Economic Impact - Baseline and Limiting Carbon Emissions at 93% of 1990 Levels by 2008-2012

WEFA

Global Warming:

The High Cost of the Kyoto Protocol
Impact on Massachusetts

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

Massachusetts Would Lose 45,600 Jobs and $2.9 Billion
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 Massachusetts would:
■ Lose 45,600 jobs, including 4,000 manufacturing jobs

■ See an unemployment rate as high as 5.5%

■Lose $2.9 billion 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

Four thousand manufacturing jobs would be lost by 2010, as Massachusetts companies become less competitive in international markets.

Natural gas prices would rise by 79% in 2010 versus the baseline.

Real gross state product would fall by 2.9% in 2010 relative to the baseline.

Massachusetts would lose 45,600 jobs by 2010 relative to the baseline, with manufacturing bearing the brunt of losses.

Real wages and salaries in manufacturing would decline by 2.4% in 2010 versus the baseline

projection.

Business Impacts: Massachusetts

Massachusetts's manufacturing sector would be negatively impacted. Manufacturing employment would decline by 1.0% (4,000 jobs) in Massachusetts by 2010 relative to the baseline forecast. The competitive position of manufacturers located in the state would be eroded due to rising costs, especially relative to non-participating developing countries. Industrial electricity prices would rise 51.4% by 2010 relative to the baseline (i.e., the price level without an emissions-reduction policy). Massachusetts has a high concentration of capital goods producers, which would see large declines in exports.

Energy Prices

Sharp increases in fuel and electricity prices would be felt across the nation. Industrial firms in Massachusetts would be burdened in the global competition for markets with price increases of 79% for delivered natural gas and 51% for electricity by 2010 versus baseline levels.

Output

Imposition of carbon permit fees would significantly impact the overall level of output as well as the composition of output in the state. Real gross state product would fall 2.9% below the baseline in 2010. Hardest hit among the industries in the state would be manufacturing, as firms experience increased cost of power and move jobs from the state. Real output in the manufacturing sector would fall by 3.3% in 2010. Manufacturing losses would cause producers to reduce their purchases of labor and purchased inputs of services. Sharply higher energy prices would shift Massachusetts toward an even greater reliance on service industries.

Employment

Total employment is projected to fall 45,600 jobs below the baseline in 2010. The decline would be largest in service jobs. Within manufacturing, severe declines would occur in durable categories including transportation equipment, and miscellaneous manufacturing - two important sectors in Massachusetts. Two non-durable categories that would be severely impacted are apparel and textiles. The largest decline in percentage terms would occur in transportation, communications and public utilities.

Wages & Salaries

Wages and salaries would fall under the imposition of a carbon permit fee. Rising costs must be offset by lower real wages as economies attempt to retain their competitive position. In Massachusetts, real manufacturing wages would decline by 2.4% in 2010 relative to the baseline. Real private nonmanufacturing wages would fall 2.0% below the baseline forecast.

GLOBAL WARMING: THE HIGH COST OF THE KYOTO PROTOCOL

Limiting greenhouse gas emissions would cost each state resident $434 of their real annual disposable income by 2010.

Real personal income would fall by 2.5% compared to the baseline in 2010.

Residential energy prices would increase by at least 41% in Massachusetts relative to the baseline.

Housing prices would be 10.9% higher by 2010 relative to the baseline.

Medical costs would rise by 14% relative to the baseline in 2010.

Food costs would be 11% higher in 2010 than in the baseline.

Consumer Impacts: Massachusetts

If the Kyoto Protocol were implemented consumers would be squeezed by slower increases in income and the rising costs of basic necessities and other goods and services. Due to the severe loss of employment under the Kyoto Protocol, real personal income in Massachusetts would decline. Meanwhile the cost of energy to consumers would increase dramatically. Prices of home heating oil, natural gas, and electricity would rise along with the costs of nonenergy goods and services such as medical care, food, and housing. The cumulative result would be a continued erosion of consumers' purchasing

power.

Income

Real income growth would slow along with the loss of jobs. Wages in manufacturing are higher than in most nonmanufacturing industries and the accelerated shift of economic activity and jobs towards service industries would further reduce income growth. By 2010, relative to the baseline forecast real disposable income per capita would decline by $434, and total real personal income would decline by 2.5%.

Energy Prices

Residential consumers would face a substantially higher energy bill under the proposed measure. Residential prices for energy would rise significantly above baseline levels in 2010: natural gas (49%), electricity (41%) and home heating oil (74%). The price of motor gasoline would increase 48% relative to the baseline.

Housing

Housing prices are also projected to increase faster under the carbon abatement scenario. Housing prices would be 10.9% higher by 2010 relative to the baseline projection. In Massachusetts, housing prices would escalate at a higher rate than the national average reflecting the in-migration projected for the state due to the less severe loss of employment opportunities.

Medical Expense

Under the carbon abatement scenario, a comparable set of medical services would cost 14% more relative to the baseline projection. Higher medical care prices would lower purchases and the health of the average consumer would suffer as a result.

Food

Under the carbon limit scenario, food prices would be 11% higher than the baseline in 2010. Because food is a necessity, there would be little decline in the amount purchased per household. Therefore, most households would bear the total increase in food costs.

GLOBAL WARMING: THE HIGH COST OF THE KYOTO PROTOCOL

Massachusetts tax
revenues would be
reduced by $2.9 billion and
the unemployment rate
would approach 5.5% in
2010.

Real output in

Massachusetts would fall by $7.6 billion relative to the baseline in 2010.

Tax revenues would fall by 8.6% in 2010.

The unemployment rate would rise to 5.5% in the carbon abatement scenario in 2010.

Government Impacts: Massachusetts

Massachusetts would face a possibly significant decline in tax revenue associated with the imposition of policies aimed at meeting the Kyoto Protocol target. Federal, state, and local tax revenues could decline 8.6% below baseline projections in 2010. This has significant implications for public policy, which would be exacerbated increased unemployment Specifically, Massachusetts's unemployment rate is expected to approach 5.5% in 2010. With increases in unemployment and decreases in revenue, the state would be confronted with a daunting problem: how to provide support for its unemployed workers.

Gross State Product

Adopting carbon emission limits would put Massachusetts at risk of losing
$7.6 billion real dollars of output in 2010 relative to the baseline projection. In
percentage terms, the state stands to lose approximately 2.9% of its potential
output, as economic growth slows. The manufacturing sector would suffer one
of the most severe declines in real output, but the nonmanufacturing sectors
also would lose $6.4 billion in real output in 2010 versus the baseline.
Tax Revenues

As a result of the imposition of a global agreement to limit carbon emissions,
real tax revenues in Massachusetts would fall 8.6% below the baseline
projection in 2010. As a percentage of gross state product, baseline tax
revenues would be 12.8%. This assumes no changes in tax policy in
Massachusetts. If taxes were raised to offset the projected loss of tax revenues,
its competitiveness relative to other states would decline and further reduce
economic activity in the state.

Unemployment and Net Migration

As a consequence of implementing the Kyoto Protocol, Massachusetts is projected to lose nearly as many jobs on a percentage basis as the US average. Migration from the state would not increase because the state's loss of employment is less than the national average. This results in an increase in the number of unemployed workers. For Massachusetts, the unemployment rate is expected to remain stable near the 1996 level of 4.3% in the baseline projection in 2010. If the Kyoto Protocol were fully implemented, the unemployment rate in Massachusetts would reach 5.5% in 2010.

GLOBAL WARMING: THE HIGH COST OF THE KYOTO PROTOCOL