Global Chill

Thursday, October 30, 1997

When a waiter reels off those great-sounding daily specials without giving the prices, isn't it tempting just to order? If you are the one picking up the tab, though, you had better ask the cost. Right now, U.S. representatives in international negotiations leading to a treaty on global warming are focused only on what looks good, not on what it will cost the American economy.

What's more, in a radical policy shift, the Clinton administration is now inviting the nations of the world to place their orders and insisting that the United States will pick up most of the bill. U.S. negotiators have turned their backs on our most consistent policy of promoting voluntary reductions in fossil fuel consumption and now insist that cutbacks must be binding. Binding for us, that is, and for other developed nations. Our developing nation trade competitors in Asia and Latin America will not have binding limits.

If this sounds scary to you, you're not alone. American business across the board has reason for concern, and congressional leaders are wondering why they have not been given any economic impact analyses about such a major impending commitment. As they learn more, American consumers will also have cause to worry--about their jobs and their standard of living.

Negotiations behind Closed Doors

Think about this, as U.S. negotiators certainly should have. Greenhouse gas emissions are produced mainly by burning fossil fuels. Coal releases the most carbon dioxide; petroleum and heating oil less; and natural gas the least. It does not take a scientist, or an economist, to see immediately that these fossil fuels are the mainstays of our present energy and transportation systems, not to mention the source of energy Americans rely on for home heating and cooling.

With no official economic analyses available from the administration, concerned economists are moving to fill the gap. It is difficult because the specifics of the proposed treaty are not known. According to negotiators, specific figures may not be hammered out until the last hours before treaty signing. Not a very comforting prediction, and one that will leave the U.S. Congress with no option but a "yes-no" vote if they continue to be left out of the deliberation process.

We do know that the U.S. proposal calls for limiting greenhouse gas emissions to 1990 levels, with this target being binding for developed countries. Not surprisingly, some nonbound developing countries are calling for even more drastic cutbacks on our part, and oil-producing states are already asking for financial compensation, regardless of what limits are agreed to. Forecasting the potential economic cost to the United States is hampered in this environment, but the direction of the negotiations immediately raises a forest of red flags.

Yale economist William Nordhaus estimates a net discounted cost of seven trillion dollars for stabilizing greenhouse gas emissions at 1990 levels. Presuming that some system of carbon taxation would have to be implemented, a study by DRI/McGraw-Hill economist Lawrence Horwitz estimates that a levy of one hundred dollars a ton would cost the American economy two hundred billion dollars a year. Raising the carbon tax estimate to two hundred dollars a ton produces a three hundred and fifty billion dollar decline in the production of goods and services, a cost of 4.2 percent of our entire gross domestic product.

Any decision affecting the American standard of living on this scale demands major discussion, not behind-the-scenes treaty negotiations.

The increased cost of American goods and services would undercut our global competitiveness, providing a windfall for competitors like China, India, and South Korea, all of them exempt from binding limits on their own energy use. It would be natural for U.S. production to move offshore, taking American jobs with it. Add to this the cost and confusion of new regulations--being monitored and enforced by an international bureaucracy.

Gas Lines?

For consumers, it would feel like life during the oil crisis of the late 1970s. The American Petroleum Institute warns that the only way to achieve the drastic reductions called for is through an energy tax or fuel rationing. It is estimated that just to get back to 1990 emission levels would require a doubling in home heating oil prices and a gasoline tax of sixty cents a gallon. This sudden escalation in prices for gasoline combined with rising costs for home heating and cooling is likely to cause economic growth to be cut by 1 percent a year. Any decision affecting the American standard of living on this scale demands major discussion, not behind-the-scenes treaty negotiations.

It does not take an economist to understand that any treaty that could require as much as a 60 to 80 percent cut in worldwide fossil fuel use would have severe economic ramifications. The fundamental problem is that the negotiations on global warming have been directed and focused by environmentalists. Without solid economic analysis and perspective, a flawed agreement is being rushed to completion. The economic impact must be considered in the little time left before the treaty signing, scheduled for December in Kyoto, Japan. If the bill is being handed to American consumers and American business, then we must know what the cost will be.