INTRODUCTION

CONSAD Research Corporation, one of the Nation's leading economic forecasting firms, conducted a May 1998 economic analysis of the proposed Kyoto Protocol. Their analysis parallels findings by other leading economic forecasters which detail the negative impact this treaty will have on employment, economic output, and standard of life for working families, senior citizens, and those who live on fixed or low-incomes. The study provides a 50 state breakdown of job losses and economic dislocation due to policies enacted to implement the Kyoto Protocol.

CONSAD Research's key findings are that, implementation of the Kyoto Protocol will mean:

• Consumers and businesses will be forced to pay higher energy costs. The resulting increase in energy costs will also drive up prices on all consumer goods;

Approximately 3.1 million fewer

American workers will be working in the year 2010 as a direct result of this treaty (assuming high permit

U.S. Gross Domestic Product (GDP) in the year 2012 will decline by at least $177 billion and perhaps by as much as $318 billion;

• Key strategic industries (aluminum, pulp and paper, chemical, and others) will experience persistent employment losses as well as losing market share for these products in international markets;

• Every region of the U.S. will experience increased unemployment due to the treaty, with the greatest losses occurring in California, Arizona, Louisiana, Oklahoma, and Texas;

• The highest job losses will be in high-skilled, high-wage employment sectors, with many U.S. workers being forced to take employment in lower-paying jobs in service-related industries rather than facing prolonged periods of unemployment; and

• The U.S. standard of living will decrease as working families are forced to reduce consumption of goods and services in every major category-including food, energy,

BACKGROUND

In December 1997, the 168 signatories to the Framework Convention on Climate Change met in Kyoto, Japan, to conclude an agreement that includes legally binding commitments by 38 industrialized nations to reduce their emissions of carbon dioxide (CO2) and other greenhouse gases to specific levels (targets) by specific dates (timetables).

Simply stated, the United States and other industrialized nations' agreed to reduce emissions during the five-year period 2008-2012 to levels that, on average, are 5.2 percent below their 1990 levels. These emissions reductions would be legally binding on all parties and enforceable under international law if the treaty is ratified by the requisite number of countries.

In the United States, the treaty will not become official policy unless ratified by two-thirds of the U.S. Senate.

The United States agreed to reduce emissions seven percent below 1990 levels during the budget period 20082012. Other industrialized countries made different commitments. For example, Japan and Canada will reduce emissions by six percent; the European Union as a whole has agreed to meet an eight percent reduction target; Russia will not exceed its 1990 emissions level; and Australia will be allowed to increase emissions eight percent above 1990 levels.

Countries with emerging economies were exempted from emissions controls under the terms of the Kyoto

Protocol. Exempted countries include such major, heavily industrialized nations as China, India, South Korea and Mexico. Their economies are among the fastest growing in the world, and data supplied by both the International Energy Administration and the U.S. Energy Information Administration show that, collectively, these countries will be the largest total emitters of greenhouse gases by the year 2010.

The Kyoto Protocol does not specify how countries should meet their reduction commitments. The specific policies to be used are left to individual governments. The Protocol does however, allow development of an international system for trading emissions among industrialized countries that would allow a country to meet a portion of its reduction target through the purchase of emission reduction credits from any of the other countries in the industrialized bloc. In addition to an international trading system, it is expected that many countries, including the United States, will set up domestic emissions trading systems.

This study assumes that the international trading system will not be sufficiently mature by the first budget period to have an appreciable impact on costs. Therefore it assumes that only domestic trading will occur. Tradable emissions permits can initially be allocated in several ways: for example, by giving them to industries (or final consumers) at no charge, or by distributing them through an auction system. This study assumes

that emission permits will be auctioned and that the price by 2010 will be in the range from $140 to $265 per ton of carbon emitted.'

This study is limited to an assessment of reductions in carbon dioxide, one of the six greenhouse gases covered by the Protocol (CO2, NO, CH1, HFCS, PFCs, and HF). These gases make-up approximately three percent of total global greenhouse gas emissions. Water vapor accounts for the remaining 97 percent of the inventory.

The report estimates the potential impact of the Kyoto Protocol on the U.S. in terms of gross domestic product (GDP) and aggregate employment, including estimated impacts on individual industrial sectors, individual occupational groups, and individual geographic regions. Judged only in terms of percentage reductions in aggregate GDP and employment, the impacts of the proposed emission reductions may not appear large. However, industries that directly or indirectly rely heavily on fossil fuels (coal, oil, and natural gas) will incur large cost increases when tradable emission permits are auctioned to achieve the emission reductions. Impacts on those industries, on their major suppliers and customers, and on geographic regions where these industries are heavily concentrated will be disproportionately large.

It is important to note that this analysis does not consider the additional reductions that will be required beyond the first budget period of the Protocol, 2008-2012. The next reduction targets for the budget period 20132018 will be negotiated at a later date, but no later than 2005.

KYOTO'S NATIONAL ECONOMIC IMPACT

If ratified by the U.S. Senate and implemented as official U.S. policy, the Kyoto Protocol's binding commitments to reduce CO2 emissions in the U.S. to an average level of seven percent below the 1990-level during the 20082012 period will stimulate two notable responses at the federal level.

Auction Revenues and Federal Reserve Actions

First, the auctioning of emissions permits will generate additional revenue for the federal government, and that revenue will be used in some way. In this analysis, it is assumed that the revenue is rebated to consumers by reducing personal income taxes.

Second, if achieving the emission reductions will result in a decline in aggregate employment, this study assumes that the Federal Reserve will react as it has historically to such declines: it will expand the money supply, thereby reducing interest rates. Increased Energy Costs

The immediate impact of achieving the Kyoto targets through emissions permit trading will be substantially increased costs for fossil fuels used in production and space heating. Costs will increase because firms must purchase permits authorizing the amounts of carbon dioxide that they emit into the atmosphere, and those amounts will depend primarily on the types of fossil fuel that they burn.

Fossil fuels account for just over 69 percent of the electricity generated in the U.S. Since the combustion of all of these fuels results in emissions of CO2