Foreword Scope This report, Global Warming: The High Cost of the Kyoto Protocol, National and State Impacts, presents WEFA's analysis of the national economic and energy sector consequences the U.S. faces if the Kyoto Protocol is implemented. Separate Economic Impact Profiles are available for the following: Sponsor Contributors This study was funded by the American Petroleum Institute, although the views expressed are strictly those of the authors. The following WEFA economists contributed to the preparation of this study under the direction of Mary H. Novak. 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 ■ State tax revenues would be reduced by $93.1 billion due to job and output loses The sharp rise in energy prices would reduce economic growth opportunities. 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 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 $265 per metric ton of carbon (1992$) 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. 54-19099-22 GLOBAL WARMING: THE HIGH COST OF THE KYOTO PROTOCOL |