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The Costs of Cap and Trade and The Costs of Doing Nothing

Posted By Nicolas Loris On October 15, 2009 @ 11:54 am In Energy | Comments Disabled

The economic losses from carbon emissions cap-and-trade policies are often compared with “the cost of doing nothing.” CBO director Doug Elmendorf in his testimony to the Senate Energy and Natural Resources Committee [1]labels these costs as nonmarket impacts. These include effects of human health, loss of species’ habitats, and other destruction to wildlife and ecosystems. He points to a study [2]by William Nordhaus and Joseph Boyer that found an 11 degree Fahrenheit increase by 2100 translates to an almost 5 percent drop in output.

This is a common argument made by proponents of the legislation. However, those who make this argument do not carry the analysis through in a rigorous way, which renders the argument simply a strawman.

This “opportunity cost” of doing nothing must be discounted by the actual effect the “doing something” will have. Doing something like cap-and-trade, does not mitigate climate change entirely and therefore the (negative) opportunity foregone (i.e., the expected climate change) is not the full benefit.

We have to look at how much climate change Waxman-Markey is expected to mitigate. As Heritage analyst David Kreutzer says [3], “We need to look at the cost of these proposals in light of what difference these proposals make. None of the proposals will entirely eliminate predicted climate change regardless of the assumptions, models, computers or theories used.”

Climatologists estimate [4]that Waxman-Markey’s impact on world temperature will be too small to even measure in the first several decades. The projected reduction of world temperature would be 0.05 degree Celsius by 2050. If CO2-emission levels meet the Waxman-Markey target of 17 percent of 2005 emissions by the year 2050, and if they are frozen at that level for the rest of the century, Waxman-Markey would still reduce the world temperature by only .2 degrees Celsius (0.36 degrees F) by 2100. Therefore the increase from the “do nothing” baseline in GDP assuming a rough linear relationship of 11 degrees to 5% GDP is 0.36*(11/5) = 0.79% (a generous estimate). The cost of 3% of GDP must be compared against a benefit of (at most) 0.79% GDP.

Being good stewards of the environment and not wasting our resources are compatible goals. That is why using a cap and trade policy that hinders the second goal by forcing us to use our resources less efficiently is very likely to end up hurting the environment as well. The recent Nobel Prize in economics [5]highlights the work of economists that show that individuals are very ingenious at finding ways to work cooperatively towards a common goal. Americans by and large are concerned about the environment and, given the chance and resources will develop environmentally sound and economically efficient energy sources. Maybe the 3% potential income Waxman-Markey is willing to give up each year could be used to find lower cost solutions to mitigating climate change. Why cut that income off?

Karen Campbell [6]co-authored this post.


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

URL to article: http://blog.heritage.org/2009/10/15/the-costs-of-cap-and-trade-and-the-costs-of-doing-nothing/

URLs in this post:

[1] in his testimony to the Senate Energy and Natural Resources Committee : http://www.foundry.org/2009/10/15/cbo-director-there-are-costs-involved-with-cap-and-trade/

[2] points to a study : http://cowles.econ.yale.edu/books/nordhaus/wdn_warming.htm

[3] says: http://www.heritage.org/cda/upload/KreutzerTestimonyTrade.pdf

[4] Climatologists estimate : http://masterresource.org/?p=2355

[5] recent Nobel Prize in economics : http://economix.blogs.nytimes.com/2009/10/12/honoring-the-nobel-laureates/?scp=1&sq=ed%20glaeser%20economix&st=cse

[6] Karen Campbell : http://www.heritage.org/about/staff/karencampbell.cfm

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