The Cost of Kyoto

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posted September 26, 2002
My friend always knows what worries his wife. She talks in her sleep and recently, the word Kyoto has come up many times. Some time ago my friend had been able to put to rest her fears that their children would soon be drowned by the rising oceans or die from starvation because of failing harvests.

But now that the Prime Minister has committed Canada to the ratification of Kyoto, she has begun to worry about the cost and implications for the family budget. Nothing she could find in the media reassured her. Some reports said that the government did not know. Other talked about costs in terms of $40 - $120 per ton of CO2 reduction. Some suggested that the cost might be 3 percent of GDP. This kind of information meant nothing to her. What was GDP anyway?

There are, however, some estimates of cost that my friend’s wife can relate to. The price of gasoline will rise 15 cents per liter. The cost of heating a home with gas or oil will go up 45 percent. The cost of coal, used for making steel and consumer products will increase by 550 percent. My friend’s wife reacted with horror to this information. The family budget has no room for these extra expenditures. Her fears of rising oceans and starvation could be dismissed more or less as speculation about events that may be many years away, the fears about balancing the family budget are much more immediate and real. Prime Ministers wanting to leave a legacy have their ways of getting what they want.

The estimates about the cost of Kyoto just cited come from a study entitled An Assessment of the Economic and Environmental Implications for Canada of the Kyoto Protocol. The study was published in 2000, sponsored jointly by the federal and provincial governments and produced through the National Air Issues Coordinating Committee - Climate Change.

The credibility of the study is high since it is based on the input of many natural and social scientists. More important, its work was subjected to critical review by government officials and a wide range of stakeholders from the private sector, including environmental organizations.

The costs given above are the midpoint of ranges provided in the study. The actual costs could be 50 percent higher or 50 percent lower. We just do not know, mainly because the government has not provided researchers with definite plans for CO2 reduction. The Kyoto protocol deals with targets, not policies.

However, stripped of all technicalities, the requirements of Kyoto are very simple. By 2012 Canada has to reduce the emission of CO2 by 240 megatons. Such a reduction is possible only if we burn correspondingly less fossil fuel. To do this, the users of such fuels must be induced to use less.

To achieve this objective in a market economy, policies must raise the prices of all burnable fuels and thus cause consumers to change their behavior. The higher price of gasoline will force people to switch to smaller vehicles and to take fewer trips. The higher cost of airline tickets will discourage travel for pleasure and business. Commuters will have to switch to public transport and fewer families can afford suburban living. Dwellings will have to be better insulated and become smaller. The prices of all goods and services will rise, the more so the more energy is used in their production, directly and indirectly.

It is important to note that there will be no such price increases in Mexico and the United States since they will not be bound by the Kyoto protocol. Our exporters and import-competing industries will suffer and the exchange rate will drop further. The adjustments induced by higher energy prices will be extremely pervasive and cause some major changes in the way Canadians live and what we produce.

Eventually, people who buy smaller cars, drive less, insulate their smaller homes and buy fewer energy using products will end up paying a reduced energy tax bill. But they will still pay plenty on their remaining consumption of energy since life is impossible without it. The higher revenue collected by the government allows tax cuts or may end up as foreign aid in Africa.

The poor in Canada will suffer the most. They can least afford to insulate their homes, pay more for public transit or the new, more fuel-efficient cars and buy the more expensive imports. Since they pay no taxes, they will not benefit from the possible reduction in tax rates.

The environmental lobby will deny the accuracy of the preceding predictions. They have the faith that even small increases in the price of CO2 producing will induce the rapid expansion of energy generated through non-polluting wind and solar power so that consumer prices of energy do not have to rise by the predicted amounts.

Some of this effect is incorporated in the study noted above, but there is little evidence that clean energy production will rise very much. Environmentalists have a poor record of prediction. They had forecast that once recycling was mandatory and there would be vast quantities of used glass, metal and paper, industry would develop uses for them and pay prices that made up for the cost of collection. We are still waiting and the taxpayers’ cost of recycling programs has remained high. New York City has run out of patience. It can no longer afford the cost and is terminating its recycling program. Other cities managed by courageous politicians are sure to follow the example of New York.

My friend’s wife should be worried about the implications of Kyoto for her family’s budget, as should all Canadians. If they do, watch out Liberal MPs and leadership candidates. Just ask Joe Clark what Canadians do to politicians who vote to raise gasoline prices and to increase the cost keeping their homes warm in winter.

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