Opinion Editorial | |
Burning Down the House: The Climate Change Treaty's Probable Effects on the Natural Gas IndustryH. Sterling BurnettH. Sterling Burnett is an environmental policy analyst with the National Center for Policy Analysis, a non-partisan, non-profit research and education institute. |
At the 1992 United Nations' Earth Summit in Rio, the United States signed
a treaty establishing the voluntary goal of returning to 1990 levels of
greenhouse gas emissions by the year 2000. By 1996 it was evident voluntary
action was not working. In response, Timothy Wirth, U.S. Undersecretary
of State for Global Affairs, told a 1996 U.N. conference on climate change
in Geneva that the Clinton administration was committed to legally binding
limits on greenhouse gas emissions. And on December 11, 1997, more than 160 of the world's nations agreed
to a treaty in Kyoto, Japan, that seeks to reduce greenhouse gas emissions,
at least by most developing countries. The Clinton administration's position and the Kyoto treaty raise several
questions. Why is a treaty to reduce or stabilize the levels of greenhouse
gases in the atmosphere thought necessary? Will the proposed treaty solve
the problem it was created to address? If the treaty is implemented, what
will be the probable effect on the economy? And particularly, what are the
likely impacts of this treaty on the gas industry? Background on the Greenhouse Effect and the Evidence for Human Caused
Global Warming. Global warming is the scientific theory that increased levels
of atmospheric greenhouse gases due to human activities are contributing
to generally rising temperatures around the world. Supporters of the theory
argue that human caused global warming could have severe consequences for
the humans and the environment. To better understand global warming, one must first understand the natural
greenhouse effect. Sunlight heats the earth, but the Earth would be far
cooler if not for the presence of water vapor and other greenhouse gases
(e.g., carbon dioxide (CO2), methane, nitrous oxide and several
other trace gases) in the atmosphere. These gases act like the walls and
ceiling of a greenhouse, letting sunlight through to warm the Earth, but
keeping a portion of the solar radiation from escaping back out into space. Without these gases the earth would be largely uninhabitable. Water vapor
accounts for as much as 96 percent of the greenhouse effect. The other greenhouse
gases account for most of the remainder of earth's warmth with CO2
and methane being the most significant contributors. Most scientists grant
that human activities (primarily the burning of fossil fuels for energy)
have caused a 30 percent increase in atmospheric CO2, from approximately
280 parts per million (ppm) to 360 ppm, and a 150 percent increase in methane.
Global warming theorists argue that all other factors being equal, increasing
the levels of greenhouse gases in the atmosphere - like using thicker glass
in a greenhouse - allows less heat to escape, leading to a general warming
or "global warming." Two other factors are cited as evidence that humans are causing global
warming. First, ground-level temperature measurements indicate that Earth
has warmed between 0.3 and 0.6 degrees Celsius in the last century. Second,
computer climate simulations suggest the current warming is due to increased
greenhouse gases in the atmosphere. According to the models, absent a sharp
and immediate reduction in the level of greenhouse gas emissions, the earth
will warm further between 0.8 and 3.5 degrees Celsius over the next 100
years, causing all manner of calamities. For instance, some scientists claim
continued global warming could melt the polar ice caps, raise sea levels
and flood coastal cities and low lying island nations around the globe.
Others argue that global warming could cause droughts and floods in increased
numbers and of greater severity. All of the evidence for human caused global warming is problematic. First,
there are several factors that would tend to show a warming bias in the
ground based temperature measurement system. Most of the measurements come
from a the relatively small portion of the globe that is heavily industrialized,
while both the Southern Hemisphere and the world's oceans (the vast majority
of the earth's surface) are underrepresented. This highlights a second bias:
temperature measurements from large urban areas suffer from the "urban
heat island effect." Many temperature gauges are found in heavily developed
areas (often on the airport tarmacs) surrounded by concrete; these areas
are notably hotter than the surrounding areas simply due to the level of
development. More evidence that the ground based measurement systems are
flawed comes from other sources of meteorological data: global satellites
and weather balloons. Neither satellite data nor temperature measurements
from weather balloons, the most reliable sources of climate evidence that
we have, show any evidence of warming over the past 19 years. Indeed, the
satellite and weather balloon data track each other in showing a slight
cooling trend. Second, there is little evidence that increased CO2 has had
more than a small part to play in this century's temperature increase. Most
of the recorded warming occurred before the 1940s, before the vast majority
of human-caused CO2 emissions. Most scientists recognize that
the world came out of a "little ice-age" around the middle of
the last century, which would account for the warming in the early part
of this century. Finally, the models used to predict warming are more noted for their
weaknesses than their strengths. The models fail to track past and present
temperatures by more than a degree (which is greater than the lower end
of the range of predicted future temperature increases). In fact, every
time the models are run with new data, they do track temperature and climate
trends more closely; but the amount of predicted temperature rise falls
by more 1/3 and the time over which the predicted rise occurs doubles -
in other words, every time the models improve, they indicate that catastrophic
global warming is less and less likely. Despite the fact that there is considerable uncertainty about the magnitude
of global warming (if any), whether CO2 is contributing to global
warming, and the environmental consequences of possible global warming,
the United States agreed to a treaty that would force reductions in energy
use. The Kyoto Treaty: What Did the U.S. Agree to and Will it Reduce Greenhouse
Gas Emissions? Going into Kyoto the Clinton administration endorsed four
principles to guide their negotiations. First, the U.S. would agree to cut
greenhouse gas emissions to no more than 1990 levels between the years 2008
- 2012. Second, six greenhouse gases that humans partially contribute would
be included in any treaty signed and the pact would account for carbon sinks
as well as emissions cuts. Third, that different countries could use different
schemes to reduce emissions and one of the major initiatives to reduce emissions
would be the creation of a market in greenhouse gas emissions credits. Fourth,
the treaty would include meaningful participation by developing countries.
In other words, developing countries would have to be part of the solution
- they would have to commit to emissions reductions as well. What did we agree to in Kyoto? Something quite different. The U.S. did
get all six greenhouse gases into the treaty, a limited form of emissions
trading, and policy differentiation so countries wouldn't have to standardize
emissions reduction policies. However, what the Clinton administration failed
to get is more important than the concessions it received from the rest
of the world. First, the U.S. agreed to make emissions reductions seven
percent below 1990 levels between the years 2008 - 2012. This means the
U.S. would have to cut greenhouse gas emissions between 12 and 15 percent
from current levels and more than 33 percent from what they would otherwise
have been with continued moderate economic growth. This stands in stark
contrast to some developed countries like Australia who not only do not
have to cut emissions, but may actually increase emissions in the coming
years. Second, though countries agreed in principle to allow limited emissions
trading and to count carbon sinks, the treaty does not include any mechanism
for counting sinks. In addition, it limits those partners with whom countries
may trade emissions credits. Many developed countries have already expressed
the opinion that less than half of any greenhouse gas emissions reduction
credits can come from emissions trading. More importantly, the Clinton administration
failed to secure developing countries participation - in fact, leaders from
the developing world flatly refused to participate, vowing to scuttle the
deal if even voluntary emissions reductions for developing countries were
included in the treaty language. Before discussing the possible impacts of this treaty on the natural
gas industry one should note that the treaty itself may never come into
force. In July the Senate passed a resolution cosponsored by Senator Chuck
Hagel (R-Neb.) and Senator Robert Byrd (D-W.Va.), that requested the Clinton
administration to not agree to a treaty mandating greenhouse gas emissions
reductions if developing countries did not also commit to reduce greenhouse
gas emissions or if the cuts would harm the US economy. This resolution
passed 95 - 0 and everyone from the administration to the Senate recognizes
the treaty agreed to in Kyoto does not meet the first condition and according
to most analysts is unlikely to meet the second condition. The Clinton administration recognizes this treaty fails to meet the conditions
of the senate resolution. It has said that it will not submit the treaty
to the senate for ratification until it gets meaningful commitments from
developing countries. This appears unlikely to occur. Absent Senate approval,
many analysts and senators suspect the Clinton administration will try to
circumvent the Senate and meet the treaty's goals via regulations, executive
orders and the budget process. Some evidence that this is the case has already
surfaced. The Clinton administration has asked for more than $6 billion
in additional funds to be spent over the next five years on energy conservation
measures, tax credits for consumers who install home solar panels or purchase
electric cars and further subsidies for the development of renewable energy
sources and technologies. Even if the Senate approves the treaty, and its ambiguous accounting
and enforcement mechanisms are worked out and it is fully implemented, it
will fail to halt the rise in greenhouse gas levels and thus prevent human
caused global warming should it be occurring. Why? Because in 1995, the
U.S. State Department and other developed countries agreed to the Berlin
Mandate, which stipulated new climate change commitments would apply only
to developed countries. According to the International Energy Agency, as much as 85 percent of
the projected increase in CO2 emissions will come from developing
countries - the same countries and regions exempted from the proposed treaty
(China, India, South Korea, Mexico, Brazil, etc.). The U.N. estimates exempted
countries will contribute 76 percent of total greenhouse gas emissions within
the next 50 years. By 2025, China alone will emit more carbon dioxide than
the current combined total of the United States, Japan and Canada. Thus,
even if developed countries unilaterally stopped all their greenhouse
gas emissions immediately (something no one seriously proposes), total greenhouse
gas emissions would continue to rise. Indeed, greenhouse gas emissions may rise faster under the treaty than
would have otherwise been the case - this is the "carbon leakage"
problem. Industries in developing countries will have a competitive advantage
due to lower energy costs and no restrictions on greenhouse gas emissions.
As these domestic industries expand, greenhouse gas emissions will rise
faster because they use less efficient technologies and "dirtier"
fuels which use more energy and produce more CO2 per dollar of
gross domestic product (GDP) than do comparable industries in the U.S. and
other developed countries. For instance: · India, the fifth largest emitter of CO2, uses approximately
three times the energy and emits four times the CO2 per unit
of GDP as the U.S. · China, the second largest emitter of greenhouse gases in the
world, is even less efficient, using approximately five times the energy
and emitting eight times the CO2 per unit of GDP as the U.S. In addition, agreeing to unilateral, binding greenhouse gas reductions
would give American businesses another reason to move production facilities
overseas. This would entail a loss of jobs in both the service and high-wage
manufacturing industries, and add to the carbon leakage problem. The Kyoto Treaty's Impact on the Natural Gas Industry. One might
think the effects on the natural gas industry of the Kyoto Treaty would
be quite positive. After all, natural gas emits much less CO2
than coal, so as fuels are substituted to reduce emissions, natural gas
is a clear winner. But not so. Natural gas is affected negatively both directly
and indirectly by the treaty. Directly, natural gas is not a clean fuel
by greenhouse gas standards. Natural gas emits much more methane as a by
product than other fossil fuels. Methane is a much smaller percentage of
greenhouse gases than CO2, and it has a much shorter life in
the atmosphere - 10 - 15 years. However, its productio is increasing at
a much faster rate and it has as much as 25 times the heat-trapping capability
of CO2 on a per volume basis. This is why environmentalists,
when they support switching to natural gas at all, are willing to do so
only on a short term basis. Even in the short term, Kyoto would impose costs
on the natural gas industry by forcing methane leakage reductions at the
wellhead and for pipelines. Indirectly, the natural gas industry is negatively affected by this treaty
in a number of ways. Natural gas would have been the fuel of choice for
future electricity generation, even absent the Kyoto treaty's mandates for
lower carbon emissions. But, because the treaty would negatively affect
the economy in general, the natural gas industry will also suffer. Every
credible economic analysis of the impact of reducing CO2 emissions
at or below 1990 levels shows severe economic harm as a result: · Some analysts estimate that meeting the administration's proposal,
cutting emissions below 1990 levels would reduce U.S. gross domestic product
by $200 billion annually. · A DRI/McGraw Hill study projects that over the next 14 years
more than 500,000 Americans annually would lose their jobs if the 1992 Rio
commitments were implemented. · The study also estimated that the government would have to increase
gas prices by more than 60 cents a gallon and double the price of heating
oil just to hold carbon emissions at 1990 levels, and more than double those
increases to reduce emissions another 10 percent. · A study of the proposed commitments by Consad Research, Inc.
estimated that meeting them would kill off 1.6 million jobs over the next
nine years and put another 3.5 million or so "at risk," primarily
in Texas, California, Ohio, Michigan, Pennsylvania and Louisiana. In addition, the price of food and transportation would rise dramatically.
Low-income families who spend a higher proportion of their incomes on food
and energy will suffer the most under these policies. Artificially high energy prices are the cause of the expected economic
downturn. One recent analysis found that gas costs for electricity would
rise from $10 billion to 21 billion. Fuel costs for power generation via
natural gas projected to be double that of coal on a BTU basis by 2010.
The electricity sector's demand for natural gas would have increased at
a steady rate to approximately 7.21 quads in 2010 without the treaty to
15.68 quads with it. Such an increase would require a large investment in
new pipeline capacity and in new combined-cycle plants. For instance, a
Department of Energy (DOE) study estimated that pipeline expansion to meet
natural gas demand could cost upwards of $70 billion. The domestic energy market can be expected to respond in a number of
ways to dramatically higher gas prices. First, higher gas prices are likely
to extend the life of older coal fired plants and nuclear plants as the
cost of substituting natural gas for existing electric power capacity rises.
In addition , natural gas use priorities will shift dramatically. Currently
about 25 percent of natural gas demand goes to residential use, 50 percent
to industry and 22 percent for electricity generation. The Department of
Energy has indicated the demand for natural gas could fall from a business-as-usual
case more than two quads overall as gas demand decreased relative to low-carbon
technologies that do not use natural gas - wind, nuclear, hydropower expansion,
cofiring with biofuels and energy efficiency. Indeed, since the rise in natural gas prices will be comparable to the
rise in oil prices due to the Arab Oil embargo and President Nixon's price
controls in the 1970s, one would expect that, as in the 70s, energy use
overall will go down quite dramatically. While the electric industry may
increase its natural gas demand, this demand may be more than offset by
a reduction in industrial and direct consumer use. This reduction in the
industrial sector will come from fuel switching, increased cogeneration
for heating, and as companies close plants in the US and move overseas to
countries not bound by the Kyoto treaty - many of which have large deposits
of cheap coal. The decrease in consumer use will come from fuel switching,
energy conservation efforts and the purchase of energy efficient products. The impact on the economy in general and the natural gas industry in
particular, only gets worse when one realizes that the Kyoto Treaty is only
a small first step. Members of the Clinton administration has stated that
to substantially reduce the likelihood of human-caused global warming greenhouse
gas reductions on the order of 70 percent (and thus accordingly energy use
reductions) will probably be necessary within the next 50 years. Conclusion. Predicting the future is always fraught with uncertainties.
This is especially true in predicting future climate, energy needs and the
economy because there are so many factors to account for (both known and
unknown). What we can say is that as the climate science has improved, the best
evidence indicates that catastrophic human caused global warming is not
likely. If a dramatic rise in energy prices and the concomitant slowing
of the economy would ensure a cleaner, safer environment for us and our
children the sacrifices called for by the Kyoto treaty might be justified.
But scientific analyses suggest that it will not - signing the treaty will
be all pain and no gain. This is true even for the natural gas industry
which, just a few short years ago, some analyst thought might be a boon
for gas suppliers. Increased demand for gas will increase for some uses
but decrease in others and the overall economic decline which most analyst
predict will result from the Kyoto treaty will most assuredly show up as
red ink on the bottom line of the gas industry.
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