The Kyoto Protocol:
A Flawed Treaty Puts America at Risk
SECTORAL AND REGIONAL ECONOMIC IMPACT ANALYSIS
CONSAD Research Corporation
Pittsburgh, Pennsylvania
May 1998
INTRODUCTION
CONSAD Research Corporation, one of the nation's leading economic forecasting firms, conducted a May 1998 economic analysis of the proposed Kyoto Protocol. Their analysis parallels findings by other leading economic forecasters which detail the negative impact this treaty will have on employment, economic output, and standard of life for working families, senior citizens, and those who live on fixed or low-incomes. The study provides a 50 state breakdown of job losses and economic dislocation due to policies enacted to implement the Kyoto Protocol.
CONSAD Research's key findings are that implementation of the Kyoto Protocol will mean:
BACKGROUND
In December 1997, the 168 signatories to the Framework Convention on Climate Change met in Kyoto, Japan, to conclude an agreement that includes legally binding commitments by 38 industrialized nations to reduce their emissions of carbon dioxide (CO2) and other greenhouse gases to specific levels (targets) by specific dates (timetables).
Simply stated, the United States and other industrialized nations(1) agreed to reduce emissions during the five-year period 2008-2012 to levels that, on average, are 5.2 percent below their 1990 levels. These emissions reductions would be legally binding on all parties and enforceable under international official policy law if the treaty is ratified by the requisite number of countries.
In the United States, the treaty will not become official policy unless ratified by two-thirds of the U.S. Senate.
The United States agreed to reduce emissions seven percent below 1990 levels during the budget period 2008-2012.(2) Other industrialized countries made different commitments. For example, Japan and Canada will reduce emissions by six percent; the European Union as a whole has agreed to meet an eight percent reduction target; Russia will not exceed its 1990 emissions level; and Australia will be allowed to increase emissions eight percent above 1990 levels.
Countries with emerging economies were exempted from emissions controls under the terms of the Kyoto Protocol. Exempted countries include such major, heavily industrialized nations as China, India, South Korea and Mexico. Their economies are among the fastest growing in the world, and data supplied by both the International Energy Administration and the U.S. Energy Information Administration show that, collectively, these countries will be the largest total emitters of greenhouse gases by the year 2010.
The Kyoto Protocol does not specify how countries should meet their reduction commitments. The specific policies to be used are left to individual governments. The Protocol does however, allow development of an international system for trading emissions among industrialized countries that would allow a country to meet a portion of its reduction target through the purchase of emission reduction credits from any of the other countries in the industrialized bloc. In addition to an international trading system, it is expected that many countries, including the United States, will set up domestic emissions trading systems.
This study assumes that the international trading system will not be sufficiently mature by the first budget period to have an appreciable impact on costs. Therefore it assumes that only domestic trading will occur. Tradable emissions permits can initially be allocated in several ways: for example, by giving them to industries (or final consumers) at no charge, or by distributing them through an auction system. This study assumes that emission permits will be auctioned and that the price by 2010 will be in the range from $140 to $265 per ton of carbon emitted.(3)
This study is limited to an assessment of reductions in carbon dioxide, one of the six greenhouse gases covered by the Protocol (CO2, N2O, CH4, HFCs, PFCs, and HF6). These gases make up approximately three percent of total global greenhouse gas emissions. Water vapor accounts for the remaining 97 percent of the inventory.
The report estimates the potential impact of the Kyoto Protocol on the U.S. in terms of gross domestic product (GDP) and aggregate employment, including estimated impacts on individual industrial sectors, individual occupational groups, and individual geographic regions. Judged only in terms of percentage reductions in aggregate GDP and employment, the impacts of the proposed emission reductions may not appear large. However, industries that directly or indirectly rely heavily on fossil fuels (coal, oil, and natural gas) will incur large cost increases when tradable emission permits are auctioned to achieve the emission reductions. Impacts on those industries, on their major suppliers and customers, and on geographic regions where these industries are heavily concentrated will be disproportionately large.
It is important to note that this analysis does not consider the additional reductions that will be required beyond the first budget period of the Protocol, 2008-2012. The next reduction targets for the budget period 2013-2018 will be negotiated at a later date, but no later than 2005.
KYOTO'S NATIONAL ECONOMIC IMPACT
If ratified by the U.S. Senate and implemented as official U.S. policy, the Kyoto Protocol's binding commitments to reduce CO2 emissions in the U.S. to an average level of seven percent below the 1990 level during the 2008-2012 period will stimulate two notable responses at the federal level.
Auction Revenues and Federal Reserve Actions
First, the auctioning of emissions permits will generate additional revenue for the federal government, and that revenue will be used in some way. In this analysis, it is assumed that the revenue is rebated to consumers by reducing personal income taxes.
Second, if achieving the emission reductions will result in a decline in aggregate employment, this study assumes that the Federal Reserve will react as it has historically to such declines: it will expand the money supply, thereby reducing interest rates.
Increased Energy Costs
The immediate impact of achieving the Kyoto targets through emissions permit trading will be substantially increased costs for fossil fuels used in production and space heating. Costs increase because firms must purchase permits authorizing the amounts of carbon dioxide that they emit into the atmosphere, and those amounts will depend primarily on the types of fossil fuel that they burn.
Fossil fuels account for just over 69 percent of the electricity generated in the U.S. Since the combustion of all of these fuels results in emissions of CO2 into the atmosphere, actions to reduce CO2 emissions will result in increased energy costs.
For all types of fossil fuel, industrial users generally pay lower prices than commercial and residential users. As a result, fossil fuel cost increases caused by expenditures for emissions permits will represent the largest percentage increase in energy costs for industrial users. While the percentage cost increase for residential customers will not be as great, they will still face the highest energy prices of all users and will be compelled to pay higher costs as a result of policies to implement the Kyoto Protocol.
Economic Competitiveness and Employment
The analysis conducted in this study shows that the proposed emission reductions will result in immediate and sizeable decreases in total U.S. employment and value added, or GDP.(4)
Compared to the situation without emissions reductions (the business-as-usual situation), total U.S. employment will be lower throughout the forecast period as the price of CO2, emission permits rises progressively through 2012. (As already stated, additional reductions will be required after this frame which will require higher permit prices in 2013 and beyond. These increases are not considered here.) During this period, escalating energy costs result in increased production costs for domestic firms. U.S. products will become less competitive in world markets, as they are forced to compete against products manufactured in countries exempt from the mandates of the Kyoto Protocol. A substantial portion of U.S. production in energy-intensive industries will be replaced by foreign imports, and American jobs will be lost in the process.
Most American businesses will, as dictated by market competition, pass their increased production costs through to consumers, resulting in higher prices for goods and services. This will cause additional declines in real household disposable income. The reduction in personal income taxes described earlier will, to some extent, offset declines in real household income. The decline in personal income taxes will stimulate consumer demand and contribute to employment growth primarily in service-related industries. Overall, however, the net effect will still be a substantial drop in employment and value added as shown in Table 1.
The employment reductions that will result from the Kyoto commitments will be greatest during the midyears of the forecast period. Peak job losses will be between 1.80 and 3.13 million people. When they occur, employment will be between 1.3 percent and 2.2 percent lower that it would have been in the business-as-usual situation. The maximum decline in GDP will range from $179 to $318 billion, corresponding to decreases in the range from 2.0 percent to 3.4 percent.
KYOTO'S IMPACT ON AMERICAN INDUSTRY
Regardless of the level of permit prices assumed, almost every industry sector in the U.S. will experience job losses throughout the period of this study, which ends at 2012 (Table 2, Appendix 1). The employment reductions begin to recede in the latter part of the forecast period, and a few sectors are projected to experience small employment gains. Additional emissions reductions required after 2012 may well reverse these gains in employment. These emissions reductions are the subject of future negotiations, and their magnitude is currently unknown. The analysis does not include the impacts of the emissions reduction that will be required after the initial budget period.
Collectively, the manufacturing sector will experience a 352,000 to 695,000 drop in employment from the baseline level in the year 2010. Manufacturing employment is projected to decline during the forecast period even without the Kyoto Protocol. With the additional effects of the Protocol, employment by U.S. manufacturers will be from six to 12 percent lower than in 1996. The manufacturing sector accounts for a large portion of the reduced GDP because it generates high levels of value added per employee. The decreases in value added that are projected for specific industrial sectors are presented in Table 3, Appendix 1. These estimates indicate that in 2010, when the manufacturing sector's share is 22 percent of the total employment loss, that sector's reductions in value added makes up 43 percent of the total GDP loss.
The job losses projected for the chemicals, petroleum products, and primary metals industries stand out in comparison to those projected for the rest of the manufacturing sector. These industries rely heavily on fossil fuels as a source of both energy and feed stock. Fuel cost increases that result from the auctioning of emission permits raise the cost of production in these industries. In nations that are exempt from the Kyoto Protocol, however, producers will continue to operate with unchanged cost conditions. U.S. firms will find it increasingly difficult to maintain production and sales in the absence of any policy that mitigates the cost differential between U.S. products and competitive imported products at the port of entry. Over time, an increasing portion of U.S. output in these industries will be replaced by foreign imports, resulting in dramatic loss of American jobs and economic productivity. Specifically, these three industries together will account for 244,000 to 440,000 lost jobs in the year 2010, or between 64 and 69 percent of the jobs lost in manufacturing.
Reduced U.S. production in the chemicals, petroleum products and primary metals industries will also affect related industries. The coal mining and the oil and gas extraction industries supply a large portion of the inputs to these industries, and are adversely affected when their customers' emissions reductions translate into reduced demand for coal and petroleum products. Consequently, mining activity declines and by 2010 job losses in mining will range from 166,000 to 260,000. Even without the Kyoto Protocol, job losses in this sector will be severe, but the Protocol will exacerbate the situation. The decline of coal mining will also significantly impact railroad employment, as railroads lose revenues they otherwise would have derived from transporting coal.
As might be expected, the greatest declines in value added occur in the chemical, petroleum products and mining sectors of the economy. The losses from these three sectors account for 42 percent of all lost value in 2010.
KYOTO'S ECONOMIC IMPACT ON U.S. REGIONS
All ten federal census regions will suffer job losses as a result of the Kyoto Protocol. The largest absolute employment losses will occur in the South Atlantic (DE, DC, FL, GA, MD, NC, SC, VA and WV), East North Central (IL, IN, MI, OH and WI), West South Central (AR, LA, OK, and TX), Pacific Contiguous (CA, OR and WA) and Mid-Atlantic (NJ, NY and PA) regions (Table 4, Appendix 1). The employment losses in these five regions make up 78 percent of the national employment losses in 2010 due to the Kyoto Protocol.
If permit prices were to stabilize after 2012, employment levels in all regions might begin to recover. However, the Protocol requires additional, but as yet unspecified, emissions reductions after 2012. Permit prices will therefore continue to rise, and employment recovery will be adversely affected. This analysis does not consider the impacts of those currently unspecified reductions.
As a region, New England (CT, ME, MA, NH, RI and VT) is projected to experience the smallest absolute employment losses from the implementation of the Kyoto Protocol. However, job losses in that region are not shared equally by all states within the region. Jobs lost in Massachusetts will account for about half of the total regional employment dislocation as a result of the Kyoto Protocol.
The five regions with the most lost jobs will also experience the largest absolute reduction in value added. (Table 5, Appendix 1) In 2010, the lost value added in these regions will total between $141 and $246 billion, which accounts for more than three-quarters of the total reduction in GDP
KYOTO'S IMPACT ON THE AMERICAN PEOPLE
The economic impacts that the Kyoto Protocol will impose on different industrial sectors will have important implications for American working families. Workers in industries such as manufacturing or mining have substantially different sets of skills compared to workers in the trade or services sectors. Manufacturing and mining involve high-skilled, high-paying jobs that working families depend upon to provide a living wage.
Even when job losses in one set of industries are offset by employment growth in another set, considerable personal costs are imposed when workers are forced to make occupational transitions. Transition often requires additional training, which takes time and money, and does not necessarily guarantee the level of wages previously earned in the jobs that are no longer available. In practice, many American workers may remain unemployed for long periods, especially if relocation and retraining are necessary.
Employment reductions are projected for every occupational category during the period of the study, which extends through 2012. In percentage terms, the largest employment declines from baseline levels are observed among extractive and related workers and among plant and system operators.
A comparison of the wage rates in the stagnant or shrinking occupational categories and in those with appreciable recovery shows that workers who make the transition into the more rapidly growing categories are likely to receive lower wages than they earned in their previous jobs. That is because most of the sluggish employment is predicted to occur in occupational categories with wages that are above the national average. Workers in high-skilled industries who lose their jobs as a result of the Kyoto Protocol will, in most cases, be forced to accept employment in sectors with lower wages and requiring fewer skills, rather than relocating or remaining unemployed for extended periods of time.
Specifically, extractive and related workers who are predicted to lose many jobs are among the occupational categories with the highest median weekly wages. In contrast, marketing sales workers and services workers, two of the occupational categories with the largest projected employment increases, are in the lower income ranges.
All of the occupational categories in the highest wage brackets are projected to experience below average growth, while above average growth is predicted for all the occupational categories in the lowest wage ranges.
CONCLUSION
The Kyoto Protocol will put America's economy and the economic prosperity of United States working families at risk. U.S. jobs will be lost. U.S. goods will become less competitive in international markets, and U.S. consumers will be forced to pay more for energy and other commodities as the result of this legally binding international treaty.
Research Methodology
This study has used the modeling system developed by Regional Economic Models, Inc. (REMI) to estimate the economic impacts of the Kyoto Protocol on individual regions and industrial sectors on the U.S. The version of the modeling system used in this study represents the U.S. economy as 53 economic sectors, including 49 industrial sectors and four governmental sectors, and four geographic areas. The areas have been formed by combining contiguous federal census regions into four groups, based on similarity in the shares of specific fossil fuels that are used in electricity generation within the regions. The economic projections developed for the four areas are then disaggregated to produce impact estimates for the ten census regions and individual states.
To use the model in analyzing the potential impacts of the commitments offered by the U.S. in the Protocol, input data have been developed describing four types of direct consequences of the commitments. Those consequences are the changes in energy prices, household expenditures, industry behavior, and federal revenue patterns that are expected to result from the commitments.
First, increases in the prices of the various types of fuels have been estimated on the basis of the two series of prices for emission permits that have been used in the analysis. The two sets of permit prices are based on different assumptions about such unknowns as the rate at which improved technology will increase energy efficiency, and the price elasticities of demand for specific types of energy. The energy price estimates also take into account differences among the fuel prices paid by industrial, commercial, and residential energy users, and interregional differences in the composition of fuel types used in electricity generation.
Second, the increases in residential energy prices will cause increases in household expenditures for gasoline, electricity, and heating oil. Their aggregate disposable income, however, will not change. Expenditures on all other consumption categories have therefore been adjusted downward by an amount equivalent to the increases in energy-related expenditures.
Third, changes in the behavior of six energy-intensive industries have been projected on the basis of results from a study conducted by the Argonne National Laboratory. Parameters in the REMI model describing regional purchasing patterns have been suitably adjusted to represent changes in importation suggested by this study.
Finally, the federal government will obtain large increases in revenues from the auctioning of emission permits. To preserve the size of the total government budget, the real disposable income of consumers has been increased by an amount equivalent to the projected corporate expenditure on emission permits. Such an adjustment could be implemented in practice by increasing the standard deduction in the personal income tax.
Notes:
1. Industrialized nations in addition to the United States include other OECD countries (Australia, Austria, Belgium, Canada, Denmark, Finland, France, Germany, Greece, Iceland, Ireland, Italy, Japan, Luxembourg, the Netherlands, New Zealand, Norway, Portugal, Spain, Sweden, Switzerland, Turkey, the United Kingdom), nations of the former Soviet Union and Eastern Europe (Belarus, Estonia, Latvia, Lithuania, the Russian Federation, the Ukraine, Bulgaria, Croatia, the Czech Republic, Hungary, Poland, Romania, Slovenia, and Slovakia), Liechtenstein and Monaco.
2. This study, however, assumes that the target to be met is 3 percent, not 7 percent, below the 1990 levels (assumed in the President's October 22, 1997 Climate Plan). This assumption is identical to that made by the Administration in its "post Kyoto" interpretation of the targets that must be achieved in the budget period. The Administration states that inclusion of sinks in the target, but not in the base amount, and a 1999 base line for three gases, HFCs, PFCs, and HF6, account for the 4 percent difference.
3. These values are consistent with the permit prices estimated in several other recent analyses of the economic consequences of reducing CO2 emissions. The precise permit prices that will be realized will depend upon such unknowns as the rate at which technological improvements will increase energy efficiency and the price elasticities of demand for energy.
4. The concept of value added relates to the portion of the value of output that is attributable to the capital and labor used in production. It excludes the value of the intermediate inputs, such as raw and processed materials and product components, that are purchased and used in production. The total value added in all firms in all industries is the gross domestic product (GDP) of the economy.