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Updated 6 February, 2004

US Senate Committee on Energy and Natural Resources
Hearing to receive GAO's preliminary comments on its review of the Administration's Climate Change Proposal and to hear the Administration's response to GAO's comments
Thursday, June 4, 1998

 

 

 

 

 

 

 

 

 

WITNESS LIST

Hearing to receive GAO's preliminary comments on its review of the Administration's Climate Change Proposal and to hear the Administration's response to GAO's comments

Thursday, June 4, 1998
9:30 a.m. Senate Dirksen Office Building, Room 366
Washington, DC

Mr. Victor Rezendes
Director
Energy, Resources, and Science Issues
U.S. General Accounting Office
Washington, DC

        Accompanied by:
        Mr. David Marwick
        Assistant Director
        Environmental Protection Issues
        U.S. General Accounting Office
        Washington, DC
Mr. Dirk Forrister
Chairman
White House Climate Change Task Force
Washington, DC
        Accompanied by:
        Hon. David Gardiner
        Assistant Administrator for Policy, Planning, and Evaluation
        Environmental Protection Agency
        Washington, DC
Hon. Daniel Reicher
Assistant Secretary for Energy Efficiency and Renewable Energy
U.S. Department of Energy
Washington, DC

Mr. John Karl Scholz
Deputy Assistant Secretary for Tax Analysis
U.S. Department of Treasury, Washington, DC

Victor Rezendes

Mr. Chairman and Members of the Committee:

We are pleased to be here today to discuss the preliminary results of our analysis, being conducted at your request, of the administration's proposal on global climate change. Our statement is also based on our recently issued report on the Department of Energy's part in the proposal. As you know, the President introduced a three-stage proposal on climate change in October 1997, in anticipation of an international agreement to be negotiated 2 months later in Kyoto, Japan. He listed voluntary actions to be taken during stage 1 (the next 5 years) to reduce the emission of greenhouse gases by stimulating the development and use of energy-efficient products and technologies. The administration proposes to increase spending for climate change by $6.3 billion during this period. The agreement, known as the Kyoto Protocol, was negotiated in December 1997 by the United States and other nations. The protocol must be signed by the President and ratified by the Senate before its provisions apply to the United States.

To comply with the Kyoto Protocol, the United States will need to reduce greenhouse gas emissions substantially--by about 31 percent by 2010, according to the Department of Energy's Energy Information Administration. Concerned about the potential impact of efforts to comply with the protocol, you asked us to answer the following questions: (1) Does the administration have an overall goal for stage 1 and a plan for accomplishing that goal? (2) If funded, to what extent will the $6.3 billion stage 1 climate change proposal help the United States meet the protocol's emissions target? (3) What are the implications for the United States if the Senate ratifies the protocol, given the current status of the administration's efforts to implement the climate change proposal?

In summary, our work to date and our recently issued work have shown the following:

  • The administration has several broad goals for what it wants to accomplish in stage 1 and a broad plan for accomplishing them. Both the broad goals and plan are contained in the President's October 1997 speech. However, the administration has not established a quantitative goal for reducing greenhouse gas emissions by the end of stage 1--a primary focus of its initiative. Furthermore, while Office of Management and Budget officials acknowledge that the plan is broad, they have no specific time frame for preparing a more detailed plan that would include overall performance goals and measures to meet the spirit of the Government Performance and Results Act.
  • The extent to which the $6.3 billion stage 1 proposal will help the United States meet the protocol's target for emission reductions is unclear. The largest investment under the proposal, tax credits, with an estimated cost of about $3.6 billion, has no estimate of the expected benefits and thus is not explicitly tied to the protocol's target for emission reductions. The administration has set performance goals for most of the $2.7 billion proposed for research and development and the increased use of energy-efficient products and has estimated potential emissions reductions. However, the Department of Energy only recently provided its estimates, while commenting on a draft of this testimony, and we have not analyzed them. In addition, the Environmental Protection Agency's estimates may be overstated. Therefore, it is uncertain how much these activities will help the United States meet the target specified by the protocol.
  • Without an overall goal and plan for stage 1 and complete information on expected outcomes and links to the protocol's emission reduction target, it is uncertain whether stage 1 will effectively lay the foundation for the 31-percent emissions reduction required by the protocol. Although the administration's response to the protocol is relatively recent, a firm foundation in stage 1 is important because the protocol's targets for emission reductions are binding on the nations that agree to the protocol, and penalties for noncompliance with the targets are to be discussed by the parties to the protocol in November 1998.
BACKGROUND

Emissions of heat-trapping greenhouse gases are believed to contribute to global warming. Carbon dioxide, generated both naturally and by the burning of fossil fuels, accounts for the majority of emissions. According to administration representatives, the potential environmental, health, and economic consequences of increasing accumulations of greenhouse gas emissions are serious. For example, according to an Assistant Administrator of the Environmental Protection Agency (EPA), without significantly decreased emissions, over the long term, 15 percent or more of the nation's coastal wetlands could be submerged, the quality of drinking water in certain states could be severely degraded, malaria and other infectious diseases could increase, and severe droughts and floods could increase personal and property damage.

In October 1997, the President proposed a three-stage response to climate change, covering a period of 14 years. Stage 1 (1999-2003) is intended to put the nation "on a smooth path" to reducing greenhouse gases through research and development, tax credits for energy-efficient products, and eight other voluntary actions (listed in app. I). During stage 2 (2004-07), the results of stage 1 would be studied, and a system would be designed, and perhaps tested, for awarding and trading permits to emit greenhouse gases. In stage 3 (2008-12), mandatory limits on emissions would be put in place, through a market-based domestic and international emissions trading system.

Under the Kyoto Protocol, the United States agreed to limit its emissions during the 5-year period 2008 through 2012 to 7 percent below the 1990 emissions level. To achieve this new level, emissions would have to be cut by 31 percent by 2010 (the midpoint of the 5-year period), or the equivalent of about 552 million metric tons of carbon. In February 1998, the administration submitted its budget for fiscal year 1999, including a request to add $6.3 billion over the 5 years of stage 1 to existing funding levels for climate change activities. The majority of this sum ($3.6 billion) was for tax incentives administered by the Department of the Treasury. The balance was designated for the Department of Energy (DOE) ($1.9 billion), EPA ($677 million), the U.S. Department of Agriculture ($86 million), the Department of Commerce ($38 million), and the Department of Housing and Urban Development ($10 million). According to an OMB official, that office and seven other government entities will also be involved--the departments of Defense and State, the General Services Administration, the National Science Foundation, the Office of Science and Technology Policy, a White House task force, and the Council of Economic Advisers.

In recent years, the Congress has emphasized the need for good planning practices to ensure that federal funds are spent effectively and has directed federal agencies to focus their planning efforts on the results to be achieved. The Government Performance and Results Act of 1993 requires, among other things, that federal agencies set program goals and measure their performance in achieving those goals. In doing this, agencies are to set annual performance goals that have objective, quantifiable, and measurable target levels and that focus on results to the extent possible. In addition, the act implies that federal programs attempting to achieve the same or similar results should be closely coordinated to ensure that goals are consistent and, as appropriate, program efforts are mutually reinforcing.

To answer the three questions you asked us, we interviewed officials at DOE, EPA, and Treasury because of their responsibilities for stage 1 actions; we also reviewed budget documents, agencies' strategic and performance plans, and other documents relating to their programs. In addition, we discussed the governmentwide scope of stage 1 efforts with OMB officials.

Of the 10 proposed stage 1 actions, we selected 3 for detailed review because of their significant budgeted costs and our past work: (1) tax credits, (2) research and development, and (3) the increased use of energy-efficient products. These three actions account for nearly all of the requested $6.3 billion in additional funding.

We did not attempt to determine the reasonableness of the administration's cost estimates. We performed our review from January through June 1998 in accordance with generally accepted government auditing standards.

THE ADMINISTRATION HAS SEVERAL BROAD GOALS AND A BROAD PLAN FOR STAGE 1

The administration has several broad goals for what it wants to accomplish in stage 1 and a broad plan for accomplishing those goals. However, the administration has not established a quantitative goal for reducing greenhouse gas emissions by the end of stage 1--a primary focus of its initiative. Furthermore, while OMB officials acknowledge that the plan is broad, they have no specific time frame for preparing a more specific plan that would include overall performance goals and measures to meet the spirit of the Government Performance and Results Act.

The administration's goals and plan for accomplishing its goals are contained in the President's October 1997 speech, according to OMB's Office of Natural Resources, Energy, and Science. There are at least three major goals, according to this office: (1) to spur energy efficiency and encourage the development and deployment of energy sources that produce lower levels of carbon, (2) to provide an immediate incentive for near-term action to reduce greenhouse emissions, and (3) to seek win-win solutions to reduce carbon emissions that can improve energy efficiency and save consumers money. However, the administration has not established a quantitative goal for reducing greenhouse gas emissions by the end of stage 1. According to OMB's Associate Director for Natural Resources, Energy, and Science, the administration expects to establish emissions reduction goals for stage 1 but has not yet done so because the effort is so new. He also pointed out that DOE and EPA have performance measures related to their respective activities. He said that OMB expects to continue coordinating and monitoring the efforts of individual agencies.

While OMB officials acknowledge that the existing stage 1 plan is broad, they have no specific time frame for preparing a more detailed plan that would include overall performance goals and measures to meet the spirit of the Government Performance and Results Act. We believe a quantitative overall stage 1 goal, and a plan to implement that goal, are desirable primarily because the proposed federal response is extensive--involving 14 federal entities and budgeted to cost $6.3 billion in additional funding. Coordinated program efforts could help ensure that federal funds are used efficiently and could contribute to the overall effectiveness of the federal effort.

EXTENT TO WHICH STAGE 1 WILL MEET KYOTO TARGETS IS UNCLEAR

The extent to which the $6.3 billion stage 1 proposal will help the United States meet the protocol's target for emission reductions is unclear. The largest investment under the proposal, tax credits, with an estimated cost of about $3.6 billion, has no estimate of the expected benefits and thus is not tied to the protocol's emissions reduction target. The administration has set performance goals for most of the $2.7 billion proposed for research and development and the increased use of energy-efficient products and has estimated potential emissions reductions. However, DOE only recently provided its estimates, while commenting on a draft of this testimony, and we have not analyzed the method or assumptions used to support them. Such an assessment would require a detailed examination of DOE's impact analysis for the technology sectors involved. In addition, EPA's estimates may be overstated. Therefore, it is uncertain how much these activities will help the United States meet the target specified by the protocol.

Tax Credits Lack Estimates of Expected Benefits

The administration has proposed a package of nine tax credits designed to accelerate the adoption of more energy-efficient technologies. Treasury will be responsible for administering the tax credits, which are estimated to cost $421 million in fiscal year 1999 and a total of $3.6 billion during stage 1. The credits are primarily intended to encourage more energy-efficient buildings, transportation, industrial processes, and electricity generation. However, the administration has not estimated the benefits that would result from the credits. According to the Deputy Assistant Secretary for Tax Analysis, official estimates of the benefits are being prepared but are not yet available.

Results of Research and Development Are Uncertain

DOE is responsible for implementing most of the research and development activities under the administration's climate change proposal. It plans to increase its spending to $1.06 billion for climate change research and development in fiscal year 1999, a $331 million increase in funding from the 1998 level. The $331 million increase, as well as the remaining $729 million, will continue to support and expand existing research and development programs in energy efficiency and renewable energy, as well as other programs related to climate change. Over the 5-year period, DOE estimates that it will increase spending for climate change research and development by about $1.9 billion.

While DOE plans to spend over $1 billion for research and development in fiscal year 1999, the results of that spending are uncertain. Because the research and development efforts address multiple objectives, a senior DOE official told us that the agency's performance goals do not specifically quantify the extent to which these activities could decrease greenhouse gas emissions. These multiple objectives include decreasing U.S. dependence on foreign oil, improving air quality, decreasing energy costs for consumers and businesses, increasing economic competitiveness, and decreasing greenhouse gas emissions, according to departmental officials. However, DOE recently provided us with estimates while commenting on a draft of this testimony. The Department's estimates assume a continuation of its proposed fiscal year 1999 funding of approximately $1.06 billion per year during the 5-year period. DOE estimates reductions in carbon ranging from 31 million to 48 million metric tons by 2005; 87 million to 140 million metric tons by 2010; and 189 million to 338 million metric tons by 2020. Because we received the estimates so recently, we have not analyzed the method or assumptions used to support them. Such an assessment would require a detailed examination of DOE's impact analysis for the technology sectors involved--renewable energy, transportation, industry, buildings, and federal energy use. Nonetheless, we are concerned about the reasons why these estimates have not been expressed as performance goals and measures in DOE's annual performance plan. As such, they would be useful in helping DOE benchmark its progress in this area.

Furthermore, in our April 1998 report, we pointed out five common questions the Congress may want to consider before funding DOE's proposed increase for research and development or any research and development: (1) Would the private sector do the research without federal funding? (2) Will consumers buy the product? (3) Do the benefits exceed the costs? (4) Have efforts been coordinated? (5) Have implementation concerns been addressed? In discussing these themes, we cited previous GAO reports--concerning DOE and other agencies--to illustrate these areas.

Estimates of Results for the Increased Use of Energy-Efficient Products May Be Overstated

The primary focus of EPA's responsibilities under the climate change initiative is to increase the use of energy-efficient products. As with DOE's research and development activities, EPA's efforts will largely continue and expand ongoing activities. For fiscal year 1999, the agency is proposing to spend about $142 million in that effort; this is an increase of about $77 million over the previous year's $65 million. EPA has specified performance goals for this action. The goals include reducing U.S. energy consumption by over 45-billion kilowatt-hours and reducing emissions by 40-million metric tons of carbon equivalent per year. However, the goals may overstate the potential results of EPA's programs.

In a 1997 report on selected voluntary climate change programs, which are now included in EPA's portion of the Climate Change Technology Initiative, we found that, in some cases, EPA did not adjust reported reductions to take account of nonprogram factors that may have contributed to the reported results. For example, for the Green Lights Program (which is intended to encourage businesses and others to install energy-efficient lighting), we found that EPA did not take into account the fact that utility companies' financial incentives and other factors may have induced participants to undertake some energy-saving activities. In commenting on our 1997 report, EPA said it would further study the programs' impact. In commenting on a draft of this statement, an EPA official stated that the results of the further study support EPA's position that it has adequately accounted for nonprogram factors in reporting results. We have not had an opportunity to review the basis for this statement.

LACK OF KEY INFORMATION ON STAGE 1 HAS IMPLICATIONS FOR THE FUTURE

Because stage 1 lacks a quantitative goal for reducing greenhouse gas emissions, does not have a specific performance plan, and contains incomplete information on expected outcomes and links to the protocol's target, stage 1 may not provide a firm foundation for stages 2 and 3. The success of voluntary efforts in stage 1 would make it easier for the United States to adjust to the mandatory measures envisioned in stage 3 and to achieve the substantial reductions in emissions specified in the Kyoto Protocol. These mandatory measures would be implemented in the third stage (2008-12), when the protocol's target must be reached. Therefore, there may be penalties for noncompliance if the United States ratifies the protocol but does not reach the target, although the specific penalties have not been agreed upon.

The various stage 1 actions are designed to stimulate the development and use of energy-efficient products and technologies, according to administration officials. In so doing, they are meant to improve the nation's energy efficiency, thus reducing greenhouse gas emissions, and to smooth the transition to the mandatory measures that are to be implemented in stage 3. However, because there is no emissions reduction goal and only a broad plan for stage 1, it is not clear how the transition is to be accomplished. A number of factors, including the short time period for achieving the emissions reduction target, make an effectively planned and implemented stage 1 important.

First, the United States would be required by the protocol to meet the emissions target during the 5-year period, 2008 through 2012. This time period coincides with stage 3 of the President's proposal.

Second, the projected growth in U.S. carbon emissions will make the protocol's target challenging to meet, according to an April 1998 estimate by the Energy Information Administration. Taking into account both the growth expected from 1990 through 2010 and the protocol's target of reducing emissions to 7 percent below the 1990 level, the United States will need to reduce its emissions by 31 percent in 2010.

Finally, according to the Department of State, the protocol's targets are binding on nations that enter into the accord, and noncompliance could eventually carry penalties. The parties are to begin discussing procedures for eventually establishing penalties for noncompliance in Buenos Aires in November 1998.

Mr. Chairman, this concludes my statement. I would be pleased to answer any questions you may have.

PROPOSED STAGE 1 ACTIONS

The administration has outlined 10 actions in stage 1, listed below:

  1. Tax cuts to spur energy efficiency and the development of lower-carbon energy sources.
  2. Research and development to accomplish the same goals.
  3. Use of energy-efficient products, through a broad-based effort to expand the use of existing energy-efficient technologies.
  4. Credit for early action, to provide an immediate incentive for companies to take near-term actions to cut emissions.,
  5. Industry-by-industry consultations, for key industry sectors to prepare plans for reducing emissions.
  6. Focus on federal procurement and energy use as a means to reduce greenhouse gas emissions from federal sources.
  7. Electricity restructuring, to change the rules that can impede the introduction of cleaner technologies.
  8. The setting of a concentration goal for greenhouse gases in the atmosphere.
  9. Bilateral dialogues with key developing countries to promote clean energy.
  10. Economics and science reviews.

  11. Dirk Forrister

    Mr. Chairman and Members of the Subcommittee, I am pleased to be here today to describe the Administration's efforts to address the important issue of global climate change. In our view, climate change is one of the great environmental challenges of the next century. Rarely has there been a greater need for the Executive Branch and the Congress to work closely together to heed the clear warning of the world's leading scientists that we must begin now to address the threat of global warming.

    Last October, President Clinton proposed a strong and sensible plan that is aimed at improving our energy efficiency, spurring the development of renewable energy sources, enhancing America's leadership in energy technology, improving air quality and reducing greenhouse gases. In my testimony today, I will outline this plan in more detail.

    But first, I think it worthwhile to take a moment to review the basic reason why we are here today discussing this issue. Why do we care about global warming? The answer is that we have no alternative. We care about climate change because our best scientists tell us it is a real problem. We care because our best scientists tell us that the threats climate change poses are too serious to ignore. It is our responsibility to take vigorous, sensible steps to solve this problem. If we fail to do so, it is our children and grandchildren who will pay the price.

    The Science of Climate Change

    Scientists know that greenhouse gases in nature keep the Earth's temperature an estimated 60 degrees Fahrenheit warmer than it would be absent such gases, thus sustaining our existence on the planet.

    As a result of human activities, the concentration of carbon dioxide (the principal greenhouse gas) has increased 30 percent since preindustrial times. If we continue on a business-as-usual trajectory, concentrations of carbon dioxide could double by 2100 -- levels not seen on the planet for 50 million years. Climate models project a temperature increase of 2 to 6.5 degrees Fahrenheit by 2100. By way of reference, a cooling in average temperatures of 9 degrees Fahrenheit brought on the last ice age.

    There is substantial evidence that global warming is well under way. Studies have shown that the 20th century has been the warmest century in 600 years. The 1990s have been the warmest decade in that period and 1997 was the single warmest year on record.

    Potential Impacts of Climate Change

    The impacts of this warming pose serious threats to public health and the environment. Warmer temperatures are projected to increase fatalities from heat stress of the kind that killed 400 people in Chicago in 1995 and expand the geographic ranges for diseases like malaria and dengue fever. The incidence of asthma and other respiratory illnesses, particularly among children and the elderly, is expected to increase from the additional smog caused by warmer temperatures.

    Warmer, wetter weather is projected to increase the frequency and intensity of extreme and costly events such as floods and drought. The 1993 Mississippi River flood alone caused damages of between ten and twenty billion dollars. The Pacific Northwest floods of 1996 and 1997 and the 1997 Ohio River and Red River floods resulted in substantial costs to business and homeowners.

    Scientists project that sea levels will rise by an additional six to thirty-eight inches by the year 2100. A 20-inch sea level rise could inundate 7,000 square miles of the U.S. coastline. Low lying areas, such as Florida and the Gulf Coast, are at the greatest risk with potential devastating effects on local agriculture, quality of life and drinking water supplies.

    Furthermore, changes in growing seasons, water availability, soil moisture and precipitation could cause significant regional shifts in food productivity, with decreases in food production in many of the world's poorest regions.

    Some have argued that we can wait to act until all the details of the climate system have been fully understood. This is a recipe for disaster. We will only fully confirm predictions when we experience them. At that point it will be too late. The concentrations of greenhouse gases in the atmosphere continue to rise each year, and because these gases persist for many decades to centuries, this problem is only slowly reversed. The earth will continue to warm and the seas continue to rise as long as we continue to load the atmosphere of the earth with greenhouse gases.

    Kyoto Protocol

    The Clinton Administration is working hard at home and with our partners abroad to address climate change. The Kyoto Protocol, negotiated last December, is an historic step toward building an effective international response to the problem of climate change. The essential elements of the Kyoto Protocol include binding emissions targets for industrialized nations to be reached over a five-year period, from 2008 to 2012. The Protocol includes key market mechanisms -- like international emissions trading and the new Clean Development Mechanism -- that will provide companies with real flexibility in how they achieve emissions reductions. The Clean Development Mechanism establishes the right for companies to secure low-cost emissions credits by participating with developing countries in specific projects to reduce their emissions.

    The Administration's focus going forward will be on securing meaningful participation from key developing countries and on establishing rules and guidelines for putting agreed market mechanisms into practice. The President has made it clear that the treaty will not be sent to the Senate for its consideration until this goal has been achieved. We have initiated extensive bilateral and multilateral discussions aimed at encouraging progress in this area. We are also engaged in ongoing discussions related to the implementation of international trading and the Clean Development Mechanism, as well as provisions on activities, such as forestry, that absorb carbon. All of these issues are likely to be the subject of discussions at this year's negotiating sessions.

    The President's Domestic Plan

    Turning to our efforts at home, President Clinton's plan for reducing greenhouse gas emissions emphasizes win-win initiatives designed to cut emissions by increasing energy efficiency; by developing new, cleaner energy technologies; by working with industry and others to promote sensible solutions; and by relying on market-based mechanisms to ensure cost-effective reductions. I would like to briefly outline the key elements of this plan.

    The President's FY 1999 budget includes a program of tax incentives and research and development investments to help us meet the challenge of climate change while increasing our nation's economic competitiveness and protecting our environment. The program totals 6.3 billion dollars over 5 years -- 3.6 billion dollars in proposed tax cuts and 2.7 billion dollars in new investments.

    The tax incentive package includes tax credits such as up to 4,000 dollars for consumers who purchase highly efficient vehicles and up to 2,000 dollars for energy-efficient new homes. A 15 percent tax credit (up to 2,000 dollars) for rooftop solar equipment and a 20 percent tax credit (subject to a cap) for energy-efficient building equipment for homes and offices. A 10 percent tax credit for investment in combined heat and power systems. And, finally, an extension of a current tax credit of 1.5 cents per kilowatt hour for the production of electricity from wind and biomass.

    The investment package includes research and development spending in the major carbon-emitting sectors of the economy -- buildings, transportation, and industry. These investment proposals build on a solid track record of government-industry partnership. For example, among projects to be expanded is the Partnership for a New Generation of Vehicles, a government-industry effort to develop highly-efficient cars. We will also build on our solid foundation of advanced and basic research by investing substantial funds in research partnerships for key renewable energy technologies.

    A second component of the President's plan involves building partnerships with key energy-intensive industries to develop sector-by-sector initiatives to cut emissions. These partnerships will identify opportunities for working together to remove barriers to the development and widespread use of energy efficient technologies and practices. As part of these consultations, the Administration will discuss ways to ensure credit for businesses that act early.

    On May 4, President Clinton announced one important new partnership -- the Partnership for Advancing Technology in Housing (PATH). This partnership with the homebuilding sector is designed to build new homes that are 50 percent more energy efficient within a decade and to retrofit at least 15 million existing homes within a decade to make them 30 percent more energy efficient. Meeting PATH goals would save consumers 11 billion dollars a year in energy costs by 2010 and reduce annual carbon emissions in 2010 by nearly 24 million tons -- the amount produced by some 20 million cars.

    In another recent government-industry development, the Environmental Protection Agency and the Department of Energy extended their join Energy Star program to commercial buildings that achieve a 30 percent reduction in energy use. The Energy Star program allows manufacturers of selected energy efficient products to promote their products with an "ENERGY STAR" label. Among the major buildings that have already signed up for the Energy Star building program are the Empire State Building, World Trade Center, and Chicago's Sears Tower.

    My own work with the White House Climate Change Task Force has been particularly focussed on these industry consultations during the past several months. We have held preliminary meetings with a number of key energy intensive industries and we are hopeful that these ongoing discussions will lead to a fruitful collaboration, with industry providing their best ideas on ways they can improve their energy use and thereby reduce their emissions, and the government providing useful assistance to spur industry efforts.

    A third element of the President's plan is to substantially reduce the Federal government's own greenhouse gas emissions by improving the energy efficiency of Federal facilities and activities and by reforming procurement practices. These actions would be important in their own right, since the Federal government is the nation's largest single energy user, but they can also set an important example for the private sector.

    Another core element of the President's plan involves restructuring the electricity industry in such a way as to reduce greenhouse gas emissions while saving consumers millions on their energy bills. The Administration's restructuring proposal includes a renewable portfolio standard to increase the use of electricity from renewable sources, a 6 billion dollar a year Public Benefits Fund to spur greater investment in energy efficiency and renewable resources, and a labeling requirement so that consumers will have information about the source of electricity being used when selecting their supplier.

    The President has also proposed a domestic emissions trading system to begin by 2008, after a decade of experience in reducing emissions. The goal of such a regime is to ensure that further cuts are achieved as cost-effectively as possible. The United States has used emissions trading successfully to reduce the pollution that causes acid rain -- exceeding environmental objectives at costs far lower than anticipated.

    Finally, the Administration is continuing its strong support for the U.S. Global Change Research Program. This program is focused on increasing our knowledge of the timing and regional patterns of the climate changes we expect, the combined effects of natural variation and human actions, and the vulnerability of natural resources. A strong foundation of peer-reviewed science results will support sound policy making and the evaluation of actions taken to confront the challenge of climate change.

    Conclusion

    Taken together these domestic actions chart a course aimed at enhancing our nation's energy efficiency and spurring technological innovation in ways that will reduce greenhouse gas emissions. We look forward to continuing to work with this committee and the rest of Congress as we move forward in meeting the important challenge of responding to the risks of global climate change.

    I would be happy to answer any questions the Committee may have.

    David M. Gardiner

    Mr. Chairman and Members of the Committee, I appreciate the opportunity to appear before you to discuss the President's Climate Change Technology Initiative -- a $6.3 billion dollar investment to help the country meet the challenge of global warming and, at the same time, achieve multiple environmental and economic benefits. We have proposed this initiative because the scientific evidence strongly supports our belief that a changing climate would pose very serious risks to public health and to the environment.

    It is difficult to predict with certainty what will happen in the future, but the risks are enormous. If emissions of greenhouse pollutants are not reduced worldwide, atmospheric concentrations are expected to reach double pre-industrial levels by the year 2060. That would cause global temperatures to rise by roughly two to six degrees by the year 2100, and global sea levels to rise 6 - 38 inches.

    Climatic changes on that scale would pose very serious threats to public health and the environment. For example, a doubling of current atmospheric concentrations of greenhouse pollutants could contribute to more frequent and intense episodes of urban smog, thus increasing rates of human illness and death. The projected increase in the duration and frequency of heat waves could increase mortality rates due to heat stress.

    Climate change also could lead to increases in several infectious diseases, including malaria, dengue, and yellow fever, as the range of organisms that carry these diseases expands. It has been estimated, for example, that as global surface temperatures rise, by the end of the 21st century the global population will suffer an additional 50 - 80 million cases of malaria.

    By the year 2100, rising sea levels could submerge 15 - 60 percent of America's coastal wetlands. These wetlands are nature's kidneys; they cleanse and purify the waters that pass through them. Their loss would be a blow to the health of humans and wildlife alike.

    Groundwater aquifers and surface waters could be rendered unfit for drinking by the saltwater intrusion that could be common as sea levels rise. Seven thousand square miles of dry land in states like Louisiana and Florida could be inundated, with devastating effects on local agriculture, quality of life, and drinking water sources. Both droughts and floods are likely to become more frequent and severe as average temperatures rise, thus increasing personal and property damage.

    In Alaska, rising surface temperatures will melt the permafrost and endanger the roads and structures that rest upon it. Wildlife, forestry and commercial fishing operations will also be threatened by rising temperatures.

    In short, the potential consequences of climate change go far beyond a few degree rise in average global temperatures over the next century. Rising temperatures and related climate phenomena pose a distinct and serious threat to human health, the environment, and the quality of life on earth. The Intergovernmental Panel on Climate Change stated the problem succinctly: Climate change is likely to have wide-ranging and mostly adverse impacts on human health, with significant loss of life.

    >In the face of this evidence, and because the effects of climate change would be so serious and so costly, the President has proposed a Climate Change Technology Initiative to allow our nation to reduce greenhouse pollution in common sense, cost-effective, and flexible ways.

    The partnership programs and targeted tax cuts that the CCTI will fund will improve on the success of the Administration's current climate change programs in reducing greenhouse gas emissions. And funding these programs is a wise investment in America's energy future that will benefit the economy, public health, and our environment.

    The investments proposed by the President will bring economic benefits beyond those associated with the control of global warming. They will provide incentives for American businesses and communities to cut greenhouse gas emissions now in ways that make economic sense now. They will speed the adoption of today's cost-effective, energy-efficient, low-carbon technologies throughout the economy, and hasten the development of even more advanced technologies in the future. Over 85 percent of greenhouse gas emissions are associated with the burning of fossil fuels, our nation's primary fuel source. Thus, using energy more efficiently in our businesses, homes, and vehicles will save money and make our overall economy far more productive, while at the same time reducing emissions of greenhouse gases and other pollutants.

    We've already seen how effective these kinds of incentives can be. Under our current Climate Change Action Plan, the Administration has negotiated more than 6,000 EPA partnerships with U.S. businesses, local governments, hospitals, universities and schools across the nation. Dozens of companies like General Motors, IBM, Motorola, and Lockheed Martin are cutting energy use, saving money, and reducing their emissions of greenhouse gases.

    And they work. By 1999, continuation of existing voluntary programs can reduce greenhouse pollutants by over 40 million tons a year, and eliminate 90,000 tons of nitrogen oxides, a prime component of urban smog. In fact, every dollar we invest to improve energy efficiency and limit climate change will also control conventional air pollutants like particulates, nitrogen oxides, volatile organic compounds, and carbon monoxide. These pollutants have been linked to heightened risks of mortality, chronic bronchitis, congestive heart failure, heart disease, and other serious illnesses. Children and the elderly are most vulnerable to these pollution-related illnesses.

    And these voluntary programs produce real energy savings. They can reduce U.S. energy consumption by over 45 billion kilowatt hours in 1999, providing $3 billion in energy savings to consumers and businesses. For every dollar spent by EPA, the nation's energy bill is reduced by more than $70.

    Let me give you some examples of how rewarding these actions can be for both the environment and the economy:

    • EPA partnerships with industry have resulted in significant reductions of greenhouse emissions. DuPont has taken steps to cut energy use that saved the company 31 million dollars in 1995, while reducing carbon dioxide emissions by 18 million tons by the year 2000.
    • Climate Wise Partner BP America is working in Alaska to improve the efficiency of its extraction and exploration operations. In all, over the last three years, BP America has reduced emissions in Alaska alone by over 460,000 tons of CO2 per year. This is equal to taking over 100,000 cars off the road.
    • EPA and DOE have expanded their successful Energy Star programs and developed new partnerships with window manufacturers to produce more efficient windows, and with electronic manufacturers to improve the energy efficiency of new televisions and VCRs. Without any noticeable change in the product, improving the efficiency of our TVs can reduce pollution by up to a million tons of carbon per year and save consumers up to $500 million per year on their energy bills. But TVs are just one of the many products offered under EPA and DOE's Energy Star partnerships. The Energy Star partnership with computer manufacturers, launched in 1992, delivered several hundred million dollars in energy bill savings to consumers and businesses in 1997 -- all from computer systems that use energy more efficiently and reduce pollution simultaneously.
    • Under the Energy Star Buildings program, the Empire State Building, the World Trade Center and other major office buildings have agreed to achieve significant reductions in greenhouse gas emissions through the installation of energy efficient lighting and heating and cooling systems.
    These voluntary programs help enhance the productivity of the American economy. They help American businesses compete more effectively in the global economy. And by reducing greenhouse pollution they help us reduce the threat of global warming. The Climate Change Technology Initiative continues this common-sense, cost-effective strategy. The President's Initiative expands these voluntary programs designed to reduce greenhouse pollutants. And if the Initiative is implemented, we can expect to achieve even greater reductions in emissions, and with greater energy savings for consumers and industry alike:
    • Today, a majority of home energy-using products are now covered by the "ENERGY STAR" label, including heating and cooling equipment, computers, and appliances such as refrigerators and washing machines. If over the next 15 years everyone were to buy only those energy-efficient products marked in stores with EPA and DOE's distinctive "ENERGY STAR" label, we could shrink our energy bills by a total of over $100 billion over the next 15 years and dramatically cut greenhouse gas emissions.
    • Our Energy Star Buildings objective is to profitably improve the energy efficiency of one-half of all commercial buildings and homes by the year 2010. The objective can be accomplished by improving the technologies that home and building owners purchase over the next decade, and by improving the design and construction of new homes and buildings. Achieving this objective would yield annual savings of about 70 million tons of carbon by 2010 and about 170,000 tons of nitrogen oxides while saving consumers and building owners more than $30 billion per year.
    • In the industrial sector, our objective under CCTI is two-fold: first, to work with businesses to double their normal rate of energy efficiency improvements between now and 2010; and second, to reduce methane, HFC, PFC, and SF6 emissions by 25 percent from projected baseline levels in 2010. Achieving those dual objectives in the industrial sector would result in annual reductions of about 140 million tons of carbon by 2010 and annual energy bill savings to American industry of up to $15 billion per year by 2010.
    • There is tremendous potential for emissions reductions in the transportation sector, now responsible for a full one-third of the U.S. greenhouse gas emission inventory. Our objective will be to increase the efficiency of light vehicles through the Partnership for a New Generation of Vehicles and through the introduction to the market of ultra-high fuel economy vehicles even earlier than the 2004 model year.
    Some have suggested that the CCTI is a "backdoor attempt" to implement the goals agreed to by the United States and other industrialized nations under the Kyoto Protocol. This is an erroneous interpretation of this proposal. Many of the programs that will be continued and expanded under the CCTI were begun under President Bush's leadership. These programs are strictly voluntary. They are good for the economy and can save energy costs for businesses and consumers. And these programs are consistent with the criteria established under the Rio Accord of 1992 calling for effective, voluntary measures to prevent climate change. By every measure, these programs are successful, and have brought us economic and health benefits beyond those associated with the control of global warming.

    As with our existing climate change programs, the Climate Change Technology Initiative programs will operate under clear performance standards. EPA's agency-wide Strategic Plan outlines specific goals, objectives and milestones for all climate-related programs and activities. In accordance with the Government Performance and Reporting Act, EPA has developed a successful and extensive system of performance measures and program evaluations for the climate programs. We devote considerable effort to obtaining the best possible information upon which to evaluate our programs. For example, EPA reports the results of the Green Lights program based exclusively on detailed reports submitted by the program's partners on over 14,000 completed projects around the country. We are confident that these important programs can provide maximum accountability and generate valuable information for future program development.

    The EPA and DOE work together under a signed memorandum of understanding that ensures complete cooperation between our agencies in managing and evaluating these voluntary programs and the emissions reductions achieved. The effective evaluation of individual program results is a key aspect of the program implementation process. Climate Wise companies agree in joining the program to develop comprehensive Action Plans that describe and quantify actions undertaken to reduce greenhouse gas emissions. These plans are then subjected to a rigorous interagency review process to ensure accuracy under sector-wide emissions reduction plans.

    The Administration evaluates the effectiveness of its climate programs through an interagency program review. The first such interagency evaluation, chaired by the White House Council on Environmental Quality, examined the status of the Climate Change Action Plan. The review included participants from EPA, DOE, DOC, DOT, and USDA, as well as White House offices. The results were published in the U.S. Climate Action Report-- 1997 as part of the United States Submission to the Framework Convention on Climate Change. There were several opportunities for public comment. The Administration will continue to evaluate the future effectiveness of the climate programs through a White House coordinated, interagency process.

    This is an economically sound and environmentally sensible approach. We hope the Committee will give these programs the utmost consideration. We thank you for your continued assistance and look forward to working with you in our efforts to prevent climate change and provide a better quality of life for all our people.

    * * * * *

    JOHN KARL SCHOLZ

    Mr. Chairman and Members of the Committee, I appreciate the opportunity to discuss with you today the Administration's climate change tax incentives.

    As you know, a few months ago, in the Administration's budget for FY 1999, the President presented to the Congress his plan to begin addressing climate change. That plan includes $3.6 billion of tax incentives that will encourage energy efficiency and renewable energy sources. The proposed tax incentives are part of a larger package of technology initiatives. In addition to the $3.6 billion of tax incentives, the Administration proposed $2.7 billion for R&D and deployment of energy efficiency, renewable energy, and carbon-reducing technologies. These provide a total of $6.3 billion in new funding and tax incentives over five years. We believe that these initiatives will stimulate the development and use of technologies that can help to improve energy efficiency and reduce greenhouse gas emissions.

    My comments today will focus on an explanation of the Administration's proposed tax incentives.

    DISCUSSION

    Individuals and businesses underinvest in energy-saving technologies because the private returns from those investments are lower than the benefits to society. Private incentives may be too low because the market prices that serve as the signals that influence investment decisions do not take into account the benefits to society attributable to energy savings. Investments in energy-saving technologies can reduce dependence on oil imports and slow the buildup of greenhouse gases in the atmosphere. Tax incentives are an appropriate method for addressing the failure of market prices to achieve the desirable level of investment in energy-saving technologies because they can increase the private return from the investment by reducing its cost.

    The proposed tax incentives are intended to reduce energy consumption and greenhouse gas emissions by encouraging the deployment of technologies that are highly energy efficient RR-2492 and that use renewable energy sources. Tax incentives can only be claimed for items that meet high standards for energy efficiency, use renewable energy sources, or reduce emissions of certain highly potent greenhouse gases. If the incentives are successful and are claimed by taxpayers, there will be energy savings and reductions in greenhouse gas emissions. If taxpayers do not take advantage of the incentives, however, there will be no revenue loss.

    Specifically, we designed the incentives to take into account the following considerations:

    1. Superior energy efficiency compared to conventional equipment. The eligible items must meet high standards for energy efficiency or use renewable energy sources. This helps to ensure that scarce public resources are being used for the intended goal of reducing greenhouse gases.
    2. High threshold for eligibility. The eligible items must presently account for a small share of the market. This minimizes windfalls for purchases that would have been made anyway.
    3. High up-front costs compared to conventional equipment. The targeted technologies have significantly higher purchase prices than conventional equipment and, at current market prices, are not universally cost-effective. These high up-front costs are another reason not many would be purchased without the credit.
    4. Commercially available. The items must be commercially available or near commercialization. This ensures that the incentives encourage the deployment of new technologies that private markets have already developed.
    5. Ease of administration. The items must be able to be defined precisely enough so that the Internal Revenue Service can administer the incentives. This helps to ensure that incentives are claimed only for items for which they are intended.
    We also targeted tax incentives to address certain emissions of highly potent greenhouse gases that in some cases have atmospheric lifetimes of thousands of years and a global warming potential as much as several thousand times greater than carbon dioxide, the most abundant greenhouse gas.

    The tax incentives the Administration has proposed cover the four major greenhouse gas-emitting sectors of the economy: buildings, industry, transportation, and electricity.

    Buildings

    Buildings currently account for about one-third of energy consumption and the related greenhouse gas emissions. The proposed tax incentives for the buildings sector would encourage investment in a new generation of energy-efficient building equipment, highly energy-efficient new homes, and rooftop solar systems.

    Tax credit for highly energy-efficient building equipment

    A 20 percent tax credit would be provided for the purchase of certain highly energy-efficient building equipment. This credit encourages the purchase of equipment that will improve the energy efficiency of both residential and commercial buildings. The items covered are certain fuel cells, electric heat pump water heaters, natural gas water heaters, electric heat pumps, natural gas heat pumps, and advanced central air conditioners. Only very energy efficient equipment of each type would be eligible. The credit would be temporary -- for equipment purchased between January 1, 1999 and December 31, 2003 (fuel cells would be delayed one year). The revenue cost of this incentive is estimated to be $1.4 billion for FY 1999 - 2003.

    The proposed tax credits reflect the considerations noted above. Eligible items embody new, cutting edge technologies, generally capturing less than 1 percent of market sales. Therefore, few of the credits would go for purchases that would have been made anyway. These top-tier technologies have substantial purchase prices and are not universally cost-effective, but offer superior energy efficiency compared to conventional equipment. For example, compared to typical units on the market, the eligible advanced air conditioning systems and electric heat pumps are 40 percent more efficient, and eligible electric heat pump water heaters and natural gas heat pumps are about twice as efficient. Eligible items are currently available. Energy efficiency standards are available for the eligible equipment so that items could be defined precisely enough for IRS to administer the credit.

    Through 2008, we estimate that over 7 million taxpayers will purchase energy efficient equipment eligible for the credit. As noted above, eligible units are substantially more energy efficient than the typical units on the market.

    Tax credit for new energy-efficient homes

    Residences account for about one-sixth of US greenhouse gases and offer one of the largest sources of energy saving potential. Almost one million new homes and manufactured homes are built and sold each year. Some states and certain Federal programs require new houses to meet Model Energy Code standards for insulation and related construction standards, and for heating, cooling and hot water equipment. But the energy efficiency of new homes could be improved by 50 percent or more through the use of energy efficient building practices and more efficient heating and cooling equipment.

    To encourage the purchase of new highly energy-efficient homes, a tax credit would be provided equal to one percent of the purchase price (up to a maximum credit of $2,000) of new homes that use at least 50 percent less energy for heating, cooling and hot water than the Model Energy Code. The full credit would be available for homes purchased between January 1, 1999 and December 31, 2003, and would phase out in 2006. The revenue cost of this incentive is estimated to be $0.2 billion for FY 1999 - 2003.

    Again, we have set a high threshold for eligibility for the credit. Eligible houses would be very energy efficient compared to present standards. Energy used in housing eligible for the credit would be reduced by 75 percent to 85 percent compared to existing housing and by over 50 percent compared to new housing.

    Tax credit for rooftop solar systems

    Solar energy systems, which accounted for .02 percent of electricity generation in 1996, have the potential to reduce greenhouse gas emissions and energy costs for businesses and individuals. The tax credit for the purchase of rooftop photovoltaic (PV) systems and solar water heating systems solar systems would make these systems more affordable and encourage their purchase. The credit would be 15 percent of qualified investment up to a maximum credit of $2,000 for PV systems and $1,000 for solar water heating systems. The credit would be available from January 1, 1999 to December 31, 2003 for solar water heating systems, and to December 31, 2005 for rooftop PV systems. The revenue cost of this incentive is estimated to be $0.1 billion for FY 1999 - 2003.

    This tax initiative will help to achieve the President's goal of one million solar roofs by 2010. Heat and electricity produced from solar energy systems produce no greenhouse gases.

    Industry

    The proposed tax incentives for industry would promote energy efficiency by encouraging investments in combined heat and power systems that make effective use of energy that is otherwise wasted in producing electricity by more conventional methods. Tax credits are also provided to encourage the replacement of certain electricity circuit breakers that are prone to leak a potent greenhouse gas and the purchase of equipment that recycles certain greenhouse gases used in the semiconductor industry.

    Tax credit for combined heat and power (CHP) systems

    CHP systems use thermal energy that is otherwise wasted in producing electricity by more conventional methods. These systems increase energy efficiency, lower the consumption of primary fossil fuels and reduce carbon emissions as compared with conventional methods.

    To encourage and accelerate investment in CHP equipment, a 10 percent tax credit would be provided for investments in CHP systems that meet certain energy efficiency requirements. A qualified system would be required to produce at least 20 percent of its total useful energy in the form of both thermal energy and electric or mechanical power, and would have to meet certain efficiency standards. The credit would apply to property placed in service between January 1, 1999 and December 31, 2003. The revenue cost of this incentive is estimated to be $0.9 billion for FY 1999 - 2003.

    Current cogeneration capacity is nearly 45 gigawatts. The credit should increase that capacity by about ten percent. Eligible CHP systems should reduce input energy requirements by about one-third compared to conventional systems. This saving is achieved by capturing the current waste heat that is created during the generation of electrical energy and using that waste heat in a thermal application. This saves fuel costs and generates fewer greenhouse gas emissions.

    Tax credit for replacement of certain circuit breaker equipment

    Certain older, large power circuit breakers used in the transmission and distribution of electric power are particularly prone to leak sulfur hexafloride (SF6). This equipment, using a dual pressure technology that was no longer produced after 1985, is particularly prone to leak as the seals corrode over time. The purpose of the tax incentive is to encourage utilities to replace the old equipment with new equipment. To prevent the old equipment from being sold to another utility in the US or abroad, the old equipment must be certified by an appropriate third party to have been destroyed.

    To encourage the replacement of leaky circuit breakers, a 10 percent credit would be provided for the cost of new equipment. The credit would apply to new equipment placed in service between January 1, 1999 and December 31, 2003. The revenue cost of this incentive is estimated to be less than $50 million for FY 1999 - 2003.

    Tax credit for perfluorocompound (PFC) and hydrofluorocarbon (HFC) recycling equipment

    PFCs and HFCs are among the most potent greenhouse gases because of their extreme stability in the atmosphere and strong absorption of radiation. Because of the rapid anticipated growth of the semiconductor industry, the use of these gases is expected to grow at rates of 20 to 30 percent per year for the next ten years. A 10 percent tax credit would be provided for the purchase of equipment to recycle and recover PFCs and HFCs used in the production of semiconductors. The credit would apply to equipment placed in service between January 1, 1999 and December 31, 2003. The revenue cost of this incentive is estimated to be less than $50 million for FY 1999 - 2003.

    These two tax credits are targeted toward emissions of very potent greenhouse gases that in some cases have atmospheric lifetimes of thousands of years and a global warming potential as much as several thousand times greater than carbon dioxide.

    Transportation

    The proposed tax initiatives in the transportation sector include tax credits for the purchase of highly fuel-efficient cars and light trucks, and an incentive to encourage public transportation and vanpools.

    Tax credits for highly fuel efficient vehicles

    Cars and light trucks (including minivans, sport utilities, and pickups) currently account for 20 percent of greenhouse gas emissions. Tax credits for highly fuel efficient vehicles will help to move vehicles that are ultra efficient from the laboratory to the highway. Thus this credit complements the research Partnership for a New Generation of Vehicles (PNGV program) that will develop a production prototype of a family car with three times the fuel economy of today's comparable car (about 80 miles per gallon) by 2003-2004.

    Two tax credits would be provided:

    • A $4,000 credit for a vehicle with triple the base fuel economy for its class. This credit would be available for purchases of qualifying vehicles beginning January 1, 2003. The credit amount would be phased down to $3,000 in 2007, $2,000 in 2008, and $1,000 in 2009, and would be phased out in 2010.
    • A $3,000 credit for a vehicle with twice the base fuel economy for its class. The $3,000 credit would be available for purchases of qualifying vehicles beginning January 1, 2000. The credit amount would be phased down to $2,000 in 2004, $1,000 in 2005, and would be phased out in 2006.
    These credits would be available for all qualifying vehicles, including cars, minivans, sport utility vehicles, pickup trucks, and electric vehicles. The revenue cost of this incentive is estimated to be $0.7 billion for FY 1999 - 2003.

    Again, we have set a very high threshold for obtaining these credits. Eligible vehicles must be two or three times as efficient as today's comparable vehicles. Tripling a car's fuel economy reduces its emissions of carbon dioxide by 67 percent; doubling a car's fuel economy reduces its emissions of carbon dioxide by 50 percent.

    Equalize the tax treatment of parking and transit benefits

    Under present law, qualified transportation fringe benefits provided by an employer are excluded from income. Qualified transportation fringe benefits include parking, transit passes, and vanpool benefits. Beginning in 1998, parking is excludable from gross income even when provided in lieu of other compensation payable to an employee. Transit passes and vanpool benefits, however, are only excludable if provided in addition to, and not in lieu of, any compensation otherwise payable to an employee. In 1998, the amount of employer-provided benefit that is excludable from income per month is $175 for parking and $65 for vanpool and transit benefits.

    This initiative would equalize the tax treatment of parking benefits and transit and vanpool benefits. To encourage public transportation and vanpools, employers would be allowed to provide tax free transit and vanpool benefits in lieu of compensation, up to the same amount that they can provide for parking beginning January 1, 1999. The revenue cost of this incentive is estimated to be $0.1 billion for FY 1999 - 2003. A similar provision is contained in the Surface Transportation Revenue Act of 1998.

    Electricity

    Extension of tax credit for electricity produced from wind and biomass

    Wind energy systems accounted for about .09 percent of electricity generation in 1996. What is deployable today is the result of successful R&D in the past. To encourage the production of electricity from wind and certain biomass, a 5-year extension is proposed for the present 1.5 cent per kilowatt hour tax credit (adjusted for inflation after 1992). The present credit, which applies to facilities placed in service before July 1, 1999, would be extended for five years. The revenue cost of this incentive is estimated to be $0.2 billion for FY 1999 - 2003.

    This tax credit helps to make electricity from these systems competitive with other forms of electricity generation. Electricity produced from wind energy systems produces no greenhouse gases.

    CONCLUSION

    Our goal has been to design a package of tax incentives to achieve reductions in greenhouse gases and to increase energy efficiency. The tax incentives have well-defined goals. Eligible items offer superior energy efficiency, use renewable energy sources, or reduce emissions of some of the most potent greenhouse gases. If taxpayers claim a credit, it is for items that produce energy savings and reductions in greenhouse gas emissions. If taxpayers do not take advantage of the credits, there is no revenue loss.

    The impact of the incentives in this package on greenhouse gases will likely increase significantly in the years beyond the ten-year budget window, and those distant effects, by their very nature, are the most difficult to predict. That is why the Administration has chosen not to make speculative estimates about the potential benefits. I would like to illustrate this point with one example. I stated earlier, with respect to the tax credit for highly energy-efficient building equipment, that the affected equipment presently captures less than one percent of market sales. With the credit in place, we expect this fraction to increase significantly in the short-run. We also expect that after the credit has expired the share of the market for highly efficient building equipment will be much larger as a result of the credit. But whether it will double, or triple, or increase by a factor of 10 is unclear. The estimated impact on emissions reductions will hinge on assumptions about the long-term increase in market share, which is very difficult to predict.

    In conclusion, Mr. Chairman, we believe that the Administration's proposed tax incentives represent sound policy that will have long-term benefits. We look forward to working with the Congress on this matter.


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