Environmental Valuation & Cost-Benefit News

Below we present to of the more widely quoted discussions of the The American Clean Energy and Security (ACES -- Waxman-Markey Global Warming Cap and Trade Bill - one from a left-liberal perspective, the other from a more conservative orientation. In any case, warming estimates will probably have to be doubled due to all the hot air, electrons and dead trees, that have, and will be, generated by this controversial bill. For the full analyses follow the links provided.

CBO stunner: Waxman-Markey cuts U.S. GHGs sharply but costs only a postage stamp a day — without counting the efficiency savings
June 22nd, 2009
Climate Progress www.ClimateProgress.org
http://climateprogress.org/2009/06/22/cbo-stunner-waxman-markey-postage-stamp-a-day-low-income-families-efficiency-savings/

A June 5 Congressional Budget Office analysis found under the American Clean Energy and Security (ACES) Act, greenhouse gas emissions in capped sectors would be cut nearly 12% in 2020. And I’ve argued we would actually achieve even deeper ... reductions ... thanks in part to soaring production of unconventional natural gas. ... Another new study found that accelerating the transition to a clean energy economy would generate 1.7 million jobs....

The opponents of ACES, H.R. 2454, keep raising their estimated cost of the clean energy and global warming pollution reduction programs like some out of control auctioneer. These wild estimates were based on either perversions or distortions of independent government or university studies, or partisan studies with rigged assumptions designed to produce an outlandish estimate.

On June 19, the Congressional Budget Office announced that the average household would spend a miniscule amount to reduce global warming pollution under H.R. 2454. This independent analysis determined “that the net annual economywide cost of the cap-and-trade program in 2020 would be $22 billion—or about $175 per household.” This is 48 cents per day....

The least well off households — those “in the lowest income quintile — would see an average net benefit of about $40 in 2020.” ...

CBO [notes] that its estimates are quite conservative (low) since the calculation “does not include the economic benefits and other benefits of the reduction in GHG emissions and the associated slowing of climate change.”

Signficantly, CBO’s estimate also does not include the economic benefits of other provisions in H.R. 2454. The American Council for an Energy Efficient Economy estimates that the efficiency provisions alone could save businesses and consumers $22 billion annually by 2020. The savings would be $170 per household in 2020 –- roughly equal to CBO’s cost per household estimate for ACES in 2020.

Economic models that attempt to predict the future compliance costs of pollution reduction legislation generally overestimate the actual costs. That’s because they do not account for the vast potential for innovation and entrepreneurship once binding reductions and deadlines are set. This would put a price on greenhouse gas pollution for the first time, which creates economic incentives to spur engineers and managers to devise technologies and methods to meet the gas reduction requirements more cheaply than estimated....

The estimated cost of compliance with the acid rain control provisions in the Clean Air Act of 1990 were much lower than EPA predicted. The “annual cost of the program was expected to be $2.7 billion — 4.0 billion.” Yet an EPA analysis a decade later determined that the actual cost of cutting sulfur emissions by 40 percent was substantially lower—“$1 to $2 billion per year...

Dunce Cap-and-Trade: The Waxman-Markey global-warming bill cannot survive cost-benefit analysis.
by Jim Manzi, Senior Fellow at the Manhattan Institute and chairman of an applied-artificial-intelligence software company
National Review http://nrd.nationalreview.com
http://nrd.nationalreview.com/article/?q=ZDU1OGMyZjkwYWM1ZTBkZTVmMTA3MzVhZTE4ZjcxYTE=
June 8, 2009

...The stated purpose [of the bill] is to reduce potential future harm from human-caused climate change, and the vehicle is a climate-and-energy bill commonly referred to as Waxman-Markey. But the reasoning behind this proposal is innumerate, even if we accept the scientific and economic assumptions of its advocates.

According to the authoritative U.N. Intergovernmental Panel on Climate Change (IPCC), under a reasonable set of assumptions for global economic and population growth, the world should expect to warm by about 2.8°C over the next century. Also according to the IPCC, a global increase in temperature of 4°C should cause the world to lose about 3 percent of its economic output. So if we do not take measures to ameliorate global warming, the world should expect to be about 3 percent poorer sometime in the 22nd century than it otherwise would be. This is very far from the rhetoric of global destruction. Because of its geographical position and mix of economic activities, the United States is expected to experience no net economic costs from such warming through the end of this century, and to begin experiencing net costs only thereafter.

A government program to force emissions reductions to avoid some of these potential future losses would impose a cost of its own: the loss in consumption we would experience if we used less energy, substituted higher-cost sources of energy for fossil fuels, and paid for projects — which are termed “offsets” — to ameliorate the effect of emissions (an example would be planting lots of trees). It’s complicated to estimate the cost of an emissions-reduction program, but the leading economists in this area generally agree that it would be large, and that we should simply let most emissions happen, because it would be more expensive to avoid them than to accept the damage they would cause. This makes sense, if you consider that most such plans (for example, Waxman-Markey) call for eliminating something like 80 percent of carbon emissions within the next 40 years or so. Even if the economy becomes more efficient over this period, such a quick transition away from our primary fossil-fuel sources will be expensive.

If a) the total potential benefit of emissions abatement is about 3 percent of economic output more than 100 years from now, b) we can avoid only some of this damage, and c) it’s expensive to prevent those emissions that we can prevent, the net benefit of emissions reduction will likely be a very small fraction of total economic output. William Nordhaus, who heads the widely respected environmental-economics-modeling group at Yale, estimates the total expected net benefit of an optimally designed, implemented, and enforced global program to be equal to the present value of about 0.2 percent of future global economic consumption. In the real world of domestic politics and geostrategic competition, it is not realistic to expect that we would ever have an optimally designed, implemented, and enforced global system, and the side deals made to put in place even an imperfect system would likely have costs that would dwarf 0.2 percent of global economic consumption. ///

The mechanism for mitigation proposed in the Waxman-Markey bill is a “cap and trade” plan. The idea is quite simple: The government sets a fixed annual limit to total carbon-dioxide emissions and distributes ration cards for the right to emit a portion of this amount (that’s the “cap”); it also allows those who receive ration cards to sell them (that’s the “trade”). Now, “distributes” is an artfully chosen word: How would the government decide who gets the ration cards? One method is to sell them; another is to give them away, theoretically based on some objective criterion such as historical emissions, but in practice more likely based on campaign contributions. Waxman-Markey doesn’t specify how the distributing is to be accomplished. The Obama administration expects to sell ration cards, bringing the government $80 billion a year in revenue over the next decade. This revenue represents a cost increase for more or less any company that uses lots of fossil-fuel energy in one way or another (i.e., most of the economy). Like all raw-material cost increases, these will be passed along to consumers in the form of higher prices....

The Environmental Protection Agency (EPA) has done the first cost estimate for Waxman-Markey. It finds that by 2020 Waxman-Markey would cause a typical U.S. household to consume about $160 less per year than it otherwise would, and about $1,100 less per year by 2050....

First, it assumes that every dollar collected by selling the right to emit carbon dioxide will be returned to taxpayers through rebates or lowered taxes. Waxman-Markey establishes this intention but doesn’t describe how it would be achieved, which reflects the political difficulty of achieving it. Second, it assumes no costs for enforcement and other compliance measures. Third, it assumes that large numbers of cheap emissions credits from foreign countries will be available for purchase; without these, costs to our domestic companies would be far higher. Fourth, it assumes that the rest of the world will begin similar carbon-reduction programs. ... Fifth, it assumes that there will be no exemptions, free ration cards, or other side deals — that is, no economic drag created by the kind of complexity that has attached to every large, long-term revenue-collection program in history.
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Remember that the U.S. should not expect any net economic damage from global warming before 2100....

Now consider the potential benefits, of which neither the EPA nor the bill’s sponsors have produced an estimate. Climatologist Chip Knappenberger has applied standard climate models to project that, under the scenario for global economic and population growth referenced above, Waxman-Markey’s emissions reductions would have the net effect of lowering global temperatures by about 0.1°C by 2100. Remember that the estimated cost of a 4°C increase in temperature (40 times this amount) is about 3 percent of global economic output. Assume for the moment that global warming has the same impact on the U.S. as a percentage of GDP as it does on the world as a whole (an assumption that exaggerates the impact on the U.S.). A crude estimate of the U.S. economic costs that Waxman-Markey would avoid sometime later than 2100 would then be about one-fortieth of 3 percent, or about 0.08 percent of economic output. This number is one-tenth of 0.8 percent, the EPA’s estimate of consumption loss from Waxman-Markey by 2050. To repeat: The costs would be more than ten times the benefits, even under extremely unrealistic assumptions of low costs and high benefits. More realistic assumptions would make for a comparison far less favorable to the bill.
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A second potential objection to my analysis is that we owe it to the rest of the world to limit our emissions because of our historical role as an emitter. What this ignores is that the reason the U.S. and Europe have historically emitted carbon dioxide is that they invented the modern economy. Along with putting all that carbon dioxide in the air, the West invented the polio vaccine, the limited-liability corporation, the high-efficiency power turbine, and so on. It invented, that is, the tools for creating wealth that successful parts of the developing world are now using to escape poverty....

A third and more serious potential objection to my analysis is that while Waxman-Markey may not create benefits if the projections I offered above turn out to be accurate, climate science is highly inexact, and the bill is an insurance policy against higher-than-expected costs. ...
This concept has been called, somewhat grandiosely, the “precautionary principle.” Once you get past all the table-pounding, this is the crux of the argument for emissions abatement. ...

But this is to get lost in the world of single-issue advocates and become myopic about risk. We face lots of other unquantifiable threats of at least comparable realism and severity. A regional nuclear war in central Asia, a global pandemic ..., and a rogue state weaponizing genetic-engineering technology all come immediately to mind. Any of these could kill hundreds of millions of people. ...

In the face of massive uncertainty on multiple fronts, the best strategy is almost always to hedge your bets and keep your options open. Wealth and technology are raw materials for options, and a much more sensible strategy to deal with climate risk would emphasize technology rather than taxes. ...

The danger here, of course, is that we may end up back in the failed game of industrial policy. ...