Monday, September 21, 2009

Climate Legislation Debate Confused Over Cost Estimates

Sep 21: As the Senate begins debate over climate change legislation, conflicting reports on the overall costs are giving both sides of the issue reason to tout their claims. The following provides and overview of a recent report from CBO; the release of FOIA information on a 2008 Treasury Department memo; and a recent detailed report by the Congressional Research Service. The Senate Energy & Natural Resources Committee, Chaired by Senator Jeff Bingaman (D-NM) is currently conducting hearings on the cost associated with cap and trade, climate change legislation.

CBO Report On Economic Effects of GHG Legislation

Sep 18: The Congressional Budget Office (CBO) released a report -- The Economic Effects of Legislation to Reduce Greenhouse-Gas Emissions -- that summarizes its analyses of the economic effects of proposed policy changes aimed at reducing emissions of greenhouse gases (GHG). In its report CBO makes several points regarding the economic implications of policies that might be chosen to address climate change:
  • "The economic impact would depend importantly on the design of the policy. Decisions about whether to reduce greenhouse gases primarily through market-based systems (such as taxes or a cap-and-trade program) or primarily through traditional regulatory approaches that specify performance or technology standards would influence the total costs of reducing emissions and the distribution of those costs. The costs would also depend on the stringency of the policy; whether other countries imposed similar policies; the amount of flexibility about when, where, and how emissions would be reduced; and the allocation of allowances if a cap-and-trade system was used.
  • "Reducing the risk of climate change would come at some cost to the economy. A cap-and-trade system, for example, would lead to higher prices for energy from fossil fuels and for energy-intensive goods, which would in turn provide incentives for households and businesses to use less carbon-based energy and to develop energy sources that emit smaller amounts of carbon dioxide. Changes in the relative prices for energy and energy-intensive goods would also shift income among households at different points in the income distribution and across industries and regions of the country. Policymakers could counteract some of those income losses and shifts by having the government sell emission allowances and use the revenues to compensate certain households or businesses, or by having the government give allowances away to some households or businesses. Even so, some income losses and shifts would occur.
  • "For example, CBO concludes that the cap-and-trade provisions of H.R. 2454, the American Clean Energy and Security Act of 2009, would reduce GDP below what it would otherwise have been—by roughly ¼ to ¾ percent in 2020 and by between 1 and 3½ percent in 2050. By way of comparison, CBO projects that real (that is, inflation-adjusted) GDP will be roughly two and a half times as large in 2050 as it is today, so those changes would be comparatively modest. In the models that CBO reviewed, the long-run cost to households would be smaller than the changes in GDP because consumption falls by less than GDP and because households benefit from more time spent in nonmarket activities. Moreover, these measures of potential costs do not include any benefits of averting climate change.
  • "Climate legislation would cause permanent shifts in production and employment away from industries that produce carbon-based energy and energy-intensive goods and services and toward industries that produce alternative energy sources and less-energy-intensive goods and services. While those shifts were occurring, total employment would probably be reduced a little compared with what it would have been without such a policy, because labor markets would most likely not adjust as quickly as would the composition of demand for different outputs.
  • "CBO has estimated the loss in purchasing power that would result from the primary cap-and-trade program in H.R. 2454. CBO’s measure reflects the higher prices that households would face and the compensation they would receive, primarily through the allocation of allowances or the proceeds from their sale. However, the measure omits some channels of influence on households’ well-being that cannot be readily quantified. It appears that CBO’s measure probably understates the true burden to a small degree. As estimated, the loss in purchasing power would be modest and would rise over time as the cap became more stringent, accounting for 0.2 percent of after-tax income in 2020 and 1.2 percent in 2050.
  • "The distribution of the loss in purchasing power across households depends importantly on policymakers’ decisions about how to allocate the allowances. According to CBO’s calculation, households in the lowest fifth of households when arrayed by income would see gains in purchasing power in both 2020 and 2050, because the compensation they would receive would exceed the costs they would bear. However, households in the middle fifth would see net losses in purchasing power amounting to 0.6 percent of after-tax income in 2020 and 1.1 percent in 2050."

    Republicans React To Cap & Trade Costs Estimates

    Sep 16: U.S. Sen. Lisa Murkowski (R-AK), Ranking Member of the Energy & Natural Resources Committee released a statement in response to the U.S. Treasury Department’s estimate that cap and trade legislation would cost American taxpayers up to $200 billion annually. Senator Murkowski was reacting to the Competitive Enterprise Institute (CEI) information released a from a ... (FOIA) request to the Department of Treasury. The redacted November 8 memo from Treasury indicates it expects that the sort of plan that the president is calling for -- a plan that either immediately auctions off carbon dioxide emission permits or sells nearly all after a few years of giving industry most of its permits for free – would bring from $100-200 billion per year in revenue for the government. CEI indicated that "At the upper end of the administration's estimate, the cost per American household would be $1,761 a year, on top of what they already pay in taxes to the government."

    Senator Murkowski said, “It’s becoming apparent that the administration knew all along how much their cap and trade program would cost, yet they continue to claim it will cost no more than a postage stamp a day. I believe we need to do something about climate change, but I’m equally concerned about the health of the economy. We must focus on legislation that will effectively limit costs, establish a realistic compliance curve, and encourage the rest of the world to join the effort. Some have dismissed the costs of climate legislation as minimal, or surmountable, but we lawmakers must remember that we will be affected far less than many others. Those who will really feel its effects are trying to find jobs right now. They are trying to find a way to pay their bills and mortgages. We shouldn’t pass legislation that makes it harder for Americans to get back on their feet.”

    CEI issued a release saying, “The cost of a cap-and-trade plan to businesses and consumers will be huge, which the Treasury Department internally acknowledges. The documents represent what the administration expects ‘cap and trade’ to cost, and raise. It's a candid perspective that must be told with as much openness to the American public as administration staff discuss with each other. Therefore, we call on the Administration to immediately release complete, un-redacted copies of these documents for all to see. No more hiding.”

The Senate Energy & Natural Resources Committee, Chaired by Senator Jeff Bingaman (D-NM) is currently conducting hearings on the cost associated with cap and trade, climate change legislation. The Committee held a hearing on September 15 [See WIMS 9/16/09]. A second hearing, scheduled for September 17, was postponed until further notice.

A 100-page report -- Climate Change: Costs and Benefits of the Cap-and-Trade Provisions of H.R. 2454 -- by the Congressional Research Service (CRS), released at the first Senate hearing and dated September 14, 2009 indicates, "Attempts to estimate household effects (or other fine-grained analyses) are fraught with numerous difficulties that reflect more on the philosophies and assumptions of the cases reviewed than on any credible future effect." The report, concludes with a range of cost per household based on various assumptions and estimates that are much lower than the cost indicated in the 2008 treasury memo.

Senator James Inhofe (R-OK), Ranking Member of the Senate Environment and Pubic Works Committee, also issued a statement on the CEI release. Senator Inhofe said, During the campaign, President Obama promised tax relief for the middle class. That was then, this is now: the President’s own economic team said his cap-and-trade proposal would cost each family $1,761 per year. To keep his promise with the middle class, the President should have changed course. Instead, he eagerly supported cap-and-trade in the House. And he continues to support it now. And if President Obama gets his way, middle class families, indeed all families, will pay more for gasoline, food, electricity, and much more. This revelation also raises fundamental issues of trust and transparency. . ."

Access a blog posting from CBO summarizing the report (
click here). Access the complete CBO report (click here). Access a release from Senator Murkowski (click here). Access a release from CEI and link to the FOIA documents (click here). Access the CRS report on costs and benefits (click here). Access a release from Senator Inhofe (click here). Access the first Senate hearing website for links to all testimony and a webcast (click here). Access previous WIMS eNewsUSA postings on the cost of climate change legislation (click here).