Foreword.

This report, Global Warming: The Economic Cost of Early Action, National Impacts, provides a detailed analysis of the national economic, industry and energy sector impacts of a proposed plan to achieve the Administration's goal of reducing carbon emissions to the 1990 level by the year 2010. The economic and energy price impacts on consumers are discussed in separate chapters of this report. In addition, the impact on regional economies is summarized in the last chapter of this report.

A separate report entitled Global Warming: The Economic Cost of Early Action, State Impacts, describes the state and regional economic impacts of the proposed plan. In addition, fact sheets describing the impact on individual states are available.

GLOBAL WARMING: THE ECONOMIC COST OF EARLY ACTION

Contributors

Global Warming: The Economic Cost of Early Action was prepared for the American Petroleum Institute by WEFA, Inc. Mary Novak was the Project Manager. The following WEFA economists contributed to the preparation of this study.

Energy Services

Mary Novak

Ron Denhardt

John Dean

Lilly Teng

Richard Simons

U.S. Macro Economic Services

Kurt Karl

Daniel Bachman

Regional Economic Services

Ross DeVol

Perry Wong

James Diffley

Aran Ryan

Industry Services

Priscilla Trumbull

Mohsen Bonakdarpour

World Services

Peter Jaquette

GLOBAL WARMING: THE ECONOMIC COST OF EARLY ACTION

I. Executive Summary

Despite the uncertainty about the significance of global warming and the expected high costs of plans to reduce carbon emissions, the Administration has proposed a framework for a potential agreement to reduce greenhouse gas emissions.

Given that carbon
taxes/fees are the most
efficient means of reducing
carbon emissions, the
results measure the
minimum economic impact
of imposing a carbon
emission abatement
policy.

The Proposed Plan to Reduce Carbon Emissions:
Uncertain Benefits and High Costs

There has been considerable debate about whether increasing
concentrations of carbon dioxide and other gases, referred to as
Greenhouse Gas (GHG) emissions, are causing or would cause
significant global warming. The Clinton administration has acknowledged
that it would take at least ten years or more of scientific study to confirm
that the global climate is changing. Further, many economists and
stakeholders, who would be affected by efforts to reduce carbon
emissions, have wamed that the economic consequences of mitigating
an as-yet unsubstantiated problem are significant. The administration
has acknowledged that the capping of GHG emissions would
permanently reduce economic growth.

Despite the uncertainty about the significance of global warming and the expected high costs of plans to reduce carbon emissions, the Administration has proposed a framework for a potential agreement to reduce greenhouse gas emissions. The Administration has embraced the potential target of reducing GHG emissions to 1990 levels by 2010 and stabilizing emissions at that level. More severe constraints on GHG emissions are on the table.

To assist in achieving the Administration's target, the State Department has proposed inter-participating-country tradable emission permits as a mechanism for reducing carbon emissions. While potentially improving economic efficiency, the establishment of a program to allow countries to take advantage of inter-country trading, banking and borrowing over the next decade is unlikely. First, there is a lack of infrastructure for the administration of such a program. Second, changes of such magnitude take a significant amount of time to implement

The objective of this study is to establish the minimum cost to the economy of adopting one of the least onerous of the current proposals to limit GHG emissions — stabilization at the 1990 level by 2010. For this analysis, WEFA has assumed intra-country tradable permits at the first point of purchase. Analytically, the intra-country tradable permits are similar to a carbon tax or fee. As a fee/tax directly associated with the emission to be controlled represents the marginal cost of abatement, it theoretically is the least cost means of reducing carbon emissions. Given that carbon permit fees/taxes are the most efficient means of reducing carbon emissions, the results measure the minimum economic impact of imposing a carbon emission abatement policy.

THE ECONOMIC COST OF LIMITING CARBON EMISSIONS

Carbon emissions are projected to be 27% above 1990 levels by 2010 and 46% above by 2020.

Reaching and Maintaining the 1990 Emissions
Level: An Ambitious Goal

Despite projected improvements in energy efficiency of more than twice
the rate during the previous decade and an increasing market share of
fuels that emit less carbon, the WEFA baseline projections call for carbon
emissions to be 27% above the target by the year 2010 and 46% above
the target by the year 2020. This increase in carbon emissions is a result
of continued economic and demographic growth as well as the retirement
of nuclear plants.

Achieving a dramatic reduction in carbon emissions would require substantial investments by both consumers and businesses. These investments would require the diversion of funds from education, health care and new productive equipment.

Achieving a dramatic reduction in carbon emissions would require substantial investments by both consumers and businesses to improve energy efficiency and to substitute low-carbon energy sources for higher carbon energy sources. Because energy-using equipment and facilities have a long life, a great deal of equipment would be replaced long before it would have been without carbon permit fees. These investments would require the diversion of funds from savings and/or investments, which would have provided other benefits such as education, health care, or new productive equipment, etc.

Consumers would invest in improvements to the thermal integrity of their homes and more energy efficient appliances. Businesses would invest in more energy efficient capital equipment and the improvement of process efficiency. Finally, utilities would replace coal fired power plants with fuels that have no or low carbon emissions.

GLOBAL WARMING: THE ECONOMIC COST OF EARLY ACTION