Page images
[ocr errors][merged small][merged small][merged small][merged small][merged small][merged small]

I. Executive Summary

The first assessment report of the Intergovernmental Panel on Climate Change, issued in August 1990, states that “emissions resulting from human activities are substantially increasing the atmospheric concentrations of the greenhouse gases: carbon dioxide, methane, chlorofluorocarbons (CFCs) and nitrous oxide. These increases will enhance the greenhouse effect, resulting on average in an additional warming of the earth's surface." The Department of Commerce contracted with DRIMcGraw-Hill to research the eco nomic implications of proposed international policies designed to mitigate this environmental change.

employed its country energy, country macro economic, and world economic models to identify the appropriate level of carbon taxes for each of the 12 OECD countries specified. The carbon tax scenario was designed to force the OECD-12 to stabilize their carbon emissions at the 1988 level by 2000, and then reduce emissions to 10% less than the 1988 level by 2010 and 20% less than the 1988 level by 2020. Carbon taxes were phased in beginning in 1994, increasing as needed by country to meet the incremental carbon emission reduction targets.

In the international debate over possible climate change, a number of measures to reduce greenhouse gas emissions have been proposed. This study focused on one of these proposed remedies, the taxation of fossil fuels based on the level of carbon dioxide (CO2) each emits in combustion.

The Department of Commerce (DOC) asked DRI to assume that the tax would be revenue neutral, with tax revenues returned to each country's economy through reductions in personal income taxes. All the remainder of the report's contents, including the base case economic scenarios for each country, estimates of the carbon taxes required to achieve the 20% reduction by 2020, and the estimates of eco nomic effects, are based on DRI's assumptions (explicit and implicit) and DRI's analysis using its proprietary econometric models. DRI's economic assumptions, descriptions of the economic developments in each country studied, and the economic models employed for the analysis do not necessarily reflect the official views of the Department or the Administration.

Study Design DRI designed a set of economic and energysector scenarios to simulate the effects that such a tax would have on the economies of the 12 major OECD countries (the U.S., Canada, the United Kingdom, France, West Germany, Spain, Greece, Italy, Sweden, the Netherlands, Japan, and Australia). It was assumed that each country would be given 30 years from the introduction of the tax to comply with hypothetical CO2 emissions reduction goals established by the international community. The study was performed by forecasting baseline economic and energy variables, and then estimating the same variables for a specified Carbon Tax Scenario. DRI/McGraw-Hill

The carbon content for each major fuel source was the basis for calculating fuel-specific taxes. The average carbon content (expressed in tonnes of carbon per tonne of oil equivalent, or toe) for each fuel is: oil products, 0.837 tonnes carbon/toe; solid fuels, 1.076 tonnes carbon/toe; natural gas, 0.641 tonnes carbon/toe.

January 1992 1

[merged small][merged small][merged small][graphic][subsumed][ocr errors][ocr errors][merged small][merged small][subsumed][subsumed][ocr errors][ocr errors][ocr errors][ocr errors][merged small][merged small][merged small][merged small][merged small][ocr errors][merged small][merged small][merged small][merged small][merged small][ocr errors][ocr errors][ocr errors][merged small][ocr errors][ocr errors][ocr errors][merged small][ocr errors][ocr errors][merged small][merged small][ocr errors][merged small][ocr errors]

Factors Affecting the Study Results The carbon taxes are designed to restrict carbon emissions to country-specific historical levels. As a result, proper analysis must be based on both current levels and forms of energy consumption by each country as well as projections of consumption levels and energy-mix changes through 2020. Mainly because each nation begins with a different baseline, the carbon taxes required to reduce emissions to target levels and the economic and energy

[ocr errors]


0.1 2.4 2.3 Italy......... 2.1 2.3 2.4 Netherlands...

2.2 2.0 Spain......... 0.2

2.6 Sweden........ 0.0 1.6 1.5 United Kingdom 0.1 2.2 2.1



[ocr errors][ocr errors]
[merged small][graphic][subsumed][subsumed][subsumed]

Population Growth. While population growth
for the 12 countries studied will average 10.6%
between 1988 and 2020, individual growth
rates will vary greatly. The U.S. will experi-
ence the greatest absolute population increase
and associated direct requirement for in-
creased energy. Canadian growth will be
42.1% while the Italian population will actual-
ly decline 3% over the same period.

Output Growth. Growth in output (measured
as GNP in the U.S., Japan and Germany and
as GDP in Australia, Canada and the rest of
Europe) reflects the need for absolute energy
growth in an economy. For the countries be-
ing studied, base case output growth varies
from 64% to 163% over the 30-year forecast
period. The higher the expected growth, the
greater the pressure to increase energy use
and associated carbon emissions. High out-
put growth leads to higher carbon tax levels
and higher economic costs.

Per Capita Income Growth. A rising stan-
dard of living is associated with a greater need
for energy. Current and forecasted living
standards differ significantly among the 12
OECD countries. The United States, which
currently has living standards 20% to 30%
higher than those in Europe or the Pacific,
can be expected to see only moderate growth
in per capita income. On the other hand, both
Greece and Spain are expected to see living
standards improve significantly over the study
time-frame. As with population growth, high-
er growth here will lead to higher energy and
emissions growth.

Energy Intensity of Output. Energy intensity, or the average amount of energy consumed in creating a unit of national income, also varies greatly across the 12 nations (Table I.2). Improving (reducing) energy intensity provides all nations with a means of reducing energy use without reducing output. Improving enero gy efficiency is an avenue best used by relatively inefficient, high intensity users.

Fossil Fuel Reliance. Countries relying heavily on fossil fuels for current or future energy

January 1992 3

[merged small][merged small][merged small][merged small][merged small][merged small][merged small][ocr errors][ocr errors][merged small][merged small][ocr errors][merged small][merged small][merged small][merged small][merged small][merged small][ocr errors][merged small][merged small][merged small][ocr errors][merged small][ocr errors][ocr errors][merged small][ocr errors][ocr errors][ocr errors][merged small][ocr errors][ocr errors][ocr errors][merged small][ocr errors][ocr errors][ocr errors][merged small][ocr errors][ocr errors][ocr errors][merged small][ocr errors][merged small][ocr errors]

requirements stand to face major energy-sec. tor dislocations when carbon taxes are implemented. Countries that can shift a small portion of their energy requirements to some form of renewable energy may be able to at. tain required reductions with lower tax levels and less economic output loss. But those nations with little access to renewable energy will find requirements to reduce CO2 emissions by even small amounts very difficult to meet.

Fossil Fuel Mix. Fossil fuels vary in the levels of CO2 emitted when burned, with coal having the highest CO2 per Btu, followed by petroleum and natural gas. Countries currently relying heavily on coal either now or for future energy requirements could reduce CO2 emissions by switching to either oil or natural gas. Countries relying on natural gas cannot achieve reductions by fossil fuel switching, and stand to face both a requirement to implement a higher carbon tax and the possibility of incurring greater economic costs. Ac. cess to future sources of natural gas can significantly reduce the requirement for higher carbon taxes in some countries.

Current Emission Intensity. Required emissions reductions are based on current (1988) levels. Therefore, nations with higher levels of CO2 emissions per total energy have more options to exercise as the use of fossil fuels becomes more expensive with carbon taxes. The easier it is to attain the emissions reductions, the lower the tax that must be imposed. Existing Energy Taxes. Today, existing energy taxes vary quite considerably, both among fuels and sectors within an individual country and among different countries. Delivered fuel prices reflect current tax and subsidy policies that governments use to achieve national, sectoral or fuel-specific objectives. In the United States, for example, the carbon taxes were added to existing energy taxes, such as the federal and state gasoline taxes. Energy Growth Profiles. Projected future energy demand growth patterns play an impor. tant role in both the level of carbon taxes required to achieve specified emission reductions, and the cumulative economic effects that they generate. For the U.S., where demand growth is greatest in the second de

[ocr errors]
« PreviousContinue »