CBO Grossly Underestimates Cost of Cap and Trade (Waxman-Markey)

Last week, the Congressional Budget Office (CBO) released their analysis of the Waxman-Markey climate change bill that had proponents of the bill claiming Americans could save the planet for just $175 per household. That was the figure CBO estimated cap and trade would cost households in 2020 alone.[1]

Both the CBO's analysis and the subsequent legislation are troubled: The analysis grossly underestimates economic costs while the legislation will have virtually no impact on climate. Overall, there are a number of basic problems with CBO's analysis:

The CBO's June 19 study projected that the allowance price--the price to emit carbon dioxide--will be $28 per ton of CO₂ in 2020.[2] Since there are 5.056 billion tons of CO₂ equivalent in the cap that year (the amount of carbon dioxide and other greenhouse gases businesses are allowed to emit), this projection implies a $141 billion gross cost; however, CBO lists the cost as $91.4 billion. Although there were no changes to the bill between June 5 and June 19, the CBO projected allowance revenues of $119.7 billion, $129.7 billion, $136 billion, $145.6 billion, and $152.9 billion for the years 2015-2019. As the cap on carbon dioxide becomes more stringent, one would expect the allowance revenue to continue to climb, not dramatically decrease to $91.4 billion.[3]

The goal of a cap-and-trade program is to reduce the amount of carbon dioxide and other greenhouse gases in the atmosphere. In order to realize such reductions, cap-and-trade programs establish absolute limits on total emissions of greenhouse gases. Before businesses in a covered sector can emit a greenhouse gas, they need to have the ration coupons (also known as allowances) for each ton emitted.The price a firm pays for these allowances, euphemistically referred to as "climate revenue," should be considered tax revenue. CBO mistakenly assumes that the government spending and distribution of allowance revenue is the dollar-for-dollar equivalent to a direct cash rebate to energy consumers--that is, that the carbon tax is not a tax if the government spends the money, which is simply preposterous.

Most problematic is the CBO's complete omission of the economic damage resulting from restricted energy use. As footnote 3 on page 4 of the CBO analysis reads, "The resource cost does not indicate the potential decrease in gross domestic product (GDP) that could result from the cap. The reduction in GDP would also include indirect general equilibrium effects, such as changes in the labor supply resulting from reductions in real wages and potential reductions in the productivity of capital and labor."[4] In The Heritage Foundation's analysis of the Waxman-Markey climate change legislation, the GDP hit in 2020 was $161 billion (2009 dollars). For a family of four, that translates into $1,870--a pretty big chunk of change that the CBO is ignoring.

It is also worth noting that, of the 24 years analyzed by The Heritage Foundation's Center for Data Analysis (CDA), 2020 had the second lowest GDP loss. Furthermore, the CDA found that for all years the average GDP loss was $393 billion, or over double the 2020 hit. In 2035 (the last year analyzed by Heritage) the inflation adjusted GDP loss works out to $6,790 per family of four--and that is before they pay their $4,600 share of the carbon taxes.[5] The negative economic impacts accumulate, and the national debt is no exception. The increase in family-of-four debt, solely because of Waxman-Markey, hits an astounding $114,915 by 2035.[6]

The CBO analysis is an accounting analysis of the flow of allowance revenue; it is not an economic analysis of the true opportunity cost of the bill. The analysis's "net cost" is essentially the cost of producing offsets and other emissions reductions--a process similar to a company's chief financial officer doing a cash-flow analysis of one investment project. The CBO does not take into account the dynamic general equilibrium consequences of the much higher energy prices: There are serious economic impacts from the energy price increases that they ignore.

The CBO and Congress seem to assume that energy price increases can be mitigated by giving allowance revenue back to businesses and consumers. This is not how the economy works. Prices are merely an information signal about the relative scarcity of real resources that are being used. For example, if farmers use their land, labor, and equipment to produce offsets, instead of planting more food crops, the price of food will go up. Yet the CBO report ignores this reality.

The CBO analysis cannot be used to debate the economic cost versus economic benefit of the bill. Instead, it can be used only to follow the money of the allowance revenue so policymakers and the public can understand exactly how that piece of the legislation is being handled. There is value in keeping an accounting of this revenue flow in order to determine who is getting what, but CBO should make it clear that this is the limit of their analysis.

It is inappropriate to go beyond this analysis, for example, by comparing CBO's cost estimates to those of The Heritage Foundation, the National Black Chamber of Commerce, or even the EPA, as many Members of Congress are already doing. These Members are simply trying to compare two different cost concepts--accounting versus economic. Although the EPA's analysis is flawed for other reasons,[7] mostly because of unrealistic assumptions, they at least attempt to estimate the economic cost, which the CBO did not.

Regardless of the CBO's cost estimates of the Waxman-Markey cap-and-trade program, the necessary second part of the question--what benefits do the costs generate?--remains unanswered. Americans will get almost nothing in exchange for these higher taxes, and the legislation will provide nothing for future generations except more debt and less economic opportunity. According to climatologist Chip Knappenberger, Waxman-Markey would moderate temperatures by only hundredths of a degree in 2050 and no more than two-tenths of a degree at the end of the century.[8] This does not sound like a great deal for the next generation--millions of lost jobs, trillions of lost income, 50-90 percent higher energy prices, and stunning increases in the national debt, all for undetectable changes in world temperature.

The CBO analysis of Waxman-Markey fails to take into account all the adverse effects that will ripple through the U.S. economy if cap and trade becomes law. CBO's grossly underestimated costs means Members of Congress will be grossly misinformed when voting on the legislation.

David W. Kreutzer, Ph.D., is Senior Policy Analyst for Energy Economics and Climate Change, and Karen A. Campbell, Ph.D., is Policy Analyst in Macroeconomics, in the Center for Data Analysis, and Nicolas Loris is a Research Assistant in the Thomas A. Roe Institute for Economic Policy Studies, at The Heritage Foundation.

[1]Douglas Elmendorf, "Measuring the Effects of the Business Cycle on the Federal Budget," Congressional Budget Office Director's Blog, June 23, 2009, at http://cboblog.cbo.gov/ (June 24, 2009).

[2]Congressional Budget Office, "The Estimated Costs to Households from H.R. 2454 American Clean Energy and Security Act of 2009," June 19, 2009, at http://www.cbo.gov/ftpdocs/103xx/doc10327/06-19-CapAndTradeCosts.pdf (June 24, 2009).

[3]American Clean Energy and Security Act of 2009", June 5, 2009 at http://www.cbo.gov/ftpdocs/102xx/doc10262/hr2454.pdf (June 24, 2009).

[4]Congressional Budget Office, "The Estimated Costs to Households from H.R. 2454 American Clean Energy and Security Act of 2009."

[5]William W. Beach, David Kreutzer, Karen Campbell, and Ben Lieberman, "Son of Waxman-Markey: More Politics Makes for a More Costly Bill," Heritage Foundation WebMemo No. 2450, May 18, 2009, at http://www.heritage.org/Research/EnergyandEnvironment/wm2450.cfm.

[6]Ibid.

[7]For a critique of the EPA's economic analysis of Waxman-Markey, see David Kreutzer and Nicolas D. Loris, "Questions on EPA's Cost Estimates for Waxman-Markey Climate Change Legislation," Heritage Foundation WebMemo No 2470, June 9, 2009, at http://www.heritage.org/Research/Energy
andEnvironment/wm2470.cfm.

[8]Chip Knappenberger, "Climate Impacts of Waxman-Markey (the IPCC-based Arithmetic of No Gain)," MasterResource, May 6, 2009, at http://masterresource.org/?p=2355 (June 24, 2009).

The Climate Change E-Mails the EPA Doesn’t Want You To See
By Michelle Malkin, June 24, 2009

Another day, Another Obama Cover-up.

The Competitive Enterprise Institute has obtained internal EPA e-mails that show the agency willfully and recklessly disregarded scientific data that undermined the bureaucracy’s global warming zealotry.
This information is especially relevant as Congress rushes to pass the cap-and-trade nightmare on Friday.

CEI general counsel Sam Kazman has notified the EPA and requested that the internal communications and suppressed study be released to the public and added to the public record. Will another whistleblower be disappeared? Note especially this warning to the dissenting scientist: “The time for such discussion of fundamental issues has passed for this round. The administrator and the administration has decided to move forward on endangerment, and your comments do not help the legal or policy case for this decision… I can only see one impact of your comments given where we are in the process, and that would be a very negative impact on our office.”

Read:

CEI is submitting a set of four EPA emails, dated March 12-17, 2009, which indicate that a significant internal critique of EPA’s position on Endangerment was essentially put under wraps and concealed. The study was barred from being circulated within EPA, it was never disclosed to the public, and it was not placed in the docket of this proceeding. The emails further show that the study was treated in this manner not because of any problem with its quality, but for political reasons.

CEI hereby requests that EPA make this study public, place it into the docket, and either extend or reopen the comment period to allow public response to this new study. We also request that EPA publicly declare that it will engage in no reprisals against the author of the study, who has worked at EPA for over 35 years.

The emails, attached hereto, consist of the following:

1) a March 12 email from Al McGartland, Office Director of EPA’s National Center for Environmental Economics (NCEE), to Alan Carlin, Senior Operations Research Analyst at NCEE, forbidding him from speaking to anyone outside NCEE on endangerment issues;

2) a March 16 email from Mr. Carlin to another NCEE economist, with a cc to Mr. McGartland and two other NCEE staffers, requesting that his study be forwarded to EPA’s Office of Air and Radiation, which directs EPA’s climate change program. The email notes the quantity of peer-reviewed references in the study, and defends its inclusion of new research as well. It states Mr. Carlin’s view that “the critical attribute of good science is its correspondence to observable data rather than where it appears in
the technical literature.” It goes on to point out that the new studies “explain much of the observational data that have been collected which cannot be explained by the IPCC models.” (Emphases added);

3) a March 17 email from Mr. McGartland to Mr. Carlin, stating that he will not forward Mr. Carlin’s study. “The time for such discussion of fundamental issues has passed for this round. The administrator and the administration has decided to move forward on endangerment, and your comments do not help the legal or policy case for this decision… I can only see one impact of your comments given where we are in the process, and that would be a very negative impact on our office.” (Emphasis added);

4) a second March 17 email from Mr. McGartland to Mr. Carlin, dated eight minutes later, stating “ I don’t want you to spend any additional EPA time on climate change.”

Mr. McGartland’s emails demonstrate that he was rejecting Mr. Carlin’s study because its conclusions ran counter to EPA’s proposed position. This raises several major issues.

A. Incompleteness of the Rulemaking Record: The end result of withholding Mr. Carlin’s study was to taint the Endangerment Proceeding by denying the public access to important agency information. Court rulings have made it abundantly clear that a rulemaking record should include both “the evidence relied upon [by the agency] and the evidence discarded.” Ethyl Corp. v. EPA, 541 F.2d 1, 36 (D.C. Cir. 1976), cert. denied, 426 U.S. 941 (1976).

B. Prejudgment of the Outcome of the Endangerment Proceeding: The emails also suggest that EPA has prejudged the outcome of this proceeding, to the point where it arguably cannot be trusted to fairly evaluate the record before it. Courts have recognized “the danger that an agency, having reached a particular result, may become so committed to that result as to resist engaging in any genuine reconsideration of the issues.” Food Marketing Institute v. ICC, 587 F.2d 1285, 1290 (D.C. Cir. 1978).

C. Violations of EPA’s Commitment to Transparency and Scientific Honesty: Finally, the emails suggest that EPA’s extensive pronouncements about transparency and scientific honesty may just be rhetoric. Shortly before assuming office, EPA Administrator Lisa Jackson declared: “As Administrator, I will ensure EPA’s efforts to address the environmental crises of today are rooted in three fundamental values: science-based policies and programs, adherence to the rule of law, and overwhelming transparency.” Jan. 23, 2009, link. See also Administrator Jackson’s April 23 Memo to EPA Employees, “Transparency in EPA’s Operations”. These follow the President’s own January 21 memo to agency heads on “Transparency and Open Government”. And in an April 27 speech to the National Academy of Sciences, the President declared that, “under my administration, the days of science taking a back seat to ideology are over.”

Because of ideology, however, it was this back seat to which Mr. Carlin’s study was relegated; more precisely, it was booted out of the car entirely.

For these reasons, we submit that EPA should immediately make Mr. Carlin’s study public by entering it into the Endangerment docket, and that it should either extend or reopen the comment period in this proceeding to allow public responses to that study. It should do so, moreover, while publicly pledging that Mr. Carlin will suffer no adverse repercussions from agency personnel. Mr. Carlin is guilty of no wrongdoing, but the tenor of the emails described above suggests he may well have reason to fear reprisals.

Read all the e-mails here.

Do your congressional reps know about this? Tell them: 202-224-3121.

TAB

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