the UK electricity and gas systems that included a

‘‘dash for gas’’. It is estimated that this accounted for about half of the total observed reductions in UK CO2 emissions. Sharply rising gas prices in the most recent

years have reversed the trend towards natural gas in power production and resulted

in a slight increase in CO2 emissions.

A number of the measures indicated have continued to expand, and the government is currently conducting a major review. The Carbon Trust, for which I work

half time, has steadily expanded its operations in relation to both energy efficiency

and low carbon technology investments.

THE ECONOMICS OF ENERGY EFFICIENCY

Technical assessments systematically show a potential for reducing both emissions and costs; the UK Energy White Paper estimates that the UK economy could

save several billion pounds through increased energy efficiency (see appended presentation). Many barriers impede corporate take-up of this potential (Charts 13–15).

Part of the Carbon Trust’s remit is to help companies deliver these efficiency improvements, and our experience confirms the potential for reducing both emissions

and costs. In FY 2004–5 the Carbon Trust spent L26m (c.US$40m) on its carbon

management programmes, we estimate that our clients co-invested L80m–L130m

(c.US$120–220m), and the value of the energy savings to these companies was

L280m–L430m (c. US$400–US$700). [Chart 16] The Carbon Trust continues to get
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strong and growing market interest and our budget is targeted to increase to about

L110m (c. US$180m) annually over the next 3 years.

Companies in the Climate Change Agreements—the agreements with energy intensive sectors to deliver quantified emission reductions in return for rebates on the

UK Climate Change Levy—have generally over-delivered on their targets, in part

because they found more opportunities for cost-effective savings than originally anticipated.

These measures, together with other measures in the UK climate change programme and the introduction of the European Emissions Trading Scheme, mean

that the UK is on track to over-achieve its Kyoto target of reducing greenhouse gas

emissions to 12.5 percent below 1990 levels, and will profit from doing so.

TECHNOLOGY INVESTMENT

Low carbon technology and innovation are essential to delivering long term, deep

emission reductions. Most of the technologies that competitively use and supply energy today have matured in the private sector, and this is likely to be true in the

future.

Based on Carbon Trust experience and developments in the empirical economics

innovation, I offer four broad observations about low carbon technology from a business perspective.

First, innovation, to business, is not a dream for future decades but a continuous

process of constantly evolving, improving and selling new products. From this perspective, calls for massive government R&D and technology transfer programmes

are inadequate answers to an ill-defined question about delivering ‘‘low carbon technology’’. The idea that low carbon technologies are all things for tomorrow is a myth

that does not reflect reality. There are many products and services designed for efficiency that could bear the label ‘‘low carbon’’ right now. There are efficient cars, appliances, buildings and even renewable energy sources growing both their sales and

market share. The challenge is to accelerate their uptake in a world where consumers are aware of climate change but not ready to buy something on the basis

of it. This not only reduces emissions directly, but also gives confidence to the private sector that low-carbon innovations will more quickly find markets—and hence

rewards. Energy efficiency standards, trading and fiscal schemes that reward the

adoption of more efficient, lower-emitting technologies, are an important part of the

technology story.

Second, measures that place a price on carbon, like the EU emissions trading system for implementing Kyoto, are an essential part of a low-carbon technology strategy. Robustly implemented, cap-and-trade systems provide the beacon for deeper

private sector innovation and investment, and also deter investment in carbon-intensive innovation and capital stock which could prove extremely expensive to reverse as governments respond more strongly to the mounting impacts of climate

change over time.

Third, although such measures are necessary they are not sufficient. The barriers

to deeper innovation are large, particularly when the price signal is so uncertain

partly because of the lack of international consensus even on the fact that it is needed. Technology innovation takes a long time as good research becomes a good idea,

a proven concept and finally a commercial technology. These earlier stages do not

require just R&D, but a whole chain of support to help build businesses out of

bright ideas, so as to help technologies bridge the ‘valley of death’ that has previously impeded our countries from securing the fruits of R&D. Financial support,

test centres, field trials and precommercial markets developed through a variety of

policy mechanisms all have a role to play.

Fourth, for the crucial global dimension, it is important to recognise that most innovation occurs in a handful of major industrial powers and is diffused globally

through investment by multinational companies. The calls for global R&D and technology transfer programmes thus miss the point. The key is to ensure that energy

innovation in those major powerhouses—national and corporate—is supported by

domestic market incentives, is in a low carbon direction, and is then projected internationally by incentive systems that reward low-carbon investors in developing

countries. Kyoto’s Clean Development Mechanism seeks to do just that (though

much must be done to make the CDM more attractive to business), and future expansion of cap-and-trade type targets and associated domestic policies over time

would do the job still better.

The world will spend many trillions of dollars on energy provision over the next

few decades: expenditure that will determine both the scale of climate change and

the energy technology systems that will dominate the rest of the Century. At

present much of that investment is flowing towards new and innovative ways of
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making the climate problem worse, by accessing ever more difficult sources of carbon and transforming them into useful energy. Low carbon technology offers the solution to climate change, but the question is about incentives. From a business perspective, it is wholly erroneous to suggest that the best way to deliver low carbon

technologies is to avoid—or even abandon, where now adopted—the very policies

that can make investing in them strategically worthwhile.

THE KYOTO PROTOCOL

The Kyoto Protocol has four main elements:

• it states that the way to solve the climate problem is for countries to negotiate

quantified, binding limits on their overall greenhouse gas emissions, sequentially

over time as the uncertainties reduce and they gain experience;

• these commitments are embedded in a variety of flexible market-based instruments like emissions trading, to make them as efficient as possible;

• the Treaty specifies the first round of limits, on emissions during 2008–12 for

the industrialised countries that had already agreed in the original Convention to

take the first specific steps;

• it has various provisions to bring in the rest of the world, including the ‘Clean

Development Mechanism’ under which industrialised countries can gain emission

credits for investments that reduce emissions in developing countries.

Like any agreement, it is far from perfect. But in defining commitments in terms

of the outcome (emissions, on as wide a gas basis as practical, rather than trying

to mandate specific technologies, policies, or measures); and in building in an unprecedented array of economics instruments with global reach, it is a Treaty probably more strongly influenced by economic reasoning than any other in history save

those specifically related to trade and investment. Indeed, the Protocol’s flexibility

mechanisms were largely designed by US economists.

These flexibilities are crucial to understanding the compliance strategies of EU

Member States. Most EU Member States do not intend to deliver all their targets

domestically. The majority will fall short in domestic delivery, and will comply

through use of the Protocol’s flexibility mechanisms.

Most crucially, these mechanism include the Clean Development Mechanism,

which generates emission reduction credits for investment in projects that help developing countries to adopt a cleaner course of development. The bigger the gap between domestic delivery and a country’s Kyoto target, the more it will need to invest

through the CDM and associated flexibility mechanisms in order to comply. To put

it more bluntly, the Kyoto Protocol is only effective in helping developing countries

to develop more cleanly to the extent that industrialised countries fall short of delivering their targets domestically; and this was built into the design of the Protocol

and its first period targets. EU Member States have already set aside several billion

Euros to help fund their compliance with the Kyoto Protocol in this way.

In effect, the design of the Kyoto Protocol ties countries to their targets with the

elastic of international investment requirements to cover any gap. I have seen no

evidence that any European country intends to defy international law by cutting

this elastic.

To conclude, it appears to me that there are several misunderstandings about the

nature of the Kyoto Protocol and I wish to close by setting out my perspective on

these:

1. Environmental Effectiveness. The Kyoto Protocol provides the framework for a

dynamic, evolving regime, with the current set of emission targets for the first commitment period being only the first step in a much longer term process of tackling

climate change. The Protocol establishes a structure of rolling commitment periods,

with agreement that negotiations on second period commitments (intended for

2013–2017) will start by 2005. The current first period emission targets are intended to meet the Convention requirement that industrialised countries should

demonstrate that they are taking the lead by modifying their emission trends; they

were never intended to provide the definitive solution to climate change. Much

greater emission reductions will be needed to stabilize atmospheric concentrations

of GHGs. The Protocol offers a structure through which to achieve this, by gradually

‘‘ratcheting up’’ the Protocol and its resulting environmental effectiveness. A similar

approach was used in the ozone regime, where the Montreal Protocol’s initial CFC

emission target of a 50 percent cut was far from being environmentally effective,

but was progressively tightened over time to greatly increase the treaty’s environmental impact.

2. Developing country involvement. The Kyoto Protocol is very much a global

agreement, and so is the Framework Convention on which it is based. All parties,
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including developing countries, have a general commitment to adopt climate change

mitigation policies and to report on the action they are taking. The Kyoto Protocol

also establishes the Clean Development Mechanism (CDM) to promote globally sustainable development, especially through partnership with the private sector. By

ratifying the Convention, its 185 parties agreed that establishing quantified commitments for countries in earlier stages of development would be premature and inequitable, as well as impractical, given the huge uncertainties in their emissions data,

growth trends and governance. However, there is a clear understanding that, as industrialized countries take the lead in moving their economies onto a less carbon

intensive path, the developing countries will follow. This understanding is built into

the Protocol, which stipulates that its overall ‘‘adequacy’’ must be reviewed no more

than two years after it enters into force. Along with the above-mentioned requirement for negotiations on second commitment period targets, the issue of deepening

developing country commitments will be on the agenda.

3. Kyoto is a flexible agreement with feasible commitments. The Kyoto targets

were negotiated as a package along with the various flexibilities in the agreement,

including the market-based mechanisms of joint implementation, the CDM and

emissions trading, as well as carbon sinks, multiple gases and a five-year commitment period, all of which the US fought hard to get agreed in the Protocol. These

flexibilities make compliance feasible even for countries that have taken little domestic action so far and are facing a large gap between domestic emissions and

their Kyoto ‘assigned amounts’, providing they undertake appropriate investments

through the mechanisms.

4. The costs of meeting the Protocol’s targets are modest. I have testified to UK

experience. The IPCC reported results from global modeling studies of the costs for

complying with Kyoto to be in the range 0.1 to 1.1 percent of GDP, with full emissions trading but without other Kyoto flexibilities (multiple gases, sinks, or CDM),

which would further lower costs. This equates to between 0.01 and 0.1 percent reduced annual GDP growth rate in the richest countries of the world, far smaller

than the standard uncertainties in economic growth projections that governments

routinely use as the basis for policy making. The IPCC also notes that poor climate

change policies to implement the Protocol’s targets could raise costs, whilst smart

implementation (e.g. that harnesses cost-effective efficiency improvements, co-benefits, and ‘double dividends’ from shifting taxation) would lower them; some European studies even show net economic benefits.

5. Kyoto is a carefully-crafted and integrated package developed over many years

of global negotiations. As with any multilateral agreement, different parties place

value on different provisions. Most developing countries were already unhappy with

what they saw as weak targets in the Protocol; weaken them still further and the

prospects for enticing developing countries into a global regime of quantified commitments will grow ever more distant. And as noted, it is the targets themselves

that drive the Protocol’s international mechanisms.

Kyoto is neither perfect, nor comprehensive; what global agreement ever is? But

it offers a credible structure to solve the problem. It has survived because no-one

has yet come up with an overall more plausible, or more efficient, basic approach

to international agreement that can effectively limit emissions and expand over time

as the seriousness of the problem becomes more apparent.
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