' ' 4 O M - G -'n '7 11 k U 'IoW -k Gl jl tr j 1 0' 1 - #l l ct 0 DEPARTMENT OF THE TREASURY - 7 t ' p - ' r -' V 11--- 8RIEfiNG WASHINGTON D C 20220 Februaty 20 2001 MEMORANDUM FOR SECRETARY O'NEILL rwY FROM John C Hambo Director Offic croeconomic Analysis SUBJECT Background for Briefing on Climate Change Policy Briefing Date Time Location Februaty 21 2001 1 to 2 p m Secretaty's Small Conference Room The State Department's Acting Assistant Secretaty for Oceans Environment and Science Ken Brill will chair the briefing He will begin by outlining upcoming events that will require U S climate policy preparation For example the current round of international negotiations will reconvene in late June or early July Although this schedule represents a slight delay pursuant to a U S request we understand that the State Department will suggest early conimencement of an interagency policy process Rosina Bierbaum fi'om the White House Office of Science and Technology Policy will present a brief update on the latest scientific conclusions ofthe Intergovernmental Panel on Climate Change Dan Bodansky and Nigel Purvis ofthe State Department will present the histoty and status of international negotiations some of the major obstacles to progress and general options going forward Adele Morris with Treasmy's Office of Economic Policy will describe the economics of greenhouse gas abatement policy She will give special attention to estimates of the costs of complying with the Kyoto Protocol A complete agenda is attached under Tab A Tab B presents some succinct conclusions on the economics of climate change mitigation Tab C is a preview of the economics presentation Prepared by Adele Monis lam-W TAB A Climate Change Briefing February 21 2001 Agenda 1 Introduction Action Forcing Events Acting Assistant Secretary Ken Brill State Department 2 Update on science Rosina Bierbaum Office of Science and Teclmology Policy 3 HistOlY and status of climate negotiations Dan Bodansky State Department 4 Options and challenges going fOlward Nigel Purvis State Department 5 Economics of climate change mitigation Adele Monis Office of Economic Policy 6 Conclusion Ken Brill Eris 93 TABB Economics of Climate Change Mitigation o The key policy is to put a price on carbon-equivalent emissions so that economic activity incorporates the envirOlmlental cost of greenhouse gas emissions o To be efficient the price signal should broadly affect all sectors gases sources and sinks o eounlly-specific targets such as under the Kyoto Protocol can produce equal price signals across countries through emissions trading o The US has a very ambitious target under Kyoto but so do others o Emissions reductions are much more costly if they must be done quickly requiring premature scrapping of capital o Emissions trading and sinks can dramatically lower compliance costs Kyoto provides scope for this although negotiating for a lot of sink credits would be velY harel o Russia makes out well under Kyoto because its target is well above its projected emissions o Developing countlY pmticipation can greatly lower our costs and benefit them Nonetheless most are opposed on principle to taking even modest growth targets o Options for m or changes from Kyoto in particular more modest targets and a cost cap could greatly lower costs L - Pricing 4 @ o reenhouse Gas Emissions Put a price on carbon -eq u ivalent o o emiSSions Changes relative prices of inputs and outputs Economicactivity incorporates cost of emissions Emissions in Kg C mBTU 30 25 20 15 10 5 o Natural Gas Gasoline Coal Cap and Trade vSG Carbon Tax o Economically very similar o Cap provides environmental certainty and tax provides economic certainty o Both systems transmit price signal Efficient to provide equal price signal across sectors gases sinks and sources Economic e Model s Marginal costs of abatement increase o Cost of a given reduction is lower in long run than short run e e Range of models different assumptions drive large range of results Higher confidence in comparing model results across different scenarios - e g emissions trading lowers costs dramatically in all models US Marginal Cost Curve for 2010 220 200 ------- -------- I I c 0 c 180 l I'G to 0 c 0 l CI Co ' 0' 0' ' 160 140 120 100 80 60 40 ' ----- 20 0 o 50 100 150 200 250 ' I ' I i i J i 300 350 400 450 500 550 Emissions Reduction from BAU Millions of Metric Tons of Carbon Equivalent MMTCE Per Year in 2010 Illustrative Model Batelle's Second Generation Model 600 US Emissions Kyoto target approximately 2 500 - - - - - - - - - - - - - - - - - - - - - - 7% below 1990 emissions 2 000 - - - - - - - - - - MMTCE per year 17% below current emissions 1 500 - 1 000 -- 30% below 2010 projection 500 -- o -- I 1990 1999 2010 emissions Emissions Projection Kyoto target II Above Kyoto target I 600 to 650 MMTCE target reduction difference between projection and target Projected GHG Emissions in 2010 Compared to Kyoto Target 60% ---------------------------------------- 50% 40% 30% 20% 10% 0% -10% -20% -30% -40% United States Western Europe Canada Japan FSU Easte n ro hot air ---t - L -_ _ _ _ _ _ _ _ _ _ _ _ _ _ _---- _ _ _ _ _ _ _ _ _ _ _------2 Estimated Compliance Costs for US billions of 1997 $ per year 2010 $ ---------------------------------------- $40 - ---$35 - $30 -- $25 -- $20 - - $15 - $10 -$5 -$ -t-Domestic Only Domestic Some Sinks Annex I Trading Illustrative Model Batelle's Second Generation Model Annex I Trading Some Sinks Some CDM US Compliance Costs High Cost Scenario 0 s 0 0- C Q t-- en en 'I 220 200 180 160 140 120 100 80 60 40 20 0 0 50 100 150 200 250 300 350 400 450 500 550 Emissions Reduction from BAU M illions of Metric Tons of Carbon Equivalent Per Year in 2010 Illustrative Model Batelle's Second Generation Model 600 US Compliance Costs Low Cost Scenario Q 220 200 ee - 180 0 160 140 0 120 L- u c lI CI Q enen 'I Domestic reductions 100 80 No-cost sinks complete compliance 60 40 20 0 0 50 100 150 200 250 300 350 400 450 500 550 Em issions Reduction from BAU M iliions of Metric Tons of Carbon Equivalent Per Year in 2010 Illustrative Model Batelle's Second Generation Model 600 I' J Kyoto Protocol Costs vs Other Domestic Environmental Programs 'i w $60 $50 0' $40 - $30 - 2 $20 o b $10 N c - $0 Clean Kyoto water Act ' high to low NAAQS cost 'Clean Water Act costs are for 1997 not 201 0 Mobile Source Controls Title IV 502 EPA budget 1999 Flexibility Mechanisms o Trading under Kyoto could produce large transfers to Russia about $21 billion per year o If Russia doesn't participate or trading is otherwise impeded costs escalate o Developing country participation can lower our costs a lot o Developing countries impervious to their own potential gain Sinks III us has a very large BAU sink - About 300 MMTCE per year or 50% of target red uctions o Credit for BAU sinks target III Less stringent US Credit for above-BAU sinks Possible cost-effective abatement opportunities o Large sinks for US and Russia smaller sinks forEU Economics of Major Changes to Kyoto Increasing US Target US costs under Annex I Trading Scenario $25 - - - - - - - - - - - - - - - - - - - - - C'C G s C'C $20 G Q Q A- e $15 0'0 $10 00' 0' f 1 tI o 9 o s - - c $5 $O -- -- -- - ---- -- 300 200 250 50 100 150 Increase in US target MMTCE p ryear Illustrative Model Batelle's Second Generation Model Safety Valve 5 49 Extra allowances available at predetermined price Sets upper bound on cost o Economic effect depends on who gets the money e Not as dramatic at lowering costs as easing targets but possibly easier to negotiate --------------- This document is from the holdings of The National Security Archive Suite 701 Gelman Library The George Washington University 2130 H Street NW Washington D C 20037 Phone 202 994-7000 Fax 202 994-7005 nsarchiv@gwu edu