The Good News—the Air is Getting Cleaner

The report can be summed up with this graphic from EPA:

GDP, vehicle miles traveled, population, and energy consumption have all increased since 1990. But despite the fact that more people are using more energy to produce more goods and services, air pollution emissions have decreased.

EPA reports that air quality has improved for the six main air pollutants:

Since 1990, nationwide air quality has improved significantly for the six common air pollutants. These six pollutants are ground-level ozone, particle pollution (PM2.5 and PM10), lead, nitrogen dioxide (NO2), carbon monoxide (CO), and sulfur dioxide (SO2). Nationally, air pollution was lower in 2008 than in 1990 for:

• 8-hour ozone, by 14 percent
• annual PM2.5 (since 2000), by 19 percent
• PM10 , by 31 percent
• Lead, by 78 percent
• NO2 , by 35 percent
• 8-hour CO, by 68 percent
• annual SO2 , by 59 percent

The below graphic, from EPA’s website, (but not in the actual air trends report) shows air quality trends since 1970. These trends are even more dramatic that the 1990 to 2008 numbers.

The Bad News: the Press Does Not Seem Interested in Telling the American People Our Air Quality has Dramatically Increased

This is good news that air quality continues to improve and even more so because the American people do not know it. According to a 2004 poll from the Foundation for Clean Air Progress, only 29 percent of people thought that “America’s air quality is better than . . . it was in 1970.”

One reason that the American people do not know this is because the press does not report on it.  So far not one major newspaper has written a story about the good news in this air trends report—there’s nothing from the Washington Post, New York Times, Los Angeles Times, or any of the other major news outlets. The only story we could find is from E&E News (a subscription-based environment and energy news service) and even then it was the 12^th story in their afternoon publication.

It’s tough for the American people to lean to the truth about air quality when the media does not report the good news.

Our Air is Getting Cleaner

Today we can breathe easier knowing that our air is much cleaner than in the past. Even though the media is not reporting this good news to the American people, our air quality has substantially improved and will continue to improve. The data shows the truth.

The Obama Administration’s recently released “Economic Report of the President” devoted an entire chapter to “Transforming the Energy Sector and Addressing Climate Change” [.pdf]. Whenever the government promises to transform an entire sector of the economy, we know to watch out. Upon a simple reading it is obvious that the president’s fancy economic rhetoric doesn’t justify the $60 billion in “stimulus” funds and the proposed new mandates on the private sector. Even the report’s own analysis shows that the likely damages from climate change are comparable to the economic damages of more government regulation.

The Official Economic Argument for Intervention

Frequently when governments want to increase their power, money, and influence they justify their schemes with a scientific appeal. Standard economic theory provides just such a justification in the form of “market failure,” where the Invisible Hand breaks down because of “externalities.” Most people are familiar with the alleged negative externality of greenhouse gas emissions—which then justify either carbon taxes or cap-and-trade—but the president’s report introduces us to a new market failure, this time from a positive externality:

A market-based approach to reducing greenhouse gases [i.e. cap-and-trade] will provide incentives for research and development (R&D) into new clean energy technologies as firms search for ever cheaper ways to address the negative externality associated with their emissions. However…there is a separate externality in the area of R&D. Because it is difficult for the person or firm doing research to capture all of the returns, the private market supplies too little R&D—particularly for more basic forms of R&D…In this case, government R&D policies can complement the use of a market-based approach to reducing greenhouse gas emissions and yield large benefits to society. A policy that broadly incentivizes energy R&D is more likely to maximize social returns than a narrow one targeted at a specific technology because it allows the market, rather than the government, to pick winners. Likewise, funding efforts in support of basic R&D are less likely to crowd out private investment because differences between private and social returns to innovation are largest for basic R&D. (Economic Report, p. 243, bold added)

Rhetoric versus Reality

Given the textbook justification for government spending, we would now expect the Obama Administration to tout its expenditures on, say, math and science Ph.D. students, or a superconducting supercollider. As the report itself stresses, the economic rationale for such investments is that the social returns spill out across many sectors, so that individual companies would not be expected to spend the optimal level when we consider the costs and benefits to society as a whole. Since the report says the stimulus package provided “$60 billion in direct spending and $30 billion in tax credits” to “jump-start” the transition to a “clean energy economy,” there is a whole lot of ‘splainin’ that the administration must do.

Yet look at the programs the president’s report touts as fulfilling the requirements of “basic R&D,” without the government “picking winners”:

In its 2011 proposed budget, the Administration has stated a commitment to fund R&D as part of its comprehensive approach to transform the way we use and produce energy while addressing climate change. The Recovery Act investments begun in 2009 are a first step in this clean energy transformation. They fall into eight categories that are briefly described here.

Energy Efficiency. The Recovery Act promotes energy efficiency through investments that reduce energy consumption in many sectors of the economy. For instance, the Act appropriates $5 billion to the Weatherization Assistance Program to pay up to $6,500 per dwelling unit for energy efficiency retrofits in low-income homes…

Renewable Generation. The Recovery Act investments in renewable energy generation also are leading to the installation of wind turbines, solar panels, and other renewable energy sources…

Traditional Transit and High-Speed Rail. Grants from the Recovery Act also will help upgrade the reliability and service of public transit and conventional intercity railroad systems. For example, $8 billion is going to improve existing, or build new, high-speed rail in 100- to 600-mile intercity corridors…

Clean Energy Equipment Manufacturing. The Recovery Act investments are increasing the Nation’s capacity to manufacture wind turbines, solar panels, electric vehicles, batteries, and other clean energy components domestically. As the United States transitions away from fossil fuels, demand for advanced energy products will grow, and these investments in clean energy will help American manufacturers participate in supplying the needed goods. (pp. 243-245)

In the quotation above, we have omitted some of the items—such as research on batteries—that could plausibly be classified as “basic R&D.” But as the list above shows, much of the spending programs are the furthest things from basic R&D, and are quite obviously examples of the government shoveling money to favored constituencies. Engineers already know how to weatherize homes and build traditional transit systems; there is no “market failure” here from spillover benefits from R&D spending.

The Costs of Inaction?

After sketching some of the major components of the $90 billion in total government assistance for “clean energy” in the stimulus package, the president’s report goes on to describe the administration’s plans to push for a government cap on greenhouse gas emissions, as well as new mandates on energy efficiency and renewable electricity generation.

In order to stifle voter skepticism over the costs of these proposed interventions into the energy sector, proponents will usually say, “Sure the costs are high, but the costs of inaction are much higher. We can’t afford to not act when it comes to global warming.”

In this context, the reader might be surprised to examine the report’s charts which show that the actual scientific literature—even the “consensus” as codified by the Intergovernmental Panel on Climate Change’s latest report—shows that the case for alarmism is dubious:

[T]he projected losses for the most likely range of temperature changes are relatively modest. For example, at the Intergovernmental Panel on Climate Change’s most likely temperature increase of 3˚C for a doubling of CO₂ concentration (concentrations in 2100 are likely to be higher), the projected decline is 1.5 percent of GDP. (Box 9-2, page 242, emphasis added)

That is worth repeating: The Administration’s own report, in a chapter devoted to the need to “transform the energy sector,” admits that doing absolutely nothing would “most likely” lead to a “relatively modest” impact. This is consistent with the CBO’s modeling which showed that a “pessimistic” estimate of the damages from inaction are lower than the high-end estimate of the economic cost of the Waxman-Markey cap-and-trade bill by the year 2050.

Of course, it’s always possible that unchecked greenhouse gas emissions will lead to disaster. After letting the cat out of the bag regarding the “most likely” impacts from letting the market and nature run their course, the president’s report tells us:

The projected relationship between temperature changes and consumption losses is nonlinear—that is, the projected losses grow more rapidly as temperature increases. For example, while the projected loss for the first 3˚C is 1.5 percent, the loss at 6˚C is five times higher. And the estimated loss associated with an increase of 9˚C is about 20 percent [of consumption’s share of GDP]…Overall, it is evident that policy based on the most likely outcomes may not adequately protect society because such estimates fail to reflect the harms at higher temperatures. (ibid, bold added)

Those are scary numbers, it’s true. But how likely is it that human activities will cause the world to increase 9˚C, when the total warming since the start of the Industrial Revolution has been about 0.7˚C? As this graph from the IPCC’s latest report shows—across three different emission scenarios and five different modeling teams—the probability of such a rapid warming is virtually zero. Once the government gets permission to transform entire sectors of the economy because of the dangers posed by extremely unlikely outcomes, the sky’s the limit.

Conclusion

The proposals to transform the energy sector are so audacious that they can’t even be justified according to the government’s own rhetoric. A simple reading of the president’s own economic report reveals that the billions in handouts violate their own alleged rationale, and the government’s own numbers show that the likely threat of climate change is less damaging than the Waxman-Markey cap-and-trade plan.

Washington, DC – Earlier this morning, President Obama promised that over the next 10 years, the federal government will reduce its carbon emissions by 28 percent – and issued an executive order to make it so. “Actions taken under this Executive Order,” the White House declared today, “will spur clean energy investments that create new private-sector jobs, drive long-term savings, build local market capacity, and foster innovation and entrepreneurship in clean energy industries …”

Following the announcement’s release, the Institute for Energy Research (IER) conducted its own fact-check of key assertions contained in the statement. What follows is what we found:

WH Presser: “Achieving the Federal GHG pollution reduction target will reduce Federal energy use by the equivalent of 646 trillion BTUs, equal to 205 million barrels of oil, and taking 17 million cars off the road for one year.  This is also equivalent to a cumulative total of $8 to $11 billion in avoided energy costs through 2020.”

IER: While it’s not entirely clear from where the 646 trillion BTU number was derived (no citation given), the notion that this initiative will result in the “cumulative total of $8 to $11 billion in avoided energy costs through 2020” is difficult to substantiate. What will this initiative cost? Will expected costs exceed “avoided” costs? To argue that this is a cost savings measure is not only disingenuous, it is misleading.  A proper accounting of costs and benefits would include a recognition that there’s no such thing as a free lunch – especially when dealing with renewable energy resources that are, by their very nature, expensive, unreliable and intermittent.

WH Presser: “As the largest energy consumer in the United States, we have a responsibility to American citizens to reduce our energy use and become more efficient,” said President Obama.  “Our goal is to lower costs, reduce pollution, and shift Federal energy expenses away from oil and towards local, clean energy.”

IER: That the U.S. Government is the largest consumer of energy in America is accurate; beyond that, very little of this statement seems to reflect the reality of the present world. It is indeed easy to cast demagogic aspersions on oil – and then leave the podium to board an aircraft that runs entirely on fuels derived from it. More difficult – but more representative of the actions of a leader – is to admit that any attempt to radically restructure the means by which the federal government secures it energy will necessarily require higher costs, higher taxes, and the potential for significant disruption owing to the use of an unreliable, but politically correct, product. Framed in that context, some Americans may still support the broader program – but at least none would be deluded into thinking it can be secured without cost.

WH Presser: “Federal Departments and Agencies will achieve greenhouse gas pollution reductions by measuring their current energy and fuel use, becoming more energy efficient and shifting to clean energy sources like solar, wind and geothermal.”

IER: At its core, this initiative is nothing more than a renewable electricity mandate and a cash for caulkers program wrapped into one, sweet-sounding cipher. While the President cites “avoided” costs, he fails to mention the untold additional costs such a program like this will cost the taxpayer. According to Energy Information Administration (EIA) statistics, wind and solar energy will continue to be the most expensive way of generating electricity for years to come. Click HERE for a levelized cost analysis of all generating technologies.

For additional information, please contact Patrick Creighton, 202-621-2947, or Laura Henderson, 202-621-2951.

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Senator McCain called “the agreement to take note of the accord” reached by the United States and a handful of developed nations a “nothing burger.” Senator Kerry, on the other hand, believes the accord is important and called China’s participation “the most critical thing” to ensuring Senate passage of the national energy tax, even though few observers believe China will actually do anything to curtail their growing use of carbon-based energy.  Meanwhile, the question of whether the outcome in Denmark was enough to advance international efforts to control emissions can best be summarized by Henry Derwent, president of the Geneva-based International Emissions Trading Association, who noted that the climate talks were a “step backward” in terms of a signal that will support carbon prices.

While the Copenhagen Accord does not represent a major change from the status quo, there are a few troubling aspects of the U.S. effort in Copenhagen worth noting.   

First, U.S. negotiators opposed efforts from China and India to ban the use of border tariffs on energy-intensive exports.  That means the U.S. actively fought to leave the prospect of Smoot-Hawley-type trade wars on the table for Senate cap-and-trade negotiators. The United States has benefited greatly from free trade; now the U.S. government is opposing free trade. 

Second, unlike China and other developing countries, the U.S. will allow “international consultations and analysis” of our greenhouse gas emissions. It is not clear how intrusive these international consultations will be, but with millions of sources of greenhouse gas emissions, it’s hard to believe that they won’t in some way encroach on U.S. sovereignty.

Third, the U.S.’s commitment to hand over billions of dollars a year in taxpayer money was a premature gesture that will only serve as the new floor for developing nations in the next round of international talks.  Why would nations in the third world operate under this agreement if they can now see that the starting point for COP 16’s bargaining talks is $30 billion?

Fourth, we must consider the sheer size of the U.S. delegation; press accounts reveal that in addition to the President, five cabinet officials, four other high ranking officials, one czar, over thirty Members of Congress and a host of staff attended all or part of the conference. The United States spent millions to send a small army to Copenhagen to forge a non-binding “accord” that very few Americans view as a priority.

Finally, contrary to Senator Kerry’s hopes, China’s willingness to sit at a non-binding negotiating table will not ease the pain a national energy rationing cap-and-trade tax will cause for American families and is certainly not a sufficient gesture to justify its passage.

Ultimately, Copenhagen will have no impact on the outcome of the cap-and-trade legislation moving through Congress.  As we have just seen in the health care debate, Senate passage of this increasingly unpopular measure will depend on how much taxpayer money Majority Leader Reid is willing to give away to his fence-sitting colleagues to reach the 60 votes necessary to move this bill forward.

“What was offered today was nothing more than more of the same. Bipartisanship for the sake of bipartisanship may make for good headlines, but the proposal outlined today is a tripartisan bad idea for the American people – paving the way for a job-killing cap-and-trade system that will increase the price of energy across the board.

“The Senators claim that their approach is a ‘market-based’ one. More government mandates, regulations and huge amounts of taxpayer subsidies to unreliable, expensive energy forms – a key component of their plan – will not put our nation on a path toward energy and economic security and is the furthest thing from ‘market-based’. This is a ‘government-mandated’ approach that creates a ‘market’ out of thin air.

“As for the nominal attempts to expand domestic offshore energy exploration, nothing has changed. Commonsense action from the Obama Administration – not Congress – is what now stands between the American people and the vast job-creating energy resources on taxpayer owned lands. The Senators should spend their time urging the Obama Administration to stop its administrative embargo against America’s domestic energy supplies.

“Unfortunately, American families facing economic hardships are strikingly absent from this debate. And they realize that this proposal – like others being considered by Congress and by the EPA – will increase their energy bills, keep more American energy off-limits and cost even more jobs.”

Note: Click here to read the Senator’s framework.

For additional information, please contact Patrick Creighton, 202-621-2947, or Laura Henderson, 202-621-2951.

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Washington, DC – Today, the U.S. Senate Environment and Public Works Committee passed a global warming bill. Following the panel’s vote, Thomas J. Pyle, president of the non-partisan, pro-market Institute for Energy Research (IER), issued this statement:

“The winners today are rent-seeking corporations, Washington special interests and our global competitors, especially China. The timing of this vote – which will weaken America’s ability to compete in the global economy – is particularly ironic, given that just yesterday a U.S. global warming envoy official told Congress that ‘No country holds the fate of the Earth in its hands more than China.’

“Enacting burdensome policies – such as cap-and-trade – will drive energy prices up and make it more difficult to create jobs, wealth and prosperity here in the U.S. China’s hand, however, will only grow stronger, as they continue to aggressively access and develop all forms of energy in their country and across the world. This, in large part, is what has enabled their enormous economic growth and expansion.

“While the members of this committee who voted to advance this legislation may attempt to downplay their vote to increase energy costs for American families, seniors and small businesses as an inside-the-beltway procedural motion, the fact remains that job-killing, carbon regulating legislation has cleared a major hurtle and is a major step closer to becoming law.”

For additional information, please contact Patrick Creighton, 202-621-2947, or Laura Henderson, 202-621-2951.

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Unlike previous versions, this one spells out which groups are politically-favored enough to receive preferential treatment in the form of free carbon dioxide emissions allowances. This draft also includes “Increased Investments in Energy Efficiency and Renewable Energy.” In other words, increased subsidies for politically-favored forms of energy. The premise of this section of the bill seems to be that the American people need the federal government to tell them how to use energy cost-effectively.

Like Waxman-Markey, this bill is shaping up to be incredibly costly and incredibly intrusive into all aspects our energy use.

Apparently, Senators Boxer and Kerry understand the difficulties they will face in passing a cap-and-trade bill this year. It seems that, in order to create leverage to secure more votes, the drafts do not completely spell out how the carbon dioxide allowances will be allocated. Instead the draft bills contain many placeholders. The following outlines the placeholders in the first bill leaked today:

SEC. 101. DISTRIBUTION OF ALLOWANCES FOR INVESTMENT IN CLEAN VEHICLES.

[PLACEHOLDER FOR AUTHORIZING LANGUAGE]

SEC. 124. DISTRIBUTION OF ALLOWANCES FOR COMMERCIAL DEPLOYMENT OF CARBON CAPTURE AND SEQUESTRATION.

[PLACEHOLDER FOR AUTHORIZING LANGUAGE]

SEC. 131. DISTRIBUTION OF ALLOWANCES TO STATES.

[PLACEHOLDER FOR AUTHORIZING LANGUAGE]

SEC. 201. ENERGY INNOVATION HUBS.

[PLACEHOLDER FOR AUTHORIZING LANGUAGE]

SEC. 202. ADVANCED ENERGY RESEARCH.

[PLACEHOLDER FOR AUTHORIZING LANGUAGE]

SEC. 454. ENERGY EFFICIENCY IN BUILDING CODES.

[PLACEHOLDER FOR TEXT PROVIDING ALLOCATION FOR PROGRAM UNDER SECTION 174]

SEC. 455. BUILDING RETROFIT PROGRAM.

[PLACEHOLDER FOR TEXT PROVIDING ALLOCATION FOR PROGRAM UNDER SECTION 175]

SEC. 456. FLOOD PREVENTION.

[PLACEHOLDER FOR TEXT PROVIDING ALLOCATION FOR PROGRAM UNDER SECTION 181]

SEC. 457. WILDFIRE.

PLACEHOLDER FOR TEXT PROVIDING ALLOCATION FOR PROGRAM UNDER SECTION 182]

SEC. 460. GREEN JOBS AND WORKER TRANSITION.

[PLACEHOLDER FOR TEXT PROVIDING ALLOCATION FOR PROGRAM UNDER SUBTITLE B OF TITLE III or for ENERGY EFFICIENCY AND RENEWABLE ENERGY WORKER TRAINING FUND UNDER SECTION 322]

SEC. 461. NATIONAL CLIMATE CHANGE ADAPTATION PROGRAM.

[PLACEHOLDER FOR TEXT PROVIDING ALLOCATION FOR PROGRAM UNDER SECTION 351]

SEC. 462. CLIMATE CHANGE HEALTH PROTECTION AND PROMOTION FUND.

[PLACEHOLDER FOR TEXT PROVIDING ALLOCATION FOR PROGRAM UNDER SECTION 367]

SEC. 463. CLIMATE CHANGE SAFEGUARDS FOR NATURAL RESOURCES CONSERVATION.

[PLACEHOLDER FOR TEXT PROVISING ALLOCATION FOR PROGRAM UNDER SUBPART C OF PART 1 OF SUBTITLE E OF TITLE III (section  371 et seq.)]

SEC. 464. NATURAL RESOURCES CLIMATE CHANGE ADAPTATION FUND.

PLACEHOLDER FOR TEXT PROVISING ALLOCATION FOR PROGRAM UNDER SECTION 380]

SEC. 465. INVESTMENT IN ENERGY EFFICIENCY AND RENEWABLE ENERGY.

PLACEHOLDER FOR TEXT PROVISING ALLOCATION FOR PROGRAMS UNDER SUBSECTIONS (a)(8), (b)(6), and (b)(7) of SECTION 782, and SECTION 788, of the Clean Air Act (as added by SECTION 411)]

Subtitle D—International Climate Change Program

Sec. 341.

TO BE SUPPLIED.

SEC. 2. FINDINGS.

TO BE SUPPLIED

SEC. 142. NUCLEAR WASTE RESEARCH AND DEVELOPMENT.

TO BE SUPPLIED

SEC. 173. ADVANCED BIOFUELS.

TO BE SUPPLIED

SEC. 181. FLOOD PREVENTION.

TO BE SUPPLIED

SEC. 790. ENERGY REFUND PROGRAM.

TO BE SUPPLIED

Subtitle D—International Climate Change Program

SEC. 341.

TO BE SUPPLIED.

SEC. 788. CLIMATE CHANGE CONSUMER REBATES.

TO BE SUPPLIED

After the first draft bill was leaked, and appeared in a story in Greenwire, an updated draft was leaked. This second draft did not contain as many placeholders as the first, instead it gives the EPA Administrator discretion to allocate many of the allowances. This still gives Senators Boxer and Kerry bargaining power to allocate allowances to politically preferred groups.

But it also raises an important question—if Congress needs to act to limit the damage of EPA regulating carbon dioxide under the Clean Air Act, how is the second Boxer-Kerry draft an improvement over EPA regulation? This is especially important because the Boxer-Kerry draft does not limit EPA authority to regulate greenhouse gases using the Clean Air Act.[1]

Even more surprising, the CBO report reveals (without trumpeting the result, of course) that the costs borne by the U.S. may exceed the benefits to the entire world. This should be surprising indeed to the casual observer who thought there was a “clear consensus” on the net benefits of the cap-and-trade component of Waxman-Markey.

CBO Says: Waxman-Markey’s Costs to U.S. Economy May Outweigh Benefits to U.S. Economy

For all the warnings about the dire consequences of ignoring the threat posed by climate change, the reader of the latest CBO report may be shocked to discover this admission:

Despite the wide variety of projected impacts of climate change over the course of the 21^st century, published estimates of the economic costs of direct impacts in the United States tend to be small. Most of the economy involves activities that are not likely to be directly affected by changes in climate. Moreover, researchers generally expect the growth in the U.S. economy over the coming century to be concentrated in sectors—such as information technology and medical care—that are relatively insulated from climate effects. Damages are therefore likely to be a smaller share of the future economy than they would be if they occurred today.

As a consequence, a relatively pessimistic estimate for the loss in projected real gross domestic product is about 3 percent for warming of about 7° Fahrenheit (F) by [the year] 2100. [CBO p. 3, emphasis added.]

It’s true there are much larger estimates of projected impacts from climate change if we include “non-market” activities and include scenarios of “abrupt changes”; we will explore those in more detail in a later section. But it is worth stressing that when environmental economists set out to carefully quantify the likely effects of uninterrupted climate change if governments “ignored” the problem, their best-guess estimate is a loss of 3 percent of GDP a century from now.

In contrast, what are the estimated costs of limiting greenhouse gas emissions, and trying to mitigate this potential 3 percent hit to GDP in 2100? The CBO gives this information in a convenient table, though the reader has to flip ahead to page 13 to find it. Once there, we learn that the CBO’s estimate of the hit to the U.S. economy from H.R. 2454 is in the range of 1.1 to 3.4 percent of GDP by the year 2050. Here’s CBO’s graph:

This is quite simply a bombshell revelation, and the skeptical reader only needs to look at the two pages (3 and 13) of the CBO report [.pdf] to make sure we’re not making this up. The CBO is admitting that even a pessimistic estimate of the danger posed by climate change is 3 percent of GDP, which won’t occur until 2100. On the other hand, the high-range estimate of the cost of Waxman-Markey’s cap-and-trade program is 3.4 percent of GDP, which will hit 50 years earlier.

These revelations alone are sobering enough, but it’s much worse than the difference of 0.4 percentage points. First, the time element matters. Put most simply, people prefer to have a dollar today than a dollar 50 years from now because we do not know what the future holds. Future benefits (such as averted climate damage) need to be discounted by some factor, simply because they accrue in the future. This is not a “climate change skeptic” debating point; all sides agree on the principle, they simply disagree on the appropriate number to use when discounting the future.[1] Therefore, the fact that the full economic damages of Waxman-Markey hit fifty years before the full (alleged) benefits kick in, is quite significant.

But second and more important: It is wildly inappropriate to judge the cost of Waxman-Markey (1.1 percent – 3.4 percent of GDP by 2050) against the full damage resulting from unrestricted climate change (possibly 3 percent of GDP by 2100), because Waxman-Markey will not stop global climate change in its tracks. In the extreme case, standard models show that if the U.S. complies with the Waxman-Markey emission caps, while the rest of the world continues with their baseline emissions growth, then the increase in global temperatures (in the medium emission scenario) will only be slowed by two-tenths of one degree Fahrenheit.

Of course, the proponents of Waxman-Markey say that the U.S. government needs to show its own commitment to limiting greenhouse gas emissions, and then we will see the rest of the major governments following suit (even though they have said explicitly that they won’t). That’s fine. So what these proponents need to do, is lay out an actual scenario, showing at what dates various other governments will limit their own emissions. Then U.S. policymakers will be in a position to make an informed decision as to whether the projected costs to the U.S. economy are counterbalanced by likely benefits.

But as it stands currently, all of the published work rests on a complete non sequitur. Even if Waxman-Markey cured the world of the threat from climate change, the CBO’s own figures show that its price tag might be too high, in terms of benefits and costs to the U.S. economy. But once we realize that Waxman-Markey is, by itself, a largely symbolic gesture that may not lead to similar commitments from other governments, the case for Waxman-Markey is far more dubious.

CBO Says: Price of Carbon Allowances Are Definitely Too High to Benefit Americans, and Possibly Even the World as a Whole

Rather than looking at GDP figures, there is another way to see that the CBO report shows Waxman-Markey will cost Americans far more than it will benefit them. We will show that the CBO’s projections for the market price of carbon allowances are much higher than the lower-end estimates that the government places on the “social cost of carbon.” On page 10 the CBO report says:

CBO estimates that the price of the allowances under H.R. 2454 would be $15 in 2012, the initial year that the cap took effect, and would rise at an annual real rate of 5.6 percent over the course of the policy, reaching $23 in 2020 and $118 by 2050 (all in 2007 dollars).

Now the whole theoretical justification of capping emissions is that they constitute a “negative externality,” meaning that emitting a ton of carbon dioxide imposes damages on others that the emitter is not correctly taking into account. The solution, in standard economics textbooks, is for the government to impose an artificial cost (through either a tax or mandating an allowance that carries a market price) to make the emitter “internalize the externality.”

But in order for this to be efficient, the size of the penalty—the tax on carbon or the price of an carbon allowance—has to match up with the alleged externality. In the climate change literature, this externality is called the “social cost of carbon,” or SCC.

The CBO has just shown us what it projects the price of carbon allowances will be in the U.S. market, under the cap-and-trade program outlined in Waxman-Markey. As the cap tightens over time, the price of the allowances will rise, reaching a level of (inflation-adjusted) $118 by 2050. In order to know whether this is too high, too low, or just right, we need to compare this projected path of allowance prices, with the estimated path of the social cost of carbon.

The CBO report doesn’t have this information, but the Federal Register (Vol. 74, No. 167) [.pdf] does. On page 44948 we read:

The interim judgments resulting from the recent interagency review process can be summarized as follows: (a) DOE and other Federal agencies should consider the global benefits associated with the reductions of CO2 emissions resulting from efficiency standards and other similar rulemakings, rather continuing the previous focus on domestic benefits; (b) these global benefits should be based on SCC estimates (in 2007$) of $55, $33, $19, $10, and $5 per ton of CO2 equivalent emitted (or avoided) in 2007; (c) the SCC value of emissions that occur (or are avoided) in future years should be escalated using an annual growth rate of 3 percent from the current values); and (d) domestic benefits are estimated to be approximately 6 percent of the global values.

When we combine the above paragraph with the CBO’s projections of allowance prices under Waxman-Markey, we reach some startling conclusions. First, if we use the two low-end estimates of the global SCC (namely $5 and $10 per ton), then from the year 2012 onward, the price of allowances under Waxman-Markey is inefficiently high. In other words, American businesses would, from day one, be paying more for a permit to emit carbon, than the global damage resulting from an additional ton of emissions.

Second, if we use the mid-range estimate of the SCC, namely $19 per ton in 2007, then by the year 2028, and continuing from that point onward, the cost of an allowance under Waxman-Markey will be too high. (The reason is that the price of allowances grows at 5.6 percent, while the SCC grows at only 3 percent.) The inefficiency gets worse and worse over time, so that by the year 2050, the CBO projects a price of a carbon allowance of $119 (with rounding), whereas the mid-range estimate has the social cost of carbon in the year 2050 at only $68 per ton. That is an enormous discrepancy.

Now it’s true, under the two highest estimates of the SCC (namely $33 and $55 per ton in 2007), the price of allowances under Waxman-Markey are lower than the SCC for all of the years up through 2049. (Even in the $33 case, in the year 2050 the price of an allowance becomes too high.) So from the standpoint of textbook economic theory—and assuming these numbers were correct!—the costs of complying with Waxman-Markey’s caps would be justified by the benefits of avoided climate damage.

However, these figures for the SCC are global estimates. As the Federal Register quotation showed in point (d): “domestic benefits are estimated to be approximately 6 percent of the global values.”

Even in the worst-case estimate from the Federal Register of a social cost of carbon of $55 in 2007, the cost to the United States of an additional ton of emissions is only $3.83 by the year 2012. Contrast that to the CBO’s projected price of an allowance of $15. By the year 2050, even using the highest government estimate of the social cost of carbon, American businesses would be paying $119 for the right to emit an additional ton, when the cost to the U.S. of that ton of emissions would be a mere $12.

Of course, the issue of global climate change involves all nations, not just the United States. It may very well be true that the correct metric to use, when evaluating legislation such as Waxman-Markey, is global benefits versus global costs. Yet we think policymakers and the American public should realize just how altruistic they are going to be.

Certain proponents of a “green economy” have stated that cap-and-trade and other measures will help the American economy. But as the government’s own analyses indicate, this is not true at all. Only by using the high-end estimates of the dangers of greenhouse gas emissions can Waxman-Markey be justified on a global scale, and even then, the United States’ economy endures all of the pain but only 6 percent of the benefits.

What About the Really Big Threats?

After admitting that the U.S. economy will suffer only a 3 percent hit to GDP by 2100, even under a pessimistic scenario, the CBO report does what it can to rebuild the reader’s support for climate legislation. It says that this figure of 3 percent does not include “non-market” damages, nor does it account for truly catastrophic scenarios of runaway climate change. Once we figure in these, CBO tells us:

The most comprehensive published study includes estimates of nonmarket damages as well as costs arising from the risk of catastrophic outcomes associated with about 11°F of warming by 2100. That study projects a loss equivalent to about 5 percent of U.S. output and, because of substantially larger losses in a number of other countries, a loss of about 10 percent of global output. [CBO, p. 4]

Scary stuff, indeed. Yet if we look to the footnote to discover what the “most comprehensive published study” is, we find it is William D. Nordhaus and Joseph Boyer’s 2000 book, Warming the World: Economic Models of Global Warming.

Ironically, a newly published, peer-reviewed paper[2] critiques the procedure by which Nordhaus and Boyer generated their alarming projection. The full explanation is too involved for a blog post; the interested reader should consult pages 14-17 here [.pdf]. The catastrophic impact estimates were not derived from a careful modeling of the global climate system, and then an economic analysis of the projected damages. On the contrary, Nordhaus simply surveyed various experts for their point estimate of the number, and then changed their answers later on, in light of new information about potential risks. (In other words, he didn’t go back to the same experts and ask them for a new guess.) Here is the summary of the changes he made, when updating the answers to his original survey of experts:

Nordhaus in 1994 asked experts to estimate (among other things) the probability of global GDP loss of 25 percent in the event of 3˚C warming. The surveyed experts gave him their answers, from which he computed the mean. By 1999, further research had made these scenarios seem more plausible and/or catastrophic. So Nordhaus (and Boyer) took the original average of probabilities reported by the experts, doubled it, and then assigned this as the probability for a 30 percent loss of GDP rather than the 25 percent the experts had been told to consider, for a less significant warming of 2.5˚C rather than the 3˚C mentioned in the original survey. (Murphy, “Rolling the DICE” [.pdf], pp. 16-17)

We do not mean to suggest that William Nordhaus has done anything intellectually dishonest. The point is, policymakers (and the CBO staff itself) might be very surprised to discover how fragile the estimate of “10 percent of GDP loss” really is. And as the CBO says, this is from the most comprehensive published study of the matter.

Conclusion

A careful reading of the latest CBO report on climate legislation shows just how dubious the case for Waxman-Markey really is. If proponents of its cap-and-trade program want to say, “We need to stop emissions immediately, regardless of the cost, because there is a chance the world will end,” then they are free to make that case. We obviously cannot prove them wrong. But by the same token, physicists could request $1 trillion to build a space-based laser system, since there is a definite chance that a killer asteroid will otherwise destroy the earth in the year 2075.

Proponents of cap-and-trade will also point out that there are plenty of reasons to support Waxman-Markey besides mere dollars and cents. Again, they are free to make that case. All we insist is that they tell us quite honestly and plainly how much Americans are going to pay for these “non-market benefits.”

The rhetoric from Waxman-Markey supporters up until now has led Americans to believe that this bill will actually be good for the U.S. economy. As the recent CBO report itself shows, this is nonsense. American consumers will pay higher prices, particularly for electricity and gasoline, which don’t avoid a comparable amount of climate damage even under the government’s own mid-range estimates. Once we factor in everything the government reports leave out, the answer is obvious: Waxman-Markey’s costs will far outweigh its benefits.

[1] Some economists, such as Nicholas Stern, favor a very low discount rate, because they think future generations’ happiness (or “utility”) should be given as much weight in current decisions, as the happiness of the present generation. Yet even Stern agrees that some discount should be applied, since it’s possible that nuclear war (or a giant asteroid) could kill billions of people between now and the year 2100. In that (very unlikely but possible) event, our present efforts to cut greenhouse gas emissions would be a waste, since few people would be around in 2100 to enjoy the moderate climate. That’s why all economists agree that future benefits must be discounted at some rate, relative to present costs.

[2] Murphy, Robert P. “Rolling the DICE: William Nordhaus’ Dubious Case for a Carbon Tax,” The Independent Review (Vol. 14, Number 2, Fall 2009), pp. 197-218. An early version of this paper is available at: http://www.instituteforenergyresearch.org/2008/06/05/ier-economist-murphy-takes-on-nordhaus-case-for-a-carbon-tax/

FOR IMMEDIATE RELEASE
July 28, 2009
Contact:
Patrick Creighton, 202.621.2947
Laura Henderson, 202.621.2951

LOST IN TRANSLATION

Lawmakers who believe that passage of cap-and-trade legislation will encourage China, India, Russia to follow suit suffer from language barrier

• Senator John Kerry (D-MA):”Yes, we want more than promises from China – the world’s largest emitter must eventually accept binding reductions. But it would be a mistake to focus single-mindedly on what China has said it will not do.” (Financial Times, 7/26/09)

• U.S. Commerce Secretary Gary Locke says China needs to pay for emissions: “They’ve got to step up. They’ve got to pay for the cost of complying with global climate change. They’ve got to invest in energy efficiency and conservation, but also very definitive steps in reducing greenhouse gas emissions.” (Doug Palmer, “U.S. climate chaos: Confused Obama administration flip-flops on climate politics”, Reuters, 07/20/09)

• Congressman Edward Markey (D-Mass.): “[W]e leave here [China] encouraged that progress can be made heading towards Copenhagen and we hope that in the months ahead we can work cooperatively together …” (Voice of America News, May 28, 2009)

• Senator John Kerry (D-MA): “In my meetings this week, Chinese leaders assured me that China will play a positive and constructive role in the Copenhagen negotiations … China recognizes the need to address climate change as a critical component of the nation’s economic development and national security strategy.” (The Hill, May 28, 2009)

China Says No to Job-Killing Emission Caps

Chinese spokesman at June 2009 United Nations Framework Convention on Climate Change: “It is natural for China to have some increase in its emissions, so it is not possible for China in that context to accept a binding or compulsory target.” (George Will: “China, India have a big emissions veto,” Minneapolis Star Tribune, 7/23/09)

Qin Gang, a spokesman for the Chinese Foreign Ministry, said that since China is a developing country and is making strides to strengthen its economy, “it is natural for China to have some increase in emissions, so it is not possible for China to accept a binding or compulsory target.” (Carl Mortished, “Climate pact in jeopardy as China refuses to cut carbon emissions,” The Times, 6/12/09)

Jiang Kejuan, director of the energy systems center at China’s NDRC, stated that “The energy-saving policies made by the Chinese government have already been the biggest energy-saving and emission-reduction movement in the world. The Chinese government has already done well enough.” (Ariana Eunjung Cha, “At Odds on Emissions, U.S., China Open Talks,” The Washington Post, 6/9/09)

China won’t commit to emissions cuts: “‘No matter what happens on the road to Copenhagen, our stance and principles are long-held,’ Li said. ‘We are active both in global talks and taking action in curbing emission.’ The Chinese government has said that it would avoid promising a cut in greenhouse gases during the 2013-2030 period. Instead, China will consider setting a goal to improve energy efficiency by 2020.” (Fu Jing and Li Jin, “China stance on climate talks firm”, China Daily, 05/15/09)

Chinese Premier Wen Jiabao downplays agreement on mandatory caps: “‘It’s difficult for China to take quantified emission reduction quotas at the Copenhagen conference, because this country is still at the early stages of development,’ he [Jiabao] said in an interview with the Financial Times. ‘Europe started its industrialisation several hundred years ago, but for China, it has only been dozens of years.’” (Tom Young, “China lowers expectations of Copenhagen deal”, Business Green, 02/03/09)

Xie Zhenhua, vice chairman of the China Development and Reform Council, upon urgings by the West that China reduce emissions, stressed that “[b]oth developing countries and developed countries have realized the importance of technologies in building more energy-efficient and low-emission industries, however on transferring such technologies, developed nations underline the role of markets, while developing nations urge the combination of roles of markets and governments.” (“China reiterates developed nations’ obligation in anti-global warming efforts,” China View, 3/16/08)

Chinese minister Xie Zhenhua rejects responsibility for emissions: “‘The primary responsibility for tackling climate change should rest with the developed countries,’ Xie said. ‘The developed countries should take the lead,’ he said.” (“Ahead of Bali, China says the west must bear emission reduction burden”, Associated Press, 11/29/07)

Chinese President Hu Jintao says developing countries need energy, not caps: “‘Developing countries still have a long way to go before achieving industrialization, urbanization and modernization, and they face an arduos task of improving people’s life,’ Hu said. ‘To meet their development goals, developing countries need to consume more energy.’” (Andrew McCathie, “China, India insists climate change solution lies in the west”, Deutsche Press Agentur, 06/08/07)

India Says No to Job-Killing Emission Caps

Indian Environment Minister Jairam Ramesh reiterates that India will not accept emissions caps: “The world has nothing to fear from India’s development… An artificial cap is not desirable and not even necessary as we haven’t been responsible for emissions in the first place.” (James Lamont, Joshua Chaffin, and Fiona Harvey, “India widens climate rift with west”, Financial Times, 07/23/09)

Dr. R.K. Pachauri, noted environmentalist and Chairman of Intergovernmental Panel on Climate Change, says India will continue to use coal: “‘Can you imagine 400 million people who do not have a light bulb in their homes,’ Dr. Pachauri told reporters here Monday. ‘You cannot, in a democracy, ignore some of these realities and as it happens with the resources of coal than India has we really don’t have any choice but to use coal in the immediate short term.’ ” (“Pachauri defends India’s climate stand, The Hindu, 07/22/09)

Rajendra Pachauri, Chair of the UN Intergovernmental Panel on Climate Change (IPCC): “You cannot, in a democracy, ignore some of these realities and as it happens with the resources of coal that India has we really don’t have any choice but to use coal in the immediate short term.” (“Pachauri defends India’s climate stand,” The Hindu, 7/21/09)

Indian Prime Minister’s special envoy on climate change, Shyam Saran, on emissions: “it is not our responsibility.” (Bryan Walsh, “Climate conundrum: How to get India to play ball”, TIME, 07/21/09)

Indian Environment Minister Jairam Ramesh: “India’s position is clear and categorical that we are simply not in a position to take any legally binding emissions reductions… Ramesh drew the red lines clearly. ‘There is simply no case for the pressure that we, who have been among the lowest emitters per capita, face to actually reduce emissions.’” (“India rebuffs Clinton, rules out emissions targets”, The Times of India, 07/20/09)

Indian Environment Minister Jairam Ramesh tells Secretary of State Clinton: “There is simply no case for the pressure that we, who have among the lowest emissions per capita, face to actually reduce emissions.” (Matthew Rosenberg, “India rejects U.S. proposal of carbon limits”, Wall Street Journal, 07/20/09)

Indian Environment Minister Jairam Ramesh: “We are simply not in a position to take on legally binding emissions reduction targets.” (Nicholas Kralev, “India tells Clinton: no carbon cuts,” The Washington Times, 7/20/09)

Indian Prime Minister’s special envoy on climate change, Shyam Saran, doubts the G20’s promise to keep global warming under two degrees Celsius: “We do not regard this as an arithmetical target; we regard this as a political decision because there is a great deal of uncertainty with respect to what would be the actual rise in temperature, what would be the consequences of that rise of temperature.” (Indrani Bacghi, “India: 2 degree Celsius is not a fixed target”, The Times of India, 07/17/09)

Indian Prime Minister Manmohan Singh: “There is a lot of pressure on India and China on the issue of climate change. We have to resist it.” (“Singh: India, China have to resist pressure on climate change”, The Economic Times, 07/11/09)

Indian Prime Minister’s special envoy on climate change, Shyam Saran, places emission burden on developed countries: “The developed countries have been the biggest polluters and have to share their historical responsibility on it. India spends 2.5 percent of its GDP on the fallout of climate change like natural disasters. Technology is the key to reducing emissions and developed countries will have to step in for this.” (Jaideep Sarin, “Climate remains an issue at G8-G5 summit”, Express Buzz, 07/10/09)

Indian Environment Minister Jairam Ramesh: “India will not accept any emission-reduction — period. This is a non-negotiable stand… We are not re-negotiating the U.N. Framework Convention on Climate Change,’ Ramesh said, referring to the treaty that entered into force in 1994 and laid the groundwork for emissions cuts by richer nations. ‘There is no way India is going to accept any emission reduction target, period, between now and the Copenhagen meeting and thereafter.’” (Bibhudatta Pradhan, “India’s red line: Rules out any emissions cuts under new climate treaty”, Bloomberg, 06/30/09)

Indian Foreign Minister Somanahalli Mallaiah Krishna: “‘India is a developing country,’ he [Krisha] said, speaking after talks with EU diplomats. ‘We have challenges and we will have to concentrate on development. And development takes precedence over everything else.’ ” (“India vows cooperation on climate change but not at economic cost”, Deutsche Press Agentur, 06/29/09)

Indian climate negotiations delegate rejects caps: “‘If the question is whether India will take on binding emission reduction commitments, the answer is no. It is morally wrong for us to agree to reduce when 40 percent of Indians do not have access to electricity,’ said a member of the Indian delegation to the recently concluded U.N. conference in Bonn, Germany, which is a prelude to a Copenhagen summit in December on climate change.” (Rama Lakshmi, “India rejects calls for emission cuts”, Washington Post, 04/13/09)

India’s top negotiator at U.N. climate conference rejects caps: “In India I need to give electricity for lightbulbs to half a billion. In the west you want to drive your Mercedees as fast as you want. We have ’survival’ emissions, you have lifestyle emissions. You cannot put them on the same basis. I am trying to give a minimal commercial energy service. Whereas you are not prepared to give up any part of your affluent lifestyle or give up consumption patterns.” (Randeep Ramesh, “India rebuffs Obama, won’t accept emissions limits”, The Guardian, 12/08/08)

Russia Says No to Job-Killing Emissions Cap

Arkady Dvorkovich, Russian President Dmitry Medvedev’s top economic advisor: “For us the 80 percent figure is unacceptable and likely unattainable. We won’t sacrifice economic growth for the sake of emission reduction.” (Anna Smolchenko, “G8 Emissions Pledge Unravels as Russia Objects”, AFP, 07/08/09)

Russian President Dmitri Medvedev”[W]e will not cut off our development potential.” Despite statements by the Russian President for CO₂ reductions, and similar calls from the international community, Russia is expected to release around 30 percent more greenhouse gases by 2020. (“Russia’s Medvedev announces greenhouse gas target,” Reuters, 6/19/09)

Russian official responsible for country’s Kyoto obligations rejects emission limits: “‘Energy must not be a barrier to our comfort. Our emerging middle class… demands lots of energy and it is our job to ensure comfortable supply,’ he said. ‘We don’t plan to limit the use of fuel for our industries. We don’t think this would be right,’ he said, referring to the current round of Kyoto. (Simon Shuster, “Russia says it has no plans to cap carbon emissions”, Reuters, 04/28/08)

The Institute for Energy Research (IER) is a not-for-profit organization that conducts intensive research and analysis on the functions, operations, and government regulation of global energy markets. IER maintains that freely-functioning energy markets provide the most efficient and effective solutions to today’s global energy and environmental challenges and, as such, are critical to the well-being of individuals and society.

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