Kyoto Protocol and Beyond: The Economic Cost to Germany

Executive Summary

The Kyoto Protocol entered into force as an international  treaty for those countries that had ratified it on February 16, 2005. Of the Annex B countries that ratified the Kyoto Protocol, only a few have begun implementing  measures necessary to limit their  greenhouse  gas  emissions to their Annex B obligations.

As a result, most of the Annex B economies are experiencing rising greenhouse gas emissions. To the extent that  initial measures and incentives  have been implemented, they have been relatively ineffective and it is highly likely that in the absence of significantly more onerous measures the Annex B countries will exceed their emission targets.

While the prospects for  meeting  the  emission limits established for the first budget period appear doubtful,  discussion  of tightened emission limits for subsequent periods has begun. Recent proposals under consideration and analyzed here are:

Case 1: Current commitment under the Kyoto Protocol through the first  period (2008-2012) and a target level of 60% below year 2000 levels of CO2 emissions by 2050, achieved via a  continuous annual reduction per year beyond the first Kyoto commitment period. (For Germany, this results in a target emission rate of 65% of 1990 levels in 2025–or 35% below 1990 levels.)

Case 2: Current commitment under the Kyoto Protocol through the first  period (2008-2012)  and a  target level of zero  CO2 emissions by 2050 achieved via a continuous annual reduction beyond the first Kyoto commitment  period. (For Germany, this results in a target emission rate of 53% of 1990 levels in 2025–or 47% below 1990 levels.)

Implementing limits on carbon dioxide emissions would dramatically increase delivered prices of energy to consumers and businesses. In 2010, Germany is expected to achieve Kyoto Protocol commitment from domestic actions.

However, energy prices  in Germany would be impacted by emissions trading under the EU-ETS and by additional energy taxes (or tradable permits) that would be imposed on all energy consumers throughout the economy:

  • ƒthe price of home heating oil would rise by nearly 30%.
  • ƒgasoline and  diesel prices would be 9% and 12% higher, respectively,than the baseline estimates.
  • ƒindustry would pay 30%  more for its natural gas and  electricity above the baseline estimate.

 

By 2025, if one of the more stringent targets were implemented, consumers and businesses will be subjected to even higher energy prices even assuming continued operation of nuclear power plants.

The economy will suffer from a loss of  output as real GDP shrinks 0.8% (18.5 billion Euros) below base case levels during the 2008-12 budget period. In 2025, real GDP would be 1.4-1.7% (40 to 48 billion Euros) below the baseline level depending on whether Case 1 or Case 2 has to be achieved.

 

Annual job losses are projected to be 318,000 in 2010. By 2025, job losses will be 519,000 under the proposal for Case 1 or 622,000 if the Case 2 proposal were implemented.

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