With the climate change debate now in the Senate, leaders are set on addressing the problem through legislation, but the numbers are adding up to a high-cost, low-impact policy.
[IMGCAP(1)]Senate Democrats, led by Massachusetts’ John Kerry and California’s Barbara Boxer, have crafted a bill similar to the Waxman-Markey bill that squeaked through the House. It would impose a cap-and-trade system to ration greenhouse gas emissions as well as mandating higher levels of energy efficiency. Unfortunately, mounting evidence suggests bills that include cap-and-trade and other mandates will impose higher energy prices, which will mean decreased production and a stiff reduction in overseas jobs.
Raising the cost of energy — a key input of all economic and personal activities — will hit consumers in the form of significantly higher electricity, gasoline and natural gas costs. A recent economic-impact analysis of the Waxman-Markey bill (H.R. 2454) by the American Council for Capital Formation and National Association of Manufacturers finds electricity prices will increase by as much as 50 percent over inflation by 2030, with gasoline going up by at least 20 percent.
For all too many, those higher prices will come with lower incomes or pink slips. The ACCF-NAM study found that passing the Waxman-Markey climate policy bill would reduce employment by 1.8 million to 2.4 million jobs by 2030, with the already-beleaguered manufacturing sector absorbing 6 in 10 of those lost jobs over the 2012-2030 period. While there would be new jobs created because of the subsidies and mandates for renewable energy and energy efficiency in H.R. 2454, overall employment would be lower than if the bill had not been enacted. Even for those keeping a job, household income in the U.S. would decrease by $400 to $900 (in constant, inflation-adjusted dollars).
The effects on individual states, especially in the Midwest, are projected to be about twice as high as the national average. For example, household income in Illinois would be $1,096 lower in 2030 under the low-cost case and $1,782 lower under the high-cost case. Other Midwestern states such as Michigan, Indiana and Kansas show a similar pattern. Their income losses would be much higher than the national average. The governor of Texas recently warned that cap-and-trade would be an economic catastrophe for his state.
Add it all up and the Waxman-Markey cap-and-trade legislation would reduce cumulative gross domestic product by as much as $3.1 trillion from 2012 to 2030. Such a loss in GDP will in turn reduce cumulative tax receipts by anywhere from $670 billion to nearly $1 trillion.
These dramatic costs are not an unfortunate byproduct of a climate bill; the very purpose of a cap-and-trade plan is to raise the cost of energy. For years, politicians hoping to address climate change have pinned their hopes to cap-and-trade because, as New York Times columnist Thomas Friedman has noted, “it doesn’t use the word tax’ — even though it amounts to one.—
The Environmental Protections Agency’s analysis of the Kerry-Boxer bill bases its conclusion that the economic damage of the bill would be minimal on two very unlikely assumptions. First, the EPA assumes that the U.S. will build 150 nuclear generating plants by 2050, even though we haven’t built one plant since 1978. Second, the analysis assumes that international agreements to reduce greenhouse gases will be in place in developing countries so that U.S. companies will be able to buy low-cost “offsets— to meet their own emission reduction targets.
While it’s true that cap-and-trade will raise costs like a tax would, it’s also open to rent-seeking by special interests and makes it more difficult for firms to plan for their energy expenditures because of the volatility of the price of buying a permit to emit carbon. This makes it an economically inefficient method of addressing a policy problem.
Even worse, a U.S. cap-and-trade policy is poorly suited to actually addressing global climate issues. According to the Council of Economic Advisers’ Report of the President, global concentrations of carbon dioxide will be all but unaffected by 2100 in an America-only scheme. We know from recent declarations that the leaders of China, India and Russia have no intention of impairing their economies with similar emissions trading plans for reducing greenhouse gas emissions.
The costly nature of a cap-and-trade scheme, combined with the unlikely possibility of attracting other nations, requires an update to the old Beltway idiom: It turns out, all politics — and economics — are global.
There are alternative policies to address global climate issues, though. We can promote truly global solutions and continue to support the international Major Economies Initiative on climate change with its focus on economic growth and technology transfer to other major emitters. These are real solutions that make a positive difference without harming our economy and, in particular, chances for economic recovery.
It is essential that we focus on multinational efforts aimed at promoting both access to cleaner energy and boosting economic growth because we will not have one without the other.
Dr. Margo Thorning is senior vice president and chief economist of the American Council for Capital Formation, a nonprofit, nonpartisan organization promoting pro-capital formation policies and cost-effective regulatory policies.