[House Hearing, 106 Congress]
[From the U.S. Government Publishing Office]



 
                    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



                      U.S. GOVERNMENT PRINTING OFFICE
59-434                        WASHINGTON : 1999



                      COMMITTEE ON SMALL BUSINESS

                  JAMES M. TALENT, Missouri, Chairman
LARRY COMBEST, Texas                 NYDIA M. VELAZQUEZ, New York
JOEL HEFLEY, Colorado                JUANITA MILLENDER-McDONALD, 
DONALD A. MANZULLO, Illinois             California
ROSCOE G. BARTLETT, Maryland         DANNY K. DAVIS, Illinois
FRANK A. LoBIONDO, New Jersey        CAROLYN McCARTHY, New York
SUE W. KELLY, New York               BILL PASCRELL, New Jersey
STEVEN J. CHABOT, Ohio               RUBEN HINOJOSA, Texas
PHIL ENGLISH, Pennsylvania           DONNA M. CHRISTIAN-CHRISTENSEN, 
DAVID M. McINTOSH, Indiana               Virgin Islands
RICK HILL, Montana                   ROBERT A. BRADY, Pennsylvania
JOSEPH R. PITTS, Pennsylvania        TOM UDALL, New Mexico
MICHAEL P. FORBES, New York          DENNIS MOORE, Kansas
JOHN E. SWEENEY, New York            STEPHANIE TUBBS JONES, Ohio
PATRICK J. TOOMEY, Pennsylvania      CHARLES A. GONZALEZ, Texas
JIM DeMINT, South Carolina           DAVID D. PHELPS, Illinois
EDWARD PEASE, Indiana                GRACE F. NAPOLITANO, California
JOHN THUNE, South Dakota             BRIAN BAIRD, Washington
MARY BONO, California                JANICE SCHAKOWSKY, Illinois
                     Harry Katrichis, Chief Counsel
                  Michael Day, Minority Staff Director




                            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


      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 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 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.
    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.
    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 
business-as-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 mytestimony 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.
    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 
sub-Saharan 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.
    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 isa 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.
    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 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?
    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'vehad 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.
    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 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 havehere, 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 best-case 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.
    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.
    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?
    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?
    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 
andmoisture 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 
pre-industrial 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 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.
    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.
    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.
    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?
    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.
    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.
    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 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.
    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, 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.
    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 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.
    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?
    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 inways 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.
    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.
    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 utilities, 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 world-scale 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 which there are no agreed 
rules yet, contribute about 3\1/2\ 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 best-case.
    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.
    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 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.
    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.
    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 so-called 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?
    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.
    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.
    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.
    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 5\1/
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.
    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.
    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 pure-market 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.
    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. Thegentlelady? 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.
    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.]
                 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 emissions 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 Administration'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 domestic 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 emission 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 Velazquez, 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 countries 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 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\
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    \1\ Please refer to the attached paper copy or http://
www.whitehouse.gov/WH/New/html/kyoto.pdf for a PDF version of this 
document.
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   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 
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 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 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.
---------------------------------------------------------------------------
    \2\ The results of the Stanford Energy Modeling Forum's Kyoto 
Protocol exercise will be published in a forthcoming issue of the 
Energy Journal.
    \3\ Please note that several modeling teams participating in the 
EMF exercise made presentations at the OECD workshop.
    \4\ PDF-formatted files of the OECD workshop proceedings can be 
downloaded from the OECD webpage at http://www.oecd.org//dev/news/
Environment/Modeling.htm.
---------------------------------------------------------------------------
    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%.
---------------------------------------------------------------------------
    \5\ Please 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.
---------------------------------------------------------------------------
    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 
tradingconstraint 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 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 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 ``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.
                               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 understanding 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 reductions in the 
former East Germany as a result of closing many inefficient energy-
intensive 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 
emissions 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 associated 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 countries 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.
    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 representan 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.
    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.
    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.
    However, avoid judging any specific measure as ``no-regrets'' 
regardless of differences 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 system. 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 human-
induced 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 
officials 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 rangeof 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.
    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.
    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 tobe 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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