Implementing the Protocol would require significant reductions in energy use. Any carbon permit fee Historically, the only period that experienced a rate of energy improvement similar to the one needed to meet the Kyoto target was the late Proponents of ratifying the Kyoto Protocol offer a rejoinder to WEFA's analysis: 1) technology can greatly reduce the cost to the US economy; and 2) several conceptual mechanisms in the Protocol-such as sinks and international emission trading - can reduce the economic impact on the US. In response: The Kyoto Protocol's Call for Early Action Reduces the Role Technology Could Play in Mitigating the Risk of Global Warming The Administration has argued that the economic cost estimates from WEFA, the Energy Information Administration, and other independent firms and academics are overstated. Relying on its own technology assessments, the Administration concludes that substantial technological progress is available with little or no price incentives. WEFA, through its on-going assessments of energy technology and analysis of the aggregate performance of the economy in improving energy use, comes to a different conclusion. Substantial improvements in energy-efficiency, particularly in newly restructured electric power markets, are included in WEFA's baseline. Further efficiency gains would be increasingly expensive. The extraordinary efficiency gains required for achieving the Kyoto target would only occur in response to extraordinary price incentives. The carbon fee has to bring about a large reduction in the demand for energy services, major improvements in energy efficiency, as well as improve the opportunity for substitution of low carbon and non-carbon emitting fuels. The required change in energy efficiency to meet the goal is unprecedented. As shown in the chart, energy use per dollar of real GDP would need to improve at a rate in excess of 2.0% per year. Historically, the only period that experienced a similar rate of energy improvement was the late 1970s and early 1980s- and nearly half of that improvement is attributable to structural changes in the economy (the loss of energy intensive well-paying manufacturing jobs overseas.) Without price incentives, the goal would not be reached. 1970s and early 1980s. Nearly half of that improvement is -1.00% GLOBAL WARMING: THE HIGH COST OF THE KYOTO PROTOCOL Measures not included in WEFA's analysis are international emission trading, sinks, the inclusion of an additional three gases, and mechanisms for promoting technology transfer. WEFA believes that a better climate strategy would be to match policy actions to an evolving understanding of climate science. The developing economies The principal contributors to GHG emission growth are the emerging Trading, Sinks And Other Mechanisms While the Kyoto Protocol includes provisions that have been touted by its proponents as a means for alleviating the cost of complying with the Protocol's goals, these measures have not been tested and have been heavily discounted in WEFA's analysis. These provisions are currently only conceptual or have very uncertain implications for meeting the target Measures not included in WEFA's analysis are international emission trading, sinks, the inclusion of an additional three gases, and mechanisms for promoting technology transfer (Joint Implementation and the Clean Development Fund). However, these "market based" mechanisms are undefined in the Protocol and hence have to be negotiated by a large number of UN nations, many of whom have expressed open hostility toward such ideas. Further, the Protocol itself indicates these may only be supplemental to a country's internal programs. And finally, most are limited in scopeemissions trading, for example, won't involve the developing nations-, have no history in international relations, will be costly and difficult to administer, and may conflict with existing GATT or other agreements. For these reasons, it is premature at best to assume costs can be significantly reduced by these measures. The Kyoto Protocol Is Not the Only Option As the present study and the work of others make clear, the Kyoto Protocol forces policymakers to decide whether they are willing to risk the economic well being of their nation. From both economic and risk-assessment viewpoints, WEFA believes that there is a better climate strategy, namely to match policy actions to an evolving understanding of climate science; to increase investments in technology (should it prove necessary to substantially reduce fossil fuel use); and to gradually retire existing capital stock. Further support for investing in a technologically based solution is evident from the chart below. It is the developing countries that are the principal contributors to annual global emission increases. Driven by their expanding economies and their rising populations, the less developed economies of the world will emit more emissions than the industrialized economies by 2015. The reduction in carbon emissions that would result from the developed economies fully meeting their targets under the Kyoto Protocol would not significantly affect the annual global emissions. The developing economies of the world will not meaningfully participate in a greenhouse gas emission reduction or limitation program until there are technological alternatives that provide equal or better opportunities for economic growth than is offered by fossil fuels today. Global Carbon Emissions from Energy Use (Million Metric Tons) 10.000 0.000 economies. 0.000 7,000 substantially impact global emissions. 1000 1096 2000 2008 Source: Energy Information Administration, International Energy Outlook 1997 GLOBAL WARMING THE HIGH COST OF THE KYOTO PROTOCOL Introduction, Study Goals and Design The Kyoto Protocol would legally bind the US to reduce GHG to 93% of 1990 levels by 2008-2012. In December 1997, some 200 countries including the US completed negotiation of the Kyoto Protocol. If signed and ratified, the Kyoto Protocol would legally bind the U.S. to reduce GHG emissions 7% below the 1990 level on average over the period 20082012. Further reductions for succeeding years are under discussion. Developing countries have not agreed to either binding or voluntary targets. The main features of the Protocol are listed below. Summary of the Kyoto Protocol • Countries. The Protocol would bind the Annex B countries to quantified emission limits. The Annex B countries, defined in the Protocol, are: US, Canada, Japan, Australia, New Zealand, European Community countries, the countries of Eastern Europe, Russia and the Ukraine. With the exclusion of Turkey and the addition of a few smaller European countries, this is the same group of countries referred to as Annex B of the UN Framework on Climate Change (UN/FCCC). • Greenhouse Gases Emissions and Sinks (Carbon Sequestration). The Kyoto Protocol set quantified emission limits on the "aggregate anthropogenic carbon dioxide equivalent emissions" of six greenhouse gases: carbon dicocide (CO), methane (CH). nitrous oxide (NO), hydrofluorocarbons (HFCs), perfluorocarbons (PFCs), and sulfur hexafluoride (SF). To establish the emission target for each country, the first three gases use a 1990 base year and the last three gases may use a 1990 or 1995 base year for the commitment period 2008-2012. The Kyoto Protocol also requires that changes in emissions, relative to 1990 levels, from direct human-induced land use changes and forestry activities which impact this sequestration is counted. These activities have been restricted to afforestation, reforestation, or deforestation. Later, other agricultural soil, land use or forest related sinks might be added. • Quantified Emissions Limits. The Clinton Administration has committed the U.S. to reduce greenhouse gas emissions to 93% of 1990 levels on average over the period 2008-2012. Other industrialized nations have committed to cap greenhouse gas emissions at the following multiple of 1990 emissions for this period. Tightened emission limits for subsequent periods have not yet been specified. • Emission Banking, As a concept, banking emission credits is allowed from the date that the Protocol becomes effective. • Emission Trading, Emission trading between Annex B countries is allowed, at least conceptually. However, all details, such as the principles, modalities, rules, guidelines, verification, reporting and accountability are yet to be decided. • Bubbles. Groups of countries are allowed to treat their aggregate quantified emission limits as a single party (acting under a “bubble”). For example, this provision allows the EU countries to operate under the long-declared EU “bubble" - individual country emissions can be above or below the 92% of 1990 level target as long as the EU aggregate achieves the targeted level. • Joint Implementation (JI). Joint Implementation (JI) among Annex B countries is allowed. These are project-specific emissionreduction efforts undertaken by one Party in another Annex B country. JI projects must be approved by the parties, and generally entail a transfer of a stream of emission credits over time from one Annex B Party to another. (The concept of 'additionality' has been discussed with reference to JI; it refers to adding on to "what otherwise would have been" This is clearly a problematic concept) • Clean Development Mechanism (CDM). The CDM would allow project-specific reduction efforts in non-Annex B countries. The resulting emission "credits" could then be sold to Annex B countries. A new UN/FCCC body that will certify all CDM and JI projects has been proposed. A share of the proceeds from the CDM projects is to be collected by this body to cover administrative costs and to help developing countries with the costs of adaptation to climate change. • Compliance. All compliance issues have been left to future discussions and negotiation. GLOBAL WARNING: THE HIGH COST OF THE KYOTO PROTOCOL The Kyoto Protocol contains no commitments for developing countries to reduce greenhouse gas emissions. In fact, China and India have emphatically stated that they would not bind their countries to GHG restrictions. To assess the economic consequences the US faces if it implements the Kyoto Protocol, WEFA has analyzed the economic cost of reducing carbon emissions from the energy sector to 7% below 1990 levels on average over the period 2008-2012. The Kyoto Protocol has been called a "work in progress" by members of the Clinton Administration. While the US has not signed the Protocol and few congressional leaders have agreed to support its ratification, the Protocol is an amendment to the United Nations Framework on Climate Change (UN/FCCC), which means that the terms (or articles) of the Protocol cannot be changed and new articles cannot be added. The Protocol is available for countries to sign as of March 1998. It becomes a legally binding treaty when two criteria are met: • 55 Parties to the Framework Convention on Climate Change sign the Protocol • 55% of the greenhouse gases subject to restrictions under the Protocol are committed. The Kyoto Protocol contains no commitments for developing countries to reduce greenhouse gas emissions. In addition, the developing countries did not agree on a voluntary process for reducing or limiting their emissions. In fact, China and India emphatically opposed such voluntary commitments, saying that they would not bind their countries to GHG emission restrictions. Countries that are not included in the Kyoto Protocol (though they are free to sign it) include: • All Latin American countries, including Mexico, Argentina, Brazil, Venezuela, Colombia. • Most Asian countries, including South Korea, Taiwan, Indonesia, Malaysia, Singapore. Study Goal: Assessing the Economic Risk of The objective of this study is to assess the economic consequences - at the national, state and selected county/MSA level – of implementing the Kyoto Protocol. Previously, WEFA has studied the much less ambitious goal of the U.S. reducing carbon emissions to the 1990 level'. The Kyoto Protocol is an international agreement with no provision for modification before it is signed by the requisite number of countries. Signing the Kyoto Protocol would legally bind the US to achieve the specified targets over the period 2008-2012. To assess this risk, WEFA has analyzed the economic cost of reducing carbon emissions from the energy sector to 7% below 1990 levels on average over the period 2008-2012 and maintaining the emission limit. The Economic Risk Assessment Excludes Several Provisions of the Kyoto Protocol While the Kyoto Protocol includes several international market-based mechanisms that potentially could alleviate some of the devastating impact on the economy of meeting the negotiated target and timetable through indigenous action, these provisions are currently only conceptual and remain to be negotiated among the parties. Further, under the Protocol, they are to be supplemental, not means of achieving the goals, and many countries have expressed hostility to their use. The following provisions of the Kyoto Protocol have not been included in this analysis due to these uncertainties in their structure or implementation: 1 "Global Warming: The Economic Cost of Early Action", WEFA, Inc. 1997. This two volume study on the National and State Impacts of the Administration's proposed plan for reducing greenhouse gas emissions was funded by the American Petroleum Institute, although the views expressed are strictly those of the authors. GLOBAL WARMING: THE HIGH COST OF THE KYOTO PROTOCOL • the sequestration of carbon through forest management policies, • emission trading between Annex B countries, ⚫ and the inclusion of several other greenhouse gases. Sinks While the Protocol identifies sinks as a mechanism to adjust the target limit on greenhouse gases, these are currently limited to forestry initiatives subject to restrictions that have not been fully specified. Other initiatives, such as land-use changes, remain ‘on the table,' but are even less clearly defined. There are several issues that need clarification before the opportunity for using sinks to achieve the target emission reduction can be assessed, including: There is limited lead-time for growing trees and substantial uncertainty regarding the • Population in the U.S., for example, is expected to increase by about 50 million people • The rules for this category of emissions have yet to be written, and their potential significance will depend critically on those rules. Emission Trading between Annex B Parties The WEFA analysis does not include international trading of carbon emission permits. International trading of carbon emission permits could potentially reduce the cost of achieving carbon emission targets. In concept, the Kyoto Protocol allows inter-country trading of carbon emission permits between Annex B Parties. Details such as the principles, rules, verification, reporting and accountability are not addressed. Until these details are addressed it is not possible for trading to take place. Given the diverse and strongly held views about trading that were expressed in the negotiations leading to the Protocol and that prevented the inclusion of trading rules in the Protocol, it is unclear if and when an effective inter-country carbon emission trading program would be implemented. Further, the benefits that would actually be realized from such a program could be limited because trading would be limited to Annex I Parties only. Working out these details to allow trading to actually take place will require overcoming difficult political, administrative and technical hurdles. To illustrate the difficulties of implementing such a system, the following briefly describes some of the details that need to be addressed. Initial Allocation of Permits: A carbon permit system would probably be implemented by issuing permits to the first seller of a product. Each country would have to determine who will get these permits and how. Permits could be issued by a lottery, auctioned off, or allocated based upon historic emissions. These permits will have substantial value and it is likely that the allocation of these permits will cause substantial political conflict within each country. Verification. Monitoring and inspection systems will have to be set up to assure that carbon emissions do not exceed the level allowed by the carbon permits owned. Each owner of a carbon permit would have to have a record keeping system with checks and balances that could GLOBAL WARMING: THE HIGH COST OF THE KYOTO PROTOCOL NATIONAL AND STATE PACTS |