In 2010, US carbon emissions in the WEFA baseline are 37% above the Kyoto.

Assuming that today's carbon intensity per dollar of output (GDP) was to remain constant, carbon emissions would be 51% above the Kyoto target.

On a per person basis, carbon emissions from the energy sector were 5.32 million metric tons (mmt) in 1995. In the baseline, carbon emissions per person are projected to be 5.70 mmt in 2010. If there were no energy efficiency gains, the carbon emissions per person in 2010 would be 6.39 mmt, 53% above the Kyoto target.

The Kyoto Protocol presents a daunting challenge: based upon today's experience, the required decline in carbon per dollar of GDP (925) and the required decline in carbon per person are extraordinary.

Assuming that today's

carbon intensity per capita

was to remain constant,

carbon emissions would

be 53% above the Kyoto

target in 2010.

1990

2010

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

The Kyoto Protocol: Energy Impacts

Reducing carbon

emissions from the energy
sector to 93% of 1990
levels would require a
dramatic reduction in
fossil fuel use, and a
substantial investment in
more efficient energy
using capital.

As substitution of noncarbon based fuels and lower-carbon fuels is not expected to provide substantial relief from the target reductions under the Kyoto Protocol, to achieve this reduction, some form of intervention in the market (such as a tax, fee or tradable permit) would be required.

To achieve these dramatic reductions in carbon emissions 37% on average over the
period 2008 to 2012, and more than 50% by 2010- would require a dramatic reduction
from currently projected levels of energy consumption. As there is no cost-effective
technology currently available to capture CO2 once it is produced, actions to achieve a
reduction in carbon emissions from the energy sector over the next few decades fall into
three broad categories:

• substituting non-carbon-emitting fuels for fossil fuel use: Some emission reductions could
be achieved through the increased use of nuclear, hydro, and renewable energy in the generation
of electricity. However, it is unlikely given economic and environmental considerations that
nuclear or hydro could produce a major portion of the reductions necessary to reach a carbon
emission target. Under a carbon emission limits policy, other renewable energy technologies
would be steadily more economically attractive, but additional R&D is necessary to improve
their general applicability. This limits the opportunity for substantial introduction of these
technologies during the Kyoto budget period 2008-2012.

▪ substituting lower emitting fuels for higher emitting fuels: Switching from fossil fuels with
higher carbon emission rates (1.e., coal and petroleum) to those with lower emission rates (L.e.,
natural gas) can provide some of the reductions needed to reach a target. However, the potential
is limited over the next ten to twenty years due to the increasing reliance on lower carbon fuels
that is already included in the base case. In the base case, natural gas use is projected to expand
to almost 30 quadrillion Btu by 2010, straining the exploration, production, and pipeline
capacity of North America.

⚫ using less energy: Achieving a carbon emission target through reductions in energy use would require cutting energy use by nearly the same amount as the desired change in carbon emissions from the baseline. To the extent that some of the reductions would be obtained with the two previous options, the necessary reduction in energy use would be less. As these options are not expected to provide substantial relief from the target reductions under the Kyoto Protocol, to achieve this reduction, some form of intervention in the market (such as a tax, fee or tradable permit) would be required. Once in place, energy use would be curtailed through three mechanisms:

WEFA estimates that the cost expressed in constant 1996 dollars per metric ton of carbon would be $265 for the period 2008-2012, rising to $360 per metric ton by 2020.

3. reduction in purchases of energy and electricity by businesses and consumers.

The Price Consumers Pay to Achieve the Kyoto Protocol

As the opportunity for meeting the Kyoto Protocol target emission reductions through substitution of non-carbon energy sources or low-carbon energy sources is limited, reducing energy consumption would require large changes in energy prices. WEFA estimates that the cost expressed in constant 1996 dollars per metric ton of carbon would be $265 on average for the period 2008-2012, rising to $360 per metric ton by 2020. Consumers would see price increases of 45% to 75% over baseline projections

GLOBAL WARMING. THE HIGH COST OF THE KYOTO PROTOCOL
NATIONAL AND STATE IMPACTS

Consumers would see price increases in excess of 55% for electricity and 70% for home heating oil by 2010.

Commercial establishments, including hospitals and schools, as well as industrial facilities, would see electricity price increases of 60% by 2010.

Truckers and railroads would see their fuel costs rise by nearly 70 cents per gallon by 2010.

by 2010 and 60% to 95% by 2020. The price increases would be substantially larger for commercial and industrial customers.

The carbon permit fees must be high in order to provide the economic incentive for dramatic improvements over a base case, which already includes many changes in it to lower carbon emissions.

The Kyoto Protocol: Too Little Time to Achieve the Goal except
Through 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. Such changes could only be
realized if consumers and businesses commit to investments that improve the efficiency of
energy using capital or reduce energy use in their households and work places. Further, the
carbon permit fees must be high in order to provide the economic incentive for dramatic
improvements over a base case, which already includes many changes in it to lower carbon
emissions.

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

As shown below, energy use per dollar of real GDP (energy intensity) has been steadily improving. During the period of the early 1970s through the early 1980s, energy intensity improved approximately 2.5% per year. Approximately, half of that gain was attributable to improvements in capital or processes and the other half was attributable to changes in the structure of the economy. That is, dramatic changes in energy prices during this period, in combination with other factors, led to a significant change in industry's contribution to GDP. Industrial relocation to other countries led to a sharp decline in domestic energy use. When energy use per dollar of GDP is adjusted for these effects, the rate of improvement was approximately 1.5% per year.

Baseline Energy Consumption, Real GDP, and Energy Intensity (E/GDP):
Index (1996-1.0)

improve at double the rate

of the last ten years.

The Kyoto target is
dramatic and

unprecedented. To achieve
these changes, a sharp
and sustained increase in
real energy prices would
need to be experienced by
consumers and
businesses.

Consumption of petroleum products would decline substantially under policies designed to limit carbon emissions.

Over the very long-run consumers and businesses would invest in more energy-efficient vehicles, but during the budget period 2008-2012 consumers and

businesses would respond to sharply higher prices by reducing their demand for services (miles traveled, cargo shipped).

During the period of the late 1980s and the early 1990s, the rate of improvement in energy use per dollar of GDP slowed significantly to less than 0.5% per annum. Stable, low energy prices and a robust economy slowed, but did not stop or reverse, energy efficiency gains.

Over the forecast period, WEFA projects an improvement in energy efficiency in excess of 1.0% per annum. Regulatory reform of the electric utility industry in combination with continued small gains in all other sectors leads to this substantial improvement.

The Kyoto target is dramatic and unprecedented. To achieve these changes, a sharp and sustained increase in real energy prices would need to be imposed upon consumers and businesses.

Investments required to improve the efficiency of energy using capital would be quite substantial. Because energy-using equipment and facilities have a long life, a great deal of equipment would have to 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 productive equipment etc. Consumers would have to improve the thermal integrity of their homes and replace existing appliances with more energy efficient appliances. Businesses would have to invest in energy efficient capital equipment and the improvement of process efficiency. Finally, utilities would have to replace coal fired power plants with fuels that have no or low carbon emissions. The aggregate improvement in energy efficiency would need to reach 2% in just ten years. An unprecedented rate - unless the nation is willing to accept significant industrial restructuring and job losses.

The Impacts on the Energy Industry

Proposed global warming policies would have a profound impact on energy prices and markets. The prospective reduction in energy use to meet carbon emission targets would increase competition for markets, lower producer prices for coal and petroleum, and induce greater productivity as energy producers struggle to survive.

Petroleum

Consumption of petroleum products would decline substantially under policies designed to limit carbon emissions. In the non-transportation markets, the small demand for oil in these sectors would erode as the increase in price encourages a reduction in use and over the longer term, a conversion to another fuel source. In the transportation sector, high fuel prices, a slowdown in economic growth and falling personal income would reduce personal, business and freight service requirements. Over the very long-run consumers and businesses would invest in more energy-efficient vehicles, but during the budget period 2008-2012 consumers and businesses would respond to sharply higher prices by reducing their demand for services (miles traveled, cargo shipped).

As demand for petroleum products declined here and in other developed economies, producer prices for crude oil would decline from baseline levels. As a result, developing economies would be given an additional economic advantage in the global market place.

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