Energy, Economic and International Issues in Global Warming Policy

American Council for Capital Formation
By Margo Thorning, Ph.D.
Senior Vice President and Chief Economist, American Council for Capital Formation

Before the Committee on Environment and Public Works Subcommittee on Private Sector and Consumer Solutions to Global Warming and Wildlife Protection, U.S. Senate, July 24, 2007

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Executive Summary

Introduction: Security of energy supplies and protection for the environment are two important policy goals on which developed countries have focused significant amounts of time and money in recent years. Developed countries have devoted less attention to the need to increase supplies of clean energy to the world’s poorest inhabitants, many of whom live on less that a dollar a day. Since energy use goes hand-in-hand with economic development, many experts think increasing the supply of clean energy for the poor should be a top priority as well.

Trends in Energy Use and Carbon Emissions: Globally, fossil fuels will remain the dominant source of energy to 2030, absent sharp changes in consumption and technological breakthroughs, according to the 2006 International Energy Agency (IEA) report. The new draft report of the National Petroleum Council, “Facing the Hard Truths about Energy” notes that world energy demand has increased by about 60 percent over the past twenty five years and most forecasts project a similar increase (from a much larger base) over the next twenty-five years. IEA projects carbon emissions will increase by more than 50 percent by 2030. China’s CO2 emissions exceeded those of the United States by 8 percent in 2006.

Energy Security Requires Investment: Rising oil and gas demand, if unchecked, will accentuate the consuming countries’ vulnerability to a severe supply disruption and resulting price shock. OECD and developing Asian countries are projected to become increasingly dependent on imports as their indigenous production fails to keep pace with demand. Non-OPEC production of conventional crude oil and natural gas liquids is set to peak within a decade. Meeting the world’s growing hunger for energy will require over $20 trillion (in 2005 dollars) over the next 25 years.

Bringing Modern Energy to the World’s Poor: By 2030, one-third of the world's population will still be relying on biomass (wood, charcoal, animal dung) for cooking and there will still be 1.4 billion people in the world without electricity. The inefficient and unsustainable use of biomass has severe consequences for health, the environment and economic development. Shockingly, about 1.3 million people - mostly women and children - die prematurely every year because of exposure to indoor air pollution from biomass.

Pros and Cons of Cap and Trade vs. a Carbon Tax: A cap and trade system could contribute to energy price volatility, reduce economic growth, provide shareholders with windfall profits and burden low income households. A carbon tax allows nationwide emissions to vary depending on prevailing economic conditions and provides funds to reduce tax burdens elsewhere in the system, including on low income households.

European Union’s Emission Trading System: The European Environmental Agency’s latest projections show that without strong new measures, the EU 15’s greenhouse gas emissions will be 7.4 percent above 1990 levels in 2010, rather than 8 percent below as required by the Kyoto Protocol. Mandatory Emission Reductions: Emissions caps are not likely to promote new technology development because they will force industry to divert resources to near-term, “end of pipe” solutions rather than promote spending for long-term technology innovations. A fixed cap on emissions also inevitably collides with U.S. population growth. In fact, if the U.S. adopts emission caps, higher energy prices will make U.S. industry less competitive vis-a-vis China and India. As a result, China and India, whose primary focus is economic growth, will see it in their interest to accelerate the development of industries that depend on a competitive advantage in energy prices.

Strategies to Increase Energy Security and Reduce Emission Growth and Energy Poverty: Increased energy security and emission reduction will depend on factors such as increased economic growth, energy efficiency, technology developments in both fossil fuels (carbon capture and storage, for example) and renewable fuels (wind and solar, in particular) and possibly increased reliance on nuclear power for electricity generation. To reduce energy poverty, vigorous and concerted government action, with support from the industrialized countries, is needed action to help people switch to modern cooking fuels and technologies.

Role of International Partnerships: The Asia Pacific Partnership on Clean Development and Climate serves as a practical model focusing on sector-specific technologies to increase energy efficiency and reduce emissions. Extending the framework of the AP6 to other major emitters will allow developed countries to focus their efforts where they will get the largest return, in terms of emission reductions for the least cost. By focusing on the key emitters, developed countries may find they have more resources for promoting both energy security of supply and reducing global energy poverty.

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