The High Cost of Kyoto

Champions of the Kyoto Protocol say curbing carbon emissions will ensure a safer, more prosperous future for all. But if developing countries don’t go along with it, Kyoto could put the bite on U.S. GDP

June 1 1998 by Ronald Bailey


“YOU CANNOT UNDERSTATE THE IMPACT THAT the regulation of carbon dioxide emissions under the Kyoto Protocol will have on American business,” says Fred Palmer, CEO of Western Fuel Associates, a large cooperative of coal-burning electric utilities. “Cutting CO’ emissions to meet Kyoto goals would devastate not only utilities, but also a whole host of other industries, including aluminum and iron smelting plants, paper and pulp manufacturers, oil refining, automobiles.” Direct energy costs are likely to soar by at least 50 percent.

“Already, the Environmental Protection Agency (EPA) has begun to explore how it might regulate the CO’ emissions from the burning of fossil fuels like coal and oil,” says Palmer. In fact, the green zealots at the EPA have already been caught discussing how to begin implementing limits on carbon emissions, even before the Kyoto Protocol has been submitted by President Clinton to the Senate for ratification. In a recent internal memo, EPA officials claimed that the agency had the authority under the Clean Air Act to establish pollution control requirements for CO’ including a “cap-and-trade” scheme that “would be seen as a concrete step to move forward domestically on global warming while continuing to work for progress internationally in follow-up to Kyoto.”

Once the memo was made public, EPA officials hastily declared the document “predecisional” and dropped for the time being its proposals to regulate CO’ as a pollutant.

Palmer points out just what is at stake. If the EPA models its CO’ regulations on its current Clear Air Act sulfur dioxide and nitrogen oxide standards, that would mean that any company that emitted more than 100 pounds of CO’ per year would be subject to EPA restrictions. Therefore, any of the millions of businesses that burn the equivalent of $7,000 of fuel oil annually might be forced to obey very detailed regulations on the use of energy in manufacturing, transportation, and heating and cooling. Even big buildings like hospitals, schools, plants, and apartment buildings that use a lot of oil for heating would likely be subject to federal regulations. In order to keep track of how every watt is produced and used, the EPA will have to impose a complicated accounting scheme that will likely make the federal tax code look simple by comparison. Enforcement of these new CO restrictions could entail substantial fines and perhaps even jail time for executives who fail to comply with them.

Worse yet, the playing field will be radically tilted in favor of America’s international competitors in developing countries like China and Brazil because they will not have to pay more for energy or subject themselves to the same centralized regime of international energy controls with which U.S. companies will have to contend.

Meanwhile the Clinton administration is gamely attempting to downplay the costs and complications of the Kyoto Protocol. That treaty would commit the U.S. consumers and businesses to reducing their emissions of greenhouse gases, chiefly carbon dioxide, by about 30 percent below what they would otherwise have been between 2008 and 2012.

The greens inside the administration, including Vice-President Gore, know that the costs coming out of several different independent econometric models are enough to scare most business executives, so the administration is trying to counter them with well-massaged and soothing, but phony, numbers of its own.

Janet Yellen, chair of the President’s Council of Economic Advisors, presented the administration’s funny numbers to the House Commerce Committee in March. She claimed that meeting Kyoto CO= reduction goals will cost at most $110 per household. Most economic analysts dismiss this estimate as utterly fantastic. The infamous 1980s “Rosy Scenario” budget fudging looks modest by comparison to this new Green Delusion. In order to reach these incredibly low numbers, Yellen boldly asserted that “the net costs of our policies to reduce emissions are likely to be small, assuming those reductions are undertaken in an efficient manner and we are successful in securing meaningful developing-country participation as well as effective international trading.”

“You can pretend that emissions trading will happen and that it’s perfectly efficient and can be instantaneously put in place and that every country gives up its sovereignty. If we do all those things right, then CO= emissions reductions wouldn’t cost us too much,” says WEFA (formerly Wharton Economic Forecasting Associates) economist Mary Novak. “Or you can be realistic.”

“What is at risk is that if we go ahead and sign the Kyoto Protocol, and then other countries simply say no to our carbon emissions trading proposals after we sign,” warns Novak. “That would be very costly to our economy.”

Novak is right to be worried. Key developing countries whose emissions of CO’ will surpass those of the U.S. early in the next century-China, India, Brazil, Indonesia, along with some 120 other countries-oppose emissions trading and absolutely refuse to consider limiting their own energy use as a way to cut CO’ emissions. If the developing countries don’t cut their CO= emissions, efforts to slow the alleged threat of global warming will fail.

The next long step toward hobbling energy use by American businesses and consumers will be taken at the Kyoto follow-up meeting this coming November in Buenos Aires. The Kyoto Protocol is, as Vice-President Gore has reminded us, just another step in a long-term process. The screws will really begin to tighten at Buenos Aires. U.N. climate negotiators are slated to “approve appropriate and effective procedures and mechanisms to determine and to address cases of non-compliance with the provisions of this [Kyoto]

Protocol, including the development of an indicative list of consequences, taking into account the cause, type, degree, and frequency of non-compliance.” Translation: At Buenos Aires, fines and sanctions to be levied against developed countries that fail to cut their CO’ emissions as much as specified in the treaty will be established. These will probably be trade sanctions including tariffs against exports from any developed country that fails to comply with the treaty. But developing countries get off scot-free.

Despite the Clinton administration’s soothing words, there is no indication that developing countries will be roped into COQ reduction commitments or that they will agree to an international emissions trading scheme.

Nevertheless, on the basis of the heroic assumptions of developing-country participation and international emissions trading, Janet Yellen triumphantly pulled an econometric rabbit out of her hat. She claimed that “the resource costs of attaining the Kyoto targets for emission reductions might amount to $7 billion to $12 billion per year in 2008 to 2012.” According to Yellen, it would cost only between $14 and $23 per ton to cut carbon emissions. Overall costs meeting the Kyoto CO= reduction commitments would reach roughly one-tenth of 1 percent of projected GDP in 2010 and would raise the average household’s energy bill between $70 and $110 per year.

Can America really cut its energy use by one-third in 12 years without significantly affecting jobs and economic growth? Roughly, the U.S. is committed to reducing its emissions of carbon 7 percent below the level of 1,337 million metric tons it emitted in 1990. So in compliance with the Kyoto Protocol, America should be emitting only 1,243 million tons of carbon in 2010. However, if the U.S. economy were allowed to follow a business-as-usual growth trajectory, carbon emissions in 2010 would reach about 1,750 million tons annually. Already, emissions are now up to 1,461 million tons annually. This means that by 2010, under the Kyoto Protocol, the U.S. economy would be required to emit about 500 million tons of carbon less than it otherwise would have.

There is no historical parallel for such deep cuts, according to economist Russell Jones of the American Petroleum Institute. He points out that during the “energy crisis,” U.S. carbon emissions remained flat between 1974 and 1986-they did not decline-even though the price of petroleum more than quadrupled. In implementing the Kyoto Protocol cuts, the Clinton administration is clearly contemplating a much more wrenching change than the energy price shocks that many economists believe caused the economic stagflation of the 1970s and early ’80s.

Yellen’s funny numbers assume that carbon emissions would be reduced merely 3 percent from what it would otherwise be. The administration assumes that the U.S. can offset most of its obligations through the purchase of carbon permits from Russia, the Ukraine, and developing countries. This means that the U.S. would only need to reduce its emissions by 50 to 75 million tons in 2010. This, according to WEFA’s Novak, is a chancy strategy.

Right now, the bare concept of emissions trading is limited to just Annex B countries. Russia and the Ukraine are the only Annex B countries that are likely to have emission permits for sale, largely because their emission levels set under the Kyoto Protocol are based on 1990 carbon emission levels, which were much higher than they are today due to the collapse of their inefficient post-Soviet economies. WEFA estimates that they will be able to offer permits for only about 160 million tons of carbon emissions in 2010. So even if the U.S. bought up all of those permits (which is unlikely since the Europeans, Japanese, Australians, and New Zealanders are likely to bid for those permits too)-and actually cut its domestic emissions by 75 million, that would still leave 265 million tons left to cut by 2010. Janet Yellen says the administration is counting on including the developing countries in the international emissions market. But there is no provision for setting binding limits on developing countries’ emissions. Developing countries such as China, India, Brazil, Mexico, and Indonesia are excluded-they have no commitments to reduce carbon emissions, nor are any commitments in the future even mentioned in the treaty.

As Congressman Dan Shaefer (R-CO), chairman of the House Subcommittee on Energy and Power, succinctly put it in March: “With respect to meaningful developing country commitments under the Kyoto Protocol: it is a done deal and they don’t have any.”

And despite Clinton administration hectoring, developing countries are very unlikely to agree during the next round of climate negotiations this November in Buenos Aires to any binding limits on their future carbon emissions. They will simply ignore President Clinton’s promise to the American people that “the United States will not assume binding obligations unless key developing nations meaningfully participate in this effort.” Clinton correctly pointed out that “if the entire industrialized world reduces emissions over the next several decades, but emissions from the developing world continue to grow at their current pace, concentrations of greenhouse gases in the atmosphere will continue to climb.” By 2015 or so, CO’ emissions from the developing world will exceed CO’ emissions from the developed countries.

“This flawed treaty will force the U.S. to commit to emissions reductions that will put Americans on a strict energy diet, a more than 30 percent cutback in our energy use, while allowing our international competitors to increase their emissions,” warned Congressman Weldon (R-FL) in March. “What about the jobs that will move to more than 130 countries overseas that are not committed to these emissions reductions?”

The heads of eight U.S. labor unions, including the International Brotherhood of Electrical Workers, United Paperworkers International Union, and the United Mine Workers, share the congressman’s views. They sent a letter to President Clinton this past January in which they “strongly urge you to reject the climate-change protocol recently negotiated in Kyoto.” They added: “We believe forcing such severe changes in the way our economy consumes energy in such a short period of time could have very detrimental impacts on economic growth, jobs, and consumer prices.”

Key developing countries, including China, India, Brazil, and Indonesia, have said they don’t intend to agree to any limits on the CO’ they emit. Yet these developing countries have the least-cost opportunities for reducing carbon emissions, and that’s what the Clinton administration is counting on. These countries are flatly refusing to undertake binding obligations to cut CO2 because they are afraid the rich countries will buy all the permits now and limit their development in the future.

There is a political problem. Most European countries and developing countries don’t fundamentally believe emissions trading is politically or morally the right thing to do, says Novak. “They believe that the U.S. is seeking to shirk bearing its fair share of the burden of reducing CO’. There is a very strong sense that we are trying to buy our way out of the problem that we caused.”

Stuart Eizenstat, undersecretary of State for Economic, Business, and Agricultural Affairs, and the chief U.S. climate negotiator, testified before the House Subcommittee on Energy and Power that he hoped some developing countries would voluntarily submit to emissions limits.

A skeptical Representative Ralph Hall (D-TX), the ranking Democrat on the subcommittee, snorted, “What hammer do we have over these [developing countries]? Are we going to bomb them? Are we going to put a special prosecutor on them?”

“I don’t believe there’s any chance over the next 20 or 30 or 40 years that the developing countries will devote any resources to carbon abatement,” says Thomas Schelling, professor of economics at the University of Maryland. “They’ve got problems with dirty drinking water, poison soils, unbreathable air, and diseases in the environment, and I wouldn’t expect them-and I wouldn’t recommend to them-that they devote their own resources seriously to carbon abatement.”

So what would it realistically cost the U.S. to meet the requirements of the Kyoto Protocol and cut its carbon emissions by 30 percent by 2010? Three recent post-Kyoto analyses by WEFA, DRI, and Charles River Associates show that the costs of complying with Kyoto, under more realistic assumptions than the administration’s Rosy Scenario, are likely to be quite high and would clearly clobber the U.S. economy.

WEFA’s analysis concludes that complying with Kyoto limits would cost the average American household $2,728 annually. The DRI analyses differ on the amount of international trading that is assumed to occur. Case 1 assumes that 42 percent of the target reductions in carbon emissions can be achieved through trade, whereas Case 2 assumes even more. The WEFA analysis assumes that essentially no international emissions trading is likely. Even the administration’s estimates, $240 to $145 per ton of carbon, are in line with the estimates once the unrealistic assumptions of effective international trading and developing-country participation are dropped.

Economist David Montgomery of Charles River Associates notes that even assuming that the U.S. could buy 200 million tons of carbon permits at $25 per ton means they would cost $50 billion annually. Montgomery wonders if Americans would accept sending at least $50 billion dollars annually to foreign countries to buy carbon permits.

President Clinton has promised not to implement any part of the Kyoto Protocol until it has been ratified by the Senate. Undersecretary Eizenstat repeated that promise when he testified in February before the Senate Foreign Relations Committee that “we have no intention…of trying to impose or take any steps to impose what would be binding restrictions on our companies, on our industry, on our business, on our agriculture, on our commerce, or on our country until and unless the Senate of the United States says so.”

But even if the treaty is not passed by the Senate, the administration could nevertheless use the treaty as a framework for developing carbon abatement policies, just as the EPA was trying to do earlier. In fact, Senator John Kerry (D-MA), has already suggested that the lack of ratification need not impede compliance with its goals. Remember SALT II? President Carter signed it, couldn’t get it through the Senate, but he declared that he would observe it anyway.

Representative James Sensenbrenner (R-WI) summed it up best: “I believe the Kyoto Protocol to be seriously flawed-so flawed, in fact, that it cannot be salvaged,” declared the House Science Committee chairman. “This treaty is based on immature science, costs too much, leaves too many procedural questions unanswered, is grossly unfair because developing countries are not required to participate, and will do nothing to solve the speculative problem it is intended to solve.”

Business executives should urge the Clinton administration to pull the plug on the Kyoto negotiating process now-before the U.S. becomes even more entangled in a treaty that could cause significant damage to our economy while doing nothing to fix the alleged problem of global warming.


Is The Earth Really Getting Warmer

THE CONCERN OVER GLOBAL WARMING FIRST arose when early computer climate models predicted that the earth’s temperature might rise by between 5 and 9 degrees Fahrenheit over the next century due to the increased levels of CO’ in the atmosphere that the burning of coal and oil have caused. And indeed, certain land-based temperature records suggest that the planet is getting warmer. But measurements made by NOAA satellites and weather balloons show virtually no warming over the past 20 years. Still, the original climate computer models predicted the atmosphere should have warmed by 0.4 to 0.6 degrees centigrade over that period.

Global warming alarmists predict that hurricanes and floods will become fiercer. But the frequency of intense hurricanes and their maximum windspeed have declined significantly over the past half century. Rainstorms that drop more than two inches in 24 hours have increased modestly since 1910; there is now one additional heavy rain every two years. There has been no significant trend for long-term or extreme droughts in the United States since 1895. As for temperatures in the United States there is no significant increase in the percent of the U.S. experiencing temperatures much above normal.

The predictions of sea level rise due to glacial melting have been greatly reduced to only about 10 inches over the next 100 years. Let’s put that in context-over the past 60 years sea level rose by six inches. Did anyone notice? But even the claim that sea level will rise has been called into question. Some scientists predict that a slightly warmer world will mean a slightly wetter world. They theorize that this could mean greater snowfall in Antarctica, which could lead to a lowering of sea level.

What appears to be happening is that globally winter nighttime temperatures are getting warmer. There is no evidence that summer daytime temperatures in the U.S. have increased. Now what do higher winter nighttime temperatures mean? Longer growing seasons, for one thing. Recent evidence seems to back up that notion-one study shows that spring has been arriving two weeks earlier than it used to.

The bottom line, according to NASA climate scientists Roy Spencer and John Christy, is that the earth is likely to warm up modestly-perhaps an average of 1 to 1.5 degrees Centigrade over the next century.

But what if the climate models are correct and it turns out that global temperatures will increase substantially. Do we have to act now? Should the U.S. rush to go along with the Kyoto Protocol?

An important study published in Nature in 1996 concluded that waiting to cut carbon emissions would give scientists and engineers time to develop less carbon-intensive energy technologies to which we can switch at a lower cost in a few decades. In other words, we needn’t take drastic and costly action now. Humanity can wait at least a decade or so to see if the climate models turn out to be right. And if they are, then technological innovations and judicious capital investment will make it possible to reduce carbon emissions more cheaply in the future before they become a significant problem.

Dr. Jerry North, head of the Department of Meteorology at Texas A&M, says he thinks there may be something to global warming, but he adds, “I think it’s too early to start action now. I believe that we have a decade or so in which can collect data and refine our models before we have to act.”


Ronald Bailey is an independent writer and television producer in Virginia. He is the editor of The True State of the Planet (Free Press), and author of ECO-SCAM: The False Prophets of Ecological Apocalypse (St. Martin‘s).