Global Warming Policy - Bad Economics?

0 Comments | Environmental Insider News, August 28, 2003

According to a newly released report published by the Federal Reserve Bank of Dallas (in its Economic & Financial Policy Review, V. 2, No. 1, August 20, 2003), inefficiencies in post- Kyoto global warming policy could result in worldwide increases in the cost of emission reductions while benefitting individual nations that are able to shift costs by more aggressively reducing their use of imported fuels as compared with their use of exported fuels. The authors found that members of the Organization for Economic Cooperation and Development have substantial incentives to reduce carbon dioxide emissions in ways that do not minimize world costs - and presumed they might actually do so.

Many previous studies of economic inefficiencies that could occur as a result of implementing global warming policies had assumed compliance with the targets set by the Kyoto Protocol. These emphasized the "where" inefficiency that can arise in international agreements - that is, how limiting participation to a subset of countries would boost the cost of reducing global emissions. Other studies examined the "when" inefficiency - that is, how setting target dates for reducing emissions could raise costs when energy-using capital equipment must be retired prematurely.

Theories on minimizing the where inefficiency included clean development mechanisms that would have allowed parties in developed countries to earn credits for emission reductions that resulted from projects in developing countries. The when inefficiency could be minimized by delaying achievement timetables for target emission reductions, thus reducing costs.

Studies of these two inefficiencies all assumed the abatement policies individual countries would adopt would depend solely on a fuel's carbon or greenhouse gas content. In this new study, authors Stephen P. A. Brown, Director of Energy Economics and Microeconomic Policy, Federal Reserve Bank of Dallas, and Hillard G. Huntington, Executive Director, Energy Modeling Forum, Stanford University, looked at the "how"inefficiency in the context of reducing emissions of carbon dioxide - the principal gas targeted by global warming policies.

The authors begin with the premise that, in the real world, nations will not uniformly base their global warming policies on maximizing reductions of fuel greenhouse gas content (thus maximizing emission reductions of carbon dioxide). Instead, those which can would likley employ a strategy designed at maximizing profits, or minimizing costs - typically, a strategy that would yield gains in the terms of trade at the expense of their trading partners.

Back in 1993, the Clinton Administration actually proposed such an idea - a carbon tax that would have placed taxes on the carbon content of crude oil -much of which is imported - and natural gas that would have been 350% and 70% higher, respectively, than the tax on the carbon content of coal - much of which is exported. On a worldwide basis, the least-cost approach would have been equal taxes on the carbon content of both natural gas and coal and slightly lower taxes on the carbon content of crude oil.

Of significance today, the estimated cost of reducing carbon dioxide emissions to the world, OECD, and the United States varies considerably depending upon whether (a) the OECD minimizes world costs, (b) the OECD acts cooperatively to minimize its own costs), or (c) two groups of OECD countries act non-cooperatively to minimize their individual costs. Minimizing world costs, however, creates very high short-term costs for both OECD and the United States.

The reason is that carbon reduction strategies almost invariably call for major efforts at coal conservation - or substituting other fuels for coal in power generation, thus devastating U.S. coal exports. These strategies also encourage expansion of crude oil production by OPEC nations as a way of reducing worldwide energy costs - thus increasing U.S. reliance on oil imports at a time when the nation is hurting from a loss in coal revenues. Is there any wonder, then, that the Bush Administration is pursuing a policy that declines to consider carbon dioxide as a "pollutant"?