The Cost of the Kyoto Protocol: Moving Forward on Climate Change Policy While Preserving Economic Growth Dr. Margo Thorning Managing Director, International Council for Capital Formation Brussels Office: Park Leopold, Rue Wiertz 50/28 B-1050 Brussels, Belgium Tel: +32.2.401.68.44 Fax: +32.2.401.68.68 Email: mthorning@iccfglobal.org Web: www.iccfglobal.org Washington D.C. Office: 1750 K Street, Suite 400 Washington, D.C. 20006 Tel: 202-293-5811 Fax: 202-785-8165
Greenhouse Gas Emissions in the European Union Projected to Exceed Kyoto Targets in 2010 EU-15 Sweden UK Germany Luxembourg France Netherlands Italy Greece Belgium Ireland Finland Austria Portugal Spain Denmark -10% -5% 0% 5% 10% 15% 20% 25% 30% 35% 40% Source: European Environmental Agency, November 30, 2004
Macro Model Simulations of Meeting Kyoto Protocol and Additional Targets for Italy, Spain, UK and Germany Macro Models: The advantage of a macro model is that it measures the overall costs to an economy of meeting emission targets where the short-term frictional costs of adjustment are included. Assumptions of macroeconomic analyses by Global Insight for EU countries: An international emission trading system is established Companies can purchase emission credits at: 39 in 2010 per metric tonne of Carbon Dioxide 50 in 2020 per metric tonne of Carbon Dioxide 55 in 2025 per metric tonne of Carbon Dioxide Crude oil prices (in constant euros) begin to decline slowly in 2006 and fall to 2000 levels by 2025 All non-co2 emission reductions are met but the costs are not included in analysis.
Impact of Kyoto Protocol and Additional Targets on GDP in the EU in 2010 and 2020: Macroeconomic Model Results Real GDP - % Difference from Baseline 0-0.5-1 -1.5-2 -2.5-3 -3.5-4 Germany UK Spain Italy Germany UK Spain Italy 2010 2020 Kyoto Target 60% Below 2000 Levels by 2050 Source: Global Insight, Inc. 2005
Impact of Kyoto Protocol and Additional Targets on Energy Prices for Industry Macro Model Results (percent increase compared to baseline) Electricity Natural Gas 2010 2020 2010 2020 Italy 13% 14% 44% 54% UK 35% 34% 46% 57% Spain 23% 27% 42% 51% Germany 31% 32% 30% 39% Targets: 2010: Kyoto Target 2020: 60% below 2000 levels by 2050
Impact of Kyoto Protocol and Additional Targets on Employment in the EU in 2010 and 2020: Macroeconomic Model Results 0 Italy Germany UK Spain Italy UK Germany Spain Thousands of Jobs -100-200 -300-400 -500-600 -700-800 2010 2020 Kyoto Target 60% Below 2000 Levels by 2050 Source: Global Insight, Inc. 2005
Wealth Transfer If Countries Purchase International CO2 Credits Millions (2004 Euros) 14000 12000 10000 8000 6000 4000 2000 Germany UK Italy Spain 0 2010 2025 2010 2025 2010 2025 2010 2025 Kyoto Target 60% Below 2000 Levels by 2050 100% Below 2000 Levels by 2050 Source: Global Insight, Inc. 2005
Impact of the Kyoto Protocol and Additional Tighter Targets on Germany (With and Without Nuclear Power) Macroeconomic Model Results Compared to Baseline Forecast With Nuclear Without Nuclear Kyoto Target 60% Reduction Target Kyoto Target 60% Reduction Target 2010 2025 2010 2025 GDP (percent change) -0.8-1.4-0.9-1.6 Employment -318,000-519,000-342,000-627,000 Wealth Transfer 0 398 million 351 million 5.1 billion
Caps on Carbon Emissions Do Not Provide Incentives for Radical New Energy Technologies Tight carbon caps will not force the R&D needed to develop the radical new technologies needed to dramatically reduce carbon emissions according to U.S. DOE/EIA reports. Private investors will not be willing to spend large amounts to new technologies unless they think carbon prices will stay high enough to enable them to cover both fixed costs (R&D) as well as operating costs. Future governments are not likely to keep carbon prices high (through taxes) once the new technologies are developed because low carbon taxes are better for economic growth. Anticipating that governments will not keep carbon prices high, investors may be unwilling to commit a large amount of funds to radical new energy technologies.
Economic Freedom and the Adoption of New Energy Technologies Economic Freedom Promotes Improved Living Standards: protection of investment, openness of internal markets, overall share of output absorbed by government, political freedom Faster Economic Growth: associated with adoption of new energy technologies which reduces energy intensity of emissions as living standards rise Barriers to adoption of new technology: Barriers to adoption of new technology: - Pricing distortions - Lack of markets - Subsidies through State-run enterprises - Lack of protection for property rights including intellectual property - Restrictions on foreign direct investment - Lack of infrastructure, education, skills to handle new technology - Import restrictions
80000 Economic Freedom Compared to Energy Intensity in 2001 Russia 70000 60000 Btu per $ of Output 50000 40000 30000 20000 10000 Zimbabwe China Slovenia India Italy Spain S. Korea Singapore Belgium USA Germany 0 3.00 4.00 5.00 6.00 7.00 8.00 9.00 Economic Freedom Index
Comparison of EU and US Energy Intensity Reduction 1992-2002 1992-1997 1997-2002 1992-2002 Percent Change 0% -2% -4% -6% -8% -10% -12% -14% -16% -18% US EU US EU US EU -2.50% -7% -6.90% -9.30% -10.70% -16.90% Data: EIA International Energy Annual 2002
Practical Strategies to Address Economic Growth and Climate Change Policy Avoid policies which do not meet cost-benefit tests including mandated caps on carbon emissions from mobile and stationary sources Remove barriers to developing world s access to more energy and cleaner technology by promoting economic freedom and market reforms Increase R&D for new technologies to reduce energy intensity Develop sequestration through both natural and man-made technologies Promote nuclear power for electricity Expand bilateral cooperation with developing countries Promote a truly global solution such as the new Asia Pacific Partnership on Development