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The Impact of Climate Change Policy on Consumers:
Can Tradable Permits Reduce the Cost?
A monograph published April 1998 by the
ACCF Center for Policy Research.
ISBN: 1-884032-07-9
Introduction
For more than two decades, the ACCF Center for Policy Research has sponsored
innovative studies by leading experts on environmental, regulatory, and
tax policies to encourage capital formation. In recent years, the Center
has also underwritten a series of blue-ribbon symposiums on the impact
of environmental policies on U.S. living standards, investment, and economic
growth.
To bring its research to a wider audience, the Center has published this
volume containing the edited papers presented at the Center's September
24, 1997, symposium, Climate Change Policy, Economic Growth, and
Environmental Quality. The research presented at this symposium
analyzed how alternative policies to address climate change would impact
U.S. economic growth and household living standards, and examined issues
involved in setting up a system of tradable permits and joint implementation
to reduce global carbon dioxide emissions.
The Center's research is particularly timely in light of the 1997 Kyoto
treaty negotiations in which the United States agreed to reduce its carbon
dioxide emissions to 7 percent below 1990 levels. Many experts believe
that meeting the emission reduction goals in the Kyoto treaty would have
serious economic consequences for all Americans, with few environmental
benefits.
WEFA, Inc. senior vice president Mary H. Novak prepared an analysis of
the economic impact of stringent emission reductions for the Center's
research project. Her research was released prior to the December negotiations
in Kyoto, and thus used the Administration's previously announced goal
of reducing emissions to 1990 levels. She concluded that stabilizing carbon
emissions at 1990 levels by 2010 would produce higher energy costs and
send a series of shocks through the U.S. economy much like the Arab oil
embargo and the Iranian oil crisis. Reducing emissions to 1990 levels
would permanently reduce U.S. economic performance: GDP would be 2.4 percent
lower in 2010 and 1.7 percent lower in 2020 than baseline estimates. The
total lost income per household would average almost $30,000 over the
2001-2020 time period. Limiting emissions would also put the U.S. economy
at a competitive disadvantage and reduce available financial resources
for such needs as education, health care, and aid to low-income households.
Households would be squeezed between higher costs for essential goods
and services and lower income. Further, unless developing countries participate
in the plan, the impact on global carbon emissions would be relatively
small. Implementing the more stringent emission reduction goals negotiated
in Kyoto would, according to Ms. Novak, increase the size of the shock
to the economy.
The Kyoto agreement also calls for the development of a system of tradable
permits and joint implementation to reduce the costs of carbon dioxide
emission reduction. Professor Richard Schmalensee of the Massachusetts
Institute of Technology, who analyzed the issues of tradable permits and
joint implementation for the Center's project, concluded that applying
the concept of tradable permits to carbon dioxide emissions at the national
and global levels would require the resolution of numerous complex issues.
These include how carbon allowances would be distributed and how carbon
emissions would be monitored. Such a system with fixed annual total emissions
would be inflexible and would tend to destabilize the price level. In
addition, while the Administration's proposal calls for developing nations
to participate in controlling global emissions, it will be very difficult
to get meaningful participation from these countries. Since the bulk of
global emissions growth in the coming century is projected to occur in
the developing world, it will very likely be impossible to attain atmospheric
stabilization without significant abatement by developing nations. We
have time to design and adopt realistic strategies to respond to the threat
of climate change; we should not be distracted by political pressures
to take short-term symbolic action that may well be counterproductive
in the long run, Professor Schmalensee concludes.
The forum keynote addresses were given by Congressman John D. Dingell
(D-MI), ranking minority member of the Commerce Committee, and Senator
Charles T. Hagel (R-NE), chairman of the Subcommittee on International
Economic Policy, Export, and Trade Promotion of the Committee on Foreign
Relations.
Congressman Dingell expressed his concerns with the Administration's current
approach to climate change policy. The Michigan congressman stressed:
The debate over the science of climate change will and should
continue, and I am prepared to accept the possibility that either side
may be right-even though for now I must render a Scotch verdict, which
is to say, the case is not proven. But if climate change is real, then
we must answer the second question: What should we do about it? I happen
to think that it is good that we are trying to grapple with international
environmental issues. I hope that in the end it will be a productive
endeavor. If the need to address climate change has been conclusively
established, if the process is fair, then every nation has a duty to
be part of the solution.
Speaking on the challenges presented by the Kyoto negotiations, Senator
Hagel observed:
The United States needs to take global climate issues seriously.
We have made tremendous strides in cleaning up our environment, and
we will continue to make progress in the future. We are all concerned
about the state of the environment that we leave to our children and
grandchildren. But when we take actions that will reduce their economic
opportunities, we must ensure that the benefits would be real, and that
they would justify the very real economic hardship that we would be
passing on to future generations.
This global climate treaty is not the way to go. The current path to
Kyoto should be abandoned until we can come up with a truly global solution,
one based on sound science, that is fair and equitable for all the nations
involved.
The ACCF Center for Policy Research is grateful to our presenters and
respondents for their contributions that made this symposium and book
possible.
The Center will continue to focus its attention and resources on economic
growth through sound tax and environmental policies. We look forward to
sharing new information, analyses, and proposals with you, and welcome
your thoughts and inquiries about this and all other ACCF Center for Policy
Research programs.
Charls E. Walker
Chairman
Mark A. Bloomfield
President
Margo Thorning
Senior Vice President and Director of Research
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