June 03, 2002
From the desk of Jane Galt:Ask the MBA Reader Jim
Ask the MBA
Reader Jim Bennett writes in with this question about Kyoto:haven't seen commentary on this from any of The Usual Suspects - but it seems likely to have economic consequences - that is, if the individual EU countries actually pay attention to the requirements handed down from above. Or was this treaty designed to be harmless to EU economies while handcuffing ours? So that the ratification really requires no changes on their parts?I want to leave aside the question of whether global-warming treaties are necessary; that's an issue for another time. (And yet I guarantee that there will be at least one email which starts: "You say that it's an issue for another time. But it's the central issue that we MUST address before we talk about Kyoto. . . ).
Which leaves the following questions:
1) How much will it cost?
2) Is the cost outweighed by the benefit?
3) Is the treaty designed to screw the US?
How much it will cost is a tricky topic, because of course the advocates are out in force on the numbers. (For a good discussion of how the Clinton Administration got the forecasts it used, look here. Yes, it's Cato, my green-fingered goslings, and we all know they hate Kyoto. But all this paper is talking about is methodology, 'kay?) Best guess is between 1-2% of GDP, with best case scenarios estimating that we will be able to buy Russia's emissions permits, which would be based on their pre-collapse Soviet emissions levels, and that we can make a quick, optimally efficient switch to natural gas from coal, producing a negligible impact on GDP; while worst-case scenarios, in which Russia's economy booms and we have to actually reduce our own emissions, place the damage at over 4% of GDP. Neither best nor worst is particularly likely.
Doesn't sound like much, does it? Couple of things: First of all, that's a moderately bad recession. (For purposes of comparison, GDP shrank by about 25% during the Great Depression. We aren't talking about an economic holocaust). But unlike a recession, it's permanent. Second of all, our population is growing. A smaller pie, divided among more people, means a real decline in standards of living.
But no one really knows how much it will cost, because there are too many variables. But it certainly will not be, as environmental activists would like to make out, practically painless. For one thing, the coal industry will have its workforce cut by at least 1/3. That's a lot of angry, unhappy, vote laden miners, and a couple of regions losing their last source of employment. Labor mobility in the US is good, but certainly not perfect. Thousands of problems like this, on top of the reduced productivity from pricier electricity, will cost us.
So yes, there is a pretty serious cost.
Does the benefit outweigh the cost? Not according to anything I read, but of course, my sources are not exhaustive. But the environmental sources, while embracing Kyoto, wailed that it wouldn't go far enough, conceding through backdoor comments that it wouldn't do much; anti-Kyoto forces said the same thing, emphasizing the cost-benefit analysis. But serious carbon controls, the kind that would really dent global warming, would take us back to approximately the economic level last seen when global warming was not a problem. That's 1850. But say we're willing to accept a slower growth of global warming. 1900? Ouch. 1950? Doesn't sound so bad? Turn off the appliances, baby: your dishwasher, air conditioning, washer-dryer, and refrigerator are a major factor in global warming. Get rid of the second car; hell, half of you get rid of the first car. No air conditioning at work, either. That computer sucks a fair amount of juice; so does that plane trip you took to visit Mom -- and the Hawaiian vacation you were planning. Ever wonder why those resort communities in the Catskills and Poconos are dying? Because people can afford to go somewhere better, these days.
Maybe that's what we need to do. But that's going to be the price of serious global warming controls -- a serious decline in our standard of living. Or a serious conversion to Nuclear, and hey, I'm all for it.
Fuel celled cars won't help. It takes more energy to extract the hydrogen to put in the fuel cells than you get from the cell. Unless we build the nuclear plants first, no net gain in emissions. Conservation's no panacea either. Cost-effective conservation is not exhausted -- but it's a shallow well. And non-cost effective conservation cuts GDP.
Excuse me, I'm ranting. Here's the answer to your question, from Cato:
What would Kyoto do about [global warming]?The answer is, nothing.
At least nothing that could have any discernible impact on how climate influences our lives. Clinton administration scientists answered this one for us: If all of the nations did what they said they would do under Kyoto, the net amount of warming reduced by the year 2100 would be 0.14ºC. That’s 6.4 percent of the average warming of those U.N. models.
So, answer to Question 2: Kyoto's benefits only outweigh the costs if you put a much higher price on the environment than most of us do.
Does it favor Europe over the US? Well, check out the graph on page 2 of this paper, and the answer seems to be yes. Columnists like to point out that the EU's target is even higher than ours: 8% for them, 7% for us. (Against a worldwide average of 5.2%). But that's getting too cute by half with the numbers. They get a huge drop from closing the polluting industries of the East German worker's paradise; then there's Britan's (independantly motivated) switch from dirty Welsh coal to clean North Sea gas. France gets a boost from nuclear plants and a shrinking population. Etc.
Kyoto won't hurt Canada much, either, with it's untapped Hydro -- but Canada's net GDP loss is even higher than ours. Why? Because Canada is a net exporter of energy, and not just renewable energy. Net energy exporters get hurt badly by Kyoto -- and I won't fault you for smiling a little at the discomfited Saudis.
So, overall, the answer is that, yes, it's economically costly; no, it's not particularly beneficial, and yes, it disfavors us at the expense of Europe and developing nations, who hope to gain competitive advantage by it.
It has to, in order to get signed.
This is what I think happened with Kyoto (and I'm about to get slammed for Europe bashing, but no matter):
The European politicians who pushed it care less about absolute prosperity than relative prosperity. They're okay with hurting their economies if ours is hurt more.
[Note: I'm not saying that this is the only reason that they signed it; you can decide whether it's altruism or naked political interest. I'm talking now about the shape of the treaty]
Let's look at key provisions:
Base year: 1990. Just in time to let Russia and Eastern Europe cash in on the closure of their inefficient companies (and in some cases, the collapse of their economies), Britain cash in on the gas conversion. Why not 7% below 1995, when the treaty was negotiated, instead of 5% below 1990? You know the answer.
No carbon sinks: Europe and most developing nations have little forest, the US has a lot. Can't let the US cash in by planting trees.
Developing nations excluded: China loves this.
These provisions were necessary to get it signed. Otherwise, Europe would end up worse than us, even with the same overall level of carbon emissions. Europe, with its 30 nations, would never sign. Nor would any developing country sign away their right to grow. Even Canada, I think, was willing to suffer as long as we suffered along with her. After all, it's not like the Canadian standard of living is miserable. As long as the voters couldn't compare it to a more prosperous America, the politicians signing the treaty have little risk of getting unelected.
So in order to get it signed, the majority made sure that whatever else it did, the treaty disproportionately harmed our interests. Who are the exceptions in the developed world? Australia and Canada, with small populations, not powerful enough to affect the outcome whether or not they do sign. Everyone else does better than we do. No, the target is us.
And they assumed that if they got enough of a majority, we'd go along. Clinton would have, I think; you can judge for yourself whether or not this is the high moral ground. But if it weren't for the Republican congress, I think we'd have had a treaty. To help Al Gore win, if nothing else. So it wasn't a bad gamble, overall.
And the upshot of all of this is that I will find it funny as hell if this explodes in Europe's face and 55% of all respondants sign, putting the treaty into effect for them -- and their constituents begin screaming about our unfair advantage.
Because when they back out because of that "unfair advantage", they're going to have to do some 'splaining about why they thought we should bear an "unfair disadvantage" about 3 times as large.
Posted by Jane Galt at June 3, 2002 12:50 PM | TrackBack | Technorati inbound links