Prepared Remarks by David L. Luke III before the Casey Institute of the Center for Security Policy’s Symposium

“The Implications of the Global Climate Change Treaty
for the U.S. Economy, Sovereignty and National Security”

November 19, 1997

My role today is to cover the probable impact on the United States economy of adopting what
appears will be the United States’ proposal at Kyoto. It is still not absolutely clear what will be
put on the table, but in my comments, I will assume that the United States as a developed country
will probably suggest controlling its emissions on a legally binding basis in or around the year
2010 at or below the level of its emissions of the year 1990.

I am also assuming that other developed countries will do about the same. However, a group of
about 130 developing countries, including China, India, Brazil, Chile, Mexico, South Korea,
Malaysia, and Indonesia, which have so far largely resisted any limits on emissions, will probably
have only rather vague and voluntary long-term emission targets.

To deal with my part of the agenda, I would like to discuss with you three subjects:

    A. What may be the impact on the United States economy?

    B. What will happen in the countries which will not be under legally binding
    limits?

    C. What is likely to happen to the world’s total greenhouse gas emissions?

What may be the impact in the United States Economy?

The United States economy is now vigorous, competitive, and growing nicely because of
generally excellent technology, creativity and leadership in the private sector, together with the
fact that there has been enough self-discipline and wisdom in our electorate to avoid some of the
regulatory excesses and governmental interventions that so clearly have caused a degree of
economic stagnation in some other very prominent nations in the developed world.

The United States is also clearly one of the leaders in the world in the efficiency with which it
converts energy into units of GDP and very gradually we will probably continue to make a little
more progress in efficiency. But the key point is that we are now at the forefront in world energy
efficiencies. There is no efficiency deficit in our country, and there is no obviously available
opportunity which will let us magically and suddenly do drastically better.

Because our GDP is growing at about 2.3 percent per year,(1) in 2010 it would be about 46
percent on a noncompounded basis larger than in 1990. Our emissions are growing in parallel
with our GDP and it obviously would be a very major and challenging task to have to return our
emissions to the 1990 levels or below them.

To try to accomplish this, the administration has proposed a market trading system for emission
permits. This has not yet been spelled out in detail and so an easier and possibly more likely
mechanism for governments to consider is a potential tax on carbon emissions. Actually the two
are in many ways synonymous.

WEFA (formally known as Wharton Economic Forecasting Associates) has calculated that such a
tax would need to be $200 per ton of carbon emitted in order to return our emissions to the 1990
levels.(2)(3) They estimate, however, that imposing such a tax would produce the following results
in our economy. In each case, the impact cited is the change from the base case assumed if the
plan were not instituted.

  • Gasoline prices would increase by 45 cents per gallon.(3)
  • Residual fuel oil prices for industrial facilities would increase by roughly 140 percent.(4)
  • Natural gas prices for industry would increase by 90 percent.(4)
  • USGDP would decline by about $228 billion per year (more than 2.5 percent) below the base
    case.(2)
  • A million good, high-paying jobs would be lost.(3)
  • The U.S. trade deficit would jump sharply.(3)
  • The growth in personal net income for an extended period of time would fall by 15 percent
    below the base case level.(3)

In addition to the WEFA study just summarized, DRI/McGraw-Hill has developed data
which supports many of the key conclusions of the WEFA analysis of the economic impact.(5)

There are several other projections of the potential impact from other sources, including one
issued by the U.S. Department of Commerce with the work done by the Argonne National
Laboratory in July 1997 and another by the Economics Strategy Institute in September 1997.

The first study deals with six major energy-intensive industries. The projected impacts of this
study are very disturbing and very serious. While some assumptions are different, the overall
impact on the economy is not dissimilar to the WEFA data.(6)

The ESI study deals with industries with varied characteristics and is interesting because one of
the industries it looks at is the semi-conductor industry. While we would not normally expect a
negative effect here because it is not thought of as an energy-intensive industry, there are special
circumstances here which would place a very heavy burden on semi-conductors. The United
States is currently a moderate net importer of semi-conductors.(7) With alternate sources such as
Korea, Malaysia, Taiwan, and Singapore not expected to be covered by binding carbon emission
regulations, even more of our semi-conductors are projected to be imported and fewer of those
made in the United States would be exported.(7) Jobs in this excellent and growing industry are
projected to be lost overseas.(7)

In short, several reputable and well-informed sources of opinion feel that under the Global
Climate Change protocol, United States economic growth would be reduced, excellent, well-paying jobs would be exported, our trade deficit would grow, and our much-envied standard of
living would be reduced.

Totally independently from the four studies I have mentioned, Senator Hagel has previously
reported that the AFL-CIO has estimated an overall loss of United States jobs totaling 1,250,000
to 1,500,000.(8) In total, the appraisals from widely different sources describe some very serious
negative impacts for the United States economy. It is not a very pretty picture!

Beyond this there is one other important factor about the United States economy which should
also be considered.

The program will put a sharp focus on the comparison of various types of fuel. Before we look
too carefully at this, we should consider briefly the advantages that fuel-type diversity and
indigenous fuels provide in a less-than-totally-stable and predictable world. Not all foreign fuel
sources are located in politically stable parts of the world. Some of the largest present and
prospective sources of energy are in the areas where there is considerable tension clearly visible.

The United States is fortunate enough to have large coal, oil, and gas deposits. These are not
large enough to make us self-sufficient, but this diversity of indigenous fuel types and their
aggregate strength minimizes very substantially what would otherwise be a much greater
dependency on foreign sources.

Let me illustrate a potential impact of the Global Climate Change Program which might occur.
Currently, 23 percent of the United States energy supply is derived from coal.(9) However, coal is
more carbon-intensive than other fuels. One unit of coal produces 20 percent more carbon
dioxide than petroleum and 80 percent more carbon dioxide than natural gas.(9) The proposed
energy emission penalties on coal are expected to be proportionate to the relative emission of
each fuel. This will place a harsh economic penalty on coal because of its emission number. As a
nation, we could reduce our emissions by moving away from coal, but it would move us away
from a secure, indigenous source of energy into greater dependency on potentially much less
secure, nonindigenous sources of energy.

The United States coal industry is now quite efficient and modern, and if we give it up in a period
of easy energy availability, it can’t be instantaneously called back into service in a period of great
future need. I remember vividly that our coal supply was invaluable to the nation during the
energy crisis of the 1970s.

Without a really compelling reason to change, supply diversity and reasonably high self-sufficiency
are great national assets. Clearly, such a position should not be abandoned without the most
careful thought.

Now let’s turn to what will happen in the developing countries which are not expected to be held
to mandatory limits on emissions?

Simply put, the factors from the Global Climate Change Program that produce significant
economic disadvantage in many of the developed countries will automatically produce significant
relative economic advantages in the developing countries which compete with the developed
countries.

With the increasingly global nature of the world economy, jobs and capital will be inclined to flow
to areas of the greatest relative economic advantage. The absence of the new energy emission
penalty to be imposed in the developed countries and the economic advantage in the developing
countries resulting from this will move jobs and industrial plants to Brazil, Chile, Mexico, Korea,
China, India, and so forth. Many of the major multinational companies are already established in
the developing world and so the transition would not be hard to accomplish, but it would be very
hard on some of the developed countries.

One might theorize that a reasonable expectation would be that the emission regulation status of
the developing countries would transition to Developed Country status over time. However,
most would say that this is a very optimistic point of view. For illustration, look at the trade
discussions with the two countries with which the United States has its largest trade deficits. Our
markets are open to them, but even our status as the world’s only remaining superpower does not
lead either of them to want to ignore their own national economic self-interest enough to
voluntarily open their markets to us. As a result, our trade deficits with them simply keep on
growing.

The same analogy applies to those countries who are driven by economic self-interest to make
capital investments in the so-called rogue states. The same economic self-interest also applies to
those who transfer sensitive military technology to less-than-peace-loving recipients. The
economic self-interest of nations is a very compelling force in most areas of the world, and it is
very, very hard to voluntarily persuade many nations to give up their own self-interest.

Unless we bring all nations in on the same basis at the beginning, it will be virtually impossible to
do it later. Once most of the developing nations taste the rewards of the relative economic
advantage they will gain under the Global Climate Change Program, they simply won’t give it up!

My next topic deals with what might be expected to happen to the world’s total greenhouse
emissions under the scenario which many foresee if only the developed countries are regulated
and the developing countries are not.

The simple fact is that, in spite of the great sacrifices called for in the United States and in some
other countries in the developed world, and in spite of curtailment of emissions in those countries
at least to the 1990 levels, economic growth will continue and probably accelerate in the
developing world, stimulated in part by job transfers. Also, it is true that energy efficiency per
unit of GDP is significantly less in many of the developing countries, such as China. For example,
greenhouse gas emissions in China are on average as much as eight times greater per unit of GDP
than in the United States.(10)

Therefore, making a product in China which was previously made in the United States might
produce eight times the energy emissions for that same product.

A recent report from the Center for Study of American Business concludes that even without the
Global Climate Change Program the percentage share of total emissions by the developing nations
will rise from 36 percent in 1990 to 52 percent in 2015 and 66 percent in 2100.(11) With the
Global Climate Change Program implemented as proposed, the percentage relationship will be
exacerbated in favor of a still greater share produced by the developing nations.

Failure to control the developing nations will mean that almost no matter what is done in the
developed nations, total world emissions will continue to grow and any hope to stabilize
atmospheric concentrations will not be fulfilled.

I hope that my comments may have opened the opportunity for further discussion of these issues.
Their importance justifies much discussion.

— End of prepared remarks —

(1) The Global Climate Change Debate, Economic Strategy Institute, September 1997, Page 23

(2) The Road to Kyoto, The Heritage Foundation, October 6, 1997, Page 13

(3) The Global Climate Change Debate, Economic Strategy Institute, September 1997, Page 33

(4) The Road to Kyoto, Page 14

(5) The Road to Kyoto, Page 16

(6) Impact of High Energy Price Scenario on Energy Intensive Sectors, July 1997, Argonne National Laboratory, U.S.
Department of Commerce, Pages ES-3,4

(7) The Global Climate Change Debate, Pages 76 ,77

(8) Environment News, August 1997, Page 16

(9) The Global Climate Change Debate, Pages 9, 10

(10) Human Events, 10/24/97, Page 13

(11) The Road to Kyoto, Page 18

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