Global Warming Policy: Some Economic Implications
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1Although many analysts believe that greenhouse gases resulting from human activity are contributing to global warming, the linkage is highly uncertain. Human-caused emissions are only about 3 to 5 percent of the total annual emissions of greenhouse gases in the world. The greenhouse gas most frequently emitted through human action is carbon dioxide (CO2) from fossil fuels (petroleum products, natural gas and coal).2 Thus, the conservation of fossil fuels figures prominently in strategies to reduce CO2 emissions.
"The U.S. would be required to reduce CO2 emissions to 7 percent below 1990 levels."
Increased concerns about the extent and potential consequences of global warming led to a United Nations conference on global warming at Kyoto, Japan, in late 1997. Prior to the conference, President Clinton had proposed that the United States and other industrialized countries set a target for reducing each country's CO2 emissions to 1990 levels by 2010. The conference went well beyond that proposal, and when it ended the industrialized nations had agreed to different targets for each country. Some industrialized nations would be allowed to increase CO2 emissions beyond 1990 levels, while the U.S. would be required between 2008 and 2012 to reduce emissions to 7 percent below 1990 levels. Whether developing countries would have to reduce emissions as their income rises is under negotiation. The United States and 83 other nations have signed the Kyoto accord, but only eight small countries, none of them industrialized, have ratified it. It would become a binding treaty only if ratified by the industrialized nations responsible for at least 55 percent of CO2 emissions in 1990.
As shown in Figure I, the U.S. Department of Energy has projected that the CO2 emissions from the consumption of fossil fuels will increase more than 30 percent in the industrialized countries and 45 percent in all countries from 1990 to 2010.3 Thus compliance with a Kyoto treaty would substantially reduce the expected use of fossil fuels from what could otherwise be expected. However, lower fossil fuel prices resulting from reduced demand in the United States and other industrialized countries would spur greater fuel consumption in developing countries. My analysis indicates that, as a result, developing countries would consume nearly 12 percent of the fossil fuels the industrialized countries conserved to comply with the Kyoto accord. The net effect of emission reductions would be to slow the growth of global CO2 emissions from the projected 45 percent to 30 percent between 1990 and 2010.4 Some analysts worry that compliance with the Kyoto accord would impose drastic costs on the industrialized countries with little or no proven benefit. Others worry that the Kyoto targets are too modest to prevent costly environmental problems. These concerns raise two basic questions.
- What is the rationale for government intervention in markets to reduce CO2 emissions?
- By how much does economic analysis suggest the United States should reduce its CO2 emissions, and how do President Clinton's proposal and the Kyoto accord compare with what is optimal?
"Carbon emissions are projected to increase 45 percent worldwide from 1990 to 2010."
The first question can be answered with simple economic theory. The second can be answered by combining estimates of the economic benefits of reducing CO2 emissions with the opportunity costs of doing so.