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EPA's Flawed Cap and Trade Analysis

Posted By Nicolas Loris On May 22, 2009 @ 9:15 am In Energy | Comments Disabled

Today the National Black Chamber of Commerce (NBCC) released [1]a new study that predicts devastating economic impacts of Waxman-Markey’s cap and trade legislation.

The analysis determines that by 2030 the law would:

• Reduce national GDP roughly $350 billon below the baseline level;

• Cut net employment by 2.5 million jobs (even after accounting for new “green” jobs); and

• Reduce earnings for the average U.S. worker by $390 per year.

• Reduce an average household’s annual purchasing power by $830.

Although the Chamber’s model, used by CRA International who was commissioned for the study, differs from the Global Insight model our economists used, the two major model-based analyses of this legislation have reached the same conclusion: it’s an economic nightmare. Our analysis found the drafted legislation would [2]:

Reduce aggregate gross domestic product (GDP) by $662billion in 2035;
• Destroy 1,105,000 jobs on average, with peak years seeing unemployment rise by over 2,479,000 jobs;
Reduce an average household’s disposable income by $879 in 2030;
• Raise electricity rates 90 percent after adjusting for inflation;
• Raise inflation-adjusted gasoline prices by 58 percent;
• Raise residential natural gas prices by 55 percent;
• Raise an average family’s annual energy bill by $1,241;and
• Increase inflation-adjusted federal debt by $114,915 per family of four by 2035.

Proponents of cap and trade point to the Environmental Protection Agency’s analysis of the Waxman-Markey bill. The EPA, in its two-page memo without citations, suggests the revisions policymakers made to the bill actually mitigate the economic pain, but their assertion is hardly model-based. The revisions lowered the 20% emissions reductions cap by 2020 to 17% while all the longer targets remained the same.

They assume (without explanation as to how) that a three percent reduction in allowance carbon cap will reduce allowance prices by three percent. The memo discusses static reduced price effects without recognizing the actual economic cost drivers of businesses that would affect the overall allowance price. As we and CRA International explain, the targets have not changed and therefore the economic fundamentals driving prices have not changed. The differences are largely timing differences meant to delay the political and economic pain.

Our economic analysis and the one done by CRA International uses dynamic modeling that takes a fuller account of the overall economic costs and benefits of this legislation.

For example, the EPA memo seems to ignore the effects of increased borrowing. The revisions of the bill give away allowances to businesses in the near-term. In essence, it’s a subsidy to emit carbon dioxide while increasing spending to help alleviate the burden of higher energy costs. This spending almost certainly will be borrowed in the near term. These giveaways add to the national debt, crowd out private sector investment and drive up interest rates, which increases the cost of making investments in new energy efficient technologies and therefore would put upward pressure on the price of an allowance.

Since the EPA did not document its model and assumptions in the two-page “report [3],” it’s difficult to take the analysis seriously. Unfortunately many politicians are.

Appendix C [1] of the Chamber’s study gives a detailed, technical critique of the EPA’s May 17th economic impact projections. Their basic conclusion is that the EPA estimated a very short term effect and that the EPA analysis does not consider the actual economic affects of the draft legislation but rather simply the price effect. One example they cite is the differing assumptions for the electric sector [1]:

EPA focused on four areas that had changed to support their conclusion. The four areas of change are: 1) Cap level, 2) Offsets provisions, 3) Allowance allocations for protection from electricity price increases, and 4) Incentives for CCS. EPA did not list the RES provisions, which it did not model from the draft bill.

With respect to item 3, we believe that EPA has mischaracterized the provisions on the allowance allocations to electric local distribution companies. The specific provisions on the use of the allowances do not allow the use of the allowances for rebates based “solely on the quantity of electricity delivered to such ratepayer.” Since the rebate is not to be based on electricity use it should not distort the incentive for consumers to conserve electricity. Both EPA’s analysis and this analysis show significant reductions in the electric sector, limited reductions in the non-electric sectors and significant uptake of offsets (including the full utilization of international offsets in all years). CRA’s analysis utilizes more domestic offsets than EPA.”

The modeling differences imply technology is one of the fundamental cost drivers of the allowance price that the EPA did not seem to consider. Technically speaking [1],

[I]f EPA had coordinated its IPM and ADAGE models to produce consistent electric sector results, we would expect that EPA would have found significantly higher CO2 prices for ACESA than they are currently reporting. Given that EPA says the IPM model is more “realistic” for the near-term, one can conclude that its ADAGE-based impact estimates are “not realistic” until they are made consistent with their IPM model projections.”

In short, EPA’s conclusion that Americans will be better shielded by this draft legislation from the pain of capping carbon is fantasy. There’s an open invitation for any economist at the EPA to explain and defend their findings. After all, we’re ushering in a new era of transparency, right? We now have two major independent model analyses of Waxman-Markey. We’re waiting for a third.


Article printed from The Foundry: Conservative Policy News from The Heritage Foundation: http://blog.heritage.org

URL to article: http://blog.heritage.org/2009/05/22/epas-flawed-cap-and-trade-analysis/

URLs in this post:

[1] released : http://www.nationalbcc.org/images/stories/documents/CRA_Waxman-Markey_%205-20-09_v8.pdf

[2] would: http://www.heritage.org/Research/EnergyandEnvironment/wm2450.cfm

[3] report: http://www.epa.gov/climatechange/economics/pdfs/EPAMemoonHR2454.pdf

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