Summary

In 1992 the United States ratified the United Nations Framework Convention on Climate Change, which was intended to stabilize the buildup of greenhouse gases in the earth's atmosphere but did not impose binding limits on emissions. In July 1997, when preliminary negotiations on a new climate agreement were under way, the Senate passed a resolution expressing the sense of the Senate that the Clinton administration should not agree to limits on U.S. greenhouse gas emissions if such an agreement did not include economically developing nations or if it could seriously harm the U.S. economy. In December 1997 the United States participated in drafting the Kyoto Protocol, an international agreement to specifically limit greenhouse gas emissions. The Protocol did not impose limits on developing nations' emissions, and its possible effect on the U.S. economy was the subject of numerous studies during that period, including the two studies that are the subject of this report. Although the U.S. government signed the Protocol in 1998, the Clinton administration did not submit it to the Senate for advice and consent, which are necessary for ratification. In March 2001, President Bush announced that he opposed the Protocol. At a July 2002 hearing on the administration's climate initiative, the Chairman of the Council on Environmental Quality (CEQ) testified that implementing the Kyoto Protocol would reduce U.S. economic output by "up to $400 billion" in 2010. This estimate is similar to a $397 billion estimate that appeared in a 1998 report by the Energy Information Administration (EIA), an independent statistical and analytical agency within the U.S. Department of Energy. The EIA estimate differed from another, well-publicized estimate prepared the same year by the Council of Economic Advisers (CEA), which found that the costs of implementing the Protocol could be as little as $7 billion to $12 billion a year in economic output, depending on the extent of international emissions trading allowed and the participation of developing countries. Congress asked us to identify likely reasons for the differences between the two cited cost estimates ($397 billion from EIA and $7 billion to $12 billion by CEA), based on (1) the economic models used to prepare these estimates and (2) the assumptions incorporated into these models, including economic assumptions and assumptions about how the Protocol would be implemented.

Two likely reasons why the cost estimates differed based on the economic models are that (1) the models focus on different time periods, with different assumptions about how the economy adjusts to new policies, and (2) they measure costs differently. CEA used a type of model that typically focuses on longer time periods and generally assumes that the economy adjusts smoothly to new policies over the longer-term, while EIA used a type of model that typically focuses on a more immediate time period and highlights the near-term costs of economic adjustments (such as unemployment). The different types of models produce different types of cost estimates; EIA's model used a more comprehensive cost measure than CEA's model and was thus able to capture certain costs that CEA's model could not capture. It was likely that EIA's cited cost estimate would be higher than CEA's estimate because of two assumptions the agencies made about the U.S. economy and about the Protocol's operations. First, the cited EIA estimate assumed that all reductions would be achieved domestically, while the cited CEA estimate allowed for the purchase of emissions reductions from other nations. Second, the economic growth rate assumed by EIA (2.3 percent a year for 1995 through 2010) was higher than the growth rate assumed by CEA (2.1 percent for the same time period). A higher growth rate results in more growth in emissions and would require larger reductions to reach an emissions target. In testifying that implementing the Kyoto Protocol "would have cost our economy up to $400 billion" in 2010, the CEQ Chairman was relying on the highest of six cost estimates prepared by EIA. This scenario would have required reductions in U.S. greenhouse gas emissions to 7 percent below the 1990 level--the most restrictive of the six EIA estimates. Following the hearing, the Chairman noted that certain provisions in the Kyoto Protocol could require smaller reductions (specifically, to 4 percent below the 1990 level), but he did not cite a cost estimate corresponding to this smaller reduction.