At Home in Hespeler

I have been looking over a report from the International Council for Capital Formation in the costs to Germany of the Kyoto protocol. The report, Kyoto Protocol and Beyond: The Economic Cost to Germany, concludes that home heating oil prices will rise by nearly 30%; gasoline and diesel prices 9 – 12%; industry would pay 30% more for natural gas and electricity; GDP would shrink 1.4-1.7 by 2025 (60 – 73 Billion Canadian Dollars); and Job losses would be 318,000 by 2010 and between 519,000 and 622,000 by 2025.

All these conclusions are based on the assumption that Germany’s nuclear capacity remains unchanged. However, Germany has made a commitment to retire it’s nuclear capacity by 2020, meaning the “economic implications of the proposed policies to limit CO2 emissions would be more severe.”

Also of note, the loss of 600,000 jobs (approximately 1.5%) would pile on top of Germany’s present 9.5% unemployment rate.

Here’s some selective sections from the study:

Mechanisms for Achieving the Required Carbon Emission Reductions

For Germany to achieve it’s targeted reductions in carbon emissions would require a dramatic reduction from currently projected levels of energy consumption. As there is no cost-effective technology currently available to capture CO2 emissions, domestic actions to achieve a reduction in carbon emissions from the energy sector over the next few decades fall into three broad categories:

substituting non-carbon-emitting fuels for fossil fuel use: Some emission reductions could be achieved through the increased use of nuclear or renewable energy in the generation of electricity… Under a carbon emission limits policy, other renewable energy technologies would be steadily more economically attractive. However, significant investment in renewable is underway and incorporated in the Global Insight base case. The next trace of renewable would likely be developed after 2020.

substituting lower emitting fuels for higher emitting fuels: Switching from fossil fuels with higher (i.e. coal and petroleum) to those with lower emission rates (i.e. natural gas) can provide some of the reductions needed to reach a target. However, the potential is limited over the next ten to twenty years due to increasing reliance on lower carbon fuels that is already included in baseline analysis. Further, the prospect of steady reductions in carbon emissions assumed under the post-2012 period reduces the incentive for infrastructure developments needed to expand gas use dramatically.

using less energy: Achieving a carbon emission target through reductions in energy use would require cutting edge use by nearly the same amount as the desired change in carbon emissions from the baseline. To the extent that some of the reductions would be obtained with the two previous options, the necessary reduction in energy use would be less. As these options are not expected to provide substantial relief from the target reductions under the Kyoto Protocol, to achieve this reduction, some form of intervention in the market (such as fee or tradable permit) would be required. Once in place, energy use would be curtailed through four mechanisms:

1. investment in energy efficient capital

2. investment in process change

3. reduction in purchases of energy and electricity by business and consumers

4. leakage of industry to other countries.

I love number 4: “leakage of industry to other countries”. Nothing like economic understatement.

Economic Impacts

Output and employment losses would be expected under the Kyoto Protocol because: energy using equipment and vehicles would be made prematurely obsolete; consumers would be rattled by rapid increases in living costs; and financial ministers concerned over possible inflation would most likely need to target more slack in the economy to deflate non-energy prices and thus stabilize the overall price environment.

The analysis assumes that the cost of emission allowances would be passed along to consumers in the form of higher energy prices and ultimately high prices for all goods and services. Consumers’ purchasing power would be reduced by the higher cost of using energy, reducing real disposable income.

Consumption and residential fixed investment would be the hardest hit components of real GDP because of the direct loss in real disposable income.

Residential fixed investment would be hardest hit. In other words, the value of your home would plummet, because potential buyers would not have sufficient disposable in come to purchase it.

Brian Gardiner Uncategorized