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Generous Assumptions on Cap and Trade Do Not Mask the Costs

Posted By Nicolas Loris On August 10, 2009 @ 2:30 pm In Energy | Comments Disabled

The Heritage Foundation recently released its economic analysis [1]of the Waxman-Markey cap and trade bill, and unsurprisingly, found devastating results. The goal of cap and trade is to force energy prices to rise so high that people use less of it. And boy do they. Even under the most generous assumptions the Heritage analysis found: Gas prices will rise 58 percent. Gas prices are expected to increase in the future even without cap and trade. Waxman-Markey would add an additional $1.38 to that increase. Electricity prices will rise 90 percent. In total, a family of four can expect per-year energy costs to rise $1,241 by 2035.

A family of four will also reduce its consumption of goods and services by up to $3,000 per year, as its income and savings fall; Over the 2012-2035 time frame, the years in which we modeled the bill, aggregate GDP losses will be $9.4 trillion; in other words, we will be $9.4 trillion poorer with cap and trade than without. The government will collect $5.7 trillion in energy tax revenue. By 2035, job losses will be nearly 2.5 million.

All of these costs come after very generous assumptions about renewable energy and does not include the full economic impact of the legislation.

2035 and Beyond: This Heritage analysis extends only to 2035. But it should be noted that the emissions reductions continue to tighten through 2050 (when the carbon reductions are most stringent) and that model-based analysis by other groups whose models extend beyond 2035 shows increasing harm to the U.S. economy. For instance, The National Black Chamber of Commerce study projects [2]a reduction in GDP of 1.5 percent ($730 billion) below the baseline (without cap and trade) by 2050. The Brookings Institute estimates [2]that GDP in the U.S. would be lower by 2.5 percent in 2050.

Clean Energy Assumptions

The model’s baseline assumptions that will reduce carbon emissions include:

• A near doubling of light-vehicle fuel efficiency by 2030,
• Non-hydro renewable electricity reaching 17 percent by 2030–a more than five-fold increase, and
• 36 billion gallons per year of ethanol production, with 20 billion gallons of cellulosic ethanol.

Though these goals and mandates will be costly to meet (if even they can be met), the costs will occur with or without Waxman-Markey. Therefore, these costs are not counted in the Heritage analysis of the economic impacts from cap and trade. Transitioning our economy and enforcing the renewable energy mandates, the building energy efficiency standards and the new lighting and appliance efficiency measures will inevitably lead to new, unprecedented mismanagement of the economy and will cause headaches for everyone involved. And it won’t be cheap. It’s difficult for economic models to capture all these costs because of the amount of detailed information that is needed so any attempt to quantify the costs of these regulations is likely to significantly underestimate their costs.

The current baseline – what the model assumes to occur no matter what — projects 18.3 gigawatts of increased nuclear power capacity. The history of nuclear construction in the 1960s through the 1980s shows that a much more aggressive nuclear build-out is technologically possible, but political and other factors make a “nuclear renaissance” highly uncertain. Therefore, the study assumes no additional nuclear capacity beyond the baseline increase.

Even with all of aforementioned generous assumptions, the overwhelming costs do not justify the benefit of reducing the global temperature a fraction of a degree. Even the supposed “postage stamp” costs of carbon capping regulations outweigh the negligible benefits Americans would see from cap and trade.

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URL to article: http://blog.heritage.org/2009/08/10/generous-assumptions-on-cap-and-trade-do-not-mask-the-costs/

URLs in this post:

[1] released its economic analysis : http://www.heritage.org/Research/EnergyandEnvironment/cda0904.cfm

[2] projects : http://www.heritage.org/Research/EnergyandEnvironment/wm2550.cfm

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