Battle in the Greenhouse: Economy Vs. Environment

WHICH of the following scenarios will come to pass?

Case 1: Over the next three centuries, the accumulation of "greenhouse" gases in the earth's atmosphere reaches eight times preindustrial levels, causing average temperatures to rise 18 degrees F. The result is droughts, floods, and higher sea levels that shrink world economic output by 6 to 20 percent.

Case 2: The nations of the world, following this month's Earth Summit in Rio de Janeiro, impose a "carbon tax" of $24 per ton of emissions as an incentive to reduce greenhouse-gas emissions. As a result the world economy suffers. In the United States, 600,000 jobs are lost within five years and the annual rate of economic growth falls by 1 to 2 percent.

Case 3: A transition to energy-efficient technology reduces global warming while actually helping the present-day economy by cutting fuel costs.

Whether the answer is 1, 2, 3, or none of the above, mankind's response to the threat of climate change could have significant economic impacts, short-term and long-term.

Economists such as William Cline (who envisions case 1) and Wilbur Steger (case 2) are busy modeling the costs and benefits of various steps to cut emissions. Case 3 is seen as a possibility by several groups that have analyzed available technology (see related story, this page).

If greenhouse-gas emissions are to be held steady or cut, many economists say the way to do it is with market-based incentives. Two approaches have emerged: a tax on carbon emissions and a system of tradeable emission permits (see story, facing page). Behind each of these proposals lurks a common question: How will it affect economic growth?

The issue has gained attention with the Rio conference, at which more than 100 nations are expected to sign a treaty to cut emissions of carbon dioxide and other gases that trap radiation in the earth's atmosphere.

The industrial nations will agree to try to bring emissions to 1990 levels by the year 2000, and to give some financial assistance to help developing nations control their emissions.

But the treaty does not require signers to reach the target of 1990 levels. President Bush shied away from setting specific levels and timetables, a decision criticized this week by Democratic presidential candidate Bill Clinton. For the accord to achieve its goals, several challenges must be overcome:

r Carbon emissions have traditionally gone hand in hand with economic growth. Developing nations such as China and India are rapidly expanding their emissions as they industrialize, and they want to keep growing.

r Fossil fuels are cheap today, compared to the period of oil-price shocks in the 1970s, cutting incentives for investing in renewable sources and efficiency.

r The problem is not yet evident. When holes appeared in the earth's ozone shield over Antarctica, for example, the nations set up a timetable to phase out the production of ozone-depleting chemicals. But with global warming, the buildup of gases represents a "commitment" to climate change decades before temperatures rise, scientists say.

The Intergovernmental Panel on Climate Change, which assesses the scientific evidence and policy options on climate change, has estimated that the warming could be held to 4.5 degrees F by aggressive emission-reduction. But under business as usual, by 2100 the world could be "committed" to a rise of 10 degrees.

Worldwide, carbon emissions could rise from 6 billion tons to 20 billion tons by 2100, says Mr. Cline, an economist with the Institute for International Economics in Washington.

Since the fastest growth in emissions is occurring in developing nations, how to finance pollution control there has become a subject of "North-South" debate. Developing nations proposed that developed nations should bankroll a multi-billion-dollar "green fund" if they want to see emissions cut.

The industrial nations have financial constraints of their own, however, and share the quest for economic growth. Finding a workable way to share the burden among nations will not be easy. Carbon tax debated

The idea of a carbon tax - even if none of the revenue goes to developing nations - is drawing strong opposition from industry in Europe, Japan, and especially the US, the world's biggest carbon emitter. US carbon dioxide output is projected to rise about 7 percent by the year 2000 to 1.4 billion metric tons.

If industrial nations agreed to impose a $24 per ton tax, the impact on the US economy would be severe, according to economic modeling done by Dr. Steger, who is president of CONSAD Research Corporation in Pittsburgh. He predicts 600,000 US jobs would be lost, prices would jump 5 to 10 percent, and economic growth would be 1 or 2 percent lower annually than otherwise.

"The quality of life is going to go down," he says. Among the hardest-hit industries: electricity generation, air and automobile travel, coal mining, printing, paper products, chemicals, rubber, plastics, steel, aluminum, glass.

Steger says the consequences would be more severe if the US acted unilaterally, rather than as part of an international accord.

Cline says reducing emissions "inevitably involves up-front costs, and the benefit of avoided damage comes later on." He adds that world's plentiful coal reserves make it unlikely that fossil-fuel use will drop naturally by laws of supply and demand. A two-step plan

He suggests a two-phase approach to the problem.

In the first phase, nations would try to bring carbon emissions to 1990 levels over the next eight years. A carbon tax would be imposed, rising by $5 a year to $40 per ton of emissions by 2000. The $40 figure amounts to about 12 cents per gallon of gasoline, Cline says.

Then, if scientific research has confirmed the seriousness of the problem, international action would move to a second phase: a higher carbon tax or a system of tradeable permits, backed by trade penalties against offenders.

The idea of a new tax, however, is "nowhere to be heard" in a US election year, says Nicholas Lenssen, a researcher at the Worldwatch Institute, an environmental organization.

Mr. Lenssen notes that US drivers already pay an average tax of 35 cents a gallon on gasoline - a levy well above $100 per ton of carbon emissions. European gas taxes are much higher. Using the tax revenue

The economic impact of a carbon tax depends largely on what is done with the tax revenues, according to an analysis by the US Environmental Protection Agency (EPA). The money could be used to cut the budget deficit, reduce income taxes, or reduce corporate taxes, for example.

The approach that would best stimulate economic growth, the EPA concludes, would be to offset the carbon tax with a tax credit for business investment. Because this would encourage new capital investment, national economic output would increase by $3,000 for every ton of carbon reduced by the tax, according to one of three models cited by the EPA, that of DRI/McGraw Hill, an economic consulting firm.

Depending on the choice of a policy, the carbon tax considered by the EPA could reduce gross domestic product by 1 percent or enlarge it by 1.6 percent, the agency concludes.

Critics of the tax, such as John Cohen of the National Association of Manufacturers, say it is unrealistic to expect Washington to give the money back to industry or other taxpayers, given the billowing federal budget deficit. Some states tax utilities

Meanwhile, some US states have put their public utilities under a form of carbon tax. In New York, Massachusetts, California, and Nevada, electric rates are designed to reflect the environmental cost of various energy options.

For example, a utility might consider building a coal-fired plant that can generate power at 6 cents per kilowatt hour. But if it faces another 4 cents per kWh in environmental dues, the utility might choose a cleaner fuel that costs 6.5 cents per kWh.

But experts such as Paul Joskow of the Massachusetts Institute of Technology say these "environmental costing" efforts are flawed.

One reason, he argues, is that the approach applies only to utilities and only in certain states. Thus, a manufacturer might choose to locate a plant in a state without the environmental tax on energy, or to generate its own power, even though those options might be more harmful to the environment.

For now, however, the nationwide carbon tax that could overcome such problems appears to be politically unworkable.

Still, says Lenssen, "This carbon-tax debate ... is one that is not going to go away."