North American versus European Global Warming Policies: Same Constraints, Different Objectives Ross McKitrick Department of Economics University of Guelph

Europe and USA Different stated objectives  EU: Kyoto target of 8% below 1990 by 2008  US: Intensity reduction of 18% by 2012 EU target implies hard cap and total cut

US Target implies BAU

Actual outcomes not so different CO 2, 1990 to 2004:  EU: up 5.5%  US: up 13.8% But intensity changes similar:  EU (25): down 18%  US: down 15%

EU & US Intensity changes since 1995 US: fairly steady decline EU: decline slows after 2000

Why aren’t outcomes more different? Same constraints  Energy efficiency & emissions intensity are resilient to change  No low-cost CO 2 abatement options appear to exist  Price paths favour coal over oil and natural gas in recent years  Energy is crucial for growth These constraints matter more than the objectives

Context Historical US emissions

Context Historical EU emissions (not incl. Germany)

Factors behind emissions growth Change in Emissions/GDP +Change in Population +Change in Income (GDP per person) =Change in Emissions

Factors behind emissions growth Change in Emissions/GDP (-1% p.a.) +Change in Population (+1% p.a.) +Change in Income (GDP per person) =Change in Emissions

Historical rates US after 1960  Population +1.1% p.a.  Intensity -1.7% p.a.  Real Income+2.2% p.a. If Income+Pop grow by 3.3%, intensity must fall by 3.3% just to cap emissions Twice the historical rate

How likely is this? Low-cost air pollution options do not carry over

OPA Analysis 2007 “[Projected] Reductions in CO 2 emissions between 2010 and 2014 were driven by reductions in coal [-fired electricity] production rather than by emission controls. At present there is no viable control technology available to reduce CO 2 emissions from coal plants. Therefore CO 2 reductions under all alternatives are the same.” (OPA 2007, p. 5)

Recent price trends Favour coal adoption

Energy consumption & growth Does energy use cause growth or does growth cause energy use? If the latter, the 2 can be more easily decoupled without putting growth at risk Method of analysis: Vector Autoregression/Granger Causality testing

Causality runs both ways The multivariate analysis shows that energy Granger causes GDP either unidirectionally as indicated by the first of the three models investigated or possibly through a mutually causative relationship… The results presented in this paper, strengthen my previous conclusions that energy is a limiting factor in economic growth. Shocks to energy supply will tend to reduce output.  Stern (2000) p. 281 (emph. added)

Rhetoric and reality in EU US opposition to mandatory cuts longstanding and clear But EU countries have done little either Apart from UK and German one-time drops, EU emissions paths have not changed much  “there are no systematic signals for distinguishing the behavior of the examined countries in the pre- and post- Kyoto period.” Diakoulaki and Madaraki (2007 p. 655)

ETS problems Price collapse in first round German request for 14-year supply for coal plants Latvia, Poland, Hungary, the Czech Republic, Slovakia and Estonia suing Brussels 13 Polish and one French steel companies suing Brussles, as well as the governments of the UK, Slovakia and Germany on behalf of domestic power and steel companies

It’s not so easy Blair. Washington, Nov. 2005

Conclusions EU and US have staked out very different objectives But both operate under same basic constraints These constraints are sufficiently strong that the outcomes are not all that different