It’s About Time
After burying it for over six months the Clinton Administration finally released a Department of Energy report on the economic impacts of proposed energy regulations. The report finds that rising energy prices resulting from climate change policies would be devastating to the chemicals, iron and steel, petroleum refining, aluminum, paper and allied products, and cement industries. Based on a carbon tax of between $100 and $140 per ton of carbon dioxide phased in between 2000 and 2010 the report forecasts an increase in the cost of coal of $70 to $90 per ton. Electricity prices would rise by 25 to 35 percent, No. 2 fuel oil would rise by 60 to 90 percent, and natural gas by 50 to 60 percent.
Clinton Administration greens were not pleased. A memo released with the report, written by Marc Chupka, acting assistant secretary of DOE’s Office of Policy and International Affairs, called the assumptions used in the study “outdated” because they did not take into consideration the Clinton Administration’s own opinions. Specifically, the Administration believes that proposals such as an international trading system for greenhouse gas emissions and joint implementation programs will lower abatement costs.
Regardless, Chupka argues that the study is still valuable in instructing policy makers as to the dangers of increasing energy costs. It also makes clear to industrial countries the danger of unilaterally imposing binding emission reduction targets. According to the study, this policy would cause a massive transfer of manufacturing in the six industries listed above from the industrialized world to the developing world (BNA Daily Environment Report, July 15, 1997).
International Trading Scheme Would Transfer Wealth
A Brookings Policy Brief (“A Better Way to Slow Global Climate Change,” No. 17) argues that an international emissions trading scheme – which would allow for the most abatement to occur where it is cheapest – would result in a large transfer of wealth from the industrial countries. A tradable emission system would increase the U.S. trade deficit by $27 billion to $54 billion every year, a 24 to 47 percent increase. Most of this wealth would go to the developing countries, dwarfing the $17 billion in foreign aid the U.S. sends abroad each year.
The authors, Warwick J. McKibben and Peter J. Wilcoxen, propose an internal trading scheme where each nation will receive permits based upon historical emission levels. Each national government could distribute the permits as it saw fit. Trading would occur entirely within the nation, avoiding the international wealth transfer problem. Of course, an obvious weakness of this plan is the difficulty in verifying whether governments are enforcing emissions reductions within their own countries (Brookings’ webpage www.brook.edu/ES/POLICY/Polbrf17.htm).
In a speech at the Competitive Enterprise Institute’s “Costs of Kyoto” conference on July 15, economist Brian Fisher of Australia’s ABARE projected that by 2010, 12 percent of the former Eastern bloc’s GNP would come from income transfers, assuming a climate treaty covering industrialized countries with a tradable emission scheme. He wondered aloud whether the U.S. Senate would be comfortable with that.
1996 Greenhouse Gas Data
According to the World Energy Council (WEC), global carbon dioxide emissions continued to rise in 1996, with the highest increase of 5.5 percent, occurring in India, China, the newly industrializing Asian tigers and the Middle East. U.S. emissions increased by 3.1 percent while the European Union experienced a 2.3 percent rise in its second consecutive year of greenhouse gas increases, most of which can be attributed to Germany, the United Kingdom and Denmark.
Rapid increases in the Asian-Pacific countries could heighten pressure to impose binding emission targets on developing countries. Increases in the U.K. and Germany erode their moral credibility and raise doubts about their ability to reach the stringent targets proposed by the two countries at the Rio Plus Five conference. According to Michael Jefferson, the WEC’s deputy secretary general, the honeymoon of closing polluting industries is over for the U.K. and Germany. They must now deal with the economic realities that the rest of the world faces in terms of emissions reduction (Nature, July 17, 1997).
Voluntary Programs Not So Great
A General Accounting Office (GAO) report argues that EPA predictions about the greenhouse gas reducing potential of three voluntary programs are overly optimistic. The EPA estimates that the Green Lights program will save 3.9 million metric tons of carbon equivalent (MMTCE), the Source Reduction and Recycling Program 1.9 to 6.7 MMTCE, and the State and Local Outreach Program 1.7 MMTCE. But the GAO argues that the EPA’s projections “are not consistent with experience to date.” The GAO also argued that much of the future reductions attributed to the outreach program might happen regardless of EPA’s actions (BNA Daily Environment Report, July 21, 1997).
The Consequences of Climate Change Policy
In an editorial in the Wall Street Journal (July 25, 1997), Jack Kemp identified three major economic consequences of proposed limits on greenhouse gases. First, production costs would increase for virtually all U.S. industries, making American products less competitive abroad and less affordable at home. Second, as much as 250,000 high paying jobs could leave the U.S. as American companies struggle to remain competitive in world markets. Finally, Americans would face higher energy bills which could increase as much as 50 percent.
As the AFL-CIO has indicated, carbon taxes “. . . are highly regressive and will be most harmful to citizens who live on fixed incomes and work at poverty level wages.”
The pain involved is not justified, however. As Kemp points out, a treaty excluding the high growth developing nations such as China, South Korea, and India, would do nothing to curb greenhouse gas emissions. And if climate change is not happening anyway, as Kemp indicates in the article, then why should anyone implement all pain, no gain policies?