Climate Mitigation Policy and U.S. Economic Growth

We commend Chairman McIntosh and the Subcommittee on National Economic Growth, Natural Resources, and Regulatory Affairs for their focus on the critical issue of the effect of climate change policy on U.S. economic growth. Studies sponsored by the ACCF Center for Policy Research, the public policy research affiliate of the American Council for Capital Formation, show that near-term limitations on the increase in U.S. carbon emissions will reduce growth in U.S. GDP and household income and increase income inequality with little or no environmental benefits. Adopting a thoughtfully timed climate change policy-based on science and improved climate models-would both enhance U.S. and global economic growth and lead to long-term stabilization of carbon concentrations in the atmosphere.

Macroeconomic Effects of CO2 Emission Limits 

The Kyoto Protocol to the United Nations Framework Convention on Climate Change, which the United States negotiated in December, 1997, calls for industrial economies such as the United States, Canada, Europe, and Japan to reduce their collective emissions of six greenhouse gases by an average of 5.2 percent from 1990 levels by 2008-2012. The U.S. target is a 7 percent reduction from 1990 levels. Many experts believe that the Kyoto agreement has potentially serious consequences for all Americans, and that these consequences have not been fully analyzed and understood.

  • Impact on Economic Growth. Recent macroeconomic studies sponsored by the ACCF Center for Policy Research have estimated the economic impact of stabilizing carbon dioxide (CO2) emissions at 1990 levels (this was the Administration’s original, pre-Kyoto, emission reduction target). Thus, the results of studies by top climate change scholars such as Professor Gary W. Yohe of Wesleyan University, Dr. Lawrence M. Horwitz of Primark Decision Economics, and Senior Vice President Mary H. Novak of WEFA, Inc., are lower-bound, conservative estimates of the Kyoto agreement’s impact since the agreement calls for the United States to reduce its emissions about 30 percent more than was modeled.The studies show that stabilizing CO2 emissions at 1990 levels would require a carbon tax (or tradable permit price) of $200 to $260 per ton. As a result, output would fall as prices rise for carbon-using goods, and U.S. GDP growth would decline in the range of 1.0 to 4.0 percent annually.
  • Impact on Income, Wages, and Employment. The analyses by Dr. Horwitz, Professor Yohe, and Ms. Novak conclude that stabilization of CO2emissions at 1990 levels would reduce real wage growth and raise unemployment. Professor Yohe’s analysis shows that stabilization would cause real wages would fall by 5 to 10 percent per year.
  • Impact on Household Consumption and Lifestyles. The higher energy prices required to stabilize emissions at 1990 levels would result in higher prices for the goods and services purchased by consumers. Studies show that, in response to sharply higher energy prices, U.S. consumers would be forced to make major changes in their lifestyles. For example, electricity use would drop by an average of 30 percent, natural gas by 17 percent, and auto purchases by 8 percent.
  • Impact on Income Distribution. Policies to curb emissions also worsen the distribution of income in the United States, according to the analyses of both Professor Yohe and Ms. Novak. For example, based on a standard measure of the degree of income inequality among a country’s population called the GINI coefficient, Professor Yohe’s analysis shows that carbon taxes, even when recycled through personal income tax reductions, cause relatively large losses in the poorest one-fifth of the population.

Level of Effort Required to Meet the Kyoto Targets

Another way of measuring the effort or sacrifice required to meet the Kyoto emission targets is through the use of the Kaya Identity, presented in a new study by Ms. Rayola Dougher and Dr. Russell Jones of the American Petroleum Institute. This approach uses 35 years of history plus government projections of growth in GDP and energy use through 2010, and provides a yardstick to evaluate how much behavior must be altered from current and expected patterns in order to meet the Kyoto targets, and how this altered behavior compares to past experience, especially the maximum historic effort to limit energy use during the energy crisis years of 1974-1986.

The Dougher and Jones study concludes that the Kyoto target, which requires the United States to make annual reductions in carbon emissions of 2.3 percent, is unrealistic. Even if the maximum historic effort were repeated, the United States would only reduce annual carbon emissions by 1.1 percent and growth in per capita GDP would be cut in half.

Environmental Impact of Emission Limits

Scholars such as Professor Richard Schmalensee of the Massachusetts Institute of Technology, Professor Alan S. Manne of Stanford University, and Dr. Jae Edmonds and his colleagues James Dooley and Marshall Wise of Pacific Northwest National Laboratory (PNNL) all warn that there would be almost no environmental benefits if the United States and other industrialized countries were to stabilize CO2 emissions by 2010 or 2015, because most of the new emissions will come from China, India, Latin America, and other emerging economies. In fact, developing nations, which are not required to cut CO2 emissions under the Kyoto agreement, already produce about 50 percent of all emissions–and by 2050 are expected to produce 75 percent of all greenhouse gases.

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 twenty-five years (Stage I), the United States should commit resources to carbon capture and sequestration as well as the development and spread of new energy technologies. 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 a growing population, the retirement of the baby boom generation, and a persistent trade deficit, policymakers should weigh carefully the likely negative economic impact of precipitous near-term reductions in U.S. CO2 emissions and energy use. Adopting a thoughtfully timed climate change policy–based on science and improved climate models–would both enhance U.S. and global economic growth and lead to long-term stabilization of carbon concentrations in the atmosphere.