*Per IRS Restructuring and Reform Act of 1998

Source: American Council for Capital Formation

Dr. W. David Montgomery, vice president, Charles River Associates, and Ms. Mary Novak, senior vice president, WEFA, Inc., presented new research at the Center's briefing explaining the flawed economic assumptions used by the Clinton Administration to estimate the cost of the Kyoto Protocol to the American economy. In addition, the new studies focused on the negative impact of the Protocol on U. S. economic growth and living standards.

Remarks by Representative Dingell and Senator Hagel

Representative Dingell, ranking member of the House Committee on Commerce, opened the briefing. He stressed that the Kyoto treaty is "fatally flawed." "The treaty, as written, is almost certain to impose large costs on the United States while, at the same time, it fails to address climate change," he noted. The Michigan congressman also explained that the treaty would seriously undermine U.S. competitiveness in world markets.

"There is one simple step we could take to reduce the costs of Kyoto," Representative Dingell said. "We could refuse to sign the agreement and go back to the table to negotiate another one that makes economic and environmental sense."

Senator Hagel, chairman of the Subcommittee on International Economic Policy, Export, and Trade Promotion of the Senate Committee on Foreign Relations and head of the Senate Climate Change Observer Group, told the audience that "more study is needed on the climate issue before imposing a certain economic burden to solve a problem that may not be real. While the science is not sure, the economic consequences for the United States are clear."

"The issue," added Senator Hagel, "is not about the environment. It's about energy. The debate must focus on how best to provide a clean environment. We cannot simply take on this issue piece by piece, as the Clinton Administration has been doing." He added that the objective is to reduce man-made greenhouse emissions, but the Kyoto treaty will not achieve this goal because it eliminates the participation of developing nations, which will be responsible for the largest percentage of greenhouse gas emissions.

New Research on Costs of Kyoto Protocol

The policy briefing featured a new report by Dr. W. David Montgomery, which analyzed the Administration's estimates of the costs of implementing the Kyoto Protocol. By replicating the Administration's analysis with Charles River Associates' own model, Dr. Montgomery and his colleagues were able to explain how the Administration's low estimates for carbon permit prices were derived, and repeat the analysis using alternative and perhaps more realistic assumptions.

• The Administration's permit cost estimates show that the United States would need to purchase 82-8 percent of its permits from abroad. The European Union and others have objected to any country securing more than 50 percent of its permits this way.
• The Administration assumes worldwide permit trading, although the Kyoto Protocol includes only limited trading possibilities.
• The Administration's estimates take into account only the costs in energy markets-the direct costs. Other models that incorporate indirect costs estimate GDP loss at two to four times direct costs.
• The Administration has assumed the replacement of coal-fired power plants with natural gas plants by 2008-ten years from now. This is an extremely optimistic assumption about how rapidly changes in the infrastructure of power generation can be achieved.
• More realistic assumptions about technology, fuel substitution, and the scope of international trading show that permit costs of $170 per metric ton appear plausible even with restricted international emissions trading. (The Administration estimated permits costs of $14 to $23 per metric ton in 2010.) Such costs would increase the average household's energy bill by about $850 per year and gasoline prices by almost 50 cents per gallon.

U.S. Living Standards Would Be Reduced

Mary Novak reported on her research which demonstrates that, in contrast to the Clinton Administration's rosy projections, achieving the emissions reduction goals of the Kyoto Protocol would require sharply higher prices for energy and electricity. WEFA forecasts indicate that if today's carbon intensity per capita were to remain constant, carbon emissions would be 53 percent above the Kyoto target in 2010; thus, achieving the Kyoto goals would require a per capita cut in energy use of approximately 50 percent over the next decade. The costs of food, housing, and medical care would rise at least 10 percent, severely impacting lower-income families. The Kyoto Protocol would reduce U.S. economic growth by 3.2 percent or about $300 billion annually, and cause the loss of 2.4 million jobs. In addition, the treaty would give developing countries-who are not required to cut emissions-a competitive advantage over the United States at the same time as U.S. living standards are being reduced.

An alternative to the Kyoto Protocol, discussed by both Representative Dingell and Ms. Novak, would be to increase investment in energy-efficient and non-carbon-based technologies. This strategy could be termed "low-regrets," since, according to Representative Dingell, "These research and development investments ought to be made whether or not climate change is a real problem." In addition, according to Ms. Novak, the emerging economies will not meaningfully participate until an alternative to fossil fuel-based energy is available.

The Impact of Climate Change Policy on Consumers: Can Tradable Permits Reduce the Cost?, a new book just released by the ACCF Center for Policy Research, includes studies by Ms. Novak and Hon. Richard Schmalensee, Gordon Y Billard Professor of Economics, Massachusetts Institute of Technology, and commentary by Representative Dingell, Senator Hagel, and others. To order copies, please contact the Center at 202/293-5811. (ISBN: 1-884032-07-9 / April 1998 / 88 pages / paperback / U.S. $25.00.)

Senator Nickles Speaks to Capital Formation Forum

Senate Assistant Majority Leader Don Nickles (R-OK), a nine-year member of the Senate Republican leadership and a member of the tax-writing Finance Committee, met with ACCF supporters on April 30 for a Capital Formation Forum.

Senator Nickles moderated a question-and-answer session with forum participants on issues ranging from the prospects for a 1998 tax bill, the outlook for fundamental tax reform, new ideas for social security reform, and other short- and long-term fiscal policy issues now before the Congress.

"The idea of fundamental tax reform seems to be resonating in the country more than a tax cut," Senator Nickles said, adding that comprehensive tax code reform will not be enacted this year. If the Congress proposes tax cuts this year, the senior senator from Oklahoma observed that he would like to see marginal tax rates reduced.

Turning to social security issues, Senator Nickles said he had made the case to President Clinton that an effort should be made to "personalize" the social security system to give people some control. However, moving to a partially privatized social security system has transition costs that need to be resolved before this goal can be achieved, he added.

Climate Change Policy: Practical Strategies to
Promote Economic Growth & Environmental Quality

September 23, 1998
National Press Club, Washington, D.C.

Adjusting U.S. energy use to achieve the Kyoto Protocol goals would result in serious economic and environmental consequences. The ACCF Center for Policy Research will examine those consequences in a blue-ribbon symposium on September 23. Leading congressional and administration policymakers, top scholars, and prominent experts from the private sector will address:

• The Kyoto Treaty: Economic and Environmental Consequences
• Technological Development and CO₂ Reduction in Energy Use:
• Outlook for Near-Term Progress
• The Role of Energy in the U.S. Economy
• Removing Obstacles for Long-Term Technological Innovation to Reduce CO₂ Emissions
• Tradable Permits for CO₂ Emissions: Obstacles to a Functional International System

For more information, please call the ACCF Center for Policy Research, 202/293-5811.

Free Trade vs. Protectionism and Economic Sanctions:
What Are the Issues?

September 23, 1998
National Press Club, Washington, D.C.

An opportunity to learn about new research on the benefits of open markets and the costs of trade protection and economic sanctions, featuring

• Rep. Jim Kolbe (R-AZ), leading proponent of free trade in the U.S. House of Representatives;
• Dr. Gary Hufbauer, Director of Studies and Maurice R. Greenberg Chair, Council on Foreign Relations; and
• Bruce Stokes, Senior Fellow in Economic Studies, Council on Foreign Relations.

Join us on July 29, 1998, from 8:00-9:00 a.m. at the Capitol Hill Club, 300 First Street, S.E., Washington, D.C. (continental breakfast provided).
Please call 202/293-5811 to reserve space at this briefing.