Emission Credits: The Supply & Demand Gap

Emission Credits: The Supply & Demand Gap

October 23, 1998

Full Briefing available in PDF format.


Last year, some 160 nations negotiated an agreement in Kyoto, Japan, that would require the United States to reduce its emissions of greenhouse gases, chiefly carbon dioxide from the combustion of fossil fuels, more than 30 percent below the levels otherwise projected for 2008- 2012. Since emission levels are closely linked to energy use, since energy is used to produce and transport virtually all goods in a modern economy, and since 85 percent of all U.S. energy comes from fossil fuels, the Kyoto Protocol would appear to pose a serious threat to our economy.

The Clinton-Gore administration claims, however, that if implemented with “flexibility mechanisms,” Kyoto would impose negligible costs on the U.S. economy – not more than one-tenth of 1 percent of GDP. The most important flexibility mechanism is emission trading – a system under which the U.S. supposedly could pay others to reduce their emissions for a fraction of what we’d have to pay to reduce our own.

The Administration’s cost estimate assumes, first of all, that the European Union and the G-77 plus China developing country bloc will accept unrestricted trading among industrial (Annex B) countries, even though Article 17 of the Protocol states that emission trading shall be “supplemental” to “domestic actions” undertaken to reduce emissions.

More fundamentally, the Administration’s estimate assumes that the supply of emission credits will be adequate to meet the demand. What if the actual demand outstrips the potential supply? To shed light on this and related matters, CEI invited Robert Reinstein, President of Reinstein Associates International, Inc., to address an audience of congressional staff, journalists, and industry representatives.

Robert Reinstein has had a series of careers spanning almost four decades of professional experience in science, economics, and diplomacy. Among other senior policy making positions, he was principal negotiator for the Bush Administration at the Rio Treaty and on the energy aspects of the both Uruguay Round of the General Agreement on Tariffs and Trade (GATT) and the U.S.-Canada Free Trade Agreement. Reinstein also chaired two working groups of the Intergovernmental Panel on Climate Change (IPCC).

By adding up all Annex-B country emission reduction obligations and subtracting from that total the projected supply of credits in the former Soviet Union countries, Reinstein finds that potential demand exceeds potential supply by a factor of 2 to 10. This is not a matter of complicated models but of simple arithmetic. Even if the EU and the G-77 plus China agree to unrestricted trading, there will not be enough emission credits in the world to allow the U.S. to satisfy a large percentage of its Kyoto obligations through trading. In short, implementing the Kyoto Protocol won’t be cheap. The Administration has not done its homework.

Marlo Lewis Jr.Vice President for Policy & Coalitions