CBO Grossly Underestimates Costs of Cap and Trade
Posted June 22nd, 2009 at 4.25pm in Energy and Environment.
Last week, the Congressional Budget Office released their analysis of the Waxman-Markey climate change bill that had proponents of the bill claiming we could save the planet for just $175 per household. That was the figure CBO estimated cap and trade would cost households in 2020, which “includes the cost of restructuring the production and use of energy and of payments made to foreign entities under the program, but it does not include the economic benefits and other benefits of the reduction in greenhouse gas emissions and the associated slowing of climate change.”
The trouble with the analysis is that costs are grossly underestimated. The trouble with legislation is that it will have virtually no impact on climate.
Overall, there are a number of basic problems with CBO’s analysis:
• Their allowance cost numbers don’t add up. They say the allowance price will be $28. Since there are 5.056 billion tons of CO2 equivalent in the cap that year, that implies a $141 billion gross cost. They list 91.4 (see table one). In the CBO’s June 5 analysis of Waxman-Markey, they projected allowance revenues of $119.7 billion, 129.7 billion, $136 billion, $145.6 billion, and $152.9 billion for the years 2015 to 2019. It’s hard to believe that the next number in that series would be $91.4 billion.
• They assume that spending/distribution of allowance revenue is dollar-for-dollar equivalent to a direct cash rebate to energy consumers. That is, the carbon tax isn’t a tax if the government spends the money. When have Americans ever seen all of a tax returned to them? It’s like suggesting your tax rebate will be as large as the amount taken from your paycheck every year.
• Most problematic is their complete omission of economic damage from restricting energy use. Footnote three on page four reads, “The resource cost does not indicate the potential decrease in gross domestic product (GDP) that could result from the cap. The reduction in GDP would also include indirect general equilibrium effects, such as changes in the labor supply resulting from reductions in real wages and potential reductions in the productivity of capital and labor.” That’s a pretty big chunk of change to ignore. In The Heritage Foundation’s analysis of the Waxman-Markey climate change legislation, the GDP hit in 2020 was $161 billion (2009 dollars). For a family of four, that is $1,870 that they ignore.
It’s also worth noting that 2020 had the second lowest GDP loss of the 24 years we analyzed. For all years the average was $393 billion or over double the hit in 2020. In 2035 (the last year analyzed by Heritage) the lost GDP works out to $6,790 per family of four and that is before they pay their $4,600 share of the carbon taxes (again, costs are adjusted for inflation to reflect 2009 prices).
Also telling, on page 5, the report says:
The distribution of the gross cost of complying with the policy would be quite different if the price level did not increase as a result of the cap—if, for example, the Federal Reserve adjusted monetary policy to prevent such an increase. In that case, the compliance costs would fall on workers and investors in the form of lower wages and profits.”
So high inflation will help mask the pain (at least in 2020); however, it is doubtful the Fed would not act to try to keep inflation low especially if investors and international investors are getting hit. According to the CBO, then, this would cause workers and investors to be hit harder. But if investors are hit harder, they will invest less; therefore, there will be less capital and the potential GDP will be lower going forward than it would otherwise be. A lower potential GDP means fewer opportunities for future populations. (Note: The Heritage analysis assumes the Fed would use a Taylor type rule. The CBO inflation number in 2020 [0.7 increase in CPI] matches Heritage’s exactly. Yet the CBO claims it assumes no action by they Fed, while Heritage does. )
Furthermore, the CBO is misleading on the “costs” estimates. They are comparing “net costs” as those assuming the government did not recycle the revenue from allowances back to the consumers (the “gross cost” of the allowance) to the “net cost” of allowance that has been recycled. Their analysis is not a net cost to the economy in terms of the overall economic cost without a Waxman-Markey cap and trade bill versus the overall economic cost with Waxman-Markey. Our analysis measures the effects of cap and trade versus a baseline with no cap and trade legislation in place.
Higher energy costs create a significantly slower economy and reduce America’s growth potential. Heritage analysis finds that by 2035, a projected 2.5 million jobs are lost below the baseline (without a cap and trade bill). The average Gross Domestic Product (GDP) lost is $393 billion, hitting a high of $662 billion in 2035. The negative economic impacts accumulate, and the national debt is no exception. The increase in family-of-four debt, solely because of Waxman-Markey, hits an almost unbelievable $114,915 by 2035.
Whatever the costs, we will get almost nothing in exchange. According to climatologist Chip Knappenberger, Waxman-Markey would moderate temperatures by only hundredths of a degree in 2050 and no more than two-tenths of a degree at the end of the century. This doesn’t sound like a great deal for the next generation—millions of lost jobs, trillions of lost income, 50-90 percent higher energy prices, stunning increases in the national debt, and all for undetectable changes in world temperature.
Addendum: For a full analysis, please read “CBO Grossly Underestimates Cost of Cap and Trade.”
- Author: Nick Loris
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