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Chairman Murkowski, members of the Committee, I appreciate this opportunity to present testimony on behalf of the Nuclear Waste Strategy Coalition (NWSC). The Nuclear Waste Strategy Coalition is an ad hoc group of State utility regulators, State attorneys general, and utilities representing 41 member organizations in 24 states. The Coalition seeks safe, cost-effective, and timely central storage and disposal of civilian high-level waste from nuclear power plants. The Nuclear Waste Policy Act of 1999 (S.608) before you will provide much needed, comprehensive reform of America's civilian, high-level radioactive waste disposal program.
The Department of Energy (DOE) defaulted over one year ago on its contracts to begin removing nuclear waste from power plants. Americans have already paid over $15 billion for nuclear waste disposal services we are not getting. We continue to pay at a rate of $70,000 every hour. Tons of high-level radioactive waste are now stranded at 73 sites in 34 states by the Department of Energy's failure to begin removing it last winter as promised in statute and contract. Because of this missed deadline an additional $40 billion to $80 billion in costs are threatened. Clearly, it is time to act.
Missed deadlines and further delay are unconscionable. Americans expect the federal government to take actions that best protects us and avoids squandering tens of billions of dollars of our money. After sixteen years and a deadline that DOE promises to miss by at least 12 years, the time to fix this program is way past due.
Confronting Excuses.
The federal government's obligation, ability, and authority to provide transportation and central storage and disposal of civilian high-level radioactive waste has frequently been misrepresented. In addition, the delaying of central storage and disposal in Nevada has wrongly been portrayed as stopping the storage of nuclear waste, when instead it launches a massive, and vastly expensive building program to store nuclear waste not at one site, but at 73 sites in 34 states. I urge Committee members to remember that the goal is to physically move, store and dispose of this radioactive waste in the best way we are now able and not be distracted by those seeking endless delay.
The U.S. Department of Energy.
To date, the Department of Energy's civilian nuclear waste program has produced only progress reports. Progress reports, including the Viability Report, are not what Americans have paid for. We have paid to have high-level radioactive waste removed from power plants beginning by January 31, 1998. We have paid for the safe, centralized temporary storage and permanent disposal of nuclear waste from power plants. DOE is not fulfilling this obligation when it misses deadlines. Progress reports do not substitute for actual performance.
In its 1996 Indiana Michigan decision, the U.S. Court of Appeals affirmed that DOE was obligated to start moving waste on January 31, 1998, Awithout qualification or condition DOE ignored the Court prompting 46 state agencies and 36 utilities to again seek relief from the Court. In 1997, the Court observed:
AAfter issuing our decision in Indiana Michigan, we would have expected that the Department would proceed as if it had just been told that it had an unconditional obligation to take nuclear materials by the January 31, 1998, deadline. Not so. Quite to the contrary ...
As a result, the Court issued a writ of mandamus to the DOE on November 14, 1997. In that order, the Court explicitly found DOE authorized to begin providing temporary central storage of spent nuclear fuel from civilian power plants.
AGiven DOE's repeated attempts to excuse its delay ... we ... issue a writ of mandamus to correct the Department's misapprehension of our prior ruling. ... (S)pecifically we preclude DOE from concluding that its delay is unavoidable on the ground that it has not yet prepared a permanent repository or that it has no authority to provide storage in the interim. (Emphasis added.)
United States Court of Appeals decision in Northern States Power Company, et al., No. 97-1064 consolidated with Nos. 97-1065, 97-1370, and 97-1398.
In late 1998 decisions, the D.C. Circuit of the U.S. Court of Claims again affirmed DOE's obligation. The Court of Claims then extended earlier decisions by the Court of Appeals to recognize federal government liability for costs mounting as a result of DOE's missed deadline to remove waste for central storage and disposal. In testimony presented before the 104th and 105th Congresses these costs have been estimated to be at least $40 billion to $80 billion. These are the costs of delay.
The cost of delay is separate, and in addition to, the cost of providing central storage and disposal of civilian high-level radioactive waste. Electric ratepayers pay one tenth of a cent per kilowatt hour of nuclear electricity into the Nuclear Waste Fund for central storage and disposal of nuclear waste. Ratepayer payments into the Nuclear Waste Fund are to pay for the work of disposal. In contrast, damages awarded by the U.S. Court of Claims are for the costs of delaying that very work. These costs are rightfully paid from the U.S. Treasury's Judgments Fund, and not from the Nuclear Waste Fund.
Using money from the Nuclear Waste Fund to pay damages resulting from DOE's missed deadline to perform would divert these funds from their intended purpose, violating the original statute under which they were collected. Since ratepayers would be assessed the costs of Nuclear Waste Fund expenses, using the fund to pay damages would amount to ratepayers paying themselves damages.
Beyond DOE's obligation to perform, DOE has also stated for the record that it is physically able to transport and store spent nuclear fuel and other high-level radioactive waste. During the past 35 years, the federal government has averaged 68 non-commercial spent fuel shipments per year. Through the year 2010, the federal government has committed to make 3,819 shipments (382 per year) of such non-commercial high- level nuclear waste. The technology, facilities, managerial expertise, and experience are already in place and being used to do so safely. DOE has publicly affirmed this on numerous occasions including in the Court record.
THE COURT: (Y)our brief, ... on page 6 ... seems to imply that it would be possible to establish an interim storage program. ...
MR. BRYSON (Representing DOE): Well, we don't think we have the statutory authority to do that. I mean physically --
THE COURT: Forgetting a moment the statutory authority, it's physically possible, isn't it? MR.

BRYSON (Representing DOE): It certainly is, Your Honor, ...
See Transcript of Proceedings in the United States Court of Appeals for the District of Columbia Circuit, Northern States Power Company, et al. v. Department of Energy and the United States of America, No. 97-1064, page 29, lines 4 to 19, Washington, D.C., September 25, 1997.
Ongoing shipment, and storage, of spent nuclear fuel from 41 foreign countries, the Navy, and research reactors demonstrate DOE's existing capability to transport, and centrally store U.S. civilian waste.
DOE is also legally authorized to act. DOE earlier successfully argued in the 10th Circuit of the U.S. Court of Appeals that it is authorized to transport and store civilian waste from power plants. When asked by the D.C. Circuit of the U.S. Court of Appeals if it wanted to surrender its authority recognized by the 10th Circuit Court of Appeals, DOE declined.
DOE is obligated, able, and authorized to provide the nuclear waste storage and disposal services the American people have paid for. It is intolerable that in missing its deadline DOE claims that at best it will perform 12 years late; and then only if everything goes perfectly. We believe that comprehensive legislation such as S.608 is the best prospect to remedy this vexing problem.
The U.S. Nuclear Waste Technical Review Board.
The Nuclear Waste Technical Review Board (NWTRB) was established to provide engineering and scientific input and oversight to the federal nuclear waste program. Although seldom stated, the NWTRB has acknowledged it is equally safe to centrally store nuclear waste, and to transport waste to that site, as it is to store nuclear waste at plant sites. A DOE-sponsored national assembly of State emergency management officials agreed noting that non-commercial high-level nuclear waste is moving safely and being centrally stored, and we should do the same for commercial waste.
Responsible stewardship of public money dictates that given two safe options, we should take the one that avoids squandering tens of billions of dollars. There is every scientific and economic basis to proceed with nuclear waste transportation, central storage and disposal. The NWTRB's research presents no evidence favoring leaving waste stranded at power plants.
Environmental Protection Administration (EPA).
Regarding the temporary storage of nuclear waste, we challenge EPA to tell us, if not the Nevada atomic test site, where? The alternative cannot be Anowhere because nuclear waste already exists. It has to be somewhere. The alternative to centralized temporary storage is not the absence of temporary storage. Rather it is stranding high-level radioactive at 73 power plants in 34 states -- every one on a major body of water and near population centers.
Does EPA really want to compare every power plant site in America to the Nevada Test Site regarding its environmental desirability for long term nuclear waste storage? Does EPA really think that environmental protection means indefinitely stranding nuclear waste in 34 states on the shores of our lakes, rivers, and oceans? Is this the best we can do as a nation?
Americans are right to expect the federal government to move waste to a central location because that best protects public health, safety, and the environment and saves tens of billions of dollars. High-level nuclear waste is best stored, and disposed of, in a place that is remote, arid, and was once used to explode atomic bombs -- a place like the Nevada atomic test site. Even if something completely unexpected precludes using that site for permanent disposal, it remains the best site for long-term storage and best protects the environment while a permanent disposal facility is completed.
Its time to get the job done.
Let me now turn to the 6 points the Nuclear Waste Strategy Coalition believes are critical to reforming the U.S. civilian radioactive waste program. To overcome past problems of the program's lack of public confidence, cost escalation, schedule lapses, and the risk of diverting ratepayer money from the Nuclear Waste Fund, 1999 legislation reforming the Nuclear Waste Policy Act must:
1. Begin waste removal -- The federal government is unconditionally obligated to begin removing radioactive waste from the 73 temporary storage sites now at nuclear electric power plants in 34 states. It is not sufficient to simply take title or possession of the waste. The federal government must begin to remove waste from power plants across the nation and provide centralized temporary storage while the permanent disposal facility is being completed.
2. Release ratepayer's money for intended purpose -- The American public is right to expect that the ratepayer-funded Nuclear Waste Fund will be used to address nuclear waste and that Congress will appropriate the necessary money from the fund to do so. In the next year alone, electric ratepayers will pay over $600 million into the Nuclear Waste Fund. The United States government promised to use these funds to begin removing high-level radioactive waste and to provide for its permanent disposal.
Over $15 billion, including interest, has been paid into the Nuclear Waste Fund and nearly $8 billion remain held in trust by the federal government. Recognizing the complications of the federal budget scoring process, it is simply unimaginable to many that the 106th Congress would take ratepayer's money in the Nuclear Waste Fund for other purposes. This money was collected to provide safe, timely, and cost-effective centralized storage and permanent disposal of civilian high-level radioactive waste. The American people are right to expect it will be released for this purpose, not kept to provide accounting camouflage for other federal spending. Use of the Nuclear Waste Fund for other purposes would be an unjust and fraudulent tax on the American electricity consumer.
3. Provide a central temporary storage facility -- A temporary, centralized radioactive waste facility must be authorized, sited in Nevada, and funded to provide the United States with timely, safe, and cost-effective interim storage of radioactive waste. Congress must establish an aggressive waste acceptance schedule for storing waste in the interim facility. This facility must augment and facilitate our nation's permanent radioactive waste disposal program, not replace it.
4. Continue a permanent disposal program -- Characterization of the Yucca Mountain, Nevada site must continue. State governments, utilities, and the public have acted in reliance on the federal government's promise that waste would be removed from power plant sites beginning in 1998 and permanent disposal provided. To ensure that deep geologic disposal remains an essential program element, within budget constraints, the program must improve management structure to reflect program priorities and provide incentives for efficiency.
5. Facilitate transportation -- Authorize the designation, construction and operation of facilities to transport civilian high- level radioactive waste to a central temporary storage site and to a permanent disposal facility. Provide necessary transportation corridors and rights-of-way to ensure access to the designated temporary storage facility and the permanent disposal facility.
6. Cap the Nuclear Waste Fund fee -- Cap the Nuclear Waste Fund payments at the present one-tenth of a cent per kilowatt-hour to ensure that the program costs resulting from past performance problems of the federal government are not shifted to electricity consumers.
These six elements are needed in final legislation reforming the Nuclear Waste Policy Act to protect continuing consumer investment in the Nuclear Waste Fund that already exceeds $15 billion, and to ensure that the federal government fulfills its obligations for the interim storage and permanent disposal of civilian high-level radioactive waste. Civilian high-level radioactive waste now stored at 73 power plants in 34 states must be addressed. We believe legislation in 1999 is necessary and the time to enact it is now.
The Nuclear Waste Strategy Coalition cannot emphasize enough the need to enact comprehensive legislation such as S.608. We must transport, and centrally store and dispose of civilian high-level radioactive waste.

It is extremely important that we not be distracted or delayed by the those who would substitute ever lasting dialogue and Aprocess for actually doing the work that American's have not only paid for -- but trusted would be done.
The 106th Congress faces an ever more compelling call to action. The first anniversary of DOE's missed deadline has come and gone. The federal courts three times affirmed DOE's unequivocal obligation to have started removing nuclear waste from power plants by January 31, 1998. The U.S. Supreme Court chose not to even consider DOE's request for absolution from its obligations. Now, the U.S. Court of Claims has determined federal liability exists for continuing delay and is determining the amount of damages that will be paid. Estimated in previous Congressional testimony to total in the range of $40 to $80 billion or more, these costs of delay will be paid from the U.S. Treasury's Judgments Fund as damages under Court order.
I recognize that there are powerful special interests fighting to preserve the status quo -- to do nothing. Some of these special interests suggest that we are asking you to rush to judgment. If the 16 years in which we have wrestled with this dilemma is not enough time to see this program needs fixing, no amount of time will be enough.
Given the present status of America's civilian high-level radioactive waste program, comprehensive reform legislation such as S.608 is our best hope. DOE's nuclear waste program, while making minor progress at great cost, is not meeting the needs of the nation. Decisive action is needed now. The Senate must not miss this opportunity to enact the Nuclear Waste Policy Act of 1999.
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 AThe 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 on 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 Athe 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.
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 we have termed Awhen, Awhat, and Awhere, permit 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 arenas 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 issues 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 Administration'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 costs 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 carbon 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 particulate matter. These benefits alone could produce savings equal to about a quarter of the costs of meeting our Kyoto target.
The Administration released last year its proposed electricity restructuring legislation and the analysis supporting that proposal. The Administration's proposed Comprehensive Electricity Competition Act (CECA) is estimated to reduce greenhouse gas emissions by about 25 to 40 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' s CECA supporting analysis documents contain further discussion of the Administration's electricity restructuring proposal.
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 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 Organisation 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 Energy Modeling Forum comparison exercise of the Kyoto Protocol has included ten modeling teams from the United States, Europe, and Asia. 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., 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. For example, under Annex I trading SGM generates a permit price which is at the median of this set of models. 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 53% relative to a no trading scenario. Of these models, one estimated a 72% reduction in the permit price under Annex I trading. In full global trading, the permit price would be, on average, 80% lower than the no trading price. Several models estimated permit price reductions of about 90%.
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 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 price 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 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-CO 2 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 non- carbon 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 Agains 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 be 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.
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.
Margo Thorning, Ph.D.
Macroeconomic Effects of CO2 Emissions Limits Are Significant . A wide range of economic models predict that reducing U.S. CO2 emissions to either 1990 levels or to the Kyoto target (7 percent below 1990 emission levels) would reduce U.S. GDP and slow wage growth significantly, worsen the distribution of income, and reduce growth in living standards. If the United States is not able to take advantage of "where" flexibility (reducing emissions wherever it is cheapest globally) through international emissions trading to meet the Kyoto target, the cost in terms of lost output will range from about 1 percent to over 4 percent of GDP.
In addition, near-term emissions reductions would reduce U.S. competitiveness in energy- intensive manufacturing industries as well as in agriculture. Meeting the Kyoto e mission targets would make it much more difficult to sustain tax cuts or "save" social security, and could require sharp changes in fiscal policy to avoid deficit spending.
The Administration's Analysis is Questionable. The Administration's estimates of economic damage from CO2 emission reductions are far below those of other models due to unrealistic assumptions that global trading of emissions will be available in the near term and that developing countries will participate, and the use of an economic model (SGM) which appears to assume costless capital adjustments to energy price changes.
International Emissions Trading Issues Are Major. Emissions trading could substantially reduce the cost of complying with the Kyoto targets, especially if developing countries participate. Major obstacles to trading include securing developing country participation, allocating CO2 emission rights, and distributing the resulting revenue.
Conclusion: Kyoto Approach Isn't the Answer. U.S. goals in international climate policy meetings should include finding ways to involve developing countries in emission reduction, clarifying flexible mechanisms, and avoiding trading caps. Voluntary measures to reduce U.S. CO2 emissions should include modifications to U.S. tax policy that reduce the cost of capital for energy-efficient investment. Moreover, the introduction of carbon capture and sequestration techniques from central power facilities, soil sequestration, and reforestation could radically change both the cost and character of carbon mitigation. Adopting a thoughtfully timed climate change policy based on science, improved climate models, and global participation is essential, both to U.S. and global economic growth and to the eventual stabilization of carbon concentrations in the atmosphere.

LOAD-DATE: April 15, 1999

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