Executive Summary

In Washington, DC and throughout the nation, elected officials and key leaders are debating whether the Kyoto Protocol, an international treaty negotiated by the Clinton Administration that would legally bind developed countries to reduce their greenhouse gas emissions, should be signed and ultimately ratified by the US Senate. By the terms of the Protocol, the US would have to reduce its emissions 7% below 1990 levels by late next decade. And, unless developing countries agree to binding emissions targets, a competitive imbalance would be created between industrial and developing nations. Meeting the goal of the Kyoto Protocol would be a daunting task. In 1997, carbon emissions from the energy sector, the majority of greenhouse gas emissions, exceed the goal established at Kyoto by 16%. By late next decade, WEFA projects that carbon emissions would exceed the goal by at least 37%. Due to population increases, on a per capita basis, the required reduction would exceed 50%.

WEFA has analyzed the economic consequences to the U.S. of achieving the Kyoto target through domestic actions. These consequences would be severe, a result that others analyzing even less onerous targets also have reported. These include the U.S. Department of Energy, leading academic institutions, and other independent consulting firms. Meeting the Kyoto target would:

■ Nearly double energy and electricity prices, and raise gasoline prices an additional 65 cents per gallon.

■ Cost 2.4 million US jobs and reduce US total output $300 billion (19925) annually, 3.2% below baseline GDP projections, an amount greater than the total expenditure on primary and secondary education.

■ Harm U.S. competitiveness, as developing countries will not need to raise energy prices (or product prices) to meet mandatory greenhouse gas targets.

■Reduce the average annual household income nearly $2700, at a time when the cost of all
goods, particularly food and basic necessities, would rise sharply.

■ State tax revenues would be reduced by $93.1 billion due to job and output loses
attributable to lost US competitiveness in the global market and higher energy costs.

The sharp rise in energy prices would reduce economic growth opportunities.
Compounding this effect is the loss of competitiveness the industrialized countries would
suffer, as developing countries would not raise energy prices to meet greenhouse gas
reduction targets. Although developing countries argue that full responsibility for
mitigating the risk of global warming rests with industrialized countries, developing
countries exempted themselves from emission limits because they recognize the role
energy plays in their economic development.

The Administration has argued that new technology can drastically reduce the costs of implementing the Kyoto Protocol, and that international permit trading, sinks and other market-based mechanis.ns mentioned in the Protocol also will lower costs. WEFA has carefully assessed the ability of technology to reduce costs over the time period in question. Without very powerful price incentives, such rapid technology improvement is

GLOBAL WARMING: THE HIGH COST OF THE KYOTO PROTOCOL
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The high cost estimates reported would only be justified if catastrophic climate change were imminent.

As global warming may be gradual and largely due to natural causes, measures that more closely link economic cost to the stillpotential threat of very long-term global warming may be more appropriate.

extremely unlikely. Hence, technology implementation does not invalidate the estimates determined through this analysis. As for permit-trading and other international market mechanisms, the Kyoto Protocol leaves all such instruments undefined, to be worked out in the future among the parties. Further, according to the Protocol, they are to be supplemental to indigenous efforts, not primary mechanisms to reach country targets. And finally, there is great hostility on the part of many countries to their use. For these reasons, WEFA does not ascribe significant savings to them.

The high cost estimates reported would only be justified if catastrophic climate change were imminent. As global warming may be gradual and largely due to natural causes, measures that more closely link economic cost to the still-potential threat of very longterm global warming may be more appropriate. Such measures include encouraging voluntary actions, supporting academic research and educational programs on climate, and investing in the development and deployment new energy technologies.

Key results of this study of meeting the Kyoto target through intra-country tradable permits are:

Energy prices would double

The estimated costs of achieving the Kyoto target are high at both the national and state level because, without carbon limits, the economy, population and energy use are expected to grow steadily. Reducing energy use to 1990 levels within 10 years or more requires sending very powerful price signals through the economy. WEFA's analysis has determined that a $265 per metric ton of carbon (19925) would be required. When added to energy prices, consumers would see an increase of 65 cents per gallon of gasoline and nearly a doubling of natural gas and electricity prices for businesses.

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The results paint a picture of a less prosperous 21st century America.

Economic consequences would be severe:
The U.S. would lose $300 billion in real GDP

These powerful price signals result in premature retirement of capital stock, less capital
for business investments, and less disposable household income as prices climb for
electricity, gasoline, heating oil and air conditioning. As a result, the growth in GDP
would be substantially slower, there would be a sharp rise in unemployment, salaries
and wages would be lower, and prices for basic necessities such as food, medical care
and housing would be significantly higher.

Some workers would lose their jobs through a weaker economic environment.

All workers would face a slowing in their real wage growth as more workers compete for fewer jobs.

Job losses would exceed 2.4 million; wages would be lower

Implementing the Kyoto Protocol would have a devastating impact on workers. Some
workers lose their jobs through a weaker economic environment while other workers
lose relatively high paying manufacturing jobs and find only lower wage service jobs.
All workers face a slowing in their real wage growth as more workers compete for
fewer jobs. Hence, though the government compensates workers-through a refund of
the fees collected to consume carbon-based energy resources- for their increased
energy expenditures, total real disposable income falls due to reduced employment

Families would suffer as the loss in aggregate
income per household exceeds $2700

On a per household basis, the cost of signing the Kyoto Protocol results in an average
real GDP loss in 2010 of $2,728 per household.

Low and moderate income families would be hardest hit.

Low and moderate income families would be squeezed: higher costs, lower wages, fewer jobs.

Commodities such as food, medical care, and housing would be nearly 10% more expensive by 2020.

Low and moderate income families would be hurt

Low and moderate income families would be the ultimate losers under a carbon limits regime. Energy use is pervasive: all commercial activities require the use of energy, and energy is a necessity for households. Low and moderate income families spend a significant share of their income on basic necessities including energy. Raising energy prices would present an enormous hardship to these families. In combination with a weaker economy where workers are competing for less-well-paying jobs, families are projected to see a large rise in costs and a reduction in income.

The cost of all necessities would rise substantially

Throughout the forecast period, food, medical care, and housing continue to become more expensive under the carbon stabilization case. By 2020, food is nearly 9% more expensive, medical care is roughly 11% higher, and housing is nearly 21% higher than the base case.

Inflation in the Prices of Food, Medical Care, and Housing:
Percent Difference 7% Carbon Limitation Case and Base Case

The most severely impacted industries would be energy producing industries, industries that produce energy-intensive products, and industries that depend on export sales or face strong import competition.

As the imposition of carbon limits is not bome equally by all countries, U.S. exports would be relatively more expensive on world markets.

Every state would suffer output and job losses

The most severely affected industries would be energy producing industries, industries that produce energy-intensive products, and industries that depend on export sales or face strong import competition. Because the imposition of the carbon target and permit system is not borne equally by all countries (the developed economies of the OECD face comparable energy price increases, but the developing countries do not) U.S. exports are relatively more expensive on the world market. As a consequence, real exports are lowered dramatically, while imports are increased substantially, affecting:

■the chemicals and paper industries, which are both energy-intensive and already subject to stiff price competition from new producers in developing countries,

☐ the textile and apparel industries, which have difficulty competing on price due to higher U.S. labor rates, and

■the computer and electronic products industries, particularly from imports. (It is worth noting that the trade deficit in this area would escalate dramatically under the carbon emission limitation case.)

As a result, all states would suffer output and job losses that would persist as long as developing nations exempt themselves from the similar constraints on carbon emissions.

GLOBAL WARMING: THE HIGH COST OF THE KYOTO PROTOCOL
NATIONAL AND STATE PACTS