In terms of forgone economic opportunities, the energy conservation associated with CO₂ abatement is equivalent to increasing the price of energy and potentially slowing economic growth. Most economists agree that gross domestic product is a poor way to measure economic well-being, particularly when evaluating environmental policy. Nevertheless, slower economic growth would subject fiscal and monetary authorities to significant political pressure to offset the slowdown. Yielding to that pressure could lead to higher inflation.

As shown in Figure V, the effect on aggregate economic activity in the United States depends on the amount of CO₂ abatement.¹⁸

• The amount of energy conservation required to reduce 2010 CO₂ emissions to the 1990 level (President Clinton's original proposed target) would imply that U.S. GDP would be 2.7 percent to 3.7 percent lower in 2010 than it would otherwise be, representing an aggregate loss of $247.6 billion to $339.4 billion (in 1992 dollars) or $829 to $1,135 per capita.

• Without any offsets or credits, reducing emissions to 7 percent below 1990 levels in compliance with the Kyoto accord would imply that U.S. GDP would be 3.6 percent to 5.1 percent lower in 2010, representing a loss of $330.2 billion to $467.8 billion or $1,105 to $1,565 per capita.

• Even assuming the United States could use offsets and credits, compliance with the Kyoto accord would imply a U.S. GDP 3 percent to 4.3 percent lower in 2010, representing a loss of $275.2 billion to $394.4 billion or $921 to $1,320 per capita.

• These estimates imply that if the United States embarked on a 10-year program to achieve compliance with a Kyoto treaty, U.S. GDP growth would be 0.3 percent to 0.4 percent from $27.5 billion to $36.7 billion lower per year. 

Various facts partially support global warming theory. More evidence is needed to determine whether rising atmospheric levels of CO₂ resulting from the use of carbon-based fuels is causing global warming. Nevertheless, most scientists who study the issue think the use of fossil fuels contributes to the global warming that appears to be occurring. Still, considerable uncertainty remains about both the magnitude and the environmental consequences of global warming.

Given the uncertainty, reducing CO₂ emissions is like purchasing insurance against global warming and its possible environmental consequences. Under most current proposals, the industrialized nations would buy all or most of the insurance. Developing nations would possibly be asked to contribute only when their income levels rose.

Cost-benefit analysis suggests that reducing U.S. emissions of CO₂ to comply with the Kyoto accord or to reach the more modest target proposed by President Clinton represents too much insurance. Analyses for the other industrialized countries yield similar results. It is not surprising, therefore, that the Kyoto accord remains unratified.

NOTE: The views expressed here are those of the author. Nothing written here should be construed as necessarily reflecting the views of the Federal Reserve Bank of Dallas, the Federal Reserve System or the National Center for Policy Analysis, or as an attempt to aid or hinder the passage of any bill before Congress.