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Global Warming: The Gathering Storm

Russia resurrects the Kyoto Protocol and the prospect of either mandatory CO2 emissions cuts for U.S. utilities, or the start of a global trade war.
Fortnightly Magazine - August 2004

renewable energy generation sources, such as wind, solar, biomass, and geothermal. State RPS legislation, however, will not create the necessary market forces to effectuate the large-scale reductions in CO 2 necessary for the United States to achieve a significant reduction in its greenhouse gas emissions. National legislation is essential.

In October 2003, the most comprehensive global warming legislation to date was defeated by a surprisingly narrow margin of only seven votes. The Climate Stewardship Act of 2003 (S. 139), as amended by S.A. 2028, sponsored by Sens. John McCain, R-Ariz., and Joseph Lieberman, D-Conn., would establish a system of tradable emission allowances and related emissions reporting requirements to tackle global warming. The bill covers six greenhouse gases: carbon dioxide, methane, nitrous oxide, hydrofluorocarbons, perfluorocarbons, and sulfur hexafluoride. The bill would cover 75 percent of direct greenhouse gas emissions in the United States and would reduce carbon emissions to year-2000 emission levels by 2015. Appliance rebates, transition assistance, and other transfer payments that would be made by a newly created Climate Change Credit Corporation-a non-profit organization created to be funded by emission allowance sales-would significantly mitigate the increase in average household energy expenses.

EIA's May 2004 analysis of the bill found that allowance costs will fall largely on the electricity sector and would be passed on to consumers. EIA predicts average electricity prices will increase under the bill from 6.4 cents per kilowatt-hour to 6.8 in 2010 (about $33 per household per month), from 6.7 to 8.0 in 2020 (about $108), and from 6.7 to 9.1 in 2025 (about $200). MIT also studied the bill but assumed-based on experience from the Acid Rain Program-that sources would make substantial early reductions in non-CO 2 emissions that would be banked for later sale. By changing this single assumption from EIA's analysis MIT found that monthly costs to the average household would be only $15 to $20. Also, EIA assumed, unrealistically, no significant fuel-shift to natural gas (despite this market's historic unpredictability), no market penetration of new low-emission technologies (despite billions of federal R&D spending), and no continued federal and state emission reduction programs. Obviously, such programs are likely to continue, and will further reduce the bill's costs by independently contributing toward the bill's modest goal of reducing CO 2 emissions to year 2000 levels by 2015.

By adopting some form of national legislation that begins to internalize the costs of global warming, the United States would blunt any effort by the EU to impose trade sanctions on U.S. goods. The EIA analysis points out one fundamental conclusion. The reduction of global warming gas emissions called for under the Kyoto Protocol will increase electricity prices and therefore the cost of goods. Even under the relatively modest goals of the McCain Lieberman bill, electricity prices will increase due to the internalization of the costs of the cap and trade system.

The risk of trade sanctions by America's largest trading partners due to the failure of the United States to control CO 2 emissions should be a real concern to U.S. policy-makers. If the United States continues to