1997

Third World Fumes

by William Yeatman on December 4, 1997

COP-3 in Kyoto is the culmination of earlier summits the Rio Conference in 1992, the implementation of energy curtailment policies starting at COP-1 in Berlin, and the further refinement of those policies at COP-2 in Geneva. (These people really know how to pick conference sites.) All these meetings produced ambiguous documents. Was it Will Rogers who stated: America has rarely lost a war or won a treaty?

The ambiguities are now coming back to haunt us. At Rio, the US and other developed nations promised to curtail energy use ‘voluntarily’ by large amounts. COP-1 and COP-2 moved these agreements along. The original agreement wasnt clear about the responsibilities of the developing nations, but the Berlin agreement promised the developing world that they faced no commitments.

Now in Kyoto, only a handful of nations have met their commitments. Katie McGinty, Al Gores acolyte in the White House, complained that our failure wasnt the Administrations fault — the Congress had failed to provide adequate subsidies for green technologies, our economy had grown too fast, and energy prices were too low.

Possibly worried that the Administration might try to resolve these problems, the U.S. Senate passed the Byrd-Hagel resolution which says that the U.S. will impose no further pain on the U.S. economy unless the major developing nations also sign up for energy conservation. Other nations are also realizing that an All Pain, No Gain carbon withdrawal plan is wrong-headed.

As a result, Kyoto is engaged in a desperate attempt to square the circle. Creative rhetoric to paper over the massive disagreements has proliferated. Language ranging from evolution to play are being introduced to suggest gradual, painless Third World commitments. New Zealand negotiators proposed that Third World nations agree to binding commitments sometime after 2012 but only if the developed nations had made progress by then. Third World spokesman rejected these ideas very quickly.

The poorer nations seem aware even if the U.S. is not that there are real costs of curtailing energy use. A Chinese delegate likened these proposals to a cartoon — a top-hatted gentlemen approaches a peasant cooking an open-fire meal and asks him to extinguish the fire to prevent global warming. He noted that the developed world might wish to reduce luxury emissions but that China was not about to reduce subsistence emissions. How ironic. China is more concerned with poverty than the US!

If the Chinese remain steadfast, the implications for Senate ratification are obvious.

Turnabout is fair play

Street Theatre is an important element of public policy and an element generally dominated by the Greens. Today, the arena was broadened considerably. Friends of the Earth (FOE) conducted an NGO poll to select the worst environmental offender. They then ceremonially delivered this Scorched Earth Award to the Global Climate Coalition (GCC), an industry NGO. A bowl of burnt soil was delivered to the industry groups headquarters, representing the greens fear that we are burning up the earth. The GCC swiftly threw away this dubious award.

But a symbol is a horrible thing to waste; thus, a contrarian coalition came together under the banner of ‘Friends of Humanity.’ Opposed to energy use restrictions under the climate treaty, the heavily outnumbered coalition teamed CEI with the Committee for a Constructive Tomorrow (CFACT), Eagle Forum, and Sovereignty International. Friends of Humanity ‘recycled’ the award, renamed it the Scorched Economy Award, and delivered it it back to FOE. This time, the bowl was filled with Japanese Yen coins — symbolizing the costs of a Kyoto global warming treaty.

Against the backdrop of a large anti-climate treaty banner, the coalition took the opportunity to extol science, technology, and economic progress, and denounced the climate treaty. Believing that energy benefits humanity, the pro-energy coalition expressed the hope that the Scorched Economy Award would compel FOE and other anti-energy groups to reconsider.

An official of Friends of the Earth-International graciously accepted the Scorched Economy Award. Along with a World Wide Fund for Nature colleague, he began a heated exchange with the pro-energy advocates on the merits of the climate treaty. The press corps seemed to delight in excitement. At the proper dramatic moment, the two sides agreed to continue their comments in a formal debate. CEI and CFACT vs. FOE and WWF in the Match of the Century! Next Tuesday, December 9.

500 Physicians, Scientists Oppose Climate Treaty

by William Yeatman on December 2, 1997

in Kyoto Negotiations

WASHINGTON, DC — The Advancement of Sound Science Coalition (TASSC) and the European Science and Environment Forum (ESEF) today announced that more than 500 physicians and scientists have signed an open letter to world leaders opposing the climate change treaty now being negotiated in Kyoto, Japan. The text of the letter is:

“As responsible members of the scientific and medical communities, we support efforts to improve the global environment and public health.

“Given that economic prosperity is necessary for a cleaner environment and improved public health, action that harms the global and national economies should not be taken without compelling evidence of need.

“At this time, we believe the scientific understanding of the global climate is inadequate to justify drastic control policies and needs to be better developed to support limiting greenhouse gas emissions – limitations that would damage the economic well-being of most of the world’s population.

“We recommend the world’s governments defer taking action on a climate change protocol until the science shows limiting greenhouse gas emissions will benefit, not harm, the global environment and public health.”

Commenting on this expression of concern about the climate treaty, TASSC executive director Steven J. Milloy said “This letter has been in circulation only a short time. We are overwhelmed by the strength of the response and will continue to accept signatures. World leaders assembled in Kyoto should heed this call to avoid rash and harmful action on greenhouse gas emissions.”

TASSC and ESEF are not-for-profit organizations of scientists, former public policy officials and others interested in the use of sound science in public policy. TASSC is located at 1155 Connecticut Avenue, N.W., Suite 300, Washington, D.C. 20036. ESEF is located at 4 Church Lane, Barton, Cambridge, CB3 7BE, United Kingdom.

Copies of the signed letters are available for inspection in the TASSC office.

Kyoto Media Advisory – December 3, 1997

by William Yeatman on December 2, 1997

in Kyoto Negotiations

Many at COP-3 are behaving as if the Clinton-Gore administration speaks for the U.S — as if the eager quest for an aggressive global energy restriction treaty was the goal of most Americans. Fortunately, while Clinton and Gore do indeed represent one element of the American polity, they do not speak for the American people. Under the US Constitution, powers are divided and the US Congress has a separate but equal voice on policy matters. Before any treaty becomes law, the US Senate must advise and consent. Before any new funds are spent, the House and the Senate must both concur. While the “emerging consensus” at Kyoto is warming the hearts of Administration officials, it is getting a cool reception from US legislators.

US Senators attending COP-3 are getting hot under the collar at what they consider irresponsible negotiating by Clinton-Gore officials, which may result in harsher energy restrictions for the US economy than for its Third World trading partners. Republican Senator Mike Enzi of Wyoming described the Kyoto conference as “an economic meeting disguised as an environmental meeting,” reports Bonner Cohen of the Earth Times. A disbelieving Sen. Enzi mocked the entire conference as “a Chinese plot to restrict the growth of the American economy,” noting the People’s Republic of China’s flat refusal to join the UN’s incipient global energy rationing regime.

Nebraska GOP Sen. Chuck Hagel, of Byrd-Hagel resolution fame, is similarly perturbed. In his view, the Clinton-Gore administration is not paying sufficient attention to the issue of national sovereignty. Nor are the negotiators in Kyoto paying heed to the formidable scientific evidence against the global warming hypothesis (in fact, they are doing their best to suppress open and honest scientific debate).

It doesn’t help matters that the US State Department seems to be going out of its way to antagonize American legislators. One example: environmental activist Curtis Moore, former aide to the late Senator Ed Muskie, asked why the Administration was not pushing for even more aggressive energy reduction targets. He provided an excuse – he understood how hard it was to take the correct stands when reactionary legislators such as Senator Hagel were looking over their shoulders. Moore went on to note that, although he intended no disrespect, Senator Hagel had received some $70,000 in contributions from energy companies. The Administration’s respondent dodged the substantive question but made no attempt to address the attack on the senator’s integrity.

Should the Kyoto treaty ever make its way to Washington’s Capitol Hill, expect it to face serious scrutiny.

We’re Already Feeling the Kyoto Chill

Reporters, delegates, NGOs, and other climate conference participants are already experiencing what life will be like on an energy starvation diet. In keeping with the fanaticism of the occasion, the thermostat of the Kyoto conference hall has been turned WAY down. Outside, three penguin ice carvings still stand, placed there by greens who planned for the ice birds to melt in the “warming” climate. Mother Nature is obviously not cooperating for the television cameras. The politically-incorrect air in Kyoto is positively cold. Shivering conference-goers are walking around with coats, scarves, even gloves – indoors. Hasn’t anybody at the UN considered the human health effects of under-heated facilities? People of the world, this is your future if the global warming lobby gets its way.

Seizing the Moment

Debate is severely muted at Kyoto – not surprisingly given the large number of true believers who are leading this Green Children’s Crusade. There are, of course, discussion meetings among the various NGOs (non-governmental organizations) and today we free market environmentalists tried to enter a meeting to present our views. Despite the clear notice that this was a “public” meeting of environmental NGOs, we were politely but firmly ejected.

Believing that All Things should be Considered, we have elected to mount our own seminar. We’re titling it “A Contrarian Briefing on Global Warming Policy” and have pulled together a scratch team from among the tiny number of contrarians attending the conference: Science and Environmental Policy Project’s Fred Singer on the scientific issues; the Hoover Institution’s Thomas Gale Moore on the beneficial aspects of global warming; Mark Kirk of the House International Relations Committee on the politics of the climate talks; Charles River Associates’ David Montgomery on the economic costs of carbon withdrawal; CEI’s Fred Smith on climate change prevention versus adaptation/resiliency. We’ve invited the entire press corps to the event – and expect lots of hostile questions.

A Word from Our Sponsors

Let it never be said that CEI’s efforts in Kyoto have gone unnoticed. On one of our shivering tours of the chilly halls of the conference center, we happened upon a draft report listing the “Forces of Darkness” and found — yes, you guessed it, our name. A bit unfair since we’re the ones who believe in keeping the light bulbs of the world burning brightly. Then again, objective fairness was never meant to be the hallmark of the Kyoto Conference. The draft described the “infamous” CEI as no friend of the earth, and even accused us technophiles of advocating “junk” science. Worse, it implied that we are advancing “climate confusionism” – could this be the application of ancient Eastern philosophy to the issue of global warming?

All of this recalls the story told by Mark Twain of the individual who was tarred and feathered and ridden out of town on a rail. Asked later about the event, he stated: “Well, if it hadn’t have been for the honor, I would rather have walked.” Still, this incident does suggest that civility is quickly vanishing from what was already a fierce intellectual debate. The Kyoto global warming lobby clearly views the climate treaty as offering its best hope of erecting a global regulatory apparatus with real power over the world economy. The environmentalist establishment will fight fiercely to ensure that its goal is realized.

Kyoto Update — What will the U.S. do?

by William Yeatman on December 1, 1997

in Kyoto Negotiations

COP-3 opened as a Victorian drama, with the U.S. position in imminent peril as its prime defender, Undersecretary of State Tim Wirth, suddenly abandoned the fray and rushed off to make some “real” money. Still the U.S. team blustered on, railing against the binding energy restrictions demanded by the hard-line environmental zealots, yet still seeking to gain the approval of the virtuous environmental “maiden.” How, they complained, can we reconcile the protection of our planet with the need to safeguard the sovereignty and economy of the United States? As demanded by such plots, the U.S. and the EU publicly quarreled, accusing each other of blocking consensus! The U.S. team issued the expected symbolic threat – If the world doesnt respect our position, we will withdraw from negotiations.

But, as is the case with such conventional dramas, the abundance of such symbolic smoke is fully consistent with the absence of any reality of fire. The prologue and opening acts of the Kyoto drama were little more than the posturing so typical of past international negotiations. The Kyoto players have never really been in serious disagreement; everyone agrees that voluntary arrangements have “failed” (read: the market doesnt seem to respond the way the politicians and their environmental allies would like) and therefore we must do “something.” As long as that something strengthens political control of the energy economy, the details can be nuanced. Thus, a Kyoto treaty which gives each side something has always been in the cards.

When Vice President Al Gore arrives next week, expect the traditional “surprise” ending. The politicians will save the Kyoto Treaty at the last possible minute and will take their bows as the curtain comes down on a world dedicated to increased political control of energy use. The business villains, once again, will have been vanquished.

Thus, expect phrases such as “limited, carefully bounded differentiation” to emerge as the key elements of the New Global Order. Such phrases have become the Universal Solvent needed to dissolve away all negotiating difficulties. The concept makes it possible for all nations to agree to “tight” controls while preserving the “flexibility” needed to do whatever they would have done in any event.

The global environmental establishment will complain that all this is too little, too late, but the fact is they will have gained much. The Clinton-Gore team will have gained vast powers over the domestic energy sector – in effect, nationalizing this critical sector of the U.S. economy — giving the U.S. federal government effective control over 7.5 percent of U.S. GDP. They will use this power creatively.

This Strategy Finesses Compliance with the Byrd-Hagel Resolution

To date, the Byrd-Hagel resolution (passed in the U.S. Senate 95-0) constitutes the only formal effort by conservative and business interests to restore reality to the Kyoto drama. Under this provision, the U.S. cannot enter into any agreement that would impose “excess” costs on our economy or that would exempt the developing countries from incurring comparable costs. But, these restraints dissolve away under the “limited, carefully bounded differentiation” language emerging from Kyoto. Melinda Kimble, a key U.S. spokesman, still speaks fiercely of the need for “meaningful participation of key developing countries,” but that requirement is readily met in this new “differentiated” flexible world. Indeed, the newly coined approach of “evolution” in which such nations might be required to do nothing more than ensure the gradual reduction of normalized energy use in their nations (per capita, per dollar of GNP?) may greatly reduce the apparent costs of compliance by developing nations.

Still, policy does have implications. To sanction anti-energy use policies anywhere will have ramifications everywhere. If Kyoto leads to further energy restrictions in the U.S. the world will notice the impacts of declining economic and technological progress. Kyoto is all too likely to produce what CEI President Fred Smith terms “a baby step on the escalator to oblivion.”

Even such initial economic costs would likely exacerbate already troubling protectionist tendencies in the U.S. and elsewhere. Any effort by the U.S. to use the Kyoto Treaty to curtail energy would mobilize the business community into arguing for treaty enforcement via trade sanctions. David Montgomery, an economist with Charles River Associates, discussed this protectionist risk at the Competitive Enterprise Institutes Costs of Kyoto conference. He noted that the pressures and the tools for enforcing climate treaty measures will be trade — not environmentally — driven. Few outside the environmental establishment believes that trade wars will prove beneficial. In a world of “differentiated” compliance, the Byrd-Hagel resolution may well evolve into a new force for protectionism.

You Stay Poor, We Pile Up Credits

In the wake of Asian currency crises in South Korea, Indonesia, and Thailand, Third World countries cannot possibly accept “equivalent” emissions reduction targets. Nearly everyone recognizes this reality, but few are willing to come to terms with it. With economic turmoil as a backdrop, the U.S. delegation came forward with another major “concession” — it will support Joint Implementation which promises financial credits to developing nations moving toward reduced energy use. But this suggests that Annex I countries would create new foreign aid and technology assistance programs for those developing nations willing to curtail carbon emissions. The end result: The Third World must go on welfare so the climate will stay cold.

Looking for a different point of view? Check these “contrarian” web sites: www.cei.org, www.globalwarming.org.

Contact: Fred Smith, tel. (81 75) 344 8888. For back issues of Kyoto Update, check out www.cei.org or call Emily McGee at (202) 331-1010.

Kyoto Climate Conference Opens – Science and Economics Ignored in Rush to Judgment

by William Yeatman on November 30, 1997

in Kyoto Negotiations

Japans Foreign Minister opened the UN climate conference, known as “COP-3,” by calling it “an event that could change the history of mankind.” This statement is no exaggeration. Posing as the defenders of our planet, the worlds leaders seem eager to impose increased energy costs on a world economy already in crisis.

Fred Smith, president of the Competitive Enterprise Institute, noted that what happens at Kyoto will determine the future of the world economy. The world will either continue to move toward greater economic liberalization or it will move toward increasing political control. The issue is in doubt.

The 8000 or so official delegates, business representatives, and NGOs (non-governmental organizations) seek agreement on some form of global carbon withdrawal program some initial commitment to view energy use as a negative act that can and must be curbed. That decision would be the first global political endorsement of the Malthusian view that the problems of the world stem from too many people, too much consumption, and too much technology, in sharp contrast to the dominant western view of economic and technological change as positive forces. CEIs Smith noted: Malthus would be surprised at the extent to which his gloomy view of mankinds future has come to dominate the global policy debate.”

Moreover, Smith noted, the premise of the Kyoto conference is that the science of global warming is settled. Nothing could be further from the truth. Despite scientific, political and economic uncertainties, world leaders seem determined to impose energy restriction policies at any cost.

CEI, a free market research and advocacy organization, received UN credentials today as an official observer of the conference, or non-governmental organization (NGO). Thousands of NGOs are in attendance, with the category dominated by environmental groups. Very few NGOs are supportive of a free and open world energy market. The dominant view at Kyoto both among the NGOs and the politicians is that massive restrictions on global energy use are critical and overdue.

However, the policy debate is beginning to be a bit more balanced; joining CEI at COP-3 are other pro-liberty organizations such as Eagle Forum and Sovereignty International, who are representing social conservative and national interest concerns, respectively.

CEI is participating in the global warming conference for the next ten days as a voice of sobriety and reason in a forum that has lacked both in recent months. CEI represents the consumers and taxpayers of the world who stand first in line to pay for and suffer from the strident proposals on the climate negotiating table. The burdens of energy reduction policies being considered in this radical, fanaticized forum will fall chiefly on the poorest and most vulnerable peoples of the world.

For more information, contact Fred Smith or James Sheehan of CEI at the Hotel Granvia Kyoto, (81 75) 344-8888, room 870. E-mail: fsmith@cei.org / sheehan@cei.org.

Europe May Compromise; Administration Gag Order; Worldwide Poll on Climate Change

by William Yeatman on November 30, 1997

in Politics

Europe May Compromise

The European Union’s chief negotiator, Jorgen Henningsen, has conceded that the EU may be willing soften its stance on climate change. “It will be unrealistic to believe that we can strike a compromise with others if we just sit on a high horse, insisting on 15 percent, nothing but 15 percent,” said Henningsen. He expressed confidence that the EU and the U.S. would be able to narrow the gap between their respective positions. “The way to narrow the gap is for both parties to show a readiness to move.” “I have reason to believe that the Americans are ready to move. That is definitely the conditions on which we will move” (The Daily Yomiuri, November 11, 1997).

The U.S. Has Compromised

The United States delegation has conceded at an unofficial ministerial meeting that it will sign a protocol that calls for developing countries to reduce emissions in the future. The concession has allowed the developed countries to agree not to bind the developing countries with new obligations in the treaty to be negotiated in Kyoto. The concession makes almost certain a rejection of the treaty by the U.S. Senate (The Daily Yomiuri, November 9, 1997).

Administration Gag Order

U.S. undersecretary of state Timothy Wirth “outraged” Republican leaders by telling them that “they should keep their mouths shut and not criticize” the administrations global-warming stance at the climate change conference in Kyoto. A State Department spokesman said the instructions were “not unusual” and were meant to “ensure the United States speaks with ‘one voice’.”

Recall that then-Senators Timothy Wirth and Al Gore harshly criticized President Bush at the Earth Summit at Rio de Janeiro. Wirth accused Bush of “adolescent politics” and looking “silly” and “embarrassing” for not signing the treaty on biodiversity. Of course Wirth and Gore went as observers. Those congressmen who will be attending the Kyoto conference were given delegate status, a move many believe is the administration’s way to silence critics (Washington Times, November 11, 1997).

Worldwide Poll on Climate Change

Environics International Ltd., has conducted a poll which surveyed 27,000 people in 24 countries. The poll found majority support for concerted action on climate change in 15 of the 24 countries. Among industrialized countries the U.S. was the most skeptical with 46 percent wanting to “assume the worst and take major action now to reduce human impacts on climate,” and 46 percent saying we “should not take major action to reduce human impacts on climate until we know more, because of the great economic costs involved.”

Support for immediate action was strongest in France (74 percent), Germany (71 percent), Italy (71 percent), Switzerland (70 percent), Japan (69 percent), Australia (67 percent), New Zealand (65 percent) and Canada (61 percent). The poll suggests that concern for the environment is very strong in the industrialized countries and is growing in the developing countries (Calgary Herald, November 10, 1997).

Business Poll

A poll commissioned by the Confederation of British Industry has found that 83 percent its members are in favor of the EU’s proposal of a 15 percent reduction in greenhouse gas emissions below 1990 levels by 2010. Sixty-two percent of CBI members “believe Europe should unilaterally pursue an ambitious target even if it is not endorsed by other industrialized nations.”

Derek Norman, environmental manager of Pilkington, the glass manufacturer, doesn’t put much stock in the poll numbers. He believes that “There are a lot of businesses which . . . think nothing will happen at Kyoto so they won’t have to do anything,” making it easy to pay lip service to emission reductions (Financial Times (London), November 11, 1997).

Global Epidemics Not Likely; Immediate Health Effects from Climate Change; CO2 and Plant Growth

by William Yeatman on November 30, 1997

in Science

Global Epidemics Not Likely

Climate change has been implicated in a variety of catastrophic scenarios, most of which are purely speculative. One such case is the apocalyptic warnings of global plague sounded by Harvard Physician Paul Epstein among others. Epstein and others have predicted that malaria, yellow and dengue fever, cholera epidemics and heat stroke could increase as a result of rising temperatures.

These dire predictions have received a lot of publicity. However, as Science (November 7, 1997) points out in a recent article, there is very little evidence to support these contentions. “What I find astounding,” University of Michigan epidemiologist Mark L. Wilson told Science, “is how little research is actually being done in this whole thing.”

Duane Gubler, director of the division of vector-borne infectious diseases at the Centers for Disease Control and Prevention dismisses the claims as “probably the most blatant disregard for other factors that influence disease transmission.”

He notes, for example, that the dengue pandemic that afflicted Mexico in 1995 leading to more than 2,000 confirmed cases only caused 7 confirmed cases in Texas just across the Rio Grande. He also notes that the Gulf states are several degrees warmer than the Caribbean during the summer yet the Caribbean has the disease and the Gulf states don’t. “If temperature was the main factor, we would see epidemics in the Southern U.S. We have the mosquito; we have higher temperatures and constant introduction of viruses, which means we should have epidemics, but we don’t,” he says.

Gubler and others argue that public health measures are far more important in disease patterns. According to Gubler, “The most cost effective way to mitigate the effect of climate change on infectious disease is to rebuild our public health infrastructure and implement better disease-prevention strategies.”

Wealthy countries are nearly immune to the vector-borne infectious diseases which afflict much of the third world. This is due better housing, better sanitation, piped water systems, and many other factors that come with greater wealth. Destroying wealth by signing an ill-advised climate treaty may well cause prophecies of global plague to be self-fulfilling.

Health Affects of Climate Change

The American Council on Science and Health has just released a study on the possible health effects and policy implications of climate change. The report, Global Climate Change and Human Health, evaluates the various health scenarios that have been suggested as possible outcomes of increased global warming. These scenarios are evaluated assuming a 1 to 3.5 degrees C increase in global temperatures by the year 2100 as has been predicted by the Intergovernmental Panel on Climate Change.

The researchers concluded, for example, that heat-related deaths are not likely to increase significantly as a result of climate change since most warming would occur in winter and at high latitudes. The agricultural affects of climate change are likely to be positive according to the report. Elevated concentrations of CO₂ will increase plant growth and the northern latitudes would benefit from higher temperatures. Other regions are likely to be only slightly affected by global warming. Regardless, undernourishment is and will continue to be a major health problem. But it is caused by “poverty-related maldistribution of food,” not underproduction.

The report concludes that measures to stabilize atmospheric concentrations of greenhouse gases would be costly and ineffective. The researchers argue that, “The optimal approach to dealing with the prospect of adverse climate change-related health effects would be largely adaptational: its primary goal would be to suit economies, healthcare systems, and living conditions to lasting – i.e., existing foreseeable – challenges to human health.” The study can be found on the web at www.acsh.org.

Immediate Health Effects from Climate Change

A new study published in Lancet (November 8, 1997) has predicted that 700,000 avoidable deaths will occur every year worldwide by 2020 from exposure to particulates from fossil fuel combustion. Thirty-three thousand of these deaths are expected to occur in the U.S. alone. The authors argue that if climate change policies are implemented early these deaths can be avoided.

The results, however, are based on the controversial findings of a study funded by the Environmental Protection Agency. The study by C. Arden Pope III of Brigham Young University found that air-born particulate matter is associated with a 17 percent increase in mortality. The study of more than 550,000 people did not, however, measure how much pollution the study subjects were exposed to, nor did it adequately consider other confounding factors such as behavioral, occupational, environmental and genetic influences. Moreover, any statistical association less than 100 percent is considered to be weak and difficult to interpret (Wall Street Journal, January 7, 1997).

Finally, with regards to the Lancet study, Pope himself is cautious. After interviewing Dr. Pope, Science News reports that: “[Pope] who has conducted many of the particulates and health studies upon which the Lancet analysis is based, hopes that people will not place too much weight on its estimates of lives that can be saved by climate policies. Those numbers are still preliminary and rest on substantial uncertainties” (Science News, November 8, 1997). Also see www.junkscience.com for further information.

CO₂ and Plant Growth

In a paper presented at a Fraser Institute Conference, Sherwood Idso of the U.S. Water Conservation Laboratory in Phoenix, Arizona surveys the scientific literature on the Biological Consequences of Atmospheric CO₂ Enrichment. Hundreds of experiments have verified that atmospheric CO₂ enrichment boosts plant productivity in a variety of environmental conditions, including low light levels, inadequate water, and insufficient soil nutrients. In each case CO₂ enrichment helped plants to “overcome growth restrictions resulting from resource limitations.”

One reason for this result is that plants grown with high levels CO₂ have more extensive root systems and are, therefore, able to “more thoroughly explore larger volumes of soil in search of the things they need.” Other factors are greater efficiency in nitrogen use, increased activity of beneficial soil microorganisms, and most importantly direct stimulation of nitrogen-fixing bacteria. Increased “vegetative productivity from CO₂ enrichment stimulates bacterial nodule growth and activity” which in turn “produce several-fold increases in nitrogen fixation.”

Other adverse environmental conditions which are overcome by CO₂ enrichment are soil salinity, air pollution, and global warming. In the case of global warming it turns out that the benefits of high CO₂ concentrations actually rise as temperatures increase. The percentage of growth enhancement rose from nearly zero percent at 10 degrees C to a full 100 percent at 38 degrees C. “The optimum temperature for plant growth generally rises as the air’s CO₂ content rises.”

There is a worry that the benefits of CO₂ enrichment found in short-term experiments does not apply to the long-term. The longest running CO₂ enrichment study has not found this to be a problem, however. The ongoing experiment, which is now 10 years old, involves eight sour orange trees which have been grown from seedlings to maturity. The trees that are CO₂-enriched (receiving 75 percent more CO₂ than the ambient treated trees) have “produced over twice as much biomass as the trees growing in normal air.” At the last harvest the researchers picked over three times as much fruit from the enriched trees.

The paper can be obtained from The Fraser Institute at (604) 688-0221 or (416) 363-6575.

Where Has All The Warming Gone?

The National Oceanic and Atmospheric Administration has reported that the summer of 1997 was the 37^th coolest for the contiguous United States in the last 103 years at an average temperature of 71.5 degrees F. It was also the 24^th driest with a national average annual precipitation of 7.68 inches (AMS Newsletter, www.ametsoc.org/AMS/newsltr/newsltr.html, October 1997).

Goodbye Wirth

Undersecretary of state for global affairs Timothy Wirth surprised everyone by announcing that he will take a job with Ted Turner managing his $1 billion United Nations fund. Wirth will be replaced as the administration’s lead negotiator by Stuart Eizenstat. Wirth may still attend the affair as an adviser. Word is the administration is not very happy with the move (Washington Times, November 24, 1997).

Announcements

The American Policy Center has called for a “Strike For Liberty” to send a loud and clear message to the United States Senate against the Climate Change Protocol. The Strike has been called for December 5, 1997. For further information see www.americanpolicy.org/.

The Competitive Enterprise Institute has produced a book and a highlights video based on The Costs of Kyoto conference held in July 1997. Both the book and the video are available for $15 or buy both for $25. To order call CEI at (202)331-1010, or e-mail to info@cei.org.

Economic Impacts of Climate Change; Economic Impacts of Climate Change Policies; Emissions Trading is Key

by William Yeatman on November 30, 1997

in Blog

Economic Impacts of Climate Change

A paper by Robert Mendelsohn of the Yale School of Forestry and Environmental Studies conlcudes warming could be good for the economy. Mendelsohn looked at a new set of impact studies and empirical results on the economic effects of climate change on the United States. These new studies are more realistic in that they take into account the ability of humans to adapt to new climatic conditions.

The paper looks at the affects of an increase of temperature of 2.5 degrees C, a 7 percent precipitation increase, carbon dioxide of 530 ppmv and 33 cm sea level rise by the year 2060. The study concludes that this warming scenario will lead to a net benefit of $37 billion for the U.S. market economy. Farming, timber, and commercial energy sectors all benefit with the agriculture enjoying “a vast increase in supply from carbon fertilization.”

Two policy conclusions are reached: (1) “the effects that will occur will be small relative to

the size of the economy, and (2) the new models and methods predict warming will result in a net benefit to the economy rather than the net loss suggested by previous research.” “The results,” says Mendelsohn, “strongly suggest that aggregate market impacts in the U.S. are not a motivating factor for near-term action to reduce emissions of greenhouse gases.”

Economic Impacts of Climate Change Policies

Charles River Associates has just released a new study (Economic Implications of the Adoption of Limits on Carbon Emissions from Industrialized Countries, November 11, 1997) looking at the economic impacts of stabilizing emissions at 1990 levels by 2010 and maintaining those levels through 2030 using a cap and trade system. The numbers are not encouraging. To reach these levels the U.S. will have to reduce emissions by 30 percent below emission levels that would have been reached by 2010.

A reduction of this magnitude will have various adverse effects. It is estimated that to reach these emission levels it would be necessary to tax carbon emissions at $177/ton. The same holds true for emission permits. To achieve the same result carbon permits will have to be priced at $177/ton. That price would have to rise to $400/ton by the year 2030. As a result household energy prices for natural gas would rise by 46 percent by 2010 and 70 percent by 2030. Electricity prices would rise by 23 percent by 2010 and 35 percent by 2030, and heating oil prices would rise by 45 percent and 66 percent respectively. Other costs will include the equivalent of a 50 cent per gallon gasoline tax and a massive increase in the price of coal.

U.S. GDP losses would be large; on the order of 1 percent in 2010 and 2.7 percent in 2030. To put this in perspective current total expenditures on environmental protection in the U.S. equals 1.8 percent of GDP. Thus climate change mitigation would be “the single most expensive environmental protection measure ever adopted by the U.S. government.”

Such a measure would also result in a reduction in investment to 7 percent below baseline levels for 2030 that would not be offset by increased investment in energy-efficiency. The U.S. would also experience a worsening of the terms of trade.

Emissions Trading is Key

Testifying on November 5^th before the energy and power subcommittee of the House Commerce Committee, Timothy Wirth, undersecretary of state for global affairs, argued that a global carbon trading scheme is needed to end the impasse over a climate change treaty. The “successful” SO₂ allowance trading program in the U.S., according to Wirth, “should be a model for an international greenhouse gases trading system.”

Some critics have pointed out that SO₂ emissions reductions were primarily achieved through switching to low-sulfur coal and had little to do with the trading program. Another problem with an international trading scheme is the almost limitless number of emission sources that would have to be monitored; especially if we are going to limit six different greenhouse gases. Everything from cow flatulence to lawnmower exhaust to carbon sinks would have to be monitored in order to measure total emissions. Furthermore, about 30 percent of total manmade emissions disappear without a trace each year.

Wirth also claimed that “The U.S. will not agree to a treaty that will hurt it economically.” But according to Brian Fisher, an economist with the Australian Bureau of Agriculture and Resource Economics, the U.S. would be worse off under an emission trading policy relative to a uniform abatement policy.

Finally, Wirth argued that U.S. demands of “meaningful participation” by the developing countries could be met by transferring U.S. energy efficient technology to the developing countries (The Electricity Daily, November 12, 1997).

Kyoto Media Contacts Available

by William Yeatman on November 19, 1997

in Kyoto Negotiations

Following is a list of experts on a variety of aspects involving the Kyoto negotiations that are available for contact. All of the contacts listed here have been prominent spokespeople on this issue leading up to events in Kyoto.

All Aspects of Global Climate Change Policies

Marlo Lewis — Competitive Enterprise Institute — (202) 331-1010
Jonathan Adler — Competitive Enterprise Institute — (202) 331-1010
Sterling Burnett — National Center for Policy Analysis — (972) 386-6272
Myron Ebell — Frontiers of Freedom — (703) 527-8282
John Shanahan — American Legislative Exchange Counsel — (202) 466-3800
David Ridenour — National Center for Public Policy Research — (202) 543-1286
Joel Bucher — Citizens for a Sound Economy — (202) 783-3870

Science

Steve Milloy — Advancement of Sound Science Coalition — (202) 467-8586
Patrick Burns — Citizens for a Sound Economy — (202) 783-3870

Economics

Angela Antonelli — Heritage Foundation — (202) 608-6220
Peter Ferrara — Americans for Tax Reform — (202) 785-3264
Barbara Rippel — Consumer Alert — (202) 467-5809

National Defense/International Relations

Frank Gaffney — Center for Security Policy — (202) 466-0515
Brett Schaefer — Heritage Foundation — (202) 608-6123

Small Business

Karen Kerrigan — Small Business Survival Committee — (202) 785-0238

Consumers

Fran Smith — Consumer Alert — (202) 467-5809
Consumer Alert — Consumer Alert — (202) 467-5809

Seniors

Thair Philips — Seniors Coalition — (703) 591-0663
Nona Wegner — Seniors Coalition — (703) 591-0663
Henry Hough — 60 Plus — (703) 807-2070

Property Rights

Nancy Marzulla — Defenders of Property Rights — (202) 822-6770
Grant Madsen — Defenders of Property Rights — (202) 822-6770

Representatives in Kyoto

To reach these representatives in Japan, please contact their U.S. offices at the number listed.

Craig Rucker — Citizens For a Constructive Tomorrow — (202) 429-2737
Fred Smith — Competitive Enterprise Institute — (202) 331-1010
James Sheehan — Competitive Enterprise Institute — (202) 331-1010
Thomas Gale Moore — Hoover Institution/CEI — (202) 331-1010

Tradable Emission Permits – The Perfect Solution?

by William Yeatman on November 14, 1997

in Politics

Introduction

Since President Clinton announced in his speech at the National Geographic Society in Washington on October 23, 1997, among other measures to reduce CO2 emissions, the implementation of a national, as well as an international tradable permit system, it is important to take a closer look at emissions permits trading systems. The goal is to see if the concept of a trading system for emissions permits is a and workable solution to reduce so-called greenhouse gases emissions. This paper, however, shall not develop the argument for or against the need for government intervention to reduce the emissions of CO2 and other greenhouse gases, or even if there is a need to curb the emissions at all. The following arguments shall instead focus more on the problems of practical implementation and pose some questions that have not been discussed widely in the public arena.

For several reasons emissions trading systems are increasingly gaining political support. For one, the costs of an emissions permit trading system are not clear to consumers and often more difficult to calculate for companies. Consumers might not see the costs of a trading system as clearly as if they were confronted by a tax. Nevertheless the costs would most likely be passed on to consumers through higher prices. Companies have problems in calculating the additional costs from a trading system, since the price of permits in the future and the efficiency losses due to new regulations are often hard to quantify. The association of trading systems with markets – they are often called market-oriented instruments – makes them popular with to decision makers, who give the impression in the public that an emissions trading scheme is an economically efficient solution with little costs involved.

Another reason why trading systems are often preferred to a tax system is that with a tax system the government cannot guarantee a specific emissions level — it would need to find out what amount of tax is necessary to achieve a specific emissions level. A tax which is too high could lead to unnecessary costs for the economy, while a tax too low would not achieve the intended emissions reduction goal.

The following discussion shall assess at how much the market is really involved and how much command-and-control policy ⁽¹⁾would still prevail in an emissions permit trading system.

Principal Idea of Emissions Trading Programs

Emission permits systems are often described as quantity instruments (determining the quantity of emissions) in contrast to emission taxes, which are characterized as price instruments (determining the price of emissions).

At the start of every emission permits trading program, governments would need to decide on the level of emissions they would be willing to accept. Administrative bureaucracies or international environmental agreements would set the standard of environmental quality that would have to be achieved (the same procedure as under a command-and-control policy). The market would not be involved in the decision as to which amount of emissions would be ‘optimal’.⁽²⁾

In a second step, governments would issue emission permits -for free or by selling or auctioning them off- that would not exceed the set emissions target. At that point companies would be allowed to trade these permits. Companies that could achieve a lower emissions level would be able to sell their unused permits to companies that would exceed their allowed emissions limit. The total emissions by all companies together would therefore not be higher than the set limit. Companies would not be forced into specific technologies; they could choose how and where to abate. The expectation would be that with this flexibility companies could achieve the pre-set emissions level with lower costs than under a command-and-control policy. Companies with low abatement costs would reduce their emissions and could sell their permits to companies for which it would be less costly to buy permits than to reduce emissions themselves. The abatement of emissions would therefore be achieved with a minimum of costs.

The question is, are tradable permit schemes therefore the ‘perfect’ solution to the cost problem?

The cases of practical application of these instruments are still rare, especially in connection with international environmental problems. In the following discussion, three forms of emission trading that were proposed for possible implementation to reduce greenhouse gas emissions shall be analyzed, compared and possible problems in their implementation will be highlighted. The discussion includes a review of perhaps the most prominent example of tradable emission allowances, the SO2 trading system in the U.S., following the Clean Air Act of 1990, and the implications of this program for other projects.

Three different proposals for tradable emission permits schemes

The three different schemes that shall be discussed are:

An international trading system: It would give each country a certain amount of permits for emissions that governments then pass on to domestic companies. The companies could then trade these permits with each other on a global basis.

A national permit system (plus fees): Is referring to a proposal by McKibbin/Wilcoxen⁽³⁾ of a system of national permits plus fees. Permits would be given out for free up to an agreed emissions target (for example, the 1990 level). Emissions above this level would be allowed, but companies would have to pay to their national governments a certain fee (for example $10) for each additional ton of emissions. Permits could only be traded nationally.

A tradable budget system: Each country would be given a specific emission budget, and parts of the budget could be traded with other countries or banked for later years. It might also be possible to borrow from future budgets. Several variations of this scheme are discussed.

All three schemes would lead to trading in one form or another, but the national permit system would not be able to guarantee that a specific emissions level would be achieved, since companies would be allowed to emit CO2 beyond their acquired permits. Companies would nevertheless have an incentive to abate emissions if the abatement costs are less than the fees they would have to pay for additional tons of CO2.⁽⁴⁾

Distribution among countries

For all systems the first obstacle for reaching an agreement would be the amount of emissions granted to each country. Numerous proposals are on the table for the upcoming Conference on Climate Change in Kyoto, such as allocation according to the countries’ 1990 emission levels (or minus 5 percent or more). Some countries demand that other benchmarks be included, such as projected population growth, energy usage per GDP, state of the economy and more, to reflect the diverse socio-economic situations of the negotiating countries. Finding common ground on this issue will probably be the biggest impediment to reaching an agreement in Kyoto.

The decision on emissions targets goes to the very heart of the national interest of each country, because it involves issues of national sovereignty, national security,⁽⁵⁾ economic growth and its potential for future development. The amount of emissions, and therefore permits, allocated to each country will have a decisive economic impact. The initial allocation could lead to large transfers of wealth between countries. The possible significant inflows and outflows of money could thereby determine who would be the ‘winners and losers’ of such a system. For example, Russia and other East European countries might be able to sell huge amounts of permits, because of their shrinking economies during the last several years and newly imported technology which emits less CO2 than their old technology. This could mean large transfers of wealth from countries such as the U.S. to Eastern Europe, because the U.S. and others might need to buy emissions permits due to their expanding economies.

Since the decision on emission levels might lead to a cap on energy use, it is important in the negotiations for every country to achieve a level of allowed emissions that does not destroy its potential for future economic growth. It should not be underestimated that some of these negotiations will be a pure fight for market shares, where the environmental issue will be pushed into the background. Countries and industries will try to protect their self-interest, which in part means not giving any additional advantage to their potential competitors.

Domestic distribution

After the decision has been made about the level of emissions, the next step is to decide how the permits or allowances should be allocated among companies. Initially it must be established which companies should be involved in the trading scheme. The inclusion of primary energy producers and primary energy importers would seem to be a more practical way rather than including all companies that emit CO2 or even individual households. Although it seems impossible to include consumers in a permit system, it appears the idea is not totally dismissed, at least in theoretical discussions in the Administration, according to a report of the Electricity Daily, November 14, 1997.⁽⁶⁾

Since the number of companies that emit CO2 would be extremely high -not to mention the number of households, their inclusion would make monitoring impossible. Also energy rationing seems not a particular popular with voters in industrial countries and elsewhere.

If the goal of the trading system is protecting the earth from the potential danger of global warming, the trading system should not concentrate on CO2 emissions alone. The investment in different forms of “protection” should be recognized, for example, investing in CO2 sinks should be as much rewarded as investment in CO2 abatement technology.⁽⁷⁾

The reduction of other greenhouse gases, such as methane and nitrous oxide -with higher heat trapping effects than CO2- should also receive credit. These measures would make a trading system even more complicated, but those promoting a trading system should consider these points, otherwise a trading system is not really reaching the proclaimed goal of preventing global warming.

Options for issuing emissions permits include auctions, sales, or distribution for free; among these options, numerous variations exist. Auctions and selling would bring governments additional revenues.⁽⁸⁾

On the other hand, companies would face higher costs, and if not enough permits are available, they would also face the uncertainty of receiving enough permits to continue their production. For these reasons the so-called “grand-fathering” of permits is often preferred, that is, existing companies would receive permits according to their actual or past emissions for free. This approach would give firms with large amounts of emissions a potential advantage and could be regarded as discriminating against companies that had already reduced their emissions much earlier. It also may operate as a barrier to entry as new companies would have to face the additional cost of buying emissions permits while their competitors, already in the market, received their permits for free.

The way in which auctions are organized could influence the price and allocation of the permit.⁽⁹⁾

The SO2 allowance trading in the U.S., for example, has shown that the chosen auction procedure has influenced the price, and it is mentioned as one of the reasons for lower than expected trading volume.⁽¹⁰⁾

The decision of how to distribute and auction the SO2 emission allowances was also influenced by political efforts to share the burden of the additional costs of the program. Otherwise, some states in which the costs would have been concentrated would have been particularly hard hit.⁽¹¹⁾

The initial allocation of permits could affect the equity as well as the efficiency of the market. The allocation, for example, might result in dominance by some companies.⁽¹²⁾

Some authors suggest that imperfect competition in input, as well as in the output markets can reduce the welfare of the trading.⁽¹³⁾

The described procedures for distribution could be used in all three forms of a trading system. However, in the case of a tradable budget system, how or if permits would be distributed is not clear. The government could introduce some sort of trading inside the country or try to achieve the allowed budget by a command-and-control policy regime.⁽¹⁴⁾

In the case of national emissions permits trading the concept is to give out the permits to the companies up to the agreed level (for example, 1990 emissions level) for free to save costs for companies.

Validity, Property Rights and Taxes

The validity of the emissions permits would have to be determined and clear property rights for the permits would have to be established if a trading system were to be successful. For example:

What would happen if the government decided to reduce the amount of allowed emissions further?

Would permits be made invalid or would the government have the legal obligation to buy them back from the companies and, if so, at what price?

Would the government hold auctions only once or would companies have to renew the permits after a certain time?

These open issues need to be decided before companies could regard permits as property rights. Only if property rights are established could companies regard emissions permits as an asset.⁽¹⁵⁾

These points also need clarification to establish how these permits should be handled in regard to taxation, e.g. taxation of gains through trading of permits.

The government could hold back parts of the initial amount of permits for new companies to prevent additional market-entry barriers due to the costs for emissions permits. For companies it is critical to operate in a situation of “legal-certainty” and to face no uncertainties over drastic policy changes relating to the permits. Since investments are often planned with a multi-year horizon, companies need some legally binding assurances that they can continue to produce over a longer period of time.

Organization of the Markets

Another issue is how the markets themselves would be organized. All three trading schemes would lead to different market-forms.

An international trading scheme could be organized through a truly international market, where all companies affected by the agreement in all participating countries would participate. An efficient international market could probably only be organized through an international computer trading system. A computer trading system could insure the fast and easy access to the market for a large number of companies around the world. Even if the execution of the actual trading would be made easier through computer technology, there would remain several serious problems for an international market, for example:

Which authority would oversee an international emissions permit market?

In which currency would trades be made, and which trading rules and laws would apply (stock and currency markets around the world use different trading systems and regulations)?

In case of violations of trading rules, which procedure would be used to penalize such infringements of the agreements?

An international trading scheme could also be organized alongside the already existing national stock or currencies exchanges, with companies mostly trading on their national exchanges, and with bigger market players dealing on the global markets, thereby insuring that no or only smaller arbitrary gains occur. Problems would arise if companies had to go to other national markets to buy permits. Different market rules would apply and differences in national laws could lead to complications in trading, similar to the problems companies face if they offer their shares on different national stock exchanges, with differing regulations and accounting forms and other currencies. The authority that would regulate the trading must be well established.

A national trading scheme plus fees would face fewer problems, because it would not have to deal with the national differences in laws and regulations. However, a national scheme would be difficult for countries where insufficient markets exist, especially in some of the emerging markets. Since the real differences in technology and abatement costs exist between the industrial and developing countries, the absence of international trading and especially the exclusion of developing countries would greatly reduce potential cost savings, from its maximal potential.

Governments would also have to decide on the right amount for the additional fee, because it would ultimately determine the upper price limit for the permits. If it is set too low companies might not restrict their emissions, and if the fee is set too high the additional costs of the trading system could hurt the economy.

For both national and international trading schemes, the creation of future markets for emission permits could play an important to ensure that companies could hedge their risks and allocate their abatement policy in the most cost-effective way over time. Since it might not be the most cost-effective way for all companies to abate at the same time and even for the economy as a whole, it could be preferable to postpone the reduction of greenhouse gases emissions without changing the effect on any imposed emissions target in the future.⁽¹⁶⁾

It would enable companies to take a more long-term approach to permit trading and assure them that a secondary emissions market exist in future time periods.

A system of tradable budgets would not necessarily mean that a market for emission permits would be created, since every country could probably choose how to achieve its budget target. Some countries might chose a national tradable emission permit scheme with potential opportunities and problems similar to those discussed for the national trading scheme. Other countries might decide to achieve the budget target through a rigorous regulation scheme or bilateral exchanges between countries. Trading between governments would not lead to an efficient market, as other aspects, such as political issues, could heavily influence the trading.

A sufficient number of participants in the market would be required for a functioning market. In an international permit trading system the number of participants would be large, since every affected company in participating countries would be eligible to participate. Even on a national level the number of companies affected by the regulation would be relatively large. The decision to trade permits in any market would depend on the costs for these transactions. If companies experience higher costs than potential benefits, and are confronted by complicated trading procedures, companies will not trade but will look to various forms of internal abatement, even if these measures are not the most cost efficient way for the companies to reduce their emissions.

The General Accounting Office report on the SO2 emission allowance trading identified the long implementation timetable of the emissions reduction as a cause of the thin volume of trading. Companies had several years to apply the reduction. The long time period resulted from the problem that the number of buyers and sellers rarely matched; there were usually more sellers than buyers in the market.⁽¹⁷⁾

Companies had enough time to look for other opportunities to reduce the emissions or had already invested in new abatement technology. That could be a problem if long implementation and phase-in times are negotiated for the CO2 emission reductions.

It also must be decided who would be allowed to participate in the market, for example:

Would environmental groups, other governments or interested private persons be able to participate?

Or would only the companies that are affected by the regulation be allowed to trade?

The market must insure that information about both prices and companies are easily accessible to all participants. The restriction of information to only a few companies or countries could lead to a distortion of the market process. This could be a problem especially for larger trading schemes, such as a global trading in emission permits, but also for national schemes, especially if a country lacks the technological infrastructure.

Market power

A market for permits nationally or internationally could be seriously undermined if some companies (or in the case of tradable budgets, some countries) hold enough permits to influence the market, such as influencing the price in their favor. This situation could lead to efficiency losses in the market. The efficiency losses are influenced by the initial distribution of the emissions permits.⁽¹⁸⁾

For a national trading scheme it would have to be guaranteed that foreign companies would have the same access to permits as domestic companies if they invest in other countries. The danger is that governments could try to prevent competitors of domestic companies from entering the market. A permits trading system should not restrict international investment by setting up barriers against the free flow of capital.

Monitoring

Perhaps the most important prerequisite for a functioning market of tradable permits would be the efficient monitoring of the observance of such a treaty. It seems extremely difficult to solve the monitoring problem, but it would be essential for all forms of permit trading or any form of agreement, because if the treaty is not strictly enforceable the price of permits would fall. No one would be willing to pay money for a permit if companies could violate the treaty and escape scot-free. Companies in countries strictly enforcing the agreement would face a significant disadvantage vis–vis companies in countries that do not.

How the monitoring could be achieved in practice is rarely discussed, especially if the scheme were to exist on a global basis. The surveillance of all sources of CO2 emissions (even if only primary energy producers or importers are affected) would require an enormous technological infrastructure and consequently financial resources. Not all countries would have the resources to do so, especially if developing countries would join such an agreement. Remote areas and the lack of technology to oversee the sources of CO2 emissions will make the problem for them even more difficult.⁽¹⁹⁾

Some have advocated that the UN, or an organization affiliated with it, might oversee such a treaty. Right now, the UN does not seem to have the manpower or the financial resources to achieve such a complicated task. The unwillingness by some countries even to pay their regular contributions shows how hard it would be to raise enough money for such a large assignment. Many countries might be reluctant to open up their industries for emission inspections by any international organization, fearing an encroachment on their national sovereignty.

On the other hand, many argue that the monitoring would have to be done by a neutral party, such as an international organization, otherwise there would be an incentive to manipulate the data. Domestic controllers might be more reluctant to report violations by domestic companies because it would hurt the local economy. Even official statistics can be arranged to fit into certain political concepts (for example, see how European countries are struggling to meet the Maastrich criteria), so one can only imagine what might happen on a local basis if domestic companies are involved.

A national permit system would avoid some of the problems of an international trading system. The national governments would have more incentives to monitor emissions, because the additional fees would be paid to the national authorities and could be added to the national budget.⁽²⁰⁾

Enforcement

While monitoring would be difficult, perhaps even more controversial would be the enforcement of a treaty of emissions restrictions. Enforcement through trade sanctions and embargoes seems an inappropriate way to deal with the issue, since such threats would only hamper negotiations and might disrupt international trade. Smaller and developing countries might feel pushed into a treaty by their lack of economic and political power, since they are usually more vulnerable to trade sanctions than larger countries.

Macroeconomic Effects

Another problem, not yet fully investigated by economists, which is also strongly related to the initial distribution of allowed emission targets for every country, is the macroeconomic effects of an international tradable emissions permits on international financial systems, exchange rates, and international trade itself. Some authors have raised the question of what would happen if emissions were reduced to and frozen at the 1990 level. The scenario could be that countries, such as the U.S., would be forced to buy large amounts of permits from countries in Eastern Europe, such as Russia, which might be able to sell permits because of its shrinking economy in the past several years. This could lead to huge transfers of wealth from the U.S. or other industrialized countries to Eastern Europe. These countries would therefore be rewarded for having run inefficient and polluting industries in the preceding decades. This problem exists for all forms of uniform emissions targets, but in the case of emissions trading these countries face an even greater advantage over countries that increased their abatement efforts earlier, because they now also receive a financial reward for their behavior. This transfer might be very helpful for these countries or for developing countries if they decide to join, but the political acceptance in industrial countries seems questionable.

This international system might not even amount to much reduction of emissions, since some countries, in particular Britain, Germany and Russia, have already reduced their emissions from the 1990 levels.⁽²¹⁾

These countries would be able to sell their unused permits to countries that might not be able to achieve the emissions target. In this case the system would not lead to much emissions reduction overall; it would only transfer money from one country to another because of the unbalanced allocation of the emissions between these countries.⁽²²⁾

There could be a significant influence on the trade patterns of participating and non-participating countries. These structures would also determine which countries would be better off with different forms of emissions reduction scenarios. Depending on the types of products a country produces (energy intensive production or not), the export pattern and on the goods and resources it has to import, even countries that do not participate in the permit trading themselves might be hard hit if their potential trading partners can no longer afford some of the products or if the prices of resources and products they have to import rise dramatically.⁽²³⁾

Since competition on a global basis is becoming more intense, a country might base its decision for one system or another on the impact it will have on its biggest competitors.⁽²⁴⁾

The in- and outflow of permits could also affect exchange rates. Large permit purchases by industrial countries from developing countries could lead to appreciation of their currencies, which would hamper other exports so that the overall effect on the economy would be negative.⁽²⁵⁾

It could change trade balances, for example, the U.S. trade deficit might grow if the U.S. would be forced to buy emission permits from other countries. There might be an influence on inflation rates and on national budgets. How emissions trading systems would influence these areas is still very unclear and requires more research.

Influence on Technical Progress

Advocates of emissions taxes fear that a tradable emissions permits system could lead to a slow down in the development of abatement technology because a company would have fewer incentives to develop new technology than under a tax system. The company could reduce its own emissions and possibly sell unused permits to other companies, but the new technology could also lead to a potential loss in the value of permits, because demand for permits would fall and consequently the price for permits would drop. This could mean, in theory, a bigger loss for the company than the potential gain from selling permits. A tax, in contrast, would always give companies an incentive to abate more if the costs for abating an additional ton of emissions is less than the tax for the ton of emissions.⁽²⁶⁾

How much influence this has on R&D by companies is hard to estimate, but it could be a potential problem for trading schemes as it is for command-and-control policy where the same problem exists. In command-and-control policy regimes the companies are often forced to adapt “the best technology available.” This rule gives companies little incentive to develop new and cleaner technology, because it might lead to stricter environmental standards, which could involve huge costs for companies.

SO2 Allowance Trading

The sulfur emission allowance trading is often used in public discussions as an example of the successful implementation of an emissions allowance trading scheme.

While supporters of such schemes point out that the trading in sulfur allowances has led to considerable savings for the affected utilities, since the price for the allowances is much lower than originally projected, skeptics point to the impact of deregulation and other influences which led to lower prices. In the following discussion, the main results of the trading scheme so far shall be summarized and the possible transferability of the experiences with the trading of SO2 emissions allowances to the planned CO2 schemes will be discussed.

Background of the SO2 Trading

Title IV of the Clean Air Act Amendments of 1990 ordered a sharp reduction of SO2 emissions that were thought to be responsible for acid rain. The U.S. Environmental Protection Agency (EPA) used a new approach departing from the usual regulatory policy. In phase I, which went into effect in 1995, the 110 electric utilities with the most emissions had to reduce their SO2 emissions. Annual allowances were given out free to these utility companies; they could than transfer them and even bank them for the future. The companies were able to choose where they would make the reduction of emissions.⁽²⁷⁾

The EPA distributed the allowances based on fossil-fuel usage in the mid-1980s. Later, the electric utilities were allowed to sell to or buy permits from other utilities or use them to cover excess pollution in other plants of the same utility company where it would exceed the allowed emission level. In addition, since 1993 the EPA is auctioning about 2.8 percent of allowances annually, in order to help the establishment of the allowance market.⁽²⁸⁾

Before the Clean Air Act Amendments, the marginal costs of abatement for SO2 were estimated by the EPA to be up to $1500 per ton. The EPA expected the allowance price to range around half of the original marginal costs. These numbers were later corrected downwards; in 1995 the marginal price for allowances at the annual auction was between $122 to $140,⁽²⁹⁾ in 1996 it fell further to around $70.⁽³⁰⁾

The EPA’s approach to auctioning could have contributed to the lower than expected price. The price might have been lower than the actual marginal costs of abatement due to the process which encouraged offering allowances at a lower price. Trading outside of the official auction market reached higher prices.⁽³¹⁾

But not only the price for the allowances was surprisingly low but also the number of trades was below the estimated level; only 2.3 million allowances were traded in 1995 (excluding the annual auctions).⁽³²⁾

The lower price indicates that the costs for companies are less than feared and seems to suggest that the trading system is a total success. But several reasons may explain why the price is lower than expected, and not all are related to the trading system itself.

The switch by many utilities to low-sulfur coal (encouraged by the big price drop for this coal).⁽³³⁾

Railroad deregulation, which resulted in a sharp drop in shipping prices that makes shipping low-sulfur coal from the West of the U.S. to the rest of the country more attractive.⁽³⁴⁾

Distribution of additional allowances above the original distribution.⁽³⁵⁾

Irreversible investment in abatement techniques, which have reduced the demand for allowances by high-cost abaters.⁽³⁶⁾

Stiffer competition in coal, natural gas and scrubber industry.⁽³⁷⁾

Most of the reduction and savings it seems were achieved by intra-utility transfers, meaning that companies arranged the abatement inside the company in those plants with lower costs of abating, rather than trading allowances with other utilities.

The low trading is also the result of some regulations by the state public utility commissions (PUCs) in areas such as allowed rate of return, depreciation rate, and the restriction on how much of the expenses are passed on to the rate-payer. These rules can affect the incentive to trade allowances instead of other ways to cut emissions. There is also still no decision on how cost recovery is going to be regulated.⁽³⁸⁾

Certain areas tried to protect their local coal suppliers by giving incentives to companies to use local coal instead of buying somewhere else (many state laws do not allow the undermining of local economic activity).⁽³⁹⁾

Many of the potential buyers of allowances, (most of them estimated to be the smaller plants with higher costs of abatements), do not have to reduce their emissions before the next phase of the program in the year 2000. Therefore these plants have more time to reduce their emissions without the need to buy allowances from the larger utilities. This leaves the allowance market with smaller numbers of traders willing to sell and especially to buy. As a result the market remains thin, which makes predictions about the price more difficult.⁽⁴⁰⁾

But the number of trades seems to increase and will probably play a bigger part in the future strategy of utilities, especially with increasing competition due to further deregulation of the electricity market.

The EPA rules at its annual auction, which includes two auctions, one a spot auction for allowances for the current year, and an advanced auction for allowances which can be used in seven years, are potentially influencing the price of the allowances and lead to a less efficient trading system.⁽⁴¹⁾

Lessons for other tradable allowance schemes?

The question is how far can the experiences of the sulfur scheme be translated to evaluate the trading proposals described earlier? There are fundamental differences between the SO2 trading scheme in the U.S. and possible CO2 trading schemes, which makes it difficult to compare the two approaches:

CO2 emission permit trading would cover more sources than the SO2 regulation. With the increasing numbers of sources, monitoring would become more complicated and costly.

The negative environmental effects of U.S. SO2 emissions are restricted to the U.S. territory and neighboring regions; in the case of CO2 emissions, the possible negative environmental impact would be felt world-wide.

The sulfur trading is organized under one national authority and jurisdiction, which allows for easier enforcement than would be in the case with an international trading system where enforcement is much more complicated, since it would have to be done under the supervision of an international authority.

The sulfur trading system has a well established working monitoring system, but such a system would probably be extremely difficult to establish in the case of an international CO2 system.

Conclusion

After reviewing three forms of emissions trading proposals, the question remains, are tradable emission programs the ‘magic’ way of reducing emissions at almost no costs, or much reduced costs?

The analysis has shown that the idea of tradable permits is an important tool in environmental policy. Its introduction has opened up the debate for more flexible approaches to environmental problems, away from the strict regulatory approaches in earlier years; but it has also shown where its restrictions and problems are. Trading systems have the potential to reduce the costs for companies in comparison to the old command-and-control policy approach, but to estimate how high such savings would be is difficult to estimate. Even reduced costs does not mean the restriction of CO2 emissions would be for free; higher energy prices for companies and consumers result in the reduction of economic activity. The trading systems would therefore perhaps mitigate the pain or at least people would not realize it as easily as if they were confronted by open energy taxes, but to reduce the use of energy -and therefore CO2 emissions- the price of energy needs to be raised. The illusion that somehow trading systems could avoid putting an additional price on energy use is wrong.

It is therefore important to point out that tradable emissions permit systems or tradable budgets do not solve the fundamental problems: Is the cap on emissions really needed or not and what level would be the ‘right’ one? Any emission trading scheme can only work inside this already set framework; thus these trading schemes are therefore not really market instruments.

The example of the SO2 trading showed lower costs than were initially expected by many, but how this could be translated to other programs is difficult to calculate and needs more analysis of the existing program, since other issues have played an important role in the cost savings achievement in this program.

The analysis has shown that there are serious difficulties involved in the implementation of trading schemes, especially if an international trading program is considered. Many of these issues have not been sufficiently discussed in public debate, except for theoretical analyses by economists. How these programs would be/could be organized in reality is a decisive factor in the analysis about whether these programs would be workable. The discussion should focus on whether these programs could really work on a larger scale. To draw wide-ranging conclusions from a limited number of much smaller programs than the proposed CO2 emissions trading is not sufficient evidence that an international trading system would work.

1. In a command-and-control policy regime, governments and agencies decide on definite emission limits as well as the ways how companies are allowed to achieve their emissions targets, companies are therefore often confined to certain technologies.

2. In the decision to determine the emissions target lies the essential problem of any trading system. The emissions level is not decided by the market, but by a national or an international authority that sets an emissions target that cannot be the optimal target for everyone. Some argue that the government or any international agreement will never be able to define the ‘optimal’ emissions level because the authorities do not have the information needed, and therefore the trading system leads to inefficiencies in the economy. Others dispute the idea of an “optimal” emissions level for the economy as a whole, insisting an “optimal” emissions level exists only for each individual depending on his or her preferences; as a result the government cannot and should not set emissions targets.

3. The proposal is outlined in Brookings Policy Brief No.17, “A Better Way to Slow Global Climate Change,” by Warwick J. McKibbin and Peter J. Wilcoxen, at: http://www.brookings.org/ES/POLICY/Polbrf17.htm.

4. Ibid., p. 6.

5. The military is in many countries a large emitter of CO2.

6. “Clinton Plans Permits to Ration Fossil Fuels,” in The Electricity Daily, November 14, 1997.

7. For example, Peter Hartley (1997), “Can international tradeable carbon dioxide emission quotas work?” The paper was presented at ‘Countdown to Kyoto’: The Consequences of the Mandatory Global Carbon Dioxide Emissions Reductions, Australian APEC Study Centre, Canberra, 19.-21. August 1997, p. 10.

8. The redistribution of these revenues could have a decisive effect on the welfare impact of the program. The money could be redistributed to the companies, used for cutting deficits, redistributed to groups that would be particularly hard hit by increasing energy prices, or allocated to other areas in the budget.

9. Timothy N. Cason (1995), “An Experimental Investigation of the Seller Incentives in the EPA’s Emission Trading Auction, in American Economic Review, Vol. 85, No.4, Sept. 1995, p. 905.

10. General Accounting Office (GAO) Report (1994), GA1.13: RCED-95-30, “Air Pollution: Allowance Trading Offers an Opportunity to Reduce Emissions at Less Cost,” pp. 53-55.

11. Karl Hausker (1992), “The Market for Sulfur Dioxide Pollution,” in Journal of Policy Analysis and Management, Vol. 11, No. 4, Fall 1992, pp. 566-569.

12. See, for theoretical debate, for example, Robert W. Hahn (1984), “Market Power and Transferable Property Rights,” in Quarterly Journal of Economics, Vol. XCIX, November 1984, No. 4, pp. 753-765, Hege Westkog (1996), “Market Power in a System of Tradeable CO2 Quotas,” The Energy Journal, Vol. 17, No. 3, 1996, pp. 85-103, and Stavins R. N. (1995), “Transaction Costs and Tradeable Permits,” Journal of Environmental Economics and Management, Vol. 29, pp. 133-148.

13. For example, David A. Malueg (1990), “Welfare Consequences of Emission Credit Trading Programs,” in Journal of Environmental Economics and Management, Vol. 18, 1990, pp. 66-77.

14. Unfortunately, the proposal of a budget trading system was introduced by the U.S. delegation in earlier meetings to prepare for the Conference on Climate Change but very few details have emerged on how such a system would be organized in practice, a problem that also exists for other proposals and hinders the analysis of the approaches.

15. Peter Hartley (1997), “Can international tradeable carbon dioxide emission quotas work?” The paper was presented at “Countdown to Kyoto”: The Consequences of the Mandatory Global Carbon Dioxide Emissions Reductions, Australian APEC Study Centre, Canberra, 19-21 August 1997, p.9.

16. Wigley, T.L., Richels, R. and Edmonds, J.A. (1996), “Economic and environmental choices in the stabilization of atmospheric CO2 concentrations,” in Nature, Vol. 379, 18. January 1996, p.p. 240-243.

17. GAO Report (1994), p.4.

18. See, for example, Robert W. Hahn (1984) “Market Power and Transferable Property Rights,” in Quarterly Journal of Economics, Vol. XCIX, November 1984, No. 4, pp. 753-765, and Hege Westkog (1996), “Market Power in a System of Tradeable CO2 Quotas,” in The Energy Journal, Vol.17, No.3, 1996, pp. 85-103.

19. The situation in the U.S. might be easier because some of the companies are already involved in the sulfur trading process. The technical equipment to monitor the SO2 emissions could also track CO2 emissions. GAO Report (1994), p.62.

20. Warwick J. McKibbin and Peter J. Wilcoxen (1997), “A Better Way to Slow Global Climate Change,” Brookings Policy Brief No. 17, p. 6.

21. These reductions were not necessarily connected to environmental reasons. Britain slashed its subsidies for its coal-mining industry, which led to a switch to the cleaner natural gas as fuel, while (East-)Germany and Russia experienced the closing of unprofitable -and often very dirty- plants under the new market regimes.

22. Warwick J. McKibbin and Peter J. Wilcoxen, (1997), “A Better Way to Slow Global Climate Change,” Brookings Policy Brief No. 17, p. 5.

23. For an extensive discussion of the impact on trading patterns see, Brown, S. et al. (1997), “The Economic Impact of International Climate Change Policy,” Australian Bureau of Agricultural and Resource Economics (ABARE) Research Report 97.4, Canberra.

24. Surprisingly the ABARE study shows in contrast to the offered suggestions, the U.S. might be better off if countries decide on uniform emission reduction, while the Europeans could profit more from a tradable emission permit system. See ABARE, “The Economic Impact of International Climate Change Policy,” p. 9.

25. Warwick J. McKibbin and Peter J. Wilcoxen “A Better Way to Slow Global Climate Change,” Brookings Policy Brief No. 17, p. 5.

26. Jean-Jacques Laffont and Jean Tirole (1994), “Environmental policy, compliance and innovation,” in European Economic Review, Vol. 38, 1994, p. 561. See also for the discussion on R&D, Ian Parry (1996), “The Choice Between Emissions Taxes and Tradable Permits When Technological Innovation is Endogenous,” Resources for the Future Discussion Paper 96-31, August 1996.

27. Phase II of the program will come into effect in the year 2000 and will include smaller utilities (greater than 25 mega watt) burning fossil fuels. It will also lower the average SO2 emission allowed for the utilities.

28. Dallas Burtraw (1996), “The SO2 Emissions Trading Program,” in Contemporary Economic Policy, Vol. XIV, April 1996, p. 82.

29. Ibid., p. 83.

30. Timothy N. Cason (1997), “Market Masked Regulation,” in Regulation, Summer 1997, p. 15

31. Ibid., p. 15.

32. Dallas Burtraw (1996), “The SO2 Emissions Trading Program,” in Contemporary Economic Policy, Vol. XIV, April 1996, p. 82.

33. Ibid., p. 85.

34. Ibid., p. 88.

35. Klaus Conrad and Robert E. Kohn (1996), “The US market for SO2 permits,” in Energy Policy, Vol. 24, No. 12, 1996, p.1051 and p. 1054.

36. Ibid., p. 1051.

37. GAO Report (1994), pp. 28-29.

38. Dallas Burtraw (1996) “The SO2 Emissions Trading Program,” in Contemporary Economic Policy, Vol. XIV, April 1996, p.82, and GAO Report (1994), p. 45.

39. J.J. Winebrake et. al. (1995), “Estimating the Impacts of Restrictions on Utility Participation in the SO2 Allowance Market,” in The Electricity Journal, Vol. 8, No. 4, pp. 50-54.

40. GAO Report (1994), p. 4.

41. Timothy N. Cason (1995), “An Experimental Investigation of the Seller Incentives in the EPA’s Emission Trading Auction,” American Economic Review, Vol. 85, No.4, September 1995, pp. 906-907.

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1997

Third World Fumes

500 Physicians, Scientists Oppose Climate Treaty

Kyoto Media Advisory – December 3, 1997

Kyoto Update — What will the U.S. do?

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Kyoto Climate Conference Opens – Science and Economics Ignored in Rush to Judgment

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Economic Impacts of Climate Change; Economic Impacts of Climate Change Policies; Emissions Trading is Key

Kyoto Media Contacts Available

Tradable Emission Permits – The Perfect Solution?

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