Fortnightly
Kyoto Protocol: Economic Threat or Opportunity?Energy efficiency is pitched as a tool to reduce global warming
July 15, 1998
By Joseph F. Schuler Jr.
DOES THE KYOTO CLIMATE CHANGE TREATY POSE A SEVERE threat to the U.S. economy or is that claim simply a "Chicken Little" prediction of detractors?
Pro-business Republicans, environmentalist bureaucrats and industry observers debated the merits of each position at the Ninth Annual Energy Efficiency Forum in Washington, D.C., on June 10.
One of the most vociferous opponents of the treaty was Rep. F. James Sensenbrenner Jr. (R-Wisc.), chairman of the House Committee on Science, who headed the Congressional delegation to Kyoto, Japan.
Other speakers included Ambassador Stuart E. Eizenstat, under secretary for economic, business and agricultural affairs, U.S. Department of State; J. Brian Atwood, administrator, U.S. Agency for International Development; Peter Coy, associate economics editor, Business Week; and Richard L. Sandor, chairman/CEO of Environmental Financial Products Ltd. and also a director of Central and South West Corp.
"The Kyoto Protocol agreed to by the Clinton Administration and over 160 nations last September poses a severe threat to the vitality of the United States economy in the form of drastic energy price increases, job losses in key manufacturing industries and an overall decline in our standard of living," Sensenbrenner said.
Quoting Wharton Econometrics Forecasting Associates Inc., Sensenbrenner said implementing the protocol would reduce household income by more than $2,700 annually in 2010. A Charles River Associates study, he said, predicts that gasoline prices would be a third higher in 2010 and 43 percent higher in 2020 than they would be without a treaty.
The rosier scenario painted by the President's Council of Economic Advisors -- household income reduced by as much as $110 annually because of utility costs and increased gasoline prices of as much as 6 cents a gallon -- assumes the U.S. won't decrease greenhouse gas emissions by the treaty's 30 percent figure, Sensenbrenner said. What it will do, he insisted, is decrease emissions by 3 percent and make up the rest by paying other countries to reduce emissions through a tradable credit system.
He said the Kyoto agreement was beyond salvation, especially considering the Byrd-Hagel amendment and the House's unanimous vote to exempt U.S. armed forces from restrictions posed by the protocol. "Without significant...changes to the treaty, I predict it will not pass the Senate," he said.
The Byrd-Hagel amendment establishes a standard of what the protocol would need for Senate ratification, including participation by developing countries and assurances that it would not hurt the United States economically.
Co-author of that amendment, Sen. Chuck Hagel (R-Neb.), echoed Sensenbrenner's comments."If the objective, in fact, is to address man-made greenhouse gas emissions into the next century, then the Kyoto Protocol is folly before it begins," he said. "We are not the problem. The problem is China, India, Mexico, South Korea and 131 other nations... They don't have environmental protocols or regimens.
"When you hamstring America and you say you're going down on your energy consumption by 31 percent by the year 2012, has anybody thought through what that does to our economy? What that does to your international competitiveness?"
As of early June, the White House hadn't released a detailed economic analysis of the effects of the Kyoto Protocol.
Climate Change Counterpoint
Eizenstat, however, strongly countered the two Republicans.
"You may have seen or heard some studies projecting dire consequences...from this agreement," he said. "Let me say first that these are the same Chicken Little advocates who have made the same arguments for every environmental effort that we've made, going back to the initial Clean Air Act...every country would love to have the ability to trade their economy for ours.
"But there are also several reasons why these studies overestimate wildly the impacts of Kyoto. Most important, many of these were conducted before the Kyoto agreement...some were based on more severe emissions cuts than the ones we negotiated and they didn't consider emissions trading or the inclusion of sinks...which reduce costs."
Eizenstat said advances have been made in energy efficiency through 1985, with energy consumption per dollar of gross domestic product falling by almost 25 percent.
"But since about 1986, there have been no further gains in energy efficiency," he said. "Some observers might conclude...we have exhausted all the cheap and easy improvements, but our options are not fixed. They evolve constantly. Many experts have found considerable scope for increasing energy efficiency, suggesting that the economy could likely come out ahead -- that is, savings could exceed costs -- if we take action."
The ambassador said emissions trading provides an incentive for countries and companies to achieve maximum levels of emissions reductions at the least cost. Trading also helps generate impetus for open and verifiable transactions, and energy efficiency.
He cited the success of sulfur-dioxide trading.
He acknowledged Kyoto doesn't meet the requirements for developing country participation. It made a "down payment" in this area, however, he said, working with Brazil to allow companies in the developed world to enter into cooperative projects to limit greenhouse gas emissions in the developing world. Credit would be given for this action.
Eizenstat also put in a word for nuclear energy's role in reducing greenhouse gas emissions: "I have always been a strong supporter of nuclear power and I believe that beyond Kyoto, nuclear power may have to play an increasingly important role."
Atwood also gave hope to nuclear power proponents. "We're very anxious that it be safe, but I think given the concern about greenhouse gases, it may well be that nuclear power sees a new age when it might be a little more popular than it has been."
The Cost of Compliance
Sandor looked at climate change from a capital markets perspective, particularly trading CO2 credits.
The sulphur trading program, he noted, started with a 1980s baseline of 18 million tons, but that was later cut in half. Cost of noncompliance was $2,000 a ton and allowances initially were available at $1,500/ton. In the last five years, credits have dropped to $100/ton, he said. "It's [now] at 5 percent of the fine level and 10 to 15 percent of the cost of the major economists and forecasters."
This bodes well for CO2, he said. One Harvard forecaster says CO2 credits will sell for a minimum of $100/ton, meaning a $40 to $60 billion-a-year industry.
Sandor made his own prediction: "I think it's $10 or $20 a ton." He said his firm has a "mandate" to securitize 1.1 million acres of Costa Rican rainforest and will sell it at $12 a ton. "If you've got a bid, we'd be delighted to hit it." At $20/ton, the impact on gasoline at the retail level would be 3 cents a gallon, he said.
Sandor chided the audience, reminding them compliance begins in 2010, 12 years from now. "Twelve years ago, a little company in the Northwest by the name of Microsoft went public," he said. "It's up 20,000 percent since its IPO, OK? ...Things do change."
Coy, of Business Week, put his finger on the dichotomy of a world environmental economy. "If technology is a bad dream for environmentalists, wealth is a nightmare," he said. "The environmental writer Bill McKibben says that over a lifetime, an average American will use 500 times as much energy as someone from the African nation of Mali.
"And now as free markets increase wealth, the Chinese are trading in their bicycles for cars. Indians are buying refrigerators. Who can blame them? We did it ourselves."
The worst enemy of energy efficiency, he noted, is democracy. But technology still could bring a happy ending. "If you improve efficiency rapidly enough, you'll still come out ahead. People won't leave the lights on twice as long just because they're half the wattage."
He said there's room for improved fuel cells and other technologies. Free markets can be good for energy efficiency, unlike demand-side management, which he called an "expensive bribe designed by bureaucrats."
Asked whether people really care about energy efficiency, Coy replied: "The psychology of people's purchasing behaviors is just so amazingly complex.
"People...will buy a sport utility vehicle that gets rotten gas mileage...then yell at their kids for leaving a light on."
Joseph F. Schuler Jr. is senior associate editor of Public Utilities Fortnightly.
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