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. 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. 54-190 99-25 GLOBAL WARMING: 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. Inflation increases more than 14% above the baseline. 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. THE IMPACT OF THE KYOTO PROTOCOL: SEVERE ECONOMIC CONSEQUENCES FOR EVERY STATE Implementing the Kyoto Protocol would incur a heavy cost on all states. Under the Protocol, the US would need to raise energy prices significantly in order to meet the target reductions in carbon. As most carbon is emitted to the atmosphere through the combustion of fossil fuels, achieving the goal would require substantial declines in energy use per person. As a result, states that produce energy resources would be expected to suffer significant output and job losses. States that produce manufactured goods that require a substantial contribution from energy sources would be hard hit. The relative economic performance of the states would also be affected by their electricity prices. The extremely high permit fees associated with coal combustion would burden States in regions with significant coal generating capacity. Over time, these states would be expected to invest in gas-fired generating capacity. However, early replacement of coal capacity with natural gas capacity would also result in relatively higher electricity prices. A second, and perhaps an even more devastating impact on state economic performance, would be the growing disparity in energy prices between industrialized and developing economies of the world. The energy price-rise projected for the US and other industrialized nations would not be imposed on developing countries. While these nations argue that the US and other industrialized nations should bear the full burden of reducing the carbon levels in the atmosphere, they also recognize the important role energy plays in their economic welfare. Thus, the rise in energy prices and the resulting increase in the price of products and services would be felt by all industries. In particular, industries that are oriented towards sales in the global market would be hurt significantly. Supporting manufacturing industries would also feel the burden, as would supporting service industries. The latter effect may be the more egregious, as the ability of the US to overcome the loss of competitiveness is significantly hampered under the Kyoto Protocol. Under the Protocol, the cap on greenhouse gas emissions has been set without regard to population increases. Therefore, as population rises here in the US and increases more slowly in Europe and parts of the Former Soviet Union, carbon or energy use per person would need to decline at an extremely fast rate. To maintain emissions at the Kyoto target would require continuously increasing energy prices. To forestall this effect would require an increase in energy efficiency that dramatically outpaced the growth in population-forever. The prospects for even greater reductions in emissions that are still under discussion by international negotiators would exacerbate this effect. As a result, states that had invested in the global market place would find themselves with a dramatic cost disadvantage, and dim prospects without an extraordinary – and unprecedented - improvement in capital productivity. IMPACT ON STATE TAX REVENUES As a result of the loss of economic performance, states tax revenues would be lower than in the baseline. State governments would collect $93.1 billion (925) less in tax revenue. The loss of this revenue would substantially reduce its ability to transfer funds to local governments. GLOBAL WARMING: THE HIGH COST OF THE KYOTO PROTOCOL THE IMPACT OF THE KYOTO PROTOCOL: METROPOLITAN AREAS SUFFER Total Output Mining: Coal, Oil, Gas and Construction Transportation, Telecommunications, and Utilities Finance, Insurance, and Services Trade Manufacturing Agriculture To assess the effects of implementing the Kyoto Protocol on local communities, WEFA analyzed the impacts on a representative group of 20 metropolitan areas. The results for the year 2010 are summarized below, shown comparatively by region in the following table, and reported in detail in the Appendix. IMPACT OF IMPLEMENTING THE KYOTO PROTOCOL ON SELECTED METROPOLITAN AREAS For 70% of the cities and counties surveyed, output-declines by 2010 exceed 3%. San Jose, CA leads with an output decline of 6.5% below baseline. Billings MT, Madison County AL, and New Orleans follow with output declines above 4.5%. Implementing the Kyoto Protocol would have a devastating impact on the mining sector. nearly half of the counties and cities experience a decline in mining employment from the baseline above 20 percentage points. High on the list are Jefferson County KY, Cleveland OH, and Billings MT. For the remainder of the metropolitan areas, the decline from the baseline in mining sector output exceeds 10 percentage points. Jefferson County KY, Phoenix-Mesa AZ, Harris County TX and Billings MT lead the eleven cities and counties that experience a decline above 1.5% in construction employment below the baseline. Fourteen cities and counties that experience a decline above 2.5 percentage points in construction sector output, led by Clark County NV, Chicago IL, Harris County TX and Howard County MD. Nearly two-thirds of the cities and counties suffer declines in employment and output in excess of 2.0% in the transportation and utilities sector. Output for this sector dips considerably in Billings MT. Fulton County GA and Charlotte-Gastonia-Rock Hill NC also experience significant declines. Transportation sector employment declines from the baseline are also quite high, led by Phoenix-Mesa AZ, Billings MT and Fulton GA Roughly 80% of the cities and counties experience a decline greater than 3% in Finance, Insurance, and Real Estate. Half the cities and counties experience employment declines greater than 2% in this sector. Judged by the size of declines below baseline in both employment and output, the service sector Billings leads the cities and counties in trade sector declines in both employment and output. Manufacturing losses are large in all of the metropolitan areas. There are 13 cities and counties Compared to the manufacturing and non-manufacturing sectors, the agriculture sector for these metropolitan areas bear a lower burden under the Kyoto Protocol than other sectors. There are only eight cities and counties with output declines below baseline in excess of 2.0% by 2010. Agriculture sector output declines below baseline are substantial for Cleveland-Lorain-Elyria, Fort Wayne, and Chicago. GLOBAL WARMING: THE HIGH COST OF THE KYOTO PROTOCOL |