Climate Change Policy: What Action Should We Take?

Under the Framework Convention on Climate Change signed in Rio de Janeiro in 1992, the United States has agreed to negotiate an international treaty on future greenhouse gas emissions without, according to many experts, careful evaluation of this many-sided issue. The experts believe that the agreement that the United States is poised to sign in Japan has potentially serious consequences for all Americans, and these consequences have not been fully analyzed and understood.

The release earlier this year of a letter signed by 2,300 members of the 20,000-member American Economic Association in support of carbon taxes or the auctioning of emission permits to reduce U.S. carbon dioxide (CO2) emissions could lead some policymakers, as well as the average citizen, to believe that all the environmental and economic questions about climate change policies have been settled. This is not the case. Significant doubts remain in the academic and think-tank community about the wisdom of the United States signing a binding agreement to stabilize or reduce future CO2emissions.

Economic Impact of Binding Emission Limits

Research conducted over the past decade by top climate change scholars such as Professor Richard Schmalensee of the Massachusetts Institute of Technology, Professor Alan S. Manne of Stanford University, Dr. Richard Richels of the Electric Power Research Institute, Dr. W. David Montgomery of Charles River Associates, and Dr. Lawrence M. Horwitz of Primark Decision Economics, concludes that the cost of stabilizing CO2 emissions would impose a heavy burden on U.S. households and industry. For example, Dr. Horwitz’s analysis shows that reducing emissions to 1990 levels by 2010 or 2015 would require a tax in the range of $200 or more per tonne of carbon emitted. Horwitz argues that these taxes would reduce U.S. GDP growth by more than 4.0 percent annually or over $350 billion per year. Economic growth would slow as emissions are reduced due to lost output as prices rise for carbon-using goods-goods that must be produced using less carbon and/or more expensive processes. Output would also fall because of slower net capital accumulation, reflecting the premature obsolescence of capital equipment due to sharp energy price increases. In addition, Horwitz predicts that household disposable income would fall by 1.2 percent, and wages would also drop. At the same time, electricity prices could more than double from the current $0.07 per kWh to as much as $0.15-0.16 per kWh, according to a study by Montgomery. And as a result of the tax-induced price increases, household electricity consumption could fall by more than 30 percent, requiring a significant change in the daily life of practically every American citizen. Expenditures on items such as autos and housing would also decline, even if all the tax revenues were “recycled” back to consumers (see Figure 1).

[Figure 1: Negative Impacts by 2010 on U.S. Household Consumption Due to Alternative CO2 Emissions Reduction Proposals (% change from baseline)]

Source: Lawrence M. Horwitz, “The Impact of Carbon Dioxide Emission Reductions on Living Standards and Lifestyles,” in An Economic Perspective on Climate Change Policies (Washington, D.C.: American Council for Capital Formation Center for Policy Research, October 1995 Special Report)

Environmental Impact of Emission Limits

Scholars such as Professors Manne and Schmalensee and Drs. Jae Edmonds, James Dooley, and Marshall Wise of Pacific Northwest National Laboratory (PNNL) warn that there will be almost no environmental benefits were the United States and other industrialized countries to stabilize CO2emissions by 2010 or 2015 because most of the new emissions would come from China, India, the former Soviet Union, Latin America, and other emerging economies. In fact, developing nations, which would not be required to cut CO2 emissions under the proposed international treaty, already produce about 50 percent of all emissions-and by 2050 are expected to produce 75 percent of all greenhouse gases, according to Montgomery (see Figure 2).

[Figure 2: Relative Carbon Contributions of Different Regions to Global Carbon Emissions]

Source: Based on A.S. Manne and R.G. Richels, Buying Greenhouse Gas Insurance: The Economic Costs of CO2 Emission Limits. (Cambridge, Mass.: MIT Press, 1992), p. 91.

Cost-Effective CO2 Stabilization Policies and U.S. Economic Growth

Reducing global CO2 emissions should be a gradual, three-stage process, according to PNNL’s Edmonds, Dooley, and Wise. During the next 25 years (Stage I), we should commit resources to the development and spread of new energy technologies such as hydrogen transformation from natural gas, advanced liquefied hydrogen fuel cells, biomass, solar photovoltaic, and nanotechnology (the design and building of structures atom-by-atom). These experts believe that although such technologies are now in their early stages, their development could revolutionize energy production while sharply reducing the cost of stabilizing atmospheric concentrations of greenhouse gases. Stage II, from 2020-2050, would see the enforcement of an emissions cap; Stage III could see the gradual phaseout of all free-venting of carbon into the atmosphere if the science indicates the need for such a policy.

Conclusions

The consensus of these noted scholars is clear. Given the need to increase U.S. economic growth to address challenges such as the looming retirement of the baby boom generation, policymakers should weigh carefully the likely negative economic impact of precipitous near-term reductions in U.S. CO2emissions and energy use. Adopting a thoughtfully timed climate change policy would both enhance U.S. and global economic growth and lead to long-term stabilization of carbon concentrations in the atmosphere.