This analysis was undertaken at the request of the U.S. House of Representatives Committee on Science, following the earlier study by the Energy Information Administration (EIA)—Impacts of the Kyoto Protocol on U.S. Energy Markets and Economic Activity,¹ published in October 1998. The committee requested that EIA analyze the impacts of an earlier phased-in start date for carbon emissions reductions to comply with the Kyoto Protocol, based on the same assumptions and cases of the earlier study.

Representatives of more than 160 nations met in Kyoto, Japan, from December 1 through 11, 1997, to negotiate binding limits for greenhouse gas emissions for the developed countries. The 1992 Framework Convention on Climate Change called for efforts by these countries, the Annex I countries,² to undertake actions to reduce greenhouse gas emissions by 2000 to 1990 levels. In the Kyoto Protocol to the Framework Convention, binding targets for greenhouse gas emissions were established for each of the Annex I countries, relative to its emissions level in 1990. On average, the overall emissions reduction target for the Annex I countries is 5.2 percent below 1990 levels; however, the targets are differentiated by country. The target for the United States is 7 percent below 1990 levels. In each case, the target is to be achieved, on average, from 2008 through 2012, the first commitment period in the Protocol.

In 1990, total greenhouse gas emissions in the United States were 1,633 million metric tons carbon equivalent, and carbon emissions from energy comprised 1,346 million metric tons, or 82 percent of the total.³ Thus, carbon emissions from the combustion of energy are the major source of greenhouse gas emissions. The targets established in the Protocol, however, include five other greenhouse gases, each weighted by its global warming potential. Net changes in emissions from forests, other vegetation, and soils will also be used in meeting the targets. The Protocol also includes a variety of international activities that allow a country to meet its target by taking actions with or within other countries. A number of implementation issues remain to be resolved.

Because of the uncertainties concerning the Protocol, the earlier EIA analysis included a range of six cases, each with a different level of reductions for domestic carbon emissions from energy. The cases ranged from 24 percent above 1990 levels (1990+24%) to 7 percent below 1990 levels (1990-7%), with the targets achieved on average in the period 2008 to 2012. In the reference case, carbon emissions were projected to reach 1,791 million metric tons in 2010—33 percent above 1990 levels. The cases implicitly assumed different levels of offsets from carbon-absorbing sinks, other greenhouse gases, and international activities. Because the Protocol indicates that countries must show demonstrable progress by 2005, the carbon reduction targets were phased in beginning in 2005, in order to allow a gradual adjustment of energy markets.

EIA’s analysis assumed that a carbon price would be applied to each of the energy fuels at its point of consumption relative to its carbon content. The carbon price was not applied directly to electricity but was applied to the fossil fuels used for electricity generation and, thus, was reflected in the delivered price of electricity. The carbon price represents the marginal cost of reducing domestic carbon emissions, reflecting the price the United States would be willing to pay to purchase carbon permits from other countries or to induce carbon reductions in other countries.

In order to analyze the impacts of an earlier start date for carbon emissions reductions, the present analysis assumes that carbon reductions will be phased in beginning in 2000, instead of 2005, reaching the emissions target during the commitment period 2008 through 2012.

This analysis does not imply any changes in the timing or level of the U.S. commitments under the Kyoto Protocol but rather investigates whether binding limits on carbon emissions, imposed through a carbon price, would be less costly in terms of overall economic impacts if the limits began in 2000 rather than in 2005. The analysis does not assume additional impacts on consumer behavior as a result of further information programs, voluntary early reduction programs, partnerships, or regulations.

The introduction of carbon prices prior to 2005 lowers the demand for energy services in that period due to both the direct effect of higher energy prices on energy markets and the indirect effect of higher energy prices on the economy. The efficiency and carbon intensity of the stock of energy-using equipment also improves as a result of increased investment in more efficient equipment, accelerated retirements, such as retirements of less efficient industrial equipment and oil- and coal-fired generating capacity, and the acceleration of technology improvements before 2005. Consequently, energy consumption and carbon emissions are reduced prior to 2005, and the marginal cost of compliance is reduced in the commitment period. However, a carbon price is introduced earlier, and the earlier emissions reductions do not count toward the commitment targets.

The early start date reduces the carbon price in 2010 for each of the carbon reduction cases: from $67 (1996 dollars) to $62 per metric ton in the 1990+24% case; from $163 to $149 per metric ton in the 1990+9% case; and from $348 to $316 per metric ton in the 1990-7% case (Figure ES1). Average carbon prices over the first commitment period, 2008 through 2012, are also lowered: from $65 to $60 per metric ton in the 1990+24% case; from $159 to $146 per metric ton in the 1990+9% case; and from $349 to $310 per metric ton in the 1990-7% case. Because carbon prices are incurred earlier, average carbon prices over the entire projection period, 2000 through 2020, increase with the early start date: from $55 to $59 per metric ton in the 1990+24% case; from $110 to $124 per metric ton in the 1990+9% case; and from $231 to $254 per metric ton in the 1990-7% case.

Figure ES1. Projected Carbon Prices in the 1990+24%, 1990+9%, and 1990-7% Early Start and 2005 Start Cases, 1998-2020  [source]

For the 1990+9% and 1990-7% cases, which require larger shares of the total carbon emissions reductions to come from domestic energy sources than in the 1990+24% case, cumulative investments in more energy- efficient and lower carbon equipment, particularly for electricity generation, reduce the cost of compliance in the later years in both the early start and 2005 start cases. In all cases there is reduced demand for energy services, more rapid adoption of  more efficient equipment, and increased use of either noncarbon or less carbon-intensive fuels as a result of the carbon price and the increase in fossil fuel prices. U.S. coal consumption is significantly lower in the carbon reduction cases, and consumption of petroleum is also lower. Consumption of natural gas, nuclear power, and renewable energy increases, primarily for electricity generation.

With an earlier start date, the economy experiences a loss in gross domestic product (GDP) beginning in 2000 as higher prices increase the prices of goods and services throughout the economy; however, the early start date smooths the transition of the economy to the longer run target. The early start cases alter both the time profile and magnitude of the carbon price and the payments for carbon permits, which in turn affect the economy. Both potential and actual GDP are used to measure the economic impacts. The loss in potential GDP measures the loss in productive capacity of the economy attributable to the reduction in energy resources available to the economy. The loss in actual GDP incorporates the adjustment cost to the economy and reflects short-term economic dislocations that result from higher energy prices.

In the 1990+9% early start case, potential GDP losses begin in 2000 and progress slowly through 2010 (Figure ES2). In the 1990+9% case with the 2005 start date, the movement in potential GDP is more rapid. Once the carbon emissions target has been reached, however, the early start and 2005 start cases merge, and the projected rates of decline in both carbon emissions and energy use are similar in the two cases. Potential GDP then takes on the same path in both cases. By 2010, potential GDP declines by $33 billion (1992 dollars) in the 2005 start case and $30 billion in the early start case. By 2020, the loss in potential GDP is $39 billion with the 2005 start date and $42 billion with the 2000 start date. A similar pattern of results occurs in the 1990+24% and the 1990-7% cases (Table ES1).

Figure ES2. Projected Dollar Losses in Potential Gross Domestic Product in the 1990+9%, and 1990+-9% Early Start Cases, 1998-2020  [source]

The largest portion of the adjustment loss occurs in roughly the first 5 years of the imposition of the carbon price whether the start date is 2000 or 2005 (Figure ES3). In general, the loss in actual GDP in the early start cases between 2000 and 2005 is between one-half and nearly three-quarters of the loss in the cases with the 2005 start date between 2005 and 2010. In the early start cases, actual GDP begins to rebound back toward its level in the reference case sooner, and the recovery is smoother than in the cases with a 2005 start. By 2010, the GDP impacts in the 1990+24% early start case are about half those in the 1990+24% case with the 2005 start date. In the 1990+9% and 1990-7% cases, the impacts on GDP with the early start date are about one-third of the impacts with the 2005 start date. Ultimately, in all cases, the economy transitions into a long-run path, and the losses in actual and potential GDP become very close by 2020.

Figure ES3. Projected Dollar Losses in Actual Gross Domestic Product in the 1990+24%, 1990+-9%, and 1990-7% Early Start and 2005 Start Cases, 1998-2020  [source]

For each of the three carbon reduction targets, the early start and 2005 start cases project approximately the same undiscounted values for the cumulative impact on GDP from 2000 through 2020 (Table ES2). Although the cumulative impacts on GDP are similar, the early start cases involve a tradeoff. The peak impacts are less severe  in the early start cases, but they occur earlier. A net present value calculation takes into consideration the time value of money. Using a discount rate of 7 percent beginning in 2000, the cumulative discounted impacts are larger in the early start cases.