expanding voluntary efforts to limit greenhouse gas emissions, supporting scientific research and educational programs on climate, and investing in the development and deployment of new technologies. INTRODUCTION 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. WEFA has analyzed the economic consequences to the U.S. of achieving the Kyoto target through domestic actions. Sharply higher energy prices would be required to meet the goals of the Kyoto Protocol, which would reduce economic growth opportunities. Compounding this effect would be the loss of competitiveness the industrialized countries would suffer, as developing countries would not raise energy prices to meet greenhouse gas reduction targets. Developing countries have exempted themselves from emission limits because they recognize the role energy plays in their economic development, arguing that full responsibility for mitigating the risk of global warming rests with the industrialized countries. WEFA's analysis shows that the consequences would be severe; these results are consistent with results that others analyzing even less onerous targets have reported, including 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. ■ Cest 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. competitivenem, 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. ■ Federal tax revenues would be reduced by $94 billion (925) due to job and output loses attributable to reduced US competitiveness in the global market and higher energy Across the nation, metropolitan areas would suffer extreme hardship if the Kyoto Protocol were implemented. This paper discusses two impacts of the Kyoto Protocol on metropolitan areas: ■ Due to higher costs for energy and loss of international competitiveness, metropolitan areas would suffer significant output and job losses, leading to: ■ increased unemployment and under-employment with corresponding requirements for social services, and ■reduced Own-sources of tax revenues that are dependent on production and employment. ■Lower federal and state tax revenues would reduce transfers to local governments compounding projected losses in own sources of revenues GLOBAL WARMING: THE HIGH COST OF THE KYOTO PROTOCOL THE KYOTO PROTOCOL National, state and local leaders are now debating whether to sign and ultimately ratify the Kyoto Protocol, a proposed international treaty that would legally bind developed countries to reduce their greenhouse gas emissions. Developing countries, including China, India, Mexico, Brazil, Korea and Taiwan, would not limit their emissions under the Kyoto Protocol. By the terms of the Protocol, the US would have to limit greenhouse gas emissions to 93% of 1990 emission levels in little more than a decade. Meeting the goal of the Kyoto Protocol would be a daunting task. In 1997, carbon emissions from the energy sector, the majority (85%) of greenhouse gas emissions, exceeded 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% Reducing carbon emissions from the energy sector to 93% of 1990 levels would be extremely costly. The Kyoto Protocol includes several provisions that the Administration has suggested may ameliorate much of the cost of implementation. These include emission permit trading between the industrialized countries subject to emission limits under the Protocol, sinks and market-based mechanisms to promote technology development in developing countries. 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 and has not included them in this analysis. To determine the economic cost of implementing the Kyoto Protocol, WEFA has assumed that intra-country tradable permits at the point of first purchase would be instituted Revenues collected would be recycled to consumers through a lump-sum payment. GLOBAL WARMING: THE HIGH COST OF THE KYOTO PROTOCOL IMPLEMENTING THE KYOTO PROTOCOL: SHARPLY HIGHER ENERGY PRICES As the value of permits required for consumption of fossil fuels is built into the price of energy production, consumers of energy will face higher prices of this essential input. To achieve the emission reductions goals of the Kyoto Protocol would require sharply higher prices for energy and electricity. WEFA estimates that a carbon permit fee of $265 per metric ton would be required by late next decade to reduce emissions 7% below 1990 levels. When the value of the permits required to purchase and consume fossil fuels is added to the price of energy, consumers and businesses would face dramatically higher prices of this basic necessity and essential production input. As shown, energy prices would nearly double for businesses with implementation of the Kyoto Protocol. 54-190 99-25 98.3 112.0 127.3 76.3 89.9 107.5 60.2 71.3 79.4 Residual Fuel Oil 184.5 210.9 240.1 Natural Gas 118.6 135.5 156.4 Electricity 87.7 The Administration has argued that new technology can drastically reduce the costs of implementing the Kyoto Protocol, WEFA has carefully assessed the ability of technology to reduce costs over the time period in question. Given the dramatic improvements in energy efficiency included in the baseline due to the restructuring of the electric utility industry and global competitive pressures on industry, much more rapid technology improvement is extremely unlikely without very powerful price incentives. GLOBAL WADING THE HIGH COST OF THE KYOTO PROTOCOL THE IMPACT OF THE KYOTO PROTOCOL: HIGH ECONOMIC COST FOR THE NATION Meeting the goal of limiting carbon emissions to 93% of 1990 levels results in: A loss of 3.2% of baseline GDP by 2010, and a continuing reduction in real GDP from the baseline of 2.0% over the very long run. 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. Further, and perhaps more importantly, the significant increases in energy prices that would be required to reduce US emissions of carbon would create an imbalance between the industrialized countries of the world and the developing economies. The loss of global competitiveness would significantly reduce US economic performance. 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. IMPACT ON FEDERAL TAX REVENUES As a result of the loss of economic performance, federal tax revenues would be lower than in the baseline. The federal government would collect $94 billion (925) less in tax revenue, a 5% decline from the baseline. The loss of this revenue would substantially reduce its ability to transfer funds to state and local governments. GLOBAL WARNING THE HIGH COST OF THE KYOTO PROTOCOL |