Although 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.

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?

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.

The theory of global warming holds that increased levels of atmospheric CO₂ are linked to generally rising temperatures around the world.⁵ To better understand global warming, consider the greenhouse effect. Sunlight heats the earth, but the earth would be far cooler without atmospheric water vapor and greenhouse gases. The gases let sunlight through to warm the earth but trap as infrared radiation some of the heat escaping back into space. Thus the gases act like the glass walls and ceiling of a greenhouse.

The effect of increasing the level of atmospheric greenhouse gases mimics the effect of using thicker glass in the greenhouse: less heat escapes. Some scientists believe that the CO₂ released by human activities is enhancing the greenhouse effect and contributing to an increase in the earth's overall temperature. This increase is commonly called global warming.

Many scientists and others are concerned about global warming's potential effect on the environment. Among the predicted consequences are increased rainfall, melting polar ice caps, rising ocean levels, increased flooding and widespread crop failure. On the other hand, some scientists say the net effect of any global warming could be beneficial, enhancing crop production and reducing the onset of and death from some types of diseases.⁶

Scientists also disagree about the magnitude of the temperature change and the contribution if any of human-caused CO₂.

Nature contributes more than nine-tenths of all CO₂ that enters the atmosphere.⁷ The principal way people contribute to atmospheric CO₂ is through the consumption of carbon-based fuels. These fuels include petroleum products, natural gas, coal and wood. Jointly, the first three are often identified as "fossil fuels."

Deforestation, as trees are cut down for economic purposes, also contributes to increased levels of atmospheric CO₂. Scientists estimate that the world's forests remove about one-third of the current CO₂ emissions from fossil fuels. Thus large reductions in the world's forests could significantly increase the atmospheric levels of CO₂, although recent reductions have had little effect on atmospheric CO₂ in comparison with the effects from fossil fuel consumption.

The call for government action on global warming has arisen from the concern that increasing consumption of carbon-based fuels will boost levels of atmospheric CO₂ and that the resulting warmer temperatures will harm humans and the environment. Individually, consumers lack incentives to consider the global side effects of increased fuel consumption. Collectively, individual actions could be contributing to greater emissions of CO₂ than are desirable from the perspective of human well-being, environmental health and economic efficiency.

To some extent, the divergence between individual and global interests could be seen in the Kyoto debates. The representatives of each country jockeyed for advantage and criticized the others for not doing enough. The debate has been exacerbated by the fact that reducing energy consumption on a global scale yields gains for energy-importing countries, which will benefit from lower fuel prices and be able to shift some of the costs of conservation to the energy-exporting countries.