IMPLICATIONS OF THE CLIMATE CHANGE TREATY
FOR U.S. INTERNATIONAL COMPETITIVENESS

April 14, 1998

INTRODUCTION
Thank you for the opportunity to address you today. It is always a pleasure to appear before the Association of Women in International Trade. I want to acknowledge Michele Dastin for her efforts in organizing today's event. Michele and I worked together at the Commerce Department in the U.S. Foreign and Commercial Service when I served as Under Secretary for International Trade. I last addressed this group in that capacity where I discussed the importance of our trade promotion programs as well as the absolute necessity to maintain a domestic consensus for free trade. While that struggle continues, many of you here today have been on the front lines of the policy debate and your continued engagement and involvement will be critical to our ongoing effort in favor of greater trade--an effort that is critical to our continued economic prosperity.

Trade is the key to our future competitiveness. We must be both willing and prepared to engage in the global economy if we are to maintain our position of leadership and reap the benefits of a new century. To do so requires not only taking advantage of the opportunities of globalization, but also addressing the problems and challenges of an increasingly dynamic and growing global economy.

Secretary Albright has often said that American leadership is indivisible. Just as it must be demonstrated in security and foreign policy matters, it is equally important in other areas such as trade. American leadership must also be present in addressing the responsibilities and challenges of global change--specifically, how continued and sustained growth impacts our environment. Can we address this problem without harming our competitiveness or future prosperity?

That question crystallizes the present debate and discussion over the Kyoto Protocol--the agreement reached at the International Conference on Climate Change held in Kyoto, Japan, last December. In judging the merits of the Kyoto Protocol, we must recognize that it is an historic first step and is a framework for future action to meet this challenge. But the Administration fully understands and appreciates that more work needs to be done before it is implemented.

CLIMATE CHANGE Rarely has there been an environmental issue more complex and important, and rarely has there been a greater need for the Executive Branch and Congress, NGOs and the private sector to work together than climate change. As head of the U.S. delegation in Kyoto, I want to share with you some of my reflections of our accomplishments and how we were able to make an important first step in addressing the issue of climate change. To better understand this complex yet important issue, I would like to discuss four aspects: the science; the key features of the Kyoto Protocol; the misconceptions of the agreement; and the President's Climate Change Initiative.

SCIENCE The science tells us clearly we must act. The authoritative 1995 Intergovernmental Panel on Climate Change, representing thousands of scientists from 50 countries, indicated that under a business-as-usual scenario, concentrations of greenhouse gases could exceed levels not seen for 50 million years and projected temperature increases of two to six and a half degrees over the next hundred years would exceed rates of change not seen for the last 10,000. Indeed, they found that the Earth had warmed about one degree Fahrenheit over the last century, beginning with the industrial revolution, and they agree that the evidence suggests that this is coming from a discernible human influence on global climate.

Increased temperatures will speed up the global water cycle, lead to a drying of soils, and in some areas increase drought. Sea levels are expected to rise which could double the global population at risk from storm surges in low-lying areas in places like coastal Louisiana and the Florida Everglades. This will affect human health as well by exacerbating air quality problems and diseases that thrive in warmer climates. We will see extreme weather variations, changing forest and crop habitats and other problems that may be irreversible.

Not only is there consensus among scientists, but now there is recognition among industry. Recently, executives from leading oil companies indicated that in fact there is a climate change occurring and that human conduct is having an impact. One executive was quoted as saying "We're moving beyond denial," and another indicated that it is time to move beyond the debate and determine what to do about it.

THE KYOTO PROTOCOL Backed by science and an international consensus to act, we came to Kyoto with three objectives, as outlined by the President and the Vice President, in our negotiations for an international global warming treaty. We achieved the first two--sound targets and timetables for reducing greenhouse gas emissions among the world's major industrial nations, and flexible market-based mechanisms for achieving those targets. The third, participation among developing countries, will be the focus of our work in the coming months and years, and here too we have made important progress.

Our first objective--realistic targets and timetables among developed countries--had to be a credible step in reducing the dangerous buildup of greenhouse gases, yet measured enough to safeguard economic prosperity and not impact our economic competitiveness. We met this objective by achieving the following:

our concept of a multi-year time frame for emissions reductions rather than a fixed, single-year target to allow nations greater flexibility in meeting their targets; our specific time frame of 2008-2012 giving time to phase in change gradually and deploy new technologies, avoiding substantially larger costs; differentiated targets for the key industrial powers--the European Union agreed to an 8 percent reduction, while the U.S. accepted 7 percent and 6 percent for Japan; an innovative U.S. proposal to allow activities, such as planting trees--called sinks--that absorb carbon dioxide to be offset against emissions targets; coverage of six significant greenhouse gases, rather than the three that the Japanese and Europeans originally insisted on.

Our second broad objective was to make sure that countries can use flexible market mechanisms to reach their targets rather than the mandatory "policies and measures," such as carbon taxes. The Kyoto Protocol enshrines a centerpiece of this U.S. market-based approach--the opportunity for companies and countries to trade emissions permits. In this way, companies or countries can purchase less expensive emissions permits from countries that have more permits than they need because they have met their targets with room to spare. This is not only economically sensible, but environmentally sound. By finding the least expensive way to reduce emissions, we will be providing a strong incentive for countries and companies to achieve the maximum level of emissions reductions at the least cost. While the U.S. has had experience with permit trading in the acid rain program, this was a new concept for other countries in the developed world.

Throughout our marathon sessions in Kyoto, foremost on our mind was negotiating an agreement that would be both economically sound and environmentally strong. By achieving our first two objectives, the Kyoto Protocol goes a long way to meet that goal.

Our third objective was to secure meaningful participation of key developing countries. The Kyoto agreement does not meet our requirements for developing country participation. Nevertheless, a major down payment was made in the form of a provision, advanced by Brazil and backed by the United States to establish a so-called "Clean Development Mechanism," which embraces the U.S.-backed concept of "joint implementation with credit." This new mechanism will allow companies in the developed world to enter into cooperative projects in the developing world--such as construction of high-tech, environmentally sound power plans--for the benefit of both parties.

We are gearing up to put on a diplomatic full court press to secure the meaningful participation of developing countries. We must be creative in initiating bilateral agreements. We must also use regional and multilateral forums to achieve our objectives. Finally, we must enlist international financial institutions to help fund climate friendly energy and infrastructure projects in developing countries. Climate change is a global problem which requires a global solution. By 2015, China will be the largest single emitter of greenhouse gases. By 2025, the developing world will outpace the developed world in terms of greenhouse emissions.

MARKET-BASED MECHANISMS OF THE PROTOCOL Let me emphasize the fundamental importance of these market-based mechanisms--emissions trading, joint implementation, and the Clean Development Mechanism--and the opportunities they will create for the U.S. economy. One of the most important tasks this year will be to define the rules for an international trading system for greenhouse gas emission credits. I just referred to the 1980s when acid rain was a very prominent issue of concern. The Environmental Protection Agency led the governmental task force in creating a nation-wide trading system for sulfur dioxide emissions. In creating that system we used the array of choices and flexibility a market allows to speed air quality improvement. The cost of emissions permits representing a number of tons of sulfur dioxide gas a holder was allowed to emit remained much lower than skeptics ever imagined and our efforts to reduce acid rain were much faster and cheaper than was originally thought. The greenhouse gas emissions trading system of the Kyoto Protocol will draw on our success with the SO2 permit scheme.

While the protocol restricts emissions trading to be conducted among the developed countries who have quantified their total emissions and have set reduction targets, the Clean Development Mechanism provisions of the Protocol, operational guidelines of which are currently being developed, will allow us and other developed countries with sought-after technologies to carry out projects with developing countries and claim emissions reductions generated against their own commitments. By jointly implementing projects and by using the Clean Development Mechanisms of the Kyoto Protocol, we will again gain great benefit as we work toward mitigating climate change and help other economies become more energy efficient as they develop.

ECONOMIC ANALYSIS The economic costs of implementing these measures would be modest. Dr. Janet Yellen of the President's Council of Economic Advisors indicated in recently given testimony that the emission price for carbon would be roughly $14-$23 per ton. This correlates to between 3-4 cents per gallon of gasoline--a modest increase.

This is a realistic assessment. It does not account for benefits of electricity restructuring or the value of insurance against a serious environmental threat. Those who claim these estimates reflect only the rosiest of scenarios should recognize that these cost estimates exclude not only climate and non-climate benefits, but also such cost mitigating factors as carbon sinks and increases in energy efficiency from the President's $6.3 billion climate change initiative, which encourages market-oriented R&D and the cost-effective use of renewables. This is not even mentioning the market efficiencies that will be created by new technologies here and abroad.

You may have seen some studies which projected dire consequences and significant negative economic impacts if we entered an international agreement. Mr. O'Keefe will cite several of them in his presentation. But keep in mind that they overestimate the impacts of the Kyoto agreement. Even Bill O'Keefe will admit they were conducted before the agreement was actually reached and even before the Administration had announced its position heading into the negotiations. Hence, they were based on more severe emissions cuts than the ones that were negotiated and did not consider emissions trading and other market-based mechanisms and responses or the inclusion of sinks which are key components of the agreement for which the Administration fought.

With effective mechanisms for international emissions permit trading, joint implementation, and the Clean Development Mechanism, as well as meaningful developing country participation and flexible timetables, the costs will be modest and will not hurt our relative international competitiveness. The United States' economy is the world's strongest and most innovative. The world looks to us for environmentally sound technology and that will continue.

Again, it relies on market mechanisms. To quote Dr. Yellen who testified with me on Capitol Hill, "virtually all energy models reveal the potency of effective, flexible, domestic and international trading mechanisms to reduce substantially the cost and energy price impacts of meeting the Kyoto targets." As I have pointed out, the Protocol has such mechanisms.

MISCONCEPTIONS This debate over climate change must be waged on facts, and not be clouded by misinformation. The first is the misconception that Kyoto somehow will imperil the ability of our military to meet its worldwide responsibilities. This is absolutely untrue. Safeguarding U.S. national security is a fundamental diplomatic objective and the interests of our armed forces were central to our negotiating efforts in Kyoto. As head of the American delegation, I was supported by an interagency negotiating team that included two uniformed military representatives. The outcome of Kyoto successfully addressed the major concerns of the President, the Department of Defense and the foreign affairs agencies in general over the potential restricting impact upon U.S. military preparedness. By exempting mandatory emissions reductions for our multilateral operations, ensuring the availability of bunker fuels, and facilitating the deployment of U.S. forces at bases abroad, the U.S. delegation at Kyoto has protected our national defense while taking a step toward preserving the global environment. The Department of Defense is fully satisfied with the Kyoto results.

A second misconception is somehow the protocol will create a super-UN secretariat with intrusive verification. This too is false. The verification process will not be done by some UN secretariat, but by experts nominated by governments. The review teams will meet with government officials and with others only by invitation. Site visits will take place only if approved by the host country. And no one will go on private property in the United States unless the owner of that property expressly agrees.

One fear critics of the Protocol have expressed is the idea that if the developed countries take necessary measures to reduce emissions, they will be at a disadvantage in trading with developing countries who have not made binding commitments to cap greenhouse emissions. Yet from the most respected economic analyses and our experience in meeting the challenges of acid rain and the damaged ozone layer, we do not envision climate change mitigation efforts to be a zero-sum game. The creative activities needed to address climate change will promote economic expansion. Within the multi-year time periods for meeting emission reduction targets that the U.S. fought for in the Kyoto agreement, we have ample time flexibility for capital turnover and for continuing to create an develop world-leading technologies.

CLIMATE CHANGE INITIATIVE The president outlined last October a three-staged approach to address climate change at home. As a first installment, he announced in his State-of-the-Union address his own Climate Change Initiative--a $6.3 billion initiative of tax cuts and R&D.

This country has an unparalleled capacity for innovation and for developing technological solutions. We know that this technological capacity will help us meet these obligations and create jobs at the same time. Jack Smith, President and CEO of General Motors talked recently about the work they are doing to produce a car that will get twice the gas mileage than we presently get. Texaco has discussed producing a special conversion program for natural gas to reduce the amount of natural gas that's flared, thereby reducing emissions. This is true internationally as well. I met with Toyota executives on Friday who told me of a new car they are developing that will use both an internal combustion engine and an electrical engine that doesn't need recharging and gets 60 miles a gallon.

There are other sources, such as low-carbon fuel. Government-industry research and development partnerships have brought the cost of ethanol from cellulosic waste an dedicated crops from $3.60 per gallon in 1980 to $1.20 today. Such fuels are carbon neutral because the crops capture carbon dioxide when they grow and release it during combustion.

We have the technological capacity. And when I was Under Secretary of Commerce for International Trade, we created a special unit focused exclusively on environmental exports. Environmental exports are our fastest growing exports. With developing countries seeking to grow and industrialize, the demand for these products will naturally increase. This is a huge opportunity that we can take advantage of thanks to our technological expertise and high quality products.

The Administration's commitment to economic well-being has made us doubly mindful that our climate change mitigation efforts must be done right so their impact does not harm economic growth. To help us do it right, we have sought the views of trade and business leaders. WE welcome your continued input and advice that will help us achieve our shared objectives.

Kyoto is in the best interests of the United States. Global warming is not a problem we can wish away. Kyoto should be viewed as an insurance policy against the potentially devastating and irreversible impacts of global warming. If we act now, the premium on this insurance policy will be far more reasonable and less costly than if we delay in the hope that this problem will somehow go away. Indeed, it is like a life insurance policy whose costs grow significantly, if we delay year after year. In the case of global warming, we will not have a second chance. Failure to act could lead to irreversible consequences on environment and on our competitiveness. We will be committing ourselves, our children and our grandchildren to a very different planet.

Thank you.