Copyright 1999 Federal News Service, Inc.
Federal News Service
MARCH 25, 1999, THURSDAY
SECTION: IN THE NEWS
LENGTH:
7259 words
HEADLINE: PREPARED STATEMENT OF
LEROY
KOPPENDRAYER
BEFORE THE SENATE ENERGY AND NATURAL RESOURCES
COMMITTEE
BODY:
Introduction
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.
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.
Conclusion
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.
JANET YELLEN
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.
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.
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.
END
LOAD-DATE: April 15, 1999
