Climate Change Policy: Cost Effective Strategies Dr. Margo Thorning Managing Director, International Council for Capital Formation Brussels Office: Park Leopold, Rue Wiertz 50/28 B-1050 Brussels, Belgium Tel: Fax: Web: Washington D.C. Office: 1750 K Street, Suite 400 Washington, D.C Tel: Fax:

Where Does Europe Stand on Actually Complying with Kyoto?  European Union is projected to be 7% above the 1990 emission levels by  EU leaders realize they cannot reconcile goals of increased EU industrial competitiveness as well as tighter future targets for GHG emission reductions.  EU policy-makers are beginning to worry about the additional steps required to meet the targets including impact of emission trading schemes on industry.  Slow EU economic growth hinders reducing energy intensity (energy used per Euro of output)

Greenhouse Gas Emissions in the European Union Projected to Exceed Kyoto Targets in 2010 Source: European Environmental Agency, November 30, 2004

The cost of the Kyoto Protocol varies according to which type of economic model is used:   Sectoral models such as PRIMES(used by DG Environment) are designed to show the effect of policy changes on the energy sector rather than economy wide effects. Primes estimates cost of Kyoto is 0.12 % of GDP in   General equilibrium models such as that used by UNICE and the Danish consulting firm COWI are designed to show the “big picture” impacts of policy changes in the long run after the economy has had time to adjust to energy price changes. Costs range from 0.7 to 1.5% of GDP in   Macroeconomic models such as those used by Oxford Economic Forecasting or Global Insight are designed to capture the short-run, frictional costs of adjusting to policy changes. Costs range from 1.0 to 4.8% of GDP in 2010.

Impact of Climate Change Policy on EU Competitiveness in 2010: General Equilibrium Model Results Assumptions: Cost of a permit to emit a ton of Carbon ranges from €55 to €238 depending on rate of economic growth and speed of new technology penetration. Assumptions: Cost of a permit to emit a ton of Carbon ranges from €55 to €238 depending on rate of economic growth and speed of new technology penetration. % Change Source: COWI Report for UNICE, October 2004

Impact of Kyoto Protocol and Additional Targets on GDP In the EU in 2010 and 2020: Macroeconomic Model Results Source: DRI-WEFA, *Italian Target is a 70% Reduction below 1990 by 2050

0 2,000 4,000 6,000 8, Base Case Projection: Energy Information Administration, International Energy Outlook, 2004 China India If increase limited to 50% of baseline forecast Rapid Growth in China’s and India’s CO2 Emissions Projected (Million Metric Tons CO2) Rapid Growth in China’s and India’s CO2 Emissions Projected (Million Metric Tons CO2)

Limiting Emissions Growth to 50% Would Require Much Faster Reductions in CO2 Intensity Limiting Emissions Growth to 50% Would Require Much Faster Reductions in CO2 Intensity

Even Limiting Emissions Growth to 50% Could Have Big Impact on Per Capita GDP Even Limiting Emissions Growth to 50% Could Have Big Impact on Per Capita GDP

 Economic Freedom Promotes Improved Living Standards: protection of investment, openness of internal markets, overall share of output absorbed by government, political freedom  Faster Economic Growth: associated with adoption of new energy technologies which reduces energy intensity of emissions as living standards rise  Barriers to new technology:  Pricing distortions  Lack of markets  Subsidies through State run enterprises  Lack of protection for property rights including intellectual property  Restrictions on foreign direct investment  Lack of infrastructure, education, skills to handle new technology  Import restrictions Economic Freedom and the Adoption of New Energy Technologies

Economic Freedom Compared to Energy Intensity in 2001 Carbon / GDP Russia China India Singapore USA S. Korea Namibia

Million Metric Tonnes Carbon/Billion $1997 Greenhouse Gas Emissions Per Dollar of Output Greenhouse Gas Emissions Per Dollar of Output

Comparison of EU and US Energy Intensity Reduction US EU

 Remove barriers to developing world’s access to more energy and cleaner technology by promoting economic freedom and market reforms  Increase R&D for new technologies to reduce energy intensity  Develop sequestration through both natural and man-made technologies  Promote nuclear power for electricity  Expand bilateral cooperation with developing countries  Promote a truly global solution Practical Strategies to Address Economic Growth and Climate Change Policy