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Estimating the cost of the Kyoto Protocol, the international global warming treaty, has produced disagreement among the government’s energy analysts. President Clinton’s Council of Economic Advisors (CEA) put the cost of the treaty at $12 billion annually.1 Energy experts at the Energy Information Administration (EIA) put the yearly impact as high as $397 billion.2 Who’s right? Judging by the continued failure of international negotiators to create alleged cost-saving implementation measures, such as global emissions trading, the dire projections by EIA may be all too real.
The lost hope of emissions trading. Global emissions trading is a system that attempts to harness market forces to reduce greenhouse gases. Basically, the Kyoto Protocol would permanently limit greenhouse gas emissions, capping them at 7 percent below 1990 levels. Once the cap is established, emissions allowances are divided among industries. The only option for firms exceeding their allowances is to purchase emission credits from other companies that do not use all of their emissions allowances. Theoretically, emission trading creates an incentive for firms to find ways to reduce their emissions and sell the resulting credits on the open market. However, making theory a global reality is harder than first thought.
Is the CEA analysis irrelevant? The inclusion of global emissions trading is what distinguishes the $12 billion CEA figure from the more costly predictions by the EIA and other private forecasters. However, the emission trading program never materialized. This was one reason CEA chairman Janet Yellin balked when asked by Congress to support the administration’s $12 billion figure with analysis. Dr. Yellin told Congress that her oral testimony "was the economic analysis."3
Independent economists raise doubt about CEA forecast. WEFA Inc., Charles River Associates and other private firms predict serious economic consequences of the Kyoto Protocol without an abundance emission credits. WEFA, Inc. estimates the annual impact could reach $300 billion annually.4 Charles River believes the impact could reach $128 billion annually—considerably higher than the CEA estimate and closer to the EIA’s forecast.5
Trading between industrial countries will fail to reduce costs. Proponents of a global emissions trading program hit their first stumbling block when major developing nations refused to limit their emissions or participate in a trading program. Without global trading, energy-efficient industrial countries are left to trade emissions among themselves. The CEA optimistically believes that cheap emissions allowances can be bought from Russia, raising the cost of the treaty only slightly to $26 billion annually. The EIA, however, put the cost of this scenario at $63 billion. Why the difference? CEA had lower economic growth projections over the next decade than EIA, meaning emissions levels would drop. Therefore, the amount of emission reductions necessary to reach the protocol targets falls, limiting the treaty’s relative impact on the economy.
Russia’s excess emission credits, however, may never materialize. These credits exist due to an economic collapse around 1990, which decreased fossil fuel combustion nationwide and lowered emissions. Since Russia will need energy, and, thus, emissions, for future economic growth, it is not clear whether Russia will sell any emission allowances.
There is also reason to believe that the supply of Russia’s credits would not be able to keep up with demand from Japan, the United States, Australia, and others. Robert Rheinstein, former chairman of Working Group III and of Working Group II of the U.N. Intergovernmental Panel on Climate Change (IPCC), claims that industrialized nations, who will require between 1.8 billion and 3.1 billion tons of greenhouse gas emissions credits per year, will run into a shortfall of credits. It turns out that Russia and other nations have only an additional 270 million to a billion tons annually to sell.6 A credit shortage means that countries like Japan with few ways of reducing emissions domestically will pay a premium for available credits, raising the costs of implementing the Kyoto Protocol. Without any cheap international credits, the administration believed Kyoto would cost $60 billion annually, while the EIA put the cost much higher at $397 billion.7
Energy efficiency and the false hope of government R&D. Costs will rise significantly without international trading, because American firms will have to find a substitute for fossil fuel. This is why the President has asked for $4 billion in R&D and tax credits in his new budget to support new energy-efficient technologies. But history shows that such efforts are doomed to fail. The oil shortage in the 1970s prompted the federal government to spend $90 billion on a failed synthetic fuels initiative and billions on other energy projects. Solar and wind energy remain too expensive to compete with fossil fuel despite billions in R&D. For example, despite $5 billion in R&D since 1979, solar electricity generation still costs 15 cents per kilowatt/hour, more than three times the average cost of coal and natural gas generation.8
Little progress has been made in the search for alternative sources of energy and most experts believe a replacement is decades away. Research by Alan Manne of Stanford University and Richard Richels of the Electric Power Research Institute suggests that a replacement for fossil fuel is years away, because of the enormous technological hurdles that must be overcome. They found that waiting 20 years would lower the cost of emissions reductions by 40 percent.9
Conclusion. There is no Kyoto free lunch. The administration has failed to publicly acknowledge that its last analysis of the Kyoto Protocol is outdated. In the end, the truth of the matter is that no market alternative yet exists for coal, gasoline, fuel oil and the many other petroleum products that all Americans depend on everyday. And, it is not clear where the surplus emissions will come from to create a market of cheap emissions credits. In the end, the Kyoto Protocol is an attempt to reduce energy use that will impose significant costs on the global economy, and, ultimately, the American consumers.
1Joby Warrick, "White House Predicts Low Cost for Pact On Warming," The Washington Post, March 4, 1998.
2Energy Information Administration, "What Does the Kyoto Protocol Mean to U.S. Energy Markets and the U.S. Economy?" p. 18.
3Testimony of Janet Yellin before the Senate Foreign Relations Committee, March 4, 1998.
4WEFA, Inc., "Global Warming: The High Cost of the Kyoto Protocol," 1998, p. 2.
5Testimony of W. David Montgomery before the House Committee on Science, October 9, 1998.
6Comments by Robert Rheinstein, Competitive Enterprise Institute’s Economic Lecture, October 23, 1998.
7Energy Information Administration, “What does the Kyoto Protocol Mean to U.S. Energy Markets?” p. 145.
8Source: Robert Bradley, "Oil, Gas and Government: The U.S. Experience," Rowman & Littlefield, 1996, pp. 569-574; ICF-Kaiser, "Enron Outlook for gas, coal and nuclear," Robert Bradley, "Renewable Energy: Not Cheap, Not Green," Cato Institute, August 27, 1997.
9Richels and Manne looked at how timing affects the cost of cutting U.S. emissions to 20% below the 1990 level. They found that waiting a decade would decrease costs by 25% by 2100, raising emissions 3-4%. Waiting 20 years would reduce costs by 40%, raising emissions 9%; Alan Manne and Richard Richels, "Reducing U.S. Emissions: the Value of Flexibility and Timing," Stanford University, 1993.