An Economist's View of the Kyoto Climate Treaty

The urge to be selfish when talking about climate change is strong. Greenhouse gases have the same effect wherever they are emitted, yet the cost of stopping such pollution is not similarly dispersed. Each country pays the full cost of controlling its own emissions but gains only a small fraction of the global benefit.

Selfishness alone, however, did not lead the United States to reject the Kyoto protocol. Sound economic policy did. The agreement is highly inefficient and inequitable.

The treaty sets targets for greenhouse gas emissions for each participating country based on its 1990 emission levels. Unlike much of the world, the United States has grown considerably since 1990, and this places it at a great disadvantage compared to countries whose economies have fallen. Those countries may even benefit under the treaty because they will have "lost" emissions.

Prosperous Western Europe has cleverly aligned itself with slumping Eastern Europe (and possibly Russia) to take advantage of the declines in emissions in those countries. Taking Europe as a whole, the region must reduce emissions only a few percent to reach its Kyoto targets.

In contrast, the United States would have to reduce emissions by almost 30 percent to reach its Kyoto targets. This means that while the European abatement program will cost roughly $5 per ton, the United States program could cost as much $100/ton.

Another inequity in the Kyoto agreement is that it is neither global nor permanent. It explicitly exempts developing countries from any targets. Developing countries, however, are significant contributors to greenhouse gas emissions now and especially in the future. Every country must be part of the agreement for it to be effective in the long run and that most definitely includes developing countries.

The Kyoto treaty is also temporary. Compliance for the United States would require large and immediate changes in its capital stock: its buildings, its power plants, and its factories. Such investments are very expensive and cannot be easily started or stopped. A nation would be foolish to engage in such expensive capital investments before a long-term global treaty engaging all nations of the world is firmly in place.

The cost of mitigating climate change should be in line with the damage. Measuring the damages is daunting because the impacts occur well into the future, are spread across the entire globe and affect different people differently. However, based on what we know now, impacts will not be the same for everyone across the globe.

The damages are likely to be greater for people who currently live in warmer climates (low latitudes) and much less for people who live in the cooler mid-and-high latitudes. Warmer temperatures in hotter regions will cause large reductions in agriculture and large increases in energy (cooling) costs. Cool regions are likely to see increases in agricultural production and some offsetting reductions in heating costs.

Combining these effects suggests that current emissions will cause only small net damages to the world in the neighborhood of $5/ton. This and many other factors clearly imply that current abatement efforts should also be modest — much closer to the planned European programs than those the Kyoto protocol envisions for the United States.

Global warming is a long-term problem that requires a dynamic policy. As greenhouse gases accumulate in the atmosphere, future global temperatures will be pushed ever higher. Policies that require more substantial reductions in emissions will likely make sense in the future. However, policy makers must be careful to plan for these dynamic policies.

Pushing abatement too soon raises costs dramatically but increases the benefits only slightly. Environmental programs to protect the globe against climate change must be patient and spend resources where they will do the most good.

Robert 0. Mendelsohn, Ph.D, Edwin Weyerhaeuser Davis Professor, Professor of Economics, and Professor in the School of Management at Yale University.

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