Climate Change: Analysis of Two Studies of Estimated Costs of Implementing the Kyoto Protocol

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.