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Heritage Comments on the CBO Brief: “The Costs of Reducing Greenhouse-Gas Emissions.”
Posted By David Kreutzer, Ph.D. On November 25, 2009 @ 11:59 am In Energy | Comments Disabled
On November 23, 2009 the Congressional Budget Office issued “Economic and Budget Issue Brief: The Costs of Reducing Greenhouse-Gas Emissions.” 
This brief echoed many of the points The Heritage Foundation has made in its reports, WebMemos, blogs and our responses to a request from Henry Waxman (D-CA), chairman of the House Energy and Commerce Committee.
A. The CBO correctly notes that efficiency mandates (standards) don’t lower the cost of cap and trade. Here’s how they say it:
“However, standards would tend to increase the costs of a cap-and-trade program if they supplanted the effective reliance on market forces—even though they would also tend to reduce the allowance price in the program by reducing emissions covered under the program.” [Emphasis added] [CBO, page 5]
Here is what Heritage said in response to the Natural Resources Defense Council’s criticism of our analysis for not including (what NRDC misunderstands to be beneficial) impacts of such mandates:
“The whole point of cap and trade is to let markets find the least costly way of reducing emissions. Conversely, technology mandates reduce the market’s flexibility to meet those caps while not changing the carbon dioxide (CO2) caps. Nevertheless, Waxman-Markey includes additional mandates and subsidies. Trying to combine these competing policies reduces efficiency and is evidence that the bill’s authors either do not understand cap and trade or do not believe that it works.”
B. The CBO points out dramatic regulatory changes are needed for a nuclear build-out of the size required in many analyses. In addition, the use of carbon-capture technology involves great uncertainty with issues beyond the technology of capturing the carbon. Here’s what they say [emphasis added]:
“Many experts believe that nuclear power could displace a significant amount of fossil-fuel use, but only if the regulatory framework was adjusted to allow for the greater use of nuclear power to generate electricity. Similarly, generators would be unlikely to adopt technologies for the capture of CO2 and its sequestration in the ground unless an extensive regulatory structure was put in place to address issues involving property rights, rights-of-way for pipelines, and liability for emissions that escape from the ground.” [CBO, page 5]
Proposed cap-and-trade legislation does none of this and even with these changes, the pace of technological change is highly uncertain. The CBO goes on:
“Uncertainty about how the economy would respond to price changes contributes importantly to the wide variation in estimates of the cost of achieving any particular emission target. For example, expert opinion varies considerably about which types of technologies are likely to be available at different points in the future or how emissions restrictions might shift the pace of their development and deployment.”
“This particular scenario [the EPA’s low-cost projection for cap and trade] depends on three extreme assumptions. First, nuclear power generation must nearly double in the first 25 years. This is the equivalent of about 100 additional nuclear power plants. In the past 30 years, not one new nuclear power plant has been licensed and Boxer-Kerry (like Waxman-Markey) makes little to no provision for eliminating the legal and political barriers to the nuclear renaissance necessary for this EPA analysis.
“Second, the EPA assumes that technology for capturing and storing the carbon dioxide emitted from coal-fired power plants will be fully commercialized in the next 15 years. Pilot projects are still on the drawing boards. Further, even after the extraordinary technological and economic hurdles have been cleared, the political and environmental obstacles to storing tens or hundreds of millions of gallons of liquid CO2 each day must be overcome.
“Third, the EPA assumes nearly two billion tons of CO2 can be emitted beyond the caps set by the legislation because we will pay others to cut their CO2 emissions. Known as offsets, some of these cuts are to be made in the U.S., while many more are expected to be provided abroad. The results from current offset programs elsewhere are so unsatisfactory, that Boxer-Kerry devotes 90 pages to specifying the structure for establishing the stultifying regulations for offset certification, verification and trading. The theoretical availability as outlined in the earlier part of the bill is a long way from the actual availability of the offsets necessary for the EPA’s analysis.” And,
“Gambling trillions of dollars in family income and millions of jobs on any of these strained assumptions would be a great risk. Relying on all three seems unconscionable.”
C. Because higher energy prices affect some livelihoods and consumption patterns differently, the impact of cap and trade will hurt some more than others. Here is what the CBO says:
“No matter which approach they adopted, the resulting policy would almost certainly involve shifts of resources among households, in their capacity as consumers, workers, and owners or shareholders of firms… Revenue-raising approaches would effectively shift income from consumers of fossil-fuel intensive goods and services to the people who would benefit from the resulting spending increases or tax reductions.” [CBO, page 6]
“Nevertheless, the employment effects of H.R. 2454 [the Waxman-Markey bill could be substantial for some workers, families, and communities. Labor markets would take time to adjust to shifts in demand. Job losses would be concentrated in particular industries and in particular geographic regions. Some workers would probably end up working fewer hours or at lower wages than they did previously, and some might leave the labor force entirely. Involuntary job losses could significantly reduce the lifetime earnings of some affected workers.” [CBO, page 12]
“Waxman-Markey affects some industries more than others. Some industries are undoubtedly more energy-intensive and thus hit harder by higher energy prices. Particularly alarming is the damage that Waxman-Markey inflicts on America’s manufacturing base. By 2035, the last year of the simulation, durable manufacturing employment will have lost 1.17 million jobs. Nondurable manufacturing losses reach almost 210,000 jobs by 2035. Combined, manufacturing employment averages 389,000 less than the baseline between 2012 and 2035, hitting a high of 1.38 million lost jobs in 2035.”
D. The whole point of cap and trade is force people to change their behavior. The CBO lists some of the behavioral changes they expect:
“…market-based policies would induce firms and households to change their practices—in the short run, by driving slightly less, adjusting thermostats, and switching fuels in the power sector; and in the long run, by buying more-efficient vehicles and equipment, building more-energy-efficient buildings in denser neighborhoods…” [CBO, page 6]
“Businesses and consumers will adapt as well as possible to these higher prices. They will spend more for less energy. They will build smaller houses and buildings. They will drive smaller, less safe vehicles. They will turn thermostats up in the summer and down in the winter. They will divert income to more expensive energy-saving appliances. But these activities and more will not be enough to offset the higher energy costs. The net effect is lower income, higher prices, and fewer jobs.”
E. The CBO brief confirms there will be no green stimulus from cap and trade:
“Rising costs of emission-intensive activities would tend to dampen overall economic activity by reducing the productive capacity of existing capital and labor; by reducing households’ income (which, in turn, would tend to reduce consumption and saving); by reducing real (inflation-adjusted) wages and, thereby, the supply of labor; and by discouraging investment through increasing the costs of producing capital goods (which is a relatively energy-intensive process) and through diverting investment and research toward the production of less emission-intensive but more expensive sources of energy.” [CBO, page 7]
“The direct effect is a reduction in the consumption of carbon-based energy.
“The indirect effects are more complex. Generally speaking, the carbon fees reduce the amount of energy used in producing goods and services, which slows the demand for labor and capital and reduces the rate of return on productive capital. This “supply-side” impact exerts the predictable secondary effects on labor and capital income, which depresses consumption.”
And, “The Waxman-Markey bill proposes a new national tax of historic proportions. Though levied directly on carbon-based energy, the tax’s impact spreads through the economy, increasing prices, reducing income, destroying jobs, and significantly expanding the national debt.”
F. The CBO pulls the curtain back on the renewable electricity fraud. Solar and wind power don’t generate electricity if the sun isn’t shining or the wind isn’t blowing. These problem constraints put fundamental limits on how much we can depend on them. The CBO says:
“Energy conservation and most renewable energy sources are projected to play relatively limited roles over the entire period, mainly because most kinds of renewable energy provide power intermittently. Instead, a substantial increase in the use of nuclear power plays a dominant role under some assumptions, while significant increases in the use of biofuels or carbon capture and sequestration play a much more important role under other assumptions.” [CBO, page 10]
” [Our] model projects no additional nuclear, solar, wind, or biomass beyond those motivated by the existing, federal, state, and regional mandates and programs. CCS is not commercially and politically feasible before the 2035 horizon of our analysis. The reference case includes 15 gigawatts of net new nuclear power by 2035; biofuels for light-duty vehicles rise from 8.9 billion gallons per year in 2008 to 33.4 billion gallons per year in 2035; electricity generation from renewables (not including conventional hydropower) rises from 133 terawatt-hours in 2008 to 641 terawatt-hours in 2035.”
G. When the benefits of cutting CO2 are included, you still don’t get much (especially this century). The CBO says:
“Nonetheless, CBO concludes that the net effects on GDP of restricting emissions in the United States—combining the effects of diverting resources to reduce emissions and moderating losses in GDP by averting warming—are likely to be negative over the next few decades because most of the benefits from averting warming are expected to accrue in the second half of the 21st century and beyond.” [CBO, page 12]
“All of these costs will be paid for no more than a 0.2 degree (Celsius) moderation in world temperature increases by 2100, and no more than a 0.05 degree reduction by 2050. Saddling the next generation with higher prices, higher debt, less income, fewer jobs, and more taxes does not seem like a worthy legacy–especially when the purported environmental benefits are so small they can barely be measured.”
Article printed from The Foundry: Conservative Policy News Blog from The Heritage Foundation: http://blog.heritage.org
URL to article: http://blog.heritage.org/2009/11/25/heritage-comments-on-the-cbo-brief-%e2%80%9cthe-costs-of-reducing-greenhouse-gas-emissions%e2%80%9d/
URLs in this post:
 “Economic and Budget Issue Brief: The Costs of Reducing Greenhouse-Gas Emissions.”: http://www.cbo.gov/ftpdocs/104xx/doc10458/11-23-GHG_Emissions_Brief.pdf
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