Tuesday, May 20, 2008

Climate Change: Costs and Benefits of S. 2191

May 15: The Open CRS project has posted a new report from the Congressional Research Service (CRS) entitled, Climate Change: Costs and Benefits of S. 2191 (RL34489, May 15, 2008). This report examines six studies that project the costs of S. 2191 (the Lieberman-Warner Climate Security Act of 2008) to 2030 or 2050. The report is important in light of the May 20 hearing of the Senate Energy & Natural Resources Committee on Energy and Related Economic Effects of Global Climate Change Legislation (See related article below) and the upcoming, tentatively scheduled June 2 vote in the Senate on S. 2191. In general, Republicans and the business community have concluded the bill would reek havoc on jobs and the economy; Democrats and environmental organizations are saying the bill will not have a significant affect on the economy and much cheaper than the eventual cost of doing nothing; and the bill sponsors say: "EPA's detailed analysis indicates that the U.S. can curb global warming without sacrificing economic prosperity;" and "EPA's analysis demonstrates what we have long known: You can control greenhouse gas emissions in a manner that leaves the economy whole and is not burdensome on consumers."

According to the CRS report, "It is difficult (and some would consider it unwise) to project costs up to the year 2030, much less beyond. The already tenuous assumption that current regulatory standards will remain constant becomes more unrealistic, and other unforeseen events (such as technological breakthroughs) loom as critical issues which cannot be modeled. Longterm cost projections are at best speculative, and should be viewed with attentive skepticism. Despite models' inability to predict the future, cases examined here do provide insights on the costs and benefits of S. 2191."

First, if enacted, the ultimate cost of S. 2191 would be determined by the response of the economy to the technological challenges presented by the bill. The bill provides numerous incentives for technology innovation. The potential for new technology to reduce the costs of S. 2191 is not fully analyzed by any of the cases, nor can it be. Technology development is not sufficiently understood at the current time for models to replicate with confidence. Likewise, it is difficult to determine if available incentives are directed in an optimal manner. The cases do suggest that S. 2191's Carbon Capture and Storage (CCS) bonus allowances would encourage deployment of CCS, accelerating development by 5-10 years.

Second, a considerable amount of low-carbon generating capacity will have to be built under S. 2191 in order to meet the reduction requirement. How much capacity will be necessary depends on new and replacement capacity needs, along with consumer demand response to rising prices and incentives contained in S. 2191.

Third, offsets could be a valuable tool not only to potentially reduce costs, but also to buy time to permit further development of new, more efficient technologies. Cost could be lowered further by greater availability of offsets and international credits and with a broader definition of eligible international credits.

Fourth, the Carbon Market Efficiency Board could have an important effect on the cost of S. 2191 through its power to extend the availability of offsets and international credits. In this sense, the Board's powers could mesh with the previous insight about the potential effect of offsets on the bill's overall costs.

Fifth, the Low Carbon Fuel Standard could significantly raise fuel prices and limit supply. The effects will depend on what fuels are included, the emissions reductions achieved by alternatives, and the ability to produce those alternatives.

Finally, S. 2191's climate-related benefit is best considered in a global context and the desire to engage the developing world in the reduction effort. The United States and other developed countries agreed both to reduce their own emissions to help stabilize atmospheric concentrations of greenhouse gases (GHGs) and to take the lead in reducing GHGs when they ratified the United Nations Framework Convention on Climate Change (UNFCCC). This context raises two issues for S. 2191: (1) whether S. 2191's GHG reduction program would be considered sufficiently credible by developing countries so that schemes for including them in future international agreements become more likely, and (2) whether S. 2191's reductions meet U.S. commitments to stabilization under the UNFCCC.

The CRS report indicates that the most comprehensive analysis has been conducted by U.S. EPA. The report is entitled: EPA Analysis of the Lieberman-Warner Climate Security Act of 2008: S. 2191 in 110th Congress (March 14, 2008) [
See WIMS 3/17/08]. The analysis employs a suite of models and basecases, along with some useful sensitivity analyses. The CRS report focuses on three of the models, two basecases, and sensitivity analysis as appropriate.

The other analyses investigated by CRS include: (2) the Energy Information Administration (EIA), entitled Energy Market and Economic Impacts. (3) the Massachusetts Institute of Technology (MIT) Joint Program on the Science and Policy of Global Change. The report is an appendix to a more comprehensive analysis of cap-and-trade programs released in 2007.8 The appendix is titled: Appendix D: Analysis of the Cap and Trade Features of the Lieberman-Warner Climate Security Act (S. 2191). (4) the Clean Air Task Force (CATF) by OnLocation. The report is titled The Lieberman-Warner Climate Security Act -- S.2191: A Summary of Modeling Results from the National Energy Modeling System (February 2008). (5) the American Council for Capital Formation (ACCF) and National Association of Manufacturers (NAM) by Science Applications International Corporation. The report is entitled Analysis of The Lieberman-Warner Climate Security Act (S. 2191) Using The National Energy Modeling System (NEMS). (6) the National Mining Association (NMA) by CRA International. The report is entitled Economic Analysis of the
Lieberman-Warner Climate Security Act of 2007 Using CRA’s MRN-NEEM Model (April 8, 2008).

Senate Hearing On Energy & Economic Effects Of Climate Bills

May 20: the Senate Energy & Natural Resources Committee on Energy, Chaired by Senator Jeff Bingaman (D-NM) held a hearing to receive testimony on Energy and Related Economic Effects of Global Climate Change Legislation -- most notably S. 2191 (the Lieberman-Warner Climate Security Act of 2008). A substitute for S. 2191 is being developed and will be considered on the Senate floor in June. Witnesses testifying at the hearing included mostly highly technical representatives of the Congressional Research Service (CRS); Energy Information Administration; U.S. EPA; and the Congressional Budget Office [See related article above on the CRS report analyzing 6 separate model projections on the economic impacts of S. 2191].

Chairman Bingaman set the stage for the hearing saying, "Debates on climate legislation -- and energy policy in general -- have often focused heavily on analyses and predictions. On the extremes, models have been used to show that legislation will have massive disruptions to the economy and cause widespread unemployment. They have also been used to show that legislation will be free to society and a net-benefit to the U.S. economy. Given this wide disparity of findings, it can be difficult to navigate the space in between and understand what the true impacts of legislation will be. We are faced with the question: how can reasonable people and institutions analyze the same policy and find completely incompatible results about its impacts. This hearing will attempt to learn more about the broader issues of what models can and cannot tell us about the impacts of policy and what assumptions can be used that will influence the findings of those models. . ."

U.S. Senator Pete Domenici (R-NM), Ranking Member of the Committee issued a statement warning of “dire consequences” if the proposed Lieberman-Warner cap and trade legislation becomes law. Domenici noted that all eleven economic analyses done on such legislation found that cap and trade would result in higher energy prices for Americans. Of those, seven have been specific to Lieberman-Warner, and all found that the bill will have a negative impact on the economy, ranging from $444 billion to $4.8 trillion by 2030.

Domenici said, ". . .a range of more than $4.5 trillion is as massive as it is inconclusive, and has left me concerned about the dire consequences that Lieberman-Warner could have for our nation." He cited as an example that, the Energy Information Administration’s 2005 Annual Energy Outlook projected the price of oil in 2010 as $25 per barrel, "a prospect which seems very unlikely now, as oil approaches $129 a barrel today." He said the European Union began operating its cap and trade program in 2005, and has seen an annual increase in carbon dioxide emissions of about one percent per year.

Domenici said, "Assume for a moment that Congress passes, and the President signs, the Lieberman-Warner legislation. What then will we have accomplished for the environment? As it turns out, the answer is next to nothing. This is a global program, but without further international action, the Lieberman-Warner bill would reduce the atmospheric concentration of greenhouse gases by a mere one percent by 2050. To achieve that reduction, we may subject America’s economy, prosperity, and global competitiveness to irreparable harm." He noted that China has already surpassed the United States in greenhouse gas emissions, and that the U.S. has already stood strongly against the idea of unilateral action at a time when the American economy was significantly stronger than it is today [referring to the 1997, Senate passage of a resolution indicating its lack of support for the Kyoto Treaty on a 95-0 vote].

Domenici indicated that, “We, as a Congress and a nation, must realize that cap and trade is neither our only option nor our best option for addressing global climate change. Rather than choosing among cap and trade proposals, we should look at alternative measures -- promoting nuclear power, advancing clean energy tax incentives, and accelerating clean technologies.

Access the complete 79-page CRS report (
click here). Access the hearing website for links to all testimony (click here). Access the opening statement from Senator Bingaman (click here). Access the opening statement from Senator Domenici (click here). [*Climate, *Energy]