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

CO2, 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

GHG Intensity for EU-25 and USA, 1995-2004

100.0 100.5

96.4

93.1

88.9

85.5 84.883.1 83.4

81.6

100.098.4 98.9

94.1

91.6 91.590.0 89.4

87.185.4

70.0

75.0

80.0

85.0

90.0

95.0

100.0

105.0

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

EU Intensity

USA Intensity

Why aren’t outcomes more different?

Same constraints Energy efficiency & emissions intensity are

resilient to change No low-cost CO2 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

PopulationPopulation

GDP

GDP

EmissionsEMISSIONSGHGTOTAL

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

TABLE 1

AIR POLLUTION ABATEMENT OPTIONS AND COSTS

Availability

Abatement Option Relative Cost SO2 CO2

Scrubbers Low Yes No

Switch to cleaner version of same fuel Low Yes No

Switch to different fuel High Yes Yes

Reduce overall consumption High Yes Yes

OPA Analysis 2007

“[Projected] Reductions in CO2 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 CO2 emissions from coal plants. Therefore CO2 reductions under all alternatives are the same.” (OPA 2007, p. 5)

Recent price trends

Favour coal adoption

Real Fossil Energy Price Indexes (US$ per Million BTU) 1991-2006

0.0

50.0

100.0

150.0

200.0

250.0

300.0

350.0

400.0

1991 1993 1995 1997 1999 2001 2003 2005US$/Million BTU

Coal

NatGas

Crude

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