Global Warming Policy: Some Economic Implications

Global Warming | Policy Reports

No. 224
Saturday, May 01, 1999
by Stephen P. A. Brown

Executive Summary

Many analysts believe that human-caused emissions of greenhouse gases principally carbon dioxide (CO2) from the consumption of fossil fuels such as petroleum products, natural gas and coal are contributing to an increase in global temperatures.

The link between greenhouse gas emissions and global temperature increases is uncertain, and some scientists believe the net effect of any global warming could be beneficial. Still, the United States has signed but not ratified an accord drawn up at Kyoto, Japan, in late 1997 that would obligate the U.S. to reduce its CO2 emissions to 7 percent below 1990 levels between 2008 and 2012. The accord also assigns various targets to other industrialized nations. It will become a binding treaty only if countries accounting for 55 percent or more of 1990 CO2 emissions ratify it. Thus far no industrialized nation has done so.

What difference will the treaty make? The treaty would not actually reduce global CO2 emissions. Instead, it would merely slow their growth:

  • The U.S. Department of Energy has projected that from 1990 to 2010 emissions of CO2 from the consumption of fossil fuels will rise by 45 percent worldwide.
  • If the Kyoto accord were implemented, the net effect would be to slow the worldwide growth of CO2 emissions to 30 percent.

Despite the fact that the impact on global CO2 emissions would be modest, the effects on the U.S. economy would be large:

  • This study estimates that compliance with the Kyoto accord would require the U.S. to reduce its energy consumption by about 25 percent below the amount that would otherwise occur.
  • To appreciate what this would mean, consider that about one-fourth of total U.S. energy consumption in 1996 was for transportation.
  • One way (but not the most efficient way) of reducing energy use in the United States by one-fourth would be to stop nearly all highway, rail, sea and air traffic permanently.

Economists often use cost-benefit analysis to determine whether government action should be taken and, if so, what action will produce the best results at the least cost. This study compares the worldwide benefits of U.S. reduction of CO2 emissions with the worldwide costs. The benefits can be expressed as the economic value of avoiding the environmental damage that might arise from global warming. Fewer hurricanes mean less property damage; avoiding tidal flooding increases the value of coastal property; less crop destruction translates into lower food prices; fewer diseases mean lower health care costs. This study estimates these benefits based on the average finding of studies that conclude the benefits are positive.

The costs can be expressed in terms of economic opportunities lost as a result of using less fossil fuel. In general, economic well-being is maximized at the level of abatement where the last barrel of oil not consumed creates benefits equal to the costs of not consuming it. For abatement beyond that point, the additional cost outweighs the additional benefit. This study finds:

  • The economic benefits of lower energy use justify U.S. reduction in CO2 emissions of only about 14 percent of that required by the treaty.
  • Thus the Kyoto treaty would require seven times more CO2 reduction by the United States than is justified by a comparison of costs and benefits.
  • Similar results also apply to other developed countries.

Regardless of its impact on the world as a whole, CO2 emissions reduction would be costly for the United States. In general, the cost of reducing CO2 emissions can be measured in terms of fewer goods and services purchased at lower energy levels. It might be possible to reduce these costs through international transactions. For example, the United States could purchase the right to emit additional units of CO2 from other countries. Alternatively, the U.S. could obtain the right to emit more by helping other countries reduce their emissions. This study finds:

  • Without any offsets or credits, U.S. GDP would be 3.6 percent to 5.1 percent lower in 2010, representing a loss of $330 billion to $467 billion or about $1,100 to $1,600 per capita.
  • Using offsets and credits, compliance would cost the U.S. from 3 percent to 4.3 percent of GDP, representing a loss of between $921 and $1,320 for every man, woman and child in the country.

If reducing CO2 emissions is similar to purchasing insurance against the possible consequences of global warming, these figures suggest that U.S. compliance with the Kyoto accord represents costly and excessive insurance.

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