EXECUTIVE SUMMARY After 2000, real GDP per Metropolitan areas are increasing in size and density. Comprised of inner cities, older inner-ring suburbs and newly developed suburban areas, they face myriad issues. Among the greatest concerns of metropolitan area officials are economic development, infrastructure support and social support systems. Metropolitan areas have complex inter-relationships among the various communities and with state and federal government. All metropolitan areas rely on federal and state funds: ■ for many smaller areas, the funding may represent 25% of their budget ■ for larger areas, the funding may exceed 40%. The balance sheets of metropolitan areas are not expected to improve substantially over the coming decade. The US is one of the few developed economies that is projected to have a significant increase in population, about 0.8% per annum. By 2010, the population in the US will be 10.3% greater than today. Metropolitan areas, which are attracting an increasing proportion of the population, will be called upon to provide services to more people. Further, the baseline projection of economic growth calls for a slowdown in economic performance per person. As a result, there will be greater pressure on those workers with fewer skills, and skilled workers will be experiencing very slow improvement in their economic prosperity. THE KYOTO PROTOCOL: HIGH ECONOMIC COST 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. GAL NADK: THE HIGH COST OF THE KYOTO PROTOCOL The implementation of the Kyoto Protocol would carry a high economic cost to the nation and every state. Sharply higher energy prices and lost global competitiveness would combine to: ■ Cost the US 2.4 million jobs. ■ Reduce US annual output (real GDP) $300 billion per year below baseline estimates. ■ Reduce the average household income nearly $2700. Both federal and state tax revenues would be significantly lower if the Kyoto Protocol were adopted. ■ Federal tax revenues would be $94 billion (925) less than under the baseline assessment. ■ State tax revenues would be $93.1 billion (925) less. IMPLEMENTING THE KYOTO PROTOCOL WOULD REDUCE Ratifying and implementing the Kyoto Protocol would seriously harm metropolitan areas. The impacts would be far-reaching with both economic and social implications. Metropolitan areas' vulnerability stems from two areas: First, most small metros and large counties immediately surrounding large cities have shared less than proportionately in the economic growth of the nation since the recession in the early 1990s. As the analysis shows, ■ metropolitan areas would suffer output and job losses that would meet or exceed the percentage loss of jobs in their state ■ the loss of output and jobs would reduce metropolitan areas own sources of funds. Second, metropolitan areas rely upon state and federal transfers to meet the needs of their constituencies. On average, metropolitan areas receive one-third of their revenues through inter-governmental transfer. ■ for many smaller areas, the funding may represent 25% of their budget ■ for larger areas, the funding may exceed 40%. WEFA's analysis shows that federal tax revenues would be 5.5% lower than projected in the baseline for 2010 ($94 billion 1992 dollars), and state revenues would decline between 5.3% and 10.9% below baseline projections by 2010 (total state tax revenue reduction would be $93.1 billion 1992 dollars). All states suffered revenue losses. Metro areas' pleas for increased funds from state coffers could not be answered if the Kyoto Protocol is ratified. The table below summarizes the projected declines for selected metropolitan area output and employment projections which indicate the increasing demand for services and the reduction in tax revenue that metro areas would experience. Further, state tax revenue losses and federal tax revenue losses are reported as indicators of the funding reduction that would occur under the Kyoto Protocol. GLOBAL WARMING: KYOTO IS NOT THE ONLY OPTION WEFA's analysis shows severe economic consequences for the US, the states and metropolitan areas if the Kyoto Protocol is implemented. A better strategy to alleviate this potential global threat may be the use of longer-term opportunities, such as GLOBAL WARMING: THE HIGH COST OF THE KYOTO PROTOCOL 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. ■ 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 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 costs. ■ State tax revenues would be reduced by $93.1 billion (925). 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 |