It All Depends on the Assumptions

The Clinton Administrations estimates of the costs of complying with the Kyoto Protocol are based on some implausible assumptions, write Raymond J. Kopp and J.W. Anderson of Resources for the Future (Weathervane, March 12, 1998, www.weathervane.rff.org).

Janet Yellen, chair of the Council of Economic Advisors, testified before the House Commerce Committee on March 4, 1998 that the costs of emissions reductions would range from $14 to $23 per ton of carbon equivalent. This would lead to a mere $70 to $110 increase in energy costs per household over the next ten years.

The Administrations estimates were based in part on the Second Generation Model (SGM) of Battelle Laboratories which, according to Yellen “is one of the best positioned [models] to analyze the role of international trade in permits.” This is important because the Administrations numbers rely heavily on the assumption that the U.S. will be able to trade emissions with developing countries.

As reported in our last issue, however, Raul Estrada-Oyuela, head of the United Nations commission that negotiated the Kyoto Protocol, stated that emission trading may be phased out after eight years which would significantly alter the Administrations estimates.

The SGM estimates that in the absence of trading it will cost the U.S. $108 per ton of carbon to meet the Kyoto commitments. Trading between developed countries alone would reduce the costs of compliance to $72 per ton and trading amongst all countries would lower the cost to $26 per ton. Under the last scenario (which is about the same as Yellens upper bound estimates) only 15 percent of U.S. emissions reductions would occur within the country. The remaining reductions would occur abroad.

Developing countries, according to Kopp and Anderson, “fear that the rich countries will use their financial power to buy their way out of emissions limits, while limits grow tighter on the poor.” They also argue that “It is also not clear that the U.S. Congress will support a system that envisions large outflows of investment capital to the poor countries for emissions permits. Some influential congressmen have already begun to refer to emissions trading as foreign aid.

Other assumptions made by the Administration include: enough “opportunities for cheap emissions reductions . . . in the developing world” to meet European, Japanese and American demand for emission permits and a perfectly efficient trading system.