Climate Change: Analysis of Two Studies of Estimated Costs of	 
Implementing the Kyoto Protocol (30-JAN-04, GAO-04-144R).	 
                                                                 
In 1992 the United States ratified the United Nations Framework  
Convention on Climate Change, which was intended to stabilize the
buildup of greenhouse gases in the earth's atmosphere but did not
impose binding limits on emissions. In July 1997, when		 
preliminary negotiations on a new climate agreement were under	 
way, the Senate passed a resolution expressing the sense of the  
Senate that the Clinton administration should not agree to limits
on U.S. greenhouse gas emissions if such an agreement did not	 
include economically developing nations or if it could seriously 
harm the U.S. economy. In December 1997 the United States	 
participated in drafting the Kyoto Protocol, an international	 
agreement to specifically limit greenhouse gas emissions. The	 
Protocol did not impose limits on developing nations' emissions, 
and its possible effect on the U.S. economy was the subject of	 
numerous studies during that period, including the two studies	 
that are the subject of this report. Although the U.S. government
signed the Protocol in 1998, the Clinton administration did not  
submit it to the Senate for advice and consent, which are	 
necessary for ratification. In March 2001, President Bush	 
announced that he opposed the Protocol. At a July 2002 hearing on
the administration's climate initiative, the Chairman of the	 
Council on Environmental Quality (CEQ) testified that		 
implementing the Kyoto Protocol would reduce U.S. economic output
by "up to $400 billion" in 2010. This estimate is similar to a	 
$397 billion estimate that appeared in a 1998 report by the	 
Energy Information Administration (EIA), an independent 	 
statistical and analytical agency within the U.S. Department of  
Energy. The EIA estimate differed from another, well-publicized  
estimate prepared the same year by the Council of Economic	 
Advisers (CEA), which found that the costs of implementing the	 
Protocol could be as little as $7 billion to $12 billion a year  
in economic output, depending on the extent of international	 
emissions trading allowed and the participation of developing	 
countries. Congress asked us to identify likely reasons for the  
differences between the two cited cost estimates ($397 billion	 
from EIA and $7 billion to $12 billion by CEA), based on (1) the 
economic models used to prepare these estimates and (2) the	 
assumptions incorporated into these models, including economic	 
assumptions and assumptions about how the Protocol would be	 
implemented.							 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-04-144R					        
    ACCNO:   A09183						        
  TITLE:     Climate Change: Analysis of Two Studies of Estimated     
Costs of Implementing the Kyoto Protocol			 
     DATE:   01/30/2004 
  SUBJECT:   Climate statistics 				 
	     Comparative analysis				 
	     Economic analysis					 
	     Air pollution control				 
	     International agreements				 
	     Cost estimates					 
	     Kyoto Protocol					 

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GAO-04-144R

A

United States General Accounting Office Washington, D.C. 20548

January 30, 2004

The Honorable Ernest F. Hollings

Ranking Minority Member

Committee on Commerce, Science and Transportation United States Senate

The Honorable John F. Kerry

Ranking Minority Member

Subcommittee on Oceans, Fisheries and Coast Guard Committee on Commerce,
Science and Transportation United States Senate

Subject:	Climate Change: Analysis of Two Studies of Estimated Costs of
Implementing the Kyoto Protocol

In 1992 the United States ratified the United Nations Framework Convention
on Climate Change, which was intended to stabilize the buildup of
greenhouse gases in the earth's atmosphere but did not impose binding
limits on emissions. In July 1997, when preliminary negotiations on a new
climate agreement were under way, the Senate passed a resolution
expressing the sense of the Senate that the Clinton administration should
not agree to limits on U.S. greenhouse gas emissions if such an agreement
did not include economically developing nations or if it could seriously
harm the U.S. economy. In December 1997 the United States participated in
drafting the Kyoto Protocol, an international agreement to specifically
limit greenhouse gas emissions. The Protocol did not impose limits on
developing nations' emissions, and its possible effect on the U.S. economy
was the subject of numerous studies during that period, including the two
studies that are the subject of this report. Although the U.S. government
signed the Protocol in 1998, the Clinton administration did not submit it
to the Senate for advice and consent, which are necessary for
ratification. In March 2001, President Bush announced that he opposed the
Protocol.

A participating nation's compliance with the Kyoto Protocol will be
determined by first calculating its average emissions of the six covered
gases-carbon dioxide, methane, nitrous oxide, and three synthetic
gases1-for the 5-year period 2008 through 2012. Reductions can then be
made for, among other things, the purchase of emissions reductions from
certain other nations; this feature, called emissions trading, allows a
nation that has reduced its emissions more than the required amount to
sell its unused emissions reductions to other nations. In addition,
developing

1Hydrofluorocarbons, perfluorocarbons, and sulfur hexafluoride.

GAO-04-144R Estimated Costs of the Kyoto Protocol

nations can generate emissions reductions for developed countries by
participating in certain projects.

Although the United States is not participating in the Kyoto Protocol,
climate change remains a topic of congressional and public concern, and
there is continuing interest in estimating how reducing greenhouse gas
emissions could affect the U.S. economy and quality of life. To make such
estimates, economists typically rely on economic models-computerized sets
of mathematical equations that represent the economy in a simplified way
to project future conditions. Models can vary in terms of size, structure,
complexity, and other features. Any such model's results can be
significantly affected by changing its assumptions about economic growth,
energy prices, and other key variables. For example, the estimated costs
of implementing the Kyoto Protocol could be significantly higher or lower,
depending on the modelers' assumptions about the future values of such
variables. In addition, a model's results can be significantly affected by
changing its assumptions about how a policy, like the Protocol, is
implemented.

At a July 2002 hearing on the administration's climate initiative, the
Chairman of the Council on Environmental Quality (CEQ) testified that
implementing the Kyoto Protocol would reduce U.S. economic output by "up
to $400 billion" in 2010.2 This estimate is similar to a $397 billion
estimate that appeared in a 1998 report by the Energy Information
Administration (EIA), an independent statistical and analytical agency
within the U.S. Department of Energy.3 The EIA estimate differed from
another, well-publicized estimate prepared the same year by the Council of
Economic Advisers (CEA), which found that the costs of implementing the
Protocol could be as little as $7 billion to $12 billion a year in
economic output, depending on the extent of international emissions
trading allowed and the participation of developing countries.4 You asked
us to identify likely reasons for the differences between the two cited
cost estimates ($397 billion from EIA and $7 billion to $12 billion by
CEA), based on (1) the economic models used to prepare these estimates and
(2) the assumptions incorporated into these models, including economic
assumptions and assumptions about how the Protocol would be implemented.
You also asked us to determine the basis for the cost estimate cited by
the CEQ Chairman.

To address these objectives, we reviewed the CEA and EIA reports, the CEQ
testimony, and related literature. We did not perform any independent
economic modeling. In addition, we did not attempt to track the continuing
international negotiations on the details of the Protocol or to determine
whether CEA's and EIA's assumptions about the Protocol's operations turned
out to be accurate.

2Statement of James L. Connaughton, Chairman, White House Council on
Environmental Quality, on United States Global Climate Change Strategy,
before the Senate Committee on Commerce, Science and Transportation, July
11, 2002.

3Energy Information Administration, Impacts of the Kyoto Protocol on U.S.
Energy Markets and Economic Activity. Report No. SR/OIAF/98-03, October
1998.

4President's Council of Economic Advisers, The Kyoto Protocol and the
President's Policies to Address Climate Change: Administration Economic
Analysis, July 1998.

            Page 2 GAO-04-144R Estimated Costs of the Kyoto Protocol

Results in Brief

Two likely reasons why the cost estimates differed based on the economic
models are that (1) the models focus on different time periods, with
different assumptions about how the economy adjusts to new policies, and
(2) they measure costs differently. CEA used a type of model that
typically focuses on longer time periods and generally assumes that the
economy adjusts smoothly to new policies over the longer-term, while EIA
used a type of model that typically focuses on a more immediate time
period and highlights the near-term costs of economic adjustments (such as
unemployment). The different types of models produce different types of
cost estimates; EIA's model used a more comprehensive cost measure than
CEA's model and was thus able to capture certain costs that CEA's model
could not capture.

It was likely that EIA's cited cost estimate would be higher than CEA's
estimate because of two assumptions the agencies made about the U.S.
economy and about the Protocol's operations. First, the cited EIA estimate
assumed that all reductions would be achieved domestically, while the
cited CEA estimate allowed for the purchase of emissions reductions from
other nations. Second, the economic growth rate assumed by EIA (2.3
percent a year for 1995 through 2010) was higher than the growth rate
assumed by CEA (2.1 percent for the same time period). A higher growth
rate results in more growth in emissions and would require larger
reductions to reach an emissions target.

In testifying that implementing the Kyoto Protocol "would have cost our
economy up to $400 billion" in 2010, the CEQ Chairman was relying on the
highest of six cost estimates prepared by EIA. This scenario would have
required reductions in U.S. greenhouse gas emissions to 7 percent below
the 1990 level-the most restrictive of the six EIA estimates. Following
the hearing, the Chairman noted that certain provisions in the Kyoto
Protocol could require smaller reductions (specifically, to 4 percent
below the 1990 level), but he did not cite a cost estimate corresponding
to this smaller reduction.

We received written comments on a draft of this report from the Council of
Economic Advisers and Council on Environmental Quality, jointly, and from
the Energy Information Administration. The Councils characterized our
draft as, among other things, "incorrect, incomplete, and lacking in
analytical rigor in several significant areas." We strongly disagree with
this characterization and do not believe that the points in their comment
letter provide adequate substantiation for such a broad assertion.
However, we did enhance our report to provide additional information on
developments prior to the negotiation of the Protocol, better specified
the report's objectives, and clarified the importance of assumptions about
how the Protocol might be implemented and the effect of these assumptions
on the cost estimates. In addition, the Councils provided one technical
comment, which we incorporated. EIA suggested that we include additional
material on its approach to modeling, and we did so. EIA also provided
technical comments, which we incorporated where appropriate.

Background

Carbon dioxide and certain other gases trap some of the sun's heat in the
earth's atmosphere and prevent it from returning to space. The trapped
heat warms the earth's climate, much like glass in a greenhouse. Hence,
the gases that cause this effect are often referred to as greenhouse
gases. The most prevalent of the six greenhouse gases covered by the
Protocol is carbon dioxide, which

            Page 3 GAO-04-144R Estimated Costs of the Kyoto Protocol

results from combustion of coal and oil in power plants and industrial
boilers, the burning of gasoline in vehicles, and other sources. The six
gases covered by the Protocol differ in their effects on the atmosphere
and their expected lifetimes.

In recent decades, concentrations of greenhouse gases have built up in the
atmosphere, giving rise to concern that continuing increases might
interfere with the earth's climate system, for example, by increasing
temperatures or changing precipitation patterns. In 1992, the United
States joined with other nations in developing the United Nations
Framework Convention on Climate Change, which does not impose specific
binding targets or timetables for emissions reductions. In contrast, in
the Kyoto Protocol, a follow-on to the Convention signed by the United
States and about three dozen other nations-most of them economically
developed-emissions were limited by specific amounts over a specified time
frame. To help achieve the required reductions, the Protocol allows
countries to purchase emissions reductions from other countries or to
offset their emissions through the use of sinks, such as trees, which
capture and store carbon dioxide.

Over the past decade or longer, there have been many efforts to estimate
the cost to the U.S. economy of implementing various regimes for
regulating greenhouse gas emissions. In the area of climate policy, two
basic types of models, often referred to as top-down and bottom-up, are
frequently used in assessing potential costs and benefits of reducing
emissions. The two model types are based on fundamentally different
perspectives, although in recent years the distinctions between the two
model types have narrowed as modelers have begun to integrate features of
the two types.

o 	Top-down models are economywide models that describe, among other
things, the relationships between energy and the rest of the economy,
based on observations of past experience, to project future policy-induced
changes. One type of top-down model, a macroeconomic model, starts from a
view of how the economy as a whole functions and how macroeconomic
variables, such as economic output (known as gross domestic product, or
GDP), consumption, and aggregate savings and investment, are determined
and interrelated. Another type of top-down model, a computable general
equilibrium model, draws from microeconomic theory and assumes that
markets adjust efficiently in the long run as consumers and producers
adapt to changing prices in response to, for example, a new policy
regulating greenhouse gas emissions.

o 	Bottom-up models generally contain a great deal of technological
detail, but less detail on the rest of the economy. Their projections are
based on, among other things, calculations of future technological
possibilities under different economic or policy conditions. In contrast
to topdown models, bottom-up models used for analyzing climate policy
focus primarily on the energy sector of the economy, with less detail on
the economy as a whole. They contain extensive information about specific
energy technologies, identifying the least expensive technology options
available for energy savings and fuel-switching to reach a specific
emissions target. Unlike top-down models that project possibilities for
technological substitution based on trends observed in the past, bottom-up
models allow for the substitution of new technologies at various prices,
if, for example, the price of energy increases in response to a new carbon
policy. Because they lack detail about the general economy, they are
sometimes linked to top-down models, which can provide such detail.

            Page 4 GAO-04-144R Estimated Costs of the Kyoto Protocol

Even among models of the same type (e.g., macroeconomic or computable
general equilibrium models) results can vary because each model is
designed with different features and may include different input
assumptions.

CEA and EIA posed the same basic question about the potential costs to the
U.S. economy of implementing the Kyoto Protocol but took different
approaches to modeling these costs and produced different results.

CEA's study. CEA's 1998 study sought to estimate the costs to the U.S.
economy of complying with the Kyoto Protocol by 2010. CEA modeled 10
scenarios of how the Protocol might be implemented, which differed in the
extent to which they allowed international emissions trading and the
purchase of emissions credits in developing countries.5 Among these were
scenarios in which the United States traded emissions only with certain
other industrialized countries (i.e., other nations signing Annex I of the
1992 Framework Convention on Climate Change6); with Annex I countries and
certain developing countries; and with certain Annex I countries, as well
as the countries of Eastern Europe and certain developing countries. Under
the last scenario-the least restrictive-the cost to the U.S. economy in
2010 was estimated to be 0.07 percent of GDP, or about $7 billion a year
in total resource costs, which are defined by CEA as the direct costs to
the U.S. economy of meeting its Kyoto target, including both the cost of
abating emissions domestically and the cost of purchasing emissions
reductions from abroad. CEA estimated that under this scenario the
corresponding cost of reducing emissions would be $14 a ton in 2010.7 At
the other extreme, the CEA report implied that if the United States made
all its reductions domestically, the cost would be $192 to $200 a ton.8

Table 1 shows selected results for four of CEA's scenarios, from the least
restrictive to the most restrictive. For each scenario, cost is
represented both as the percentage by which GDP would decrease and the
incremental cost of reducing emissions by one ton. As the scenarios become
increasingly restrictive, total resource costs and the incremental cost of
reducing emissions by one ton increase. (The costs shown do not include
short-term adjustment costs, such as the temporary unemployment of workers
due to high energy prices, which is discussed in more detail on pp. 7 and
8.)

5CEA's report presents the results of nine scenarios that incorporated
international emissions trading. It also refers to a tenth scenario,
involving no emissions trading, assuming rather that all reductions
occurred domestically. Although CEA did not present the results for that
scenario, the inferred cost is $54 billion to $60 billion.

6Thirty-six developed countries are listed in Annex I. These countries
include all the countries belonging to the Organization of Economic
Cooperation and Development in 1990, plus most of the central and eastern
European economies-in-transition.

7Costs per ton refer to costs per metric ton of carbon.

8We estimated this range on the basis of information provided in the CEA
report on the trading scenarios.

            Page 5 GAO-04-144R Estimated Costs of the Kyoto Protocol

Table 1: CEA's Cost Estimates under Four Scenarios

Decrease in GDP in 2010

                                Total resource               Incremental cost 
                                costs                                      to 
       Sources of emissions      (1992 dollars               reduce emissions 
            reductions                      in               
        from other nations           billions) Percentage of     (dollars per 
                                               GDP                      ton)a 
     Certain Annex I nations,                                
             Eastern                                         
    Europe, and key developing              $7          0.07              $14 
             nations                                         
    Annex I and key developing              12          0.11               23 
             nations                                         
         Annex I nationsb                23-26     0.23-0.24            54-56 
     No international trading                                
            (domestic                                        
        reductions only)b                54-60     0.54-0.55          192-200 

Source: GAO analysis of CEA data.

aWe estimated these figures on the basis of information provided for other
scenarios. The estimates were derived based on information provided by CEA
for the $14-per-ton and $23-per-ton carbon price scenarios.

bThe cost to reduce emissions is referred to by CEA as the permit price.
We refer to the permit price as the incremental (marginal) cost of
reducing emissions.

EIA's study. EIA's 1998 study estimated the costs9 in 2010 of reducing
carbon dioxide under six scenarios showing how the Protocol might be
implemented. Because the exact rules that would govern final
implementation of the Kyoto Protocol were not fully determined at the time
of its analysis, EIA did not know the specific reduction in energy-related
emissions that would be required. Therefore, EIA created six scenarios
that assume a range of emission reductions levels. For example, the 1990
level minus 7 percent scenario was chosen to resemble the Kyoto Protocol
target requiring the United States to reduce its emissions 7 percent below
its 1990 baseline, without allowances for sinks, other greenhouse gases,
or international activities; the 1990 level minus 3 percent scenario was
chosen to represent a case where sinks and offsets from other gases
produce a 4 percentage point contribution toward meeting the 7 percent
target.10 EIA modeled four other scenarios: no change in emissions and
emissions increases of 9 percent, 14 percent, and 24 percent above the
1990 level. Under these scenarios, it was assumed that the United States
would purchase varying amounts of its required reductions abroad, with the
most international purchases occurring under the 1990 level plus 24
percent scenario.

EIA estimated that the costs would be between 1.0 and 4.2 percent of U.S.
GDP in 2010, depending on the scenario, and that the corresponding
incremental cost of reducing carbon emissions would be between $67 and
$348 a ton. The lowest cost estimate was based on the scenario in which
emissions in 2010 would be 24 percent above the 1990 level. The highest
cost estimate was based on the scenario in which emissions in 2010 would
be 7 percent below the 1990 level.

Table 2 shows selected results for the six EIA scenarios, from the least
restrictive to the most restrictive. Under each scenario, cost is
represented both as the percentage by which GDP would

9EIA estimated incremental costs in 1996 dollars per metric ton of carbon.

10According to the EIA study, a January 1998 fact sheet by the Department
of State noted that the provisions of the Protocol would yield this 4
percentage-point difference-3 percentage points due to the counting of
sinks and 1 percentage point due to the use of 1995, rather than 1990, as
the base year for the three synthetic greenhouse gases.

            Page 6 GAO-04-144R Estimated Costs of the Kyoto Protocol

be reduced and the incremental cost of reducing emissions by one metric
ton. As the scenarios become increasingly restrictive, the cost to the
overall economy and the incremental cost of reducing emissions by one
metric ton increase.

               Table 2: EIA's Cost Estimates under Six Scenarios

                                                   Incremental cost to reduce
                  Decrease in economic output in 2010 emissions (1996 dollars
          Scenario 1992 dollars in billions Percentage of GDP per metric ton)

        1990 level + 24 percent           $96           1.0               $67 
        1990 level + 14 percent           161           1.7      
        1990 level + 9 percent            188           2.0      
              1990 level                  292           3.1      
        1990 level - 3 percent            327           3.5      
        1990 level - 7 percent            397           4.2      

Source: GAO analysis of EIA data.

Note: The decrease in GDP and the cost to reduce emissions in EIA's model
include short-term adjustment costs, such as temporary unemployment of
workers resulting from higher energy prices. The incremental costs
represent the carbon prices resulting from each scenario. These carbon
prices result in higher energy prices and lower GDP.

Using Different Types of Economic Models Likely Contributed to Higher Cost
Estimates from EIA than from CEA

In estimating the costs to the U.S. economy of implementing the Protocol,
CEA and EIA used economic models that differ in the way they represent how
the economy functions. The models focus on different time periods and
measure costs differently. These differences likely contributed to higher
cost estimates from EIA than from CEA.

CEA used a top-down computable general equilibrium model that describes
the economy's path over the long term. Such models generally represent
markets as adjusting smoothly in the long run to price changes resulting
from, for example, new regulations for greenhouse gas emissions. Because
they are generally not as well suited as macroeconomic models to represent
the nearterm effects of government policies, computable general
equilibrium models may tend to underestimate the short-term costs of
adjustments to a policy change. In contrast, EIA used a bottom-up energy
sector model linked to a top-down macroeconomic model. Macroeconomic
models often yield higher cost estimates than computable general
equilibrium models because they are better able to capture short-term
economic adjustment costs, such as those that might be caused by limiting
greenhouse gas emissions.

Because of differences in how they represent the economy, the models
include different measures of costs. The total loss in GDP attributable to
emissions reduction policies has two components:

o 	Loss of potential GDP measures the loss of productive capacity of the
economy. This loss is directly attributable to the reduction in energy
resources available to the economy. (Polices to reduce greenhouse gas
emissions raise the price of energy, leading to reduced use.)

            Page 7 GAO-04-144R Estimated Costs of the Kyoto Protocol

o 	Adjustment costs reflect frictions to the economy that result from the
policies to reduce emissions. These frictions would include the temporary
unemployment of workers and other resources resulting from higher energy
prices.

The model used by CEA assumes that the economy makes a smooth transition
to a new path over the long term, losing some productive capacity as a
result of higher energy prices. Thus, CEA's cost estimate includes only
the loss in potential GDP, or the loss in GDP if employment were full. In
contrast, EIA's model captures both types of costs. EIA's approach to
modeling energy markets explicitly incorporates, on an annual basis, such
as factors as technological change and costs, consumer choice behavior,
and changes to energy infrastructure. Thus, in addition to the loss in
potential GDP, the EIA model also estimates the adjustment costs, and the
estimates shown in table 2 include both types of losses.11 Compared to
CEA, therefore, EIA's estimate of economic loss is a broader measure of
the costs of implementing the Protocol.

EIA separately estimated economic losses in potential GDP, which is
similar to the measure used by CEA. These estimates are shown in table 3.
In all of these scenarios, the losses in potential GDP are smaller than
the corresponding losses in total GDP shown in table 2. For example, for
the most restrictive scenario-achieving emissions 7 percent less than the
1990 level-the estimated reduction in potential GDP was $72 billion, while
the estimated reduction in total GDP was $397 billion.

Table 3: EIA's Cost Estimates (in terms of potential GDP) under Six
Scenarios

                     Decrease in economic output in       Incremental cost to 
                                  2010                                 reduce 
                                                      emissions (1996 dollars 
                                                                          per 
      Scenario               1992 dollars in billions             metric ton) 
                                    Percentage of GDP 
1990 level + 24                            $13 0.1                     $67 
       percent                                        
1990 level + 14                             27 0.3 
       percent                                        
1990 level + 9                              34 0.4 
       percent                                        
     1990 level                                53 0.6 
1990 level - 3                              62 0.7 
       percent                                        
1990 level - 7                              72 0.8 
       percent                                        

Source: GAO analysis of EIA data.

Note: Like the CEA results in table 1, the decrease in GDP and costs to
reduce emissions in this table do not include short-term adjustment costs,
such as temporary unemployment of workers resulting from higher energy
prices. The incremental costs represent the carbon prices resulting from
each scenario. These carbon prices result in higher energy prices and
lower GDP.

11EIA refers to the sum of loss in potential GDP and economic adjustment
costs as "actual GDP."

Page 8 GAO-04-144R Estimated Costs of the Kyoto Protocol

Using Different Assumptions Also Likely Contributed to Higher Cost
Estimates from EIA Than from CEA

Of the many assumptions incorporated into the two modeling efforts, we
identified two used by CEA and EIA that likely contributed to their
different results. One of these relates to how the Protocol would operate,
while the other relates to the economy's growth rate. Both assumptions
would likely yield higher cost estimates from EIA than from CEA in the
scenarios we examined.

International trade in emissions reductions. A scenario that does not
allow the United States to purchase emissions reductions from other
nations will likely yield higher estimated costs than a scenario that does
allow such purchases, because the United States' cost of reducing its
emissions is likely to be higher than many other nations' costs. The most
restrictive of the scenarios modeled by EIA did not allow for
international trade in emissions reductions, while the least restrictive
of the CEA scenarios did allow for such trade.12 In fact, according to the
CEA study, an effective international market for emissions trading among
industrialized countries would potentially reduce the resource costs to
the United States by more than half relative to a scenario in which all
emissions reductions occur domestically. Moreover, if the United States
were allowed to purchase emissions from developing countries, the costs
could be reduced even further. Thus, as would be expected, EIA's
no-trading scenario cost estimate was higher than CEA's full-trading
scenario estimate.

Economic growth rates. The rate at which an economy's GDP grows is
important in determining the costs to limit emissions. A slower-growing
economy uses less energy and produces fewer emissions; therefore, smaller
emissions reductions are needed to meet a given target. Conversely, a
faster-growing economy uses more energy and produces more emissions;
therefore, larger reductions are needed to meet a given target. In its
analysis, CEA assumed that the economy would grow by 2.1 percent between
1995 and 2010, while EIA assumed that the economy would grow by 2.3
percent during the same time period, a difference of 0.2 percentage
points. This difference increases in significance when compounded over
many years. In this case, CEA assumed that the economy would grow about 37
percent between 1995 and 2010, while EIA assumed it would grow about 41
percent. In the context of a roughly $10 trillion economy, this difference
can be significant.

CEQ's Chairman Cited a Cost Estimate Based on EIA's Most Restrictive and
Expensive Scenario

In prepared testimony in support of the administration's 2002 climate
change strategy, the Chairman of CEQ stated that implementing the Kyoto
Protocol would cost the U.S. economy "up to $400 billion" in 2010. By
citing this estimate, the CEQ Chairman focused on the most restrictive of
the six scenarios modeled by EIA. This scenario required the deepest
reduction in U.S. emissions (to 7 percent below the 1990 emissions level)
and did not allow for, among other things,

12As noted above, CEA modeled a range of scenarios with different levels
of trading. The inferred cost of the no-trading CEA scenario is about $54
billion to $60 billion a year, while the estimated cost of the no-trading
EIA scenario of 7 percent below the 1990 level is $72 billion in terms of
potential GDP. The comparable EIA estimate in terms of actual GDP is $397
billion.

            Page 9 GAO-04-144R Estimated Costs of the Kyoto Protocol

emissions trading with other nations. Under this scenario, EIA estimated
that the cost to the U.S. economy (in terms of reduced GDP) would be $397
billion in 2010.

In answering follow-up questions after the hearing, the Chairman
recognized that the United States might not be required to reduce its
emissions to 7 percent below the 1990 level. Specifically, he stated that
"the inclusion of sinks provides a 3 percent offset to the most stringent
case."13 He did not provide an estimate for the cost of reaching that less
stringent level.

Agency Comments

We provided a draft of this report to the Secretary of Energy; the
Chairman, CEA; and the Chairman, CEQ, for review and comment. We received
written comments jointly from the Chairman, CEA, and the Chairman, CEQ
(see enc. I), and from the Administrator, EIA (see enc. II). The Councils
characterized our draft as, among other things, "incorrect, incomplete,
and lacking in analytical rigor in several significant areas." We disagree
with this characterization and do not find that it is substantiated in the
Councils' letter. However, we have provided additional information on
developments prior to the negotiation of the Protocol, better specified
the report's objectives, and clarified the importance of assumptions about
how the Protocol might be implemented and the effect of these assumptions
on the estimated costs to the economy. Our objective was to explain the
differences in the results of the 1998 economic modeling studies by CEA
and EIA. In addition, we addressed the technical comment made by the
Councils.

EIA suggested that we include additional material on its approach to
modeling, and we did so. EIA also provided technical comments, which we
incorporated where appropriate.

Scope and Methodology

To answer the first and second objectives, we reviewed the CEA and EIA
studies and literature on economic modeling. To answer the third
objective, we reviewed the CEQ Chairman's July 2002 testimony and his
responses to follow-up questions. We did not independently assess the
validity of the CEA and EIA models in this report. (In addition, we did
not attempt to track the continuing international negotiations on the
details of the Protocol or to determine whether the CEA's and EIA's
assumptions about the Protocol's operation turned out to be accurate.) We
performed our work from July through December 2003 in accordance with
generally accepted government auditing standards.

As arranged with your offices, unless you publicly announce the contents
of this report earlier, we plan no further distribution until 30 days from
the date of this report. At that time, we will send copies to the
appropriate congressional committees; the Secretary of Energy; the
Chairman, CEA;

13Response of the Honorable James Connaughton, Chairman, Council on
Environmental Quality, to questions posed by Senators after the July 2002
hearing.

           Page 10 GAO-04-144R Estimated Costs of the Kyoto Protocol

and the Chairman, CEQ. In addition, the report will be available at no
charge on the GAO Web site at http://www.gao.gov.

Should you or your staff need further information, please contact me or
David Marwick at (202) 512-3841. Chuck Bausell and Anne K. Johnson made
key contributions to this report. Karen Keegan, Cynthia Norris, and Anne
Stevens also made important contributions.

John B. Stephenson Director, Natural Resources and Environment

Enclosures

           Page 11 GAO-04-144R Estimated Costs of the Kyoto Protocol

Enclosure I:

  Comments from the Council of Economic Advisers and Council on Environmental
                                    Quality

Note: GAO comments supplementing those in the report text appear at the
end of this appendix.

                                 See comment 1.

                                 See comment 2.

                                 See comment 3.

           Page 13 GAO-04-144R Estimated Costs of the Kyoto Protocol

                                 See comment 4.

                                 See comment 5.

                                 See comment 6.

           Page 14 GAO-04-144R Estimated Costs of the Kyoto Protocol

           Page 15 GAO-04-144R Estimated Costs of the Kyoto Protocol

Enclosure I: Comments from the Council of Economic Advisers and Council on
                             Environmental Quality

The following are GAO's comments on the joint Council of Economic
Advisers/Council on Environmental Quality letter dated December 10, 2003.

GAO's Comments 1.

2.

3.

4.

5.

6.

We prepared this report in response to a request from the Ranking Minority
Members of the Senate Committee on Commerce, Science and Transportation
and its Subcommittee on Oceans, Fisheries and Coast Guard.

We added information on developments prior to the negotiation of the
Protocol.

We stated that developing nations can generate emissions reductions, which
CEA/CEQ does not dispute. As noted earlier, we did not attempt to track
developments since 1998, such as how many such projects have been
approved.

We believe that the first two paragraphs of our Results in Brief section
appropriately summarize the results of our work on the likely reasons for
the differences between the two cited cost estimates based on (1) the
economic models used to prepare these estimates and (2) the economic and
other assumptions incorporated into these models. However, in the body of
the report, we have clarified in several places the importance of
assumptions about how the Protocol might be implemented and the effect of
these assumptions on the estimated costs to the economy.

We revised the report as suggested.

We deleted a comparison of the basis of the cost estimate cited by the CEQ
chairman to a 1998 State Department fact sheet. However, we cite the fact
sheet in the section dealing with EIA's cost estimates, because-according
to EIA officials-one of EIA's six scenarios (a target of 3 percent below
the 1990 emissions level) is based on the fact sheet.

           Page 16 GAO-04-144R Estimated Costs of the Kyoto Protocol

Enclosure II:

              Comments from the Energy Information Administration

Note: GAO comments supplementing those in the report text appear at the
end of this appendix.

See comment 1.

       Enclosure II: Comments from the Energy Information Administration

                                 See comment 2.

                                 See comment 3.

       Enclosure II: Comments from the Energy Information Administration

                                 See comment 4.

                                 See comment 4.

                                 See comment 4.

                                 See comment 4.

                                 Enclosure II:
                      Comments from the Energy Information
                                 Administration

The following are GAO's comments on the Energy Information
Administration's letter dated December 10, 2003.

GAO's Comments 1.	We believe that the first two paragraphs of our Results
in Brief section appropriately summarize the results of our work on the
likely reasons for the differences between the two cited cost estimates
based on (1) the economic models used to prepare these estimates and (2)
the economic and other assumptions incorporated into these models.

2.	We expanded our discussion of its approach to modeling energy markets.
See page 8.

3.	EIA notes that we did not discuss the difference between CEA and EIA's
approaches for estimating the economy's response as the Kyoto Protocol was
phased in over time. We recognize that this assumption could have affected
the agencies' respective cost estimates. Whereas EIA notes that CEA
"implicitly" assumed a particular phase-in period, we did not find
explicit documentation in the CEA study for its assumption in this regard
and, therefore, did not report on this issue.

4. We clarified our discussion, as suggested.

360394 Page 20

GAO-04-144R Estimated Costs of the Kyoto Protocol

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