· First, the direct impact of higher energy prices is a reduction in energy demand, particularly for coal with its high carbon content. The consequences are reductions in output from the mining sector and from all services connected to the production and distribution of coal. • Second, higher energy prices disproportionately increase the cost of production for energy-Intensive Industries. As energy price increases are passed along by industry through higher prices for their products, consumers will tend to substitute away from the relatively expensive energy-Intensive products to less energy-Intensive products and services. The consequences are reductions in gross output from the energy-intensive sectors of the economy. principally, chemicals and allied products; stone, clay, glass, and concrete; and primary metals. • Third, the changing composition of macroeconomic final demand will alter the composition of sectoral output. In the cases considered here, all the carbon permit revenues are assumed to be returned to consumers through personal income tax rebates, moderating the projected impacts on disposable income. Consequently, in percentage terms, consumer spending falls by less than GDP, while investment falls by more. This change in the composition of final demand decreases the output from consumerrelated sectors, such as services and retail trade, by less than the average drop for all economic output, while decreasing the output from the construction and manufacturing sectors by more than the average. • Finally, because the carbon emissions restrictions are placed only on Annex I countries, industries with high levels of imports, particularly those with Imports from non-Annex I countries, will see larger reductions in domestic output than industries with low import penetration. If imports are already competitive, increasing the cost of production for the domestic industry and not for non-Annex I importers will tend to increase imports, leading to a drop in domestic output. For this reason, output from manufacturing sectors such as leather and leather products, electronic and other electrical equipment, and miscellaneous manufacturing will fall by more than the output for the manufacturing sector as a whole. It is difficult, a priori, to predict the degree and rate of change of such effects. Figure 136 shows the disaggregated impacts of restricting carbon emissions in the 1990+9% case. The upper part of the graph shows the projected growth rates for GDP, total gross output, and sectoral gross output for the major SIC divisions between 2005 and 2010. The GDP and total gross output growth rates provide an economy-wide frame of reference against which the sectoral growth rates can be compared. The lower part of the graph shows the growth rates for total manufacturing gross output and sectoral gross output by 2-digit SIC breakdown between 2005 and 2010, with the growth rate for total manufacturing gross output as a reference. Figures 137 and 138 show the results for the 1990-3% and 1990+24% cases, respectively. Figure 136. Projected Sectoral Growth Rates In Real Economic Output in the 1990+9% Case, 2005-2010 7. Comparing Cost Estimates for the Kyoto Protocol Introduction 86 This chapter provides a comparison of recent publicly available estimates of the costs of achieving the Kyoto Protocol carbon reduction targets in the United States for the period 2008 to 2020. The projections are compared for the years 2010 and 2020, when the information is available, for the following projection sources: the Energy Information Administration (EIA) using the National Energy Modeling System (NEMS), WEFA,85 Charles River Associates (CRA) using the MultiRegional Trade model (MRT), the Pacific Northwest National Laboratory (PNNL) using the Second Generation Model (SGM), the Massachusetts Institute of Technology (MIT) using the Emissions Prediction and Policy Analysis Model (EPPA). Electric Power Research Institute (EPRI) using the MERGE model and Data Resources, Inc. (DRI). Differences between studies are related, to the extent possible, to the features of the modeling systems used (e.g., level of aggregation, level of geographic coverage), important assumptions employed, and the particular points of view embodied in the models.91 90 88 Two cases were solicited for analyses from each group: a 7-percent-below-1990 (1990-7%) case in which the United States is assumed to reduce carbon emissions to 1990-7% levels for the period 2008-2020 without the benefit of sinks, offsets, international carbon permit trading, or the Clean Development Mechanism (CDM): and a best estimate of the impact on U.S. energy markets if sinks, offsets, and Annex I emissions trading were allowed, but not global trading or CDM. Differences in the cost estimates for meeting the Kyoto Protocol targets can be related to important differences in assumptions about (1) economic growth in the reference cases without the Kyoto Protocol, (2) the status of the resources available (e.g., resource base, world oil prices, and the slate of technologies available to the marketplace). (3) the sensitivity of energy demand to price changes, (4) the degree of foresight that decisionmakers have in the marketplace, (5) the structure and function of the economy (e.g., how quickly the economy can shift to less energy-intensive industries when the price of energy relative to capital and materials increases). (6) the degree and speed of substitution for factors of production (capital, labor, energy, and materials) when their relative prices change, and (7) the representation of technology (i.e., representation of vintaged energy equipment and the penetration of new technologies). Summary of Comparisons Because the information available varies considerably, a detailed comparison among the sources is virtually impossible. Therefore, a comparison of common variables is provided in this section, with an explanation for the differences between the sources. Comparisons are provided for three of the cases analyzed in this report: the 1990-7% case and two cases-9 percent above 1990 (1990+9%) and 14 percent above 1990 (1990+14%)--that are comparable in some respects to the Annex I trading case. The variables compared are carbon price, change in actual gross domestic product (GDP) from the respective reference case in each study. 85 WEFA, Inc., Global Warming: The High Cost of the Kyoto Protocol, National and State Impacts (Eddystone, PA, 1998). 86 Both the CRA and WEFA studies have been supported to some extent by industry groups, including the American Petroleum Insti tute. 87 J.A. Edmonds et al., Modeling Future Greenhouse Gas Emissions: The Second Generation Model Description (Washington, DC: Pacific Northwest National Laboratory, September 1992). Runs using PNNL's SGM model formed the basis for the testimony provided by Dr. Janet Yellen, chairman of the Council of Economic Advisers, on March 4, 1998, before the House Commerce Committee, Energy and Power Subcommittee. 88 H.D. Jacoby, R. Eckhaus, A.D. Ellerman, et al. "CO, Emission Limits: Economic Adjustments and the Distribution of Burdens," Energy Journal, Vol. 18, No. 3 (1997), pp. 31-58. MIT's analysis is part of a much larger integrated assessment methodology funded by the Office of Energy Research, U.S. Department of Energy. 89 A.S. Manne and R.G. Richels, "On Stabilizing CO, Concentrations-Cost Effective Emissions Reduction Strategies," Energy and Environmental Assessment, Vol. 2 (1997), pp. 251-265. EPRI's work is self-funded and is part of the research agenda of electric utilities. 90 Standard and Poors DRI, The Impact of Meeting the Kyoto Protocol on Energy Markets and the Economy (July 1998). 91 Information used in this chapter was contributed by Dr. Montgomery and Dr. Bernstein of Charles River Associates, Dr. Richels of the Electric Power Research Institute, Dr. Edmonds of Pacific Northwest National Laboratory, and Professor Jacoby of MIT. |