EIA Report Steering Policy Makers Wrong
Flawed Study Fails to Consider Energy Efficiency
Washington, DC, October 15, 1998 — According to the Energy Information Administration's report, Impacts of the Kyoto Protocol on U.S. Energy Markets and Economic Activity, released October 9, meeting the U.S. carbon reduction target of 7 percent below the 1990 level would require a carbon tax to induce carbon savings. The effects of this tax, EIA predicts, would reduce the U.S. gross domestic product in 2010 by 4.2 percent.
"The EIA study joins the growing list of studies on the impact of the Kyoto Protocol that have serious shortcomings," says Alliance President David M. Nemtzow. "As a vehicle to guide policy makers, the study fails to take into account likely scenarios that would reduce the negative impacts of complying with the Kyoto agreement."
One of the report's biggest flaws is its complete omission of energy efficiency. "Given that energy use accounts for approximately 90 percent of U.S. carbon emissions," Nemtzow points out, "policy makers need results of studies that model realistic policies and programs, including energy efficiency, designed to implement the Kyoto Protocol."
According to EIA, achieving the U.S. Kyoto target — 7 percent below 1990 carbon emissions — calls for a carbon tax of $348 per metric ton. In 2010, this tax would cause coal prices to rise almost eight-fold, natural gas prices to double or triple, electricity rates to double, and gasoline prices to rise 50 percent.
How It was Done
The Energy Information Administration is an independent research unit within the U.S. Department of Energy. The EIA study report was performed at the request of the U.S. House of Representatives' Committee of Science. EIA conducted analyses of scenarios "...focusing on U.S. energy use and prices and the economy in the 2008-2012 time frame."
EIA used an economic model to estimate the impacts of achieving various levels of carbon reduction — from 24 percent above to 7 percent below U.S. 1990 carbon emissions. It assumed a carbon tax as the sole mechanism to get consumers and businesses to reduce energy consumption by the required amount in each scenario
Problems with the Study
The main EIA analyses omit important considerations to achieving the Kyoto Protocol:
- potential benefits of emissions reductions;
- international permit trading and other mechanisms; and
- potential implementing policies, regulatory actions, or funding of energy and environmental programs that could be designed to achieve the Kyoto Protocol.
The latter omission seems particularly unfortunate given the Committee of Science's letter directing EIA to study (resources permitting) "...cases...that deal with major policy alternatives in the energy area." Taken together, these omissions severely limit the study's usefulness as a vehicle to guide policy decisions. Another weakness is EIA's use of the Data Resources, Inc. (DRI) model to assess the economic impacts of reducing carbon emissions. "The DRI model is a short-term (two to three year) forecasting model; it is not well suited for forecasting impacts beyond this range," says Dr. Douglas Norland, Alliance Director of Research and Integrated Programs.
In addition, the DRI model's long-term projections are highly sensitive to assumptions about energy prices, often at odds with historical experience. Finally, Norland says, "The model does not allow for changes in the mix of energy and other production inputs, an assumption — while reasonable in short-term forecasting — is totally unreasonable for long-term forecasting."