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.)

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

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

Implementing the Protocol would require significant reductions in energy use.

Any carbon permit fee must be high in order to provide the economic Incentive for dramatic improvements over a base case, which already includes many technology advances and lower carbon emission

estimates.

Historically, the only

period that experienced a

rate of energy improvement similar to the

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 wellpaying manufacturing jobs overseas.) Without price incentives, the goal would not be reached.

Compound Annual Growth Rates in the Energy to GDP Ratio
(Quadrillion BTU/Billion 1992$)

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 of the world will not meaningfully participate in a greenhouse gas emission reduction or limitation program until technological alternatives exist that provide an equal or better opportunity for economic growth than is offered by fossil fuels.

The principal contributors to GHG emission growth are the emerging economies.

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 scope--emissions 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.

Reducing carbon

emissions from

participating industrialized

countries by 5% would not

substantially impact global emissions.

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

WEFA

Global Warming:

The High Cost of the Kyoto Protocol
Impact on Alabama

In December 1997, the Clinton Administration agreed to the Kyoto Protocol, an international treaty that would legally bind industrialized countries to reduce their greenhouse gas emissions. US emissions would be limited to 7% below 1990 levels by late next decade. Meeting this goal would be a daunting task, as carbon emissions from the energy sector are expected to exceed the Kyoto goal by more than 37%. WEFA estimates that to achieve the Kyoto goal would require a carbon permit fee of $265 per metric ton added to energy prices, resulting in:

■ A hike in gasoline prices of nearly 65 cents a gallon

■ A doubling of electricity and energy prices for consumers and
businesses

The Kyoto Protocol Would Slow Economic Growth and
Cost US Jobs

The Kyoto Protocol is supposed to be an international agreement, but 134 of 160
negotiating nations said that the US and other industrialized countries should bear the
entire burden. China and India were particularly emphatic, saying that they will
never participate in a global effort to reduce greenhouse gas emissions. If key
developing nations continue to exempt themselves from the Kyoto Protocol, WEFA
estimates that by 2010 the US would:

■Lose 2.4 million jobs

■ See a 3.2% drop in U.S. annual output (GDP)

■ Lose $300 billion annually, or more than total expenditures on
elementary and secondary education

Alabama Would Lose 67,500 Jobs and $929 Million in
Tax Revenue

While developing nations would get a free ride under the Kyoto Protocol, state and
local economies would not. Implementing the agreement would raise energy costs
and slow economic growth. In 2010, WEFA estimates that Alabama would:
■Lose 67,500 jobs, including 21,700 manufacturing jobs

■ See an unemployment rate as high as 6.3%

■Lose $929 million in tax revenue, reducing the state's ability to provide social services when the need for such services would be increasing

The Kyoto Protocol is Not the Only Option

WEFA's analysis shows severe economic consequences for US consumers if the Kyoto Protocol is implemented. Only near-term catastrophic global climate change would justify imposing these costs on US businesses and consumers. As global warming may be gradual and largely due to natural forces, a better strategy to alleviate this potential global threat may be the use of longer-term opportunities, such as:

■ Expanding voluntary efforts to limit greenhouse gas emissions

■ Supporting scientific research and educational programs on climate ■Investing in the development and deployment of new technologies