Cutting Carbon Emissions at a Profit:Opportunities for the U.S.Florentin KrauseInternational Project for Sustainable Energy Paths (IPSEP)7627 Leviston Ave.El Cerrito, CA [email protected] BaerEnergy and Resources GroupUniversity of CaliforniaBerkeley, CA [email protected] J. DeCanioDepartment of EconomicsUniversity of CaliforniaSanta Barbara, CA [email protected]. Andrew HoernerCenter for a Sustainable Economy1731 Connecticut Avenue N.W., Suite 500Washington, DC [email protected], 20011Cutting Carbon Emissions at a Profit: Opportunities for the U.S.: Short SummaryThis report identifies and corrects shortcomings in recent mod-eling studies on the economics of reducing greenhouse gas emis-sions in the U.S. The major assessments of the Kyoto Protocol —by the U.S. Energy Information Administration, the ClintonWhite House Council of Economic Advisers, the U.S. Departmentof Energy Inter-Laboratory Working Group, and the StanfordEnergy Modeling Forum — are found to be seriously incomplete.Each study is shown to omit one or several of four major cost-reducing policy options, resulting in cost estimates that are far toopessimistic. The present study is the first to integrate all cost-cutting policyoptions into a coherent least-cost policy framework. Threedomestic policies — a national carbon cap and permit tradingprogram, productivity-enhancing market reforms and technologyprograms, and recycling of permit auction revenues into econom-ically advantageous tax cuts — are combined with internationalemission allowance trading. In analyzing this integrated least-cost approach, the presentstudy introduces no new models. It relies on established, peer-reviewed methodologies used in the major U.S. assessments todate. This reassessment leads to the following principal findings:1) The U.S. could meet the emission reduction targets setforth in the Kyoto Protocol by 2010 and exceed them by2020 while increasing economic output from baselinegrowth projections. 2) In 2010, an integrated least-cost strategy would produce anannual net output gain of about $50-60 billion/yr orroughly 0.5 percent of GDP. By 2020, this gain grows to$120 billion/yr or 1 percent of GDP. On a cumulative netpresent value basis, the U.S. would gain $250 billion by2010 and $600 billion by 2020.3) Most of these economic gains can be achieved through apurely domestic no-regrets strategy. International tradingadds some further benefits, but these are not decisive for apositive economic outcome. 4) A strong synergy exists between a national energy policyaimed at safeguarding the economy and a least-cost policyaimed at slowing climate change. By reducing consump-tion of oil and natural gas relative to rising business-as-usual trends, a climate policy would help protect the U.S.against energy price shocks.5) Net economic benefits can be realized in the early years ofimplementation and continue to grow over time. Asenergy-using equipment and capital stocks turn over, mar-ket, organizational, and institutional reforms have theeffect of speeding up and completing the penetration ofcurrently available, highly cost-effective energy efficiencytechnologies that require little or no time-consumingresearch, demonstration, and commercialization. 6) Potential economic savings from energy productivity gainsfar exceed the costs of technology R&D programs.Together with expanded markets under a climate protec-tion policy, these have the effect of accelerating cost reduc-tions for renewable energy sources and other low-carbontechnology options. 7) Postponing least-cost emissions reduction policies or rely-ing on incomplete, one-sided policy strategies wouldresult in lost opportunities for the U.S. economy of $50-150billion/yr in 2010. 8) In the context of an integrated least-cost strategy, credits forcarbon sinks and constraints on the use of the Kyoto flexi-bility mechanisms are of only minor economic significance. 9) An integrated least-cost approach would not only be moreeffectively in insulating U.S. industries from competitive-ness problems than a global emissions trading approachapplied in isolation; it would actually improve U.S. com-petitiveness. Productivity gains and tax shifts wouldreduce production costs and export prices in most indus-tries below baseline levels rather than merely limitingincreases in costs and prices. 10) The perception that emission reduction targets such asthose of the Kyoto Protocol are unavoidably costly or unfairis the result of outdated modeling assessments. Integratedeconomic analysis such as that contained in this report isneeded as an input for future climate negotiations. Short Summary“Economic studies have found that there are many potential policiesto reduce greenhouse- gas emissions for which the total benefits out-weigh the total costs. For the United States in particular, sound eco-nomic analysis shows that there are policy options that would slowclimate change without harming American living standards, andthese measures may in fact improve U.S. productivity in the longerrun.”— From the Economists’ Statement on Climate Change signed by over 2,500 economistsincluding eight Nobel laureates in 1997.The market reform and technology programs of the CleanEnergy Futures scenario include the following: 1. Expanded voluntary labeling programs for buildings andend-use equipment. 2. Expansion of cost-benefit tested energy efficiency stan-dards to more products and higher cost-effective levels.3. Increased enforcement and more stringent cost-benefittested building codes.4. Tax credits for certain cost-effective energy efficiencyinvestments that go beyond code requirements.5. Doubled cost-shared federal R&D expenditures.6. Utility demand-side management programs financedthrough public benefits wire charges.7. Increased government procurement of energy efficiency andrenewable energy technologies for government facilities.8. Voluntary agreements with industrial sector associations toincrease energy efficiency by one percent per year.9. Expanded voluntary energy efficiency challenge programsfor motors, compressed air, steam, and combined heat andpower production.10. Expanded technical assistance through