U.S. GOVERNMENT PRINTING OFFICE

59–434 WASHINGTON : 1999

THE EFFECT OF THE KYOTO PROTOCOL

ON AMERICAN SMALL BUSINESS

HEARING

BEFORE THE

COMMITTEE ON SMALL BUSINESS

HOUSE OF REPRESENTATIVES

ONE HUNDRED SIXTH CONGRESS

FIRST SESSION

APRIL 29, 1999

Serial No. 106–10

Printed for the use of the Committee on Small Business

(

(II)

COMMITTEE ON SMALL BUSINESS

JAMES M. TALENT, Missouri, Chairman

LARRY COMBEST, Texas

JOEL HEFLEY, Colorado

DONALD A. MANZULLO, Illinois

ROSCOE G. BARTLETT, Maryland

FRANK A. LOBIONDO, New Jersey

SUE W. KELLY, New York

STEVEN J. CHABOT, Ohio

PHIL ENGLISH, Pennsylvania

DAVID M. MCINTOSH, Indiana

RICK HILL, Montana

JOSEPH R. PITTS, Pennsylvania

MICHAEL P. FORBES, New York

JOHN E. SWEENEY, New York

PATRICK J. TOOMEY, Pennsylvania

JIM DEMINT, South Carolina

EDWARD PEASE, Indiana

JOHN THUNE, South Dakota

MARY BONO, California

NYDIA M. VELA ́ZQUEZ, New York

JUANITA MILLENDER-MCDONALD,

California

DANNY K. DAVIS, Illinois

CAROLYN MCCARTHY, New York

BILL PASCRELL, New Jersey

RUBEN HINOJOSA, Texas

DONNA M. CHRISTIAN-CHRISTENSEN,

Virgin Islands

ROBERT A. BRADY, Pennsylvania

TOM UDALL, New Mexico

DENNIS MOORE, Kansas

STEPHANIE TUBBS JONES, Ohio

CHARLES A. GONZALEZ, Texas

DAVID D. PHELPS, Illinois

GRACE F. NAPOLITANO, California

BRIAN BAIRD, Washington

JANICE SCHAKOWSKY, Illinois

HARRY KATRICHIS, Chief Counsel

MICHAEL DAY, Minority Staff Director

(III)

C O N T E N T S

Page

Hearing held: April 29, 1999 .................................................................................. 1

WITNESSES

Yellen, Janet, Chair, Council of Economic Advisors ............................................. 3

Reinstein, Robert, President, Reinstein & Associates International, Inc ........... 32

APPENDIX

Opening statements:

Talent, Hon. James M. ..................................................................................... 47

McCarthy, Hon. Carolyn .................................................................................. 47

Prepared statements:

Yellen, Janet ..................................................................................................... 48

Reinstein, Robert .............................................................................................. 53

Additional materials:

Letter from Shawn Downey, Washington Representative, Associated

Builders and Contractors, Inc ...................................................................... 116

Letter to His Excellency Naresh Chandra, Ambassador of India to the

United States from Chairman James M. Talent ........................................ 118

Reply letter to Chairman James M. Talent from His Excellency Naresh

Chandra, Ambassador of India to the United States ................................. 120

Study by the National Cattlemen’s Beef Association: ‘‘United Nations

Kyoto Protocol: Potential Impacts on U.S. Agriculture’’ ............................ 121

Executive summary of study by the National Cattlemen’s Beef Association: ‘‘United Nations Kyoto Protocol: Potential Impacts on U.S. Agriculture’’ .......................................................................................................... 162

Post-hearing questions submitted to Dr. Janet Yellen, Chair, Council

of Economic Advisors, by Chairman James M. Talent .............................. 166

Answers of Dr. Janet Yellen, Chair, Council of Economic Advisors, to

post-hearing questions submitted by Chairman James M. Talent ........... 176

(1)

THE EFFECT OF THE KYOTO PROTOCOL ON

AMERICAN SMALL BUSINESS

THURSDAY, APRIL 29, 1999

U.S. HOUSE OF REPRESENTATIVES,

COMMITTEE ON SMALL BUSINESS,

Washington, DC.

The Committee met at 9:00 a.m., in room 2360 of the Rayburn

House Office Building, the Honorable Jim Talent, Chairman of the

Committee, presiding.

Chairman TALENT. The hearing will come to order.

I’ll convene the hearing of the Small Business Committee, another in a series of hearings on the global warming protocol, otherwise known as the Kyoto Protocol.

In December of 1997, at Kyoto, the United States agreed as part

of a protocol to reduce its production of greenhouse gases to approximately seven percent below 1990 levels.

Dr. Janet Yellen, the Chair of the Council of Economic Advisors,

was here in June of 1998 to testify regarding the economic impact

of that protocol, and she offered her observations at that time.

She had not at that time published for public consumption the

economic analysis underlying her conclusions. She has since done

so and so we’ve asked her to return so we can ask her questions

about that analysis.

She has kindly agreed to do so.

However, Dr. Yellen is on a short timeframe so rather than make

a formal opening statement, I’ll just submit something for the

record later and then I’ll yield to my friend and colleague, the distinguished Ranking Member, for any comments she may wish to

make.

[Mr. Talent’s statement may be found in the appendix.]

Ms. VELAZQUEZ. Thank you, Mr. Chairman.

I would like to thank you for holding this hearing. It is important

that the Committee review the Kyoto Protocol in the context of our

nation’s small business.

As we do, we should keep an open mind and take into account

not only the potential negative effects it might have, but the positive opportunities it can bring.

The effects of greenhouse gases on our environment are becoming

more and more evident. During the last century, the earth’s temperature has risen by one degree Fahrenheit.

While this might not seem a lot to you or I, in the delicate balance of nature, it is significant. Furthermore, the forecast for the

future predicts this rise to continue, with scientists estimating that

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temperatures will continue to rise another 1.8 to 6.3 degrees over

the next century.

This fundamental change in the environment has started to

cause some serious problems. Shifts in agricultural growth conditions are beginning to rob regions of their ability to produce food.

There has been a reduction in the ability of fresh water and we

have seen an increase in the range and incidence of disease.

Estimates show that by the year 2100, we may see 50 to 80 million more cases of malaria alone.

If these trends go unchecked, so will the threat to human health.

Unfortunately, these problems show no signs of going away on

their own, which means we cannot ignore them.

On December 10th, 1997, the United States, along with leaders

from 161 other nations, concluded the Kyoto Protocol. This agreement sets binding targets for the reductions of emissions of greenhouse gases world-wide.

It was an important first step and a good place to start. The Administration itself has acknowledged, however, that Kyoto is not

perfect and it’s still a work in progress.

The flexibility and enforcement of emission reductions that the

Administration secured were important in creating a workable solution to the problem of global warming.

But the protocol did not include developing nations in the framework and the Administration is working to correct that.

The President has also stated that he will not send the treaty to

the Senate until other nations, notably China, have agreed to emission reductions.

These are problems and they’re being addressed.

From a domestic standpoint, we have different issues to consider.

The last time this Committee examined the economic impact of the

Kyoto Protocol, we did not have a study detailing the cost of implementing the treaty.

As a result, there were justifiable concerns regarding how much

Kyoto will cost America’s small business community. Today, we

have a detailed study about the potential cost of the treaty for

American businesses and consumers which we can now incorporate

into our debate. These statistics are especially important to me.

As the Ranking Member of the Small Business Committee, I

have concerns about the impact of the Kyoto Protocol on America’s

small business community and I know that the Chairman shares

my concerns.

Small- and medium-sized businesses should not be asked to pay

an unfair share of the burden of reducing global warming. But examining this issue in only negative terms is too limiting. I believe

we should also look at how the protocol might have created new opportunities for small enterprises that focus on green technology.

Entrepreneurs have always been at the forefront of innovation

and have been able to meet new technological challenges. I believe

that stricter emissions standards may offer opportunities to countless small businesses who are working to innovate new environmentally sound technologies.

Finally, Mr. Chairman, I believe it is not productive for us to

simply criticize the treaty without offering an alternative. If the

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answers that lay in this agreement are unworkable, then I am interested in hearing others.

Congress cannot just sit idly by criticizing without offering other

solutions.

Let me close by once again thanking the Chairman for holding

this hearing and I’m looking forward to the testimonies offered

today.

Chairman TALENT. I thank the gentlelady for her comments.

And I’ll just say that while I have been critical, I certainly

haven’t been idle. [Laughter.]

I appreciate the gentlelady’s comments. We’ll go to Dr. Yellen.

Dr. Yellen, I gave up my opening statement, which for a member

of Congress and the chairman of a committee, is a great sacrifice

because I understand that you have to leave. You’re on a time

schedule. You need to leave about 10:30 or so.

Dr. YELLEN. Yes, I do.

Chairman TALENT. So, in view of my sacrifice, I hope you will be

conscientious in summarizing your testimony for us and keeping it

brief.

Because, assuming members come, I want them to have the opportunity to ask you questions.

Thank you. You can proceed.

STATEMENT OF DR. JANET YELLEN, CHAIR, COUNCIL OF

ECONOMIC ADVISERS

Dr. YELLEN. Thank you, Mr. Chairman. I appreciate your accommodating my schedule this morning. I’ll try to be brief and I’d ask

that my full testimony be included in the record.

Chairman TALENT. Without objection.

Dr. YELLEN. I appreciate having this opportunity to discuss with

you the economics of climate change and the Administration’s efforts to address this significant environmental challenge.

As you mentioned, the Administration released a report last July

entitled, The Kyoto Protocol and the President’s Policies to Address

Climate Change.

In addition, since the Kyoto Conference, a variety of research on

the economics of Kyoto, and especially on the economics of Kyoto’s

flexibility mechanisms, has been undertaken.

Today, I’ll provide a brief summary of the Administration’s economic analysis and review several of the key findings in the recent

economic literature on climate change.

The Administration’s economic analysis found that the economic

cost of attaining targets and timetables specified in the Kyoto Protocol will be modest for the United States in aggregate and for typical households, assuming that effective mechanisms for international trading, joint implementation, and the clean development

mechanism are established and also assuming that the United

States achieves meaningful participation by key developing countries.

An illustrative assessment using the Second Generation Model

that accounts for effective trading and developing country participation yields permit price estimates ranging between $14 and $23

a ton, and direct resource costs to the United States between $7

billion and $12 billion per year.

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Under the assumptions of the Administration’s analysis, permit

prices in this range translate into energy price increases at the

household level between three and five percent, but this would be

roughly offset by the Administration’s electricity restructuring proposal. I’d be happy to further discuss these results during the questioning period.

Since December, 1997, many economists have conducted and

made available their analyses of the Kyoto Protocol.

For example, the Stanford University Energy Modeling Forum,

the so-called EMF, which is a long-running model comparison exercise involving many of the leading climate and energy models, has

coordinated full-scale analyses of the Kyoto Protocol with 12 global

models.

Further, the Organization for Economic Cooperation and Development, the OECD, has published the proceedings of the Economic

Modeling Workshop it sponsored last fall. The modeling results

from the EMF and OECD provide very useful context for the Administration’s economic analysis.

First, the illustrative model used by the Administration, the Second Generation Model of the Pacific Northwest National Laboratory, tends to fall in the middle of the range of the EMF models

in terms of U.S. permit prices.

Under Annex I trading, the SGM permit price is at the median

of this set of models and under full global trading, it is just below

the median permit price.

Second, both modeling exercises found that the reduction in permit prices as trading expands from no trading to Annex I trading

to full global trading, is robust.

On average, the EMF models found that Annex I trading would

cut the U.S. permit price by 60 percent relative to a no-trading scenario, while the OECD models found a 57 percent average price reduction.

In full global trading, the permit price would be, on average, 81

percent lower than the no-trading price.

Several EMF modeling teams have considered the impact of constraints on the opportunity to buy or sell emissions allowances in

the international market. While the United States is unambiguously opposed to trading restrictions, several parties to the agreement have indicated support for some form of a trading constraint.

Trading restrictions would generate no benefit for the global climate while they could significantly increase the costs of achieving

the Kyoto targets.

In my written testimony, I describe two examples of trading constraints where the U.S. permit price would increase by up to four

times that of the unconstrained price.

Chairman TALENT. Just yield for just a second.

The European Union, for example, wants caps on what you can

buy, right, under this kind of thing?

Dr. YELLEN. That’s correct.

Chairman TALENT. So that that’s an example of one of the countries that wants restrictions.

Dr. YELLEN. Precisely.

Chairman TALENT. Thank you. I’m sorry.

Dr. YELLEN. Absolutely. That’s exactly what I had in mind.

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Most models used to evaluate the Kyoto Protocol only focus on

carbon dioxide emissions and do not account for the six types of

greenhouse gases comprising Kyoto Targets and the opportunity to

trade across gases.

However, recent work by a group a researchers at MIT has found

that including the opportunity to abate noncarbon dioxide greenhouse gas emissions and promote carbon sinks reduces the cost to

the United States by about 25 percent relative to a carbon dioxide

only approach.

Other recent research has found similar results.

The EMF modeling indicates that economic and environmental

benefits could accrue to some developing countries if they adopt

emissions targets. Setting a binding emissions target would generate climate benefits by reducing global emissions below what

they otherwise would have been.

In addition, if the target is set not too far below the businessas-usual emissions level, the participation of the country in the

global trading system would produce economic benefits or gains

from trade for both the developing country and its trading partners, such as the United States.

Annex I countries and private firms in these countries who would

purchase these emissions allowances in the world market would

achieve their targets at lower cost than without the participation

of the developing countries.

The Administration’s overall conclusion is that the economic impact of the protocol would be modest under the conditions we’ve

identified in our economic analysis. And the purpose of my testimony has been to summarize the analysis we presented in the Administration Economic Analysis on climate change and to provide

a brief update on recent analytic efforts outside the government.

I look forward to continuing to work with members of this Committee and other interested parties in further analyzing the Kyoto

Protocol and evaluating the economic impacts of reducing greenhouse gas emissions.

It is my hope that economic analysis can continue to play a key

role in designing policies in this area.

Let me stop there and I will welcome your questions.

[Dr. Yellen’s statement may be found in the appendix.]

Chairman TALENT. Thank you, Dr. Yellen, for summarizing your

testimony.

I have questions in a lot of areas. But I think, given your short

timeframe and the faithful attendance of my friends on the Democratic side of the aisle—and I congratulate you for being here—and

we’re going to try and speak to some of those on our side of the

aisle about whether they might want to emulate your model.

[Laughter.]

I certainly want these members to have a chance to ask questions.

So I think I’ll go into probably the area of my prime concern,

which is this whole issue of meaningful participation.

This is the analysis you referred to, right? And this is the Administration’s analysis.

Dr. YELLEN. Let’s see.

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Chairman TALENT. The Kyoto Protocol and the President’s Policies. Okay. You have it in a different binder.

I want to be certain about what it was that we were dealing

with.

And as I understand it, one of the assumptions you make—I’m

going to try and short-circuit some of this, again, in view of the

time constraints.

In reaching your conclusions, one of the assumptions you make

is that we can secure ‘‘meaningful participation,’’ and I’ll put quotes

around that because that’s something I want to go into, by key developing countries. Other things also, the clean development mechanism, joint implementation, the joint trading agreement.

But for the purpose of my questions, I’m going to talk mostly

about the assumption that we’ll get meaningful participation by

key developing countries.

That’s one of the assumptions underlying your analysis. Isn’t

that correct?

Dr. YELLEN. It is one of the assumptions underlying the numerical results that I indicated to you of permit prices in the $14 to

$23 range.

Chairman TALENT. Okay. Now let’s go into what are the key developing countries.

What are some of the key developing countries?

Dr. YELLEN. Well, that remains to be determined in negotiations.

In the context of our model, we had to use the constraints of the

Second Generation Model, which only enables us to look at a number of countries in the developing country bloc.

Particularly, it enabled us to look at China, India, Mexico and

Korea.

Chairman TALENT. Right.

Dr. YELLEN. And those were ones that we identified. But in

terms of our negotiations, we would have to see where things go.

Chairman TALENT. There could be others. But those are four of

the key developing countries—China, Korea, India and Mexico.

That’s what I understood as well.

So we’re not talking about just extremely poor countries of subSaharan Africa or some very poor countries in Asia. We’re talking

about developing countries or countries that some might consider

to be first-world countries, like Korea.

But China, Korea, India and Mexico are examples of key developing countries.

Dr. YELLEN. Well, in our analysis.

Chairman TALENT. Right. I understand.

And as I understand it, the reasons why meaningful participation is necessary is—and I get this from your testimony, so let me

go through it and make sure I understand it—one of them is just

as simple as a matter of science and environmental science. We

can’t do it without them. In other words, even if we restrict our

production of greenhouse gases, if they have unlimited increases,

since this is a global problem, we’ve achieved nothing.

So probably the number-one reason is that we can’t do it scientifically without them.

Is that right?

Dr. YELLEN. In the long run, that’s certainly true.

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Chairman TALENT. And also, it’s key to our ability to comply

with our own targeted emission restrictions at a reasonable cost because your analysis depends on this international trading system

where they’re able to sell us credits because they’ve reduced below

their targeted emission levels.

That’s another reason, isn’t it, to make this international trading

scheme work?

Dr. YELLEN. Well, I’d like to clarify that.

Our analysis and the results that I describe that show permit

prices in the $14 to $23 range, do assume participation by key

countries and their inclusion in an international emissions trading

system.

And that certainly is critical to generating prices as low as I

mentioned.

However, what my testimony and outside research points out is

that even without the participation of any non Annex I countries,

that international trading that is already included in the agreement by Annex I countries alone, results in a very, very substantial

reduction in costs.

The EMF exercise, 12 models that I report in my testimony,

showed a 60-percent reduction in costs that comes from Annex I

trading——

Chairman TALENT. Which are essentially the European countries.

That’s correct, right? And I recall reading that. So you get a substantial reduction even if only the European countries are participating.

Dr. YELLEN. That’s right. That also includes Russia and the

former Soviet Union.

So, specifically, in the context of the model results that we report

in this analysis, even if we had trading only in the Annex I countries, or under an umbrella that excluded the European Union, we

would be looking at permit prices perhaps in the $30 to $55 range.

Chairman TALENT. Right.

Dr. YELLEN. Which I would hesitate to label as modest, but still

is very much lower than the kinds of——

Chairman TALENT. I’ll modify what I said. We can’t get down

to—I think it’s like a 90-percent reduction we can get if we have

the key developing countries participating.

Dr. YELLEN. That’s right.

Chairman TALENT. And another reason is, you’ve testified before,

is just the fairness. This is a global problem and the burden should

be shared globally.

So those are three reasons why we need meaningful participation

by key developing countries.

Am I correct?

Dr. YELLEN. Yes, although I think it’s fair to say that given differences in per-capita income levels, the burdens should not be

equally shared at this time.

The developing countries have, countries like China and India,

much lower levels of per-capita income and I think different burdens at the present time given those different income levels.

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Chairman TALENT. Let’s get to that because we’ve talked about

which are the key developing countries and why meaningful participation is important.

Let’s discuss what meaningful participation is.

I’ll preface that by saying I don’t see it in the protocol. I see the

international trading in the protocol, the clean development mechanism, the joint implementation in the protocol, but not the meaningful participation. And that’s because that’s not yet a globally-accepted term, is it?

Dr. YELLEN. That’s right.

Chairman TALENT. That’s our term.

Dr. YELLEN. Yes. The Senate has made it very clear and for the

reasons you’ve given, it’s clear to us, and to the Administration as

well, that it is important to achieve meaningful developing country

participation.

And that is something that the Administration continues to work

on very hard in multi-lateral, bi-lateral and other fora.

Chairman TALENT. So what is meaningful participation? How do

we define that?

Dr. YELLEN. I don’t want to offer at this time a definition of what

it means on behalf of the Administration.

In the context of the model results that underlie the Administration’s economic analysis for a modeling purpose, we have taken it

to mean that key developing countries take on binding targets close

to their business-as-usual levels.

And what that enables them to do is to participate in international emissions trading.

Those countries are low-cost abaters and they do a lot of abatement. They sell the United States and other developed countries

emissions permits. And there are gains for us in being able to carry

out our job at lower expense.

There are gains for those countries.

And essentially, that’s what it means.

Chairman TALENT. Now we’re getting to the guts of one of my

concerns that you started to refer to before.

We’ve agreed in this that we’re going to reduce our emissions to

seven percent below 1990 levels. And your economic analysis assumes that these key developing countries will be able to go on

with business as usual.

In other words, they will be able to produce as many greenhouse

gases, as much tonnage of greenhouse gases as they would if there

wasn’t a Kyoto Protocol.

It doesn’t sound like a very good deal for us.

Dr. YELLEN. Well, as a benchmark, it seems to me that if we

could convince developing countries—remember we’re in the first

stage of what will be a very long-term task of abating emissions.

This is the first commitment period. It certainly can’t be the last

if we’re going to succeed in this task.

But to ask developing countries in the early stages to take on

targets that are somewhat below their business-as-usual paths,

would produce environmental gains relative to the Kyoto treaty, so

we would have greater reductions in greenhouse gases than those

agreed to by the Annex I countries. In addition, there would be

gains all around in the sense that it would be less expensive for

9

us to carry out our commitments and there would also be gains,

economic gains, to those countries from abating their emissions and

they would abate them further than they would be required to because for them there would be a clear economic gain given they are

growing rapidly. These developing countries do have easy, cheap

opportunities as they grow to put into place energy-efficient investments, and they would have a clear incentive to undertake greater

reductions than they were obliged to do in those targets.

Chairman TALENT. It still seems like a lousy deal to me. We

could get, I guess, a better deal than that.

You’re assuming this for the purposes of the analysis. But I

guess it’s possible that we can get a better deal.

Dr. YELLEN. Well, we are engaged in discussions with developing

countries and trying to convince them and educate them that—

their participation is important and that they can participate in a

way that will not require them to sacrifice their economic growth.

Chairman TALENT. I’m concerned about us getting a worse deal.

And I don’t think our education plan is working.

Here’s a letter from the Indian ambassador, the last sentence of

which, and I can show it to you if you want to. It says, ‘‘India is

not engaged in bilateral discussions on emissions with any country,

nor do we support efforts to obtain pledges which go beyond the

convention and also the Kyoto Protocol which don’t contain meaningful participation at this point.

In fact, the framework convention authorized developing countries to raise their emissions to meet their social and developmental concerns.’’

And that’s dated April 13th, 1999.

[The letter may be found in the appendix.]

Chairman TALENT. I’m really concerned that we may not even

get business as usual.

Are you?

Dr. YELLEN. Well, clearly, this is an effort that’s important for

us to undertake.

I don’t want to discuss the state of our diplomatic negotiations.

I think it’s more important for my colleagues from the State Department to discuss the state of diplomacy in this area.

I would say simply from my own standpoint, I have been involved in a number of discussions with officials from key developing countries, including China. And while official positions may

not have changed, I think there is a growing understanding among

developing countries that this can be a win-win deal in which they

achieve some benefits and also help in combating the problem of

growing greenhouse gas emissions.

There’s no doubt that we have substantial——

Chairman TALENT. Dr. Yellen, I’m going to say if we’re at seven

percent below 1990 levels and they’re at business as usual, it

doesn’t sound like a win-win.

It sounds like we lose, they win.

Dr. YELLEN. Well——

Chairman TALENT. I mean, why should we have to bear all the

burdens. Because we happen to be a developed economy? We happen to have produced a lot?

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We happen, for example, to have won the Second World War

along with our allies, so that a lot of these countries—Korea

wouldn’t be a free country if it wasn’t for the production that we’ve

had and what we did for them.

So why are we conceding as part of our analysis that they’re

going to be able to operate at business-as-usual levels?

That’s not even environmentally sound.

Dr. YELLEN. In the analysis, we have taken that as a benchmark

and clearly indicated it.

It seems to me that in discussions with developing countries, we

should be looking for some reductions below that. That would result in the clear environmental benefit beyond what was negotiated

at Kyoto.

I think it seems clear to me, and I think the Byrd-Hagel resolution recognizes, that a one-size-fits-all approach for countries at

very different states of development is not necessarily called for.

Chairman TALENT. All right. Well, let me leave that and get into

how the trading system would work, assuming we get the participation. I guess this would be the case even if we don’t get the key

developing countries and we have the Annex I countries.

As I understand it, if I had a manufacturer in my district, big

or small—I was going to use Chrysler because we have a plant, or

Ford—but it would actually apply to small businesses, too, and he

wants to expand, he or she, that person would have to get a credit

under this trading system. And they would buy that from something like a foreign exchange.

Is that what you would anticipate happening?

Dr. YELLEN. Well, to know what a Ford or a General Motors or

a small business would have to do, we would have to have greater

specificity about how a domestic permit system would work.

That has not yet been discussed.

It’s conceivable that a permit system could work in a way that

would require sellers of fossil fuels to obtain permits.

For example, to sell a ton of coal, you would have to have a permit. Or to sell or import a barrel of oil would require a permit, in

which case General Motors, Ford, and the typical small business

would face no requirements to ever have permits for anything at

all.

Those requirements would have been leveled upstream.

But it is also possible that the requirements could be leveled

downstream for holding permits so that it is conceivable in some

designs that a Ford or a GM would need permits for emissions.

And the idea would be that markets would develop for these permits. They would be traded in markets just in the same way that

permits for sulfur dioxide are currently traded and one can call up

a broker and obtain permits.

Chairman TALENT. Except that that’s a domestic trading system.

Dr. YELLEN. Domestic trading system?

Chairman TALENT. The concern that I want to get at is that

somebody—and I like it a little better if it’s done upstream—but

somebody’s going to be getting a permit from a foreign country or

a foreign exchange before they’re allowed to expand a plant in the

United States, or build a new manufacturing facility in the United

States.

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Dr. YELLEN. We would have the ability to purchase permits from

foreign countries that took on targets or that earned them as a result of Clean Development Mechanism projects that had verified

credits.

And I believe what would happen is that a trading system and

specialists would develop who would obtain those permits abroad

and sell them here into a trading system so that a General Motors

would have no obligation to be negotiating with foreign entities.

Chairman TALENT. Right. It’s possible that our government

might buy permits and be an agent.

Is that another way it might work?

Dr. YELLEN. Well, the design of the system remains unclear. But

potentially, this is something that could be handled entirely by the

private sector.

And there has been a substantial amount of interest by organized exchanges and by the financial community in seeing a market of this sort set up.

I think they feel that in the case of SO2 permits, this is a mechanism that has worked very well.

Chairman TALENT. I think you can see my concern.

Dr. YELLEN. Sure.

Chairman TALENT. Making American companies buy directly or

indirectly from foreign companies before they can—we might have

an interest in them not expanding a particular facility.

And here’s another possibility. Let’s take a manufacturing facility in my district.

It might decide, well, you know—let’s take Chrysler. They might

decide it’s really not worth buying that permit so we can expand

this facility in the United States. We’ll move to Mexico, particularly—let’s suppose Mexico is a key developing country that hasn’t

agreed to participate as part of Kyoto, but we’ve gone ahead and

done it anyway because of the other countries.

So Chrysler says, ‘‘we’re going to go to Mexico because we don’t

have to pay the permit fee there. And not only that. Maybe our

government set up the system so that because we’re producing

fewer cars in the United States because we’ve moved to Mexico,

we’re emitting fewer greenhouse gases in the United States. We get

a domestic credit for that. So we save the permit fee by going to

another country.’’

They might even get a domestic credit by leaving our country

and our jobs go offshore.

And Mexico isn’t a part of the Kyoto Protocol, so it’s producing

as many greenhouse gases as it wants.

You see my concern here? I’m not trying to just be critical for the

sake of it. I’m concerned about our jobs. And I see this trading

scheme and I see our jobs going overseas.

Dr. YELLEN. I think you’re right to be concerned about the competitiveness and jobs in the United States.

We’re equally concerned, I believe, about jobs in the United

States and avoiding incentives for American firms to move abroad.

That would not be a win for the economy and it wouldn’t be a win

for the environment, either.

I think the first point is that the strength of that incentive, even

assuming that developing countries do not take on targets, depends

12

on the impact of these agreements on permit prices and on energy

prices in the United States.

That’s why it is important to look at the economics of the agreement and to try to reassure ourselves that these obligations can be

met without having a substantial effect on U.S. GDP or on energy

prices.

And that’s why my conclusion that the impact on energy prices

will be small is critical.

I think, if I’m right about that, the energy price changes in the

United States would not be large enough to rate as a substantial

factor in the decision of a General Motors or a Ford as to where

to put their plant.

Chairman TALENT. I agree. That is critical. Let me get to that.

And I appreciate the Committee’s indulgence. I’ll be done in a

minute or two. As many have here, I’ve done a lot of work on this.

I didn’t know Dr. Yellen’s time would be short. She indicated that

to us a couple of days ago.

I’m happy, if we can’t get to all members, to reconvene the hearing and ask her to come back. I’ll be finished in a moment or two,

and then I’ll recognize the gentlelady from New York for as many

questions as she may wish to ask.

Let’s get to that, the impact of this international trading system,

in your judgement.

Now, as I understand it, you believe, and I think this is the bestcase scenario, although there are other scenarios which also would

save money. But your best-case scenario, as I understand it, if we

have key developing country participation and this international

trading system, this would be with, what, Annex—the umbrella

with eastern Europe and the key developing countries—is that the

cost of a credit on an international market like that would be as

long as a range—and I understand why you have to give a range—

of $14 to $23 per ton of greenhouse gases saved.

Is that correct?

Dr. YELLEN. The range depends on whether or not the European

Union would participate in Annex I trading or not.

Chairman TALENT. And that’s the best possible scenario. There

are other scenarios as well, but that’s the best that you think you

can get.

And that would be a reduction by a factor of about ten, would

it not, of what the cost would otherwise be of the permit and the

cost of compliance.

Is that correct?

Dr. YELLEN. That’s roughly right.

Chairman TALENT. So about a 90-percent reduction. So it would

be ten times as much if we don’t have this trading system in place.

Is that correct?

Dr. YELLEN. Well, as I indicate, the Kyoto Protocol allows for

Annex I trading.

Chairman TALENT. Right.

Dr. YELLEN. And even if we did not have meaningful developing

country participation, which of course, it is the Clinton Administration policy to obtain. But even without it, the permit price would

likely not be anything like ten times as large with Annex I trading

or under an umbrella.

13

Without participation by developing countries, the range would

be on the order of $29 to $54.

But even there, we’re ignoring the possibility of sinks, sinks and

other features of the Climate Change Technology Initiative to lower

that.

So that’s purely a model-based estimate.

To get up to ten times the figure that you’re talking about, one

would have to assume that none of the flexibility features of Kyoto

were taken advantage of.

Chairman TALENT. Okay. I was just looking at your analysis on

page 52, where it says, permit prices and resource costs relative to

domestic-only abatement of various trading scenarios.

Dr. YELLEN. Yes.

Chairman TALENT. And you have a 93-percent reduction.

Dr. YELLEN. Yes.

Chairman TALENT. And I think there’s another——

Dr. YELLEN. But just notice that the top line indicates that simply with Annex I trading or under the umbrella, that the percent

reduction in permit prices are 72 to 85 percent.

Chairman TALENT. Then I was also going in response, in answer

to a question that was in our first written questions to you, in

which we asked about the costs, energy costs, assuming emission

trading is not allowed.

And I won’t read the whole answer, but the last sentence is: We

believe that this difference of nearly a factor of ten underscores the

importance of international permit trading and developing country

participation, two cornerstones of the Administration’s climate

change policies.

So the key, as you said, the critical key to this is the trading system. Because you say here on For the analysis reported here, the

Administration employed a conservative assumption that all country sinks equaled zero.

Dr. YELLEN. That’s right.

Chairman TALENT. And that no country would implement policies to stimulate the creation of carbon sinks.

Dr. YELLEN. We assume that because we don’t yet have good estimates of how sinks will work and what we will get out of them.

But I think sinks offer the potential to bring down the costs very

substantially.

Chairman TALENT. Right. But the 93-percent reduction was without sinks.

Dr. YELLEN. The 93-percent reduction is without sinks with trading under the umbrella and with key developing countries included.

But even without the developing countries, the point that I want

to make sure that I get across is you can see in line 2 on the chart

on page 52, that costs are reduced by 85 percent.

That’s utilizing the trading, international emissions trading within Annex I.

Chairman TALENT. And that surprised me because Japan has

agreed to reduce its emissions to six percent below 1990 levels.

The European Union had agreed to reduce its emissions to eight

percent below 1990 levels.

Canada had agreed to reduce its emissions to six percent below

levels.

14

And if you take those three and combine them with the United

States—I don’t have the figure—that’s got to be 80 percent of the

world’s Gross National Product, or the Gross International Product,

whatever you economists call it.

So I was wondering how, if 80 percent of the world’s economy

were buyers and a maximum of 20 percent of the world’s economy

were sellers, where we’re going to get a reduction of 90 percent in

the permit prices.

Dr. YELLEN. Well, Russia and the former Soviet Union are also

included in this scheme and use energy extremely inefficiently.

And on top of that, their economies have done very badly. So,

they are potential sellers of permits to all of these countries.

Chairman TALENT. That still leaves 80 percent of the world buying. Right? And 20 percent of the world selling.

Dr. YELLEN. Well, what I can report to you are that, for example,

beyond our own analysis, and this is why in my remarks this morning, I thought it important to provide some context for our estimates by telling you about a much wider range of analysis that’s

now available of this protocol.

Chairman TALENT. But this is the analysis of the Administration,

and this is what we’re talking about.

Dr. YELLEN. Yes.

Chairman TALENT. I’m not talking about Stanford’s analysis. I’m

talking about your analysis.

Dr. YELLEN. Yes. I agree. And I’m simply telling you that our

analysis falls right in the middle of a wide range of results that are

now available.

And so——

Chairman TALENT. Is that because, by the way, and I want to

finish for the other members. I’m hurrying here, believe it or not.

Is that because the European countries will be able to sell to

us—when you mention Annex I countries trading, it’s your anticipation that they will be sellers to us.

Right?

Dr. YELLEN. We would be net purchasers from other Annex I

countries. Clearly we would be net purchasers from the former Soviet Union and Eastern Europe.

And Japan, my guess is, would likely be a net buyer. And Europe—it depends on whether they are included or not. They might

well be net buyers as well.

Chairman TALENT. What’s your estimate regarding demand for

emission credits in this critical period, world demand, say, in 2008

through 2012?

We always use 2010 because that’s the midway period in the

compliance period.

So what’s the estimate you had for world demand for emission

credits in this critical period?

Dr. YELLEN. That’s not a number I can give you without doing

some work to find it. I don’t have that at my fingertips.

I’ll try to——

Chairman TALENT. Is that in the analysis?

Dr. YELLEN. The world demand.

Chairman TALENT. It isn’t, is it?

15

Dr. YELLEN. Well, implicitly, that’s something that models generate, is they look to see what the demand for trading is.

But it’s not something that we’ve focused on.

Chairman TALENT. Well, you see, I think that’s pretty important

because you don’t have an estimate for world supply, either, do

you?

Dr. YELLEN. Well, that is something that’s included in these markets.

Demand depends——

Chairman TALENT. It’s not included in your analysis.

Dr. YELLEN. It is included in the analysis implicitly, although

I’ve not reported to you the numbers that come out of the models.

Chairman TALENT. We asked you, the Committee asked you, in

a written question for estimates of the U.S. demand for emission

credits by year for the period, 2008 through 2012. And we asked

for the potential supply from Russia and the Ukraine.

And here was your answer: The Administration has no estimates

of the demand for emission credits by year for the period, 2008

through 2012. Demand will be sensitive to a variety of factors that

are quite different to forecast ten to fourteen years in advance, especially the rate of technological innovation and the diffusion and

adoption of current innovations and those placed on the market

over the next ten years.

For the same reason, we have no estimates of the supply of emission credits.

Dr. YELLEN. Well, I think we have to distinguish two things.

One is the results that come out of the model, which we have

reams of computer output on.

Another question is what is our best judgment about what is

likely to happen in reality under this agreement, if it’s ratified.

What we’ve tried to do in this analysis is to assure ourselves that

the cost of this agreement can be modest. And we believe that

we’ve made that case effectively.

However, what will the trading actually be? It depends on a host

of factors we’ve quite openly admitted we have not yet taken into

account, like sinks.

So if you asked me what does the computer simulation say about

those questions of trading, that’s something I can answer. But

what do I think will really happen, I want to wait to find out what

happens with sinks.

It depends on the——

Chairman TALENT. I guess I’m not an economist. I don’t know

how you can estimate price without having estimates for supply

and demand.

Dr. YELLEN. There are supply and demand estimates included in

the models and that is how these prices were generated.

Chairman TALENT. Well, I guess there was some misunderstanding and mistaken answer to this question, because you say

that the Administration has no estimates of the demand for emission credits.

Dr. YELLEN. The models contain estimates. And the ones that

were used to produce the numbers here do contain estimates.

Chairman TALENT. And can we have those estimates in response

to this question?

16

Dr. YELLEN. We’ll try to provide you with some estimates. We’ll

see what we can do. Understanding they are model results and not

the Administration’s judgments about what will really happen

when the treaty is workable and sinks provisions and other things

have been clarified.

Chairman TALENT. I thank the Committee for its indulgence. I

don’t normally take such advantage of the Chairman’s privilege to

ask questions, but this is an area that does concern me.

And I’ll be happy now to recognize the gentlelady from New York

for any questions she may wish to ask.

Ms. VELAZQUEZ. Thank you, Mr. Chairman.

And I just would like to request that maybe we should have another hearing so that the members on my side are given an opportunity to ask questions. They were here on time and I don’t think

it’s fair that she has to leave by 10:30.

Chairman TALENT. As I mentioned before, that was not my understanding. Dr. Yellen indicated a couple of days ago that she

would have to leave by 10:30.

I’m more than happy to reconvene the hearing if members desire

it.

Ms. VELAZQUEZ. Thank you.

Chairman TALENT. In fact, I was originally thinking of postponing it until she had more time. But I thought we’d do what we

could do now.

Ms. VELAZQUEZ. Thank you. Dr. Yellen, the line of questioning

that were asked by the Chairman basically are focusing on the cost

of implementing Kyoto.

Can you please explain to us or share with us some of the conclusions that the world’s scientists have come to with regard to the

cost of inaction in this area?

Dr. YELLEN. Yes. I think that if we have inaction in this area

and continue to allow concentrations of greenhouse gases, carbon

dioxide, in the atmosphere to rise, while I’m not a scientist, I have

looked at the literature in this topic, and some of the consequences

would include rise in sea levels, increased incidence of severe

weather events, such as hurricanes, stress on water supplies, giving rise to potential problems of availability of fresh water, stress

on soil and moisture that can impact agriculture and the productivity of lands in complex ways around the globe, impacts on

human health and incidence of disease.

And in addition to that, species loss and impact on biodiversity

and ecosystems.

On top of that, there are frightening possibilities to consider. Presumably, low probability events, but potential catastrophes that

are of grave concern, like shifting of ocean currents or substantial

changes in the ice sheet in Antarctica, with potentially catastrophic, although small probabilities.

So I think all of those things are of concern.

And economists who have bravely attempted to put pricetags on

those have concluded that a doubling of concentrations from preindustrial levels would likely produce a loss in world GDP of one

percent, at least one percent, possibly more.

Ms. VELAZQUEZ. Do you know or are you aware whether the scientific and economic analysis on which you are relying are being

17

called into question as seriously in other countries as it is the case

here in the United States?

And if not, do you have any opinion as to why that might be?

Dr. YELLEN. Well, again, I’m not an expert on the science of it.

But my impression is that the scientific results underlying this

are quite well accepted in other countries. I don’t want to say that

there is no scientific discussion or doubt, but the IPCC, the Intergovernmental Panel on Climate Change, which convened a group

of experts to consider the science, has concluded that the science

is sound and on top of that, there’s a discernible human influence

on climate.

Ms. VELAZQUEZ. By now, I guess you understand why critics are

concerned that the phrase, meaningful participation, has needed to

be defined more precisely.

And I guess you have explained this to your colleagues in the

diplomatic community.

What can you tell us is their commitment?

Dr. YELLEN. The commitment of my colleagues?

Ms. VELAZQUEZ. Yes.

Dr. YELLEN. My colleagues are working extremely hard and have

been for some time in every possible forum, from bilateral diplomatic consultations to multi-national, multi-lateral fora, to attempt

to explain to developing countries the potential benefits to them of

participating in this agreement, as well as the need to do so.

And while I agree we have not yet achieved it, it is something

we understand the need for and are working on extremely hard.

Ms. VELAZQUEZ. I will finish with my line of questioning so that

I can give opportunity to my side.

Chairman TALENT. Mr. Toomey?

Mr. TOOMEY. Thank you, Mr. Chairman. A couple of quick questions here.

On the first page of your testimony, there’s a quote from the

IPCC. And it says that their conclusion in 1995 was that the balance of evidence suggests that there is a discernible human influence on global climate.

My question is does the IPCC anywhere conclude specifically

that the release of greenhouse gases by human industry has in fact

raised global temperatures already?

Dr. YELLEN. I believe this is their summary of their findings.

Namely, that looking at all the evidence, the balance of evidence,

suggests that, yes, the human activity has resulted in changes in

the global climate.

Mr. TOOMEY. Well, okay. It says, a balance of evidence. And

that’s an interesting choice of terms. It’s not as strong a statement

certainly as one could make.

And it also says it’s a discernible human influence on global climate, which again is a curious way to describe it.

If there were a consensus and a conviction that there was in fact

an increase in the global temperature, presumably, that would

have been stated.

Dr. YELLEN. Well, I think there’s no doubt that concentrations of

carbon dioxide in the atmosphere have increased.

I don’t think there can be very much dispute about that.

18

The question of what’s caused that and whether or not there’s a

human influence, I believe this is the way they stated their conclusion.

Mr. TOOMEY. Right. And it seems to me that it leaves still

unaddressed the question of whether that increase in the concentration of greenhouse gases has resulted in an increase in global

temperature, or whether it has not.

And I guess my question is, is it fair to state that that is still

an unresolved question in the scientific community as to whether

or not there has in fact already been an increase in the global temperature, or whether the global temperature continues to fluctuate

within a band that it has historically fluctuated within?

Dr. YELLEN. I think I’m not the right person to ask definitive

questions to on the science. I would be happy to send one of my

colleagues who is.

My own understanding is that the evidence shows both that carbon dioxide concentrations have increased and that temperatures

as well have increased during the century.

That’s my understanding of the scientific results. But I’m probably not the right person to press further on this issue.

Mr. TOOMEY. Okay. Fine. On another topic, I just wanted to follow up with some questions the Chairman had regarding the application to developing countries, particularly the business-as-usual

concept.

Clearly, in recent history, in these countries, business-as-usual

has meant an annual increase in the output of greenhouse gases.

Does business as usual mean that that annual increase would

continue for these countries or that it imposes a cap at the current

level of business?

Dr. YELLEN. Well, business as usual means a baseline in which

no obligations are imposed on these countries and they continue to

grow according to their best forecasts and use energy without policy changes.

That’s what business as usual is.

That was the baseline for our estimates here. Presumably, if developing countries were willing to take on targets, it would be appropriate for them to cut off of a business-as-usual path to achieve

global benefits.

You could think of business as usual for developing countries as

a neutral for the world from an environmental standpoint.

But cuts off of business as usual by developing countries would

represent the contribution by them to make further progress on the

environment beyond what developed countries agreed to at Kyoto.

Mr. TOOMEY. Okay. Thank you. The last question I had was——

Chairman TALENT. If the gentleman would yield.

As Dr. Yellen testified before the Subcommittee on Energy and

Power of the Committee on Commerce, and this is consistent with

what she just said, but it may be a little clearer:

We presented results that assume that key developing countries

take on binding quantitative targets, emissions targets.

These are the target, at their business-as-usual levels. Or close

to them.

Dr. YELLEN. In the analysis, that’s the targets.

19

Chairman TALENT. Right. So the analysis is predicated on them

continuing to expand at what they would expand if there was no

protocol.

Dr. YELLEN. Right.

Chairman TALENT. I thank the gentleman for yielding.

Mr. TOOMEY. Last question. The trading mechanism that your

analysis envisions, as I understand it, would apply or could apply

to the purchase—essentially, what amounts to a fee that would be

applied to energy sources.

For instance, as you mentioned, a barrel of oil could require a

permit to be paid for, or a unit of electricity, presumably, or coal

or some other fuel.

Does this mechanism in any way contemplate that the way you

use that oil or coal has potentially widely varying emissions of

greenhouse gases?

For instance, if you take a barrel of oil and it’s converted to gasoline and it’s burned in a modern car, the same quantity of oil

burned in a chainsaw has very different levels of emission.

Is that contemplated at all?

Dr. YELLEN. I believe it’s the case that burning a ton of coal or

a gallon of oil produces, if it’s fully burned, produces a fixed quantity of carbon dioxide into the atmosphere.

And cars can be more or less efficient in their use of gas or electric power plants and their use of coal. But when a ton of coal is

fully burned, it emits a fixed proportion of carbon dioxide into the

atmosphere.

Those things are different. Coal is most intense in its emission

of carbon dioxide. Oil less intense. And natural gas produces the

least intense.

Mr. TOOMEY. Okay. Thank you.

Chairman TALENT. Mr. Baird was next.

Mr. BAIRD. Thank you, Mr. Chairman.

I have two fairly brief questions, but they may have long answers.

The first question is, my concern when we look at economic impacts as the topic of today’s meeting, is when we speak in terms

of macro-scale and talk about modest economic impact, my concern

is, on the more micro-scale, specifically the communities where coal

is the primary economic engine of that community.

Many of these communities are rural communities. In many

cases, coal mining or a power system that depends upon coal is

really the predominant job-creator there.

What can you tell us about two issues? First of all, what are the

more localized economic impacts because, for me, they seem to be

potentially profound.

And two, in your analysis, or the Administration plans, what

steps can be offered to help these communities either cope with

emission reductions or provide compensatory economic opportunities?

Dr. YELLEN. Did you want to talk about coal communities specifically?

Mr. BAIRD. It seems to me that that may be the most problematic

area.

20

Dr. YELLEN. I think certainly to identify coal as the industry that

is mostly likely to be affected by this policy is absolutely correct.

Having said that, coal has a very important place in this country’s energy future.

The Kyoto Protocol would in no way change that. Coal in every

forecast, ours and every other forecast that I’ve seen, continues to

play a major role.

So I think that’s the first thing to say.

I think it can continue to play an even more important role if we

undertake research and development on clean coal technologies to

make the use of coal increasingly efficient. And there are potential

ways in which we might learn to sequester some of the emissions,

the carbon dioxide emissions, from coal.

And the Administration has a research program in that area.

And if there are pay-offs there, coal can have a growing place in

the nation’s energy picture.

Having said that, I think it’s important to say first, coal is an

industry that, with or without Kyoto, or climate change, has been

under stress.

Employment has been diminishing in the coal industry for quite

some time.

So these are communities that have been experiencing pain.

They have mainly been experiencing pain because of very rapid

productivity increases in the coal industry.

Nowadays, one can produce a ton of coal with many fewer workers than it required ten or 20 years ago. And that’s why coal output

has been going up and employment has been plunging.

That’s the beginning picture.

Now, in the kind of scenario that we depict in this analysis with

permit prices in the $14 to $23 a ton range, we’ve tried to look at

what would happen to coal.

And the answer is that coal output would essentially level off

over this commitment period rather than in the baseline, increase

slightly.

So there would be a mildly negative impact on coal output.

But, still, there would not be an absolute decline in coal production in the United States.

All that said, the Administration is completely committed to

working with the coal industry, with communities with affected

workers, since they are the ones that are most likely to see an impact.

Mr. BAIRD. I would personally be interested in some material on

the coal research projects for cleaner coal burning and how we can

help the rural communities.

I appreciate that information.

The second question I would have is, as we look at the sale of

the greenhouse gas credits in an international market, it seems to

me rational to suggest that the profits from those sales be cycled

back into measures to further reduce the greenhouse gases.

So sort of a two-part question.

One, who benefits from the marketing of the greenhouse gas

credit? Who gets the money?

We put it on the market. Money comes in somewhere. Who gets

that money? And to what end would it be put?

21

Dr. YELLEN. Well, I think when there’s a market place, anyone

that can produce something at lower than the market price and sell

it, stands to make a profit.

And when you ask, who is it that stands to make a profit in a

market like this, it would be anyone here in the United States—

firms, households—or in the rest of the world, that look and say,

wow, I can reduce my energy use, my greenhouse gas emissions

cheaply. And if I do it, I then have the ability to sell a permit in

the market place and take the gain as my profit.

So the gains would be very widely distributed. And of course,

there would be incentives, I think, to pour a good share of the profits back into energy efficiency investments because it’s those investments that would create the opportunity for further profits in

that market place.

Mr. BAIRD. Thank you.

Thank you, Mr. Chairman.

Chairman TALENT. I think it would reduce production by just

moving, closing down.

Ms. Kelly is next, because Mr. Forbes, although there’s still signs

of life over there—he’s coming back.

So we’ll go to Ms. Kelly in the meantime.

Mrs. KELLY. Thank you, Mr. Chairman.

I’m interested in the fact that the State Department has proposed that we have these tradable emission permits. And they

would cover all of the household, commercial, industrial and agricultural and forestry sources of greenhouse gases.

Is that correct?

Dr. YELLEN. You’re referring to——

Mrs. KELLY. I’m talking about emissions trading.

Dr. YELLEN [continuing]. The United States? Are you talking

about international emissions trading?

Mrs. KELLY. Yes.

Dr. YELLEN. Or trading in the United States?

Mrs. KELLY. I’m talking about international.

Dr. YELLEN. Well, internationally, countries would have the ability to trade the permits to the extent that they cut their emissions

below their agreed-upon targets.

Mrs. KELLY. All I’m interested in—I understand that. But all I’m

interested in, it’s my understanding that this covers all household,

commercial, industrial and agriculture.

These are combined gases that we’re talking about.

Dr. YELLEN. The aggregate emissions of these greenhouse gases

by the country as a whole relative to the targets agreed upon in

the treaties.

Mrs. KELLY. Okay. If that’s the case, then I’d like to know who

would be in charge of monitoring this. I’d like to know what’s been

thought through in terms of making some sort of monitoring, enforcing and deciding who’s allocating how much, who’s emitting

how much.

What mechanism has been thought through in terms of enforcement?

Dr. YELLEN. Well, I think you’ve asked an important question.

For a trading system to work, there has to be monitoring and assurance of compliance.

22

And there are a number of ways in which that could be brought

about.

Mrs. KELLY. In your economic structure, though, I don’t know.

Maybe it’s there in something that I haven’t read. But I don’t see

anything in terms of the economics of what that cost would be.

Who would be involved? How many people? What we’re talking

about what the cost is?

I don’t know what that economic burden is going to be and who’s

going to carry it.

And I’d like to know if you have any kind of an idea.

Dr. YELLEN. One of the tasks on the agenda at the next two conferences of parties, COP–S and COP–6, is to try to agree upon the

rules governing international emissions trading.

That will get into and have the answer to the question you’ve

asked about monitoring, enforcement, compliance, verification.

Mrs. KELLY. So we don’t really have a good idea at this point of

what that cost would be.

Dr. YELLEN. We’ve certainly not attempted to estimate that. The

rules are not yet specified.

The Administration has often said that Kyoto is a work in

progress. And what that means is that at Kyoto, the agreement

contained a basic right for countries taking on Annex I targets to

engage in international emissions trading.

But a system has to be devised to govern the rules governing

that trading. And that work remains unfinished. And until it is finished, I can’t give you an estimate. We’ve not tried to come up with

one of what the cost would be of running the system.

Mrs. KELLY. Okay. I’m going to let that be because it’s clear that

there’s nobody that understands what the cost to anyone in the

world will be.

It concerns me that we’re picking out a few nations here and not

including all of the developing nations because there’s a great deal

of open burning in developing nations that put carbon gases in the

atmosphere.

I’m very concerned about the fact that, from what I’ve read, I

don’t see anything that monitors that.

I’m going to go on to something else.

I want to know what steps the Administration has taken right

now to put the Kyoto treaty into implementation.

Dr. YELLEN. The Administration has taken no steps to put the

Kyoto treaty into implementation and would not do so until the

treaty is ratified by the Senate.

Mrs. KELLY. So there’s nothing going on, no intent to go ahead

with this before it’s ratified by the Senate.

Is that correct?

Dr. YELLEN. Absolutely not. I would say we do have obligations

under the Framework Convention on Climate Change that gave us

1990 levels of emissions by 2000 as a goal. And a number of climate change programs of the government are consistent with that

ongoing obligation which was ratified by the Senate.

But with respect to Kyoto, there would be no action undertaken

until such time as that treaty is ratified by the Senate.

Mrs. KELLY. But you will go for goals that are included in the

treaty without coming to the Senate.

23

Is that what I’ve just understood you to say?

Dr. YELLEN. I’ve said there are previous agreements that have

generated programs. Previous agreements, not Kyoto.

Mrs. KELLY. When does the Administration plan to submit the

treaty to the Senate?

Do we have an estimate?

Dr. YELLEN. We continue to work to implement in an effective

way the Clean Development Mechanism, international trading, and

we’re committed to achieving meaningful developing country participation, and won’t submit it to the Senate until we feel that

we’re there.

Mrs. KELLY. Thank you. My time is up. I have a number of other

questions.

Chairman TALENT. And Dr. Yellen, with regard to the cost of this

international trading system, wouldn’t it be a good idea to have

some analysis of that before we agree to something?

Dr. YELLEN. Well, ideally, we would have estimates of the economic impacts of everything. 2,500 economists signed a letter urging the United States to negotiate an agreement to limit greenhouse gases that would have such flexibility mechanisms because

the experience that we’ve had with using it for environmental purposes here in the United States and markets generally, is that they

work well and, on balance, greatly reduce the cost of meeting environmental and other goals.

Now there are some costs to running markets themselves and

you’re very right to point out that market systems require institutions and monitoring and compliance.

It’s not costless.

But, on balance, the contribution of a market system of international trading to reducing costs is very great and I think it’s

something that we pushed for and were right to push for and insist

on in the Kyoto Protocol.

Chairman TALENT. This analysis was published in July of 1998.

Right?

Dr. YELLEN. Yes.

Chairman TALENT. Is that when you had it available? Is that

when you had made the analysis, in July of 1998? Or had you

made it before then?

Dr. YELLEN. We had undertaken a variety of kinds of economic

analysis earlier. But this analysis reflects our understanding, an

analysis of what was agreed to at Kyoto.

Obviously, it was a negotiation. And we only know what was

agreed to when it’s over. And so we’ve taken the key things that

were agreed to and have tried to perform an analysis with that

knowledge.

That doesn’t mean that no economic analysis was done prior to

going off to negotiate. That would be false.

Chairman TALENT. Okay. Well, I wondered about that because,

in response to one of the questions from the Committee, you indicated that ‘‘all of the quantitative analyses underlying Dr. Yellen’s

testimony’’—that was when you testified before the Committee in

June of 1998—‘‘were developed after Kyoto.’’

Dr. YELLEN. That’s correct. That’s what’s in this document, this

analysis. And in my earlier testimony, the results that I cited were

24

the ones that are also given in this document that was later published.

All of that work was undertaken after Kyoto.

But it does not mean that the negotiations in Kyoto were uninformed by an understanding of economics.

That’s my point.

Chairman TALENT. Okay. Thank you. I’ll recognize—who is

next?—Ms. Christian-Christensen is next.

Ms. CHRISTIAN-CHRISTENSEN. Thank you, Mr. Chairman. Good

morning, Dr. Yellen.

Dr. YELLEN. Good morning.

Ms. CHRISTIAN-CHRISTENSEN. I wanted to follow up on a question

about the flexibility mechanisms because you said in your testimony that during the development of the work plan last fall in

Buenos Aires, it was decided to resolve key implementation issues

regarding these flexibility mechanisms by the end of the year 2000.

Is resolving this by that time necessary before ratification efforts? And if so, does that bear on suggestions that we should renegotiate elements of Kyoto because the timeframe is becoming too

constrained?

Dr. YELLEN. I think it is critical to resolve the issues about how

international emissions trading will work and how the Clean Development Mechanism can work as a mechanism in implementing

the Kyoto agreements.

So, clearly, these issues need to be resolved.

But I believe we can meet the commitments that we’ve made. If

these issues are resolved by the end of 2000, which is the plan, I

believe there’s adequate time for us to set the things in motion that

are necessary for us to meet our commitments in the first commitment period.

I think there’s time that remains. And we are engaged now in

discussions with industries that are willing to take on voluntary

commitments. Certainly, many industries are thinking about

Kyoto, are making their own plans with the knowledge that reduction of greenhouse gases is high on the environmental agenda, an

important issue.

And so, while we’ve done nothing to implement Kyoto, I think it’s

fair to say that many industries, many firms, are looking to a future in which we are attempting world-wide to limit greenhouses

gases in making their own investment decisions now.

And in that sense, we’re already on the way to taking meaningful

action to meet these goals.

Ms. CHRISTIAN-CHRISTENSEN. Thank you. I have one other question. Again, it follows up on a question that the Chairman—a concern of his, and of many critics, that the cost of implementing

Kyoto and the U.S., because of the cost, employers will relocate facilities to the developing world, resulting in serious job losses and

economic dislocations.

If you disagree with that conclusion, could you tell us what factors lead you to believe that major disruptions of this kind are not

likely to occur?

Dr. YELLEN. It’s a very important consideration. I disagree with

the conclusion. I want to give three reasons.

25

First, that I believe the impact on energy prices will be so small

as quantitatively, to be unimportant in driving international location decisions for firms.

That’s number one.

Number two, many of the countries with whom we compete, the

Annex I countries will be undertaking commitments like ours.

So, to the extent that there’s some impact on energy prices here,

there will be comparable impacts with many of our competitors.

Third, if we are successful in achieving meaningful developing

country participation, and particularly if developing countries, key

developing countries were to take on targets, that would work to

level the playing field world-wide because countries that take on

targets and participate in international trading will have the incentive to comparably raise energy prices to conserve on energy and

to take advantage of the gains from that system.

So another reason for wanting the developing countries to participate in this system is to globally level the playing field so that

you don’t have the kind of relocations that you would be rightly

concerned about.

Ms. CHRISTIAN-CHRISTENSEN. So you don’t anticipate that Congress would need to consider programs to counteract the potential

for those kind of dislocations at this point?

Dr. YELLEN. I don’t believe that that should be in Congress’

agenda at this time.

Ms. CHRISTIAN-CHRISTENSEN. Thank you.

Thank you, Mr. Chairman.

Chairman TALENT. Mr. Hill?

Mr. HILL. Thank you, Mr. Chairman. And thank you, Dr. Yellen,

for being here.

Dr. Yellen, a year ago I asked you some questions about some

assumptions that I had made, and I asked you to make comment

on those, and if you disagreed with them. And you didn’t.

So I presume that you agreed with them. And I just wanted to

run through these again to make sure that my understanding of

this is correct.

It’s estimated that there are about 90 billion tons per year of carbon dioxide that comes from the oceans, about 30 billion tons of

carbon dioxide that comes from decaying plants, and about 30 percent billions of carbon dioxide emitted into the atmosphere that

comes from animal and plant activities separate from human activity.

And then about seven billion tons that comes from all the consumption of fossil fuels and from all of human activity.

That represents about five percent of the total carbon dioxide

emissions that are coming from our activities and it’s this five percent that we’re substantially trying to deal with with the protocols

at Kyoto, how we’re going to manage this five percent.

Do you have any reason to disagree with those approximate

numbers?

Dr. YELLEN. I don’t have any information on those numbers here.

Mr. HILL. I would ask you again, if you do, maybe you would let

the Committee know, as I asked you a year ago about that.

What I want to do is talk about the natural elements that are

occurring out there because, basically, the numbers I’ve given you,

26

about 150 billion tons of emissions coming from natural activities

and 7 billion tons coming from other purposes.

It seems to me that if our goal is to try to reduce the carbon dioxide emissions, carbon dioxide build-up in the atmosphere, that we

ought to be trying to analyze what’s happening in the natural side.

The assumption here is that either there’s become an imbalance

in terms of those natural activities that consume the natural emissions, or that the accumulation of human activity has added to the

increase in carbon dioxide in the atmosphere.

Would you agree with that? That’s basically the assumption that

Kyoto is based on.

Dr. YELLEN. Well, this is a scientific question that I’m probably

not best qualified to comment on.

But you’re certainly right that changes in land use and natural

activities, along with human activity, matter to the build-up of

greenhouse gases in the atmosphere.

That’s certainly true. And that is one reason that carbon sinks

are included in the Kyoto Protocol as a factor governing emissions.

We know that deforestation, for example, leads to an increase in

greenhouse gas emissions in the atmosphere. That’s why it’s very

important that the treaty recognize that we should take into account in computing countries’ targets the factors governed by carbon sinks and changes in their release and absorption of carbon.

Mr. HILL. I don’t want to argue that point with you. But deforestation reduces the natural processes that reduce the carbon in the

atmosphere. Deforestation wouldn’t necessarily increase carbon

emissions.

But that’s one of the things that I want to talk with you about

because carbon dioxide that is released—a ton of carbon dioxide

that comes from coal is no different than a ton of carbon dioxide

that would come from oil or gas or from any other process, is it?

It’s all the same.

Dr. YELLEN. Right.

Mr. HILL. There may be more BTUs. There may be different economic consequences of all those things. But in terms of the impact

on the atmosphere, it would be the same.

Which brings me to the question that concerns me. And that is

the question of sinks because, interestingly, in the protocol, our forest management practices were kind of left out.

In fact, they were carved out.

What we’ve learned in the Resources Committee, Dr. Yellen, is

that we have catastrophic fire hazards in our national forests.

As a matter of fact, our national forests are subject to greater

fire hazard today than any time in the history of the country. And

that the Administration’s policies are putting off for as long as 50

to 70 years eliminating these catastrophic fire hazards.

Now, clearly, a burning national forest adds to the carbon dioxide

in the atmosphere, doesn’t it?

If a forest burns, it’s going to add carbon to the atmosphere.

Would you agree with that?

So preventing that fire from occurring, do you think it would be

a good policy?

Dr. YELLEN. You know, I’m not qualified to talk about what the

right way is to promote sink activity.

27

Mr. HILL. Even though the Kyoto Protocol suggests that sink activity is one of the significant ways that we can deal with the carbon dioxide issue.

In other words, what you’re saying is that we should ignore that?

Dr. YELLEN. No. I think sinks are extremely important and forestry initiatives that are judged to be both cost effective and can

help us meet our emissions targets certainly are important and

ought to be part of our approach.

Mr. HILL. So the Administration’s plan prescribed burning, to increase the burning of the forests.

How does that help us meet the emissions goal?

Dr. YELLEN. I’m sorry?

Mr. HILL. The Administration has a plan to substantially increase prescribed burning of our national forests.

Could you tell me how that’s going to help us meet our emissions

goal?

Dr. YELLEN. I’m not an expert on forestry management. And to

discuss that, I really think I ought to send you somebody who’s better qualified to discuss it than I am. I’d only point out that there

are a number of different factors relating to forest management

policy that have to be taken account of.

And on the issue of burning, I’m not the right person to ask that

question to.

Mr. HILL. So you’re not aware of any aspect of our current forest

management practices that would help us meet those objectives.

Dr. YELLEN. I’m not knowledgeable enough on this topic to respond to your question.

I’d be happy to refer to this Committee somebody who can answer it.

Mr. HILL. The last thing, Mr. Chairman, before I go, your goal

when you were here, there were a lot of questions that arose again

in your testimony that members wanted to understand fully the

economic assumptions and factors that you use for your projections

because you’re aware of the fact that there are other economic models out there that differ dramatically from what your economic

models suggest.

Dr. YELLEN. Well, in fact, I’ve tried to summarize in my testimony this morning a great deal of economic research to help put

our results in context.

And the conclusion that I reached and would be happy to justify

in greater detail is that our results lie more or less in the middle

of what a large number of analyses are saying about Kyoto.

Mr. HILL. Dr. Yellen, you know, it’s said that if you have your

feet in the refrigerator and your head in the oven, on average, your

temperature is about right.

An average doesn’t mean much and it certainly doesn’t determine

accuracy.

What we want to do is to get the factors so that we can make

an analysis of the difference because even within the Administration, there are different conclusions that are drawn.

We need to first of all understand those factors and assumptions.

Then we need to translate this into some sort of cost-benefit analysis that we can use to compare alternative strategies, including

28

strategies that might increase the natural processes to reduce carbon dioxide build-up.

I thank you.

Thank you, Mr. Chairman.

Chairman TALENT. Next is Ms. Tubbs Jones.

Ms. TUBBS JONES. Thank you, Mr. Chairman.

I’m going to make my questions brief in order to give my colleague, Ms. Millender-McDonald, at least a couple of minutes to

make an inquiry of you.

I want to go back to meaningful participation and get an understanding as to what meaningful participation in fact means by developing countries in this discussion about the Kyoto agreement.

Dr. YELLEN. I don’t have a definition to give you of meaningful

participation. But, certainly, if key countries would agree to take

on targets, emissions targets, and to participate in international

emissions trading, that would be sufficient, I believe, to constitute

meaningful participation.

Ms. TUBBS JONES. Let me delve just a little bit deeper, then.

How many countries are we talking about in order to assess

what meaningful participation is?

Dr. YELLEN. I don’t have a pre-determined formula to give you.

I can tell you that there are hopeful signs in that there are some

countries that have agreed to voluntarily take on targets that are

not in Annex I.

Argentina and Kazakstan are two countries that have shown interest. And it is our hope, working diplomatically, intensively, that

we will convince other countries.

And we understand that, in presenting a treaty to the Senate for

ratification, which is what’s required of the Administration, that it

will be our job to make the case that we have achieved something

that constitutes meaningful participation.

We will have to make that case.

Ms. TUBBS JONES. So as you sit here, you have no particular goal

in mind.

Dr. YELLEN. I don’t want to determine in advance, pre-judge precisely what that goal is.

But as I’ve indicated, we’re working intensively diplomatically to

attempt to draw developing countries into this treaty, so that we

will be able to make the case when the time comes that we’ve

achieved that.

Ms. TUBBS JONES. Then you recognize that your critics, by you

responding as you’re responding to me, say, well, what does that

mean?

Dr. YELLEN. Yes.

Ms. TUBBS JONES. And so, I’m sure as a result of that, you are

going to work on how we can better respond, those of us who are

supportive of this agreement, to that issue.

Dr. YELLEN. Yes. I think it’s our job to justify—I mean, at the

moment we’re engaged in intense diplomatic efforts to try to move

developing countries to participate in this agreement in ways that

will be beneficial for us and for them and satisfy the Senate that

we have achieved meaningful participation.

We know that’s the bar we have to jump over at the end of the

day, and ought to, for this treaty to be ratified.

29

I would urge you to invite someone from the State Department

to discuss our diplomatic initiatives in greater detail and what

their interpretation would be of meaningful participation.

Ms. TUBBS JONES. I yield to my colleague, Mr. Chairman.

Chairman TALENT. Yes.

Ms. MILLENDER-MCDONALD. Good morning, Dr. Yellen.

I first would like to speak to the Chair because, as it appears,

our colleague had raised many scientific questions to you. And it

appears that there needs to be a scientific expert who comes to this

Committee to answer those questions, as opposed to posing those

questions to you and you do not have the answers.

It appears as if that is an indication that—and it seems to me

that those are questions that are posed primarily to embarrass, if

nothing else, in my opinion.

And so, I do feel, Mr. Chairman, that if we’re talking about scientific questions being raised, we certainly should have the proper

people being in this Committee to do so.

Dr. Yellen, you say that you’re trying to draw developing countries into this Kyoto Protocol. And yet, they are saying that they

will not come in because of new commitments or they have been

excluded with—let’s see if I can get you that so that I can adequately state that.

They feel that they have been clearly excluded from new commitments in this protocol.

So how do you expect to draw them in if, in fact, they feel that

they have not been brought to the table with certain commitments

that should be within this agreement?

Dr. YELLEN. First of all, we have a Clean Development Mechanism that is part of the protocol.

I think the Clean Development Mechanism offers clear advantages in meeting the goals of the protocol and benefits for developing countries.

So one of the first things we need to do is to convince developing

countries of the benefits to them of using this as a way to put in

place environmentally friendly energy-efficient projects in countries

that are growing rapidly.

And we’re doing that.

Beyond that, I think we can try to convince them, and we are,

of the benefits to them of taking on targets voluntarily, in spite of

the fact that they’re not obliged to do so under the terms of the

treaty.

And the reason that I think we have a chance in convincing them

is because there is a win-win here.

There is a potential win for developing countries because if they

take on targets that represent reductions from their baseline emissions paths, but ones that are not excessively ambitious given their

economic situations, they will have the ability to reduce emissions

more than they’re required to do so.

They have the potential to do that at very low cost and they can

earn income as well as resources for their development of their energy sectors by selling emissions permits in the world markets to

the United States and other developed countries.

Ms. MILLENDER-MCDONALD. And has this been articulated to

them?

30

Dr. YELLEN. Yes, indeed, it has been articulated.

Ms. MILLENDER-MCDONALD. And what has been the response

that they’ve given?

Dr. YELLEN. I personally articulated this case in several instances in China and in other countries.

I think that this is something that they are beginning to understand, that they can participate in ways that will be a win for

them.

And we’re pursuing this diplomatically. There is a case to be

made.

On top of that, if you take a country like China and ask, what

is its number-one environmental problem, I think the answer is air

pollution.

So they themselves are tremendously concerned about the adverse health consequences of their intensive reliance on coal. They

see themselves developing rapidly with worse pollution, local pollution problems.

That isn’t greenhouse gases. That’s not climate change. But they

have a motive to try to deal with coal and substitute cleaner energy

in their own development. Even forgetting about greenhouse gases

and climate change.

When you combine their natural interest in controlling pollution

with the possibility that they can abate emissions very cheaply,

and particularly with the help of U.S. businesses that have the

technology readily available to abate emissions of these countries

at low cost, and then walk out ahead, having actually earned revenue because by abating emissions below their targets, they can

sell these permits in world markets.

We come out ahead. They come out ahead.

Ms. MILLENDER-MCDONALD. Well, truly. But are you suggesting,

then, that the U.S. businesses are amenable to doing this with developing countries such as China?

Dr. YELLEN. They would love to do it with countries like China

because I think they can see in Chinese participation or other developing country participation enormous gains for businesses.

Businesses would have the opportunity to put into place at low

cost technologies we already possess that would enable China to

grow in a cleaner way.

And it would boost their sales. It would give a boost to an important industry in the United States, namely, energy efficiency, the

whole energy-efficient sector.

It’s terrific as a business opportunity and it’s a win-win all

around.

Ms. MILLENDER-MCDONALD. Well, you see it as a win-win. But

do our U.S. businesses see it as a win-win for them, both here, domestically, as well as internationally?

You’re saying they do internationally. What about domestically?

Dr. YELLEN. I think even domestically, many of our businesses

see the potential for a win here because we will be stimulating the

development of new technologies and new cars and fuel-efficient

cars and green technologies and environmentally-sound technologies.

And that can be a real win for businesses.

31

Ms. MILLENDER-MCDONALD. I am just absolutely excited about

this issue.

Mr. Chairman, I know I’m over time. I’ve seen the red light two

minutes ago.

But I would like for us to maybe, if I can suggest to you, Mr.

Chairman, the Ranking Member, to have another hearing on this,

but to bring some of the scientific people out because I would like

to pose some questions myself to ones who perhaps have a more

scientific view of this issue than perhaps the Doctor has.

And thank you so much.

Chairman TALENT. I appreciate the gentlelady’s comments.

We had an extensive hearing on the science in the middle of last

year.

I don’t generally restrict what members wish to ask about. Dr.

Yellen testified as to the scientific underpinnings of this. And so,

I thought it was fair for Mr. Hill to ask his questions, although I

was thinking while he was doing it that we ought to have a hearing with the Subcommittee on Rural Enterprises.

I’m very interested in reconvening this with Dr. Yellen again and

perhaps somebody from the State Department, to find out, among

other things, what analyses were made before they agreed to a

seven-percent level below 1990 emissions.

Because it does seem to me that this whole international trading

system depends on the assumption that foreign countries are able

to achieve their targeted emission levels much cheaper than we’re

able to achieve our targeted emission levels.

Otherwise, they can’t reduce the cost of our permits by close to

90 percent, which means that they got a pretty good deal in terms

of their targeted emission levels.

One question I have is why we didn’t get our target emission levels up a little bit, set at the 1990 levels the President originally

suggested.

Then maybe we could push them a little bit in negotiations to

agree to a little bit less. Because I’m less concerned about win-win

for them than I am about the effect on the American economy.

We seem to be very concerned about win-win for foreign countries and less concerned about the impact on our own country.

I’m also going to inquire, Dr. Yellen, about what analysis you did

perform before—and we’ll get through this in written questions—

before Kyoto.

Let me ask you one other question. I know you have to go.

What are we going to do if the other countries agree to targeted

emission levels and then they cheat?

Dr. YELLEN. Compliance and monitoring is clearly a very important issue in the design of an emissions trading system, and it will

be considered in great detail in that context.

Chairman TALENT. I understand. But I mean, since we are considering—Mexico agrees to targeted emission levels, and then says

it’s doing below that, sells the permits to us, gets all our money

and then builds whatever factories it wants.

Dr. YELLEN. There are a number of possible approaches to provide incentives for compliance that, to trade, the countries would

have to comply.

32

That will be the matter that’s up for negotiation at the next conference.

Ms. MILLENDER-MCDONALD. And will there be penalties for those

who do not comply?

Dr. YELLEN. Well, I don’t want to pre-judge what’s going to come

out of that negotiation. That is what’s to be decided, what form

possible penalties could take. Could they relate to ability to trade?

That’s something that needs to be determined.

Ms. MILLENDER-MCDONALD. And are the tax incentives that the

President is proposing, will this help our small businesses because

I think that is critically an issue for small businesses as they engage in this whole reduction of emissions.

Dr. YELLEN. Well, the President has laid out a series of tax incentives and other climate change initiatives. I think that small

businesses certainly have the opportunity to benefit from the tax

cuts that the President has proposed in his most recent budget and

in last year’s budget as well, to put in place energy-efficient technologies.

Ms. MILLENDER-MCDONALD. I would like to, Dr. Yellen, see those

specifically and especially for minority businesses.

Thank you, Mr. Chairman.

Chairman TALENT. Yes.

Dr. YELLEN. Thank you.

Chairman TALENT. If we know they’re cheating, they’ll comply.

Thank you, Dr. Yellen, for coming.

The next witness—we do have another panel, I should have mentioned. Actually, another witness.

And Mr. Reinstein is not under a time constraint that I know of,

so——

Mr. Reinstein, I understand you don’t have to go back to Helsinki

for a week. So you have plenty of time here for us.

Mr. REINSTEIN. I have lots of time.

Chairman TALENT. We’ll go right to your testimony. It’s Mr. Robert Reinstein, who is the president of Reinstein & Associates International, Inc.

Mr. Reinstein.

STATEMENT OF ROBERT A. REINSTEIN, PRESIDENT,

REINSTEIN & ASSOCIATES INTERNATIONAL, INC.

Mr. REINSTEIN. Thank you, Mr. Chairman. I will try and very

briefly summarize the main points of my written statement.

This is a very, very complex issue. The science is extremely complex. I think we touched on some points this morning. But there

are many factors affecting the global climate—thousands, probably—of which human emissions are only one. And in particular,

contrary to some impressions, no individual weather event can be

attributed to human greenhouse gas emissions.

The economic impacts of this issue are also extremely complex.

One of the key factors, and I have highlighted it in my written

remarks, is the rate of turn-over of capital stock. It has been said

that carbon dioxide is the principal greenhouse gas and the overwhelming source of carbon dioxide is the burning of fossil fuels.

That is primarily in four sectors. And in the United States, these

four sectors account for emissions roughly as follows—electric utiliVerDate 13-MAR-2000 12:07 Mar 13, 2000 Jkt 010199 PO 00000 Frm 00035 Fmt 6633 Sfmt 6602 E:\HEARINGS\59434PL.XXX txed02 PsN: txed02
33

ties, about 40 percent of our CO2, transport sector, about 30 percent, manufacturing sector, about 20 percent, and buildings, heating and cooling and so forth, about 10 percent.

An average power plant lasts 30 to 50 years.

We’re keeping our cars in some cases up to eight or 10 years.

Trucks and buses hang around for 15 or 20 years. Airplanes—some

of those 727s are 25 years old.

Manufacturing facilities last from ten to 30 years on average.

Particularly the largest, most energy-intensive ones, the worldscale steel and chemical plants, these are investments in the neighborhood of 30 years.

Buildings last typically 50 to 80 years, maybe. Some a lot longer,

some less.

So we think of what is required in terms of the turn-over of the

capital stock. The average lifetime of the capital stock that is emitting carbon dioxide is much longer than the timeframe of the Kyoto

Protocol. So we have a problem here.

In light of these and some other factors, I have done some analysis on the outlook for emissions in all Annex B countries, the industrialized countries, under two different scenarios, and I have described these briefly in my statement.

And what I conclude, based on analysis by gas, by sector, and in

the case of carbon dioxide, by fuel source, is that most Annex B

countries other than those in central and eastern Europe will not

be able to meet their Kyoto targets through domestic measures

alone, limited essentially by economic and political feasibility of

measures.

There are technical capabilities, but they take you beyond the

economic and political threshold, what I call the pain threshold.

I have looked at what you would get if you went across all Annex

B countries and were allowed to trade among Annex B, how much

supply might be available from those countries whose economies

are in transition—Russia and Ukraine in particular—and how

much might be needed by the OECD countries—the United States,

Canada, Japan and so forth.

And by my estimates, the demand for credits among the industrialized countries is in the range of about 1.7 to about 3 billion metric tons of carbon dioxide equivalent per year.

And the supply from the non-OECD countries—Russia, Ukraine,

and the others—is perhaps in the range of 250 million to about 1.3

billion metric tons of CO2 equivalent.

That leaves the buyers far short of what they need.

The only other source of credits is the project-based flexibility

mechanisms—joint implementation and the clean development

mechanism. They’ve been discussed earlier today, and they are discussed in my written testimony and attachments to it.

There are inherent limits in getting credits through projects. You

have to organize projects. There are guidelines that are still not

agreed internationally on what will be credited from projects.

And the volume of projects that would be required to produce the

kind of supply of credits that the emission outlook suggests is huge.

If we take the projects that have been done in the 1990s and reported to the UN Secretariat under the ‘‘activities implemented

jointly’’ program, these projects, excluding the forestry projects, for

34

which there are no agreed rules yet, contribute about 31⁄2 million

metric tons a year in total, about 43,000 metric tons per project.

If that were any kind of an indication of what you could get out

of projects, and we look at the OECD demand for credits, it would

require between 40,000 and 70,000 projects at that rate to cover

the deficit that the OECD countries fall short of their Kyoto targets.

I conclude from that and a number of other factors that the

Kyoto Protocol targets are unrealistic and unachievable and that,

as a result, a number of countries will probably hold back from

ratification and the Kyoto Protocol, as originally agreed, will probably never enter into force.

And I have made some suggestions in my testimony for some elements that might be included in a renegotiation to bring the Kyoto

Protocol to a point where it could be ratified by important countries.

In the interest of time, I think you all have the testimony and

it is available here.

I will just stop there and go on to some questions.

[Mr. Reinstein’s statement may be found in the appendix.]

Chairman TALENT. Okay. What’s your estimate about whether—

give me the numbers—about whether the amount of credits available will be adequate to meet the demand?

What percentage of the total demand do you think will actually

be available?

Mr. REINSTEIN. What would actually be available?

That’s a judgment call. I would say that the range of the two scenarios that I have for demand is between 1.7 and about 3 billion

metric tons.

My guess is, on the trends we’re on, we’re going to wind up somewhere at about 2.2 to 2.5 billion metric tons, somewhere in that

range is the likely demand. The 1.7 billion metric tons is a bestcase.

In terms of supply, I believe the supply of credits is probably not

going to exceed about 500 million, maybe 600 million metric tons.

And this is from all sources, all three flexibility mechanisms.

So—

Chairman TALENT. 30 percent of the demand.

Mr. REINSTEIN. Yes. The likely supply falls seriously short of the

likely demand for credits.

So, in theory, and you can run computer models, if you had

China and India and all these countries supplying credits in massive quantities, you might be able to get the costs of complying

with the Kyoto Protocol down to the kind of numbers the Administration is putting on the table.

I’m afraid that some of the assumptions that underlie those numbers are not realistic.

Chairman TALENT. You say in your testimony, I would estimate

the likely price of emission credits in a real international market,

if one should ever come into being before the year 2010, at somewhere between $150 and $200 per ton of carbon equivalent.

Is that correct?

Mr. REINSTEIN. That’s what I say in there. And that is a judgment.

35

I have done energy analysis for about 25 years. And this, in essence, is energy analysis. It’s analysis of where you might be able

to save energy and generate a credit or also, political judgment as

to how many credits countries are likely to make available in a

market.

I do not believe all the so-called ‘‘hot air,’’ the excess emission allowances in eastern Europe, will be fully available on a world market.

At this point, people don’t know how big that supply might be

and countries there are likely to keep some portion of it at home

if they sell it at all.

Chairman TALENT. So your estimate is about ten times the Administration’s estimate.

I’ll tell you, Mr. Reinstein, I’m kind of inclined to credit you. And

you know why? Because you actually have estimates for supply and

demand.

Now how is it that you’re able to have estimates for supply and

demand and you’re a very able person with, I’m sure, a very accomplished firm. And the government of the United States is not able

to have estimates for supply and demand.

I could ask that of Dr. Yellen.

Mr. REINSTEIN. Well, I would say that the government of the

United States probably does have estimates of supply and demand.

My estimates of the emissions outlook for the Annex B countries

are generally in line with estimates that have been done by others,

publicly.

Every industrialized country is to provide to the UN Secretariat

for the Convention projections of their emissions to 2010.

Most of these countries have done so. These were published in

UN documents made available at the fourth meeting of the Conference of the Parties in Buenos Aires.

You can take those numbers and add them up. You get the same

result.

You can take the projections of the International Energy Agency

in Paris and add them up.

I’m sure the Energy Information Administration of the Department of Energy has numbers. You can add them up.

All these numbers are in the same ballpark. My numbers are

right in the ballpark with everybody else’s.

And when you add them up, that’s what you get for supply and

demand.

Chairman TALENT. Could you perhaps explain—and I confronted

Dr. Yellen with this—how the Council on Economic Advisors could

have told the Committee the following: The Administration has no

estimates of the demand for emission credits by year for the period

2008–2012. Demand will be sensitive to a variety of factors that

are quite difficult to forecast 10 to 14 years in advance, especially

the rate of technological innovation and the diffusion and adoption

of current innovations and those placed on the market over the

next ten years for the same reason we have no estimates of the

supply of emission credits.

Could you explain how they could have said that if you can understand this as an economist, and how they could have come up

36

with the range of a price between $14 and $23 per ton, without

some estimates of supply and demand?

Because my understanding, with my rudimentary knowledge of

economics, is that the supply curve goes one way and the demand

curve goes another way. And where they intersect is where you

come up with a price.

And if you don’t have a supply curve and a demand curve, you

can’t get a price.

Mr. REINSTEIN. That’s a fairly reasonable assumption, Mr. Chairman.

As she said, and I heard her answer, there are obviously numbers in the models. And when the model results come out, if you

pull out the parts of the model output, you should be able to have

those numbers.

But it is true. Those are computer-generated things that lack the

judgment of experience on whether those numbers are realistic.

However, there are projections for emissions for each country.

And those projections, which are public, give you the supply and

demand.

That is, if you have an estimate for how much our emissions are

likely to be under different scenarios in 2010, and you know our

Kyoto target, you simply take the difference and that difference is

our demand for credits from outside the United States.

And you can do this for each country that you can project their

emissions.

And we have emissions projections for all Annex B countries.

They are difficult for Russia and Ukraine. I agree. Those are exceptionally difficult. And I have been working on mine and revising

them constantly because they are difficult.

But I have a fair degree of confidence in the numbers that are

in this paper and in the attachments to my statement.

Chairman TALENT. Will the European Union countries on net be

selling—well, first of all, let me ask you this question.

Is it likely that the United States is ever going to sell credits to

anybody under the protocol?

Mr. REINSTEIN. Well, in terms of likely, I don’t believe it’s likely

that the United States will ratify the protocol.

Chairman TALENT. All right. Assuming it were ratified.

Mr. REINSTEIN. But if we were to ratify the protocol, we have

some opportunities for reducing emissions beyond what I would call

the pain threshold, that is, what we would be willing to do on our

own. But the cost of reducing emissions in Japan, for example, may

be so much greater even than our pain threshold, that they would

come and say, we’ll pay you to do things you wouldn’t be willing

to do on your own. It’s so painful to us, we’re willing to pay and

reduce these emissions in the United States.

So it could happen that we actually sold a credit.

Chairman TALENT. So some country may have agreed to targets

that were even harder for them than our targets are for us?

Mr. REINSTEIN. Some countries may have done so.

Chairman TALENT. Are there any other countries or group of

countries where we might be a net seller?

Mr. REINSTEIN. Japan might be an example.

37

Chairman TALENT. Japan. What about the European Union

countries?

Mr. REINSTEIN. The European Union is in a better situation, primarily because of the very significant reductions in Germany resulting from the reunification of East and West Germany, and also

reductions in the United Kingdom from the switch from coal to gas

in the electricity sector.

However, by my estimate, even in the best case, they still fall

short, primarily because Germany falls short of the 21 percent reduction that it committed to under the burden-sharing in Europe.

Chairman TALENT. You know what I’m going to do before I get

caught at this. I’m going to—because you can stick around. So I’m

going to recognize the Ranking Member and then Ms. Tubbs-Jones

who stuck around. And then I’ll have some more questions for you.

But in case they wish to leave, I’ll recognize the gentlelady from

New York.

Ms. VELAZQUEZ. Thank you, Mr. Chairman. I don’t think it’s fair

that Mr. Reinstein is here answering questions or criticizing or

analyzing or making opinions on the testimony of Dr. Yellen, and

we don’t have anybody here from the Administration.

I think it could have been more productive if he’s here sitting in

this panel and we have someone from the Administration sitting

there, reacting to whatever he’s saying.

Chairman TALENT. If the gentlelady will yield for a second for a

response to that.

I did everything possible to have Dr. Yellen here as long as possible.

The Administration witnesses always want to go first. I tried

when I became Chairman to have a rule where they would go afterwards for precisely that reason. And they all have been offended

by the prospect of having to wait around for other people to testify.

And since that is universally the protocol everywhere, I finally

gave up and allowed them to testify first.

I am happy to—in fact, I am planning to reconvene. I’m sure that

Dr. Yellen will be happy to respond to what Mr. Reinstein has said.

Ms. VELAZQUEZ. And I guess we should have someone from her

camp who could also provide information that is scientific because

it was clearly stated here that she was unable to provide certain

information. And she made it very clear.

She is not in a position to offer those informations. That doesn’t

mean that they don’t have the information. It means that the person who is the appropriate person to provide that information is

not here.

Chairman TALENT. As rarely as the gentlelady and I disagree,

she testified extensively about the scientific assumptions behind

this.

I was not—I’ll say on Mr. Hill’s behalf, I don’t think it was wrong

of him to go into science, given the fact that she went into science

to justify this.

Now I will agree with you that she is not a scientific expert.

I’ve tried to set these hearings up so we have economics at one

time and science at another time because I think they present two

different questions.

38

I went into this very, very dubious about the science. And after

the hearing we had, I saw the other case a little bit better.

I’m still dubious, but much clearer in my judgment about that

case than I am about the economics.

But I’m happy—the gentlelady knows I do try and work with

her. I did go on a long time in my questions with Dr. Yellen.

But I set this up on the assumption that she could stay. So that

wasn’t my fault. And I’m happy to answer the gentlelady’s question. I’m more than happy to have a hearing where we make the

science available. Or perhaps we could have a subcommittee hearing so that only those who are interested in it could go to that subcommittee and get that testimony.

Ms. VELAZQUEZ. Well, thank you.

Chairman TALENT. I’m happy to yield to you.

Ms. VELAZQUEZ. And now, Mr. Reinstein, I understand that over

the past two decades, we have experienced an average of 1.5 percent greater energy efficiency each year.

We held a hearing last year and some of the panelists that provided testimony provided this type of information.

I’m asking you, if this trend continued over the next 12 years,

wouldn’t we achieve nearly all of the reduction needed under the

protocol?

Mr. REINSTEIN. I’m not sure what you mean by energy efficiency.

If you mean energy intensity as the overall input of energy per

unit of GDP output, that’s a rather high number. That’s a higher

number than I have seen for the improvement in energy intensity.

That’s the usual measure. That is the GDP energy input ratio.

In fact, between 1970 and 1990——

Ms. VELAZQUEZ. So, Mr. Reinstein, you see how different people

here come and provide different information.

Mr. REINSTEIN. Yes. I’d be happy to follow up. But my simple answer is, no, I do not think we can achieve the target by a simple,

natural, and automatic improvement in energy efficiency, the socalled AEEI—autonomous energy efficiency improvement.

Ms. VELAZQUEZ. Mr. Reinstein, are you familiar with EPA’s energy star and green lights programs?

Mr. REINSTEIN. Yes, I am.

Ms. VELAZQUEZ. And what they have done?

Mr. REINSTEIN. Yes, I am.

Ms. VELAZQUEZ. Is it likely that the companies taking advantage

of these programs are unique in one way or another, or would it

be possible that similar savings could be achieved throughout the

economy?

Mr. REINSTEIN. I think this kind of savings is possible. We can

extend this. And in my trend scenario, I assume that we continue

to find other examples.

That is, I call it trend rather than business as usual because I

include things beyond current programs that I assume we will

come up with over the next ten years.

Ms. VELAZQUEZ. Has there been any effort to extrapolate these

savings and emission cuts to the economy as a whole if similar programs were to be undertaken on a broad scale?

And if so, what do such extrapolations show in the Kyoto context,

if you know?

39

If not, do you think a study of this kind would be warranted?

Mr. REINSTEIN. I don’t think you can extrapolate.

First of all, these are unique situations, dealing with building

lighting or computer efficiency, the energy star program and things

like this.

You can find individual opportunities like this. But to say that

you could generalize it to all aspects of the economy I think is

going beyond what is a reasonable assumption.

Ms. VELAZQUEZ. Do you know how much of our energy needs are

met with foreign oil supplies now?

Mr. REINSTEIN. Oil supply? We’re up close to half of our oil from

imported oil.

Oil overall is—I’d have to look at my numbers. I don’t have them

handy. But it’s very important because it is the only fuel for transportation. And transportation, obviously, is a very big chunk of energy consumption.

Ms. VELAZQUEZ. How does that compare with the percentages

during the oil crisis during the ’70s, and when we faced threats

from Iraq at the time of the Desert Storm?

Mr. REINSTEIN. I would say today, there has been a significant

shift in U.S. energy use towards natural gas, for one thing. We

were almost prohibiting natural gas use during the late ’70s. We

were forcing utilities to convert from gas and oil to coal.

So there has been a significant shift back from coal towards gas

in particular.

And there has been a significant shift from direct use of energy—

oil and gas—towards electricity. For example, for home heating,

and in industry as well. There’s been a general, very significant

shift to electricity, which is the fastest-growing form of energy.

But that is derivative.

So then you have to go back and look at where the electric utilities get their energy. And there, coal continues to supply about 60

percent of the power generation in the United States.

Ms. VELAZQUEZ. Should international security considerations like

Desert Storm or the crisis in the ’70s, be included in a cost analysis

of something like the Kyoto Proposal?

Mr. REINSTEIN. In theory. In practice, it’s very difficult to quantify a benefit because you would have to hypothesize an interruption and you would have to hypothesize the economic impact of this

hypothetical interruption.

It is in theory do-able, but very difficult to do.

I believe it is in our economic and security interest to have greater energy efficiency. I have been a strong supporter.

I was at the Department of Energy in the ’70s. I was at the Federal Energy Administration, which preceded the Department of Energy before the Department of Energy was created.

So I’ve been a strong supporter for 25 years of energy efficiency.

And I think there are multiple benefits. We should pursue a number of things.

They will not, however, get us to the Kyoto targets.

Ms. VELAZQUEZ. Thank you, Mr. Chairman.

Chairman TALENT. I’ll recognize Ms. Tubbs-Jones for questions.

Ms. TUBBS JONES. Thank you, Mr. Chairman.

40

Mr. Reinstein, I’m a new member of Congress. This is my first

hearing with regard to the Kyoto treaty.

What I’m trying to understand is what is Reinstein & Associates?

Mr. REINSTEIN. It’s a consulting firm. It’s a small business, in

fact. It’s very appropriate that I’m before this Committee.

Ms. TUBBS JONES. But that’s not why you’re here to testify because you’re a small business.

Mr. REINSTEIN. No.

Ms. TUBBS JONES. You’re here to testify to the issues of the

Kyoto treaty.

Right?

Mr. REINSTEIN. That’s correct.

Ms. TUBBS JONES. Okay. Just so we’re clear on where we’re

going.

How long has Reinstein & Associates been in business?

Mr. REINSTEIN. Three years.

Ms. TUBBS JONES. And prior to the three years, what were you

doing?

Mr. REINSTEIN. I was a consultant for three years before that.

Prior to that, I was deputy——

Ms. TUBBS JONES. You were doing consulting three years before

that for whom?

Mr. REINSTEIN. I consulted for a number of people. But I have

not represented anybody.

That is, consulting can be many different things. I provide analysis, assessments and, on occasion, advice to a wide range of——

Ms. TUBBS JONES. Name five clients for me.

Mr. REINSTEIN. Five clients. The Edison Electric Institute.

Ms. TUBBS JONES. Okay.

Mr. REINSTEIN. The Dow Chemical Company.

Ms. TUBBS JONES. Okay.

Mr. REINSTEIN. The Ford Motor Company.

Ms. TUBBS JONES. Okay.

Mr. REINSTEIN. The Canadian Electricity Association.

Ms. TUBBS JONES. Okay. One more.

Mr. REINSTEIN. The Electric Utilities of Japan.

Ms. TUBBS JONES. Have you ever testified on behalf of the

United States?

Mr. REINSTEIN. I have never testified on behalf of anybody, except the United States Government.

Ms. TUBBS JONES. Okay. So, then, you’ve done this consulting,

but never been required to publicly give testimony with regard to

the product of your work.

Mr. REINSTEIN. Since leaving government, this is the first time

I’ve testified in six years. So this is the first time I’ve testified since

leaving government.

Ms. TUBBS JONES. Okay. And the five people that you just, five

companies, five or six——

Mr. REINSTEIN. Entities.

Ms. TUBBS JONES. Entities, companies, entities.

Mr. REINSTEIN. That’s just an example.

Ms. TUBBS JONES. We won’t mince words on it, Mr. Reinstein.

And let me ask the questions, okay?

Thank you.

41

The six years you’ve been consulting for them, you’ve never been

required to testify with regard to your work.

Is that fair?

Mr. REINSTEIN. I have not been required to testify for any reason.

Ms. TUBBS JONES. Or asked to present your findings before a

committee.

Mr. REINSTEIN. I have not.

Ms. TUBBS JONES. So what was the purpose of your consulting?

Mr. REINSTEIN. To provide them assessments of what was going

on internationally, in particular, in negotiations, what I thought

would be the likely future course of negotiations, what——

Ms. TUBBS JONES. Hold on for a second. What do you mean, what

was going on, internationally?

Mr. REINSTEIN. There has been an international process in the

climate change issue going on since 1988, frankly. It’s when the

IPCC was created.

I had been part of that process almost from the beginning.

Ms. TUBBS JONES. In what capacity, sir?

Mr. REINSTEIN. As a member of U.S. delegations, as head of U.S.

delegation, as chairman of the UN Inter-Governmental Panel on

Climate Change working group on responses to climate change.

And since leaving government, as a nongovernment observer to

the international——

Ms. TUBBS JONES. When did you leave government, sir?

Mr. REINSTEIN. I left government in April, 1993.

Ms. TUBBS JONES. And what were you doing at that time?

Mr. REINSTEIN. Prior to leaving government?

Ms. TUBBS JONES. No. When you left government, what were you

doing?

What was your position at the time that you left?

Mr. REINSTEIN. You mean what position did I leave or what position did I take?

At the time I left, I was in transition.

Ms. TUBBS JONES. What was your position with government

when you left, sir?

Mr. REINSTEIN. My position with government, I was Deputy Assistant Secretary of State for Environment, Health, and Natural

Resources.

Ms. TUBBS JONES. And what was your responsibility?

Mr. REINSTEIN. My responsibility was overseeing all international activity for the United States in those areas.

Ms. TUBBS JONES. And why did you leave?

Mr. REINSTEIN. I left because during that brief period prior to my

leaving, I had the category that I served at the pleasure of the Secretary of State and the President.

They decided that they no longer needed my services, so they

asked me to leave.

But I had been in government——

Ms. TUBBS JONES. And so that’s why you sit here today so critical of government, isn’t it?

Mr. REINSTEIN. No, that is not why I sit here today.

Ms. TUBBS JONES. I have no further questions.

42

Mr. REINSTEIN. Mr. Chairman, may I have permission to respond

to that?

Chairman TALENT. Yes. I’ll certainly let the gentleman respond.

I give great leeway to members to ask questions. I will say that

Mr. Reinstein’s biography, his curriculum vitae, is available. In

fact, it’s included as part of his statement.

I will read some of his qualifications to testify and then you may

certainly finish and make any other comments you may wish, Mr.

Reinstein.

He was the Deputy Assistant Secretary for Environment, Health

and Natural Resources, 1990 through 1993.

He was responsible for coordinating U.S. international environmental and health policy, including international aspects of such

issues as global climate change, ozone layer protection, acid rain,

hazardous chemicals, hazardous wastes, endangered species, forests and other conservation issues, biotechnology, AIDS, and other

health issues.

He was the chief U.S. negotiator for UN negotiations on a

Framework Convention on Climate Change—I can’t read that

date—1990.

Chief U.S. negotiator for Copenhagen Amendment to the Montreal Protocol on substances that deplete the stratospheric ozone

layer.

And his vitae goes on for a long time after that. And you certainly may have the opportunity to make any other comments you

may wish to make.

Mr. REINSTEIN. Thank you. If I could respond to the gentlelady,

I served at the request of the President and the White House, for

a brief period at State Department.

However, I was not a Republican. And I was asked to serve in

that capacity because of my professional background, not because

of any political affiliation.

I served for nearly 20 years in government, under five different

presidents. And during my entire government career, I tried to

bring the best analysis to policy-making that I could.

I worked in three distinct fields.

The reason I am here today, and I have been quiet for 51⁄2 years

after leaving government, is that I feel that the policy that was

adopted and exemplified in the Kyoto Protocol is a mistake.

I think they made a mistake in Kyoto——

Ms. TUBBS JONES. The government didn’t force you to be quiet,

however.

Chairman TALENT. I will say to the gentlelady, he’s responding

to my questions. And while I’m——

Ms. TUBBS JONES. But Mr. Chairman——

Chairman TALENT. The gentlelady will suspend. The gentleman

is responding to my questions.

Ms. TUBBS JONES. Then have him direct his remarks to you.

Chairman TALENT. The gentlelady will suspend. He’s responding

to my questions.

I certainly—if the gentlelady would like an opportunity to ask

further questions, I will consider that.

43

I’m not as strict regarding the regular order as some chairmen

are. But the gentlelady should ask for permission and ask me to

yield——

Ms. TUBBS JONES. Mr. Chairman, I would ask you to yield just

to have him direct his comments to you since those are your questions versus directing them to me.

Chairman TALENT. All right. I will yield for the gentlelady’s comment.

The Chair does not exercise or administer the Rules of the Committee in an attempt to cut off any debate or any legitimate point

that’s made, and all members are aware of that.

I did not restrict the gentlelady’s questions, which were strong.

This is an important issue.

However, I do also allow witnesses, when their credibility, or attempts have been made to impeach their credibility, to respond.

I’ve done that for witnesses on both sides and in response to questions from both sides.

So I am going to permit this Witness to respond. I would caution

the Witness, of course, that his remarks should be made in response to my questions.

But you’re fully entitled to present any comments you may wish

to make about your background or your reason for testifying here.

Mr. REINSTEIN. Thank you, Mr. Chairman.

As I understand it, the question was why I chose to come and

make my views available to the Congress at this time.

And the reason is that I believe that I have experience and insights into this issue which would be important and valuable for

good public policy-making.

That is why I came forward. I came forward in my personal capacity, representing no one, to provide views based on a number of

years, decades of experience that I thought would be useful in the

formulation of good public policy.

That is the only reason I came forward.

Chairman TALENT. I’d be happy to recognize the gentlelady from

New York.

Ms. VELAZQUEZ. Mr. Reinstein, you mentioned some clients that

you have and that you have been working for.

I just have one question and a final question.

How do those companies or clients will be impacted if the Kyoto

agreement is ratified?

Mr. REINSTEIN. I would be happy to provide the Committee with

a list of my past and present clients. They will be impacted in

many different ways.

And in fact, my clients also include people other than companies.

They include, for example, the World Bank. They have included the

United Nations Environment Program. And they’ve included environment ministries of some of the governments in Europe.

So the impacts on them will be difficult to judge.

But I can provide a list of my past and present clients and you

can see the diversity of that group.

Chairman TALENT. Well, if Dr. Yellen is right, it will be win-win

for everybody.

Mr. REINSTEIN. Let’s hope so.

44

Chairman TALENT. And the businesses of the country will just

love it.

I have a few more questions and I appreciate your patience, Mr.

Reinstein.

Discuss the situation that you anticipate in Russia. Will Russia

be a big producer of credits if this protocol were ratified?

If so, why? If not, why not?

Mr. REINSTEIN. I think Russia has significant potential for credits for trading. And that is because of the very poor state of their

economy and the fact that their target was set at 1990 levels.

They will do very well, very well, indeed, if their emissions are

back up to 1990 levels by 2010.

I think they will not be. They will be still quite significantly

below 1990, if anything like the current trends continue.

Whether they would sell all of the difference between their likely

emission levels in 2010 and their Kyoto target to the United States

or anybody else is a different question.

And there, I’m not so sanguine that they will simply transfer for

whatever price the total difference between their actual emissions

and their Kyoto target to the United States or anyone else.

The question also came up as to how do we verify and track

whatever is sold—who sells it, where does the money go?

Those are some very big questions.

In order to be able to engage in a program where Russia would

make very significant emission rights available to the United

States, they would obviously have to organize a whole program,

identify projects, if it’s project-based, and what not.

They’re having some very serious difficulties organizing their

economy these days. I think they will have very serious difficulty

organizing this kind of effort as well.

So I see a much more modest supply out of Russia potentially

than a lot of analysts. But it is for reasons having to do with the

internal difficulties that they’re having, not just the fact that

they’re short of their emissions target.

Chairman TALENT. One concern I had was the possibility of some

kind of cartel or something developing with regard to these credits.

Now, on the one hand, it would clearly be in the interest of countries that have a lot of these credits to try and artificially raise the

price through some kind of monopoly or cartel.

On the other hand, I am a believer that those things are hard

to sustain against—if there is a truly functioning kind of free market.

And you look at OPEC, for example, which has been successful

in raising prices above the market level. But that’s continually

breaking down and it’s difficult for them to sustain.

Would you give me your opinion on that? Do you think that

under this kind of a trading regimen, it would be likely that we’d

have some kind of a cartel designed to raise prices above a puremarket level?

Mr. REINSTEIN. I’m not clear that we would have a cartel.

I think, obviously, sellers would try to extract the maximum

rent, the maximum economic benefit they could get from their credits.

45

That is why I conclude that credit prices will be much higher.

That is to say, people will not sell at cost, but will sell for what

they think they can get from a market where, by my estimate, demand far exceeds supply.

Chairman TALENT. And the demand would be inelastic, would it

not, since it’s required by the law?

Mr. REINSTEIN. If in fact a country has ratified, it is legally required to meet its target. And if it has to buy credits from outside

or take very painful domestic measures, its demand is fairly inelastic. And that will tend to drive the price up.

Chairman TALENT. You probably disagree with this because you

sound like you’re a lot less of a populist than I am. But it just

seems to me that we probably comply—if past precedent is any history, we’d comply.

Mr. REINSTEIN. Yes.

Chairman TALENT. And I bet we’d be strict as all get out. If

somebody tried to open up—my brother tried to add a few tables

to his tavern and ended up using a little more electricity, they’d

come down on him like a ton of bricks. But the rest of the world

might not comply so well.

That’s one of the concerns I have with this.

Mr. REINSTEIN. I think the United States has a very good record

of compliance with those treaties it has ratified, and that is the

way we approach the ratification process.

Compliance in other parts of the world, indeed, on average, is not

as good as it is here in the United States. There is a danger that

compliance would not be as effective in all other countries that we

compete with economically.

Chairman TALENT. It would be worth a lot of money to them because the ideal scenario would be to fudge the numbers so that you

could expand pretty much what you want at the same time as

you’re selling credits to the richest country in the world for permission for it to expand its economy.

Not only are you getting the immediate transfer of the cash, but

you’re making our economy less competitive and our goods less

competitive on the world market.

Mr. REINSTEIN. That is a risk. That’s a very real risk.

Chairman TALENT. All right. That’s all I have. I notice a couple

of people—I’m sorry. The gentlelady? Go right ahead.

Ms. VELAZQUEZ. I have a question. Mr. Reinstein, do you know

if anyone has done any study or analysis about how much of American corporations who have relocated to developing countries, how

much of the greenhouse gas problem they have contributed?

Mr. REINSTEIN. There have been studies on the shift of particularly basic manufacturing from the U.S. and other industrialized

countries into developing countries.

The reasons for these shifts are very complex. Sometimes they

have to do with availability of raw materials where the deposits of

those raw materials in the United States and Canada, for example,

have become depleted and there’s a richer deposit in the developing

country.

Sometimes they have gone for tax reasons.

They may have gone where people have set environmental standards, the so-called pollution havens.

46

I don’t think—I have never seen a good study that is able to separate that factor out from all of the other economic or fiscal taxation factors that, in combination cause relocation, I have never

seen a good analysis that is able to isolate that factor from all the

other factors that may cause a company to relocate.

It’s very difficult. It sounds simple, but it’s actually very difficult

to analyze.

Ms. VELAZQUEZ. But it would be very interesting to know how

much of the greenhouse gas problem has been caused by American

corporations in those developing countries.

Chairman TALENT. There were, it looks like to me, a couple people who stayed from Dr. Yellen’s staff. And the Ranking Member

made the point that there was no opportunity to respond.

I don’t know if you wish to offer any comments for the record,

anybody who stayed from Dr. Yellen’s staff.

Ms. ANDERSON. Not at this time.

Chairman TALENT. Okay. I wanted to give you that opportunity

if you wished.

Ms. TUBBS JONES. Mr. Chairman?

Chairman TALENT. Yes, I recognize the gentlelady.

Ms. TUBBS JONES. I’d like to thank Mr. Reinstein for his testimony.

Chairman TALENT. I thank the gentlelady for her comments. And

I would, also, and we appreciate your coming here. We didn’t keep

you the whole week you’re going to be in the United States, anyway.

Thank you, Mr. Reinstein.

Mr. REINSTEIN. Thank you very much. It was a pleasure to come

here, and I’d be happy to come back.

Thank you.

Chairman TALENT. Without objection, we’ll keep the record open

for ten additional days to submit further questions.

The Committee is adjourned.

[Whereupon, at 11:40 a.m., the hearing was adjourned.]

47

STATEMENT OF CHAIRMAN JAMES M. TALENT

Good Morning. Today, the Committee on Small Business will examine the Kyoto Protocol’s impact on the United States economy. Specifically, I want to focus on the

Administration’s July 1998 economic analysis, a document released after June 4,

1998, when Dr. Janet Yellen first testified about the Protocol in front of this Committee.

The Kyoto Protocol requires the United States to reduce its greenhouse gas emis- sions 7% below its 1990 levels by 2012. Historically, there is a direct correlation between increases in greenhouse gas emissions, energy use and gross domestic product. Increased domestic production, in most cases, creates more jobs and permits

more Americans to participate in the American dream of small entrepreneurship.

Nevertheless, the Administration’s analysis suggests we can reduce greenhouse gas

emissions with minimal economic impact, including no aggregate loss of jobs. Although the United States signed the Kyoto Protocol last November, the Admin- istration’s policy relies on future negotiations for an unlimited international trading

system that includes ‘‘meaningful participation from key developing countries.’’ Dr.

Yellen attempts to justify the Administration’s policies by predicting that through

the trading system the United States can reduce carbon dioxide permit price 93%

from domestic actions alone.

Dr. Yellen previously suggested China, India, South Korea and Mexico are among ‘‘key developing countries.’’ The Administration’s analysis assumes these countries’

‘‘meaningful participation’’ requires an agreement to accept emissions target that

are ‘‘equal to . . . business as usual emissions levels in 2010.’’ this means that while

the U.S. is required to reduce its greenhouse gases by 7% below 1990 levels, these

countries can participate in the Kyoto Protocol by emitting the same amount of

greenhouse gases as they would emit absent the Kyoto Protocol. This policy hinders American corporation’s domestic expansion, encourage domes- tic downsizing and promotes corporate relocation abroad. The Administration’s analysis permits an American company to produce carbon dioxide emissions at a business as usual pace in countries such as Mexico, earn ‘‘credits’’ by cutting American

jobs and cash in the credits at the expense of American businesses that decide to

expand or remain status quo domestically Nevertheless, developing countries refuse to publicly discuss the adoption of emis- sion limits. At the latest Council of Parties meeting in Buenos Aires, a group of developing countries removed the issue from the agenda. The Indian Ambassador

echoed these sentiments in a letter to my office. With or without developing country participation, the Protocol is bad for American business, especially small businesses whose minimal capital turnover and exponential expansion dreams depend on affordable and abundant energy. These kinds

of concerns are the reason I maintain the Kyoto Protocol sells out American jobs,

American enterprise and American prosperity. We have two witnesses who will appear before the Committee today, including Dr. Janet Yellen. Before we turn to those witnesses, I will recognize the distinguished

ranking member for any statement she may wish to make.

STATEMENT OF HON. CAROLYN MCCARTHY

Thank you Mr. Chairman, and Congresswoman Vela ́zquez, for scheduling this hearing to obtain a better understanding of the economic impacts the Kyoto Protocol

will have on small businesses.

Small business owners throughout my district have expressed concern over the economic as well as labor implications this protocol will have on them. A major concern involves the difference between actual costs. It is my understanding that numerous studies have been prepared by private firms as well as the Clinton Administration that predict these cost. They range from costing an American household

$2,700 a year to $112 per family per year. This is quite a cost disparity. Another concern involves possible loss of American jobs if underdeveloped coun- tries are not held by the same pollution reduction standards as developed countries.

An estimate by the Wharton Econometrics Forecasting Association, Inc., predicted

that 2 million jobs would be lost if emissions fall 7% below the 1990 levels. This

is unacceptable. Although I am supportive of the reduction in greenhouse gases, I

believe that all countries should make an attempt to remedy this problem. This is not just an American problem or European problem, it is a global problem. If undeveloped countries are allowed to produce as many greenhouse gases as they wish,

we are ignoring the main objective of the Kyoto Protocol which aims to improve the

environment.

If businesses within developed countries are forced to abide by emission levels

stated in the protocol, it seems to me that they would take their business, as well

48

1Please refer to the attached paper copy or http://www.whitehouse.gov/WH/New/html/

kyoto.pdf for a PDF version of this document.

as jobs, to a country that does not fall under the protocol. We have already seen

this occur with the quest for cheap labor. Many times the quest for a profit overshadows adequate wages and environmental protection. I support the Administration’s attempt to include undeveloped countries in the

Kyoto Protocol. However, I would like to see any confusion surrounding the exact

cost of this protocol clarified.

Thank you Mr. Chairman.

TESTIMONY OF DR. JANET YELLEN, CHAIR, COUNCIL OF ECONOMIC ADVISERS

Thank you, Mr. Chairman. I appreciate having this opportunity to discuss with you the economics of climate change and the Administration’s efforts to address this

significant environmental challenge. As you know, the Administration released a report last July, entitled ‘‘The Kyoto Protocol and the President’s Policies to Address

Climate Change: Administration Economic Analysis.’’ The report states that, in the

Administration’s view, the costs of achieving our Kyoto target would be modest if

we can succeed in implementing international trading, joint implementation, and

the Clean Development Mechanism in an efficient manner and we achieve meaningful developing country participation. In addition, since the 1997 Kyoto Conference,

a variety of research of the economics of Kyoto, and especially on the economics of

Kyoto’s flexibility mechanisms, has been undertaken. Today, I will provide a brief

summary of the Administration’s Economic Analysis and review several of the key

findings in the recent economic literature on climate change.

THE POTENTIAL IMPACT OF CLIMATE CHANGE

The Intergovernmental Panel on Climate Change (IPCC) concluded in 1995 that ‘‘the balance of evidence suggests that there is a discernible human influence on

global climate.’’ Current concentrations of greenhouse gases have reached levels well

above those of preindustrial times. If growth in global emissions continues

unabated, the atmospheric concentration of carbon dioxide (CO2) will likely double relative to its preindustrial level by midway through the next century and continue

to rise thereafter. As a result of the increased concentration of CO2, the IPCC estimates that global temperatures will increase by between 2 to 6 degrees Fahrenheit

in the next 100 years, with a best guess of about 3.5 degrees Fahrenheit. Potential

consequences associated with this shift in climate include a rise in sea levels, greater frequency of severe weather events, shifts in agricultural growing conditions from

changing weather patterns, threats to human health from increased range and incidence of diseases, changes in availability of freshwater supplies, and damage to ecosystems and biodiversity. Further discussion of the costs of climate change is contained in the Administration Economic Analysis.1

THE KYOTO PROTOCOL AND THE BUENOS AIRES CONFERENCE OF THE PARTIES

The Kyoto Protocol provides several mechanisms that would allow countries to achieve the emissions targets established in this agreement in a cost-effective fashion. These mechanisms, which permit what we have termed ‘‘when’’, ‘‘what’’, and

‘‘where’’ flexibility in meeting the Kyoto emissions targets, are described in detail

in the Administration Economic Analysis. Since securing international emissions

trading, the Clean Development Mechanism, and joint implementation in Kyoto, the

Administration has worked in bilateral and multilateral areas to promote understanding of these mechanisms and to develop rules that will promote their efficient

operation. Last fall in Buenos Aires, a workplan to resolve key implementation issue

regarding these mechanisms by the end of 2000 was agreed to by all the participating countries. I want to reiterate that efficient implementation of these flexibility

mechanisms is critical to reducing the costs of achieving the targets established in

the Kyoto Protocol.

COSTS OF ACTION

In assessing the economic effects of the Kyoto Protocol, the Administration has

drawn on the insights of a wide range of models and analysis. Examples include

models of the energy sector and economy over the next 25 years, such as those participating in the Stanford Energy Modeling Forum, the Intergovernmental Panel on

Climate Change’s review of the economic and social dimensions of climate change,

the work of the Organisation for Economic Co-operation and Development (OECD)

on the economic dimensions and policy responses to global warming, and the AdminVerDate 13-MAR-2000 12:07 Mar 13, 2000 Jkt 010199 PO 00000 Frm 00051 Fmt 6633 Sfmt 6621 E:\HEARINGS\59434PL.XXX txed02 PsN: txed02
49

istration’s staff-level interagency analysis. In addition, the Administration used

other tools, such as a meta-analysis, basic economic reasoning, overviews of the domestic and international energy sectors, statistics regarding energy efficiency and

greenhouse gas emissions, and economic indicators from World Bank, International

Energy Agency, and Energy Information Administration databases.

Assuming that effective mechanisms for international trading, joint implementation, and the Clean Development Mechanism are established, and assuming also

that the United States achieves meaningful participation by key developing countries, the Administration’s overall assessment is that the economic cost of attaining

the targets and timetables specified in the Kyoto Protocol will be modest for the

United States in aggregate and for typical households. This conclusion is not entirely dependent upon, but is fully consistent with, formal model results. The Administration believes that there are limitations to relying on any single model to assess the economic impact of the Kyoto Protocol. However, model results can further

inform and improve the understanding of the effects of climate change policy. To

complement the economic analysis of the Administration’s policy to address climate

change, we have conducted an illustrative assessment with a modified version of the

Second Generation Model (SGM). The results from the SGM substantiate the conclusion that the economic effects of an efficient, effective, and global policy to address

the risks of climate change will be modest.

An assessment using the SGM model that accounts for effective trading and developing country participation yields permit price estimates ranging between $14/

ton and $23/ton, and direct resource to the U.S. between $7 billion and $12 billion/

year (1997 dollars). The range reflects uncertainty about the extent of Annex I participation in international trading.

Under the assumptions of the Administration’s analysis, permit prices in the

range of $14/ton to $23/ton translate into energy price increases at the household

level between 3 and 5%. Under these permit prices, fuel oil prices would increase

about 5 to 9 percent, natural gas prices about 3 to 5 percent, gasoline prices about

3 to 4 percent (or around 4 to 6 cents per gallon), and electricity prices about 3 to

4 percent. This increase in energy prices at the household level would raise the average household’s energy bill in ten years by between $70 and $110 per year, although such predictions may not be observable because they would be small relative

to typical energy price changes, and nearly fully offset by electricity price declines

from Federal electricity restructuring. By 2008–2012, the anticipated 10 percent decline in electricity prices from restructuring is projected to lead to expenditure reductions of about $90 per year for the average household.

The illustrative modeling analysis does not account for several key components of

the Kyoto Protocol and the Administration’s policies to reduce greenhouse gas emissions. These include the benefits of reducing net emissions through cargon sinks,

the Administration’s electricity restructuring proposal, the Administration’s Climate

Change Technology Initiative (increases in R&D funding and new tax incentives in

the Administration’s FY 2000 Budget), the Administration’s sectoral consultations

to encourage and support voluntary efforts by U.S. industry to undertake emissions

reductions, including the provision of credit for early action, and the Administration’s efforts to reduce federal energy use. There are also ancillary benefits of reducing greenhouse gas emissions—in particular, the corresponding reductions in conventional air pollutants like sulfur dioxide and fine particular matter. These benefits along could produce savings equal to about a quarter of the costs of meeting

our Kyoto target.

The Administration released earlier this month its proposed electricity restructuring legislation. The Administration’s proposed Comprehensive Electricity Competition Act (CECA) is estimated to reduce greenhouse gas emissions by about 40

to 60 million metric tons of carbon equivalent per year by 2010. Further, the electricity restructuring proposal provides potential cost-savings in four areas: dispatch

efficiency, improved capital utilization, savings in capital additions and cost reductions in fuel procurement, non-fuel operation and maintenance expenses, and administrative and general expenses. These four categories of savings, when translated to consumers, are likely to reach or exceed $20 billion annually. The Department of Energy is revising its technical analysis of last year’s proposal to reflect

changes in the latest proposed legislation and will release the new analysis to the

public in the near future.

RECENT RESEARCH ON THE ECONOMICS OF CLIMATE CHANGE

Since December 1997, many economists have conducted and made available their

analyses of the Kyoto Protocol. I have noted in previous appearances before Congressional Committees that there are limitations to relying on one or a small set

50

2The results of the Stanford Energy Modeling Forum’s Kyoto Protocol exercise will be published in a forthcoming issue of the Energy Journal. 3Please note that several modeling teams participating in the EMF exercise made presentations at the OECD workshop. 4PDF-formatted files of the OECD workshop proceedings can be downloaded from the OECD

webpage at http://www.oecd.org//dev/news/Environment/Modeling.htm. 5Please note that the version of SGM used in EMF differs from the analysis conducted by

the Administration because the EMF version does not include cost curves for non-carbon dioxide

greenhouse gases used by the Administration. Since efficient trading across gases would lower

costs and permit prices, and accounting for six gases affects the stringency of some countries’

targets, the EMF version of SGM yields slightly higher permit prices than the Administration

version.

of models and that we were eager to see assessments of the Kyoto Protocol by other

models. Two large efforts have been undertaken to coordinate and compile modeling

results on the Kyoto Protocol. First, the Stanford University Energy Modeling

Forum (EMF), a long-running model comparison exercise involving many of the

leading climate and energy models, has coordinated full scale analyses of the Kyoto

Protocol. Second, the Organization for Economic Co-operation and Development

(OECD) held an economic modeling workshop this past fall, and has since published

the proceedings of this workshop which includes 16 papers. In addition, several research teams have undertaken work in evaluating the potential for intergas trading

and the cost-savings of a six-gas target relative to a carbon dioxide-only target. I

would like to take this opportunity to provide an overview of this recent research.

Kyoto Modeling Analyses

The final results of the Energy Modeling Forum comparison exercise of the Kyoto

Protocol reflect the work of twelve modeling teams from the United States, Europe,

and Asia.2 In evaluating the Kyoto Protocol, all of the participating teams used economic models that incorporate the potential for international trading in greenhouse

gas permits. The OECD workshop included presentations by 10 modeling teams, 9

of which had global models as well.3 4 By explicitly incorporating international trading, these models can evaluate the opportunities for cost-savings through trading

among Annex I nations and among Annex I and developing countries were they to

adopt emissions targets. Since the Kyoto Protocol enables all countries with emissions targets to trade emissions allowances among other countries with targets,

these models are well-suited to assess the economic implications of the international

trading component of the agreement.

While the models used in the EMF exercise and the OECD workshop can assess

international trading, there are several other flexibility mechanisms of the Kyoto

Protocol that they cannot, at present, readily assess. For example, these models did

not incorporate the effects of sinks. While several modelers did assess the economic

costs of achieving the Kyoto targets with ‘‘off-line’’ assumptions about sink activity,

none incorporated an integrated energy-land use model. Further, most of the modelers did not evaluate opportunities to reduce costs by trading across greenhouse

gases. These models are primarily energy models and are focused on the economics

of reducing carbon emissions from fossil fuel combustion. Again, some modelers analyzed the Protocol by making some ‘‘off-line’’ assumptions about the potential reductions in non-carbon dioxide greenhouse gases, but none employed a model with cost

curves for these gases. Finally, it should be noted that these models did not include

opportunities for emissions reduction through Administration proposals, such as

electricity restructuring or the Climate Change Technology Initiative, that could

slow the growth over time of greenhouse gas emissions thereby lowering greenhouse

gas permit prices.

The results from both the EMF and OECD efforts provide very useful context for

the Administration’s economic analysis. First, the illustrative model used by the Administration, the Second Generation Model of the Pacific Northwest National Laboratory, tends to fall in the middle of the range of this set of models in terms of

U.S. permit prices.5 For example, under Annex I trading SGM generates a permit

price which is above the median of this set of models, while under full global trading, the SGM permit price is just below the median permit price. Second, the EMF

exercise found that the reduction in permit prices as trading expands from no trading to Annex I trading to full global trading is robust. On average, the EMF models

found that Annex I trading would cut the U.S. permit price by 60% relative to a

no trading scenario. Of these models, one estimated a 77% reduction in the permit

price under Annex I trading. In full global trading, the permit price would be, on

average, 81% lower than the no trading price. Several models estimated permit

price reductions of about 90%.

51

The reported results from the OECD workshop found similar reductions in permit

prices by going from no trading to Annex I trading. On average, the OECD workshop models found that Annex I trading would cut the U.S. permit price by 57%

relative to a no trading scenario. Moreover, they found that the European Union

and Japan would benefit more from unconstrained Annex I trading. For both the

E.U. and Japan, the average reduction in permit prices across these models would

be nearly 75%.

Analyses of trading constraints

In addition to the modeling of various efficient international trading scenarios, several EMF modeling teams have considered the impact of constraints on the opportunity to buy or sell emissions allowances in an international market. While the

United States is unambiguously opposed to trading restrictions, several parties to

the agreement have indicated support for some form of a trading constraint, for example, by setting a limit on the amount a party can purchase through the trading

system. Trading restrictions would generate no benefit for the global climate while

they could significantly increase the costs of achieving the Kyoto targets. Before describing the economic costs of trading constraints, I would like to explain why such constraints yield no climate benefits. Regardless of where a greenhouse

gas emission reduction occurs, it has the same effect on total emissions and the

same effect on the climate. A ton reduced in New York generates the same climate

benefit as a ton reduced in Berlin. In proposing trading constraints, some have focused on countries such as Russia, that will have emissions below their Kyoto targets during the commitment period because of the decline in their economic output

associated with the transition to market economies. If trading constraints are established that restrict the ability of Russia to sell permits (or restrict the opportunity

for other Annex I countries to buy Russian permits), then emissions during the first

commitment period would be lower than in the absence of such constraints. However, Russia would simply bank its allowances and use these allowances in a subsequent commitment period when its emissions exceed its target. While a trading constraint might lower emissions during the first commitment period, the cumulative

emissions over several commitment periods from Annex I countries would be the

same with and without the trading constraint. Given the long residence of times of

greenhouse gases (on the order of a 100 or more years), the cumulative effect is

what is most relevant in terms of changes in the global climate.

To provide a sense of the economic implications of trading constraints, I would

like to share with you two examples from work done by EMF modeling teams. First,

consider a trading constraint that mandates that at least two-thirds of the emissions

reductions necessary for a country to achieve its Kyoto target must occur through

domestic actions. Evaluating this trading constraint with the EPPA model based at

the Massachusetts Institute of Technology, the permit price for the United States

is almost four times higher with the constraint than under an unconstrained global

trading system. It is important to note that the effects of this constraint are even

more pronounced for the European Union and for Japan. The permit price for the

EU would be more than five times higher than the unconstrained global trading

permit price, and the Japanese permit price would be thirteen times higher. As

these results indicate, the trading constraint would result in each country experiencing a different marginal cost of abatement, and there would be no common permit price for a ton of carbon equivalent. Since the constraint restricts opportunities

for countries like the United States, Japan, and members of the EU to buy emissions allowances, the competitive price for emission allowances from countries like

Russia would fall below the unconstrained level.

Second, consider a trading constraint that mandates that acquisitions of permits

through international trading could not exceed 10% of a country’s emissions allocation. For example, the U.S. target is approximately 1.5 billion tons of carbon equivalent on an annualized basis. Under this trading constraint, the United States, or

private firms in the United States, could not purchase more than 150 million tons

on an annual basis from other countries. Assessing this trading constraint with the

Second Generation Model, the permit price for the United States would more than

triple relative to the unconstrained global trading permit price. For the E.U., the

permit price would nearly double, and for Japan, the permit would be eleven times

as high as the unconstrained global price.

While trading constraints increase greenhouse gas permit prices (and subsequently, energy prices) in the United States, the European Union, and Japan, they

also reduce the gains from trade by the countries likely to be sellers of emissions

allowances. For example, Russia and large developing countries that adopt emissions growth targets and participate in international trading, e.g., China and India,

would sell fewer emissions allowances at lower international permit prices under

52

such trading constraints than in an unconstrained global trading environment. Such

restrictions lessen the benefits of participation by developing countries in international trading.

Estimated reduction in costs from trading across gases

As we note in the Administration Economic Analysis, the Kyoto Protocol provides

additional flexibility in achieving emissions targets by specifying these targets as a

basket of 6 types of greenhouse gases (carbon dioxide, methane, nitrogen dioxide,

hydrofluorocarbons, perfluorocarbons, and sulfur hexafluoride). Countries can effectively trade across gases, based on their global warming potential, so that the aggregate weighted emissions reductions occur at least cost. Most models used to evaluate

the Kyoto Protocol have not incorporated this kind of flexibility, although several

modeling teams are actively working to modify their models to include emissions of

non-CO2 greenhouse gases. In the Administration’s analysis, cost curves for these

other gases for the United States were used in conjunction with the SGM model.

These simulations suggest that trading across greenhouse gases can lower costs up

to 15% relative to a situation where no trading across gases occurs.

Complementing this finding, recent work by a group of researchers at the Massachusetts Institute of Technology has found that including the opportunity to abate

non-CO2 greenhouse gas emissions and promote carbon sinks reduces the costs to

the United States by about 25% relative to a carbon-only approach (assuming no

international trading). On average, they find that Annex I countries’ costs would fall

by more than 20%. In addition, work by University of Illinois researchers and others

has evaluated the changes in costs of abating methane and carbon dioxide to

achieve the U.S. Kyoto target instead of abating carbon dioxide alone. They found

that meeting an emissions target through cost-effective trading between carbon dioxide and methane reductions could reduce costs by nearly 20% relative to a case

with no intergas trading. Finally, research by several Dutch analysts presented at

the OECD workshop found significant opportunities for the European Union to substitute abatement of non-CO2 greenhouse gas emissions for carbon dioxide reductions. They found that 27% of the total reduction effort necessary for E.U. countries

to achieve their emissions targets could occur through the abatement of these noncarbon dioxide gases.

Developing country participation

Last year during the Buenos Aires Conference, two non-Annex I countries, Argentina and Kazakstan stated that they will announce emissions targets and expressed

their interest in engaging in international emissions trading. We believe that these

two countries’ efforts may encourage other non-Annex I countries to follow their

lead. Economic and environmental benefits could accrue to developing countries if

they adopt binding emissions targets and participate in international trading. Setting a target below the business as usual emissions level for the commitment period

would generate climate benefits by reducing global emissions below what they would

otherwise have been. In addition, if the target is set not too far below the business

as usual emissions level, the participation of the country in a global trading system

would produce economic benefits or ‘‘gains from trade’’ for both the developing country and its trading partners. Emissions trading by developing countries would occur

only if they chose to undertake emissions reductions above and beyond their commitments—reductions that would generate trading extra income for them as long

as their marginal abatement cost is below the world trading price for greenhouse

gas permits. Many of the EMF models reveal that, for large developing countries,

like China, such excess reductions would indeed by profitable, so that these countries would export allowances and gain from trade. Developing countries would also

reap ancillary benefits of reducing conventional air pollutants, which may be substantial. Benefits from trading would also accrue to Annex I countries. Annex I

countries (and private firms in these countries), who would purchase these emissions allowances in the world market, would achieve their targets at lower costs

than without the participation of the developing countries. However, it should be

noted that the more stringent the target for the developing country, the lower the

gains from trade both for that country and for Annex I countries such as the United

States. Indeed, an extremely stringent target could conceivably make the developing

country a net importer of emissions allowances, and raise the international trading

price for a greenhouse gas permit. Still, these models illustrate the potential to create targets that simultaneously make the environment, the developing country, and

Annex I countries all better off.

53

CONCLUSION

The Administration’s overall conclusion is that the economic impact of the Protocol will be modest under the conditions we have identified in our economic analysis. The purpose of this testimony has been to summarize the analysis we have

presented in the Administration Economic Analysis on climate change and to provide a brief update of recent research efforts outside of the government. I look forward to continuing to work with members of this Committee, as well as with other interested parties, in further analyzing the Kyoto Protocol and evaluating the net effects of reducing greenhouse gas emissions. It is my hope that economic analysis will continue to play a key role in designing policies in this area. I welcome your questions.

STATEMENT OF ROBERT A. REINSTEIN, PRESIDENT, REINSTEIN & ASSOCIATES

INTERNATIONAL, INC.

Mr. Chairman, Members of the Committee, I’m pleased to appear before you today to share some of my views on the Kyoto Protocol to the UN Framework Convention

on Climate Change (FCCC). The text of the Protocol was adopted in Kyoto in December 1997 but still has not been ratified by the United States or any other industrialized country of any significance. There are good reasons for this reluctance to

ratify, as I will indicate only briefly in my remarks here. I have also made some materials available to the Committee that go into greater detail on several points that I will touch on here. Copies of these are attached to

my statement, and I would ask with your permission that they be made part of the

record of this hearing.

THE SCIENCE OF CLIMATE CHANGE AND APPROPRIATE RESPONSES

First, let me make a brief comment on the science of climate change. Several years ago I characterized the debate over the science as the debate of the birds:

Chicken Little vs. the Ostrich. Some were and still remain convinced that terrible

things will happen because of human greenhouse gas emissions and that immediate

draconian actions are justified to avoid these catastrophes. Others argue that we

know very little about climate change, which might even be a benefit to the earth,

and therefore that nothing is justified at this stage. The truth lies between these two extremes. This is a long-term issue. There are reasons to be concerned about an unlimited increase in GHG concentrations in the

atmosphere, and I believe an appropriate response to it over the longer term is

clearly justified. Many of the longer-term actions to limit emissions are also fully

justified from the point of view of energy security, international competitiveness and

other priorities as we prepare ourselves for the increasingly interdependent and

technologically oriented world of the 21st Century. However, these actions should not be taken precipitously, without a proper under- standing of both their effectiveness across a broad range of policy objectives and

their impact on different sectors of the economy and different regions of the country

and the world.

I have made some further comments regarding the science of climate change and

its possible impacts in connection with the plenary session of the UN Intergovernmental Panel on Climate Change that took place in Vienna, Austria, last September. They are provided to the Committee as Attachment 1 to my statement.

FEASIBILITY AND IMPACTS OF THE KYOTO TARGETS

In my view, the situation described above calls for some actions on the part of

governments. I think most of us want to do the ‘‘right thing’’ in regard to the global

environment.

But is the Kyoto Protocol the ‘‘right thing’’? It is an appropriate response to the

longer-term increase in human-related greenhouse gases in the atmosphere? I do

not believe that it is, for a number of reasons.

The primary reason is that the emission limitation and reduction targets agreed

to in Kyoto are simply too much and too soon for most industrialized countries listed

in Annex B of the Protocol. Only the countries with economies still in the early to

middle stages of transition from centrally planned to market-based and a few others

are likely to meet these targets, and all of them for reasons other than actions taken

to address climate change.

Russia, Ukraine, and several other small countries will meet their Kyoto targets

because their economies have declined significantly and are not likely to recover by

the first commitment period of the Protocol from 2008 to 2012. Germany will

achieve emission levels by 2010 that are below 1990 levels because of the large reVerDate 13-MAR-2000 12:07 Mar 13, 2000 Jkt 010199 PO 00000 Frm 00056 Fmt 6633 Sfmt 6621 E:\HEARINGS\59434PL.XXX txed02 PsN: txed02
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ductions in the former East Germany as a result of closing many inefficient energyintensive facilities. The United Kingdom will achieve lower emission levels because

it restructured its electricity sector and allowed utilities to purchase cheaper, cleaner, lower-carbon natural gas instead of more expensive coal that results in more

than 60% higher CO2 emissions than natural gas. Luxembourg will reduce emis- sions by closing its old, inefficient steel mill.

ROLE OF CAPITAL STOCK TURNOVER

However, none of these countries will have lowered its emissions by taking actions for climate-change reasons that were not otherwise justified either for political or

economic reasons. In particular, none of them are replacing capital stock prematurely for climate reasons. This is an important point, because it is the capital

stock lifetimes and turnover rates that constrain more than any other factor what

kind of emission limitation can be achieved in a given time frame without very high

economic costs.

Consider the typical average lifetimes of most of the capital stock that is associ- ated with emissions of CO2 the principal human-related greenhouse gas. These emissions come mostly from four sectors of the economy: transport, manufacturing

industries, electric power generation and buildings. People are now tending to keep their cars for up to 10 years or more. Trucks and buses are used for longer, perhaps 15 or 20 years, airplanes for 20 or 25 years, and

ships for even longer. Manufacturing plants last from 10 to 30 years, with the largest facilities (steel mills, chemical plants, etc.) at the high end of this range. Power

plants are used from 30 to 50 years. Buildings usually last 50 to 80 years (some

less but others even longer). With capital stock turnover rates reflecting these lifetimes, it is impossible for me to see how most countries can meet their Kyoto targets in the very short time frame

that begins in only 8 years and 8 months. Some incentives could be provided to accelerate somewhat the turnover of capital stock, but this would result in only a marginal impact relative to the inertia of most of our infrastructure and equipment. And

it is not guaranteed that the replacement will necessarily result in significantly

lower greenhouse emissions, since business and consumer choices are influenced by

many factors other than climate-change concerns.

OUTLOOK FOR EMISSIONS AND THE KYOTO FLEXIBILITY MECHANISMS

To get a clearer picture of the impact of the Kyoto targets on individual countries, I have developed projections of emissions of each Annex B (industrialized) country

for 2010 under two different scenarios. These estimates, which are described more

fully in Attachment 2 to my statement, cover each of the greenhouse gases controlled by the Kyoto protocol and are broken down by sector and, for CO2 from fuel

combustion, also by fuel (i.e., coal, oil and natural gas). These estimates are generally in line with those done by others, including the US Energy Information Administration, the International Energy Agency in Paris, and

even the individual governments themselves, as reported to the secretariat of the

UN Framework Convention on Climate Change. Almost everyone’s estimates show

the same thing: most Annex B countries are not projected to meet their Kyoto targets. However, the Kyoto Protocol also provides three mechanisms through which coun- tries can obtain credits toward their targets by cooperating with other countries.

One of these mechanisms, pushed especially by the United States, is international

emission trading, that is, the transfer of emission rights or allowances from one

Annex B country to another. The other two mechanisms that provide flexibility in

meeting emission targets are related to specific projects on other countries. Joint implementation (JI) of projects by two or more Annex B countries can create emission

reduction credits that can be shared among these countries. The Clean Development

Mechanism (CDM) encourages projects in developing countries and can generate

emission reduction credits for the Annex B donor country.

THE DEMAND FOR EMISSION CREDITS FAR EXCEEDS THE LIKELY SUPPLY

The big question is: can these flexibility mechanisms provide enough credits to

allow countries, in particular the US, to meet their Kyoto targets at an acceptable

cost? Based on the emissions projections for each country, I have estimated the outlook for credit demand and availability. If a country is projected to exceed its Kyoto

target under either of the scenarios, the difference between the projected emission

level and the target translates into a demand for credits. If a country’s emissions

would fall below its Kyoto target (as in Russia and a few other countries), the difference represents a potential supply of emission credits.

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The results of this comparison show that the demand for credits among OECED

countries ranges from somewhere more than 1.7 billion tonnes of CO2 equivalent in

the most optimistic scenario to almost 3 billion tonnes if current trends continue.

The largest part of this is the US shortfall relative to its Kyoto target, which is

about 1.2 billion tonnes of CO2 equivalent in the best case, after every economically

and politically feasible domestic measure has already been taken, and is almost 1.8

billion tonnes if current trends continue.

The supply of possible emission credits is less than this demand. The maximum

potential supply of credits available through emission trading is less than 1.3 billion

tonnes of CO2 equivalent under scenario where the economies of Russia and other

eastern European countries fail to recover from their current problems and continue

to stagnate until 2010. This scenario, which would produce barely enough surplus

credits to cover the US deficit, if we could somehow obtain all of them, should be

a cause of considerable concern to us from other perspectives, such as global economic stability or national security.

Under the scenario where these countries’ economies recover, the potential supply

of emission credits available for trading is only about 250 million tonnes of CO2

equivalent. This if far less than the minimum demand by OECD countries for such

credits and more than an order of magnitude less than the demand if current trends

continue.

For a variety of reasons discussed in the paper attached to my statement, I believe that Russia, the source of most of the credits potentially available through

emissions trading, will not actually trade much, if any, of its surplus. The government has already indicated that it prefers the project-based approach, which will

attract both investment capital and technology that are sorely needed to help modernize the Russian infrastructure.

The supply of credits from the project-based flexibility mechanisms is inherently

much less than trading-based supply. Each project must be organized, certified for

that the reductions are additional to those that would have occurred anyway, and

meet all the other criteria still to be defined. This means delays in starting and limited volumes of credits once the projects are implemented. A project-based credit

supply from the central and eastern European countries (through JI) is probably

only about 100 to at most 300 million tonnes, or about 10% of the demand from the

OECD countries.

The analysis of potential availability of credits from the flexibility mechanisms

must also consider the availability of credits from countries outside Annex B

through the Clean Development Mechanism (CDM). These credits will only be from

actual projects in these countries, which inherently limits the possible supply. Moreover, credits from each project must be certified in accordance with various guidelines and criteria, as discussed above. Credits from the CDM will be slow in coming

not only because of the need to agree on guidelines, etc., but also because of a likely

long debate over how the CDM governance is to be structured. A prudent estimate

is that 200 to 300 million tonnes would be a likely upper end of the range for CDM

credits by 2010.

Overall, I would estimate the likely total supply of emission credits from all three

Kyoto flexibility mechanisms at between 200 and 500 million tonnes per year. This

implies a very significant number of project sin other countries, perhaps from 3,000

to as many as 10,000 projects, which would represent an amazing achievement in

terms of the administrative effort required to organize and approve all these

projects. But the resulting best-case credit supply is less than 30% of the minimum

demand for credits by OECD countries under the most optimistic scenario, and the

low estimate of credit supply is less than 7% of the OECD credit demand if these

countries continue their current trends.

THE COST OF EMISSION CREDITS WILL NOT BE CHEAP

Let me say just a few words about the possible cost of credits. I do not believe,

as some apparently do, that they will be cheap. Any future international market for

emission credits is going to be dominated by the largest buyers (in this case the US)

and the largest sellers (most likely Russia, at least in the near term).

In such a situation where the demand for credits far exceeds the supply, the price

of such credits is likely to rise to close to the marginal cost of emissions reductions

for the largest buyer of credits. Why would Russia, or another country with credits

to sell make them available for significantly less than the buyer would otherwise

have to pay to achieve the same emission reductions through domestic measures?

One may conclude from this that the cost to the US of achieving the Kyoto target

with full use of the flexibility mechanisms is likely to be only slightly discounted

below the cost that would be incurred without the mechanisms.

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One source of confusion is that many economists refer only to the marginal costs

of achieving emission reductions in the United States in comparison to these costs

in other countries. This assumes the full cost of a project has already been met except for that cost necessary to gain the additional emission reduction. But this may

not be a reasonable assumption in a number of these other countries.

For example, the administration has funded and provided technical assistance

(from DOE and EPA) in preparing a ‘‘Country Study’’ of Russia and its options for

responding to climate change. This study estimates the cost of emissions reductions

in the energy sector (where most of the potential exists) at $200 to $300 per tonne

of carbon equivalent. But the administration has testified that the cost of emission

credits in the international market should be between $14 and $23 per tonne. This

is a huge difference.

The difference is due to the difference between full cost and marginal cost. The

country study is referring to full cost while the low estimates are only marginal

costs. But in Russia and many other countries, unless the full cost of many projects

is funded by outside sources, the projects simply will not materialize and the marginal costs of emission reductions will exist only in economic theory. And few sellers

in a real market sell at cost anyway. When was the last time any member of this

Committee obtained a meal in a Washington restaurant at cost?

For these and other reasons, I would estimate the likely price of emission credits

in a real international market, if one should ever come into being before 2010, at

somewhere between $150 and $200 per tonne of carbon equivalent (about $40 to $55

per tonne of CO2).

OUTLOOK FOR RATIFICATION AND ENTRY INTO FORCE OF THE PROTOCOL

Article 25 of the Protocol specifies the conditions for entry into force of the Protocol. The Protocol will enter into force 90 days after at least 55 countries have ratified or acceded to the Protocol, provided that these countries account for at least

55% of the CO2 emissions in 1990 of the industrialized countries (those listed in

Annex I of the UN Framework Convention on Climate Change).

The US accounted for about 35% of Annex I CO2 emissions in 1990, which alone

is not sufficient to block entry into force of the Ky9oto Protocol. However, a number

of other countries are very likely to wait until the US ratifies before they do so, particularly countries with strong trade and other economic ties to the US such as Canada and Japan.

The 15 Member State of the European Union must ratify all at the same time

as a group because they intend to be treated as a block or ‘‘bubble’’ under the provisions of Article 4. If any Member State ratifies alone, it is subject to the 8% reduction target that is listed for each EU country in Annex B and only a minority of

EU countries are likely to be able to reach such a target. This means that if any

EU country holds back, then all 15 countries are effectively held back from ratifying, and some EU Member States may wish to wait in order to put pressure on the

US.

The likely consequence of this dynamic is that the Kyoto Protocol is unlikely to

enter into force for several years. During that time most countries’ emissions will

have continued to rise in line when current trends. With each passing year not only

will their emissions levels be farther above their Kyoto targets, but they will be one

year closer to 2008, when the targets become binding. It will become apparent that

meeting the targets will be impossible for almost all of them.

This creates a certain dilemma, since the only way to achieve sufficient ratifications to trigger entry into force appears to be a renegotiation of the targets to bring

them more in line with reality. But the targets can not be amended except by the

Parties to the Protocol after it has entered into force. One way around this dilemma

might be negotiation of a separate legal instrument (treaty) that would be ratified

together with the Protocol, would enter into force simultaneously with the Protocol,

and would modify whatever provisions of the Protocol were necessary in order to

allow key countries to ratify.

The new instrument would be negotiated sometime between 2003 and 2006. Its

provisions might include:

A realistic set of differential targets for the Annex B countries, much more accurately reflecting national circumstances and what might actually be achieved by

each country.

A new first commitment period, say from 2013 to 2017 at the earliest. The original 2008–2012 period would already be too soon to get agreement on targets that

reflected any significant change from then current emission trends.

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A new base reference period, possibly a multi-year average of 1998–2002, which

would be much more realistic than continuing to refer back to 1990 and could also

adapt for year-to-year variations due to weather, electricity trade and other factors.

The inclusion in Annex B of some newly industrialized countries such as Korea

and Mexico and maybe a few others, provided the targets were set on a reasonable

and realistic basis.

The clarification of the rules, guidelines, criteria, etc., for the flexibility mechanisms, and establishment of the governance for the Executive Board of the CDM.

A longer-term collective target for 2025 or later that would send a signal for development of new technologies and would be conditional on evidence that such technologies were actually feasible (technically, economically and politically).

Such an agreement would correct the shortcomings of the Kyoto Protocol and

would establish a more reasonable and stable process for responding to global climate change on an international level.

That concludes my statement, Mr. Chairman. I would be happy to try to answer

any questions you or any member of the Committee may on any of the points raised

in my statement, in any of the attachments, or on any other aspects of the climate

change issue where I may be able to contribute to shed some light on various aspects of this complex issue.

Attachments

(1) R.A. Reinstein, ‘‘Some Comments and Suggestions on IPCC’s Work,’’ prepared

for the 14th IPCC Plenary Session, Vienna, September 1998.

(2) R.A. Reinstein, ‘‘Kyoto Protocol: Emissions Outlook & Flexibility Mechanisms,’’

based on a paper originally presented to the Electric Utilities and Environment Conference in Tucson, AZ, on 11 January 1999. The estimates of national GHG emissions have subsequently been updated and the tables here reflect those revisions.

(3) R.A. Reinstein, ‘‘The Kyoto Protocol and Energy-Intensive Industries,’’ February 1999.

(4) R.A. Reinstein, ‘‘Kyoto Goals: The Impossible Dream,’’ in Foreign Service Journal, March 1999.

SOME COMMENTS AND SUGGESTIONS ON IPCC’S WORK

The following comments and suggestions related to IPPC’s work are offered in the

author’s personal capacity and are based on more than ten years’ experience with

climate change issues, nearly 25 years’ experience with economic and energy policy

issues, and 40 years’ experience with scientific issues.

It is my hope that the experts gathered for the IPCC meetings in Vienna will find

them of some use in helping to frame and focus IPCC work over the next few years.

The intent of these suggestions is to encourage IPCC results that are credible and

useful to a broad audience and to avoid as much as possible confrontational areas

where the objectivity and appropriateness of IPCC’s work may be questioned.

My principal suggestions for IPCC work, which are discussed in more detail

below, include the following:

Distinguish very carefully between ‘‘human influence’’ and causality, especially

the (lack of) ability of present science to attribute individual climate events or patterns to anthropogenic emissions.

‘‘Inform’’ public policy by indicating and quantifying where possible the risks of

certain changes and impacts that may be associated with human activity in order

to facilitate decision making that ultimately must be left to the public officials responsible for these policies.

In particular, leave to the international process under the Framework Convention

the essentially political determination of what constitutes ‘‘dangerous anthropogenic

interference with the climate system.’’

Give greater attention to adaptation to climate change, since there will be climate

change in any case, in light of the vulnerability of different countries to the impacts

of climate change, particularly with regard to their level of economic development.

Identify as much as possible the critical impacts that go beyond the normal ability

of people to adapt to climate change regardless of the causes of such change, as well

as those affecting vulnerable ecosystems which may be unable to adapt naturally

or with human assistance.

Give priority attention to assessing why many ‘‘no-regrets’’ measures have not

been able to advance farther and, where possible and appropriate, identify government policy options for facilitating faster implementation of those no-regrets measures that may be currently discouraged as a result of unnecessary, non-economic

market barriers.

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However, avoid judging any specific measure as ‘‘no-regrets’’ regardless of dif- ferences in national circumstances, leaving to each individual government to make

the judgment as to what is justified as ‘‘no-regrets’’ in its specific situation. Continue and extend earlier work on the possible feasibility of various technology options in terms of three types of feasibility: technical, economic and market. Be very careful to avoid any kind of general and in particular static assessment of the economic feasibility of technological options, but identify as much as possible

the factors that influence economic feasibility while leaving the actual feasibility determination to be made by those who must actually make the investments. Identify where possible not only the feasibility factors themselves for assessing the three types of feasibility but also analytical tools for applying these factors within a specific national situation.

HUMAN INFLUENCE VERSUS CAUSALITY

Recent studies have increasingly revealed the complexity of the global climate sys- tem. While models are able to suggest how the system might respond to changes

in certain forcing functions, such as anthropogenic GHG emissions, all other things

being equal, the fact is that not all other things are equal. Various factors interact

with one another in very complex ways not yet fully captured by the models. It is now known, for example, that on different occasions many centuries prior to the industrial age, the climate system has undergone significant changes in relatively short periods of time as a result of natural forcing factors. We do not yet

know why or how this happened. And without knowing why or how, it is extremely

difficult for us today to predict with any reasonable certainty what the climate of

20, 50 or 100 years from now is likely to be.

This essential complexity of the system makes it very difficult if not impossible,

based on present scientific understanding, to identify specific results that will occur

if specific mitigation measures are taken in order to avoid climate change. Any

human-induced climate change takes place against a background of natural climate

change. This natural climate change will occur in any case, and a degree of humaninduced change may also occur because of emissions that have already been released

to the atmosphere or that will be released in the coming decades.

However, it is not possible to say today that any particular climate pattern of the

present or future has been explicitly caused by human behavior. There is a significant difference between ‘‘influence’’ and ‘‘causality.’’ It may be possible that humans

are influencing the climate system. But our current understanding does not allow

us to say that humans are causing the climate events, which are due to a very complex mix of factors, many of them natural.

The IPCC, and Working Group I in particular, needs to be very careful in making

this distinction. It is an important one, and seems to be not fully appreciated by

at least some high-level government policy makers. For the sake of its credibility,

the IPCC must make it very clear that taking any particular actions to mitigate climate change, while they may be justified for various reasons, will not mean that

humans can through these actions avoid any specific climate events. This would be

like King Canute, who tried to order the tides to be held back.

SCIENCE AND PUBLIC POLICY

In light of this near-impossibility of attributing specific climate events and patterns directly to human greenhouse gas emissions, policy makers are faced with a

major dilemma. How can a cost benefit analysis be done that will explain to the

public what benefits would result from emission limitation measures that may be

quite costly?

There are continuing debates about what these costs might be, but there is even

more uncertainty about what the benefits might be in terms of avoided climate

change. At present, we do not know what climate change may occur from natural

causes, we do not know what portion of the observed climate change may be due

to human causes, and we can not say that such and such climate events or patterns

simply will not occur if these mitigation actions are taken.

Part of the response to this dilemma, for the IPCC, lies in being very clear about

the role of science in relation to public policy. Science can and in fact must ‘‘inform’’

public policy. Decision makers need to understand as much as possible what is

known, what is presently not known, what may be known in the relatively near future, and what probably can never be known with any degree of certainty.

But ‘‘informing’’ public policy is not the same as ‘‘guiding’’ public policy. The IPCC

needs to be very clear that the various assessment and special reports of the Panel

can not tell policy makers what they should do. These reports can only facilitate informed decision making. The decisions themselves must be made by the public offiVerDate 13-MAR-2000 12:07 Mar 13, 2000 Jkt 010199 PO 00000 Frm 00061 Fmt 6633 Sfmt 6621 E:\HEARINGS\59434PL.XXX txed02 PsN: txed02
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cials responsible for these policies and not by the scientists and other experts that

prepare the IPCC’s reports.

The ultimate objective of the Convention, the Kyoto Protocol, and any other legal

instruments that may be adopted by the Parties is to achieve ‘‘stabilization of greenhouse gas concentrations in the atmosphere at a level that would prevent dangerous

anthropogenic interference with the climate system.’’ It should be understood that

this objective is basically political.

While science can inform the decision-making process by indicating and quantifying where possible the risks of certain changes and impacts that may be associated with human activity, only politicians can define what is ‘‘dangerous.’’ This will

depend on the specific circumstances of each country, the level of human influence

it may be willing to tolerate in its situation, and its (essentially political) relationships with other countries regarding the impacts on other countries and the global

system. The process that continues to evolve under the UN Framework Convention

on Climate Change is the appropriate place for these questions to be worked out

among different governments.

The question is then: Given the complexity of the climate system and inability to

be able to separate the specific effects of human emissions from the broader natural

mechanisms that cause climate change, and given the essentially political character

of the ultimate objective of the legal instruments that governments have adopted

and will adopt to address climate change, what role can science play?

It would seem that science, in particular but not exclusively through the IPCC

reports, can inform the decision-makers by identifying the kinds of effects that may

occur from human activity and the direction (positive or negative) and approximate

magnitude of such effects, and should leave to the politicians decisions as to what

kind and degree of precautionary or risk-avoidance measures should be taken in

light of this information.

IMPORTANCE OF ADAPTATION

The IPCC needs to give greater attention to adaptation to climate change. We already know that there will be climate change in any case. All countries everywhere

in the world must find ways to adapt to this change. This is nothing new. Since

the origin of the human race, people have had to adapt to climate change of considerable magnitude, and with far fewer resources than are available to people living

today.

Humans have shown a marked ability to adapt to climate change over the centuries, including to ice ages when modern means of protecting against the cold were

not available. The IPCC should take note of how adaptation has taken place in the

past and how such adaptation measures may serve to adapt to future climate

change. One might learn, for example, from the people living along the Bay of

Fundy in eastern North America, where the change in sea level every six hours as

a result of the tides exceeds 10 meters in many locations. There are many instances

of remarkable adaptation shown by people once they understand that adaptation is

necessary.

When one speaks of the impacts of climate change, it is important to note that

the actual impacts that will occur in any location are net impacts, after adaptation.

Since a significant degree of adaptation will occur in any case, as it has over many

centuries, the critical impacts that must be identified and addressed are those that

go beyond the normal ability of people to adapt to climate change regardless of the

causes of such change, as well as those affecting vulnerable ecosystems which may

be unable to adapt naturally or with human assistance.

This in turn leads to an examination of the vulnerability of different countries and

peoples to a range of possible changes in the climate system. While geographic location and circumstances can clearly be important, as in the case of small islands and

low-lying regions, the greatest degree of correlation of vulnerability to climate

change impacts is with the level of economic development.

At lower levels of economic development, people are more tied to activities, especially subsistence agriculture, that are specific to a given location. As development

proceeds, a greater portion of economic activity is flexible with regard to location,

thus reducing the potential vulnerability to sea-level rise, storms and other climate

events that may cause adverse impacts.

Similarly, vulnerability to increases in the occurrence of tropical diseases, for example, depends very much on level of economic development and the resulting advancement of health-care systems. There are many countries in the world today

with similar climates that might cause vulnerability to the incidence of vector-borne

diseases, but these countries differ greatly in the actual occurrence of these diseases

because of differences in level of development and health care.

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In addition to being necessary because there will be naturally occurring climate

change in any case, many adaptation measures are often the least-cost response to

climate change for a number of countries. For all of these reasons, the IPCC should

give greater attention in its future reports to the full range of measures that countries will need to consider as they adapt to that portion of climate change that cannot be avoided by any reasonable human actions.

In its work on these aspects of climate change, the IPCC should keep clearly in

mind both the time frame of impacts and the time frame of adaptation measures.

For example, the average lifetime of much of the building stock may be between 50

and 80 years. This means that if major sea-level rise is projected to occur at a given

location in roughly this same time frame, the buildings can simply be rebuilt on

higher ground as they would normally be replaced, without incurring major economic impacts as a result of this adaptation.

A more complete assessment of adaptation options will be of benefit to most of

the world, because all future generations will be faced with climate change from

natural causes, and perhaps also human causes, and will therefore be able to make

use of this work regardless of the outcome of current debates about the science of

anthropogenic climate change.

ASSESSMENT OF ‘‘NO-REGRETS’’ MEASURES

The preceding comments are not meant to suggest that adaptation should be the

principal or only response to climate change, but simply that a ‘‘balanced portfolio’’

of response strategies should have a good mix of both adaptation measures and mitigation measures. Many mitigation measures are justified not only for climate

change reasons but also for a number of other reasons. Such measures are often referred to as ‘‘no-regrets’’ measures because governments will not regret having taken

them even if human-induced climate change turns out not to be a significant threat.

In its earlier work the IPCC has already identified a large number of potentially

no-regrets measures. However, many of these, although they have been justified on

other grounds such as energy savings for many years now, still have not approached

their apparent market potential. The IPCC needs to give priority attention to assessing why such measures have not been adopted already.

There are many possible reasons for the failure of no-regrets measures to reach

their potential. In some cases there may be institutional, informational or other barriers to market penetration. In other cases the measures may simply not be economically justified when assessed in terms of real-world market conditions.

For example, combined heat and power (CHP), or cogeneration, is often identified

as a no-regrets measure because it can, in principle, result in very significant efficiency gains as compared with the separate production of electricity and heat. However, it requires that there be a relatively need for heat throughout the year, either

for industrial processing or for district heating. Thus, it has potential only near

power plants where there are industrial facilities not already using the waste steam

or where the climate is cold enough to require heating for a significant portion of

the year. It would probably not be considered economic to install district heating

from CHP in relatively mild climates.

The IPCC should examine the full range of reasons why no-regrets measures have

not been able to advance farther and, where possible and appropriate, identify government policy options for facilitating faster implementation of those no-regrets

measures that may be currently discouraged as a result of unnecessary, non-economic market barriers.

In this regard, however, it is important to note that the feasibility of any specific

emission limitation measure will depend very much on the individual circumstances

and conditions in each country and even in different parts of the same country.

What may be ‘‘no-regrets’’ in one situation may not be justified at all in a different

situation. While identifying potential measures in its work, the IPCC should be very

careful to avoid judging any specific measure as ‘‘no-regrets’’ regardless of these differences in circumstances. Each individual government must be left to make the

judgment as to what is justified as ‘‘no-regrets’’ in its specific situation.

ASSESSMENT OF TECHNOLOGY OPTIONS

The question of feasibility is obviously broader than simply the assessment of potentially ‘‘no-regrets’’ measures. The IPCC has already attempted to address this

broader issue even in its First Assessment Report. Earlier work has, inter alia, examined the possible feasibility of various technology options in terms of three types

of feasibility: technical, economic and market. This work needs to be continued and

extended.

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Even technical feasibility is not universal but may depend on circumstances. For

example, solar energy technologies require sunlight and wind technologies require

wind, and the relative availability of these inputs of nature is very location-specific.

Some technologies may require significant quantities of water, which is not equally

available in all locations. These factors need to be very carefully identified and listed for each technology assessed by the IPCC.

Economic feasibility is even more difficult to assess. Not only does it depend on

different conditions in different locations, but it varies over time and also depends

on the actions of other players in the market. For example, the economic feasibility

of fuel switching from coal to natural gas will depend on the relative availability

and prices of these two fuels at a particular location. However, both the availability

and the price of each fuel will change over time as a result of many market variables, including but not limited to resource depletion, changes in transportation

technology and economics, and so forth. And if many other players also decide to

switch fuels in the same relative time frame, this will cause the price of gas to rise

and the price of coal to fall, thereby altering perhaps significantly the initial assessment of economic feasibility.

In its assessments of economic feasibility, the IPCC needs to be very careful to

avoid any kind of general and in particular static assessment of the economic feasibility of technological options. As with technical feasibility, the IPCC assessments

should identify as much as possible the factors that influence economic feasibility

but leave the actual feasibility determination to be made by those who must actually make the investments.

The most difficult task is assessing market feasibility. This component of feasibility must take into account political factors, public attitudes, consumer preferences, aesthetics, ‘‘lifestyle’’ issues, and many other things that are extremely difficult to assess and often even to identify. Such differences help to explain why a

particular technology, such as nuclear power, may be acceptable in one market but

not in another, even if the technical and economic feasibility determinations are essentially the same for both markets.

As another example of the importance of assessing market feasibility, US auto

manufacturers, at government urging, produced many small cars in the late 1970s,

only to find that not enough consumers were willing to buy them, even though they

were technically sound and clearly economic in light of the high price of fuel at that

time. Subsequent research showed that many factors affected the purchasing decisions of consumers, including performance, safety and transport capacity (for both

passengers and baggage), as well as such emotional factors as ‘‘image.’’

More recently, some wind machines have been rejected by local populations on

aesthetic and animal welfare grounds. It has been argued in some of these instances

that the new, modern and efficient machines, which have finally improved their economic feasibility, are ugly when deployed in large numbers and destroy too many

birds. This illustrates that implementation on a larger scale, while usually improving economic feasibility, may have the opposite result with regard to certain market

feasibility factors.

The IPCC will not be able to, and should not attempt to, assess feasibility in specific national situations. Feasibility can not be assessed in the abstract but must be

judged in the individual situation. This is the job of national governments and of

individual investors.

As with technical and economic feasibility, however, the IPCC can provide important help to governments and others in trying to identify the full range of relevant

market feasibility factors that influence the ability of any particular technology to

penetrate a given market. Moreover, the IPCC could provide a very important service by identifying not only the feasibility factors themselves but also analytical tools

for applying these technical, economic and market feasibility factors within a specific national situation.

It should further be noted that many technologies, including ‘‘soft’’ technologies

or techniques, are not proprietary but are already in the public domain. The IPCC

can enhance the usefulness of its work by providing important information on such

technologies that are already freely available to developing countries and others.

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